1971 (11) TMI 38 - HC - Income Tax

Whether on the facts and in the circumstances of the case the depreciation allowance determined for the assessment years 1951-52 to 1954-55 should be set off against the sum of Rs. 6, 982 assessed under section 41(2)

Summary

Issues Involved:
1. Whether the unabsorbed depreciation from the assessment years 1951-52 to 1954-55 can be carried forward to the assessment year 1962-63.
2. Whether such unabsorbed depreciation can be set off against the sum of Rs. 6,982 assessed as income from business under section 41(1).

Detailed Analysis:

Issue 1: Carrying Forward Unabsorbed Depreciation
The primary question is whether unabsorbed depreciation from the years 1951-52 to 1954-55 can be carried forward to the assessment year 1962-63, despite the business ceasing operations from the assessment year 1955-56. The judgment clarifies that normal depreciation is allowable under section 32(1) only if two conditions are met: the business must be carried on in that year, and the assets must be used for business purposes. However, section 32(2) provides an independent provision for carrying forward unabsorbed depreciation, not contingent upon these conditions. The court emphasized that unabsorbed depreciation from previous years shall be "deemed to be the allowance for that previous year," even if no depreciation is allowable for that year due to the cessation of business or non-use of assets.

Issue 2: Setting Off Unabsorbed Depreciation Against Income Under Section 41(1)
The second issue is whether the unabsorbed depreciation can be set off against the sum of Rs. 6,982, which was assessed as business income under section 41(1). The court noted that section 41(1) creates a legal fiction where the refund received is deemed to be business income, even if the business had ceased. The court cited the principle that a statutory fiction must be carried to its logical conclusion, meaning that if the refund is deemed business income, the business should be deemed to have been carried on in that year. Consequently, the unabsorbed depreciation from past years would be available for set-off against this deemed business income.

Conclusion
The court agreed with the reasoning of the Judicial Member and the President of the Tribunal, concluding that the unabsorbed depreciation of Rs. 46,003 could indeed be carried forward to the assessment year 1962-63 and set off against the sum of Rs. 6,982 assessed as business income under section 41(1). The court answered the question in the affirmative, in favor of the assessee and against the department, awarding costs to the assessee.

Summary
The judgment addressed two main issues: the carry-forward of unabsorbed depreciation despite the cessation of business and the set-off of such depreciation against income deemed as business income under section 41(1). The court concluded that unabsorbed depreciation could be carried forward and set off against the deemed business income, answering the question in favor of the assessee.