Section 32(2)

Section 32(2) — the law in short

What the courts have decided on section 32(2), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT v Subhulaxmi Mills Ltd Supreme CourtHelps taxpayer
  The officer has invoked s.79 after a change in our shareholding and struck out everything brought forward, including unabsorbed depreciation. Does s.79 reach unabsorbed depreciation?
  No. The Supreme Court agreed with the Gujarat High Court that when s.79 speaks of loss, it does not include unabsorbed depreciation or unabsorbed development rebate. Only the brought forward business loss is at risk under s.79; unabsorbed depreciation continues to be governed by s.32(2).
• CIT v Mother India Refrigeration Industries (P) Ltd Supreme CourtHelps department
  I have brought forward business losses that will lapse in a few years. Can I set them off before this year's depreciation, so the losses do not run out?
  No. The Supreme Court held that current depreciation must be deducted first, before the unabsorbed carried forward business loss of earlier years is set off. The priority given to carried forward losses is over the unabsorbed depreciation that is being carried forward, not over the current year's depreciation. The deeming provision that treats carried forward depreciation as part of the following year's allowance is a legal fiction created for a definite purpose - so that it can be set against income under any head - and cannot be stretched further. The appeals were allowed and the reference answered against the assessee, with costs.
• Cambay Electric Supply Industrial Co Ltd v CIT Supreme CourtCuts both ways
  The officer has disallowed a receipt on the ground that it is not 'derived from' our undertaking. Does the exact wording of the deduction section decide the point?
  It decides most of it, and this is the judgment that says so. Section 80E as it then stood used the words 'attributable to', and the Supreme Court held that expression is of wider import than 'derived from' and was chosen deliberately, wide enough to take in a balancing charge under s.41(2) on the sale of old machinery and buildings. The corollary is what bites today: s.80-IA, s.80-IB and s.80-IC all say 'derived from', so only receipts with a direct, first-degree connection to the undertaking qualify. On the second question the assessee lost: unabsorbed depreciation and development rebate of earlier years had to be deducted before the percentage relief was computed.
• CIT v Jaipuria China Clay Mines (P) Ltd Supreme CourtHelps taxpayer
  I have a brought-forward business loss and brought-forward unabsorbed depreciation in the same year. Which one does the officer have to use first, and does it matter?
  The brought-forward business loss goes first; the unabsorbed depreciation is taken after it. The Supreme Court held the Legislature deliberately gave a preference to the deduction of losses first, because a carried-forward loss can only be used within a limited number of years while unabsorbed depreciation carries forward without that limit — set the depreciation off first and the loss simply expires unused.
• M/s Sivasakthi Threads v Deputy Commissioner of Income-tax High CourtHelps taxpayerNo later treatment found
  A survey during a search on a connected group threw up excess stock, and it was added for AY 2007-08. The department says my unabsorbed depreciation cannot be set off against it, and now cites section 79A. Is that right?
  No, on both counts, for a year before AY 2022-23. The Madras High Court held that unabsorbed depreciation carried forward takes the character of current year depreciation under s.32(2) and, read with ss.71 and 72, can be set off against income of the current year other than capital gains — including an addition of unaccounted stock in business; and it recorded that s.79A, inserted by the Finance Act 2022 with effect from 1 April 2022, does not assist the Revenue for an earlier year.
• PCIT v Burda Druck India Pvt Ltd High CourtHelps taxpayerNo later treatment found
  The assessment order for the loss year ends with a line saying the brought forward losses will not be allowed to be carried forward because our shareholding changed. Am I stuck with that when I claim the set-off later?
  No. The assessing officer of the loss year has only to notify the amount of the loss he has computed; whether that loss can be carried forward and set off is for the officer who deals with the year in which the set-off is claimed. The Delhi High Court upheld the Tribunal's direction to expunge the remark, and added that unabsorbed depreciation and capital losses do not fall within s.79 at all.
• PCIT v Lotte India Corporation Ltd High CourtHelps taxpayer
  We took over a loss-making company by amalgamation and did not file Form 62 for the third year after the merger. Does that by itself destroy the s.72A carry forward?
