1976 (9) TMI 7 - HC - Income Tax

Summary

Issues Involved:
1. Priority of business loss carried forward over current depreciation allowance.
2. Interpretation of relevant sections of the Income Tax Act.
3. Analysis of judicial precedents on the issue.

Detailed Analysis:

1. Priority of Business Loss Carried Forward Over Current Depreciation Allowance:
The primary issue in this case was whether the business loss carried forward from previous years should receive priority over the current depreciation allowance for the assessment year 1970-71. The Income Tax Officer (ITO) had set off the income of Rs. 70,555 against the current year's depreciation of Rs. 1,87,303, directing that the balance of Rs. 1,16,748 be carried forward as unabsorbed depreciation. The assessee contended that the amount of Rs. 70,555 should be set off against the carried forward business losses rather than the current year's depreciation. This contention was initially rejected by the ITO but accepted by the Appellate Assistant Commissioner (AAC) and the Tribunal, following the Allahabad High Court's decision in Mother India Refrigeration Industries (P.) Ltd. v. CIT.

2. Interpretation of Relevant Sections of the Income Tax Act:
The court analyzed various sections of the Income Tax Act, including Sections 4, 14, 28-44D, 29, 32(1), 32(2), 71, and 72. Section 32(2) provides that unabsorbed depreciation can be carried forward and added to the depreciation allowance for the following year. Section 72(1) allows for the carry forward and set-off of business losses against profits and gains of any business or profession, with a limitation of eight years for carrying forward such losses under Section 72(3). The court emphasized that the business loss carried forward is the loss not set off against income from other heads in accordance with Section 71, and it can only be set off against income from business or profession.

3. Analysis of Judicial Precedents on the Issue:
The court examined several judicial precedents, including:
- Mother India Refrigeration Industries (P.) Ltd. v. CIT (Allahabad High Court): This case held that business losses should receive priority over unabsorbed depreciation allowance.
- CIT v. Gujarat State Warehousing Corporation (Gujarat High Court): This case took the opposite view, holding that current year's depreciation should be adjusted first against the current year's revenue income, followed by carried forward business losses and then carried forward unabsorbed depreciation.
- CIT v. Jaipuria China Clay Mines (P.) Ltd. (Supreme Court): The Supreme Court held that unabsorbed depreciation of previous years could be set off against income from other heads, but did not directly address the priority between current year's depreciation and carried forward business losses.

The court noted that the Gujarat High Court's decision in CIT v. Gujarat State Warehousing Corporation was more aligned with the legislative intent, as it emphasized that current year's depreciation must first be allowed in computing current year's income before considering carried forward business losses. The court disagreed with the Allahabad High Court's view in Mother India Refrigeration Industries' case, stating that the computation of current year's income must be made in accordance with Sections 30 to 43A, with current year's depreciation allowed first.

Conclusion:
The court concluded that the business losses carried forward from previous years cannot receive priority over the current depreciation allowance. The question referred to the court was answered in the negative, in favor of the revenue and against the assessee. The assessee was directed to pay the costs of the reference to the Commissioner, with an advocate's fee of Rs. 250.