TMI Blog1978 (10) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... ls with s. 84. The assessee in Civil Appeal 1989 of 1972 is a public limited company carrying on business in manufacture and sale of yarn. During the financial year ending 31st March, 1959, being the accounting year relevant to the assessment year 1959-60, the assessee set up a new industrial undertaking which admittedly satisfied the requirement of s. 15C(2) of the Indian I.T. Act, 1922. The profit, depreciation and development rebate in respect of this new unit for the assessment years 1959-60 and 1960-61 were as follows : Year Profit Depreciation and development rebate Rs. Rs. 1959-60 33,118 1,44,361 5,07,336 (development rebate) 1960-61 3,64,672 3,19,591 1,17,205 (development rebate) 3,97,790 10,88,493 In the assessment year 1959-60, the total profit of the assessee in respect of its old and new units came to Rs. 2,42,432, including Rs. 33,118 in respect of the new unit and the total depreciation amounted to Rs. 2,66,651 including Rs. 1,44,361 in respect of the new unit and after setting off the amount of depreciation against the total profit, a sum of Rs. 24,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be computed in accordance with, such rules as may be made in this behalf by the Central Board of Revenue.).... (6) The provisions of this section shall, (in relation to an industrial undertaking,) apply to the assessment for the financial year next following the previous year in which the assessee begins to manufacture or produce articles and for the four assessments immediately succeeding ........" The ITO took the view that the benefit of s. 15C, sub-s. (1), could be claimed by the assessee only if there was any profit derived from the new unit and since this profit was, by reason of sub-s. (3) of s. 15C, required to be computed in accordance with the provisions of s. 10, it was necessary to work out the trading result of the new unit without reference to any other activity carried on by the assessee and if that was done, the result would clearly show that there was a loss in the working of the new unit in the assessment year 1961-62. The computation made by the ITO was as under. The total depreciation and development rebate in respect of the new unit for the assessment years 1959-60 and 1960-61 was Rs. 10,88,493, while the profit for these two assessment years came to on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as part of the allowance for the assessment year 1961-62 and that would wholly wipe out the profit of Rs. 1,36,822 leaving a resultant loss in the new unit for the assessment year 1961-62. The Tribunal in this view held that the benefit of the exemption under s. 15C, sub-s. (1), was not available and the ITO was justified in refusing to grant such exemption. This led to the filing of an application for reference by the assessee and on the application, the Tribunal stated a case and referred the following question of law for the opinion of the High Court : " Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to the relief under s. 15C(2). " The High Court agreed with the view taken by the Tribunal and proceeding on the assumption that for the purpose of determining the applicability of s. 15C, sub-s. (1), the new unit was required to be treated in isolation, as if no other income producing activity was carried on by the assessee, the High Court observed that there was unabsorbed depreciation and development rebate of Rs. 6,90,703 in respect of the new unit which was required to be carried forward and set off against the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de under the Act for computing the capital employed in a new industrial undertaking but we are not concerned with these rules in the present appeals. What is material is only the provision for exemption and, according to this provision, the profits and gains of a new industrial undertaking are exempt from tax to the extent of 6% per annum of the capital employed, and obviously, therefore, there must be profits or gains derived from the new industrial undertaking in the assessment year in question before any claim for exemption can be sustained under s. 15C, sub-s. (1). If there are no profits or gains derived from the new industrial undertaking in any particular assessment year, there can be no question of any exemption, because it is only where there are such profits or gains that to the extent of 6% per annum of the capital employed, they become eligible for exemption. The first question which must, therefore, arise for consideration in every case where a claim for exemption is made under s. 15C, sub-s. (1), is whether there are any profits or gains derived from the new industrial undertaking in the assessment year in question, and if so, what is the quantum of such profits or ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of another business carried on by the assessee. If, however, there are no profits chargeable under the head " Business or profession " or if the profits chargeable under that head are insufficient to cover the depreciation allowance the amount of the allowance to the extent to which it is not absorbed can be set off against profits chargeable under any other head for that assessment year. This is the plain and undoubted effect of s. 24, sub-s. (1), as explained in CIT v. Indo-Mercantile Bank Ltd. [1959] 36 ITR 1, 6 (SC). But what would happen if still some part of the depreciation allowance remains unabsorbed. The answer is provided by prov. (b) to