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TMI Blog1982 (4) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... to be of manufacture and sale of cloth till July 1966. For the assessment year under appeal the assessee has derived income from interest and rent chargeable under the head "Income from other sources" under section 56, read with section 57, of the Act. For the assessment year 1977-78, the assessee submitted his return showing a total income of Rs. 82,226, comprising interest income of Rs. 77,413 and rental income of Rs. 5,276. Against the income so returned the assessee claimed deduction of expenses amounting to Rs. 463. For the assessment year 1978-79, the assessee disclosed income from other sources, viz., interest at Rs. 51,697, and claimed expenses amounting to Rs. 14,757. Thus, the total income worked out to Rs. 36,940. For both the years the assessee claimed a set off of unabsorbed depreciation brought forward from the earlier years and it supported its claim by relying on the decision of the Allahabad High Court in CIT v. Rampur Timber Turnery Co. Ltd. [1973] 89 ITR 150. The ITO negatived the assessee's claim, for both the years, for set off of unabsorbed depreciation. He, however, fairly stated that for the assessment years 1971-72 and 1973-74, the Tribunal had accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted in section 32(2) only treats unabsorbed depreciation on par with current depreciation and subject to the carry forward of losses, which has precedence by operation of section 72, the said unabsorbed depreciation assumes the character and colour of current depreciation. The fiction could be extended to that limit only. But it could not be extended further so as to treat a business which has closed long back to be treated as the business in operation. In short, Shri Mittal's submission was that once the business as a source has become extinct, the claim for unabsorbed depreciation would lapse. Shri Mittal then pointed out that section 32(1) provides for allowance of depreciation for which two conditions are necessary, viz., the asset must belong to the assessee and that the asset must be used during the previous year. If the business is in existence but the written down value of the asset has been reduced to nil, there is no case for allowance of depreciation. Similarly if the asset is not used in the previous year, the claim for depreciation also would not arise. However, when the business is not "carried on" in the previous year, then obviously there can be no case for allowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance for that previous year, and so on for the succeeding previous years." Shri Shah submitted that all that section 32(2) provides is firstly to add the unabsorbed depreciation to the amount of allowance for depreciation, which is ordinarily understood as current depreciation, or when there is no such current depreciation, the unabsorbed depreciation be deemed to be the allowance for that previous year and so on for the succeeding previous years. Therefore, once by virtue of fiction unabsorbed depreciation assumes character and colour of current depreciation, all the conditions required for allowance of current depreciation must be deemed to have been fulfilled, with the result that it must be assumed notionally that the business is in existence during the previous year for which the unabsorbed depreciation is sought to be claimed. To put it differently, section 32(2) requires, firstly to ascertain whether there is any depreciation for the previous year or whether there is any current depreciation. Secondly, the unabsorbed depreciation has to be added to the said current depreciation and, thirdly, the total depreciation so determined would be deemed to be the allowance for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed his contentions, as aforesaid, by relying on various authorities to which a reference is made later. 6. We have considered the rival submissions. Before discussing the rival contentions in detail we first set out the provisions which are relevant for our purpose. Section 28 of the Act, which levies the charge under the head "Profits and gains of business or profession" is set out hereunder (omitting the provisions which are not necessary) : "(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year ;" Section 29 of the Act provides the manner in which the income from profits and gains of business or profession is required to be computed. The said section reads as follows: "The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A." Section 32(1), which deals with the current depreciation, is extracted hereunder (after omitting the words which are not necessary) : "In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. Secondly, the said assets to which depreciation is admissible are owned by the assessee. And lastly, the said assets used for the purpose of business or profession. Apart from these conditions the provisions of section 34 stipulate further conditions but we are not concerned with the same in the present discussion. Now, the depreciation on the said assets has to be set off ordinarily against the profits and gains from business. However, if the amount of current depreciation allowance is more than the profits of the business and the said allowance does not absorb the income falling under any head of income, that is to say, if full effect cannot be given to current depreciation in a given year, then such depreciation, which is referred to as unabsorbed depreciation, is allowed to be carried forward to the succeeding years subject to the provisions of sections 72(2) and 73(3) of the Act. That apart section 32(2) creates a fiction by which the unabsorbed depreciation become parts of the current depreciation of the succeeding year or years. However, while giving effect to the unabsorbed depreciation of earlier years, has the carried forward loss from business gains precedence. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nabsorbed depreciation allowance is that the loss under the head "Profits and gains of business or profession" could be carried forward and set off only against the income from business in subsequent year and not under any other head of income while the unabsorbed depreciation which, by fiction enacted in section 32(2), becomes depreciation allowance of the previous year, that is to say, assumes character of current depreciation, by virtue of the fiction enacted in section 32(2). such unabsorbed depreciation could be set off against income from any other head of income in any previous year. We may add in passing that the carried forward loss is subject to the time limit of 8 years while the unabsorbed depreciation could be carried forward indefinitely. The other essential distinction is that the loss of each year remains distinct and separate inasmuch as the claim of carried forward loss for each year is subject to the limit of 8 years from the year in which the said loss had occurred, while the unabsorbed depreciation assumes character of current depreciation by virtue of fiction, as stated above, and merges with the current depreciation subject, of course, to provisions of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such a restriction has to be construed in favour of the assessee where two interpretations are possible, the court should take the interpretation that is favourable to the assessee bearing in mind that a taxing statute is being construed. Therefore, under the provisions of section 32(2) for the purpose of setting off of unabsorbed depreciation carried forward from a preceding year, it is 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 decision in Sahu Rubbers (P.) Ltd. v. CIT [1963] 48 ITR 464 (Bom.) does not constitute a binding authority on the interpretation to be placed by the court and the true meaning to be given to the statutory provision enacted in section 32(2) of the 1961 Act. The difference between the proviso to section 10(2)(vi) of the 1922 Act and section 32(2) is not a difference in phraseology. But the provision contained in section 32(2) is not a proviso to any provision computing depreciation. It is an independent provision. The decision in Sahu Rubber's case principally turned on the question whether the statutory provision had to be interpreted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee, which was carrying on business in the manufacture of bobbins, etc., stopped the business with effect from the previous year relevant to the assessment year 1955-56 though it continued to own the plant and machinery, etc. Thereafter, the assessee continued to be assessed only in respect of income from property which it owned. During the relevant previous year, the assessee received a refund of Rs. 6,982 from Electricity Department which was brought to tax under section 41(1) of the Act. The assessee had also unabsorbed depreciation of Rs. 46,003 relating to earlier years. Allowing the claim of the assessee, it was held thus: "... The benefit of unabsorbed depreciation could be availed of by an assessee in any subsequent year without satisfaction of the preconditions attaching to sub-section (1) of section 32 of the Act and it is not necessary that in such subsequent year the assessee actually carried on the business and the asset in question was used for the purpose of the assessee's business. If, in any particular year, there is no income from business, but there is income from other heads, the unabsorbed depreciation carried forward from the past years, will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys down that the business would be deemed to be in existence even if in fact the business is not actually carried on. In the above situation, therefore, excess of unabsorbed depreciation over the deemed business income could be set off against income falling under any other head and balance, if any, could be carried forward. 10. Now we turn to a situation where there is no income from business either actual or deemed or notional and the claim for unabsorbed depreciation is made. In Brooke Bond Co. Ltd. v. CIT [1970] 77 ITR 220 (Cal.) it was held that the question of allowance of unabsorbed depreciation would only arise when there was a computation of business income under section 10 of the 1922 Act in the current year. If there was no assessment under section 10, there will be no question of any allowance under proviso to section 10(2)(vi) of the 1922 Act. In Hindustan Chemical Works Ltd. v. CIT [1980] 124 ITR 561 (Bom.) a similar question arose relating to set off of unabsorbed depreciation. In that case the assessee-company had completely stopped its business and had gone out of business and the only source of income for the company was income from property. The company did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or by importing another fiction. The solution is found by harmoniously applying the rules." In light of these observations, it can be stated that there is no quarrel with the proposition that the fiction must be carried to the logical end but it cannot be extended so as to create fiction upon fiction. Therefore, if we were to accept the submission canvassed on behalf of the assessee, we will have to hold by fiction that the business which was in fact and truth discontinued is deemed to be in existence. Such a contingency is not predicated in dealing with the claim for set off of unabsorbed depreciation. There are two reasons for this conclusion. Firstly, the Legislature when it has intended to create a fiction about the existence of business, it has specifically so provided as it would be evident from the set of sub-sections as set out in section 41. The Explanation to section 41, which we have referred to earlier, clearly provides for such a contingency, viz.. the business being notionally in existence. Secondly, section 28 in terms brings to charge income from profits and gains in respect of the business "carried on by the assessee". This provision, therefore, postulates tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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