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 taxpayerValidity unconfirmed
  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.
• PCIT v Burda Druck India Pvt Ltd High CourtHelps taxpayerValidity unconfirmed
  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 taxpayerValidity unconfirmed
  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 taxpayerValidity unconfirmed
  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.
• ACIT v Goldmine Shares and Finance Pvt Ltd ITATHelps departmentValidity unconfirmed
  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.