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SESHASAYEE PAPER & BOARDS LIMITED Versus DEPUTY COMMISSIONER OF INCOME TAX

Unabsorbed depreciation - whether unabsorbed depreciation should be allowed before the allowance of the unabsorbed investment allowance in computing income when the assessee had not claimed the unabsorbed depreciation in its income-tax return though it had claimed depreciation for the current year as held by ITAT? - Held that:- By legal fiction unabsorbed depreciation becomes depreciation of the year in question and gets added to the depreciation of the current year. If that be so, is it the rig .....

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making it possible to the assessee to claim set off of unabsorbed carried forward depreciation as well. A fortiorari, bifurcation thereof with option to claim depreciation of current year only and contending at the same time that portion of unabsorbed carried forward depreciation is not to be thrusted upon him as it is not claimed, would not be permissible.

Once the unabsorbed carried forward depreciation has become a part of the depreciation of the current year, it is not open to th .....

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e current year prior to the unabsorbed carried forward investment allowance, it is the entire depreciation, namely, the depreciation of the current year as well as the unabsorbed carried forward depreciation, which is to be taken into account as by virtue of the fiction created under Section 32(2) of the Act, carried forward depreciation also partakes the character of depreciation of the current year. This scrambled egg cannot be unscrambled now. Otherwise, it would amount to negating the legal .....

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, as they appear in Civil Appeal Nos. 1812-1813 of 2005, are taken note of as the following substantial question of law, which arises for consideration, is common in these appeals: Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in holding that the unabsorbed depreciation should be allowed before the allowance of the unabsorbed investment allowance in computing income of the appellant/assessee for the Assessment Year 1991-1992, when the asses .....

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he income for that year after showing exemptions, deductions and additions, which are to be made in terms of Sections 28 onward relating to computation of the business income, was arrived at ₹2,87,15,912. The assessee had unabsorbed investment allowance of previous years. It also had unabsorbed depreciation of the earlier years. In its income-tax return, however, it chose to carry forward investment allowance and claimed set off of the said unabsorbed investment allowance to the extent of .....

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cepted 'Nil' income return as filed by the assessee, but on the aforesaid basis. 5) The assessee, however, was not satisfied with the aforesaid treatment of setting off of the unabsorbed depreciation instead of investment allowance. It filed appeal before the Commissioner (Appeals). This appeal was, however, dismissed following the judgment of the Madras High Court in Commissioner of Income Tax v. Coromandel Steels (1981) 130 ITR 856. The assessee approached the Tribunal. The Tribunal al .....

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ted. 6) It is in this backdrop the question of law, which is to be answered and formulated above, relates to the issue as to whether it is unabsorbed investment allowance which is to be allowed as set off in computing the income of the assessee for the assessment year in question or unabsorbed depreciation. 7) As pointed out above, in the income-tax return the assessee had claimed set off of unabsorbed investment allowance. However, this request is declined as according to the High Court, provis .....

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had chosen to have set off of unabsorbed investment allowance and it is the assessee whose option should prevail. It was also argued that even if the provision of law was not very clear and was susceptible to two interpretations, one which was more beneficial to the assessee had to be given effect to. 9) The High Court took note of these contentions of the assessee predicated on the judgment of the Punjab and Haryana High Court in Ram Nath Jindal & Anr. v. Commissioner of Income Tax (2001) 2 .....

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with which we are concerned. Therefore, the High Court took cognizance of the said judgment. The High Court also noted another judgment of its own Court in Guindy Machine Tools P. Ltd. v. Commissioner of Income Tax (2002) 254 ITR 780, which had followed judgment of this Court in Commissioner of Income-Tax v. Mahendra Mills (2000) 243 ITR 56 wherein it was held that the provision in respect of depreciation was for the benefit of the assessee and if the assessee does not wish to avail the said ben .....

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nvestment allowance under the provisions of the Act, which has been held by various High Courts (and those judgments of the High Courts are taken note of), it is the unabsorbed depreciation allowance which would be set off first. 10) Arguments before us remain the same which were advanced by the assessee as well as the Revenue in the High Court. In order to appreciate these arguments and to answer the controversy which has arisen, it is apposite to take note of provisions of Section 32 of the Ac .....

