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TMI Blog2000 (11) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... f Hon'ble Karnataka High Court in the case of Mysore Paper Mills Ltd. vs. CIT (1979) 9 CTR (Kar) 313 : (1979) 117 ITR 132 (Kar). The matter was carried before the CIT(A) who upheld the order of the AO considering that the legal position as discussed by the AO was correct. Aggrieved by the same, the assessee is in appeal before us. 4. At the time of hearing before us the learned counsel for the assessee has raised various contentions in the matter of priority of set off of brought forward losses and allowances. For the sake of convenience, he also filed the written submissions, as per our directions, covering his entire arguments on this issue and we consider it worthwhile to reproduce the same as under: "Ground No. 1 relates to priority of set off of business loss and unabsorbed depreciation, investment allowance and deficiency under s. 80J. In this regard we would like to submit as under: 1.1 The relevant provisions in the IT Act which govern the carry forward and set off of the aforesaid allowances are reproduced below: Provisions relating to carry forward and set off of unabsorbed depreciation: '32(2) Where, in the assessment of the assessee or if the assessee is a register ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nery or plant was installed or, as the case may be, the immediately succeeding previous year.' Provisions relating to business loss: '72(1) Where for any assessment year, the net result of the computation under the head "profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of s. 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and: (i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year: Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on: (2) Where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to an earlier assessment year shall be set off under this sub-section before setting off the deficiency in relation to a later assessment year: 1.2. Sec. 32(2), it is submitted enacts a legal fiction to treat the unabsorbed depreciation as part of the current year's depreciation so that it is available for set off against income under all heads unlike business loss which can be set off only against business income. There is further no time-limit to the carry forward and set off of unabsorbed depreciation. The Supreme Court in the case of CIT vs. Mother India Refrigeration Industries (P) Ltd. (1985) 48 CTR (SC) 176 : (1985) 155 ITR 711 (SC) held that the avowed purpose of the legal fiction created by the deeming provision contained in s. 32(2) of the IT Act, 1961, is to make the unabsorbed carried forward depreciation partake of the same character as the current depreciation in the following year so that it is available, unlike unabsorbed carried forward business loss, for being set off against other heads of income of that year. Such being the purpose for which the legal fiction is created, their Lordships observed that the fiction cannot be extended beyond its legitimate field an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al income. In other words, the profits and gains derived from the industrial undertaking and forming part of the total income should be after setting off the deficiency under s. 80J. The carry forward and set off of deficiency under s. 80J is also for a limited period, the deficiency not being carried forward beyond the seventh year from the end of the initial assessment year in which the undertaking commenced manufacture or production of articles. 1.9. The position that thus emerges is as under: (i) The deficiency on account of deduction under s. 80J can be set off only against the profits and gains of the eligible undertaking (forming part of the total income of the assessee). The carry forward of the deficiency is for a limited period. (ii) Unabsorbed business loss can be set off only against the business income. Such set off is not restricted to the business income derived from the unit in which the loss was incurred. The unabsorbed business loss carried forward for a limited period of 8 years. (iii) Unabsorbed investment allowance can be set off against the total income of the assessee, being the aggregate of income under all heads of income. The unabsorbed amount of inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness loss has to be set off against income from any other business, by way of intra-head adjustment, under s. 70 and the income under any other head, by way of inter-head adjustment, under s. 71. This principle indeed emerges even from the language of s. 32(2) insofar as it implicitly recognises that the excessive depreciation of one business can be 'given effect to' against the profits and gains of another business in the same year. This indeed is a well settled proposition.' 1.11. Let us now refer to the available case precedents on the subject: Monogram Mills Co. Ltd. vs. CIT (1981) 25 CTR (Guj) 283 : (1982) 135 ITR 122 (Guj) The Gujarat High Court in this case held that the correct order of priority as between carried forward loss, depreciation and development rebate, is that unabsorbed depreciation has precedence over unabsorbed development rebate. The Court observed that though there was no direct authority for the priority to be given between unabsorbed depreciation and carried forward development rebate under the provisions of s. 32(2) and s. 33(2) of the Act, the wording of s. 33(2) made it clear that the total income against which unabsorbed development rebate could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alisation. CIT vs. North Arcot District Co-operative Spg. Mills Ltd. (1984) 42 CTR (Mad) 51 : (1985) 151 ITR 238 (Mad) 1.15. The Madras High Court in this case held that relief under s. 80J was allowable only after deduction of unabsorbed depreciation of the current year. The Madras High Court relied on the provisions of s. 32(2) of the Act to hold the view that no distinction could be made between the current year's depreciation and the carry forward unabsorbed depreciation. 