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TMI Blog1991 (8) TMI 171X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax Act, 1961, which includes section 32 dealing with depreciation allowance. So the net loss includes also depreciation allowance. Inasmuch as the return was filed beyond extended time allowed under section 139(1) not only business loss, but also the unabsorbed depreciation allowance included therein was declined to be carried forward by the ITO. However, the ITO determined the total income at Nil. 3. On appeal, the assessee raised several grounds and advanced several arguments to contend that depreciation allowance was quite different from business loss by relying on the provisions of sections 32(2), 72(2) and 73(3) of the Income-tax Act, 1961. In short the case of the assessee was that section 32(2) does not envisage the filing of return within the specified time under section 139(1) or extended time before the unabsorbed depreciation could be carried forward and section 80 is confined to business loss sustained which is sought to be carried forward. Reliance was placed on the judgment of the Madras High Court in the case of CIT v. Concord Industries Ltd. [1979] 119 ITR 458. 4. The CIT(A) rejected the contentions of the learned counsel of the assessee and upheld the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt held that section 79 of the Income-tax Act, 1961 prohibiting carry forward of losses in the case of certain companies would not apply to unabsorbed depreciation and development rebate. The Kerala High Court also held likewise. He cited several other decisions which are applicable to registered firms with which I am not concerned. The submission of the learned counsel was that so far as the element of unabsorbed depreciation was concerned, there was no bar for carry forward for the purpose of set off in the next assessment year and therefore, the CIT(A) was not justified in confirming the order of the ITO rejecting the claim. 7. The learned departmental representative, on the other hand, supported the orders of the authorities. On his part, he relied on the observations of their Lordships of the Supreme Court contained in the Head Notes in the case of Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512 which reads as under: " Unabsorbed depreciation is indeed a part of the 'loss'. This is so because, in the first place, depreciation is a normal outgoing, though in a sense notional, which has to be debited in the computation of the profits of a business on commercial princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to carry forward unabsorbed depreciation. To begin with, it is necessary to highlight or bring to focus the exact nature of the loss under consideration. From the statement of computation of total income for the year ending 31st December, 1984 contained in the paper compilation, it is seen that the profits of the business amounted to Rs. 1,29,007 against which depreciation allowance of Rs. 1,62,792 has been claimed by the assessee on the written down value of the plant and machinery of Rs. 10,85,280 at the rate of 15% per annum. The profits, were not sufficient to absorb depreciation allowance claimed by the assessee with the result the net computation resulted in loss of Rs. 33,785. Therefore, it is clear that the loss sustained by the assessee is actually the unabsorbed depreciation allowance for the assessment year 1985-86. 10. It is well known that depreciation allowance is granted as an incentive for capital formation and industrial development. The cost of the machinery or plant is allowed to be recouped by granting depreciation allowance so that when the machinery becomes obsolete or worn out, it could be replaced by the depreciation allowance already granted and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich he would not be able to set off. It seems to us that the legislature, in view of this, gave a preference to the deduction of losses first. But it is wrong to assume that section 24(2) also deals with the carrying forward of depreciation. This carry forward having been provided in section 10(2)(vi) and in a different manner, section 24(2) only deals with losses other than the losses due to depreciation. " (2) In the case of Garden Silk Weaving Factory " In our view, there is nothing anomalous or absurd in the statute providing for a dissection of the amount of loss for purposes of carry forward and providing for a special or different treatment to unabsorbed depreciations in this regard although its a component element of the genus described as 'loss'." 12. The question now arises is whether such unabsorbed depreciation allowance claimed in the return filed by the assessee on 17-9-1985 is entitled to be carried forward to the subsequent year for the purpose of set off or not. The ITO relied on the provisions of section 80 of the Income-tax Act, 1961 which enjoins that to be eligible for carry forward of loss of business, the return should have been filed in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return to be null and void since it was not filed within the assessment year and made an assessment ignoring the loss returned in view of section 22(2A) of the Income-tax Act, 1922 and refused to carry forward the same. With regard to carry forward of unabsorbed depreciation, the Court held that carrying forward of depreciation did not fall under section 24(2) and did not depend on compliance with section 22(2A) and the return fell squarely within section 22(3) and the order of the ITO was wrong. In particular, their Lordships of the Madras High Court have pointed out that the Act did not require two separate returns for the purpose of claiming business loss and unabsorbed depreciation. The composite return filed would serve both sections 22(2) and 22(2A) and if that part of the return which related to carried forward business loss was filed out of time specified under section 22(2A) it did not ipso facto and ipso jure follow that the return should be rejected insofar as it is under section 22(2) of the Income-tax Act, 1922. In other words, their Lordships have held that depreciation did not fall within the ambit of section 24(2) and consequently set off of carried forward unabsor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners) full effect cannot be given to any allowance under clause (i) or clause (ii) or clause (iia) or clause (iv) or clause (v) or clause (vi) of sub-section (1) or under clause (i) of sub-section (1A) in any previous year owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous year. " It is provided that the unabsorbed depreciation shall be carried forward and added to the amount of depreciation allowance in the subsequent previous year and it shall be deemed part of that allowance or if there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment year 1986-87 is Rs. 44,480 which shows that the assessee carried on business in the subsequent year also. Therefore, the assessee is entitled to set off of unabsorbed depreciation carried forward from the assessment year 1985-86 against profits of the assessment year 1986-87. 19. Another aspect is also required to be considered in this connection, namely, whether the direction of the Income-tax Officer that the assessee is not entitled to carry forward unabsorbed depreciation is binding on the Income-tax Officer who makes the subsequent assessment or not. The Supreme Court in the case of CIT v. Manmohan Das [1966] 59 ITR 699 at page 702 observed, inter alia, as under: " Whether the loss of profits or gains in any year may be carried forward to the following year and set off against the profits and gains of the same business, profession or vocation under section 24(2) has to be determined by the ITO who deals with the assessment of the subsequent year. It is for the ITO dealing with the assessment in the subsequent year to determine whether the loss of the previous year may be set off against the profits of that year. A decision recorded by the ITO who computes the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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