SMITH & NEWPHEW HEALTHCARE P.LTD, MUMBAI V. DCIT 8(3), MUMBAI

ITA 6735/MUM/2012

• Counselvise Citation: 673519914 RSA 2012
• Duration Of Justice: 1 year(s) 2 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2008-2009
• Appeal Filed On: 05-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M L PERUMAL
• Assessee Lawyers: R MURLIDHAR
• Keywords: Business income; Depreciation; Speculation loss; Unabsorbed depreciation
• Section: 32; 72(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUM BAI . . , , BEFORE SHRI R. C. SHARMA, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ./ I.T.A. NO. 6735/MUM/2012 ( / ASSESSMENT YEAR: 2008-09) SMITH & NEPHEW HEALTHCARE PRIVATE LIMITED 501-509B, DYNASTY BUSINESS PARK, ANDHERI KURLA ROAD, NEAR J. B. NAGAR, ANDHERI (EAST), MUMBAI-400 059 / VS. DY. CIT-8(3), ROOM NO.217, AAYAKAR BHAWAN, M. K. ROAD, MUMBAI-400 020 ./ ! ./PAN/GIR NO. AAACS 8136 N ( ' /APPELLANT ) : ( #$' / RESPONDENT ) ' % & / APPELLANT BY : SHRI R. MURLIDHAR #$' % & / RESPONDENT BY : SHRI M. L. PERUMAL ' ( % ) * / DATE OF HEARING : 08.01.2014 +,-. % ) * / DATE OF PRONOUNCEMENT : 15.01.2014 / O R D E R PER R. C. SHARMA, A. M.: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER BY THE LD. CIT(A)-15, MUMBAI DATED 09.08.2012, FOR THE ASSESSMENT YEAR (A .Y.) 2008-09. THE FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE: ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HO NBLE CIT(A): DISALLOWANCE OF CARRY FORWARD OF UNABSORBED DEPRECI ATION UNDER SECTION 32(2) OF THE ACT 1. ERRED IN CONFIRMING DISALLOWANCE OF CARRY FORWAR D OF UNABSORBED DEPRECATION FROM A.Y. 1995-96 TO A.Y. 2001-02 WITHO UT APPRECIATING THE PROVISIONS OF SECTION 32(2) OF THE ACT AS APPLICABL E FROM 1 APRIL 2002; 2 ITA NO. 6735/MUM/2012 (A.Y. 2008-09) SMITH & NEPHEW HEALTHCARE PRIVATE LIMITED VS. DY. C IT 2. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN CONFIRM ING DISALLOWANCE OF CARRY FORWARD OF UNABSORBED DEPRECATION PERTAINING TO AY 2001-02 WITHOUT APPRECIATING THAT THE ABOVE YEARS ARE WITHIN THE PERIOD OF 8 YEA RS FOR THE ASSESSMENT UNDER CONSIDERATION. 2. AT THE OUTSET IT WAS CONTENDED BY THE LD. AR THA T THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE O F MILTONS PVT. LIMITED VS. CIT IN ITA NO.2019/MUM/2012, ORDER DATED 22.05.2013. THE LD. A R HAS ALSO PLACED RELIANCE ON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF GENERAL MOTORS INDIA P. LTD. VS. DY. CIT [2013] 354 ITR 244 (GUJ), WHEREIN SIMILAR ISSUE WA S DECIDED IN FAVOUR OF THE ASSESSEE AND IT WAS HELD THAT THE UNABSORBED DEPREC IATION OR PART THEREOF NOT SET OFF TILL THE A.Y. 2002-03 IS ELIGIBLE TO BE CARRY FORWARD AND SE T OFF TILL THE FINAL SET OFF. FURTHER, RELIANCE PLACED ON THE FOLLOWING DECISIONS : 1. HINDUSTAN UNILEVER LTD. VS. ADDL. CIT [2013] 22 ITR (TRIB) 737 (GUJ); 2. DY. CIT VS. M/S. BISLERI SALES LTD. -151 TTJ 285 (MUM-TRIB.); 3. ASST. CIT VS. ECIL LTD. [2013] 56 SOT 237 (HYDERABAD); 4. DY. CIT VS. TIMES GUARANTY LTD. [2010] 40 SOT 14 (MUM.) (SB). 3. