How to set-off unabsorbed depreciation?

The claim of depreciation by taxpayers and its denial by the tax authorities has been the subject matter of constant litigation. Frequent changes in the provisions related to depreciation in the Income Tax Act have contributed to multiple interpretations and different decisions, distinguishing one from the other.

This article seeks to analyse the recent decision of the Mumbai Tribunal Special Bench in the case of Times Guaranty Ltd ('assessee'). Before we analyse this decision, it is imperative to know the background of various amendments carried out in the provisions related to set off of unabsorbed depreciation.

Up to assessment year 1996-97, unabsorbed depreciation was considered as the depreciation allowance of the succeeding year(s) and, thus, had an indefinite life for set-off against any head of income.

From assessment year 1997-98 to 2001-02 ('intervening period'), the law was amended and unabsorbed depreciation of a particular year was permitted to be carried forward for a period of eight years only, for a set-off against profits and gains of business or profession.

The law existing prior to the intervening period was reinstated with effect from assessment year 2002-03.

In this case, the assessee had claimed set off of unabsorbed depreciation determined in assessment year's 1997-98 to 1999-2000, against income under the head 'Income from other sources' in its return of income for assessment year's 2003-04 and 2004-05. The tax officer disapproved the above claim. The assessee's claim was allowed by the Commissioner (Appeals). The tax department filed an appeal before the Tribunal against the order of the CIT(A).