TMI Blog1987 (8) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... d depreciation carried forward from the earlier assessment year against the income computed for the assessment year in question. The Income-tax Officer took the view that since the business of the assessee-company relating to Manufacture of textiles had come to an end, the set off of the unabsorbed depreciation for the earlier years against the income brought to tax for the assessment year in question cannot be granted. During the assessment year 1970-71, there was no income from business. The assessee claimed set off of unabsorbed depreciation carried forward from the earlier assessment years against the income computed for the assessment year in question. The Income-tax Officer took the view that since the business of the assessee-company relating to manufacture of textiles had come to an end, the assessee was not entitled to carry forward and set off the unabsorbed depreciation for the earlier years against the income brought to tax for the assessment year in question. Against the aforesaid orders, the assessee filed appeals before the Appellate Assistant Commissioner and this claim was made by way of an additional ground. It was, inter alia, contended that the carried forwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct business carried on by the assessee during the previous year are to be computed separately in accordance with the provisions contained in sections 30 to 43A of the Act and for the purpose of determining the income chargeable to tax under the head " Profits and gains of business or profession ", amongst others, a deduction for the depreciation allowance as envisaged by section 32(l) of the Act has to be made. It is submitted that this deduction is to be made out of the revenue of the business in the previous year, but when it is not possible to give effect or full effect to the allowance for depreciation against the revenue of the business ofthe previous year, law permits adjustment against income from any other business or income under any other head. Still, if the allowance remains unabsorbed, it is allowed to be carried forward to the next following previous year and so on for the succeeding previous years. He further submits that by a deeming fiction created in sub-section (2) of section 32, the unabsorbed depreciation which is carried forward is put on par with the depreciation allowance for the next following year and so on subject to the provisions contained in sections 72 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 shall be added to the amount of the allowance for depreciation for the following previous year and be deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years. He, therefore, submits that section 32(2)specifically provides in such a case that the entire current depreciation will be deemed to be next year's current depreciation. He submits that when there is a legal fiction with regard to allowance for the previous year, it means that for that previous year all the three ingredients required under section 32(1) of the Act are to be assumed though factually not in existence. He, therefore, submits that to insist on the actual fulfilment of any of the above three conditions in respect of deemed current depreciation is to go utterly contrary to what is decided in the case of CIT v. Teja Singh[1959] 35 ITR 408 (SC). He, therefore, submits that it is not necessary to insist on the existence of the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3)of section 73. Section 72 of the Act provides for carry forward and setoff of business losses and sub-section (2) thereof provides that where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section, namely, section 72. Similarly, section 73 of the Act provides for losses in speculation business and sub-section (3)thereof provides that in respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business. It means that in speculation business also, when there is a loss, effect shall first be given to the losses of the current year and thereafter any allowance or part thereof carried forward under section 32(2) of the Act will be set off. Section 32 is not subject to any other section except the two aforesaid sub-sections. It is settled law that in interpreting or creating a legal fiction, the court has to ascertain for what purpose the legal fiction is created and after ascertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, then the allowance or part thereof to which effect has not been given would be deemed to be the allowance for that year and so on for the succeeding previous years. It is, therefore, very clear that whenever there is no such allowance for depreciation for the following previous year, the unabsorbed carried forward depreciation will be deemed to be the allowance for that previous year. It is to be noted that the assessee could have got all the advantages of that amount of depreciation as he had already complied with the provisions of section 32(1) of the Act, but he could not do so owing to either there being no profits or gains chargeable for that previous year or owing to the profits or gains being less than the allowance. When that is so, it is not necessary to prove all the three ingredients of section 32(l) of the Act in the next following previous year or for succeeding previous years, as the case may be, for carrying forward the unabsorbed depreciation. Prima facie, it appears that to call upon the assessee to comply with all the three ingredients of section 32(l) ofthe Act for the following previous year or the succeeding years would amount to putting at naught the legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the inference to be drawn from these words, it is quite clear that the words 'no profits or gains chargeable for that year' are not confined to profits and gains derived from the business whose income is being computed under section 10." It may be stated that the Supreme Court also considered the expression " in the assessment of the assessee or if the assessee is a registered firm, in the assessment of partners, full effect cannot be given to any such allowance in any year " for the purpose of giving effect to the unabsorbed depreciation of the past years of the registered firm and the Supreme Court came to the conclusion that the only effect