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TMI Blog1986 (3) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... was entitled to set off the carried forward unabsorbed depreciation. The Income-tax Officer, in the course of the assessment, found that the aggregate income of the assessee came to Rs. 2,79,427. The assessee's profit under section 41(2) of the Income-tax Act, 1961, was computed at Rs. 49,802 against which unabsorbed depreciation of the assessment year 1963-64 of like amount was set off and income under section 41(2) was determined. The assessee was thus assessed on an income of Rs. 2,79,427. The Appellate Assistant Commissioner also, in appeal filed by the assessee, confirmed the order of the Income-tax Officer. The assessee took the matter further in appeal to the Tribunal. The Tribunal rejected the contention of the assessee that since amounts were assessed under sections 41 (1) and 41(2) of the Income-tax Act, the business should be deemed to have been carried on by the assessee and the unabsorbed depreciation of the earlier years should also be brought forward and set off against income. The Tribunal, in a well-considered order, referred to the decision of this court in CIT v. Dutt's Trust, Calicut [1942] 10 ITR 477 and took the view that that decision contemplated the ph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. " There is no dispute that section 32(2) is an express provision which permits unabsorbed depreciation to be carried forward to the following year. When it is so carried forward, it is added to the amount of the allowance for depreciation for the previous year which follows the previous year in respect of which the depreciation remains unabsorbed. Statutorily, such carried forward depreciation is fictionally made a part of, the allowance for the following previous year. If in a given following previous year, there is no allowance permissible under section 32(1), then the carried forward depreciation allowance is taken to be the allowance for that previous year and so on for the succeeding previous years. The question which falls for consideration is whether, when section 32(2) fictionally makes the carried forward dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrast to an express requirement regarding the continuance of the business or profession as a condition for set off of loss under section 72(1)(i), proviso, there was no such requirement in regard to unabsorbed depreciation under section 32(2). A similar view has been taken by the Karnataka High Court in Addl. CIT v. Kapila Textiles (P.) Ltd. [1981] 129 ITR 458, where a Division Bench of that High Court held that the benefit of carry forward and set off of unabsorbed depreciation under sub-section (2) of section 32 of the Income-tax Act, 1961, is not subject to the condition that the business must have been carried on by the assessee during the relevant previous year. The Gauhati High Court in CIT v. Singh Transport Co. [1980] 123 ITR 698, has taken the view that unabsorbed depreciation is required to be set off and carried forward not by force of section 72 and/or section 73 of the Income-tax Act, 1961, but by virtue of the provisions of section 32(2) itself and that the manner of carry forward and set off of depreciation allowance is distinct and separate and covered exclusively by section 32(2). The learned counsel for the assessee has also invited our attention to the commentar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efractory works and, hence, the entire income returned for the said assessment year related only to the said business in refractory works. 3. The assessee had sold certain spares and machineries of the lamp works as well as the collapsible tubes and finished goods and loose tools during the year ending July 31, 1969, relevant to the assessment year 1970-71. The Tribunal held that the business in which the loss was originally sustained by the assessee was not carried on by it till the year in which the carried forward loss was sought to be set off and, hence, the assessee was not entitled to carry forward the unabsorbed loss in the business of collapsible tubes and set off the same against the income of the refractory works business. With regard to the unabsorbed depreciation, the Tribunal held that the business of the collapsible tubes factory and lamp works having ceased to exist before the assessment year 1970-71, the unabsorbed depreciation relating to those two businesses could not be permitted to be carried forward and set off against the income from a totally different business, viz., refractory works. We are concerned only with the second question which fell for considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2] 10 ITR 477 (Mad) and Sahu Rubbers (P) Ltd. v. CIT [1963] 48 ITR 464 (Bom), which have taken the view that the continuation of the business is a condition precedent for carrying forward and setoff of the unabsorbed depreciation of the previous years. After noticing this conflict, this court observed as follows (p. 705): " Thus, we find that there is a conflict of judicial opinion on the question whether the existence of the business is a sine qua non for carrying forward and set off of the unabsorbed depreciation in relation to that business. We are of the view that the decision in CIT v. Dutt's Trust [1942] 10 ITR 477 (Mad), lays down the correct legal position. The said decision, as already stated, has been followed in Sahu Rubbers (P) Ltd. v. CIT [1963] 