1965 (11) TMI 32 - SC - Income Tax

Whether in the facts and circumstances of the case the unabsorbed depreciation of the past years should be added to the depreciation of the current year and the aggregate of the unabsorbed depreciation and the current year s depreciation be deducted from the total income of the previous year relevant for the assessment year 1952-53 ? Held that - The unabsorbed depreciation allowance is carried forward under proviso (b) to section 10(2)(vi) and the method of carrying it forward is to add it to the amount of the allowance or depreciation in the following year and deeming it to be part of that allowance ; the effect of deeming it to be part of that allowance is that it falls in the following year within clause (vi) and has to be deducted as allowance. If the legislature had not enacted proviso (b) to section 24(2) the result would have been that depreciation allowance would have been deducted first out of the profits and gains in preference to any losses which might have been carried forward under section 24 but as the losses can be carried forward only for six years under section 24(2) the assessee would in certain circumstances have in his books losses which he would not be able to set off. It seems to us that the legislature in view of this gave a preference to the deduction of losses first. But it is wrong to assume that section 24(2) also deals with the carrying forward of depreciation. This carry forward having been provided in section 10 (2)(vi) and in a different manner section 24(2) only deals with losses other than the losses due to depreciation. Appeal dismissed.

Issues Involved:
1. Whether unabsorbed depreciation from past years should be added to the depreciation of the current year and deducted from the total income of the previous year relevant to the assessment year 1952-53.

Issue-wise Detailed Analysis:

1. Interpretation of Sections 6, 10, and 24 of the Indian Income-tax Act, 1922:
The court had to interpret sections 6, 10, and 24 of the Indian Income-tax Act, 1922. The question was whether the unabsorbed depreciation from past years should be added to the current year's depreciation and deducted from the total income of the previous year relevant to the assessment year 1952-53.

2. Computation of Total Income:
The Income-tax Officer computed the assessee's total income for the year 1952-53 at Rs. 14,041 before charging depreciation. After deducting the depreciation for the year amounting to Rs. 5,350, the profit was computed at Rs. 8,681. This figure was further reduced by Rs. 8,681 for losses during 1947-48, resulting in a business income of nil. The dividend income was computed at Rs. 2,01,130, leading to a total income of Rs. 2,01,130 on which tax was levied.

3. Assessee's Contention:
The assessee contended that the unabsorbed depreciation of Rs. 76,857 should be deducted from the dividend income, reducing the total income to Rs. 1,32,955. This contention was rejected by the Income-tax Officer, the Appellate Assistant Commissioner, and the Appellate Tribunal, but accepted by the High Court.

4. Legal Provisions and Arguments:
The answer to the question depended on the interpretation of sections 6, 10, and 24 of the Act. Section 10 deals with the computation of profits and gains of any business, including allowances for depreciation under sub-clause (vi). Proviso (b) to section 10(2)(vi) allows unabsorbed depreciation to be carried forward and added to the allowance for the following year. Section 24 provides for the set-off of losses in computing aggregate income.

5. Revenue's Argument:
The revenue argued that depreciation serves to compensate for capital loss and is a charge on the profits of a business. Therefore, the expression "loss of profits and gains" in section 24(1) does not include deficiency resulting from depreciation, and depreciation should not be set off against income from other heads.

6. Assessee's Argument:
The assessee relied on the history of the legislation and various authorities to support the High Court's judgment. The underlying idea of the Act is to assess the total income of an assessee, pooling income from business with income or loss under other heads. The Act and commercial principles do not distinguish between various allowances under section 10(2), except that depreciation is not an actual outgoing.

7. Interpretation of Proviso (b) to Section 10(2)(vi):
The court interpreted the expression "in the assessment of the assessee or the assessment of the partners" to mean individual assessments where profits from the firm and other sources are pooled. This implies that effect can be given to depreciation allowance by setting it off against income, profits, and gains under other heads.

8. Historical Judicial Interpretation:
The court noted that various High Courts had interpreted the Act to allow unabsorbed depreciation to be set off against gains and profits from other sources. Cases cited included Karam Ilahi Muhammad Shafi v. Commissioner of Income-tax, A. Suppan Chettiar & Co. v. Commissioner of Income-tax, Ballarpur Collieries v. Commissioner of Income-tax, and others.

9. Post-Amendment View:
After the amendment by Act 25 of 1953, the same view was taken by the Bombay High Court in Commissioner of Income-tax v. Ravi Industries Ltd. and the Gujarat High Court in Commissioner of Income-tax v. Girdharlal Harivallabhadas Mills Co. Ltd. The only contrary view was from the Madras High Court in Commissioner of Income-tax v. B. Nagi Reddy, which the Supreme Court did not agree with.

Conclusion:
The Supreme Court agreed with the High Court that the unabsorbed depreciation from past years should be added to the current year's depreciation and deducted from the total income of the previous year relevant to the assessment year 1952-53. The appeal was dismissed with costs.

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