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TMI Blog1995 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to the assessment year 1956-57, depreciation under section 32(1)(ii) was found to be more than the profits and gains of the assessee for that assessment year. In the assessment proceedings relating to the assessment year 1965-66, the assessee claimed that the unabsorbed depreciation, to the extent 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. This claim was rejected by the Income-tax Officer and by the Appellate Assistant Commissioner on the ground that such a set-off is permissible only where the business carried on in the subsequent assessment year is the same business which was carried on in the earlier assessment year. The Income-tax Appellate Tribunal, however, disagreed with the said view and upheld the assessee's claim. At the request of the Revenue, the Tribunal referred the following question to the Allahabad High Court (see [1974] 97 ITR 461) under section 256(1) of the Income-tax Act, 1961 (at page 463) : " Whether, on the facts and in the circumstances of the case, the unabsorbed depreciation in respect of a part of the machinery used in the soap and oil manufacturi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sahu Rubbers Private Limited v. CIT [1963] 48 ITR 464. It was of the opinion that the view taken by it is supported by the decision of this court in CIT v. Jaipuria China Clay Mines (P.) Ltd [1966] 59 ITR 555. While it is not necessary to state the facts in Civil Appeal No. 2849 of 1977, it is sufficient to state that in this decision, the Bombay High Court followed the decision of the Allahabad High Court in CIT v. Virmani Industries (P.) Ltd. [1974] 97 ITR 461. It distinguished its earlier decision in Sahu Rubbers Private Limited's case [1963] 48 ITR 464 (Bom) as one rendered with reference to the proviso to section 10(2)(vi) of the Indian Income-tax Act, 1922. The court held that though the said proviso corresponds to section 32(2) of the present Act, even so, the fact that it was only a proviso and not a substantive provision did colour the decision in Sahu Rubbers Private Limited's case [1963] 48 ITR 464 (Bom). The court pointed out that under the present Act, section 32(2) is an independent and a substantive provision. It is brought to our notice by Dr. Gauri Shankar, learned counsel for the appellant-Revenue, that there has been a divergence of opinion among the High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing to the profits or gains chargeable being less than the allowance, the allowance or part of the allowance to which effect has not been given, as the case may be, shall, for the purpose of making the assessment for the following year, be added to the amount of such allowances as aforesaid for that year, and be deemed to be part of those allowances, or, if there are no such allowances for that year, be deemed to be the allowances for that year, and so on for succeeding years. " This provision was adopted almost verbatim in the Indian Income-tax Act, 1922. As in the U. K. Act, the Indian Act also did not place any limit regarding the number of years up to which unabsorbed depreciation could be claimed for set off. In 1936, an Income-tax Inquiry Committee, headed by J. B. Vacha, looked into the provision and made a recommendation that as the allowance for depreciation is on account of loss in the value of land and machinery, such loss should only be regarded as an expense of the year in which it occurred and, therefore, depreciation should be allowed each year as expense in determining the profit or loss of the year along with the other items of expenditure, as for instance, ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se (v) of sub-section (1) 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 years. " (emphasis added). Section 57 provides for deductions out of income from other sources chargeable under section 56. One of the deductions provided by clause (ii) of section 57 is the depreciation provided by sub-section (1) as well as sub-section (2) of section 32. Inasmuch as section 32(2) refers to sub-section (2) of section 72 and sub-section (3) of section 73, it would be appropriate to reproduce the said provisions. Sub-section (2) of section 72 says : " (2) where any allowance or part thereof is, un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is court was of the opinion that while amending section 10(2)(vi) of the Indian Income-tax Act, 1922, by the Amendment Act 25 of 1953, Parliament has accepted the interpretation placed upon the said expression by several High Courts to the above effect. It referred to the decisions of the Lahore High Court in Karam Ilahi Muhammad Shafi v. CIT [1929] 3 ITC 456, the Madras High Court in A. Suppan Chettiar and Co. v. CIT [1929] 4 ITC 211, the East Punjab High Court in Laxmichand Jaiporia Spg. and Wvg. Mills, In re, [1950] 18 ITR 919 and the Bombay High Court in Ambika Silk Mills Co. Ltd. v. CIT [1952] 22 ITR 58 besides the judgment of the Judicial Commissioner, Nagpur, in Ballarpur Collieries v. CIT [1929] 4 ITC 255 (Nag), interpreting the said expression as covering all heads of income. The court further pointed out that even after the said amendment, the Bombay and the Gujarat High Courts have taken the same view in CIT v. Ravi Industries Ltd. [1963] 49 ITR 145 and CIT v. Girdharlal Harivallabhadas Mills Co. Ltd. [1964] 51 ITR 693 respectively. The contrary view taken by the Madras High Court in CIT v. B. Nagi Reddy [1964] 51 ITR 178 was disapproved. The court then observed (at page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and gains derived from the business whose income is being computed under section 10, but they refer to the totality of the profits or gains computed under the various heads and chargeable to tax. " and added (at page 785) : " It is, therefore, clear that effect must be given to depreciation allowance first against the profits or gains of the particular business whose income is being computed under section 10 and if the profits of that business are not sufficient to absorb the depreciation allowance, the allowance to the extent to which it is not absorbed would be set off against the profits of any other business and if a part of the depreciation allowance still remains unabsorbed, it would be liable to be set off against the profits or gains chargeable under any other head and it is only if some part of the depreciation allowance still remains unabsorbed that it can be carried forward to the next assessment year.... But where any part of the depreciation allowance remains unabsorbed after being set off against the total income chargeable to tax, it can be carried forward under proviso (b) to clause (vi) to the following year and set off against that year's income and so o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , (1) since the sub-section speaks of unabsorbed depreciation being carried forward to the next year and " added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance " the sub-section necessarily contemplates existence of a business in the following year, and (2) inas much as the sub-section not only speaks of adding the unabsorbed depreciation to the depreciation allowance allowed in the following year but also says that in the absence of such allowance, the carried forward depreciation allowance shall be the allowance for that year, it means that in the following year the assessee need not carry on any business or pro fession for availing of the benefit of sub-section (2) of section 32. We are inclined to adopt the second of the above two views having regard to the decisions of this court in Jaipuria China Clay Mines (P. ) Ltd.'s case [1966] 59 ITR 555 and Rajapalayam Mills Ltd.s case [1978] 115 ITR 777. We have extracted the relevant observations from both the judgments hereinabove, which say that the unabsorbed depreciation allowance has not only to be set off against other heads of income in the relevant previo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 1956-57 can be carried forward and set off against the income of the accounting year relevant to the assessment year 1965-66, yet we thought it necessary to clarify the true position of law. We answer the aforesaid question in the following words : If after setting off the unabsorbed depreciation allowance relating to the assessment year 1956-57 against the income for the following assessment years, any depreciation allowance still remained unabsorbed it could have been set off against the income for the accounting period relevant to the assessment year 1965-66. In the light of the views expressed by us hereinabove, it is not necessary to go into the question raised by Dr. Gauri Shankar, learned counsel for the Revenue, with respect to the meaning of the words " the following previous year ". The contention of learned counsel was that the said expression means literally what it says and it does not mean any following previous year. His submission was that if the chain of setting off snaps for the reason that there is no income in any of the following years, it snaps once for all and that the process of setting off cannot be restarted. For the above reasons, Civil Ap ..... 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