1997 (11) TMI 65 - HC - Income Tax

Summary

Issues:
Priority between unabsorbed development rebate and unabsorbed depreciation in computing business income.

Detailed Analysis:
The case involved a dispute regarding the precedence of setting off unabsorbed development rebate against unabsorbed depreciation in computing business income for the assessment year 1975-76. The assessee argued that the unabsorbed development rebate should be given precedence over unabsorbed depreciation due to the limited carry-forward period of the development rebate compared to the indefinite carry-forward period of depreciation. However, the Income-tax Officer did not accept this claim and allowed the unabsorbed depreciation to be set off first, reducing the taxable income to nil.

The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal also upheld the precedence of unabsorbed depreciation over unabsorbed development rebate, citing the provisions of the Income-tax Act. The Tribunal relied on a decision of the Karnataka High Court which established that unabsorbed depreciation losses should take precedence over unabsorbed development rebate in setting off against the income of subsequent years.

The High Court analyzed the legal implications of relevant sections of the Income-tax Act, including sections 32(1), 32(2), 33(1)(a), 33(2), 72(1), and 72(2). It was unanimously held that unabsorbed depreciation losses from earlier years should be given priority over unabsorbed development rebate in setting off against the income of subsequent years. The legal fiction in section 32(2) treats unabsorbed depreciation as part of the current year's depreciation, subject to the provisions of section 72(2) and 72(3).

The High Court referred to decisions by other High Courts, such as the Madras High Court and the Kerala High Court, which supported the priority of unabsorbed depreciation over unabsorbed development rebate. The court rejected the argument based on equitable considerations, stating that where there is no ambiguity in the statute, equitable considerations cannot be applied to give the assessee a choice in the matter of adjustment.

Ultimately, the High Court answered the question in favor of the Revenue and against the assessee, holding that unabsorbed depreciation should take precedence over unabsorbed development rebate in computing business income for subsequent years. The court emphasized that the statutory provisions must be strictly construed, and equitable considerations cannot override the clear provisions of the law.