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Issues involved: Interpretation of provisions related to set off of unabsorbed depreciation and development rebate u/s 32(2), 33(2), and 72(2) of the Income Tax Act, 1961.
Summary: The case involved M/s. Mysore Paper Mills Ltd. for the assessment year 1971-72. The Income Tax Officer (ITO) set off unabsorbed depreciation allowances of previous years against the current year's income, without considering the unabsorbed development rebate. The assessee appealed to the AAC, who directed the ITO to adjust the unabsorbed development rebate before the depreciation allowance. The department then appealed to the Tribunal, which held that the development rebate cannot be set off before the depreciation allowance. The Tribunal referred two questions to the High Court, which essentially focused on whether the unabsorbed development rebate should be adjusted before the unabsorbed depreciation allowance. The High Court analyzed the provisions of the Income Tax Act and held that the unabsorbed depreciation allowance of previous years should be treated as part of the current year's depreciation allowance, subject to certain provisions. The Court referred to a previous decision and explained that the deeming fiction of carrying forward depreciation should be considered before adjusting the development rebate. It emphasized that the development rebate is an incentive for investments and cannot be equated to a business loss. Therefore, the Tribunal's decision to prioritize the depreciation allowance over the development rebate was upheld. In conclusion, the High Court answered the questions against the assessee, affirming that the unabsorbed development rebate cannot be given priority over the unabsorbed depreciation allowance.
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