On October 23, 2025, the Income Tax Appellate Tribunal (ITAT) issued a significant ruling concerning the carry-forward of unabsorbed depreciation. The Tribunal held that unabsorbed depreciation under Section 32(2) of the Income Tax Act can be carried forward and set off against income in subsequent years, irrespective of whether the return was filed within the due date specified under Section 139(1). This decision underscores that the carry-forward of unabsorbed depreciation is not contingent upon the timely filing of returns.
Case Reference
ACIT vs. Elecon Engineering Company Ltd. The Ahmedabad Bench of the ITAT delivered this judgment, allowing the carry-forward of ₹2.38 crore in unabsorbed depreciation for the Assessment Year 2020–21. The Tribunal upheld the findings of the Commissioner of Income Tax (Appeals), emphasizing that the belated filing of the return does not bar the carry-forward of depreciation under Section 32(2).
This ruling aligns with the principle that unabsorbed depreciation is treated as a current year’s depreciation and is eligible for set-off against income under any head, including ‘Income from Other Sources’, irrespective of whether business activity was carried out during the relevant previous year.
The decision is particularly relevant for taxpayers who have incurred losses in earlier years and are seeking to utilize unabsorbed depreciation in subsequent years, even if the returns for those earlier years were not filed within the prescribed due dates.
Issue
Whether belated or non-filing of returns in previous years affects the right to carry forward unabsorbed depreciation under Section 32(2).
Tribunal Findings
- Carry Forward of Depreciation is a Statutory Right
- Depreciation is an allowable deduction under the Income-tax Act and is considered a current year expenditure.
- Section 32(2) explicitly allows carry forward of unabsorbed depreciation, without conditioning it on timely filing of returns.
- Non-Filing of Returns is Irrelevant for Depreciation Set-Off
- The Tribunal clarified that belated filing does not invalidate the statutory right to carry forward unabsorbed depreciation.
- Procedural lapses (late filing) may attract penalty or interest, but cannot deny the substantive right to carry forward depreciation.
- Precedent Reliance
- ITAT relied on prior rulings stating that unabsorbed depreciation is a business loss of sorts and can be set off in subsequent years, even if returns were belatedly filed.
Legal Principle
- Right to carry forward unabsorbed depreciation is independent of procedural compliance such as timely filing of returns under Section 139(1).
- Belated filing or non-filing may lead to penalties or interest, but cannot nullify the deduction.
- Ensures that taxpayers who have incurred losses or depreciation can utilize them for set-off in subsequent years, maintaining the principle of tax neutrality.
Practical Implications
- Assessees can claim carry forward of depreciation even if earlier returns were filed late, provided the depreciation was legitimately claimed in the original computation.
- Useful for companies with capital-intensive operations, where depreciation amounts are substantial.
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Revenue cannot disallow depreciation carry forward solely on procedural grounds.