Set off and Carry Forward of Unabsorbed Depreciation

Meaning of Unabsorbed Depreciation

Unabsorbed depreciation is the part of depreciation that the assessee fails to claim as an expense in his/her Income Tax Return due to insufficient profits during that year. The Income Tax Act, 1961 allows set-off of such unabsorbed depreciation against any other head of income and the remaining amount can be carried forward to subsequent years. The remaining unabsorbed depreciation can be utilized for set off against income of subsequent years.

Manner of set off current year depreciation

The current year depreciation for any assessment year shall be set off:

• Firstly, against the profits and gains of any business or profession carried on by the assessee assessable for that assessment year and
• The balance if any, against the income under any other head for that assessment year.

There might be a situation where there is still a balance of unadjusted depreciation even after set-off against all other heads of income. In such a case, you may carry forward unabsorbed (unadjusted) depreciation to next years for set-off against future taxable income.

Set-off unabsorbed depreciation in future years

Depreciation to the extent not set off and carried forward to the next assessment year shall be set-off in subsequent years against:

• Profits and gains of any business or profession carried on by the assessee and
• The balance if any against the income under any head.

It means that in the subsequent years also, the assessee can adjust unabsorbed depreciation of earlier years against income from any other heads. The exception to this is Income under the head Salary.

Time-limit of carry forward for unabsorbed depreciation

• The unabsorbed depreciation can be carried forward indefinitely. The conditions of 4 years/ 8 years are not applicable in the case of unabsorbed depreciation.
• Depreciation shall be carried forward even if the business or profession has been discontinued.

Order of set-off for the purpose of ITR

• First, adjust current year depreciation
• Then, adjust the brought forward business losses (as only 8 years are available in case of brought forward business losses)
• Lastly, you should adjust unabsorbed depreciation

Unabsorbed depreciation in case of belated or delayed return

Set-off and carry forward of depreciation is governed by section 32(2) and not by section 80. Therefore, unabsorbed depreciation can be carried forward and set off even if the return of income is filed after the time limit prescribed u/s 139(1). It simply means that even if the assessee files the ITR after the due date of filing the return, he will be entitled to carry forward the unabsorbed depreciation to subsequent assessment years.

As per the provisions of section 32(2) of the Income Tax Act, 1961, the unabsorbed depreciation becomes part of the next year’s depreciation allowance and is allowed to be set off as per the provisions of the Income Tax Act, 1961, irrespective of whether the return of earlier year was filed within the due date or not.

Carry forward of unabsorbed depreciation in case of change in the constitution of the assessee

Depreciation can be carried forward only if the assessee is the same i.e. the assessee who claimed the depreciation and the assessee who wants to carry forward the depreciation must be the same.

However, there are certain exceptions to this rule where depreciation can be carried forward even when the assessee has changed:

• Firm succeeded by a company
• Conversion of proprietorship concern into a company
• Conversion of an unlisted public company or private limited company into LLP
• Amalgamation or Demerger
• Amalgamation and Demerger of Co-operative Bank referred u/s 72AB

Disclaimer: The above article is meant for informative purposes only. Readers are requested to act diligently and under consultation with a professional before applying the information contained in this article.