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDE RS OF THE AUTHORITIES BELOW. 4. WE HAVE CONSIDERED THE RIVAL CONTENTIONS CAREFUL LY AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND FROM THE RECORD THA T THE LOWER AUTHORITIES HAVE DECLINED ASSESSEES CLAIM FOR CARRY FORWARD AND SET OFF OF U NABSORBED DEPRECIATION PERTAINING TO A.Y. 1995-96 TO A.Y. 2001-02, AGAINST THE CURRENT Y EAR BUSINESS INCOME FOR THE A.Y. 2008-09 UNDER CONSIDERATION. THIS ISSUE HAS BEEN EL ABORATELY DEALT BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF GENERAL MOTORS INDIA P. LTD. (SUPRA), WHEREIN IT WAS HELD THAT THE PROVISIONS OF SECTION 32(2), AS AMEND ED BY FINANCE ACT, 2001, WOULD ALLOW THE UNABSORBED DEPRECIATION ALLOWANCE AVAILABLE IN THE A.YS. 1997-98, 1999-2000, 2000- 01 AND 2001-02 TO BE CARRIED FORWARD TO THE SUCCEED ING YEARS, AND IF ANY UNABSORBED DEPRECIATION OR PART THEREOF COULD NOT BE SET OFF T ILL THE A.Y. 2002-03 THEN IT WOULD BE CARRIED FORWARD TILL THE TIME IT IS SET OFF AGAINST THE PROFITS AND GAINS OF SUBSEQUENT YEARS. 3 ITA NO. 6735/MUM/2012 (A.Y. 2008-09) SMITH & NEPHEW HEALTHCARE PRIVATE LIMITED VS. DY. C IT IN THE CASE OF HINDUSTAN UNILEVER LTD. (SUPRA), THE HONBLE ITAT BENCH HELD THAT THE AMENDMENT BROUGHT IN BY THE FINANCE (NO.2) ACT, 1996 WITH RESPECT TO CARRY FORWARD AND SET OFF OF UNABSORBED DEPRECIATION OF A.YS. 199 6-97 AND 1997-98, IS ALLOWABLE IN THE A.Y. 2006-07. ITAT SPECIAL BENCH IN THE CASE OF TIMES GUARANTY LTD. (SUPRA) HELD THAT THE UNABSORBED DEPRECATION RELATING TO THE A.YS. 1997-9 8 TO 1999-2000 WAS TO BE DEALT WITH IN ACCORDANCE WITH THE PROVISIONS OF SECTION 32(2) AS APPLICABLE FOR THE A.YS. 1997-98 TO 1999-2000. IN VIEW OF THE PROVISIONS OF SECTION 32( 2) AS APPLICABLE TO A.YS. 1997-98 TO 1999-2000, THE ASSESSEE COULD SET OFF THE UNABSORBE D DEPRECIATION AGAINST THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS. THE PRECISE OBSERVATION OF THE BENCH WAS AS UNDER: HELD THE SHORT CONTROVERSY THAT CAME UP FOR DISPOSAL WAS AS TO WHETHER DEPRECIATION FOR THE ASSESSMENT YEARS 1997-98 TO 1999-2000 WHICH COULD NOT BE ABSORBED, COULD BE SET OFF AGAINST INCOME FROM OTHER SOURCES IN THE ASSESSMENT YEARS 2003- 04 AND 2004-05. IN ORDER TO EXAMINE AND EVALUATE TH E RIVAL CONTENTIONS ON THIS ISSUE, IT WOULD BE APT TO TAKE STOCK OF THE PROVISI ONS OF SECTION 32(2) AS 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 INADEQUAC Y OF PROFITS OR GAINS FROM SUCH BUSINESS, THEN SUCH ALLOWANCE OR PART OF IT WHICH R EMAINS UNABSORBED, IS TO BE REFERRED TO AS UNABSORBED DEPRECIATION ALLOWANCE. SUCH UNABSORBED DEPRECIATION ALLOWANCE IS TO BE SET OFF FIRSTLY AGA INST 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 DEPRECIATION 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 EXERCI SE OF SETTING OFF THE UNABSORBED DEPRECIATION ALLOWANCE AGAINST ANY HEAD OF INCOME I S RESTRICTED TO THE YEAR IN WHICH THE CLAIM FOR DEPRECIATION HAS ARISEN UNDER S ECTION 32(1). IF, HOWEVER, INCOME OF THE ASSESSEE UNDER ALL HEADS IS INSUFFICI ENT TO ABSORB THE UNABSORBED