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nt of its partners)] full effect cannot be given to any allowance [under clause (ii) of sub-section (1)] in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amoun .....

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uctions that is to be allowed is also mentioned in sub-section (1). We are not directly concerned with this provision inasmuch as it is not in dispute that the assessee herein was entitled to depreciation on its assets and the amount of depreciation is also not in dispute. As mentioned above, in fact, the depreciation of earlier orders could not be utilized by the assessee in those years. Since the provisions of the Act permit the assessee to accumulate the unabsorbed depreciation of the previou .....

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ble being less than the allowance, such unabsorbed depreciation allowance is to be added to the amount of the allowance for depreciation for the following previous year and it is 'deemed to be part of that allowance for that previous year or the succeeding previous years, as the case may be'. This is, however, subject to the provisions of sub-section (2) of Section 72 and sub-section (3) of Section 73 of the Act. 13) What follows from the above is that in case of loss in the business inc .....

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ision which existed during the relevant period and extracted above, the carried forward depreciation allowance is deemed to be a part of, and stands on exactly the same footing as the current depreciation for the assessment year. The unabsorbed depreciation of the past years, thus, by legal fiction, becomes the depreciation of the year in question and can be set off against income chargeable under any head. There is, thus, actual depreciation which is to be calculated in that particular assessme .....

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rofession'. This carried forward loss can be set off only against the profits of any business or profession and is carried forward only for a period of eight years. On the other hand, insofar as carry forward of depreciation allowance to any subsequent year is concerned, the same is without any time limit. Sub-section (2) of Section 72 stipulates that where any allowance or part thereof is under sub-section (2) of Section 32 or sub-section (4) of Section 35 and is to be carried forward, effe .....

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on 73, which finds mention in Section 32(2), states that provisions of sub-section (2) of Section 72 shall also apply in relation to speculation business. We are not concerned with the aforesaid situation arising out of sub-section (2) of Section 72 or sub-section (3) of Section 73. However, the same are mentioned for the purpose of clarity as there is a reference to these provisions in Section 32(2). Insofar as the instant case is concerned, it depends upon the meaning that is to be given to th .....

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f first. Some of the High Courts had earlier taken the view that this would be so even if the assessee had not claimed the unabsorbed depreciation. It is the necessary consequence of the scheme of various provisions of the Act. Section 32A of the Act, which deals with investment allowance, was inserted by the Finance Act, 1976 with effect from 01.04.1976. According to Circular No. 202 dated 05.07.1976 issued by CBDT [(1976) 105 ITR St 17], the combined effect of the provisions of Sections 32, 32 .....

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development rebate of earlier years (Section 33(2)(ii) (v) Current development rebate (Section 33(2)(i)) (vi) Unabsorbed development allowance of earlier years (Section 3A(2)(ii)) (vii) Current development allowance (Section 33A(2)(ii)) (viii) Unabsorbed investment allowance of earlier years (Section 32A(3)(ii)) (ix) Current investment allowance (Section 33A(3)(i)) It emerges from sub-section (3) of Section 32A that unabsorbed investment allowance takes precedence over current investment allowa .....

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rovides that deduction under Section 32 shall be allowed only if the prescribed particulars have been furnished. It was specifically held that there is no mandatory duty on the officer to allow depreciation if the assessee does not want to claim that. The provision for claim of depreciation is certainly for the benefit of the assessee. If he does not wish to avail of that benefit for some reason, the benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is .....

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s are not furnished by the assessee, his claim for depreciation under Section 32 cannot be allowed. Section 29 is, thus, to be read with reference to other provisions of the Act. It is not in itself a complete code. 16) This principle, thus, is grounded in the reasoning that there is no provision by which depreciation could be fictionally deemed to have been claimed and granted and it is to be specifically claimed by the assessee. Further, when claiming of depreciation is a privilege given to th .....

