1976 (11) TMI 28 - HC - Income Tax

Act Of 1922, Act Of 1961, Carry Forward, Set Off, Substantive Provision, Taxing Statutes, Unabsorbed Depreciation

Issues Involved:
1. Interpretation of sections 56, 57(ii), and 32(2) of the Income-tax Act, 1961.
2. Set-off of unabsorbed depreciation against business income when the source of depreciation has ceased to exist.

Detailed Analysis:

1. Interpretation of sections 56, 57(ii), and 32(2) of the Income-tax Act, 1961:
The primary issue revolves around the proper interpretation of sections 56, 57(ii), and 32(2) of the Income-tax Act, 1961, specifically whether the unabsorbed depreciation of Rs. 70,700 from the years 1950-51, 1951-52, and 1952-53 could be set off against the business income assessed in the assessment year 1963-64, despite the source of the depreciation (a theatre) having ceased to exist since 1952.

2. Set-off of unabsorbed depreciation against business income when the source of depreciation has ceased to exist:
The assessee, a limited company, purchased a theatre in 1947 and sold it in 1952. The unabsorbed depreciation from the theatre's machinery and furniture, amounting to Rs. 70,700, remained unadjusted due to insufficient profits in subsequent years. In the assessment year 1963-64, the assessee sought to set off part of this unabsorbed depreciation against its total income of Rs. 21,453.

The Income-tax Officer did not address this issue in his order. The Appellate Assistant Commissioner rejected the assessee's claim, stating that since the theatre business had ceased in 1952, the provisions of section 57 read with section 32(2) did not apply.

The Income-tax Appellate Tribunal, however, upheld the assessee's contention, stating that there was no requirement in section 32(2) for the business to continue for the unabsorbed depreciation to be set off. The Tribunal emphasized that fiscal statutes should be interpreted in a manner favorable to the assessee when two interpretations are possible.

The High Court was then referred to consider this issue. Mr. Joshi, representing the revenue, argued that the matter was settled by the Division Bench decision in Sahu Rubbers Private Ltd. v. Commissioner of Income-tax [1963] 48 ITR 464 (Bom), which required the business to continue for the unabsorbed depreciation to be set off. However, the court noted that the decision in Sahu Rubbers' case was based on the interpretation of a proviso under the Indian Income-tax Act, 1922, whereas the current issue involved an independent substantive provision under the Income-tax Act, 1961.

The court also considered other relevant judgments, including those from the Allahabad High Court, which supported the assessee's position. In Commissioner of Income-tax v. Rampur Timber & Turnery Co. Ltd. [1973] 89 ITR 150 (All) and Commissioner of Income-tax v. Virmani Industries (P.) Ltd. [1974] 97 ITR 461 (All), the Allahabad High Court held that unabsorbed depreciation could be set off in subsequent years without the business continuing or the assets being used.

The High Court agreed with the Tribunal's view that the statutory provision should be interpreted in favor of the assessee. The court emphasized that the change in the statutory provision from a proviso to an independent substantive provision under the Income-tax Act, 1961, supported the assessee's claim.

Conclusion:
The High Court concluded that the unabsorbed depreciation of Rs. 70,700 could be set off against the business income assessed in the assessment year 1963-64, even though the source of depreciation had ceased to exist. The court answered the question in the affirmative and in favor of the assessee, upholding the Tribunal's decision. The department was directed to pay the costs of the reference to the assessee.

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