1968 (2) TMI 9 - HC - Income Tax

Whether the company is entitled to set off its unabsorbed depreciation of past years against the assessable income earned by the company of the assessment year 1958-59 - Question answered in the affirmative

Issues Involved:
1. Entitlement to set off unabsorbed depreciation of past years against the assessable income of the assessment year 1958-59.
2. Whether the Tribunal misdirected itself in law or acted without evidence in holding that the business of the applicant company in the assessment year 1958-59 was not the same as in the preceding years.

Detailed Analysis:

Issue 1: Entitlement to Set Off Unabsorbed Depreciation
The primary issue is whether the assessee is entitled to set off its unabsorbed depreciation of past years amounting to Rs. 73,404 against the assessable income of Rs. 80,210 earned in the assessment year 1958-59. The Income-tax Officer denied this claim, asserting that the business carried on during the assessment year was not the same as in previous years. This view was upheld by the Appellate Assistant Commissioner and the Tribunal, which concluded that the business had materially changed due to the contract with Bhor Industries Limited and the subsequent sale of the assessee's old machinery.

Issue 2: Tribunal's Misdirection or Lack of Evidence
The second issue examines whether the Tribunal misdirected itself in law or acted without evidence in determining that the business in the assessment year 1958-59 was not the same as in preceding years. The Tribunal's conclusion was based on the contract terms and the operational changes, such as the sale of old machinery and the use of new machinery supplied by Bhor Industries Limited.

Analysis of Judgment:

On the Nature of Business:
The court analyzed the nature of the business carried on by the assessee before and after entering into the contract with Bhor Industries Limited. The assessee had been engaged in the business of processing cloth, including bleaching, dyeing, calendering, and printing, since its inception. The contract with Bhor Industries Limited required the assessee to process and finish P.V.C. leather cloth and plain book binding cloth using special machinery supplied by Bhor Industries Limited.

Contractual Terms:
The court scrutinized the terms of the contract, particularly clauses 1, 2, 3, 8, 9, and 10. Clause 1 stipulated that the assessee would bear certain operational costs while Bhor Industries Limited would supply the necessary cloth, chemicals, and other raw materials. Clause 3 allowed Bhor Industries Limited to install special machinery at the assessee's factory. Clause 8 dealt with the consideration for processing and finishing, which was to be mutually agreed upon. Clause 9 required the assessee to maintain separate accounts for the materials supplied by Bhor Industries Limited.

Nature of Business Activity:
The court held that the essence of the assessee's business activity remained the same, i.e., processing and finishing cloth. The change in the method of carrying out the business, such as using machinery supplied by Bhor Industries Limited and processing materials provided by them, did not alter the fundamental nature of the business. The court emphasized that the essential nature of the activity (processing and finishing cloth) remained unchanged, even if the manner or method of carrying out the business had changed.

Tribunal's Conclusion:
The Tribunal had concluded that the business carried on by the assessee during the assessment year was different from the earlier years due to the sale of old machinery and the exclusive use of new machinery supplied by Bhor Industries Limited. However, the court disagreed with this view, stating that the business activity of processing cloth remained the same, and the change in machinery or materials did not constitute a different business.

Interpretation of Clause (b) of Proviso to Section 10(2)(vi):
The court also addressed the interpretation of clause (b) of the proviso to section 10(2)(vi) of the Indian Income-tax Act, which deals with unabsorbed depreciation. The court rejected the revenue's argument that the machinery in respect of which depreciation was claimed must still be in use in the assessment year. The court held that once depreciation was allowed in earlier years and remained unabsorbed, it could be carried forward and set off in subsequent years, regardless of whether the specific machinery was still in use.

Conclusion:
The court answered both questions in the affirmative, ruling in favor of the assessee. The assessee was entitled to set off its unabsorbed depreciation of past years against the assessable income of the assessment year 1958-59. The Tribunal had misdirected itself in law by concluding that the business carried on by the assessee in the assessment year was different from the preceding years. The assessee was awarded costs from the Commissioner.

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