1.16. The Madras High Court also did not have the benefit of the Supreme Court decision in CIT vs. Mother India Registration Industries (P) Ltd. The assessee did not also argue that the legal fiction enacted in s. 32(2) was only for limited period, namely, the deemed unabsorbed depreciation as part of the current years depreciation so that it was available for set off against all heads of income. CIT vs. Kerala Balers Ltd. (1988) 68 CTR (Ker) 23 : (1988) 169 ITR 364 (Ker) 1.17. The Kerala High Court in this case held that the unabsorbed development rebate had first to be set off against the profit of the new industrial undertaking and thereafter against other income and if there remained any profit derive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt with this issue in his order and urged that the same may be perused while deciding this issue. He, therefore, contended that the CIT(A) was fully justified in upholding the order of the AO on this issue. 6. We have considered the rival submissions and also perused the relevant material on record including the decisions cited by the learned counsel for the assessee as well as those relied upon by the AO. After going through the submissions made by the learned counsel for the assessee, it is observed that heavy reliance is placed by him on the decision of Hon'ble Supreme Court in the case of CIT vs. Mother India Refrigeration Indus. (P) Ltd. (1985) 48 CTR (SC) 176 : (1985) 155 ITR 711 (SC) while seeking that the settled position in respect of priority for setting off of brought forward losses and allowances need to be reviewed. Before we consider the various contentions raised by the learned counsel for the assessee on this issue, we may make it clear here that although he has made an attempt to enlarge the said issue by raising various arguments, the scope for this issue involved in the appeal before us, has arising out of the impugned orders of the authorities below, is very li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue has been contested by the assessee vide ground No. 3 but at the time of hearing, the learned counsel for the assessee has conceded that this issue is squarely covered against the assessee by the decision of the Hon'ble Supreme Court in Premier Cable Co. Ltd. vs. CIT (1999) 153 CTR (SC) 172 : (1999) 237 ITR 202 (SC). In effect it is observed that the assessee is held to be not entitled for set off of the deficiency under s. 80J against the income of the current year and that being so the question of deciding the priority of such deficiency for setting off against the current year's income does not arise at all. 8. The only issue which now survives for our consideration is regarding set off of brought forward business loss and unabsorbed depreciation prior to the unabsorbed investment allowance. 9. The legal position in respect of priority of unabsorbed business loss and unabsorbed depreciation over unabsorbed development rebate and unabsorbed investment allowance is well settled by the various judicial pronouncements, including the well-discussed decision of Hon'ble Gujarat High Court in the case of Monogarm Mills Co. Ltd. vs. CIT (1981) 25 CTR (Guj) 283 : (1982) 135 ITR 122 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, such logical conclusion seems to be that the unabsorbed depreciation has to be considered as current year's depreciation for all its intents and purpose, subject, however, to the provisions of ss. 72(2) and 73(3), as held by Hon'ble Bombay High Court in the case of Mysore Paper Mills Ltd. vs. CIT (1973) 89 ITR 77 (Bom). In the aforesaid case before the Hon'ble Supreme Court, the assessee had sought to apply the legal fiction in a reverse way in order to treat the current depreciation as unabsorbed depreciation and their Lordships have rightly rejected the assessee's plea in view of the legitimate purpose of the deeming provisions. 12. As mentioned hereinabove, the legal position in respect of correct order of priority for set off of unabsorbed losses and allowances has been laid down in the various detailed and well-reasoned judgment and there being no contradictory decisions brought to our notice, the legal position can be considered as well settled on this issue. The provisions of relevant sections have been extensively discussed and interpreted in the various judicial pronouncements and there appears to be no confusion or contradiction in the conclusion drawn by various Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court has not only just been referred to but also relied upon, it is reiterated that the unabsorbed depreciation will have priority over the unabsorbed development rebate in respect of setting off. In this detailed and well-reasoned judgment, the Hon'ble Bombay High Court has elaborately considered the controversy involved in this issue because of the time-limit prescribed for carry forward of the unabsorbed development rebate and observed that if the assessee does not adjust the unabsorbed depreciation of earlier year against the income of next year, loses it once for all with no right to claim the same in a subsequent year from computing the total income. 14. The resultant position which, therefore, emerges clearly from the reading of s. 32A(3) and the decisions of the Hon'ble Kerala High Court and Hon'ble Mumbai High Court is that the brought forward business loss and unabsorbed depreciation get priority over the unabsorbed investment allowance in respect of setting off against the profits of the subsequent years and this well settled position will continue to remain the same even after the decision of the Hon'ble Supreme Court in the case of CIT vs. Mother India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no claim of the deduction the question of applicability of the provision of s. 43B would not arise. Sec. 43B provides that certain expenditure otherwise allowable would only be allowed on its actual payment i.e., in the year of payment. The assessee-appellant did not make any claim of deduction and, therefore, the question of allowability of cess duty would not arise and therefore the provision of s. 43B would not be applicable. The AO, however, held that in view of the Hon'ble Supreme Court decision in the case of Chowringhee Sales Bureau (P) Ltd. 1973 CTR (SC) 44 : (1973) 87 ITR 542 (SC) and Sinclair Murray & Co. (P) Ltd. 1974 CTR (SC) 283 : (1974) 97 ITR 615 (SC) the cess collected by the assessee is trading receipt and, therefore, this liability is clearly covered under