The Asstt. Commissioner of Income Tax Circle 2(1), Bhopal V. M/s., M.P.Police Corporation Ltd., Bhopal

ITA 392/IND/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 47897 (ITAT-INDORE)
• Duration Of Justice: 1 year(s) 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2002-2003
• Appeal Filed On: 16-06-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ARUN DEWAN
• Keywords: Business income; Depreciation; Source of fund; Speculation loss; Unabsorbed depreciation; Capital expenditure
• Section: 72(1); 32; 27; 12; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL , INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH, J.M. AND SHRI R.C.SHARMA, A.M. PAN NO. : AACCM2221L I.T.A.NO. 392 / IND /20 10 A.Y. : 2002 - 03 ACIT, M/S. M.P. POLICE CORPN. LIMITED, CIRCLE 2(1), VS NEAR POLICE RADIO HEADQUARTER, BHOPAL BHADBHADA ROAD, BHOPAL. APPELLANT RESPONDENT APPELLANT BY : SHRI ARUN DEWAN, SR. DR RESPONDENT BY : SHRI SUMIT NEMA, ADV. O R D E R PER R. C. SHARMA, A.M. THIS IS AN APPEAL FILED BY THE REVENUE AGAINST TH E ORDER OF CIT(A) DATED 31 ST MARCH, 210, FOR THE ASSESSMENT YEAR 2002 - 03, IN THE MATTER OF ORDER PASSED U/S 147/143(3) OF THE INCOME - TAX ACT, 1961. 2. THE ONLY GRIEVANCE OF THE REVENUE RELATES TO THE ORDER OF CIT(A) FOR DIRECTING THE AO TO ALLOW SET - OFF OF UN AB SORBED - : 2 : - 2 DEPRECIATION OF RS. 33.21 LAKHS FOR THE ASSESSMENT YEAR 1992 - 93 TO 2001 - 02. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORDS PERUSED. IN THE COURSE OF ASSESSMENT, THE AO DID NOT ALLOW SET OFF OF UNABSORBED DEPRECIATION AGAINST INCOME FROM OTHER SOURC ES ON THE PLEA THAT AS PROVISIONS OF SECTION 72 . BY THE IMPUGNED ORDER, THE CIT(A) DIRECTED THE AO TO ALLOW THE SET OFF OF UNABSORBED DEPRECATION AGAINST INCOME FROM OTHER SOURCES AFTER HAVING THE FOLLOWING OBSERVATIONS : - 5.3 IN APPELLATE PROCEEDINGS, TH E AR SUBMITTED THAT AS PER THE RETURN OF INCOME FILED, THE APPELLANT HAD SHOWN NET PROFIT OF RS.36,41,971/ - WHICH INCLUDED INTEREST INCOME OF RS. 1,77,23,104/ - ON FDRS AND THE APPELLANT AFTER CLAIMING SET OFF OF BROUGHT FORWARD BUSINESS LOSSES TO THE EXTEN T OF RS.36,41,971/ - DECLARED THE TAXABLE INCOME AT NIL. IT WAS SUBMITTED THAT THE APPELLANT HAD FURNISHED THE SUMMARY OF UNABSORBED DEPRECIATION AND BROUGHT FORWARD BUSINESS LOSSES AVAILABLE - : 3 : - 3 BEFORE THE AO AS UNDER: A.Y. BUSINESS UNABSORBED TOTAL L OSS DEPRECIATION (A + B) (A) (8) 1992 - 93 418525 316189 7347 1 4 1 993 - 94 3903208 378146 4281354 1 994 - 95 3467974 461053 3929027 1996 - 97 2206856 7]2821 2919677 1999 - 00 1277562 521383 1798947 2000 - 0 1 3221863 498097 13719960 200 1 - 02 709898 1 433732 532713 TOTAL 31594969 33 , 21 , 421 34916392 IT WAS CONTENDED THAT AS PER SECTION 32(2) OF THE ACT THE APPELLANT IS ELIGIBLE TO CLAIM SET OFF OF UNABSORBED DEPRECIATION AMOUNTING TO RS.33,2 1,423/ - AGAINST THE CURRENT YEAR'S INCOM E FROM ANY SOURCES OF INCOME. IN THIS REGARD, HE RELIED UPON THE FOLLOWING DECISIONS: (I) CIT VS. PIONEER ASIA PACKING PVT LTD. (2009) 310 ITR 1 98 (MAD.) (II) CIT V. CHUGANDAS & CO. (1965) 55 ITR 17 (III) SNAM PROGETTI SPA V, ADD L . CIT ( 1981)1321TR 70 (DEL.) - : 4 : - 4 (IV) CIT V . RAMNATH GOENKA (2003) 256 ITR 26 (MAD.) THUS, IT WAS ARGUED THAT INTEREST INCOME SHOULD BE ALLOWED TO BE SET OFF AGAINST B/F BUSINESS LOSSES OR AT LEAST AGAINST BROUGHT FORWARD UNABSORBED DEPRECIATION. 5.4 I HAVE CAREFU LLY CONSIDERED THE SUBMISSION OF THE APPELLANT AND FACTS OF THE CASE. AS PER SECTION 72 OF THE ACT B/F BUSINESS LOSSES CAN BE SET OFF AGAINST THE INCOME ASSESSABLE UNDER THE HEAD PROFITS & GAINS OF THE BUSINESS. SINCE, THE INTEREST INCOME WAS ASSESSED UNDE R THE HEAD INCOME FROM OTHER SOURCES, I AM IN THE AGREEMENT WITH THE FINDINGS OF THE AO THAT THE INTEREST INCOME CAN NOT BE SET OFF AGAINST B/F BUSINESS LOSSES. HOWEVER, AS PER PROVISIONS OF SECTION 32(2) THE UNABSORBED DEPRECIATION OF EARLIER YEARS B/F BE COMES CURRENT YEAR'S DEPRECIATION AND, THEREFORE, CAN BE SET OFF AGAINST BUSINESS INCOME OR INCOME UNDER ANY OTHER HEADS OF INCOME, THEREFORE, THE AOS DIRECTED TO ALLOW SET OFF OF UNABSORBED DEPRECIATION AGAINST THE NET INTEREST INCOME ASSESSABLE AT RS. - : 5 : - 5 36 ,41,971/ - AFTER VERIFICATION OF THE RECORDS. HENCE, THE GROUND IS PARTLY ALLOWED. 1. 4. AGAINST THE ABOVE ORDER OF CIT(A), REVENUE IS IN FURTHER APPEAL BEFORE US. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES B ELOW. THE ISSUE WITH REGARD TO SET OFF OF UNABSORBED DEPRECIATION BY TREATING THE SAME AS DEPRECIATION OF CURRENT YEAR AND THEREBY REDUCING THE BUSINESS PROFIT OF CURRENT YEAR/INCREASE IN THE LOSS OF CURRENT YEAR LAID DOWN DIFFERENT SITUATIONS, WHEREIN SUC H UNABSORBED DEPRECIATION CAN BE SET OFF BY THE SPECIAL BENCH IN THE CASE OF DY. CIT VS. TIMES GUARANTY LIMITED, 40 SOT 14, WHEREIN FOLLOWING WAS THE PRECISE OBSERVATIONS AND CONCLUSION OF THE BENCH. THE SPECIAL BENCH HAVE CONSIDERED ALL THE JUDICIAL PRONO UNCEMENTS INCLUDING THE DECISIONS OF HON'BLE SUPREME COURT AND VARIOUS HIGH COURTS AND REACHED TO FOLLOWING CONCLUSIONS : - THE SHORT CONTROVERSY THAT CAME UP FOR DISPOSAL WAS AS TO WHETHER