Akay Flavours and Aromatics (P) Ltd. vs Deputy Commissioner of Income Tax

C.N. Ramachandran Nair, J.—The question raised in the appeal filed by the Assessee is whether the Tribunal was justified in holding that the Assessee is not entitled to carry over depreciation loss from 2002-03 to 2003-04, the years of assessment under appeal in this case. The Assessee is a 100 per cent export oriented unit (EOU) which enjoys tax exemption u/s 10B of the IT Act. The benefit of exemption initially available was 100 per cent of the income from the EOU. The unit started production in the asst. yr. 1996-97 and the tax exemption was given for a period of 10 years upto 2006-07. Since Section 10B originally provided for complete exclusion of income from EOU, there is no scope for granting depreciation or other allowances or to carry over the excess of the unabsorbed depreciation for subsequent years. However the position changed in the year 2001 when amendment was introduced to Section 10B which limited exemption to 90 per cent of the income from EOU. This necessitates determination of income and obviously Assessee will be able to claim depreciation and carry over cxcess unabsorbed depreciation for the subsequent years u/s 32(2) of the IT Act. It is not known as to what happened from the asst. yr. 2001-02. In any case while completing the assessment for 2002-03 the AO made an observation that unabsorbed depreciation is not available for carry forward or set off in the succeeding year which is the assessment under appeal in this case. The disallowance is seen made by the officer and confirmed by the Tribunal u/s 10B(6) of the Act. Learned senior counsel appearing for the Appellant rightly pointed out that Section 10B(6) has no application for the asst. yr. 2003-04 because it is a provision denying the benefit of carry forward depreciation and business loss for the income of the year following the end of the period of tax exemption. This happened only in 2006-07 and not for the year 2003-04. According to the Appellant, they are entitled to the benefit of carry forward depreciation for 2003-04, whatever be the restriction from the commencement of the year after the period of tax exemption is over. Even according to the standing counsel carry forward depreciation is permissible from the asst. yr. 2001-02 onwards and for earlier years the Assessee is not entitled to the benefit. On the basis of it we feel that the order of assessment sustained by the Tribunal is not tenable because Section 10B(6) has no application for the asst. yr. 2003-04. The fact that unabsorbed depreciation carried over for several years is not allowable in the assessment year immediately following the end of the period of tax exemption does not mean that until such assessment year the Assessee cannot carry forward unabsorbed depreciation or business loss. However by now the assessment for 2006-07 would have been taken for assessment if not already over. Since Section 10B(6) has no application for this assessment year, we feel orders passed arc not sustainable. The standing counsel rightly pointed out that if any unabsorbed depreciation is carried forward for the asst. yr. 2001-02 then such carry over unabsorbed depreciation cannot be added to the current depreciation of that year because until 2001 there is complete exclusion of the income from EOU. The AO is directed to recompute the eligible depreciation and carry over unabsorbed depreciation and business loss from 2001-02 onwards based on amendment. The Assessee should be heard before orders are passed. Even though the Tribunal has given a finding for the asst. yr. 2001-02 the Assessee cannot carry forward unabsorbed depreciation for the year 2003-04. Counsel for the Appellant referred to the decision of the Supreme Court in Commissioner of Income Tax, Uttar Pradesh Vs. Manmohan Das (Deceased), wherein the Supreme Court has held that eligibility for carry forward of unabsorbed depreciation is to be considered in the succeeding year. The AO is directed to follow the decision of the Supreme Court on this issue. The appeal is disposed of setting aside the order of the Tribunal and we remand the case to the AO for passing fresh orders.