cl. (a) of s. 43B of the Act. He accordingly covered under cl. (a) of s. 43B of the Act. He accordingly added a sum of Rs. 1,86,183 as income of assessee-company. In this connection it is submitted that the decisions referred by the AO relate to sales-tax. The Hon'ble Supreme Court in the above referred two decisions held that sales-tax collected would form part of trading a/c. Whereas in this case the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice that the collection of charity is also not treated as a part of trading receipt. We shall draw your honour's attention to the decision of the Hon'ble Allahabad High Court in the case of CIT vs. Tarachand Surajmal (1996) 217 ITR 315 (All) wherein the Hon'ble High Court held that market fee received from customers and payable to Mandi Samiti would not be includible in the income of the assessee. It is submitted that the ratio of the decision of the Hon'ble High Court Allahabad is squarely applicable on the facts of the present case in hand. We shall also draw your attention to the decision of the Hon'ble High Court of Rajasthan in the case of Hari Industries vs. CIT (1984) 43 CTR (Raj) 656 : (1985) 153 ITR 656 (Raj). Reference may kindly be had to the decision of the Hon'ble Supreme Court in the case of CIT vs. Bijli Cotton Mills (P) Ltd. (1979) 8 CTR (SC) 1 : (1979) 116 ITR 60 (SC). It is, therefore, submitted that the cess so collected by the assessee-appellant cannot be and should not be treated as a trading receipt and, therefore, addition made by the AO in this regard deserves to be deleted." 17. In reply the learned Departmental Representative relied on the orders of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax and price loses all significance. Further, the reliance was also placed by their Lordships upon the following observations of Goddard L.J. in Love vs. Norman Wright (Builders) Ltd. (1944) 1 All ER 618 (CA): "Where an article is taxed, whether by purchase tax, customs duty, or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consideration, though made up of cost plus profit plus tax. So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up, or whether the seller has included tax or not." After considering these observations as also the other relevant aspects, the Hon'ble Supreme Court held that tax or duty which forms part of the whole consideration paid by the purchaser to the seller is the trading receipt and accordingly should be included in the turnover of the assessee. It is thus clear that the ratio of this decision not only applies in respect of sales-tax but also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts must not be made a means of misrepresentation; (iii) Fairness--accounting rules, procedure, etc. should not serve a special purposes. Moreover, in "Accounting Postulate C-5" developed by Moris Moonity in respect of disclosure, it has been laid down that accounting reports should disclose that which is necessary to make them not misleading. 20. The following illustration based on hypothetical figures will further clarify the reflection of proper accounting treatment (A) vis-a-vis the assessee's version, (B) in respect of textile cess in the final accounts: A. Proper Accounting treatment (a) Textile Cess Collection A/c (Ledger) To P&L a/c (Textile cess collected during the year transferred to credit of P&L a/c) 100 By customers/cash (Textile cess charged in the sales bills during the year) 100 100 100 (b) Textile Cess Paid A/c (Ledger) To Cash/Bank/Adj. (Textile cess paid or adjusted during the year) To Textile cess payable a/c (Balance textile cess outstanding for the year provided for) 90 10 By P&L a/c (Textile cess for the year transferred to the debit of P&L a/c) 100 100 100 (c) Textile Cess Payable A/c (Ledger) To Balance c/f (Carried to the liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he gross inflow of cash, receivable or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services and from the use by others of enterprise resources. Clarifying further, it has been mentioned that the revenue is measured by the charges made to the customers or clients for goods supplied and services rendered to them. 21. In the case of Chowringhee Sales Bureau the Hon'ble Supreme Court has also expressed similar views and observed that the whole amount forming part of the sale consideration paid by the purchaser to the seller should be included in the turnover. It has been, therefore, held by their Lordships that the tax forming part of the turnover is a trading receipt and even if it is not so shown in the books of the assessee, the assessing authority would not be prevented from treating the same as trading receipt. 22. In the present case before us, the assessee has credited the textile cess collection and debited the payments thereof to a separate account maintained for textile cess which has its hidden and inherent effects of revenue being credited and corresponding expenditure being debited. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty is paid by the purchaser to the seller on the occasion of purchase and not certainly as part of consideration for purchase. The ratio of these decisions, therefore, cannot be applied to the present case involving textile cess which forms part of the turnover as discussed hereinabove. 25. It is also observed that the decision of Hon'ble Allahabad High Court (217 ITR 315) relates to asst. yr. 1966-67 involving the issue of market fees payable to Krishi Mandi Committee and it was held by the Hon'ble Allahabad High Court that such market fees cannot be regarded as tax or duty attracting provisions of s. 43B. It is pertinent to note here that cl. (a) of s. 43B at the relevant time referred only to tax or duty. However, the same was substituted by the Finance Act, 1988, w.e.f. 1st April, 1989, to read as under: "(a) any tax, duty, cess or fees payable under a statute by whatever name called". With the result of the above amendment the scope of s. 43B stands widened to also cover the cess and fees payable under a statute by whatever name called and as such has apparently nullified the aforesaid decision of the Hon'ble Allahabad High Court. It is relevant here to refer to the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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