TMI Blog1985 (8) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... which should be deducted first while computing the total income of an assessee for the concerned assessment year. The facts giving rise to the above question in the civil appeals are these. The concerned assessment years are 1951-52 and 1952-53. At the end of assessment year 1950-51, there was an unabsorbed business loss of Rs. 67,534 and unabsorbed depreciation of Rs. 1,78,154. The assessee's income without taking into account the current depreciation was Rs. 50,624 in 1951-52 and Rs. 64,332 in 1952-53. The assessee contended before the ITO that before deducting the current depreciation from the above profits, the unabsorbed loss of the earlier year 1950-51 should be first set off. The ITO did not accept the contention and what he did was that from the profit Rs. 50,624 for 1951-52, the depreciation allowance for that year amounting to Rs. 58,140 was partially set off and the balance of the depreciation of Rs. 7,516 was ordered to be carried forward with the result that the total unabsorbed depreciation carried forward amounted to Rs. 1,85,670. It was further directed that the entire unabsorbed loss amounting to Rs. 67,534 should also be carried forward. Similarly, in 1952-53, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year at Rs. 40,255, brought forward development rebate at Rs. 8,020 and the carried forward past losses were allowed to be carried forward in full. In appeal, the AAC, following the decision of the Allahabad High Court in the case of Mother India Refrigeration Industries (P) Ltd. [1971] 80 ITR 510 (which decision is the subjectmatter of civil appeals before us), accepted the assessee's contention that the carried forward losses have priority not only over the unabsorbed depreciation of the past years but also over the current year's depreciation in the matter of set-off. The Department preferred an appeal to the Appellate Tribunal and the Tribunal took the view that unabsorbed carried forward losses of the earlier years will have priority over unabsorbed depreciation of the earlier years but not over the current year's depreciation. In coming to this conclusion, the Tribunal placed certain construction on the relevant provisions of the 1961 Act, namely, ss. 32(2) and 72(2). In other words, it preferred the views of the Calcutta High Court in Aluminium Corporation's case [1958] 33 ITR 367 (Cal) and of the Andhra Pradesh High Court in Addl. CIT v. Andhra Printers Ltd. [1979] 117 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sub-s. (1) so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year, and (i)... (ii) where the loss was sustained by him in any other business, profession or vocation (meaning other than speculative business), it shall be set off against the profits and gains, if any, of any business, profession or vocation carried on by him in that year: provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year; ... " Then comes proviso (b) to sub-s. (2) which is material and it runs thus : "(b) where depreciation allowance is, under clause (b) of the proviso to clause (vi) of sub-s. (2) of s. 10, also to be carried forward, effect shall first be given to the provisions of this sub-section ; " Under the 1961 Act, the material provisions are to be found in s. 32(1) and (2) and s. 72(1) and (2) and it was not disputed that the material provisions in both the Acts are couched in substantially the same language. Two more things which are common under both the Acts need be noticed. Unabsorbed carried forward busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deducted first before unabsorbed carried forward losses are set off. In support of his submissions, counsel relied upon four decisions: Aluminium Corporation of India Ltd. v. CIT [1958] 33 ITR 367 (Cal), CIT v. Gujarat State Warehousing Corporation [1976] 104 ITR I (Guj), Addl. CIT v. Andhra Printers Ltd. [1979] 117 ITR 555 (AP) and CIT v. Malwa Sugar Mills Co. Ltd. [1982] 134 ITR 56 (Cal). In all these decisions, the view taken is that current depreciation has to be deducted first before unabsorbed carried forward business losses are set off. He pointed out that the High Court in deciding the question in favour of the assessee referred to a decision of this court in Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555, and relied on certain observations made therein but the point that arose for decision in that case was entirely different, and the observations cannot be divorced from the context of the point decided therein. On the other hand, counsel for the assesses, in the appeals and the tax reference, strongly relied upon the legal fiction arising from the deeming provision contained in proviso (b) to s. 10(2Xvi) of the 1922 Act and s. 32(2) of the 1961 Act as a result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the net profits and gains after the specified deductions are made that are subjected to tax ; one of such deductions pertains to depreciation allowance at the prescribed rate of percentage of the written down value of the business asset; and this is provided in s. 10(2)(vi) of the 1922 Act and in s. 32(1) of the 1961 Act. Up to this stage of computation, no question of either carry forward of unabsorbed depreciation of the earlier years or carry forward of unabsorbed business losses of earlier years arises. In other words, 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 the 1922 Act first, it will be clear that proviso (b) to s. 10(2)(vi) is in two parts and provides for two things; its first part provides for a carry forward of unabsorbed deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst other heads of income of that year. That this is so becomes clear from this court's observations in Jaipuria China Clay Mines (P.) Ltd.'s case [1966] 59 ITR 555, appearing at p. 561 of the report, which runs thus : " The unabsorbed depreciation allowance is carried forward under proviso (b) to s. 10(2)(vi) and the method of carrying it forward is to add it to the amount of the allowance or depreciation in the following year and deeming it to be part that allowance ; the effect of deeming it to be part of that allowance is that it falls in the following year within cl. (VI and has to be deducted as allowance." In CIT v. Ravi Industries [1963] 49 ITR 145 (Bom), the same position has been clarified by the Bombay High Court. The court has observed that the unabsorbed depreciation does not lose its character and attributes when it is carried forward to the following year; such unabsorbed depreciation of the earlier year, which is carried forward to the current year and which is deemed to be of the current year under proviso (b) of s. 10(2)(vi) can be set off, unlike other business losses, against income under other heads. Such being the purpose for which the legal fiction is cr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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