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TMI Blog1981 (3) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... ration of Rs. 1,21,001 to M/s. Central Refrigeration Service, 61, Sova Bazar Street, Calcutta. The assessee was granted depreciation on the said machinery, etc., up to December 31, 1970, of which the ITO noted the figures as follows : ----------------------------------------------------------------------------------------------------------------------------------------- " Description Org. cost Depn. allowed WDV as on 31-12-70 ----------------------------------------------------------------------------------------------------------------------------------------- Rs. Rs. Rs. Machinery 1,90,402.56 1,45,203.56 45,199 Insulation 83,052.32 65,341.32 17,711 Elec. installations 13,927.57 8,550.57 5,377 Furniture 56,944.54 35,044.54 21,900 --------------------- 90,187 " -------------------- The ITO, thereafter, went on to observe that no depreciation was allowed for the assessment year 1972-73 as "there was no claim for the same ". Accordingly, he computed the profit under s. 41(2) as indicated in the order, that is to say, sale proceeds at Rs. 1,21,001 less written down value at Rs. 90,187 and arrived at the figure of Rs. 30,814 and after taking that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g out the real controversy in the manner following: " Whether, on the facts and in the circumstances of the case, the Tribunal was right in not allowing the set-off of the unabsorbed depreciation against the profit under section 41(2) of the Income-tax Act, 1961 ? " In order to answer this contention, it would be necessary to refer to the relevant provisions of certain sections. Section 32 of the I.T. Act, 1961, deals with depreciation and profits and the circumstances in which such depreciation should be allowed. It enjoins, however, that if the circumstances enumerated in the different sub-clauses of the section are fulfilled, then the following deductions shall, subject to the provision of s. 34, be allowed, and then the deductions are mentioned which are not necessary for us to refer. Before we refer to s. 34 it would be necessary to mention that s. 28 to s. 41B are contained under the sub-heading " D " in Chap. IV of the I.T. Act, 1961. Section 28 of that Act contains the income that shall be chargeable to income-tax under the head " profits and gains of business or profession ". Section 28 thereafter stipulates the types of profits and gains which are exigible to tax as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee and used for the purpose of business or profession and allows certain deductions, viz., the deduction for depreciation in certain manner indicated in different sub-clauses. As we have indicated before, sub-s. (2) of s. 32 was the section upon which reliance was placed. Section 33 provides for development rebate with which we are not concerned. Section 34 deals with the condition for depreciation allowance and development rebate. The deductions referred to in sub-s. (1) of s. 32 shall be allowed, sub-s. (1) of s. 34 enjoins, only if the prescribed particulars were furnished, and, the deduction referred to in s. 33 should be allowed only if the particulars prescribed for the purpose of cl. (i) and cl. (ii) of sub-s. (1) of s. 32 had been furnished by the assessed in respect of certain business. The other material portion relevant for our present purpose is s. 41, sub-s. (2) of which deals with what is known in income-tax law as balancing charge. Sub-section (2) of s. 41 is material and is as follows: " (2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be set-off against any profit which was deemed to arise by operation of s. 41(2) of the Act. The material point that one has to bear in mind, in this connection, is that depreciation can be only in respect of the business carried on. It is not material that the business need be continued to be carried on. This aspect is important because, as we shall indicate the fiction of s. 41(2) is that a business is deemed to be carried on in the year in which the profit, which is known as balancing charge, arises out of the sale of depreciable assets. If the fact is that profits arise in this year and the further fact is that such profits arise in respect of the business deemed to be carried on by the assessee then the fact that the assessee had not continued, all throughout the previous year, the business prior to the year in question, would not, in our opinion, make any difference. Bearing in mind the aforesaid position it would now be relevant for us to decide this controversy. But, before we do so, we must deal with one contention urged on behalf of the Revenue that in this case, as the amount was not claimed by the assessee before the ITO, the assessee was not entitled to get this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits or gains had arisen from the carrying on of the business. Now, on these facts, subject to the interpretation of the effect of s. 41(2) and the materials which are on record, as would be apparent from the order of the AAC, and these facts are not disputed, that is to say, the assessee gold its plant and machinery during the year for sum of Rs. 1,21,001 on which the profit was computed under s. 41(2) at Rs. 30,414. The other fact is that Rs. 52,405 was brought forward from