1984 (7) TMI 40 - HC - Income Tax

Carry Forward And Set Off Depreciation Developement Rebate Interest On Borrowed Money Other Sources

Issues Involved:
1. Entitlement to carry forward and set off unabsorbed depreciation and development rebate.
2. Allowability of interest expenditure under section 57 of the Income-tax Act, 1961.

Detailed Analysis:

1. Entitlement to Carry Forward and Set Off Unabsorbed Depreciation and Development Rebate:
The primary issue was whether the assessee could carry forward and set off unabsorbed depreciation and development rebate from the assessment years 1968-69 and 1969-70 against the business income of the assessment years 1970-71 and 1971-72. The assessee had discontinued its original business in iron ore and started a new business involving sewing laminated bags using machinery leased from New Era Fabrics Private Ltd.

The Income Tax Officer (ITO) disallowed the set off on the grounds that the assessee did not continue its earlier business and had not created a reserve for the development rebate. The Appellate Assistant Commissioner (AAC) upheld this view, stating that the unabsorbed depreciation and development rebate could only be allowed if the assets were used for business purposes.

The Tribunal, however, accepted the assessee's contention that it was not necessary for the original business to continue for claiming the set off. It allowed the set off of unabsorbed depreciation and development rebate.

The court examined sections 32 and 33 of the Income-tax Act, 1961, which deal with depreciation and development rebate. The court noted that the deeming provision in section 32(2) allows unabsorbed depreciation to be carried forward and treated as an allowance for the subsequent years, irrespective of whether the original business continues. This view was supported by various High Court decisions, including CIT v. Rampur Timber and Turnery Co. Ltd. [1973] 89 ITR 150 (All), CIT v. Virmani Industries (P.) Ltd. [1974] 97 ITR 461 (All), and CIT v. Estate & Finance Ltd. [1978] 111 ITR 119 (Bom).

The court agreed with these precedents, stating that the deeming provision must be given full effect, allowing the unabsorbed depreciation to be set off against the business income of subsequent years, regardless of the business continuity. Similarly, section 33(2) allows the development rebate to be carried forward for reducing the total income in subsequent years, irrespective of whether the original business continues.

Hence, the court answered the first question in the affirmative, in favor of the assessee.

2. Allowability of Interest Expenditure Under Section 57 of the Income-tax Act, 1961:
The second issue was whether the interest expenditure of Rs. 16,582 was allowable as an admissible expenditure under section 57 of the Income-tax Act, 1961. The assessee had borrowed money from Utkal Properties & Finance Private Ltd. at a higher interest rate and advanced it to New Era Fabrics Private Ltd. at a lower interest rate, claiming the difference as a deductible expense.

The ITO allowed the deduction only to the extent of the interest received and disallowed the balance. The AAC upheld this disallowance, stating that the higher interest payment was not an expenditure incurred for earning income under the head "Other sources," and thus not admissible under section 57.

The Tribunal found that the assessee was obliged to advance funds at a lower rate for business purposes and allowed the deduction of the entire interest expenditure.

The court noted that the Tribunal had considered the deduction under section 57, which pertains to income from other sources, whereas the deduction should have been considered under section 36, which deals with business expenditure. Since the Tribunal had not examined the matter under the correct provision, the court remanded the issue back to the Tribunal for re-examination and disposal in accordance with the correct legal provisions.

The court thus did not provide a definitive answer to the second question due to its improper framing but directed the Tribunal to re-examine the matter under section 36.

Conclusion:
The court ruled in favor of the assessee on the first issue, allowing the carry forward and set off of unabsorbed depreciation and development rebate. On the second issue, the court remanded the matter to the Tribunal for re-examination under the correct section of the Income-tax Act. The reference was disposed of with no order as to costs.

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