1981 (3) TMI 29 - HC - Income Tax

Issues Involved:
1. Whether unabsorbed depreciation should be deducted in computing the profits under section 41(2) of the Income-tax Act, 1961.
2. Interpretation of the provisions of sections 32, 34, and 41(2) of the Income-tax Act, 1961.
3. Applicability of judicial precedents on the issue of unabsorbed depreciation and its set-off against profits.

Detailed Analysis:

1. Whether unabsorbed depreciation should be deducted in computing the profits under section 41(2) of the Income-tax Act, 1961:

The core issue revolves around whether unabsorbed depreciation from previous years should be set off against profits computed under section 41(2) of the Income-tax Act, 1961. The assessee claimed a deduction of unabsorbed depreciation of Rs. 52,405 from the year 1965-66 against the profit computed under section 41(2) for the assessment year 1973-74. The Income Tax Officer (ITO) disallowed this set-off, leading to an appeal before the Appellate Assistant Commissioner (AAC), who allowed the set-off. However, the Tribunal reversed the AAC's decision, prompting a reference to the High Court.

2. Interpretation of the provisions of sections 32, 34, and 41(2) of the Income-tax Act, 1961:

The judgment delves into the interpretation of sections 32, 34, and 41(2) of the Income-tax Act, 1961. Section 32 deals with depreciation allowances, while section 34 sets out the conditions for such allowances. Section 41(2) pertains to the balancing charge when depreciable assets are sold, discarded, demolished, or destroyed. The High Court noted that section 32(2) allows unabsorbed depreciation to be carried forward and set off against future profits, subject to certain conditions. The court emphasized that the fiction created by section 41(2) deems the business to be carried on in the year of the sale of assets, thus allowing the set-off of unabsorbed depreciation against the profits arising from such sale.

3. Applicability of judicial precedents on the issue of unabsorbed depreciation and its set-off against profits:

The judgment references several judicial decisions to support its interpretation. Key cases include:

- CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 (SC): This case established that unabsorbed depreciation could be carried forward and set off against future profits, emphasizing the commercial principle that depreciation should be accounted for in the profit and loss account.
- CIT v. Rampur Timber & Turnery Co. Ltd. [1973] 89 ITR 150 (All): The Allahabad High Court held that unabsorbed depreciation could be set off against business income deemed to arise under section 41(1), even if the business had ceased to exist.
- CIT v. Warangal Industries Pvt. Ltd. [1977] 110 ITR 756 (AP): The Andhra Pradesh High Court ruled that unabsorbed depreciation from past years could be set off against profits computed under section 41(2), even if the business was no longer in existence.
- CIT v. Official Liquidator, New Era Mfg. Co. Ltd. [1977] 109 ITR 262 (Ker): The Kerala High Court held that the fiction created by section 41(2) allows the set-off of unabsorbed depreciation against profits deemed to arise from the sale of depreciable assets.

The High Court agreed with these precedents, concluding that the fiction created by section 41(2) deems the business to be carried on in the year of the sale of assets, thereby allowing the set-off of unabsorbed depreciation against the profits from such sale.

Conclusion:

The High Court answered the reframed question in the negative, holding that the Tribunal was not justified in disallowing the set-off of unabsorbed depreciation against the profit computed under section 41(2). The court ruled in favor of the assessee, emphasizing that the fiction created by section 41(2) deems the business to be carried on in the relevant year, allowing the set-off of unabsorbed depreciation. The parties were directed to bear their own costs.

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