DEPRECIATION FOR THE ASSESSMENT YEARS 1997 - 98 TO 1999 - 2000 WHICH C OULD NOT BE ABSORBED, - : 6 : - 6 COULD BE SET OFF AGAINST INCOME FROM OTHER SOURCES IN THE ASSESSMENT YEARS 2003 - 04 AND 2004 - 05. IN ORDER TO EXAMINE AND EVALUATE THE RIVAL CONTENTIONS ON THIS ISSUE, IT WOULD BE APT TO TAKE STOCK OF THE PROVISIONS OF SECTION 32(2) A S SUBSTITUTED BY THE FINANCE (NO. 2) ACT, 1996 WITH EFFECT FROM 1 - 4 - 1997. [PARA 9] A BARE PERUSAL OF THE AFORESAID PROVISION INDICATES THAT WHERE THE AMOUNT OF DEPRECIATION ALLOWANCE UNDER SECTION 32(1) FOR THE CURRENT YEAR OF A BUSINESS CANNOT BE ABSORBED FULLY OR PARTLY DUE TO INADEQUACY OF PROFITS OR GAINS FROM SUCH BUSINESS, THEN SUCH ALLOWANCE OR PART OF IT WHICH REMAINS UNABSORBED, IS TO BE REFERRED TO AS UNABSORBED DEPRECIATION ALLOWANCE . SUCH UNABSORBED DEPRECIATION ALLOWANCE IS TO BE SET OFF FIRS TLY AGAINST THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION FROM ANY OTHER BUSINESS OR PROFESSION CARRIED ON BY THE ASSESSEE FOR THAT ASSESSMENT YEAR. IF SUCH BUSINESS PROFIT IS ALSO INSUFFICIENT TO ABSORB THE UNABSORBED DEPRECIATIO N ALLOWANCE, THEN THE REMAINING AMOUNT SHALL BE SET OFF AGAINST INCOME UNDER OTHER HEADS, AS MENTIONED IN SECTION 14 ASSESSABLE FOR THAT ASSESSMENT YEAR. THIS EXERCISE OF SETTING OFF THE UNABSORBED DEPRECIATION ALLOWANCE AGAINST ANY HEAD OF INCOME IS RESTR ICTED TO THE YEAR - : 7 : - 7 IN WHICH THE CLAIM FOR DEPRECIATION HAS ARISEN UNDER SECTION 32(1). IF, HOWEVER, INCOME OF THE ASSESSEE UNDER ALL HEADS IS INSUFFICIENT TO ABSORB THE UNABSORBED DEPRECIATION ALLOWANCE, THEN SUCH AMOUNT IS TO BE CARRIED FORWARD TO THE FOLL OWING ASSESSMENT YEAR TO BE SET OFF AGAINST THE INCOME ARISING UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION . NOT ONLY THAT, THE BUSINESS OR PROFESSION FOR WHICH THE ALLOWANCE WAS COMPUTED SHOULD CONTINUE TO BE CARRIED ON BY THE ASSESSEE DUR ING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR IN WHICH THE SET OFF IS CLAIMED. THE EXERCISE OF CARRYING FORWARD OF SUCH UNABSORBED DEPRECIATION ALLOWANCE IS TO BE CONTINUED UP TO THE EIGHT ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE ASSESSMENT YEAR FOR WHICH THE AFORESAID DEPRECIATION ALLOWANCE WAS FIRST COMPUTED. FROM HERE IT FOLLOWS THAT THE AMOUNT OF UNABSORBED DEPRECIATION ALLOWANCE WHICH COULD NOT BE SET OFF AGAINST INCOME UNDER ANY HEAD IN THE YEAR IN WHICH THE ALLOWANCE WAS FIRST COMPUTED, SH ALL BE ELIGIBLE TO BE CARRIED FORWARD FOR SET OFF ONLY AGAINST INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION TO THE FOLLOWING ASSESSMENT YEAR(S) NOT MORE THAN EIGHT ASSESSMENT YEARS IMMEDIATELY - : 8 : - 8 SUCCEEDING THE ASSESSMENT YEAR FOR WHICH IT WAS FIRST COMPUTED. [PARA 10] A GLANCE AT PROVISION OF SECTION 32(2) PRIOR TO THE AMENDMENT MADE BY THE FINANCE (NO. 2) ACT, 1996 WITH EFFECT FROM 1 - 4 - 1997 INDICATES THAT IF THERE ARE SUFFICIENT PROFITS OR GAINS TO ADJUST FULL DEPRECIATION ALLOWANCE FO R THE CURRENT YEAR UNDER SECTION 32(1), THEN IT WILL BE ADJUSTED ACCORDINGLY. IF, HOWEVER, THERE ARE NO PROFITS OR GAINS AT ALL OR THEY ARE INSUFFICIENT TO ACCOMMODATE THE DEPRECIATION ALLOWANCE FOR THE YEAR IN FULL, THEN SUBJECT TO THE PROVISIONS OF SECTI ONS 72(2) AND 72(3), THE AMOUNT OF SUCH UNADJUSTED ALLOWANCE, TO WHICH EFFECT HAS NOT BEEN GIVEN, SHALL BE ADDED TO THE AMOUNT OF DEPRECIATION ALLOWANCE FOR THE FOLLOWING PREVIOUS YEAR AND DEEMED TO BE PART OF DEPRECIATION ALLOWANCE FOR THAT PREVIOUS YEAR AND SO ON FOR ETERNITY. [PARA 12] SECTION 32(2) DEEMING THE UNADJUSTED DEPRECIATION ALLOWANCE OF THE CURRENT YEAR AS THE CURRENT DEPRECIATION ALLOWANCE OF THE FOLLOWING YEAR, IS SUBJECT TO THE PROVISIONS OF SECTION 72(2) AND SECTION 73(3). SECTION 72(1) PR OVIDES THAT WHERE FOR ANY ASSESSMENT YEAR, THE NET RESULT OF THE COMPUTATION UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR - : 9 : - 9 PROFESSION IS A LOSS TO THE ASSESSEE, NOT BEING A LOSS SUSTAINED IN A SPECULATION BUSINESS, AND SUCH LOSS CANNOT BE OR IS NOT WHO LLY SET OFF AGAINST INCOME UNDER ANY OTHER HEAD OF INCOME IN ACCORDANCE WITH THE PROVISIONS OF SECTION 71, THEN SUCH LOSS SHALL BE CARRIED FORWARD TO THE FOLLOWING ASSESSMENT YEAR TO BE SET OFF AGAINST BUSINESS INCOME. SUB - SECTION (3) PROVIDES THAT NO LOSS SHALL BE CARRIED FORWARD UNDER THIS SECTION FOR MORE THAN EIGHT ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE ASSESSMENT YEAR FOR WHICH THE LOSS WAS FIRST COMPUTED. SUB - SECTION (2) OF SECTION 72, WHICH IS RELEVANT FOR PRESENT PURPOSE, STATES THAT WHERE ANY ALLOWANCE UNDER SECTION 32(2) OR SECTION 35(4) IS TO BE CARRIED FORWARD, THE EFFECT SHALL FIRST BE GIVEN TO THE BROUGHT FORWARD LOSS. IN OTHER WORDS, IF THERE IS A BROUGHT FORWARD BUSINESS LOSS AS WELL AS BROUGHT FORWARD UNADJUSTED DEPRECIATION OF THE EARL IER YEARS, THEN BROUGHT FORWARD BUSINESS LOSS SHALL HAVE PREFERENCE OVER THE UNADJUSTED DEPRECIATION FOR THE PURPOSES OF SET - OFF AGAINST THE BUSINESS INCOME OF THE SUCCEEDING YEAR. IT IS SO FOR THE REASON THAT A TIME - LIMIT HAS BEEN ENSHRINED FOR CARRY FORW ARD OF BROUGHT FORWARD BUSINESS LOSS UP TO A PERIOD NOT MORE