  Not on this view. The Madras High Court held that filing the Form 62 certificate for the third assessment year is not a condition precedent or a mandatory condition, but at best directory, and that non-compliance does not disentitle the amalgamated company. What matters is that the level of production prescribed by Rule 9C is in fact achieved, and that can be reached at any point within four years of the merger.
• General Motors India Pvt Ltd v DCIT High CourtHelps taxpayer
  My client has unabsorbed depreciation from the late 1990s that the officer says died after eight years. Can it still be carried forward?
  Yes, if it was still unabsorbed on 1 April 2002. The Gujarat High Court held that unabsorbed depreciation available to an assessee on that date is governed by s.32(2) as substituted by the Finance Act, 2001, which carries no eight-year cap, and not by the eight-year regime introduced by the Finance (No. 2) Act, 1996 — so depreciation unabsorbed for assessment years 1997-98 to 2001-02 carries forward until it is set off.
• CIT v Govind Nagar Sugar Ltd High CourtHelps taxpayer
  The return was filed late, so the officer has refused to carry forward everything — including unabsorbed depreciation. Is depreciation really caught by the late return bar?
  No. The Delhi High Court held that s.80 and s.139(3) apply to business losses and not to unabsorbed depreciation, which is governed exclusively by s.32(2). There is accordingly no obligation to file the return within the prescribed time in order to carry forward depreciation.
• Velayudhaswamy Spinning Mills v ACIT High CourtHelps taxpayerHigh Courts differ
  My windmill lost money in its first years and those losses were set off against my other business income at the time. Now that the unit is profitable, can the officer bring those same losses back notionally under s.80-IA(5) and wipe out my deduction?
  Not on the Madras High Court's view. The fiction in s.80-IA(5) treats the eligible business as the only source of income, but it runs from the initial assessment year, and the initial assessment year is the year the assessee opts for under s.80-IA(2), not the year the undertaking started. Losses of years before that, which were actually absorbed against other income, are not revived: once the set off has taken place the Revenue cannot rework it and bring it back notionally. The Supreme Court dismissed the department's petitions against this judgment on 5 September 2016 without reasons. The Karnataka High Court has taken the opposite view, the Delhi High Court has expressly refused to follow Karnataka, and a Supreme Court appeal on the Karnataka judgment was admitted in October 2016.
• Gluhend India Private Limited v DCIT ITATHelps taxpayerNo later treatment found
  I filed this year's return late under section 139(4). The Assessing Officer has now refused to carry forward a capital loss and unabsorbed depreciation that both came from the earlier year, whose return was on time. Can he do that?
  No, on the Tribunal's reasoning. Section 80 read with s.139(3) attaches to the year in which the loss arises: if the return for the loss year was filed within the s.139(1) time, the loss has already become eligible for carry forward, and a belated return for a later year does not extinguish it. Unabsorbed depreciation stands on a stronger footing still — it is governed by s.32(2), and the s.80 restriction does not apply to it at all.
• PVR Pictures Ltd v DCIT — "unabsorbed depreciation" in clause (iii) means the unabsorbed part, not the whole depreciation charge ITATHelps taxpayer
  The CIT(A) has recomputed my clause (iii) reduction by taking the entire depreciation charge of an earlier year as unabsorbed depreciation, which wipes out my brought-forward loss and leaves me with nothing. Is that the right way to do the working?
  No. Clause (iii) of Explanation 1 to s.115JB(2) uses the words "unabsorbed depreciation", not "depreciation", and the difference is deliberate: where an earlier year threw up a standalone book profit before depreciation, that year's depreciation stands adjusted against the profit so available and only the balance is unabsorbed. Taking the gross depreciation charge instead of the unabsorbed component is contrary to the language of the clause.
• Statutory position — section 158BB: how the block figure is built, what is kept out of it, and why Abhisar Buildwell does not simply carry across CBDT Circulars & InstructionsCuts both ways
  The block assessment adds amounts for which nothing was found in the search. Can I take the Abhisar Buildwell point that there must be incriminating material?
  Not in the form in which that case decides it, because Abhisar Buildwell construes section 153A and section 158BB is worded differently. Section 158BB(1) makes the total undisclosed income of the block period the aggregate of only two things — what the assessee declares as undisclosed income in his section 158BC return, and what the Assessing Officer determines under section 158BB(2); and section 158BB(2) requires that determination to be made 'on the basis of evidence found as a result of search or survey or requisition of books of account or other documents and any other material or information as are either available with the Assessing Officer or come to his notice during the course of proceedings under this Chapter'.
