TMI Blog1983 (9) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal was right in holding that the assessee was not entitled to the relief under section 32(1)(iii) ? " The assessee-company carries on business in refractory works to manufacture fire bricks. It also carried on business in lamp factory and collapsible tubes. The ITO took the view that the business relating to lamp works and collapsible tubes did not exist in the assessment year 1970-71 and therefore, the business losses of the earlier years relating to those businesses cannot be allowed to be set off against the income from the business in refractory works for the assessment year 1970-71. On appeal, the AAC agreed with the ITO that the business losses of earlier years relating to lamp works cannot be carried forward and set off against the income determined for the assessment year 1970-71. However, with regard to the business relating to collapsible tubes, the AAC held that as the assessee sold finished goods worth Rs. 5,610 to Wavin India Limited, relating to the business of collapsible tubes division, that business must be taken to exist in the assessment year 1970-71, and that as such the business losses of the earlier years 1964-65 to 1967-68, relating to collapsible tubes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the unabsorbed depreciation relating to the collapsible tubes division and lamp factory should be carried forward and set off against the income determined for the refractory business for the assessment year 1970-71. That claim having been rejected by the ITO, the assessee went before the AAC who, following the decisions, in CIT v. Rampur Timber and Turnery Co. Ltd. [1973] 89 ITR 150 (All) and CIT v. Virmani Industries (P.) Ltd. [1974] 97 ITR 461 (All), held that the benefit of unabsorbed depreciation could be availed of by the assessee in any subsequent year, that it is not necessary that in such subsequent year, the assessee should have actually carried on the business and that if there is income from some other business, the unabsorbed depreciation carried forward from the past years will be available for set off against the income. In that view, the AAC allowed the set off of the unabsorbed depreciation relating to the collapsible tubes division and lamp factory against the business income from refractory works determined for the assessment year 1970 -71. When an appeal was filed before the Income-tax Appellate Tribunal by the Revenue against the order of the AAC, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking. For the assessment years 1970-71 and 1971-72, the losses of earlier years, namely, 1964-65 to 1967-68 amounting to Rs. 4,47,779 consisting of business loss of Rs. 2,49,581 and unabsorbed depreciation of Rs. 1,98,198, were not allowed to be adjusted as against the income from refractory works by the ITO on the ground that those losses related to the business of lamps and collapsible tubes which were non-existent during the assessment years. When the matter was taken in appeal by the assessee, the AAC called for a report from the ITO as to when exactly the business of lamp works and collapsible tubes was stopped by the assessee, and the ITO sent a report to the following effect. From the annual report for the year ended July 31, 1964, it is seen that the production in lamp factory was stopped in February, 1964, and the collapsible tubes factory was closed on April 8, 1965, that the company decided to sell the plant of the two units in the best interests of the company as the company felt it would be uneconomical to operate the said plants. The annual report for the year ended July 31, 1967, indicated that the assets of the collapsible tubes factory were not used from December ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollapsible tubes factory is concerned, the AAC held that since the assessee admittedly sold finished goods worth about Rs. 3,547.50 on July 31, 1969, it should be taken to have carried on the collapsible tubes business in the assessment year l970-71. So, the business losses relating to the collapsible tubes of the prior years should be set off against the income determined for the assessment year 1970-71. The Tribunal, though it agreed with the AAC that the unabsorbed business loss could not be set off against the income determined in the year 1970-71 in view of the fact that the loss had accrued in respect of a business which has ceased to exist in the year of account, however, disagreed with the AAC and held that, even in respect of the unabsorbed depreciation of the earlier years, the assessee can have benefit only if the business in respect of which depreciation is claimed had been continued in the assessment year, and as the two businesses had been closed long before the accounting year, the disallowance of the unabsorbed depreciation by the ITO was justified. The mere fact that some spare parts remaining with the assessee has been sold during the accounting year will not lead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written down value thereof, subject to the condition that such deficiency is actually written off in the books of the assessee. Thus the allowance under s. 32(1)(iii) is in the nature of a claim for excessive depreciation over and above the depreciation allowed in the earlier years which is represented by the written down value and, therefore, it has to be taken to be current year's depreciation. The