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Issues involved:
The issue involves the interpretation of whether unabsorbed depreciation of past years can be set off against the profit u/s 41(2) assessable in a particular assessment year. Summary: The High Court of Karnataka was presented with a question regarding the set-off of unabsorbed depreciation against profits under section 41(2) of the Income Tax Act, 1961. The case revolved around M/s. Kapila Textiles (P.) Ltd., which had ceased business in 1956 and went into liquidation in 1958. The liquidator sold assets in 1963, leading to a claim for set-off of unabsorbed depreciation against income for the assessment year 1964-65. The Income Tax Officer (ITO) rejected the claim, stating that the allowance of carried forward depreciation required the business to be in operation during the previous year. The Appellate Authority Commission (AAC) allowed the set-off based on a decision of the Allahabad High Court. The department appealed to the Tribunal, arguing that set-off was subject to section 28 of the Act and required the business to be operational during the relevant accounting year. The Tribunal upheld the AAC's decision, leading to the reference to the High Court. Considerations: 1. The assessee earned income in 1963 through the sale of assets, treated as income u/s 41(2) of the Act. 2. Section 32(2) allows for the carry forward of unabsorbed depreciation to subsequent years. 3. Section 29 mandates computation of income in accordance with sections 30 to 43A, allowing for set-off based on profits and gains of business. 4. The court found that the condition of the business being operational during the relevant year does not apply to the set-off of unabsorbed depreciation under section 32(2). 5. The court agreed with the Tribunal's decision, citing the judgment of the Allahabad High Court in a similar case. Therefore, the High Court ruled in favor of the assessee, affirming the Tribunal's decision and rejecting the department's appeal.
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