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Issues:
1. Set-off of non-speculative business profits against brought forward business losses. 2. Set-off of business losses against speculation profit. 3. Priority of current year's depreciation in determining profits. 4. Interpretation of relevant sections of the Income Tax Act. Analysis: The judgment involved an assessment of an assessee-company engaged in the manufacture of vegetable oil for the assessment year 1959-60. The primary contention was regarding the set-off of profits and losses in non-speculative business, treatment of current year's depreciation, and the priority of losses and depreciation in determining taxable profits. The Income Tax Officer (ITO) adjusted the current year's depreciation against profits, resulting in a minimal profit figure, which was then set off against a substantial loss brought forward from an earlier year. The assessee appealed to the Income-tax Appellate Tribunal, which emphasized the distinction between current year's depreciation and unabsorbed depreciation from earlier years. The Tribunal held that current year's depreciation must be accounted for before considering the set-off of losses from previous years. This interpretation was based on Section 24(2) of the Indian Income Tax Act, 1922, which prioritizes earlier years' losses against unabsorbed depreciation. The Tribunal referred two questions of law under Section 66(1) of the Act, one of which pertained to the priority of setting off non-speculative business profits against brought forward losses before adjusting for depreciation. The assessee's counsel relied on a decision by the Allahabad High Court supporting this priority. However, the Bombay High Court, following the Gujarat High Court's reasoning, emphasized the fundamental principles of accountancy. It highlighted the necessity of deducting current year's depreciation to ascertain net profits accurately, as established in commercial practices and judicial precedents. Similarly, the Andhra Pradesh High Court's stance was considered, emphasizing the need to determine current year's income before setting off losses carried forward from previous years. Both the Gujarat and Andhra Pradesh High Courts rejected the precedence of carried forward losses over current year's depreciation, aligning with basic accounting principles. Ultimately, the Bombay High Court concurred with the Gujarat and Andhra Pradesh High Courts, rejecting the Allahabad High Court's position. The judgment emphasized the significance of accounting principles in determining taxable profits, leading to a negative answer to the first question posed. The second question was not addressed as it was not pressed by the assessee, concluding the matter in favor of the Revenue. In conclusion, the judgment resolved the issues by prioritizing current year's depreciation in determining taxable profits, aligning with established accounting principles and consistent judicial interpretations.
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