TMI Blog1957 (8) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. The applicant claimed that against the profit of ₹ 9,56,479 should first be set off the loss carried forward from earlier years which amounted to ₹ 27,359. The applicant's contention was that under section 10(2) (vi) proviso (b) where in the assessment of the applicant full effect cannot be given to any such allowance (for depreciation) in any year......... owing to the profits or gains chargeable being less than the allowance, then subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24 the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following year and deemed to be part of that allowance.... The contention of the applicant was that when full amount of depreciation could not be covered by the profits of the year as in the present case, the provisions of section 24 applied immediately. It was claimed that against the profits of ₹ 9,56,479 should first be set off the loss brought forward from earlier years, namely, ₹ 27,259. The balance, namely, ₹ 9,29,120, should be set off against the depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , relative to that year of assessment, the assessee company showed a profit of ₹ 9,56,479 which was done without deduction of the depreciation due for that year. The amount of depreciation allowance to which the assessee was entitled in respect of its working during the year in question was ₹ 12,52,117. The Income-tax Officer set off that depreciation against the profit and determined the difference, namely, ₹ 2,95,638, as the loss for the year. The amount so determined as loss was directed to be carried over to the next year as unabsorbed depreciation. The company, however, had an amount of ₹ 27,359 as loss carried forward from earlier years. Before the Income-tax Officer it was contended that against the year's profit of ₹ 9,56,479 the amount of the loss carried forward from the previous years, namely, ₹ 27,359, should first be set off, and then should be set off, as against the balance of the profits, the depreciation allowance due for the year, that is to say ₹ 12,52,117. The difference between the method followed by the Income-tax Officer and that contended for by the assessee would be this: according to the determination of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the profits or gains of business for a particular year are to be ascertained the allowance in respect of depreciation, like the other allowances, has to be deducted from the gross profits or gains in order to arrive at the taxable quantum. Where the balance of the business profits left after deducting the other allowances to which the assessee is entitled is larger in amount than the depreciation allowance admissible to him the whole of the depreciation allowance will necessarily be absorbed and go towards reducing the quantum of the profits. It may, however, happen that the profits are found to be smaller in amount than the depreciation allowance due or it may even happen that there are no profits or no more profits at all. In the former case, a part of the depreciation allowance will be absorbed, while the balance will remain unabsorbed and in the latter case, the whole of the depreciation allowance will remain unabsorbed. To set off the allowances against the profits so as to reduce the quantity of the latter is, in the language of the Income-tax Act, to give effect to the allowances. What is to be done when the depreciation allowance cannot at all be absorbed by the profits o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o (b) to section 10(2)(vi) and clause (b) of section 24(2) will both be applicable is really the matter in controversy between the parties in the present case. It will be remembered that without deduction of depreciation allowance to which it was entitled, the assessee had profits amounting to ₹ 9,56,479. It had also a loss of ₹ 27,359 brought up from earlier years. The depreciation allowance due to the assessee for the current year was ₹ 12,52,177. If that amount was set off against the amount of the profits, a surplus would be left or, in other words, there would be an amount of depreciation allowance to be carried over. The contention of the assessee was that since there was the amount of ₹ 27,359 as loss carried forward and since if the amount of the depreciation allowance was set off against the amount of the profits, there would be a surplus of depreciation allowance to be carried forward, this was a case where clause (b) of section 24(2) applied and, therefore, the amount of the loss was to be set off first. I have already explained why it was to the advantage of the assessee to have other losses set off and absorbed by the profits first, because ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains of other businesses, if any. If the depreciation allowance is still not exhausted, then, it has to be set off against the profits, if any, under other heads of income as set out in section 6 of the Act. That would be by virtue of section 24(1). If the depreciation allowance is still not exhausted, only then there will be an amount available for being carried forward to the next year. In the case I have just indicated, namely, where after the depreciation allowance for the current year has been set off against the profits of the business or all the businesses, as the case may be, and also against profits under other heads of income there is still an amount left, there will obviously be no loss of the current year to be carried forward. If there had been loss, there could not be any profits against which the depreciation allowance was set off. There may, however, be some loss carried forward from earlier years. It was contended on behalf of the assessee that in the case before us there was such an amount of loss and the further argument was that since the depreciation allowance, as set off against the profits, would also be in surplus, this was a case which came directly unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he two must belong to the same level. That such is the meaning of proviso (b) to section 10(2)(vi) read with clause (b) of section 24(2) would be clear from a close examination of the terms of those two provisions. Proviso (b) to section 10(2)(vi) begins with setting out by way of a premise that there is an amount of depreciation allowance to which effect or full effect cannot be given owing to there being no profits or owing to the profits or gains chargeable being less than the allowance. There is thus a surplus of allowance. As to what is to be done with the surplus, the further provision of the proviso is that subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following year. What is contemplated is that the surplus allowance is to be added to the amount of the allowance for the following year and it is this adding to which is made subject to the provisions of clause (b) of section 24(2). On being added to the allowance for the following year, the amount added becomes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther to decide. It appears to me, however, that what clause (b) of the proviso to section 10(2)(vi) really intends to lay down is that the surplus amount of depreciation shall be added to the amount of depreciation allowance for the following year, subject only to the operative portion of clause (b) of section 24(2), that is to say, subject to the losses being first set off. I may now proceed to examine a little more closely clause (b) of section 24(2). As already indicated, it contemplates that there is an amount of loss to be set off and also an amount of depreciation allowance to be set off. The enquiry is in what circumstances such a situation can arise. It appears to me that it can arise only when there is an amount of depreciation allowance carried over from earlier years and available for being set off against the profits of a particular year and equally there is an amount of loss carried over from earlier years which also is available for being set off. Such a case will be a case where after the setting off contemplated by sections 10(2)(vi), 10(1) and 24(1) has been carried out in full against the profits of the current year, there is still a balance of profits left and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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