the year 1965-66 as unabsorbed depreciation. Now, if on these facts, which were on record, the assessee is entitled to set off the depreciation brought forward, it will be a question of law flowing from the interpretation of s. 32(2) read with s. 72(2) of the Act. Section 34 which deals with the furnishing of particulars for allowance of depreciation allowance would not strictly be applicable in this case because; in this case, all the particulars are on record and, secondly, the conditions that the prescribed particulars would be furnished, is only enjoined for the purpose of claiming initial depreciation in sub-s. (1) of s. 34, which has no reference to the right of the assessee to carry forward unabsorbed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 10(2)(vi) of the Indian I.T. Act, 1922, the Legislature clearly assumed that the effect could be given only to depreciation allowance in the assessment of a partner. The only way the effect could be given in the assessment of the partner was by setting off that against income and profits and gains under other heads. This decision, in our opinion, would not be of much assistance in resolving the present controversy. In our opinion, it establishes the proposition that unabsorbed depreciation could be carried forward unless it is set off in the manner indicated in the Act. Our attention was drawn to a decision of the Allahabad High Court in the case of CIT v. Rampur Timber Turnery Co. Ltd. [1973] 89 ITR 150. There, the assessee which was carrying on business in the manufacture of bobbins, etc., stopped with effect from the previous year relating to the assessment year 1955-56, though it continued to own the plant, machinery, etc. Thereafter, the assessee continued to be assessed only in respect of income from the property which it owned. During the previous year relevant to the assessment year 1962-63 the assessee received a refund of Rs. 6,982 from the electricity department o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation from the previous year could be set off against other income, income apart from the business. For our present purpose, it will be material to note that the fiction created under s. 41(2) obliges the assessee to have the business deemed to be carried on and for such deeming provision profit arises or accrues under s. 32(2). Learned advocate for the Revenue sought to criticise this view of the Allahabad High Court by citing other decisions to which we shall presently refer. In this respect, we may note that there is one question which is relevant, whether s. 28 deals with the profits and gains of the business. One of the material controversies that was agitated in this case was whether the same business need be in existence or some business would be sufficient. As we shall presently note the correct approach would be to hold that some business must be in existence. The depreciation allowance could be set off against the business income. Therefore, the assessee must be carrying on or deemed to be carrying on some business. Next, our attention was drawn to a decision of the Andhra Pradesh High Court in the case of CIT v. Warangal Industries Pvt. Ltd. [1977] 110 ITR 756, wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ull effect must be given to the deeming fiction under section 32(2). Mr. Rama Rao for the Revenue relied on certain observations of the Bombay High Court in Sahu Rubbers Pvt. Ltd. v. Commissioner of Income-tax [1963] 48 ITR 464 (Bom) In that case, it was held that in order to claim adjustment in the assessment year of unabsorbed depreciation of an earlier year, the assessee must establish that the business in respect of which it was allowed continued in the previous year relevant to the assessment year, and if that business is no more in existence, unabsorbed depreciation cannot, thereafter, be adjusted in the assessment of future years in respect of a different business. But the effect of the deeming fiction now embodied in section 32(2) which was formerly embodied in section 10(2)(vi) of the Indian Income-tax Act, 1922, has been, in our opinion, correctly explained by the Bombay High Court itself in Ravi Industries' case [1963] 49 ITR 145 (Bom), particularly after the decision of the Supreme Court in Commissioner of Income-tax v. Jaipuria China Clay .Vines (P.) Ltd. [1966] 59 ITR 555. It is clear that the unabsorbed depreciation of past years has to be added to the depreciation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the AAC. On a reference, at the instance of the Revenue, it was held by the Kerala High Court that since the business of the assessee should be deemed to be in existence in the accounting year relevant to the assessment year 1970-71, by the fiction introduced by the Explanation to s. 41(2), the unabsorbed depreciation of the past years would be carried forward and set-off against the profits computed in terms of s. 41(2) for the assessment year 1970-71. Reliance was also placed on the observations of the Supreme Court on the construction of a fiction in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, and oar attention was drawn to the observations of the court on the role of fiction in that case. On the other hand, on behalf of the Revenue, it was contended that where, as in this case, in the year prior to the previous year, the unabsorbed depreciation