THAN EIGHT ASSESSMENT YEARS. AS AGAINST THAT THE AMOUNT OF BROUGHT FORWARD UNADJUSTED DEPRECIATION UNDER - : 10 : - 10 SECTION 32(2) CAN GO ON FOR INDEFINITE PERIOD FOR SET OFF AGAINST THE BUSINESS INCOME IN T HE FOLLOWING YEARS. SECTION 73 DEALS WITH LOSSES IN SPECULATION BUSINESS AND PROVIDES THAT THE UNABSORBED SPECULATION LOSS SHALL BE CARRIED FORWARD TO THE SUCCEEDING YEARS FOR NOT MORE THAN FOUR ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE ASSESSMENT YEAR F OR WHICH THE LOSS WAS FIRST COMPUTED. THE PRESCRIPTION OF SUB - SECTION (3) OF SECTION 73 IS SIMILAR TO THAT OF SUB - SECTION (2) OF SECTION 72 PROVIDING FOR PREFERENCE TO THE BROUGHT FORWARD SPECULATION BUSINESS LOSS OVER THE BROUGHT FORWARD UNADJUSTED DEPREC IATION ALLOWANCE OR CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH. [PARA 13] THE EXPRESSION PROFITS OR GAINS AS USED IN THE LANGUAGE OF SECTION 32(2) IN THE FIRST PERIOD BECAME SUBJECT - MATTER OF CONTROVERSY. WHILE SOME OF THE HIGH COURTS HELD IT AS COVERING ONLY THE BUSINESS INCOME , OTHERS TOOK DIAGONALLY OPPOSITE VIEW AS ENCOMPASSING INCOME UNDER ALL THE HEADS AND NOT RESTRICTED TO THE BUSINESS INCOME ALONE. SUCH CONTROVERSY CAME TO BE SETTLED BY THE SUPREME COURT IN CIT V. VIRMANI INDUSTRIES (P.) LTD. [1995] 216 ITR 607/ 83 TAXMAN 343 . [PARA 14] IN ORDER TO NEUTRALIZE THE EFFECT OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF VIRMANI INDUSTRIES (P.) - : 11 : - 11 LTD . ( SUPRA ) EXPLAINING THE SCOPE OF EXPRESSION PROFITS OR GAINS CHARGEABLE EMPLOYED UNDER SECTION 32(2) AS EXTENDING NOT ONLY TO BUSINESS INCOME BUT ALSO TO OTHER HEADS OF INCOME AS GIVEN IN SECTION 14, THE LEGISLATURE SUBSTITUTED SUB - SECTION (2) OF SECT ION 32 BY THE FINANCE (NO. 2) ACT, 1996 WITH EFFECT FROM 1 - 4 - 1997. BY VIRTUE OF SUCH SUBSTITUTION, THE SCOPE OF SET OFF OF THE BROUGHT FORWARD UNABSORBED DEPRECIATION ALLOWANCE WAS CONSTRICTED TO THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION BY MAKING A LITTLE DEPARTURE IN THE LANGUAGE OF THE LATER PART OF THE SUBSTITUTED PROVISION. IT IS APPARENT FROM CLAUSE ( I ) OF SUBSTITUTED SUB - SECTION (2), IN THE SECOND PERIOD, THAT THE UNABSORBED DEPRECIATION ALLOWANCE SHALL BE SET OFF AGAINS T PROFITS AND GAINS OF ANY BUSINESS OR PROFESSION CARRIED ON BY THE ASSESSEE FOR THAT ASSESSMENT YEAR. IT INDICATES THAT THE SET OFF PROVIDED UNDER THIS CLAUSE IS AGAINST THE INCOME CHARGEABLE UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION . ORDINARILY THE EXPRESSION PROFITS AND GAINS DOES NOT REFER TO THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION , AS IS APPARENT FROM THE DEFINITION OF INCOME UNDER SECTION 2(24). IT CAN BE NOTICED THAT, ALTHOUGH SUB - CLAUSE ( I ) OF CL AUSE ( 24 ) OF SECTION 2 - : 12 : - 12 TALKS OF PROFITS AND GAINS , YET SUB - CLAUSES ( V ), ( VA ), ETC., ALSO REFER TO INCOME UNDER SECTION 28, WHICH IS PART OF CHAPTER IV - D. FROM HERE IT FOLLOWS THAT, THOUGH TECHNICALLY THE EXPRESSION PROFITS AND GAINS MAY NOT REFER TO TH E INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION , YET FOR THE PURPOSES OF CLAUSE ( I ) OF SUBSTITUTED SECTION 32(2), IT REFERS TO INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION . CLAUSE ( II ) OF SUB - SECTION (2) MAKES T HE POSITION CLEAR BY PROVIDING THAT IF THE UNABSORBED DEPRECIATION ALLOWANCE CANNOT BE WHOLLY SET OFF UNDER CLAUSE ( I ), THEN THE AMOUNT NOT SO SET OFF SHALL BE SET OFF FROM THE INCOME UNDER ANY OTHER HEAD , IF ANY, ASSESSABLE FOR THAT ASSESSMENT YEAR. IF THE INTERPRETATION GIVEN IN VIRMANI INDUSTRIES (P.) LTD. S CASE ( SUPRA ) HAD BEEN INTENDED TO BE RETAINED , THEN THERE WAS NO NEED TO HAVE TWO ALIKE LOOKING EXPRESSIONS IN THE LANGUAGE OF SUB - SECTION (2), VIZ, FIRSTLY, PROFITS OR GAINS IN THE MAIN PART OF SUB - SECTION (2) AND THEN, PROFITS AND GAINS IN CLAUSE ( I ). THE DOUBT, IF ANY, GETS FURTHER DISPELLED WHEN ONE TURNS TO CLAUSE ( III ) OF SUB - SECTION (2) WHICH PROVIDES THAT THE UNABSORBED DEPRECIATION ALLOWANCE NOT SO SET OFF UNDER CLAUSES ( I ) AND ( II ) SHA LL BE CARRIED FORWARD TO THE FOLLOWING ASSESSMENT YEAR AND THEN SET OFF AGAINST THE PROFITS AND GAINS OF ANY BUSINESS - : 13 : - 13 OR PROFESSION CARRIED ON BY THE ASSESSEE IN THE FOLLOWING ASSESSMENT YEAR. HERE AGAIN THE EXPRESSION PROFITS AND GAINS HAS BEEN USED W HICH IS SIMILAR TO THAT USED IN CLAUSE ( I ). HAD THE LEGISLATURE DESIRED TO GIVE WIDER MEANING TO THE EXPRESSION PROFITS AND GAINS AS INCLUDING INCOME UNDER OTHER HEADS ALSO, THEN THERE WAS NO NEED AT ALL TO HAVE CLAUSE ( II ) OF SUB - SECTION (2) PROVIDING FOR THE SET OFF OF THE UNABSORBED DEPRECIATION ALLOWANCE AGAINST INCOME UNDER ANY OTHER HEAD . FROM THE ABOVE DISCUSSION IT CAN BE EASILY ASCERTAINED THAT THE EXPRESSION PROFITS AND GAINS AS USED IN CLAUSE ( I ) OR ( III )( A ) REFERS ONLY TO INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION . [PARA 16] THE FURTHER FALLOUT OF THIS SUBSTITUTION OF SECTION 32(2), IN THE SECOND PERIOD, IS THAT THE PROVISION OF CARRY FORWARD AND SET OFF OF UNABSORBED DEPRECIATION FOR ANY NUMBER OF YEARS AGAINST IN COME UNDER ANY HEAD, WAS FURTHER