cl. (vi) of s. 10(2), which reads as follows : " Provided that--...... (b) Where (in the assessment of the assessee or if the assessee is a registered firm, in the assessment of its partners), full effect cannot be given to any such allowance in any year (not being a year which ended prior to the 1st day of April, 1939), owing to their being no profits or gains chargeable for that year, or 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-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome and so on for succeeding years. The method adopted by the statute for achieving this result is that the carried forward depreciation allowance is deemed to be part of and stands on exactly the same footing as the current depreciation for the assessment year and is thus allowable as a deduction under cl. (vi). It would, therefore, be seen that when the profits or gains of a business for a particular assessment year are to be computed under s. 10, the current depreciation allowance for the assessment year in question is deductible under cl. (vi), but the depreciation allowance of the preceding years would be liable to be taken into account only if, and to the extent to which, it is not absorbed by the total income of the assessee computed under different heads and chargeable to tax for those assessment years. The position in regard to development rebate is the same. The relevant provision in that behalf is to be found in cl. (vib) of sub-s. (2) of s. 10 That clause, in so far as material, provides as follows : " 10. (2) Such profits or gains shall be computed after making the following allowances, namely :--... (vib) in respect of...... new machinery or plant installed af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egate period not exceeding eight years. Though the amount of the development rebate is, under the main provision in sub-cl. (ii) of cl. (vib), allowable in the first instance against the profits or gains of the particular business whose profits or gains are being computed, cl. (i) of Expl. 1 makes it clear that if any part of the development rebate remains unabsorbed, it is to be set off against the other income of the assessee under any of the chargeable heads and it is only if some part of the development rebate still remains outstanding that it can be carried forward to the following assessment year and set off against the total income of the assessee for that year. The amount of the development rebate is to be set off against the total income of the assessee and not merely against the profits or gains of the particular business in respect of which the development rebate is granted and so also the development rebate which remains unabsorbed and is carried forward to the next assessment year is, by reason of cl. (ii) of Expl. 1, to be set off not merely against the profits or gains of the particular business but against the total income of the assessee for that year. It would, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the profits and gains, unless it has remained unabsorbed by reason of inadequacy of the total income chargeable to tax in the past assessment years--and, as pointed out above, by total income we mean not only profits or gains derived from the new industrial undertaking but the totality of profits or gains computed under various heads--and is carried forward to the assessment year in question. There is nothing in sub-s. (3) of s. 15C or in any other provision of the Act which requires that in computing the profits or gains of a new industrial undertaking under s. 10, depreciation allowance or development rebate in respect of the new industrial undertaking for the past assessment years should be taken into account, even if it has been set off fully against the profits or gains of any other business carried on by the assessee or against income under any other head and there is no unabsorbed depreciation allowance or development rebate to be carried forward. It is indeed difficult to see how effect can be given to depreciation allowance and development rebate twice over, once in the past assessment years and again in the assessment year in question. To give effect to depreciation all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, the language is so clear and unambiguous that it is impossible to place any other construction upon it. But, apart from the language of the section, it may be noted that if the construction contended for on behalf of the revenue and upheld by the High Court as well as the Tribunal were accepted, it would lead to the highly anomalous result that, though for the purpose of computing the total income chargeable to tax, the depreciation allowance and development rebate which have been set off against the other income of the assessee for the past assessment years would not be liable to be taken into account, they would have to be deducted in computing the profits or gains of the business for the purpose of applicability of sub-s. (1) of s. 15C. Thus, there would be two different modes of determining the profits or gains of the business, one for computing the total income chargeable to tax and the other for applying the provisions of sub-s. (1) of s. 15C. We cannot imagine that such a consequence could ever have been intended by the legislature. We find in the present case from the undisputed figures on record that the whole of the depreciation allowance of Rs. 1,44,361 in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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