1973 (4) TMI 31 - HC - Income Tax

In the year 1956-57, which was the last year of the business of manufacture of soap and oil, the Income-tax Officer had worked out depreciation, which could not be fully set off against the profits, and, as such, a part of the depreciation was left unabsorbed. In the assessment year in dispute the assessee claimed that the unabsorbed depreciation to the extent that it pertained to the old machinery utilised in the new business should be brought forward and set off against the profits of the new business - Whether same business should be carried on for the purposes of carry forward and set-off unabsorbed depreciation and whether depreciable assets of the original business should be utilised in the new business

Summary

Issues:
Interpretation of provisions for carry forward and set off of unabsorbed depreciation in a case where old machinery from a discontinued business is used in a new business.

Analysis:
The case involved a private limited company that had previously operated a soap and oil manufacturing business, which ceased in 1955. Subsequently, in the assessment year 1965-66, the company started a new business of manufacturing steel pipes using some old machinery from the previous business. The company sought to set off the unabsorbed depreciation from the old machinery against the profits of the new business. The Income-tax Officer and the Appellate Assistant Commissioner rejected the claim, stating that unabsorbed depreciation could only be set off if the old business continued in existence in the assessment year under consideration. However, the Income-tax Appellate Tribunal reversed this decision and upheld the company's claim.

The key legal provisions discussed in the judgment were Section 32 of the Income-tax Act, 1961, which deals with the allowance for depreciation of assets used in a business. The section allows for the carry forward of unabsorbed depreciation if it could not be fully set off in a previous year. The judgment highlighted that the purpose of depreciation allowance is to provide a deduction from the gross profits of a business and that unabsorbed depreciation can be carried forward without the requirement for the same business or assets to be present in the succeeding year.

The judgment also compared the treatment of carried-forward losses and carried-forward depreciation allowance. It noted that while losses can only be carried forward for a limited period, there is no time limit for the carry-forward of unabsorbed depreciation. The court emphasized that as long as the assessee continues some business in the succeeding year, the unabsorbed depreciation can be set off against the profits of that year.

The court disagreed with the department's contention that unabsorbed depreciation could only be set off against the profits of the same business. It referenced a Bombay High Court decision but found it contrary to the plain language of the relevant statute. The court held that the unabsorbed depreciation from the old business could be set off against the profits of the new business, even if the assets were different, as long as the assessee continued to operate a business in the succeeding year.

Ultimately, the court ruled in favor of the assessee, allowing the set off of unabsorbed depreciation from the old business against the profits of the new business. The decision was supported by the interpretation of legal provisions and previous judicial precedents, including a Supreme Court decision. The court awarded costs to the assessee and answered the question in the affirmative, in favor of the assessee and against the department.