DILUTED BY WAY OF CLAUSE ( III )( B ) TO SUB - SECTION (2) RESTRICTING THE RIGHT TO SET OFF OF UNABSORBED DEPRECIATION FOR A PERIOD OF NOT MORE THAN EIGHT ASSESSMENT YEARS SUCCEEDING THE ASSESSMENT YEAR IN WHICH THE ALLOWANCE WAS FIRST COMPUTED. THIS PART OF THE PROVISION GAVE BIRTH TO ONE MORE CONTROVERSY IN THE SECOND PERIOD THAT IT DID NOT DEAL WITH THE FATE OF UNADJUSTED BROUGHT FORWARD - : 14 : - 14 DEPRECIATION ALLOWANCE FOR AND UP TO THE ASSESSMENT YEAR 1996 - 97. FEARS WERE EXPRESSED IN T HE PARLIAMENT ON THIS ISSUE. TO THIS, THE FINANCE MINISTER CLARIFIED THE POSITION ON THE FLOOR OF THE HOUSES. [PARA 17] IT IS THIS CLARIFICATION BY THE FINANCE MINISTER THAT SEALED THE FATE OF THE UNADJUSTED BROUGHT FORWARD DEPRECIATION UP TO THE END OF TH E FIRST PERIOD AS AVAILABLE FOR SET OFF AGAINST TAXABLE PROFITS OR INCOME UNDER ANY OTHER HEAD FOR THE ASSESSMENT YEAR 1997 - 98 AND THE SEVEN SUBSEQUENT ASSESSMENT YEARS. [PARA 18] FROM THE ABOVE DISCUSSION IT IS PATENT THAT IN THE SECOND PERIOD, RELAXATION WAS ALLOWED BY THE FINANCE MINISTER ON TWO COUNTS, VIZ., FIRSTLY, THE CUMULATIVE UNADJUSTED BROUGHT FORWARD DEPRECIATION AS ON 1 - 4 - 1997 COULD STILL BE SET OFF AGAINST TAXABLE INCOME UNDER ANY HEAD IN THE EIGHT ASSESSMENT YEARS AND SECONDLY, THE PERIOD OF EIGHT YEARS WOULD COMMENCE FROM THE ASSESSMENT YEAR 1997 - 98 IRRESPECTIVE OF THE YEAR TO WHICH SUCH UNADJUSTED DEPRECIATION RELATED. IN OTHER WORDS, THE PERIOD OF EIGHT YEARS AS PER CLAUSE ( III )( B ) OF SECTION 32(2) CAME TO BE RECKONED FROM THE ASSESSMENT YE AR 1997 - 98 IRRESPECTIVE OF THE FACT THAT THE UNADJUSTED BROUGHT - : 15 : - 15 FORWARD DEPRECIATION AROSE IN THE ASSESSMENT YEAR 1984 - 85 OR 1994 - 95. [PARA 19] THE ABOVE PROVISION HAS BEEN SUBSTITUTED BY THE FINANCE ACT, 2001 WITH EFFECT FROM 1 - 4 - 2002. IN FACT, IT IS REIN FORCEMENT OF THE PROVISION AS EXISTING IN THE FIRST PERIOD. THUS, THE LAW AS EXISTING IN THE SECOND PERIOD WAS COMPLETELY TAKEN BACK AND AS A RESULT OF THAT THE PROVISION AS PREVAILING IN THE FIRST PERIOD WAS RESTORED. FROM THE LANGUAGE OF THE SUB - SECTION (2) OF SECTION 32 IT IS MANIFEST THAT IT IS A SUBSTANTIVE PROVISION AND NOT A PROCEDURAL ONE. IT IS SETTLED LEGAL POSITION THAT THE AMENDMENT TO SUBSTANTIVE PROVISION IS NORMALLY PROSPECTIVE UNLESS EXPRESSLY STATED OTHERWISE OR IT APPEARS SO BY NECESSARY I MPLICATION. IT IS NOWHERE COMING UP EITHER FROM THE NOTES ON CLAUSES OR MEMORANDUM EXPLAINING THE PROVISION OF THE FINANCE BILL 2001, THAT SUBSTITUTION OF SUB - SECTION (2) OF SECTION 32 IS RETROSPECTIVE. IT IS, THEREFORE, PATENT THAT THE SUBSTANTIVE PROVIS ION CONTAINED IN SECTION 32(2) AS SUBSTITUTED BY THE FINANCE ACT, 2001 WITH EFFECT FROM 1 - 4 - 2002, IS PROSPECTIVELY APPLICABLE TO THE ASSESSMENT YEAR 2002 - 03 ONWARDS. [PARA 21] IT IS OBVIOUS THAT SECTION 32(2) IS A DEEMING PROVISION AND BY THE LEGAL FICTION , THE AMOUNT OF DEPRECIATION - : 16 : - 16 ALLOWANCE UNDER SECTION 32(1) WHICH IS NOT FULLY ABSORBED AGAINST INCOME FOR THAT YEAR IS DEEMED TO BE THE PART OF DEPRECIATION ALLOWANCE FOR THE SUCCEEDING YEAR(S). A DEEMING PROVISION OR A LEGAL FICTION AS IT IS COMMONLY CALL ED IS THE ONE THE MANDATE OF WHICH DOES NOT EXIST BUT FOR SUCH PROVISION. DUE TO SUCH PROVISION ONLY THE GIVEN IMAGINARY STATE OF AFFAIRS IS TAKEN AS REALITY DESPITE IT BEING AT VARIANCE WITH THE SCOPE OF THE ENACTMENT. IT IS TRITE LAW THAT A DEEMING PROVI SION CANNOT BE EXTENDED BEYOND THE PURPOSE FOR WHICH IT IS INTENDED. WHENEVER A LEGAL FICTION IS CREATED BY WAY OF A DEEMING PROVISION, IT IS OF PARAMOUNT IMPORTANCE TO GO STRICTLY BY THE PRESCRIPTION OF SUCH PROVISION. SUCH DEEMING PROVISION CANNOT BE EXT ENDED BEYOND THE PURPOSE FOR WHICH IT IS INTENDED. WITH THIS BACKGROUND IN MIND IT WAS NECESSARY TO PROCEED TO CONSIDER THE COMMAND OF SECTION 32(2), WHICH IS A DEEMING PROVISION. [PARA 23] IT HAS BEEN NOTICED ABOVE THAT SECTION 32(2) IN THE THIRD PERIOD I S A SUBSTANTIVE PROVISION AND, HENCE, PROSPECTIVE IN NATURE. WHEN THAT IS SO, NATURALLY ITS RECOMMENDATION SHALL APPLY FROM ONLY FROM THE ASSESSMENT YEARS 2002 - 03 ONWARDS. NECESSARY - : 17 : - 17 INGREDIENTS OF THE PROVISION, IN THE THIRD PERIOD, HAVE BEEN NOTED ABOVE. FIRST THING IN SUB - SECTION (2) IS THE REFERENCE TO THE ASSESSMENT OF THE ASSESSEE IN WHICH FULL EFFECT CANNOT BE GIVEN TO ANY ALLOWANCE UNDER SUB - SECTION (1) IN ANY PREVIOUS YEAR. LATER PART OF THE PROVISION PROVIDES THAT THE ALLOWANCE OR PART OF THE ALL OWANCE TO WHICH EFFECT HAS NOT BEEN GIVEN, SHALL BE ADDED TO THE AMOUNT OF ALLOWANCE FOR DEPRECIATION IN THE SUCCEEDING YEARS. AT BOTH THE PLACES, PRESENT TENSE HAS BEEN USED IN THE NEGATIVE TERMS WHILE REFERRING TO THE ALLOWANCE TO WHICH EFFECT CANNOT BE AND HAS NOT BEEN GIVEN. SO THE STARTING POINT OF SUB - SECTION (2) IS THE ASSESSMENT OF THE ASSESSEE AND THE ALLOWANCE UNDER SECTION 32(1) TO WHICH FULL EFFECT CANNOT BE GIVEN. SECTION 32(1) DEALS WITH DEPRECIATION ALLOWANCE FOR THE CURRENT YEAR. IT IM PLIES THAT IT IS ONLY WHEN THE ASSESSMENT OF THE ASSESSEE FROM THE ASSESSMENT YEAR 2002 - 03 ONWARDS IS MADE IN WHICH DEPRECIATION ALLOWANCE