The law of set off of carried forward business loss and depreciation are different. While section 72 of the I T Act provides that unadjusted loss of a year which is carried forward up to 8 subsequent years can be set off with business income only and not with any other head income.
It means that the while current year business loss can be adjusted with income from other head except salary , the carried forward business loss can be adjusted with business income of a year only.
Carried forward depreciation loss
The rule regarding carried forward depreciaton loss is entirely different than carried forward business loss. Why ? The reason is that the depreciation loss carry forward is dealt in section 32 only under Chapter IV whereas the carry forward of losses is dealt in Chapter VI of Income Tax Act.
The simple rule regarding carry forward loss on depreciation is that it can be carried forward to indefinite period and carry ward depreciation loss can be utilised to adjust income under any head except salary.
Recently Mumbai Tribunal Special Bench passed an order in case of Times Guaranty Ltd (ITA Nos.4917 & 4918) discussed the sequence of changes made to Section 32(2) and classified the claim of unabsorbed depreciation set-off into three time zones.
Up to assessment year 1996-97: It was held that current depreciation was eligible for set off against income under any head within the same year. When unabsorbed depreciation is carried forward, it shall be deemed as current depreciation and hence eligible for set off against business income and any head of income. The aggregate amount remaining as unabsorbed depreciation for assessment year 1996-97 is eligible for set off for eight assessment years, commencing from the assessment year 1997-98. In other words, it is eligible for set off against any head of income up to the assessment year 2004-05.
Assessment year 1997-98 to 2001-02: Finance (No.2) Act, 1996 changed the law .The current depreciation became eligible for set off against business income and against income under any other head. The unabsorbed depreciation of these years, when carried forward, were eligible for set off only against business income and not against any other head of income. The carry forward time is also restricted to eight assessment years succeeding the assessment year in which it was first computed.
Assessment year 2002-03 onwards: The Finance Act, 2001 again amended the provisions relating to set off and carry forward of depreciation. Thus the taxpayer became once again eligible to set off depreciation against business income and any head of income both in the year of claim and when it is carried forward. There is no time limit for carry forward and set off of depreciation.