DEPRECIATION ALLOWANCE, THEN SUCH AMOUNT IS TO BE C ARRIED FORWARD TO THE FOLLOWING 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 SHO ULD CONTINUE TO BE CARRIED 4 ITA NO. 6735/MUM/2012 (A.Y. 2008-09) SMITH & NEPHEW HEALTHCARE PRIVATE LIMITED VS. DY. C IT ON BY THE ASSESSEE DURING THE PREVIOUS YEAR RELEVAN T TO THE ASSESSMENT YEAR IN WHICH THE SET OFF IS CLAIMED. THE EXERCISE OF CARRY ING FORWARD OF SUCH UNABSORBED DEPRECIATION ALLOWANCE IS TO BE CONTINUED UP TO THE EIGHT ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE ASSESSMENT YEAR FOR WHIC H THE AFORESAID DEPRECIATION ALLOWANCE WAS FIRST COMPUTED. FROM HERE IT FOLLOWS THAT THE AMOUNT OF UNABSORBED DEPRECIATION ALLOWANCE WHICH COULD NOT BE SET OFF A GAINST INCOME UNDER ANY HEAD IN THE YEAR IN WHICH THE ALLOWANCE WAS FIRST COMPUT ED, SHALL BE ELIGIBLE TO BE CARRIED FORWARD FOR SET OFF ONLY AGAINST INCOME UND ER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION TO THE FOLLOWING ASSESSM ENT YEAR(S) NOT MORE THAN EIGHT ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE ASSESSM ENT 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 DEPRECIA TION ALLOWANCE FOR THE CURRENT YEAR UNDER SECTION 32(1), THEN IT WILL BE ADJUSTED ACCOR DINGLY. 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 SECTIONS 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 A LLOWANCE OF THE CURRENT YEAR AS THE CURRENT DEPRECIATION ALLOWANCE OF THE FOLLOW ING YEAR, IS SUBJECT TO THE PROVISIONS OF SECTION 72(2) AND SECTION 73(3). SECT ION 72(1) PROVIDES THAT WHERE FOR ANY ASSESSMENT YEAR, THE NET RESULT OF THE COMP UTATION UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION IS A LOSS TO T HE ASSESSEE, NOT BEING A LOSS SUSTAINED IN A SPECULATION BUSINESS, AND SUCH LOSS CANNOT BE OR IS NOT WHOLLY SET OFF AGAINST INCOME UNDER ANY OTHER HEAD OF INCOME I N ACCORDANCE WITH THE PROVISIONS OF SECTION 71, THEN SUCH LOSS SHALL BE C ARRIED FORWARD TO THE FOLLOWING ASSESSMENT YEAR TO BE SET OFF AGAINST BUSINESS INCO ME. SUB-SECTION (3) PROVIDES THAT NO LOSS SHALL BE CARRIED FORWARD UNDER THIS SE CTION FOR MORE THAN EIGHT ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE ASSESSM ENT 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 SECT ION 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 EARLIER YEAR S, THEN BROUGHT FORWARD BUSINESS LOSS SHALL HAVE PREFERENCE OVER THE UNADJU STED 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 FORWARD OF BROUGHT FORWARD BUSINESS LOSS UP TO A PERIOD NOT MORE THAN EIGHT ASSESSMENT YEARS. AS AGAINST THAT THE AMOUNT OF BROUGHT FORWARD UNADJUST ED DEPRECIATION UNDER SECTION 5 ITA NO. 6735/MUM/2012 (A.Y. 2008-09) SMITH & NEPHEW HEALTHCARE PRIVATE LIMITED VS. DY. C IT 32(2) CAN GO ON FOR INDEFINITE PERIOD FOR SET OFF A GAINST THE BUSINESS INCOME IN THE FOLLOWING YEARS. SECTION 73 DEALS WITH LOSSES IN SP ECULATION BUSINESS AND PROVIDES THAT THE UNABSORBED SPECULATION LOSS SHALL BE CARRI ED FORWARD TO THE SUCCEEDING YEARS FOR NOT MORE THAN FOUR ASSESSMENT YEARS IMMED IATELY SUCCEEDING THE ASSESSMENT YEAR FOR WHICH THE LOSS WAS FIRST COMPUT ED. 