FOR THE CURRENT YEAR UNDER SECTION 32(1) CANNOT BE GIVEN FULL EFFECT TO, OWING TO THE INADEQUACY OF THE PROFIT, THAT THE DIRECTIVE OF THE DEEMING PROVISION UNDER SECTION 32(2) SHALL APPLY. THE MENTION OF THE WORDS CANNOT BE AND HAS NOT BEEN INDICATES THAT IT SPEAKS OF THE DEPRECIATION ALLOWANCE UNDER SECTION 32(1) FOR THE CURRENT YEAR. THE POINT BECOMES MORE LUCID WH EN ONE - : 18 : - 18 MULLS OVER THE LANGUAGE OF SECTION 71B, DEALING WITH THE CARRY FORWARD AND SET OFF OF LOSSES FROM HOUSE PROPERTY WITHIN THE SAME YEAR. IT PROVIDES THAT WHERE FOR ANY ASSESSMENT YEAR THE NET RESULT OF COMPUTATION UNDER THE HEAD INCOME FROM HOUSE PRO PERTY IS A LOSS TO THE ASSESSEE AND SUCH LOSS CANNOT BE OR IS NOT WHOLLY SET OFF AGAINST INCOME FROM ANY OTHER HEAD OF INCOME IN ACCORDANCE WITH THE PROVISIONS OF SECTION 71, SO MUCH OF THE LOSS AS HAS NOT BEEN SO SET OFF SHALL BE CARRIED FORWARD TO T HE FOLLOWING ASSESSMENT YEARS. SECTION 72(1) DEALS WITH CARRY FORWARD AND SET OFF OF BUSINESS LOSSES (OTHER THAN SPECULATION BUSINESS). IT PROVIDES THAT WHERE FOR ANY ASSESSMENT YEAR THE NET RESULT OF THE COMPUTATION UNDER THE HEAD PROFITS AND GAINS OF BU SINESS OR PROFESSION IS A LOSS TO THE ASSESSEE, NOT BEING LOSS SUSTAINED IN SPECULATION BUSINESS AND SUCH LOSS CANNOT BE OR IS NOT WHOLLY SET OFF AGAINST THE INCOME UNDER ANY HEAD OF INCOME IN ACCORDANCE WITH THE PROVISIONS OF SECTION 71, THEN SO MUCH O F THE LOSS AS HAS NOT BEEN SO SET OFF SHALL BE CARRIED FORWARD TO THE FOLLOWING ASSESSMENT YEARS. FROM THESE PROVISIONS IT IS AMPLY CLEAR THAT PRESENT TENSE IN NEGATIVE HAS BEEN USED HERE ALSO TO REPRESENT LOSS UNDER THE HEAD INCOME FROM HOUSE PROPERTY OR BUSINESS LOSS OF THE CURRENT YEAR. IN THE LIKE MANNER, - : 19 : - 19 OTHER SECTIONS SUCH AS SECTIONS 74 AND 74A, ETC., TO THE EXTENT THEY TALK OF LOSS FOR THE CURRENT YEAR, REFER TO CANNOT BE AND HAS NOT BEEN SET OFF. ON GOING THROUGH THESE SECTIONS IT IS PALPAB LE THAT WHEREVER THERE IS MENTION TO LOSS UNDER A PARTICULAR HEAD FOR THE CURRENT YEAR WHICH IS SOUGHT TO BE SET OFF AGAINST THE INCOME UNDER THE SAME HEAD OR OTHER HEADS OF THE INCOME FOR THAT VERY YEAR, THE SET OF WORDS CANNOT BE AND HAS NOT BEEN HAV E BEEN BROUGHT INTO PLAY. THE NECESSARY COROLLARY WHICH, THEREFORE, FOLLOWS IS THAT THE ENGAGING OF SAME SET OF WORDS, THAT IS, CANNOT BE AND HAS NOT BEEN IN SECTION 32(2) FAIRLY SUGGESTS THAT THE REFERENCE TO DEPRECIATION ALLOWANCE UNDER SECTION 32(1) , WHICH COULD NOT BE ADJUSTED DUE TO INADEQUACY OF PROFITS, IS FOR CURRENT YEAR ALONE STARTING FROM THE ASSESSMENT YEAR 2002 - 03 ONWARDS. THIS POSITION CEASES TO ADMIT OF ANY DOUBT WHEN ONE GOES TO SECTION 75, AS SUBSTITUTED BY THE FINANCE ACT, 1992, WITH E FFECT FROM 1 - 4 - 1993. THIS SECTION, DEALING WITH LOSSES OF FIRMS, PROVIDES THAT WHERE THE ASSESSEE IS A FIRM, ANY LOSS IN RELATION TO THE ASSESSMENT YEAR COMMENCING ON OR BEFORE 1 - 4 - 1992, WHICH COULD NOT BE SET OFF AGAINST ANY OTHER INCOME OF THE FIRM AND WHICH HAD BEEN APPORTIONED TO A PARTNER OF THE FIRM BUT COULD NOT BE SET OFF BY SUCH PARTNER PRIOR TO THE ASSESSMENT YEAR - : 20 : - 20 COMMENCING ON 1 - 4 - 1993, THEN SUCH LOSS SHALL BE ALLOWED TO BE SET OFF AGAINST THE INCOME OF THE FIRM SUBJECT TO THE CONDITION THA T THE PARTNER CONTINUES IN THE SAID FIRM FOR THE LOSS TO BE CARRIED FORWARD FOR SET OFF UNDER SECTIONS 70, 71, 72, 73, 74 AND 74A. AT THIS POINT IN TIME IT WOULD BE RELEVANT TO MENTION THAT SECTION 75 HAS BEEN SUBSTITUTED FOR SECTIONS 75, 76 AND 77 BY THE FINANCE ACT, 1992. SECTION 75(1), BEFORE SUBSTITUTION, PROVIDED THAT WHERE THE ASSESSEE IS A REGISTERED FIRM, AND ANY LOSS WHICH CANNOT BE SET OFF AGAINST ANY OTHER INCOME OF THE FIRM SHALL BE APPORTIONED BETWEEN THE PARTNERS OF THE FIRM, AND THEY ALONE SHALL BE ENTITLED TO HAVE THE AMOUNT OF THE LOSS SET OFF AND CARRIED FORWARD FOR SET OFF UNDER SECTIONS 70, 71, 72, 73, 74 AND 74A. ON A CONJOINT READING OF SECTION 75, BEFORE AND AFTER SUBSTITUTION, IT IS DISCERNIBLE THAT PRIOR TO 1 - 4 - 1993, WHEN THE REFER ENCE WAS MADE TO THE UNABSORBED LOSS OF A FIRM FOR THE CURRENT YEAR GETTING APPORTIONED BETWEEN THE PARTNERS OF FIRM, THE WORDS USED WERE CANNOT BE SET OFF. HOWEVER, WITH EFFECT FROM 1 - 4 - 1993, DUE TO CHANGE IN THE SCHEME OF TAXATION OF FIRMS, UNABSORBED LOSSES OF THE REGISTERED FIRMS FOR THE EARLIER YEARS, WHICH WERE APPORTIONED BETWEEN THE PARTNERS BUT COULD NOT BE SET OFF AGAINST THEIR SEPARATE INCOME, HAVE COME BACK TO THE COFFERS OF THE - : 21 : - 21 FIRM. IN ORDER TO MAKE REFERENCE TO SUCH LOSSES OF THE EARLIER Y EARS, THE WORDS USED HAVE BEEN COULD NOT BE SET OFF. THUS, IT IS MANIFEST THAT THE WORDS CANNOT BE AS USED IN SECTION 32(2) IN THE THIRD PERIOD, REFER ONLY TO THE CURRENT YEAR S DEPRECIATION, WHICH IS PARALLEL TO SECTION 75 BEFORE SUBSTITUTION. THE BRO UGHT FORWARD UNABSORBED DEPRECIATION OF THE EARLIER YEARS CANNOT BE INCLUDED WITHIN THE SCOPE OF SECTION 32(2). IF THE INTENTION OF THE LEGISLATURE HAD BEEN TO ALLOW SUCH BROUGHT FORWARD UNABSORBED DEPRECIATION RESPECTING THE SECOND PERIOD ALSO AT PAR WITH THE DEPRECIATION FOR THE YEAR UNDER SECTION 