SESHASAYEE PAPER & BOARDS LIMITED vs DEPUTY COMMISSIONER OF INCOME TAX

Introduction

The Supreme Court judgment in Seshasaee Paper & Boards Limited vs. Deputy Commissioner of Income Tax (2015) 119 DTR 0361 (SC) is a seminal authority on the interplay between unabsorbed depreciation and unabsorbed investment allowance under the Income Tax Act, 1961. The core dispute revolved around the statutory priority of set-off when an assessee claims current depreciation but seeks to carry forward unabsorbed depreciation in favor of unabsorbed investment allowance. The Court, comprising Justices A.K. Sikri and Rohinton Fali Nariman, delivered a unanimous verdict in favor of the Revenue, holding that unabsorbed depreciation, by virtue of the deeming fiction under Section 32(2), must be set off before unabsorbed investment allowance. This commentary dissects the legal reasoning, the application of the deeming provision, and the implications for tax practitioners and assessees.

Facts

The appellant, Seshasaee Paper & Boards Limited, a public limited company engaged in paper manufacturing, filed its return for Assessment Year 1991-92 declaring nil income. The computed business income under Sections 28 onward was ₹2,87,15,912. The assessee had unabsorbed investment allowance from prior years and unabsorbed depreciation from earlier years (1983-84, 1985-86, 1986-87, and part of 1987-88). In its return, the assessee chose to set off the unabsorbed investment allowance against the current year’s income, resulting in nil income. The Assessing Officer, however, applied the unabsorbed depreciation first, adjusting it against the income, and accepted the nil return on that basis. The assessee appealed, arguing that it had not claimed the unabsorbed depreciation and that its option to set off investment allowance should prevail. The Commissioner (Appeals) dismissed the appeal, relying on the Madras High Court decision in Coromandel Steels (1981) 130 ITR 856. The Income Tax Appellate Tribunal (ITAT) and the Madras High Court affirmed this view. The assessee then appealed to the Supreme Court.

Reasoning

The Supreme Court’s reasoning is anchored in a meticulous interpretation of Section 32(2) of the Income Tax Act, as it stood during the relevant assessment year. The Court framed the substantial question of law: whether unabsorbed depreciation must be allowed before unabsorbed investment allowance when the assessee had not claimed the unabsorbed depreciation in its return but had claimed current depreciation.

1. The Deeming Fiction under Section 32(2):
The Court emphasized that Section 32(2) creates a legal fiction. Where full effect cannot be given to depreciation allowance in a previous year due to absence or insufficiency of profits, the unabsorbed depreciation “shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance.” This deeming provision is mandatory—it operates automatically, not at the assessee’s option. The Court noted that the unabsorbed depreciation, by this fiction, stands on exactly the same footing as current depreciation. It becomes an indivisible part of the current year’s depreciation allowance. Therefore, when an assessee claims current depreciation, the unabsorbed depreciation from prior years is automatically deemed to be included, forming a single, composite claim.

2. Priority of Set-Off:
The Court held that since unabsorbed depreciation is deemed to be part of the current year’s depreciation, it must be set off first against the current year’s income. This priority is not a matter of assessee’s choice but a statutory mandate. The Court referred to the CBDT Circular No. 202, which clarifies that unabsorbed depreciation takes precedence over unabsorbed investment allowance. The assessee’s argument that it had not “claimed” the unabsorbed depreciation was rejected because the deeming provision operates irrespective of the assessee’s express claim. Once current depreciation is claimed, the unabsorbed depreciation is automatically triggered.

3. Distinguishing Mahendra Mills:
The assessee relied on Commissioner of Income-Tax v. Mahendra Mills (2000) 243 ITR 56, where the Supreme Court held that depreciation is a benefit for the assessee and cannot be forced upon him if he does not wish to avail it. The Court distinguished this case on facts. In Mahendra Mills, the assessee had not claimed any depreciation at all—neither current nor unabsorbed. Here, the assessee had claimed current depreciation. By doing so, it triggered the deeming provision under Section 32(2), which automatically brings in the unabsorbed depreciation. The Court clarified that the principle in Mahendra Mills applies only when the assessee completely forgoes depreciation; it does not allow the assessee to cherry-pick between current and unabsorbed depreciation.

4. Rejection of Assessee’s Option Argument:
The assessee argued that in the absence of a clear provision, the interpretation beneficial to the assessee should prevail. The Court rejected this, holding that Section 32(2) is unambiguous. The deeming fiction is mandatory, and the priority of set-off is statutorily determined. The Court also noted that the Madras High Court had correctly followed Coromandel Steels and other High Court decisions that affirmed the precedence of unabsorbed depreciation. The Punjab and Haryana High Court’s decision in Ram Nath Jindal (2001) 252 ITR 590, which held that depreciation cannot be thrust upon an assessee, was distinguished on the same ground—the assessee in that case had not claimed any depreciation.

5. Practical Implications:
The Court’s reasoning underscores that the carry-forward mechanism under Section 32(2) is not elective. The unabsorbed depreciation is not a separate item that can be carried forward at the assessee’s discretion; it is automatically merged with current depreciation. This ensures consistency in tax treatment and prevents assessees from manipulating the order of set-off to maximize tax benefits. The judgment also clarifies that the time limit for carry-forward of business losses under Section 72 does not apply to depreciation, which can be carried forward indefinitely, reinforcing the priority of depreciation set-off.

Conclusion

The Supreme Court dismissed the appeals, affirming the decisions of the ITAT, Commissioner (Appeals), and the Madras High Court. The Court held that under Section 32(2), unabsorbed depreciation is deemed to be part of the current year’s depreciation and must be set off before unabsorbed investment allowance. The assessee’s claim of current depreciation triggers this deeming provision automatically, overriding any contrary choice. This judgment settles the law on the priority of set-off between unabsorbed depreciation and unabsorbed investment allowance, providing clarity for tax administration and compliance. It reinforces the principle that statutory deeming fictions operate independently of the assessee’s preference, ensuring uniform application of tax benefits.

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