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 B USINESS LOSS OVER THE BROUGHT FORWARD UNADJUSTED DEPRECIATION ALLOWANCE OR CAPITA L EXPENDITURE ON SCIENTIFIC RESEARCH. [PARA 13] THE EXPRESSION PROFITS OR GAINS AS USED IN THE LA NGUAGE 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, OTH ERS 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 I TR 607/ 83 TAXMAN 343 . [PARA 14] IN ORDER TO NEUTRALIZE THE EFFECT OF THE JUDGMENT O F THE SUPREME COURT IN THE CASE OF VIRMANI INDUSTRIES (P.) LTD. (SUPRA) EXPLAINING THE SCOPE OF EXPRESSION PROFITS OR GAINS CHARGEABLE EMPLOYED UNDER SECTION 32(2) A S 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 SECTION 32 BY THE FINANCE (NO. 2) ACT, 1996 WITH EFFECT FROM 1-4-1997. BY VIRTUE OF SUCH S UBSTITUTION, THE SCOPE OF SET OFF OF THE BROUGHT FORWARD UNABSORBED DEPRECIATION ALLO WANCE WAS CONSTRICTED TO THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINES S 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 AGAINST PROFITS AND GAINS OF ANY BUSINESS OR PROFESSION CARRIED ON BY THE ASS ESSEE FOR THAT ASSESSMENT YEAR. IT INDICATES THAT THE SET OFF PROVIDED UNDER THIS C LAUSE IS AGAINST THE INCOME CHARGEABLE UNDER THE HEAD PROFIT AND GAINS OF BUSI NESS OR PROFESSION. ORDINARILY THE EXPRESSION PROFITS AND GAINS DOES NOT REFER T O THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION, AS I S APPARENT FROM THE DEFINITION OF INCOME UNDER SECTION 2(24). IT CAN BE NOTICED THAT, ALTHOUGH SUB-CLAUSE (I) OF CLAUSE (24) OF SECTION 2 TALKS OF PROFITS AND GAIN S, YET SUB-CLAUSES (V), (VA), ETC., ALSO REFER TO INCOME UNDER SECTION 28, WHICH IS PAR T OF CHAPTER IV-D. FROM HERE IT FOLLOWS THAT, THOUGH TECHNICALLY THE EXPRESSION PR OFITS AND GAINS MAY NOT REFER TO THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUS INESS 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 THE POSITION CLEAR BY PROVIDING THAT IF THE U NABSORBED 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 H EAD, IF ANY, ASSESSABLE FOR THAT 6 ITA NO. 6735/MUM/2012 (A.Y. 2008-09) SMITH & NEPHEW HEALTHCARE PRIVATE LIMITED VS. DY. C IT ASSESSMENT YEAR. IF THE INTERPRETATION GIVEN IN VIR MANI INDUSTRIES (P.) LTD.S CASE (SUPRA) HAD BEEN INTENDED TO BE RETAINED, THEN THER E 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 WHE N ONE TURNS TO CLAUSE (III) OF SUB- SECTION (2) WHICH PROVIDES THAT THE UNABSORBED DEPR ECIATION ALLOWANCE NOT SO SET OFF UNDER CLAUSES (I) AND (II ) SHALL BE CARRIED FO RWARD TO THE FOLLOWING ASSESSMENT YEAR AND THEN SET OFF AGAINST THE PROFITS AND GAIN S OF ANY BUSINESS OR PROFESSION CARRIED ON BY THE ASSESSEE IN THE FOLLOWING ASSESSM ENT YEAR. HERE AGAIN THE EXPRESSION PROFITS AND GAINS HAS BEEN USED WHICH IS SIMILAR TO THAT USED IN CLAUSE (I). HAD THE LEGISLATURE DESIRED TO GIVE WIDER MEAN ING TO THE EXPRESSION PROFITS AND GAINS AS INCLUDING INCOME UNDER OTHER HEADS AL SO, THEN THERE WAS NO NEED AT ALL TO HAVE CLAUSE (II) OF SUB-SECTION (2) PROVIDIN G FOR THE SET OFF OF THE UNABSORBED DEPRECIATION ALLOWANCE AGAINST INCOME UNDER ANY OT HER HEAD. FROM THE ABOVE DISCUSSION IT CAN BE EASILY ASCERTAINED THAT THE EX PRESSION PROFITS AND GAINS AS USED IN CLAUSE (I ) OR (III)(A ) REFERS ONLY TO INC OME 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 UNABS ORBED DEPRECIATION FOR ANY NUMBER OF YEARS AGAINST INCOME 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 AS SESSMENT YEARS SUCCEEDING THE ASSESSMENT YEAR IN WHICH THE ALLOWANCE WAS FIRST CO MPUTED. 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 DE PRECIATION ALLOWANCE FOR AND UP TO THE ASSESSMENT YEAR 1996-97. FEARS WERE EXPRE SSED IN THE 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 TH AT SEALED THE FATE OF THE UNADJUSTED BROUGHT FORWARD DEPRECIATION UP TO THE END OF THE F IRST PERIOD AS AVAILABLE FOR SET OFF AGAINST TAXABLE PROFITS OR INCOME UNDER ANY OTH ER 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 1-4-1 997 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 UNAD JUSTED DEPRECIATION RELATED. IN OTHER WORDS, THE PERIOD OF EIGHT YEARS AS PER CLAUS E (III)(B ) OF SECTION 32(2) CAME TO BE RECKONED FROM THE ASSESSMENT YEAR 1997-98 IRR ESPECTIVE OF THE FACT THAT THE 7 ITA NO. 6735/MUM/2012 (A.Y. 2008-09) SMITH & NEPHEW HEALTHCARE PRIVATE LIMITED VS. DY. C IT UNADJUSTED BROUGHT FORWARD DEPRECIATION AROSE IN TH E ASSESSMENT YEAR 1984-85 OR 1994-95. [PARA 19] THE ABOVE PROVISION HAS BEEN SUBSTITUTED BY THE FIN ANCE ACT, 2001 WITH EFFECT FROM 1-4-2002. IN FACT, IT IS REINFORCEMENT OF THE PROVISION AS EXISTING IN THE FIRST PERIOD. THUS, THE LAW AS EXISTING IN THE SECOND PER IOD 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 PROS PECTIVE UNLESS EXPRESSLY STATED OTHERWISE OR IT APPEARS SO BY NECESSARY IMPL ICATION. IT IS NOWHERE COMING UP EITHER FROM THE NOTES ON CLAUSES OR MEMORANDUM E XPLAINING THE PROVISION OF THE FINANCE BILL 2001, THAT SUBSTITUTION OF SUB-SEC TION (2) OF SECTION 32 IS RETROSPECTIVE. IT IS, THEREFORE, PATENT THAT THE SU BSTANTIVE PROVISION CONTAINED IN SECTION 32(2) AS SUBSTITUTED BY THE FINANCE ACT, 20 01 WITH EFFECT FROM 1-4-2002, IS PROSPECTIVELY APPLICABLE TO THE ASSESSMENT YEAR 200 2-03 ONWARDS. [PARA 21] IT IS OBVIOUS THAT SECTION 32(2) IS A DEEMING PROVI SION AND BY THE LEGAL FICTION, THE AMOUNT OF DEPRECIATION ALLOWANCE UNDER SECTION 32(1 ) WHICH IS NOT FULLY ABSORBED AGAINST INCOME FOR THAT YEAR IS DEEMED TO BE THE PA RT OF DEPRECIATION ALLOWANCE FOR THE SUCCEEDING YEAR(S). A DEEMING PROVISION OR A LEGAL FICTION AS IT IS COMMONLY CALLED IS THE ONE THE MANDATE OF WHICH DOE S NOT EXIST BUT FOR SUCH PROVISION. DUE TO SUCH PROVISION ONLY THE GIVEN IMA GINARY STATE OF AFFAIRS IS TAKEN AS REALITY DESPITE IT BEING AT VARIANCE WITH THE SC OPE OF THE ENACTMENT. IT IS TRITE LAW THAT A DEEMING PROVISION CANNOT BE EXTENDED BEY OND THE PURPOSE FOR WHICH IT IS INTENDED. WHENEVER A LEGAL FICTION IS CREATED BY WAY OF A DEE MING PROVISION, IT IS OF PARAMOUNT IMPORTANCE TO GO STRICTLY BY THE PRESCRIP TION