32(1) IN THIRD PERIOD, THEN SUB - SECTION WOULD HAVE BEEN DIFFERENTLY WORDED SOMEWHAT LIKE WHERE IN THE ASSESSMENT OF THE ASSESSEE FULL EFFECT COULD NOT BE GIVEN TO ANY ALLOWANCE OR. . . EMPLOYING THE EXPRESSIO N COULD NOT BE AKIN TO THAT USED IN THE POST - SUBSTITUTED SECTION 75. SINCE SUB - SECTION (2) OF SECTION 32 HAS BEEN WORDED IN THE PRESENT AND NOT IN THE PAST OR PAST PREFECT TENSE AND THIS BEING A DEEMING PROVISION, THE BROUGHT FORWARD UNABSORBED DEPRECIAT ION OF THE SECOND PERIOD CANNOT BE BROUGHT WITHIN ITS PURVIEW. [PARA 24] THIS POSITION CAN BE APPRECIATED FROM ANOTHER ANGLE ALSO. FROM THE LANGUAGE OF SECTION 32(2), IN THE SECOND PERIOD, IT CAN BE NOTED THAT THE DEPRECIATION - : 22 : - 22 ALLOWANCE FOR THE CURRENT YEA R TO WHICH FULL EFFECT CANNOT BE GIVEN DUE TO THE PAUCITY OF PROFIT, HAS BEEN REFERRED TO AS UNABSORBED DEPRECIATION ALLOWANCE . IN THAT VIEW OF THE MATTER SUCH UNABSORBED DEPRECIATION ALLOWANCE FOR THE ASSESSMENT YEARS 1997 - 98 TO 2001 - 02 STRICTLY COMES U NDER SECTION 32(2) WITH A SPECIAL NAME AND CHARACTER OF UNABSORBED DEPRECIATION ALLOWANCE CHANGING ITS SITUATION FROM SECTION 32(1). ONCE IT BECOMES SO AND FINDS ITS PLACE UNDER SECTION 32(2), THEN THERE CANNOT BE ANY WARRANT FOR CONSIDERING IT AS ALLOWA NCE UNDER SECTION 32(1) IN THE THIRD PERIOD, SO AS TO BE COVERED WITHIN SUB - SECTION (2) OF SECTION 32. AS THE LANGUAGE OF THIS DEEMING PROVISION DOES NOT TALK OF ANY BROUGHT FORWARD UNABSORBED DEPRECIATION ALLOWANCE OR THE DEPRECIATION ALLOWANCE WHICH CO ULD NOT BE GIVEN EFFECT TO IN THE EARLIER YEARS THAT RESULTANTLY BECAME PART OF SECTION 32(2), THERE IS NO QUESTION OF EXPANDING THE SCOPE OF THE LEGAL FICTION. [PARA 25] THUS, IT CAN BE SEEN THAT THE PURPOSE OF LEGAL FICTION IN SECTION 32(2) [WHICH IS ANA LOGOUS TO PROVISO ( B ) TO SECTION 10(2)( VI ) OF THE INDIAN INCOME - TAX ACT, 1922] IS TO MAKE THE UNABSORBED CARRIED FORWARD DEPRECIATION PARTAKE THE SAME CHARACTER AS THE CURRENT DEPRECIATION IN THE FOLLOWING YEAR. IN OTHER WORDS, THE - : 23 : - 23 OBJECT OF THE PROVISION IS TO TREAT THE WHOLE OR PART OF THE DEPRECIATION ALLOWANCE UNDER SECTION 32(1), WHICH COULD NOT BE ADJUSTED IN THE FIRST YEAR, AS THE CURRENT DEPRECIATION UNDER SECTION 32(1) IN THE SECOND YEAR. IN THE SECOND YEAR, SUCH DEPRECIATION OF THE FIRST YEAR BECO MES PART AND PARCEL OF DEPRECIATION UNDER SECTION 32(1) OF THE SECOND YEAR. IF AGAIN IN THE SECOND YEAR, THE TOTAL OF DEPRECIATION UNDER SECTION 32(1) [INCLUDING THE AMOUNT OF ALLOWANCE WHICH CAME FROM FIRST YEAR AND BECAME DEPRECIATION UNDER SECTION 32(1 ) IN THE SECOND YEAR] CANNOT BE ABSORBED, IT SHALL BECOME CURRENT DEPRECIATION FOR THE THIRD YEAR TO BE DEALT WITH IN THE SAME MANNER AS THE AMOUNT OF DEPRECIATION IN THE THIRD YEAR AND SO ON. ONCE THE UNABSORBED DEPRECIATION FOR THE FIRST YEAR IS GIVEN TH E CHARACTER OF CURRENT DEPRECIATION IN THE SECOND YEAR, THE PURPOSE OF SECTION 32(2) IS FULFILLED. IT IS NOWHERE LAID DOWN THAT THE UNABSORBED DEPRECIATION ALLOWANCE OF THE SECOND PERIOD IS TO BE GIVEN THE CHARACTER OF CURRENT DEPRECIATION IN THE THIRD P ERIOD. THE FUNCTION OF THE DEEMING PROVISION IN SECTION 32(2) IS RESTRICTED ONLY TO GIVING THE CURRENT YEAR S UNABSORBED DEPRECIATION THE STATUS OF CURRENT DEPRECIATION IN THE FOLLOWING YEAR. AS SOON AS THAT IS DONE, THE PURPOSE OF THE SUB - SECTION IS ACHIE VED. - : 24 : - 24 NOTHING MORE AND NOTHING LESS THAN THAT CAN BE DEDUCED FROM IT. [PARA 27] IT WAS ALSO ARGUED BY THE ASSESSEE THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN TREATING INTEREST INCOME AS FALLING UNDER THE HEAD INCOME FROM OTHER SOURCES . THE ASSESSEE S UBMITTED THAT SINCE ITS BUSINESS WAS THAT OF MERCHANT BANKING, THE INTEREST INCOME OUGHT TO HAVE BEEN CONSIDERED AS BUSINESS INCOME. THE SAID CONTENTION COULD NOT BE ACCEPTED AT THE INSTANT STAGE OF PROCEEDINGS FOR MORE THAN ONE REASONS. IT IS A SETTLED LE GAL POSITION THAT TO FIND OUT HEAD UNDER WHICH INTEREST INCOME WOULD FALL, NEEDS TO BE TESTED BY CONSIDERING THE CUMULATIVE EFFECT OF SEVERAL FACTORS, SUCH AS THE NATURE OF BUSINESS, NATURE AND SOURCE OF INTEREST INCOME, CIRCUMSTANCES IN WHICH THE FUNDS WE RE PARKED. HOWEVER, THERE IS UNANIMITY OF THE OPINION THAT IF THE SURPLUS FUNDS ARE DEPOSITED IN A BANK, THE INTEREST INCOME WILL PARTAKE OF THE CHARACTER OF INCOME FROM OTHER SOURCES IRRESPECTIVE OF THE NATURE OF THE ASSESSEE S BUSINESS. IN THE INSTANT CA SE INTEREST WAS EARNED ON FDRS FROM BANK. IT WAS NEVER THE CASE OF THE ASSESSEE BEFORE THE AUTHORITIES BELOW THAT THE FUNDS WERE REQUIRED TO BE DEPOSITED IN THE BANK NECESSARILY FOR CARRYING ON ITS BUSINESS. FURTHER, THE COMMISSIONER (APPEALS) HAD RECORDED A FINDING IN THE IMPUGNED ORDER THAT - : 25 : - 25 THE ASSESSEE WAS NOT CONTINUOUSLY ENGAGED IN THE ACTIVITY OF MONEY LENDING DURING THE YEAR AND THIS INTEREST WAS RECEIVED THROUGH ITS DEPOSITS WITH THE BANK. IT CAN FURTHER BE NOTED FROM THE IMPUGNED ORDER THAT THE ASS ESSEE ACCEPTED THE TREATMENT GIVEN BY THE ASSESSING OFFICER TO THE INTEREST INCOME AS FALLING UNDER THE HEAD INCOME FROM OTHER SOURCES . IN VIEW OF THE FOREGOING REASONS THE