48 ITR 464 (Bom). But these two decisions have not been followed in the later decision of the Bombay High Court in CIT v. Estate and Finance Ltd. [1978] 111 ITR 119, on the ground that the said two decisions are not supported by any reasoning. However, we find that in two later decisions in Kishandas Dilberdas v. CIT [1974] 96 ITR 638 (Bom) and Hindustan Chemical Works Ltd. v. CIT [1980] 124 ITR 561, the Bombay High Court has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orward unabsorbed depreciation to be set off is the provision in section 32(1). The relevant provision with regard to the carry forward of unabsorbed depreciation under the Indian Income-tax Act, 1922, was section 10(2)(vi), proviso (b), which is identical to section 32(2) of the Income-tax Act, 1961. With reference to this provision in section 10(2)(vi), proviso (b), the Supreme Court in Jaipuria China Clay Mines (P) Ltd.'s case [1966] 59 ITR 555, observed as follows (p. 561): " The unabsorbed depreciation allowance is carried forward under proviso (b) to section 10(2)(vi) and the method of carrying it forward is to add it to the amount of the allowance of depreciation in the following year and deeming it to be part of that allowance; the effect of deeming it to be part of that allowance is that it falls in the following year within clause (vi) and has to be deducted as allowance. If the Legislature had not enacted proviso (b) to section 24(2), the result would have been that depreciation allowance would have been deducted first out of the profits and gains in preference to any losses which might have been carried forward under section 24, but as the losses can be carried forwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achinery, plant and furniture in respect of the allowance are used for the purposes of the business or profession. We are, therefore, unable to accept the argument advanced by the learned counsel for the assessee that when this court took the view with reference to the construction of sections 32(1) and 32(2) in Tube Suppliers Ltd.'s case [1985] 152 ITR 694 (Mad), that continuance of the business is a pre-requisite condition for set off of unabsorbed depreciation, that view is affected by the non-consideration of the effect of the concluding part in section 32(2). Even on first principles, we are satisfied that the view taken by this court in Tube Suppliers Ltd.'s case [1985] 152 ITR 694 (Mad) is the, only view which is possible. With respect, we are unable to agree with the view taken by the Andhra Pradesh and Karnataka High Courts. It is true that the Bombay High Court has in CIT v. Estate and Finance Ltd. [1978] 111 ITR 119 (Bom), expressly took the view which is in favour of the assessee as canvassed by Mr. Subramaniam before us. In that, decision, the Division Bench declined to accept the decision of the same court in Sahu Rubbers Pvt. Ltd. v. CIT [1963] 48 ITR 464 (Bom), as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been to adjust the unabsorbed depreciation allowance against the profits and gains chargeable to tax of the following year or years irrespective of whether that business continues or not, it would have said so. But it has not said so and the reason appears to be obvious. If unabsorbed depreciation in respect of assets of a defunct business is added to the depreciation allowance in respect of a running business of an assessee, it would adversely affect the written down value of those assets without there being any depreciation thereof." (Emphasis supplied by us) These observations, in our view, unequivocally lay down a proposition of law that for the purpose of the proviso (b) to section 10(2)(vi) which corresponds to section 32(2) of the 1961 Act, unabsorbed carried forward depreciation cannot be permitted as an allowance unless the business is continued. This becomes clear from the very question which was referred to the Division Bench which read as follows : " On the facts and in the circumstances of the case, whether the depreciation to which full effect could not be given owing to there being no profits or gains chargeable for the years 1950-51 and 1951-52 could either wholly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the language of the proviso (b), in our opinion, it relates to the computation of the profits and gains of business of an assessee and deals with the same subject-matter as is dealt with in clause (vi) of subsection (2) of section 10 and, therefore, is within the ambit and scope of clause (vi), and is not an independent substantive provision of law. " The question as to whether the proviso was a substantive provision of law or not made no difference to the view expressed by the Division Bench that the decision in Dutt's Trust's case [1942] 10 ITR 477 (Mad) laid down the correct law. In Sahu Rubbers Pvt. Ltd.'s case [1963] 48 ITR 464 (Bom), the Division Bench has laid down a proposition of law that unabsorbed carried forward depreciation cannot be allowed unless the business in respect of which it was claimed continued in the previous year relevant to the assessment year. There are two reasons why we are unable to agree with the view of the later Division Bench of the Bombay High Court in Estate Finance Ltd.'s case [1978] 111 ITR 119, in preference to the view taken in Sahu Rubbers Pvt. Ltd.'s case [1963] 48 ITR 464. The first reason is that, as we have pointed out earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 32(1) of the 1961 Act ...... The question is