had not been set-off, in view of sub-s. (2) of s. 32 of the Act, the assessee was not entitled to the set-off as claimed. It was contended that sub-s. (2) of s. 32 enjoined that unabsorbed depreciation should be carried forward to only the next previous year and if that was not done then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation had not been set off because there was no business in the years prior to the previous year. Furthermore, it appears that the Division Bench noted that there was a finding of the Tribunal that the unabsorbed depreciation was not adjusted in any of the earlier years. All these facts had not been challenged by the assessee. It is not a question of adjusting unabsorbed depreciation. The question is the setting-off the unabsorbed depreciation against the profits which arise in respect of the business carried on by an assessee and in the case of profit arising under s. 41(2) by operation of the Explanation which is deemed to be carried on by the assessee during the year in question. Though the Division Bench referred to certain provisions of the I.T. Rules, which it was contended to be a wrong reference, it is not necessary for our purpose to go into that aspect of the matter. As we have mentioned before, the essential thing is that the assessee should be deemed to be carrying on business in the year in question. Learned advocate for the Revenue also drew our attention to several decisions in aid of his submission that the same business must be continued to be carried on by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the Bombay High Court in the case of CIT v. Estate and Finance Ltd..[1978] 111 ITR 119. There, the Division Bench of the Bombay High Court observed that when enacting the provision regarding carry forward and set off of unabsorbed depreciation under s. 32(2) of the I.T. Act, the Legislature could have imposed condition that unabsorbed depreciation could be set off against the profit of a subsequent year only if the business, in relation to which depreciation was allowed, must continue to exist in such a year. Such a provision had to be construed in favour of the assessee. Where two interpretations were possible, the court should take the interpretation which was favourable to the assessee bearing in mind that the taxing statute was being construed. Therefore, under the provision of s. 32(2) for the purpose of setting off of unabsorbed depreciation carried forward from the preceding year, it was not necessary that the business in respect of which the depreciation allowance was originally worked out should remain in existence in such succeeding year. The Bombay High Court further noted that the decision in Sahu Rubbers P. Ltd. v. CIT [1963] 48 ITR 464 did not constitute a bindi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f unabsorbed depreciation could be availed of by an assessee in any subsequent year without satisfaction of the preconditions attaching to sub-section (2) of section 32 and it is not necessary that in such subsequent years the assessee actually carried on the business and the asset in question was used for the purpose of the assessee's business. It may be pointed out that in this decision the Division Bench also accepted the alternative head of argument which proceeded upon the basis that a legal fiction was created u/s. 41(1) and as a corollary to that legal fiction it was necessary also to assume that the business had actually continued in the relevant year although, as a matter of fact, it had been closed down. It could have been argued that, as the decision has been based on both the arguments its authority to that extent is weakened somewhat and we should give effect to the scheme of section 10(2)(vi)(b) as propounded by Sahu Rubber's case [1963] 48 ITR 464 (Bom), even though the statutory provision has been somewhat differently enacted in section 32(2). Such comment as is available in respect of the decision of the Allahabad High Court in Commissioner of Income-tax v. Rampu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [1973] 90 ITR 477 that though the assessee in his return did not claim depreciation for a truck purchased in the previous year nor gave the necessary particulars in the form of return, the ITO, if in the course of the assessment proceedings, came to know of the relevant particulars necessary for the grant of a deduction for depreciation, was bound to come to it and allow depreciation, as the ITO was bound to arrive at the true figure of profits and gains of the business of the assessee. It could not be contended that merely because the assessee did not file the necessary particulars in his return, the ITO did not have jurisdiction to grant the depreciation allowance. If that is the position, in the case of s. 34(2) in case of initial depreciation, and where there is no dispute as to the amount or quantum of unabsorbed depreciation, and, where there is income in a subsequent year from the business, which is deemed to be carried on by the operation of the Explanation to s. 41(2), then such depreciation could be set off against the income of the business. For the reasons aforesaid, we would answer the question, as reframed, in the negative and in favour of the assessee. The p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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