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Seshasayee Paper & Boards Ltd. v. Deputy Commissioner of Income Tax

Civil Appeal · Neutral citation not assigned (Civil Appeal Nos. 1812-1813 of 2005)Decided 15 May 2015
Civil Appeal Nos. 1812-1813 of 2005
Justice A.K. Sikri · Justice Rohinton Fali Nariman

Background

The appellant, a paper manufacturing company, had unabsorbed depreciation and unabsorbed investment allowance carried forward from earlier years. For Assessment Year 1991-92, it chose to set off its income against the carried-forward investment allowance rather than the carried-forward depreciation, resulting in "Nil" declared income. The Assessing Officer instead set off the unabsorbed depreciation first, and this approach was upheld by the Commissioner (Appeals), the Tribunal, and the Madras High Court, prompting the appeal to the Supreme Court.

Decision Breakdown

The Supreme Court held that once depreciation for the current year is claimed, Section 32(2) of the Income Tax Act creates a legal fiction merging the current year's depreciation with any unabsorbed depreciation carried forward from earlier years, so the assessee cannot separate them and choose to set off only the investment allowance first. The Court reasoned that this "scrambled egg cannot be unscrambled," meaning once depreciation becomes part of the current year's depreciation pool, it must be set off ahead of carried-forward investment allowance. The question was decided against the assessee and in favour of the tax department, and the appeals were dismissed with costs.

Lesson Learnt

Taxpayers cannot selectively claim only some types of carried-forward deductions (like investment allowance) while ignoring the statutory order in which depreciation must first be absorbed; the law's built-in sequencing for depreciation set-offs cannot be bypassed by choice.

Official source (sci.gov.in)View Judgment (PDF)

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