1981 (8) TMI 112 - AT - Income Tax

Summary

Issues Involved:
1. Priority of set-off between brought forward losses and current year's depreciation.
2. Interpretation and application of Section 72(2) and Section 32(2) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Priority of Set-off Between Brought Forward Losses and Current Year's Depreciation
The primary issue in this case is whether brought forward losses should be given priority over the current year's depreciation when setting off against the current year's income. The Income Tax Officer (ITO) held that brought forward losses could not be prioritized over the current year's depreciation. Conversely, the Appellate Assistant Commissioner (AAC) accepted the assessee's submission that brought forward losses should have priority over both unabsorbed depreciation of past years and the current year's depreciation.

The Tribunal examined Section 72(2) and Section 32(2) of the Income-tax Act, 1961, which govern the carry-forward and set-off of losses and depreciation. Section 72(2) states that "effect shall first be given to the provisions of this section," implying that brought forward losses should be prioritized. Section 32(2) deals with the carry-forward of unabsorbed depreciation, stating that it should be added to the current year's depreciation.

The Tribunal noted that the expression "shall be added to" in Section 32(2) suggests that unabsorbed depreciation should merge with the current year's depreciation only if there are no brought forward losses. Thus, the identity of unabsorbed depreciation and current year's depreciation remains distinct until the provisions of Section 72(2) are applied.

Issue 2: Interpretation and Application of Section 72(2) and Section 32(2) of the Income-tax Act, 1961
The Tribunal reviewed various case laws to interpret Sections 72(2) and 32(2). The Allahabad High Court in Mother India Refrigeration Industries case favored the assessee, holding that brought forward losses have priority over both past unabsorbed depreciation and current year's depreciation. However, other High Courts, including Karnataka and Gujarat, provided differing interpretations.

- Allahabad High Court: Brought forward losses have priority over both past unabsorbed depreciation and current year's depreciation.
- Karnataka High Court: Unabsorbed depreciation merges into the current year's depreciation, and Section 72(2) does not provide priority over the current year's depreciation.
- Other High Courts: Unabsorbed depreciation does not merge into the current year's depreciation or does so subject to Section 72(2), giving priority to past losses over unabsorbed depreciation but not over the current year's depreciation.

The Tribunal adopted the middle course, holding that unabsorbed depreciation does not lose its identity when there are brought forward losses to be set off. Thus, past losses get priority over unabsorbed depreciation, maintaining their distinct identities as per Section 72(2).

Case Law Analysis:
The Tribunal distinguished several cases cited by both parties:

1. Bombay High Court in CIT v. Ravi Industries Ltd.: The issue was whether unabsorbed depreciation could be set off against all income, not just business income. This case was distinguishable.
2. Delhi High Court in Raj Narain Agarwala v. CIT: Similar to the Ravi Industries case, the issue was whether unabsorbed depreciation could be set off against other income.
3. Bombay High Court in Ballarpur Collieries Co. v. CIT: The issue was the treatment of unabsorbed depreciation after distribution among partners.
4. Gauhati High Court in CIT v. Singh Transport Co.: Similar to Ballarpur Collieries, focusing on unabsorbed depreciation's treatment.

Other cases like Aluminium Corporation of India Ltd. v. CIT and Addl. CIT v. Andhra Printers Ltd. dealt with different aspects of depreciation and loss set-off, not directly addressing the merger of unabsorbed depreciation with current year's depreciation.

The Tribunal favored the Gujarat High Court's decision in CIT v. Gujarat State Warehousing Corporation, which held that current year's depreciation should be adjusted first, and then brought forward losses should be given priority over unabsorbed depreciation.

Conclusion:
The Tribunal concluded that brought forward losses should be given priority over unabsorbed depreciation but not over the current year's depreciation. The appeal by the department was allowed, aligning with the middle course interpretation of Sections 72(2) and 32(2) of the Income-tax Act, 1961.