ASSESSEE S CONTENTION THAT THE INTEREST INCOME BE CONSIDERED AS FALLING UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION , COULD NOT BE ACCEPTED. [PARA 33] ANOTHER LEG OF THE SUBMISSIONS OF THE ASSESSEE WAS THAT EVEN IF IT WAS HELD THAT THE PROVISION OF THE SECOND PERIOD WOULD APPLY, STILL THE EXPRESSION PROFITS AND GAINS S HOULD BE HELD AS COVERING NOT ONLY THE BUSINESS INCOME BUT ALSO INCOME UNDER OTHER HEADS OF INCOME INCLUDING INCOME FROM OTHER SOURCES . THERE WAS NO MERIT IN THIS SUBMISSION FOR THE REASON THAT IT WAS A CASE ON THE INTERPRETATION OF THE EXPRESSIONS PRO FITS OR GAINS AS USED IN THE LANGUAGE OF SUB - SECTION (2) FOR THE FIRST PERIOD. BY MEANS OF SUBSTITUTION OF THE PROVISION IN THE SECOND PERIOD, THE INTERPRETATION GIVEN BY THE SUPREME COURT TO THE EXPRESSION PROFITS OR GAINS CHARGEABLE AS COVERING ALL TH E HEADS OF INCOME AND NOT ONLY RESTRICTING IT TO THE BUSINESS INCOME WAS DONE AWAY - : 26 : - 26 WITH. HOWEVER, THE EFFECT OF SUBSTITUTION OF SECTION 32(2) BY THE FINANCE ACT, 2001 IS THAT WHATEVER PROVISION AND ITS INTERPRETATION WAS THERE IN THE SECOND PERIOD STOOD OMITTED AND THE STATUS QUO ANTE AS EXISTING PRIOR TO AMENDMENT BY FINANCE ACT, 1996 WAS RESTORED. RESULTANTLY, THE INTERPRETATION GIVEN BY THE SUPREME COURT TO THE EXPRESSION PROFITS OR GAINS CHARGEABLE HAS ONCE AGAIN RESURFACED IN THE THIRD PERIOD AS CO VERING NOT ONLY INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION BUT ALSO INCOME UNDER OTHER HEADS. RESULTANTLY, THE UNABSORBED DEPRECIATION ALLOWANCE AS GENERATED DURING THE SECOND PERIOD CANNOT HAVE A SET OFF AGAINST INCOME UNDER THE H EAD INCOME FROM OTHER SOURCES IN THE THIRD PERIOD. [PARA 34] ONE MORE ARGUMENT WAS TAKEN BY THE ASSESSEE THAT THERE WAS SUBSTITUTION OF SECTION 32(2) BY THE FINANCE ACT, 2001 WITH EFFECT FROM 1 - 4 - 2002 AND IT WAS NOT A CASE OF AMENDMENT. THE ASSESSEE TRIE D TO MAKE OUT A CASE THAT THE EFFECT OF REPEAL OF THE EARLIER SECTION 32(2) WOULD BE THAT THE BENEFIT WHICH HAD ACCRUED TO THE ASSESSEE AS PER OLD PROVISION, WILL AUTOMATICALLY COME INTO BEING UNDER THE NEW PROVISION. IN THAT VIEW OF THE MATTER IT WAS ARGU ED THAT THE BROUGHT FORWARD UNABSORBED DEPRECIATION ALLOWANCE FOR THE SECOND - : 27 : - 27 PERIOD MAY BE TREATED AS DEPRECIATION ALLOWANCE FOR THE CURRENT YEAR IN THE THIRD PERIOD. [PARA 35] IT IS SEEN THAT SECTION 32(2) AS PREVAILING IN THE SECOND PERIOD WAS SUBSTITUTE D WITH A NEW PROVISION IN THE THIRD PERIOD AND IT WAS NOT A CASE OF SOME AMENDMENT. IF THERE IS BOTH, REPEAL OF THE OLD PROVISION AND ALSO SIMULTANEOUS INSERTION OF A NEW PROVISION IN ITS PLACE THEREOF, IT IS CALLED AS SUBSTITUTION . THE SUBMISSION MADE B Y THE ASSESSEE, THAT THE RIGHT OF UNABSORBED DEPRECIATION ALLOWANCE THAT ACCRUED IN THE SECOND PERIOD WOULD REMAIN IN TACT AND WOULD CONTINUE TO BE GOVERNED BY THE PROVISIONS OF SECTION 32(2) AS INSERTED IN THE THIRD PERIOD, WAS DEVOID OF MERIT. [PARA 36] AS PER GENERAL RULE THE REPEAL OF A PROVISION DESTROYS THE RIGHTS DEPENDENT ON IT. IF ONE EXAMINES THE GENERAL EFFECT OF REPEAL OF SECTION 32(2) AS PREVAILING IN THE SECOND PERIOD, THEN BROUGHT FORWARD UNABSORBED DEPRECIATION ALLOWANCE SHOULD OBLITERATE AN D DIE ITS NATURAL DEATH IN THE THIRD PERIOD BUT THAT IS NOT THE CASE HERE AS THE EXCEPTION SHALL COME INTO PLAY AS AGAINST THE GENERAL EFFECT OF REPEAL AS PER WHICH THE REPEALED LAW SHALL CONTINUE TO BE THE LAW OF THE PERIOD DURING WHICH IT WAS IN FORCE. A S A - : 28 : - 28 RESULT OF THAT THE BENEFIT ALREADY EARNED IN THE SECOND PERIOD BY WAY OF BROUGHT FORWARD UNABSORBED DEPRECIATION ALLOWANCE SHALL COME TO THE THIRD PERIOD TO BE DEALT WITH IN ACCORDANCE WITH THE PROVISION OF THE SECOND PERIOD FOR SET OFF AGAINST THE INC OME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION FOR A PERIOD NOT MORE THAN EIGHT ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE ASSESSMENT YEAR FOR WHICH THE AFORESAID ALLOWANCE WAS FIRST COMPUTED. IT IS STILL FURTHER NOTED THAT THE FINANCE ( NO. 2) ACT, 1996 ALSO SUBSTITUTED SECTION 32(2) AND THAT ALSO WAS NOT A CASE OF AMENDMENT. BY VIRTUE OF THIS SUBSTITUTION BY THE FINANCE ACT, 1996 THE CURRENT YEAR S DEPRECIATION IN THE SECOND PERIOD BECAME ELIGIBLE FOR SET OFF AGAINST INCOME UNDER THE HEA D PROFITS AND GAINS OF BUSINESS OR PROFESSION AND THEN AGAINST ANY OTHER HEAD. IN THE ABSENCE OF ANY PROVISION TO DEAL WITH THE UNADJUSTED BROUGHT FORWARD DEPRECIATION OF THE FIRST PERIOD IN THE SECOND PERIOD, SUCH AMOUNT WAS NOT AVAILABLE FOR SET OFF AN D, THUS, IT WOULD HAVE CEASED TO HAVE ANY EFFECT. TO FILL THE VACUUM AND TO SAVE THE LOSS OF BENEFIT ALREADY ACCRUED TO THE ASSESSEE IN THE FIRST PERIOD IN THE SHAPE OF BROUGHT - : 29 : - 29 FORWARD UNADJUSTED DEPRECIATION DUE TO THE REPEAL OF THE EARLIER PROVISION, THE FINANCE MINISTER CAME OUT WITH THE RELAXATION. BUT FOR SUCH RELAXATION GIVEN BY THE FINANCE MINISTER IN THE PARLIAMENT, THE BROUGHT FORWARD UNADJUSTED DEPRECIATION OF THE FIRST PERIOD WOULD HAVE ELAPSED. THERE WAS NO SUCH CONCESSION GIVEN BY THE FINANCE M INISTER WHILE SUBSTITUTING THE PROVISIONS OF SECTION 32(2) IN THE THIRD