OF SUCH PROVISION. SUCH DEEMING PROVISION CANNOT BE EXTENDED BEYOND THE PUR POSE FOR WHICH IT IS INTENDED. WITH THIS BACKGROUND IN MIND IT WAS NECESSARY TO PR OCEED TO CONSIDER THE COMMAND OF SECTION 32(2), WHICH IS A DEEMING PROVIS ION. [PARA 23] IT HAS BEEN NOTICED ABOVE THAT SECTION 32(2) IN THE THIRD PERIOD IS A SUBSTANTIVE PROVISION AND, HENCE, PROSPECTIVE IN NATURE. WHEN T HAT IS SO, NATURALLY ITS RECOMMENDATION SHALL APPLY FROM ONLY FROM THE ASSES SMENT YEARS 2002-03 ONWARDS. NECESSARY 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 PROVISI ON PROVIDES THAT THE ALLOWANCE OR PART OF THE ALLOWANCE TO WHICH EFFECT HAS NOT BEEN GIVEN, SHALL BE ADDED TO THE AMOUNT OF ALLOWANCE FOR DEPRECIATION IN THE SUCCEED ING YEARS. AT BOTH THE PLACES, PRESENT TENSE HAS BEEN USED IN THE NEGATIVE TERMS W HILE REFERRING TO THE ALLOWANCE TO WHICH EFFECT CANNOT BE AND HAS NOT BEEN GIVE N. SO THE STARTING POINT OF SUB- SECTION (2) IS THE ASSESSMENT OF THE ASSESSEE AND T HE ALLOWANCE UNDER SECTION 32(1) 8 ITA NO. 6735/MUM/2012 (A.Y. 2008-09) SMITH & NEPHEW HEALTHCARE PRIVATE LIMITED VS. DY. C IT TO WHICH FULL EFFECT CANNOT BE GIVEN. SECTION 32(1) DEALS WITH DEPRECIATION ALLOWANCE FOR THE CURRENT YEAR. IT IMPLIES THAT IT IS ONLY WHEN THE ASSESSMENT OF THE ASSESSEE FROM THE ASSESSMENT YEAR 2002-03 ONWARDS I S MADE IN WHICH DEPRECIATION ALLOWANCE FOR THE CURRENT YEAR UNDER S ECTION 32(1) CANNOT BE GIVEN FULL EFFECT TO, OWING TO THE INADEQUACY OF THE PROF IT, 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 SP EAKS OF THE DEPRECIATION ALLOWANCE UNDER SECTION 32(1) FOR THE CURRENT YEAR. THE POINT BECOMES MORE LUCID WHEN ONE MULLS OVER THE LANGUAGE OF SECTION 71B, DE ALING WITH THE CARRY FORWARD AND SET OFF OF LOSSES FROM HOUSE PROPERTY WITHIN TH E SAME YEAR. IT PROVIDES THAT WHERE FOR ANY ASSESSMENT YEAR THE NET RESULT OF COM PUTATION UNDER THE HEAD INCOME FROM HOUSE PROPERTY IS A LOSS TO THE ASSES SEE AND SUCH LOSS CANNOT BE OR IS NOT WHOLLY SET OFF AGAINST INCOME FROM ANY OT HER HEAD OF INCOME IN ACCORDANCE WITH THE PROVISIONS OF SECTION 71, SO MU CH OF THE LOSS AS HAS NOT BEEN SO SET OFF SHALL BE CARRIED FORWARD TO THE FOLLOWI NG ASSESSMENT YEARS. SECTION 72(1) DEALS WITH CARRY FORWARD AND SET OFF OF BUSIN ESS LOSSES (OTHER THAN SPECULATION BUSINESS). IT PROVIDES THAT WHERE FOR A NY ASSESSMENT YEAR THE NET RESULT OF THE COMPUTATION UNDER THE HEAD PROFITS AND GAIN S OF BUSINESS 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 T HE INCOME UNDER ANY HEAD OF INCOME IN ACCORDANCE WITH THE PROVISIONS OF SECTION 71, THEN SO MUCH OF THE LOSS AS HAS NOT BEEN SO SET OFF SHALL BE CARRIED FORWA RD 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 HEA D INCOME FROM HOUSE PROPERTY OR BUSINESS LOSS OF THE CURRENT YEAR. IN THE LIKE MANNER, OTHER SECTIONS SUCH AS SECTIONS 74 AND 74A, ETC., TO THE EXTENT TH EY TALK OF LOSS FOR THE CURRENT YEAR, REFER TO CANNOT BE AND HAS NOT BEEN SET O FF. ON GOING THROUGH THESE SECTIONS IT IS PALPABLE THAT WHEREVER THERE IS MENT ION 