1996 (5) TMI 47 - HC - Income Tax

Summary

Issues:
1. Interpretation of section 80J of the Income-tax Act, 1961 regarding the adjustment of profits and gains.
2. Determining the priority order for adjusting current depreciation, carried forward losses, and investment allowance under section 80J.
3. Consistency in the application of provisions related to depreciation, losses, and investment allowance in computing profits and gains.

Analysis:
The case involved a question of law arising from an order of the Income-tax Appellate Tribunal regarding the adjustment of profits and gains under section 80J of the Income-tax Act, 1961 for the assessment years 1975-76 and 1979-80. The primary issue was whether the profits and gains should be reduced by current depreciation but not by carried forward losses or depreciation or investment allowance for the purpose of relief under section 80J. The Tribunal held that current depreciation should be the first charge with priority, followed by carried forward business losses and unabsorbed depreciation. This interpretation was supported by references to various sections of the Act, including sections 32, 32A, 33, 33A, and 72, which establish the order of priority for adjusting different items against profits.

Furthermore, the Tribunal's decision was consistent with previous judgments by the Delhi High Court, Gujarat High Court, and the apex court in the case of Rajapalayam Mills Ltd. These cases also emphasized the importance of prioritizing current depreciation over carried forward losses and unabsorbed depreciation when computing profits for a particular assessment year. The Tribunal's interpretation aligned with the overall scheme of priority between different components of profits and gains, ensuring consistency in the application of relevant provisions.

Ultimately, the High Court agreed with the Tribunal's decision, stating that the profits and gains should be reduced by current depreciation but not by carried forward losses or depreciation or investment allowance for the purpose of relief under section 80J. The reference was answered in favor of the assessee, highlighting the importance of adhering to the prescribed priority order for adjusting various components against profits and gains under section 80J.