PERIOD. EX CONSEQUENTI, THE BROUGHT FORWARD UNABSORBED DEPRECIATION ALLOWANCE OF THE SECOND PERIOD CANNOT BE TREATED AS THE CURRENT DEPRECIATION IN THE THIRD PERIOD. [PARA 37] THE LEGA L POSITION OF CURRENT AND BROUGHT FORWARD UNADJUSTED/UNABSORBED DEPRECIATION ALLOWANCE IN THE THREE PERIODS IS SUMMARIZED AS UNDER : A. IN THE FIRST PERIOD ( I.E., UP TO THE ASSESSMENT YEAR 1996 - 97) ( I ) CURRENT DEPRECIATION, THAT IS, THE AMOUNT OF ALLOWAN CE FOR THE YEAR UNDER SECTION 32(1) CAN BE SET OFF AGAINST INCOME UNDER ANY HEAD WITHIN THE SAME YEAR. ( II ) AMOUNT OF SUCH CURRENT DEPRECIATION WHICH CANNOT BE SO SET OFF WITHIN THE SAME YEAR AS PER ( I ) ABOVE SHALL BE - : 30 : - 30 DEEMED AS DEPRECIATION UNDER SECTION 32(1), THAT IS, DEPRECIATION FOR THE CURRENT YEAR IN THE FOLLOWING YEAR(S) TO BE SET OFF AGAINST INCOME UNDER ANY HEAD, LIKE CURRENT DEPRECIATION. B. IN THE SECOND PERIOD ( I.E., THE ASSESSMENT YEARS 1997 - 98 TO 2001 - 02) ( I ) BROUGHT FORWARD UNADJUSTED DEPRE CIATION ALLOWANCE FOR AND UP TO THE ASSESSMENT YEAR 1996 - 97 (HEREINAFTER CALLED THE FIRST UNADJUSTED DEPRECIATION ALLOWANCE ), WHICH COULD NOT BE SET OFF UP TO THE ASSESSMENT YEAR 1996 - 97, SHALL BE CARRIED FORWARD FOR SET OFF AGAINST INCOME UNDER ANY HEAD FOR A MAXIMUM PERIOD OF THE EIGHT ASSESSMENT YEARS, STARTING FROM THE ASSESSMENT YEAR 1997 - 98. ( II ) CURRENT DEPRECIATION FOR THE YEAR UNDER SECTION 32(1) (FOR EACH YEAR SEPARATELY STARTING FROM THE ASSESSMENT YEAR 1997 - 98 UP TO 2001 - 02) CAN BE SET OFF FI RSTLY AGAINST BUSINESS INCOME AND THEN AGAINST INCOME UNDER ANY OTHER HEAD. ( III ) AMOUNT OF CURRENT DEPRECIATION FOR THE ASSESSMENT YEARS 1997 - 98 TO 2001 - 02 WHICH CANNOT BE SO SET OFF AS PER ( II ) ABOVE, HEREINAFTER CALLED THE SECOND UNABSORBED DEPRECIAT ION ALLOWANCE SHALL BE CARRIED FORWARD FOR A MAXIMUM PERIOD OF EIGHT ASSESSMENT YEARS FROM THE ASSESSMENT YEAR IMMEDIATELY SUCCEEDING THE - : 31 : - 31 ASSESSMENT YEAR FOR WHICH IT WAS FIRST COMPUTED, TO BE SET OFF ONLY AGAINST THE INCOME UNDER THE HEAD PROFITS AND GA INS OF BUSINESS OR PROFESSION . C. IN THE THIRD PERIOD ( I.E., THE ASSESSMENT YEAR 2002 - 03 ONWARDS) ( I ) FIRST UNADJUSTED DEPRECIATION ALLOWANCE CAN BE SET OFF UP TO THE ASSESSMENT YEAR 2004 - 05, THAT IS, THE REMAINING PERIOD OUT OF MAXIMUM PERIOD OF EIGHT ASSESSMENT YEARS (AS PER B ( I ) ABOVE) AGAINST INCOME UNDER ANY HEAD. ( II ) SECOND UNABSORBED DEPRECIATION ALLOWANCE CAN BE SET OFF ONLY AGAINST THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION WITHIN A PERIOD OF EIGHT ASSESSMENT Y EARS, SUCCEEDING THE ASSESSMENT YEAR FOR WHICH IT WAS FIRST COMPUTED. ( III ) CURRENT DEPRECIATION FOR THE YEAR UNDER SECTION 32(1), FOR EACH YEAR SEPARATELY, STARTING FROM THE ASSESSMENT YEAR 2002 - 03 CAN BE SET OFF AGAINST INCOME UNDER ANY HEAD. AMOUNT OF DEPRECIATION ALLOWANCE NOT SO SET OFF ( THIRD UNADJUSTED DEPRECIATION ALLOWANCE ) SHALL BE CARRIED FORWARD TO THE FOLLOWING YEAR. ( IV ) THE THIRD UNADJUSTED DEPRECIATION ALLOWANCE SHALL BE DEEMED AS DEPRECIATION UNDER SECTION 32(1), THAT IS, DEPRECIATION FOR THE CURRENT YEAR IN THE FOLLOWING YEAR(S) - : 32 : - 32 TO BE SET OFF AGAINST INCOME UNDER ANY HEAD, LIKE CURRENT DEPRECIATION, IN PERPETUITY. [PARA 38] ADVERTING TO THE FACTS OF THE INSTANT CASE IT WAS FOUND THAT THE UNABSORBED DEPRECIATION ALLOWANCE AROSE IN THE SECOND PERIOD, I.E., THE ASSESSMENT YEARS 1997 - 98 TO 1999 - 2000 WHICH COULD NOT BE ADJUSTED AGAINST THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION UP TO THE ASSESSMENT YEAR 2002 - 03. NOW THE ASSESSEE COULD NOT CLAIM SET - OFF OF SUCH U NABSORBED DEPRECIATION ALLOWANCE AGAINST INCOME UNDER ANY HEAD OTHER THAN PROFITS AND GAINS OF BUSINESS OR PROFESSION IN THE YEARS UNDER CONSIDERATION. AS THE ASSESSEE WAS SEEKING TO CLAIM THE SET - OFF OF SUCH BROUGHT FORWARD UNABSORBED DEPRECIATION ALLOW ANCE AGAINST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES , THAT COULD NOT BE ACCEPTED. IN VIEW OF THE FOREGOING REASONS IT WAS TO BE OPINED THAT THE COMMISSIONER (APPEALS) HAD ERRED IN NOT CORRECTLY INTERPRETING THE LAW IN THIS REGARD. THE IMPUGNED OR DER WAS TO BE VACATED AND THE ACTION OF THE ASSESSING OFFICER WAS TO BE RESTORED IN BOTH THE YEARS UNDER CONSIDERATION. [PARA 39] THE QUESTION POSED BEFORE THE INSTANT SPECIAL BENCH WAS, THEREFORE, TO BE ANSWERED IN FAVOUR OF THE REVENUE BY HOLDING THAT TH E UNABSORBED DEPRECIATION RELATING TO THE ASSESSMENT YEARS 1997 - 98 TO 1999 - 2000 WAS TO BE DEALT - : 33 : - 33 WITH IN ACCORDANCE WITH THE PROVISIONS OF SECTION 32(2) AS APPLICABLE FOR THE ASSESSMENT YEARS 1997 - 98 TO 1999 - 2000. [PARA 40] IN THE RESULT, THE REVENUE S APP EAL WAS TO BE ALLOWED. 6. IN VIEW OF THE ABOVE, WE RESTORE THE MATTER BACK TO THE FILE OF AO FOR CONSIDERING ALLOWABILITY OF SET OFF OF UNABSORBED DEPRECIATION IN TERMS OF DIRECTIONS GIVEN BY THE SPECIAL BENCH IN THE AFORESAID ORDER. WE DIRECT ACCORDINGLY. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 26 TH JU LY , 2011. S D/ - S D/ - (JOGINDER SINGH) ( R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 26 TH JU LY , 2011 . CPU * 12 14 7