1983 (10) TMI 14 - HC - Income Tax

Summary

Issues Involved:
1. Computation of profits of an industrial undertaking under section 80J(1).
2. Set-off of unabsorbed depreciation from earlier years.
3. Priority of deductions under section 80J versus other allowances like unabsorbed depreciation.

Detailed Analysis:

1. Computation of Profits of an Industrial Undertaking Under Section 80J(1):
The core issue revolves around the method of computing profits for an industrial undertaking under section 80J(1). The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) computed the income by first deducting current and brought forward depreciation, and then considering the relief under section 80J. The Tribunal, however, held that while carried forward losses and development rebates should be deducted first, the unabsorbed depreciation should be set off last, after granting the section 80J relief.

2. Set-off of Unabsorbed Depreciation from Earlier Years:
The Tribunal's decision to set off unabsorbed depreciation last, after section 80J relief, was challenged. The Tribunal did not provide a clear rationale for treating unabsorbed depreciation differently from current year's depreciation. The High Court pointed out that section 32(2) of the Income Tax Act treats unabsorbed depreciation from earlier years as part of the current year's depreciation. Therefore, both current and unabsorbed depreciation should be treated similarly for deduction purposes.

3. Priority of Deductions Under Section 80J Versus Other Allowances:
The High Court emphasized that section 32(2) deems unabsorbed depreciation as part of the current year's depreciation, which must be deducted before section 80J relief is allowed. The Tribunal's approach of allowing section 80J relief before unabsorbed depreciation contradicts the statutory provisions and established judicial precedents. The High Court cited multiple cases to support this view, including:
- Ashok Motors Ltd. v. CIT [1961] 41 ITR 397: Held that unabsorbed depreciation must be adjusted against profits before granting exemption under section 15C (corresponding to section 80J).
- CIT v. Sivan Pillai [1970] 77 ITR 354: Supreme Court ruled that unabsorbed depreciation should not be distinguished from current year's depreciation for computing profits under section 15C.
- Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84: Supreme Court held that income must be computed under sections 30 to 43A before applying section 80E, implying similar treatment for section 80J.
- CIT v. Patiala Flour Mills Co. P. Ltd. [1978] 115 ITR 640: Supreme Court clarified that profits for section 80J must be computed as total income chargeable to tax.

The High Court concluded that section 80J cannot override section 32(2), and the unabsorbed depreciation must be deducted before granting section 80J relief. Consequently, the Tribunal's decision was overturned, and the High Court answered the question in favor of the Revenue, affirming that unabsorbed depreciation should be set off before section 80J relief is computed.

Conclusion:
The High Court ruled that unabsorbed depreciation from earlier years must be deducted before the relief under section 80J is computed, aligning with statutory provisions and judicial precedents. The Tribunal's contrary view was deemed unsustainable, and the Revenue's position was upheld. The Revenue was awarded costs from the assessee, with counsel's fee set at Rs. 500.