opening words of s. 32(1) make it clear that for claiming depreciation under sub-s. (1)(iii), the buildings, machinery, plant or furniture in respect of which depreciation is claimed should have been owned by the assessee and used for the purpose of the business. The opening words of s. 32(1) cannot be read in isolation. Therefore, unless the assets in respect of which depreciation is claimed under s. 32(1)(iii) had been owned and used by the assessee for the purpose of his business in the relevant year, depreciation under s. 32(1)(iii) cannot be claimed. The object of s. 32(1)(iii) is to see that when the assets used in his business are sold in any assessment year and the sale price falls short of the written down value, then the difference between the written down value and the actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o businesses. When the assessee questioned the decision of the Tribunal before the Allahabad High Court, the court held that on the finding given by the Tribunal that there are two separate and independent businesses, the loss could not be allowed as a deduction under s. 10(2)(vii) in computing the income from the glass business as the sugar business was closed long before the accounting year. The principle laid down in that case applies to the facts of this case. In this case, though the assets had been sold in the year of account, the assets have not been used for the business as the business has been closed earlier to the accounting year. Therefore, the assessee is not entitled to claim the depreciation under s. 32(1)(iii). Question No. 3 is, therefore, answered in the affirmative and in favour of the Revenue. Coming to question No. 2 relating to the unabsorbed depreciation, we have to see the setting in which s. 32 under which the relief is claimed occurs in the statute. Section 32 occurs in Chapter IV dealing with computation of total income. Section 28 makes specified items of income chargeable to tax under the head " Profits and gains of business or profession ". Section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by courts, one a liberal view and the other a stricter view, and states that the stricter view is more in accord with the statutory provisions. The liberal view is that s. 32(1) providing for the grant of depreciation specifically postulates the existence of a business and the use of the asset therein. Likewise, when enacting the provision regarding carry forward and set off of unabsorbed depreciation, the Legislature could have imposed a condition that the unabsorbed depreciation could be set off against the profits of a subsequent year only if the business or asset in relation to which depreciation was allowed continued to exist and the asset continues to be used in it in such year. Since the Legislature has not done so and the absence of such a restriction has to be construed in favour of the assessee and, therefore, it should be held that it is not necessary that the business in respect of which the depreciation allowance was originally worked out should remain in existence in the succeeding year in which the set-off is claimed, and this view has been expressed in CIT v. Estate and Finance Ltd. [1978] 111 ITR 119 (Bom), CIT v. Rampur Timber and Turnery Co. Ltd. [1973] 89 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt 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 held that the existence of the business in the accounting year is necessary for allowing set off of the unabsorbed depreciation carried forward. In our view, the view taken in CIT v. Dutt's Trust [1942] 10 ITR 477 (Mad) and Hindustan Chemical Works Ltd. v. CIT [1980] 124 ITR 561 (Bom) are consistent with the statutory provisions and, therefore, the Tribunal appears to be right in holding that the assessee in this case is not entitled to carry forward and set off the unabsorbed depreciation of the earlier years in the accounting year as the business in respect of which depreciation was claimed no longer exists. The learned counsel for the assessee, however, refers to the following three decisions of the Supreme Court: (1) Produce Exchange Corporation Ltd. v. CIT [1970] 77 ITR 739, (2) Standard Refinery Distillery Ltd. v. CIT [1971] 79 ITR 589 and (3) B. R. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t been wholly set off against the income under any head of income in accordance with the provisions of s. 71, so much of the loss as has not been so set off, such loss can be carried forward and set off against the profits and gains, if any, of any business carried on by him and assessable for that assessment year. But the grant of benefit to carry forward and set off the losses in the subsequent years is subject to the proviso contained in s. 72 which is as follows: " Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year." Therefore, the benefit of s. 72 can be claimed only when the business in respect of which the loss has occurred and which is sought to be carried forward and set off is carried on in the previous year relevant to the assessment year in which the benefit to carry forward and set off is claimed. Having regard to the said explanation, we are of the view that the Tribunal is right in its decision that unless the business is continued, the losses incurred in that business cannot be carried forward and set off as against the profits and gains of a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
