1981 (6) TMI 30 - HC - Income Tax

Summary

Issues Involved:
1. Priority of set-off between carried forward business loss and current year's depreciation.
2. Interpretation of sections 32(2) and 72(2) of the Income-tax Act, 1961.
3. Applicability of judicial precedents and principles of accountancy in determining set-off priorities.

Issue-wise Detailed Analysis:

1. Priority of Set-off Between Carried Forward Business Loss and Current Year's Depreciation:
The primary issue was whether the carried forward business loss should be set off against the income before deducting the current year's depreciation or vice versa. The Tribunal, relying on the decision of the Allahabad High Court in Mother India Refrigeration Industries (P.) Ltd. v. CIT [1971] 80 ITR 510, held that the unabsorbed business loss should first be set off against the income, and only the balance should be set off against the current depreciation. This finding was challenged by the revenue, arguing that current depreciation should be allowed first before adjusting carried forward business losses.

2. Interpretation of Sections 32(2) and 72(2) of the Income-tax Act, 1961:
The revenue's advocate, Mr. S.K. Mitra, emphasized the provisions of sections 32(2) and 72(2). Section 32(2) provides for the carry forward of unabsorbed depreciation, while section 72(2) states that carried forward business losses should be set off first before the carried forward depreciation. The assessee's advocate, Mr. Pronab Kr. Pal, argued that the provisions of the 1922 Act were different from the 1961 Act, and the word "also" in the proviso to section 24(2) of the 1922 Act implied that depreciation allowance available at the stage when losses carried forward could be applied to reduce profits must belong to the same level.

3. Applicability of Judicial Precedents and Principles of Accountancy:
The court reviewed various decisions, including:
- Mother India Refrigeration Industries Ltd. v. CIT [1971] 80 ITR 510 (Allahabad High Court): Held that business losses should be given priority over unabsorbed depreciation allowance.
- CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 (Supreme Court): Discussed the carry forward of unabsorbed depreciation and its set-off against income from other heads.
- CIT v. Gujarat State Warehousing Corporation [1976] 104 ITR 1 (Gujarat High Court): Held that current year's depreciation should be treated as the first charge on profits before adjusting carried forward losses.
- Addl. CIT v. Andhra Printers Ltd. [1979] 117 ITR 555 (Andhra Pradesh High Court): Supported the view that current year's depreciation should be deducted first from the current year's income before setting off carried forward business losses.

The court agreed with the Gujarat and Andhra Pradesh High Courts, emphasizing that current year's depreciation is a first charge on profits and gains and should be deducted before adjusting carried forward business losses. The deeming fiction in section 32(2) is subject to section 72(2), and the basic principles of accountancy support this interpretation.

Judgment:
The court concluded that the Tribunal was incorrect in holding that the carried forward business losses should be set off first against the income before deducting the current year's depreciation. The business losses carried forward from previous years cannot have precedence over the current depreciation allowance. Thus, section 32(2) yields to section 72(2) of the Act. The question was answered in the negative and in favor of the revenue, with each party bearing its own costs.