1980 (8) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Priority of carried forward development rebate over unabsorbed depreciation and business losses for set-off.
2. Interpretation of section 2(45) in the context of sections 5, 33, and 72 of the Income Tax Act.

Detailed Analysis:

Issue 1: Priority of Carried Forward Development Rebate
The primary issue was whether the carried forward development rebate from earlier years should take precedence over unabsorbed depreciation and business losses for the purpose of set-off during the current year. The Tribunal held that the carried forward development rebate comes last for the purpose of setting off, as per the scheme of s. 24(2) of the Indian I.T. Act, 1922, and its equivalent s. 33(2) of the I.T. Act, 1961. The assessee contended that the development rebate should be prioritized over business losses and unabsorbed depreciation. However, the Tribunal and the court found that the correct order of priority is:
1. Current year's depreciation.
2. Carried forward business losses.
3. Unabsorbed depreciation.
4. Unabsorbed development rebate.
5. Current year's development rebate.

The court emphasized that the rationale behind this order is to prevent the erosion of the capital base of the assessee's business, giving priority to carried forward business losses and unabsorbed depreciation over development rebate.

Issue 2: Interpretation of Section 2(45) in Context of Sections 5, 33, and 72
The second issue involved the interpretation of section 2(45) of the Income Tax Act, which defines "total income" as the total amount of income referred to in section 5, computed in the manner laid down in the Act. The court examined various provisions, including sections 4, 5, 28, 29, 32, 33, and 72, to understand the computation and set-off mechanisms.

The court noted that section 72(2) provides that before any depreciation allowance can be carried forward and set-off against the profits of subsequent years, the carried forward business loss has first to be set off. Section 33(2) specifies that for ships acquired or machinery or plant installed after December 31, 1957, the development rebate can be carried forward up to eight assessment years. The court highlighted that the total income for the purpose of section 33(2) must be computed without making any allowance under section 33(1) or section 33A, or any deduction under Chapter VI-A or section 280-0.

The court referred to the Supreme Court decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT, which held that section 72(1) has a direct impact on the computation under the head "Profits and gains of business or profession." Therefore, carried forward business losses must be set off before arriving at the total income for the purpose of section 33(2).

The court concluded that the correct order of priority for set-off is as follows:
1. Current year's depreciation.
2. Carried forward business losses under section 72(2) read with section 72(1).
3. Unabsorbed depreciation by virtue of section 32(2).
4. Unabsorbed development rebate due to the provisions of section 33(2).
5. Current year's development rebate.

Conclusion:
The court answered both questions in favor of the revenue and against the assessee, affirming the Tribunal's decision. The assessee was ordered to pay the costs of the reference to the Commissioner. The court also granted a certificate for appeal to the Supreme Court, recognizing that the question of law involved is substantial and lacks direct authority from the Supreme Court.