whether any deviation from this normal rule of accountancy is contemplated by proviso (b) to section 10(2)(vi) read with proviso (b) to section 24(2) of the 1922 Act or by section 32(2) read with section 72(2) of the 1961 Act, and it is here that the aspect of proper construction of these provisions arises. " The Supreme Court then went on to explain the purpose of the legal fiction provided by the deeming provision in proviso (b) to section 10(2)(vi) as follows (p. 718): " Clearly, the avowed purpose of the legal fiction created by the deeming provision contained in proviso (b) to section 10(2)(vi) 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. That this is so becomes clear from this COURT's observations in Jaipuria China Clay Mines (P.) Ltd.'s case[1966] 59 ITR 555, appearing at page 561 of the report which runs thus : 'The unabsorbed depreciation allowance is carried forward under proviso (b) to section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to which the fiction created under the proviso (b) to section 10(2)(vi) of the 1922 Act can be carried. As already pointed out, the fiction created was limited 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 the other income of that year. This view taken in the context of proviso (b) to section 10(2)(vi) of the 1922 Act would also govern the scope of the fiction in section 32(2) of the 1961 Act and with this decision of the Supreme Court, it would be difficult to carry the fiction beyond what according to the Supreme Court was the limit to which such fiction can be carried. Therefore, with great respect to the learned judges who delivered the decision in Estate and Finance Ltd.'s case [1978] 111 ITR 119 (Bom), we are reluctant to follow that decision and we are inclined to follow the decision in Sahu Rubbers Private Ltd.'s case [1963] 48 ITR 464 (Bom), which, in our view, was rightly followed by this court in Tube Suppliers Ltd.'s case [1985] 152 ITR 694. There are two other decisions which have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny case it is too late in the day to contend that sections 71 and 72 also refer to unabsorbed depreciation allowances. Section 71 cannot be read in isolation, but has to be read as a part of the scheme contained in sections 70 to 80. Sections 70, 71 and 72, if read carefully would show that all these three sections deal only with business losses. Section 70 initially provides that where the net result for any assessment year in respect of any source falling under any head of income other than " capital gains " is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. Section 71 comes into operation after section 70 exhausts itself. Section 71 permits the loss referred to in section 70 to be set off against the income of the assessee under any other head. When we come to section 72, we find that it operates at a stage after sections 70 and 71 have been given effect to, because it expressly provides that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is difficult to accept the contention of the learned counsel for the assessee, the matter now stands concluded in so far as this court is concerned. In CIT v. Concord Industries Limited [1979] 119 ITR 458, this court was dealing with the scope of section 79 of the Income-tax Act, 1961, which is one of the provisions falling within the group of provisions dealing with set off and carry forward and set off. While dealing with the scope of section 79, this court observed at page 463 as follows : " The result is, the treatment of depreciation is different from loss as seen from section 72(2) itself. That is why section 72(2) also provides for a priority in the matter of carry forward and set off of unabsorbed depreciation before the loss is set off. If, therefore, for the purpose of section 72, losses would not include depreciation, then, as far as section 79 also is concerned, the same position would have to hold good." We may also refer to a decision of the Bombay High Court in BallarPur Collieries Co. v. CIT [1973] 92 ITR 219 in which, after referring to the decision of the Supreme Court in Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555, dealing with the provisions of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Kalpaka Enterprises (P.) Ltd. [1986] 157 ITR 658 (Ker). It would not, therefore, be possible to accept the argument that the unabsorbed carried forward depreciation should be set off under section 71(1) of the Income-tax Act, 1961. An argument was then advanced relying on the provisions of section 41(1) and section 41(2) of the Income-tax Act, 1961. The argument is that the fiction which is created by the Explanation to section 41(2) of the Act must be given benefit of to the assessee and that this fiction must also be utilised for the purpose of section 32(2). With respect, this argument is to be rejected without any consideration. Section 41(2) is provision which enables the Revenue in a case where a capital asset of the kind mentioned therein owned by the assessee and which has been used for the purpose of his business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such assets exceed the written down value, then so much of the excess as does not exceed the difference between the actual cost and the written down value, becomes chargeable to income-tax as income of the business or profession of the previous year in which the mon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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