# Carry Forward and Set-off of Depreciation [Section 32(2)]
Depreciation is a statutory allowance. When the business does not have enough profit to absorb it, the excess becomes unabsorbed depreciation.
## Treatment of unabsorbed depreciation
- When current-year profits are insufficient to fully set off the depreciation allowance, the unabsorbed depreciation is carried forward to the next year.
- In the next year it is added to (merges with) that year's depreciation allowance and effectively becomes part of it.
- Unabsorbed depreciation can be carried forward indefinitely (no time limit) until fully set off.
> Because it merges into the next year's depreciation, unabsorbed depreciation enjoys the most generous carry-forward treatment of all losses/allowances.
## Unabsorbed additional depreciation under the default regime [Sec. 115BAC]
If there is unabsorbed additional depreciation under Section 32(1)(iia) from earlier years still outstanding, and the assessee is taxed under the default regime u/s 115BAC:
- It cannot be set off against current-year income.
- Instead, the WDV of the block at the beginning of the current year is increased by the amount of unabsorbed additional depreciation not allowed for set-off (so the benefit is recovered prospectively through normal depreciation).
## Order of set-off
Per the Supreme Court in CIT v. Mother India Refrigeration (P.) Ltd.:
1. Current-year depreciation is set off first against business income;
2. then brought-forward business losses;
3. then unabsorbed depreciation of earlier years.
> Detailed sequencing is covered under the chapter on Set-off and Carry-forward of Losses.