1995 (10) TMI 1 - SC - Income Tax

Unabsorbed Depreciation - Carry Forward and Set Off - High Court has refused to answer the reference made at the instance of the Revenue on the ground that the Revenue has failed to file the paper book in spite of a period of ten years having elapsed since the reference - In view of our judgment in Estate and Finance Ltd. s case we allow this appeal also and remit the same to the High Court with a request to dispose of it according to law

Issues Involved:
1. Interpretation of sub-section (2) of section 32 of the Income-tax Act, 1961.
2. Set-off of unabsorbed depreciation against profits of a new business.
3. Requirement for continuity of the same business in subsequent years.
4. Existence and use of depreciable assets in subsequent years.
5. Necessity of carrying on any business in the following year to avail of the benefit of section 32(2).

Detailed Analysis:

1. Interpretation of sub-section (2) of section 32 of the Income-tax Act, 1961:
The core issue in these appeals revolves around the interpretation of sub-section (2) of section 32 of the Income-tax Act, 1961. The Supreme Court examined whether unabsorbed depreciation from a previous year can be carried forward and set off against the income of a new business in a subsequent year. The court clarified that section 32(2) allows for the unabsorbed depreciation to be carried forward and deemed as depreciation allowance for the subsequent year until it is fully absorbed. This interpretation aligns with the historical context and legislative intent, which did not impose a time limit on carrying forward unabsorbed depreciation.

2. Set-off of unabsorbed depreciation against profits of a new business:
The respondent-assessee, engaged in different businesses over the years, claimed that unabsorbed depreciation from an earlier business (soap and oil manufacturing) should be set off against the profits of a new business (steel pipe manufacturing). The Supreme Court upheld the view that unabsorbed depreciation is not restricted to being set off against the same business's income. It can be carried forward and set off against the income from any business or other heads of income, as long as there is some business activity in the subsequent year.

3. Requirement for continuity of the same business in subsequent years:
The court addressed whether the same business needs to be continued in subsequent years to claim the benefit of section 32(2). It concluded that there is no such requirement in the absence of explicit wording in the statute. Unlike section 72, which expressly requires the same business to be continued for carrying forward business losses, section 32(2) does not impose such a condition for unabsorbed depreciation. Therefore, the benefit of section 32(2) can be availed even if a different business is carried on in subsequent years.

4. Existence and use of depreciable assets in subsequent years:
The court also examined whether the depreciable assets that earned the depreciation in the preceding year must exist and be used in the following year. It found no such requirement in the statute. The provision allows for the unabsorbed depreciation to be carried forward and deemed as the allowance for the subsequent year, irrespective of the existence or use of the specific assets that generated the depreciation initially.

5. Necessity of carrying on any business in the following year to avail of the benefit of section 32(2):
The Supreme Court considered whether it is necessary for the assessee to carry on any business in the following year to claim the benefit of section 32(2). Two views were possible: one requiring the existence of some business in the following year, and the other allowing the benefit even if no business is carried on. The court adopted the latter view, supported by precedents like Jaipuria China Clay Mines (P.) Ltd. and Rajapalayam Mills Ltd., which state that unabsorbed depreciation stands on the same footing as current depreciation and can be carried forward even if no business is conducted in the following year.

Conclusion:
The Supreme Court clarified that unabsorbed depreciation can be carried forward and set off against the income of subsequent years, regardless of whether the same business is continued or whether the specific assets generating the depreciation are used. The court emphasized that the statutory language of section 32(2) does not impose such restrictions, and the benefit of carrying forward unabsorbed depreciation is available as long as there is some business activity in the subsequent year. The judgment aligns with the legislative intent and historical context, ensuring that unabsorbed depreciation is treated differently from business losses, which have more stringent conditions for carry forward and set-off.

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