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stated in para 10.1 of the impugned judgment, which reads as under: 10.1 But, in the case on hand, it is not the issue whether the assessee could be compelled to claim depreciation allowance, but, if he fails to claim, what would be the order of priority between unabsorbed depreciation allowance and unabsorbed investment allowance. 18) Strangely, the issue is somewhat different, namely, when the depreciation allowance is not claimed, can it be said that the assessee has failed to claim and in th .....

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it pertained to the current year. At the same time, it did not want to claim the set off of the unabsorbed depreciation allowance of the previous years. In such situation, the question is as to whether it is open to the assessee to invoke the provisions of Section 32 of the Act by claiming depreciation of the current year, but at the same time choose not to make a claim of set off of unabsorbed depreciation allowance of the previous years. As noted above, by legal fiction unabsorbed depreciation .....

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rged into the depreciation of the current year, it would become an integral part thereof. Legal fiction makes it one whole thereby making it possible to the assessee to claim set off of unabsorbed carried forward depreciation as well. A fortiorari, bifurcation thereof with option to claim depreciation of current year only and contending at the same time that portion of unabsorbed carried forward depreciation is not to be thrusted upon him as it is not claimed, would not be permissible. 20) Notwi .....

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ort this hypothesis, learned counsel referred to the judgment in Commissioner of Income-Tax, Kanpur v. Mother India Refrigeration Industries P. Ltd. (1985) 155 ITR 711 where nature of carried forward depreciation allowance on application of deeming provision is explained by the Court. She specifically referred to the following discussion in this behalf: Having regard to the aforesaid rival contentions, it will be clear that the real issue that arises for our consideration in this case is whether .....

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outset, it may be stated that a close scrutiny of the relevant provisions of the 1922 Act as also the 1961 Act clearly shows that the computation of income under the head Profits and gains of business of any particular assessment year is required to be done after making certain allowances specified in sub-s.(2) of s. 10 of the 1922 Act and after allowing certain deductions in accordance with the provisions contained in ss. 30 to 43A of the 1961 Act; in other words, it is the net profits and gai .....

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rds, the normal accountancy principle has to be applied in arriving at the net income from business for that year by debiting the current year's depreciation. The question is whether any deviation from this normal rule of accountancy is contemplated by proviso (b) to s. 10(2)(vi) read with proviso (b) to s. 24(2) of the 1922 Act or by s. 32(2) read with s. 72(2) of the 1961 Act, and it is here that the aspect of proper construction of these provisions arises. Dealing with the provisions of t .....

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bject to the proviso (b) to s. 24(2). Had proviso (b) to s. 24(2) not been enacted by the Legislature, the result would have been that the aggregate depreciation would have been deducted first out of the profits and gains in preference to unabsorbed business losses which might have been carried forward under s. 24(2) but as such losses can be carried forward only for limited number of years, the assessee would in certain circumstances have in his books losses which he might not be able to set of .....

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required to be carried forward under proviso (b) to s. 10(2)(vi) and no preference over the current depreciation is intended. It is true that proviso (b) to s. 10(2)(vi) creates a legal fiction and under that fiction, unabsorbed depreciation either with or without current year's depreciation is deemed to be the current year's depreciation but it is well settled, as has been observed by this court in Bengal Immunity Company Limited v. State of Bihar [1955] 2 SCR 603, 606; 6 STC 446, that .....

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g set off against other heads of income of that year. 21) It is clear from the above that though the question there was different, namely, precedence of carried forward business loss over the carried forward unabsorbed depreciation or vice versa, what is important is the interpretation that is given to Section 32(2) of the Act and particularly the deeming provision thereof which creates legal fiction. The Court clarified that the avowed purpose of the legal fiction created by deeming provision c .....

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ll as unabsorbed carried forward depreciation) over unabsorbed carried forward losses. 22) We do not understand as to how the aforesaid judgment helps the assessee. On the contrary, it goes against the assessee while answering the question which has arisen in the instant appeals. Once the unabsorbed carried forward depreciation has become a part of the depreciation of the current year, it is not open to the assessee to bifurcate the two again and exercising its choice to claim the depreciation o .....

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