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TMI Blog1985 (8) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... iation of Rs. 1,78,154. The assessee's income without taking into account the current depreciation was Rs. 50,624 in 1951-52 and Rs. 64,332 in 1952-53. The assessee contended before the ITO that before deducting the current depreciation from the above profits, the unabsorbed loss of the earlier year 1950-51 should be first set off. The ITO did not accept the contention and what he did was that from the profit Rs. 50,624 for 1951-52, the depreciation allowance for that year amounting to Rs. 58,140 was partially set off and the balance of the depreciation of Rs. 7,516 was ordered to be carried forward with the result that the total unabsorbed depreciation carried forward amounted to Rs. 1,85,670. It was further directed that the entire unabsorbed loss amounting to Rs. 67,534 should also be carried forward. Similarly, in 1952-53, the full depreciation allowance of that year amounting to Rs. 44,580 was set off against the income of Rs. 64,232; the net income of Rs. 19,652 (Rs. 64,232 minus Rs. 44,580) was utilised for setting off a part of the carried forward business loss of Rs. 67,534 leaving a balance of unabsorbed loss to the extent of Rs. 47,832. Both the unabsorbed amounts (Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us), accepted the assessee's contention that the carried forward losses have priority not only over the unabsorbed depreciation of the past years but also over the current year's depreciation in the matter of set-off. The Department preferred an appeal to the Appellate Tribunal and the Tribunal took the view that unabsorbed carried forward losses of the earlier years will have priority over unabsorbed depreciation of the earlier years but not over the current year's depreciation. In coming to this conclusion, the Tribunal placed certain construction on the relevant provisions of the 1961 Act, namely, ss. 32(2) and 72(2). In other words, it preferred the views of the Calcutta High Court in Aluminium Corporation's case [1958] 33 ITR 367 (Cal) and of the Andhra Pradesh High Court in Addl. CIT v. Andhra Printers Ltd. [1979] 117 ITR 555 (AP), in so far as the competition for priority was between unabsorbed carried forward loss and current depreciation. At the instance of the assessee, in view of the conflict of decisions between the various High Courts, the Tribunal has referred the following question of law for this court's opinion under s. 257 of the Income-tax Act, 1961: to Whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any business, profession or vocation carried on by him in that year: provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year; ... " Then comes proviso (b) to sub-s. (2) which is material and it runs thus : "(b) where depreciation allowance is, under clause (b) of the proviso to clause (vi) of sub-s. (2) of s. 10, also to be carried forward, effect shall first be given to the provisions of this sub-section ; " Under the 1961 Act, the material provisions are to be found in s. 32(1) and (2) and s. 72(1) and (2) and it was not disputed that the material provisions in both the Acts are couched in substantially the same language. Two more things which are common under both the Acts need be noticed. Unabsorbed carried forward business loss can be set off only against business income of the following year or years while depreciation can be deducted from income under any other head further while the former can be carried forward for a limited number of years as specified in the enactment there is no time-limit prescribed for carrying forward unabsorbed depreciation. Counsel for the Revenue urged tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 982] 134 ITR 56 (Cal). In all these decisions, the view taken is that current depreciation has to be deducted first before unabsorbed carried forward business losses are set off. He pointed out that the High Court in deciding the question in favour of the assessee referred to a decision of this court in Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555, and relied on certain observations made therein but the point that arose for decision in that case was entirely different, and the observations cannot be divorced from the context of the point decided therein. On the other hand, counsel for the assesses, in the appeals and the tax reference, strongly relied upon the legal fiction arising from the deeming provision contained in proviso (b) to s. 10(2Xvi) of the 1922 Act and s. 32(2) of the 1961 Act as a result whereof the unabsorbed depreciation is not merely carried forward to the following previous year but is deemed to be the depreciation for that year and according to counsel, this entire aggregate depreciation is made subject to the proviso (b) to s. 24(2) (of the 1922 Act) or to s. 72(2) (of the 1961 Act). Counsel urged that this legal fiction must be given full effect wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her carry forward of unabsorbed depreciation of the earlier years or carry forward of unabsorbed business losses of earlier years arises. In other words, the normal accountancy principle has to be applied in arriving at the net income from business for that year by debiting the current year's depreciation. The question is whether any deviation from this normal rule of accountancy is contemplated by proviso (b) to s. 10(2)(vi) read with proviso (b) to s. 24(2) of the 1922 Act or by s. 32(2) read with s. 72(2) of the 1961 Act, and it is here that the aspect of proper construction of these provisions arises. Dealing with the provisions of the 1922 Act first, it will be clear that proviso (b) to s. 10(2)(vi) is in two parts and provides for two things; its first part provides for a carry forward of unabsorbed depreciation and its second part provides for clubbing the said carried forward depreciation with the current year's depreciation and deeming the aggregate to be the current year's depreciation. However, carrying forward of the unabsorbed depreciation and the deeming provision in proviso (b) are not absolute but are subject to the proviso (b) to s. 24(2). Had proviso (b) to s. 24( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the allowance or depreciation in the following year and deeming it to be part that allowance ; the effect of deeming it to be part of that allowance is that it falls in the following year within cl. (VI and has to be deducted as allowance." In CIT v. Ravi Industries [1963] 49 ITR 145 (Bom), the same position has been clarified by the Bombay High Court. The court has observed that the unabsorbed depreciation does not lose its character and attributes when it is carried forward to the following year; such unabsorbed depreciation of the earlier year, which is carried forward to the current year and which is deemed to be of the current year under proviso (b) of s. 10(2)(vi) can be set off, unlike other business losses, against income under other heads. Such being the purpose for which the legal fiction is created, it is difficult to extend the same beyond its legitimate field and will have to be confined to that purpose. It is, therefore, not possible to accept the contention of counsel for the assessees that because of the legal fiction, the unabsorbed carried forward losses should be given preference not merely over the unabsorbed carried forward depreciation but also over the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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