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Issues Involved:
1. Whether unabsorbed depreciation can be carried forward and set off against assessable income in subsequent years despite the cessation of the business. Summary: Issue 1: Carry Forward and Set Off of Unabsorbed Depreciation The primary issue referred to the court was whether the unabsorbed depreciation should be allowed to be carried forward and set off against the assessable income for the assessment years 1969-70 and 1970-71, notwithstanding the cessation of the assessee's business in the assessment year 1964-65. Assessment Year 1969-70: - The assessee, a private limited company engaged in the manufacture and sale of cloth, claimed set off of unabsorbed depreciation carried forward from earlier years against the income computed for the assessment year 1969-70. - The Income-tax Officer denied the claim, stating that the business had ceased, and thus, the set off could not be granted. - The Appellate Assistant Commissioner upheld this view, emphasizing that the continuation of business was a necessary condition for allowing the claim. Assessment Year 1970-71: - The assessee claimed set off of unabsorbed depreciation against the income computed for the assessment year 1970-71. - The Income-tax Officer again denied the claim, and the Appellate Assistant Commissioner upheld the decision on similar grounds as the previous year. Tribunal's Decision: - The Tribunal concluded that the assessee was entitled to set off the unabsorbed depreciation against the total income for both assessment years, relying on the provisions of section 41(1) of the Income-tax Act and the decisions in CIT v. Virmani Industries Pvt. Ltd. and CIT v. Rampur Timber and Turnery Co. Ltd. Arguments by Revenue: - The Revenue argued that depreciation allowance under section 32(1) requires the existence of business and that unabsorbed depreciation carried forward is treated as current year's depreciation, which cannot have better treatment than actual depreciation allowance for the current year. - The Revenue further contended that if the business is not carried on during the current previous year, the allowance for depreciation under section 32(1) cannot arise. Arguments by Assessee: - The assessee argued that section 32(2) creates a legal fiction, deeming unabsorbed depreciation as part of the allowance for the following year, irrespective of the actual existence of business. - The assessee cited the Supreme Court's ruling in CIT v. Teja Singh, emphasizing that legal fictions should be assumed to fulfill their intended purpose. Court's Analysis: - The court noted that section 32(2) allows unabsorbed depreciation to be carried forward and deemed as part of the allowance for the following year, without requiring the actual existence of business. - The court referred to the Supreme Court's decision in CIT v. Jaipuria China Clay Mines (P.) Ltd., which held that unabsorbed depreciation can be set off against income from other heads. - The court also considered the decision in CIT v. Rajendra Prasad Moody, which stated that income is not a sine qua non for deduction of expenses and allowances like depreciation. Conclusion: - The court concluded that the legal fiction under section 32(2) allows unabsorbed depreciation to be set off in subsequent years, even if the business has ceased. - The court answered the question in the affirmative, in favor of the assessee, allowing the set off of unabsorbed depreciation against the assessable income for the assessment years 1969-70 and 1970-71.
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