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 HAVE BEEN BROUGHT IN TO PLAY. THE NECESSARY COROLLARY WHICH, THEREFORE, FOLLOWS IS THAT THE ENG AGING 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 3 2(1), WHICH COULD NOT BE ADJUSTED DUE TO INADEQUACY OF PROFITS, IS FOR CURRE NT YEAR ALONE STARTING FROM THE ASSESSMENT YEAR 2002-03 ONWARDS. THIS POSITION CEAS ES TO ADMIT OF ANY DOUBT WHEN ONE GOES TO SECTION 75, AS SUBSTITUTED BY THE FINANCE ACT, 1992, WITH EFFECT 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 ASS ESSMENT YEAR COMMENCING ON OR BEFORE 1-4-1992, WHICH COULD NOT BE SET OFF AGAIN ST ANY OTHER INCOME OF THE FIRM AND WHICH HAD BEEN APPORTIONED TO A PARTNER OF TH E FIRM BUT COULD NOT BE SET OFF BY SUCH PARTNER PRIOR TO THE ASSESSMENT YEAR CO MMENCING ON 1-4-1993, THEN SUCH LOSS SHALL BE ALLOWED TO BE SET OFF AGAINST TH E INCOME OF THE FIRM SUBJECT TO THE 9 ITA NO. 6735/MUM/2012 (A.Y. 2008-09) SMITH & NEPHEW HEALTHCARE PRIVATE LIMITED VS. DY. C IT CONDITION THAT THE PARTNER CONTINUES IN THE SAID FI RM 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 FI RM, AND ANY LOSS WHICH CANNOT BE SET OFF AGAINST ANY OTHER INCOME OF THE FIRM SH ALL BE APPORTIONED BETWEEN THE PARTNERS OF THE FIRM, AND THEY ALONE SHALL BE ENTIT LED TO HAVE THE AMOUNT OF THE LOSS SET OFF AND CARRIED FORWARD FOR SET OFF UNDER SECTI ONS 70, 71, 72, 73, 74 AND 74A. ON A CONJOINT READING OF SECTION 75, BEFORE AND AFT ER SUBSTITUTION, IT IS DISCERNIBLE THAT PRIOR TO 1-4-1993, WHEN THE REFERENCE WAS MADE TO THE UNABSORBED LOSS OF A FIRM FOR THE CURRENT YEAR GETTING APPORTIONED BETWE EN 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, UNABSORB ED 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 FIRM. IN ORDER TO MAKE REFERENCE TO SUCH LOSSES OF THE EARLIER YEARS, THE WORDS USED HAVE BEEN COULD NOT BE SET OFF. THUS, IT IS MANIF EST THAT THE WORDS CANNOT BE AS USED IN SECTION 32(2) IN THE THIRD PERIOD, REFER ON LY TO THE CURRENT YEARS DEPRECIATION, WHICH IS PARALLEL TO SECTION 75 BEFOR E SUBSTITUTION. THE BROUGHT FORWARD UNABSORBED DEPRECIATION OF THE EARLIER YEAR S 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 RESPEC TING THE SECOND PERIOD ALSO AT PAR WITH THE DEPRECIATION FOR THE YEAR UNDE R 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 EXPRESSION COULD NOT BE AKIN TO THA T 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 BEIN G A DEEMING PROVISION, THE BROUGHT FORWARD UNABSORBED DEPRECIATION OF THE SECO ND 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 NOTE D THAT THE DEPRECIATION ALLOWANCE FOR THE CURRENT YEAR TO WHICH FULL EFFECT CANNOT BE GIVEN DUE TO THE PAUCITY OF PROFIT, HAS BEEN REFERRED TO AS 'UNABSOR BED DEPRECIATION ALLOWANCE'. IN THAT VIEW OF THE MATTER SUCH UNABSORBED DEPRECIATIO N ALLOWANCE FOR THE ASSESSMENT YEARS 1997-98 TO 2001-02 STRICTLY COMES UNDER SECTION 32(2) WITH A SPECIAL NAME AND CHARACTER OF UNABSORBED DEPRECIAT ION ALLOWANCE CHANGING ITS SITUATION FROM SECTION 32(1). ONCE IT BECOMES SO AN D FINDS ITS PLACE UNDER SECTION 