• Statutory position — section 79A: no set-off against undisclosed income found in a search, requisition or survey, from AY 2022-23 CBDT Circulars & InstructionsCuts both ways
  A search threw up unaccounted stock and cash and the Assessing Officer has added it. I have a large brought-forward loss and unabsorbed depreciation sitting there. Can I set them off against the addition?
  For AY 2022-23 and every later year, no. Section 79A, inserted by the Finance Act 2022 (Act No. 6 of 2022) with effect from 1 April 2022, says that where, consequent to a search under s.132, a requisition under s.132A or a survey under s.133A other than s.133A(2A), the total income of any previous year includes undisclosed income, no set-off of any loss — brought forward or of the current year — and no set-off of unabsorbed depreciation under s.32(2) shall be allowed against that undisclosed income under any provision of the Act.
• Statutory position — section 79: which version of the change-in-shareholding bar applies to your year CBDT Circulars & InstructionsCuts both ways
  My closely held company changed hands and the Assessing Officer has knocked out the brought-forward loss under section 79. The section has been rewritten more than once — which text governs my assessment year?
  Four different texts of s.79 have governed the last decade, and the one that applies is the one in force for the assessment year in which the set-off is claimed. The Finance Act 2017 (Act 7 of 2017) substituted s.79 with effect from 1 April 2018 in a clause (a) and clause (b) form; the Finance (No. 2) Act 2019 (Act 23 of 2019) substituted it again with effect from 1 April 2020 into the present sub-section (1), (2) and (3) form; the Finance Act 2021 and the Finance Act 2022 added carve-outs with effect from 1 April 2022; and the Finance Act 2023 (Act 8 of 2023) substituted 'ten' for 'seven' in the start-up proviso with effect from 1 April 2023.
• Statutory position — the second proviso to s.32(1): where an asset is acquired during the previous year AND put to use for less than 180 days in that year, depreciation is restricted to fifty per cent — the exact words, what the 180 days is counted on, and the further proviso giving the balance of the additional allowance in the succeeding year CBDT Circulars & InstructionsCuts both ways
  We bought plant in February and used it from March. The Assessing Officer has halved the depreciation. Is the 180 days counted from acquisition or from the date the asset was put to use, and what happens to the other half of the additional depreciation under s.32(1)(iia)?
  The proviso is worded on BOTH events, and that is the whole fight. As printed on the most recent departmental edition, it reads: "Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be :". So the restriction applies only where TWO things are true of the same previous year — the asset was acquired by the assessee during that previous year, and it was put to use for the purposes of business or profession for a period of less than 180 days in that previous year. The 180-day count is on the period of USE ("is put to use ... for a period of less than one hundred and eighty days"); acquisition during the previous year is a separate, cumulative condition, not the thing counted. An asset acquired in an earlier previous year is outside the proviso even if it is used for less than 180 days in the year in question. The further proviso, printed immediately after, gives back the missing half of the ADDITIONAL depreciation only: where an asset referred to in clause (iia) or the first proviso to clause (iia) is acquired during the previous year and put to use for less than 180 days in that year and the deduction is accordingly restricted to fifty per cent, "then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset". The footnote evidence I could read attaches that further proviso to an insertion effective 1 April 2016; the Act number as the departmental page prints it is set out in the editor note and I could not reconcile it.
• ACIT v Goldmine Shares and Finance Pvt Ltd ITATHelps departmentOverruled
  My windmill unit's early losses were already set off against my share trading profits. Must I now notionally bring those losses back and reduce the unit's profit before claiming section 80-IA?
  Yes, on this Special Bench view. The Ahmedabad Special Bench answered the reference in favour of the Revenue: because of section 80-IA(5), the profit of the eligible business for computing the deduction must be arrived at after deducting the notional brought forward losses and depreciation of that business, even though they were actually allowed as a set off against other income in earlier years. The sub-section creates a fiction that the eligible business is the assessee's only source of income, and a fiction must be carried to its logical conclusion. The fiction cuts both ways - other units' losses cannot reduce the eligible profit either - and the deduction remains limited to gross total income.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.