32(2), THEN THERE CANNOT BE ANY WARRANT FOR CONSIDE RING IT AS ALLOWANCE UNDER SECTION 32(1) IN THE THIRD PERIOD, SO AS TO BE COVE RED WITHIN SUB-SECTION (2) OF SECTION 32. AS THE LANGUAGE OF THIS DEEMING PROVISI ON DOES NOT TALK OF ANY BROUGHT FORWARD UNABSORBED DEPRECIATION ALLOWANCE OR THE DEPRECIATION ALLOWANCE WHICH COULD NOT BE GIVEN EFFECT TO IN THE EARLIER Y EARS THAT RESULTANTLY BECAME PART 10 ITA NO. 6735/MUM/2012 (A.Y. 2008-09) SMITH & NEPHEW HEALTHCARE PRIVATE LIMITED VS. DY. C IT 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 FICT ION IN SECTION 32(2) [WHICH IS ANALOGOUS TO PROVISO (B) TO SECTION 10(2)(VI) OF TH E INDIAN INCOME-TAX ACT, 1922] IS TO MAKE THE UNABSORBED CARRIED FORWARD DEP RECIATION PARTAKE THE SAME CHARACTER AS THE CURRENT DEPRECIATION IN THE FOLLOW ING YEAR. IN OTHER WORDS, THE OBJECT OF THE PROVISION IS TO TREAT THE WHOLE OR PA RT 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 BECOMES PART AND PAR CEL OF DEPRECIATION UNDER SECTION 32(1) OF THE SECOND YEAR. IF AGAIN IN THE S ECOND YEAR, THE TOTAL OF DEPRECIATION UNDER SECTION 32(1) [INCLUDING THE AMO UNT OF ALLOWANCE WHICH CAME FROM FIRST YEAR AND BECAME DEPRECIATION UNDER SECTI ON 32(1) IN THE SECOND YEAR] CANNOT BE ABSORBED, IT SHALL BECOME CURRENT DEPRECI ATION FOR THE THIRD YEAR TO BE DEALT WITH IN THE SAME MANNER AS THE AMOUNT OF DEPR ECIATION IN THE THIRD YEAR AND SO ON. ONCE THE UNABSORBED DEPRECIATION FOR THE FIR ST YEAR IS GIVEN THE CHARACTER OF CURRENT DEPRECIATION IN THE SECOND YEAR, THE PUR POSE OF SECTION 32(2) IS FULFILLED. IT IS NOWHERE LAID DOWN THAT THE UNABSORBED DEPREC IATION ALLOWANCE OF THE SECOND PERIOD IS TO BE GIVEN THE CHARACTER OF CURRE NT DEPRECIATION IN THE THIRD PERIOD. THE FUNCTION OF THE DEEMING PROVISION IN SE CTION 32(2) IS RESTRICTED ONLY TO GIVING THE CURRENT YEARS UNABSORBED DEPRECIATION T HE STATUS OF CURRENT DEPRECIATION IN THE FOLLOWING YEAR. AS SOON AS THAT IS DONE, THE PURPOSE OF THE SUB- SECTION IS ACHIEVED. NOTHING MORE AND NOTHING LESS THAN THAT CAN BE DEDUCED FROM IT. [PARA 27] 5. IN VIEW OF THE ABOVE JUDICIAL PRONOUNCEMENT, WE DO NOT FIND ANY MERIT IN THE ACTION OF THE LOWER AUTHORITIES FOR DECLINING THE A SSESSEES CLAIM FOR SET OFF OF CARRY FORWARD UNABSORBED DEPRECIATION PERTAINING TO A.YS. 1995-96 TO 2001-02, AGAINST THE CURRENT YEAR BUSINESS INCOME OF A.Y. 2008-09. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. /. )0 (1 /) % 2 ) % ) 34 ORDER PRONOUNCED IN THE OPEN COURT ON JANUARY 15 TH , 2014 SD/- SD/- (VIVEK VARMA) (R. C. SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER ' 5/ MUMBAI; 6( / DATED : 15.01.2014 11 ITA NO. 6735/MUM/2012 (A.Y. 2008-09) SMITH & NEPHEW HEALTHCARE PRIVATE LIMITED VS. DY. C IT .(../ ROSHANI , SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. ' / THE APPELLANT 2. #$' / THE RESPONDENT 3. ' 7) ( ) / THE CIT(A) 4. ' 7) / CIT - CONCERNED 5. : ; #)(<1 , * <1. , ' 5 / DR, ITAT, MUMBAI 6. ; = > / GUARD FILE ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , ' 5 / ITAT, MUMBAI