which can be given in the assessment of a partner is by setting it off against the income profits and gains under other heads and for that purpose they considered the case of a partnership firm in which two partners were carrying on other business while the other two partners were carrying on no other business. If the unabsorbed depreciation was to be given set off only against the business income, the other two partners who were not carrying on such business could not get the advantage of the unabsorbed depreciation of the past years and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said case, it has been held that in giving set off while computing the total income of the assessee of any particular year, the current depreciation must be deducted first before deducting the unabsorbed carried forward business losses of the earlier years and the latter cannot be given preference over the former. While considering this point, the Supreme Court has also considered the case of jaipuria China Clay Mines Pvt. Ltd. [1966] 59 ITR 555, but observed that the point that arose for decision in that case was entirely different and the observations cannot be divorced from the point decided therein. While relying on the case of Bengal Immunity Co. Ltd. v. State of Bihar, AIR 1955 SC 661 ; [1955] 6 STC 446 (SC), it is observed that it is well settled as observed therein that legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field. However, it may be stated that so far as the principles laid down in jaipuria China Clay Mines (P.) Ltd.'s case [1966] 59 ITR 555 (SC) are distinguished in the said case by observing that the said case dealt with a different point altogether and, as suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is concerned. In the said case, it is further observed that the deeming fiction created by sub-section (2) of section 32 is only subject to the provisions of section 72(2) and section 73(3) and is not subject to any other provision of the Act. It is, therefore, clear that the fiction created under section 32(2) of the Act is not subject, at any rate, to section 41(5) or any other section of the Act. The reference was answered in favour of the assessee and against the Revenue. In order to meet the argument on behalf of the Revenue that there should be income from business for earning deductions and allowances under section 32(2) also, the Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 was cited. The Supreme Court held in the said case as under (headnote): " The plain natural construction of the language of section 57(iii) of the Income-tax Act, 1961, irresistibly leads to the conclusion that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fiction created by sub-section (2) of section 32 of the Act is not like the one created by Explanation (2) of sub-section (3) of section 41 of the Act so as to physically provide for the existence of business or profession in the previous year. At the outset, it may be stated that the purpose of creating fiction under sub-section (2) of section 32 of the Act is different from the purpose of providing for the physical existence of business or profession in the previous year under sub-section (2) or sub-section (3) of section 41 of the Act. The underlying principle in the granting of depreciation allowance under the Act is that true profits of a business cannot be determined without deducting from the gross profit certain sums representing the value of physical depreciation of the assets, the user of which contributes to the profit earning capacity of the business. It is clear from the language of sub-section (2) of section 32 of the Act that depreciation allowance or part of the allowance to which effect has not been given for any of the reasons stated therein is to be added to the amount of allowance for depreciation for the following year or deemed to be part of the allowance or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in manufacturing bobbins, etc., stopped the business with effect from the previous year relevant to the assessment year 1955-56, though it continued to own the plant and machinery, etc. Thereafter, the assessee continued to be assessed only in respect of income from the property which it owned. During the previous year relevant to the assessment year 1962-63, the assessee received a refund of Rs. 6,982 from the Electricity Department out of the electricity charges already paid by it in the years when it was carrying on business as aforesaid and which had been allowed to the assessee as expenditure in the business in those assessments. During the assessment for the assessment year 1962-63, the Income-tax Officer included the aforesaid amount of Rs. 6,982 as business income of the assessee in view of the provisions of section 41(l) of the Act. The assessee claimed that this refund was liable to be adjusted against unabsorbed depreciation for the years 1951-52 to 1954-55 amounting to Rs. 46,003. In the said case, the question arose before the High Court whether, on the facts and in the circumstances of the case, depreciation allowance determined for the assessment years 1951-52 to 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not help the Department for taking a different interpretation of section 32(2) of the Act. Mr. B. R. Shah has also submitted that when there is a stoppage ofthe business altogether, it cannot have any accounting period or previous year to which the unabsorbed depreciation can become an allowance. Section 2(34) of the Act provides the definition that " previous year " means the previous year as defined in section 3 of the Act. Section 3(3) of the Act provides that subject to the other provisions of this section, an assessee may have different previous years in respect of separate sources of his income. It presupposes that previous year cannot be confined to only one aspect and there would be income in respect of other sources also. It may be the same or there might be separate previous years. In that view of the matter, it cannot be said that when an assessee no business, he cannot have a previous year. Hence, we do not agree with the submissions made by Shri B. R. Shah, learned advocate appearing for the Revenue. From the above discussion, it becomes clear that the point at issue is mainly covered by the decision of the Supreme Court in the case of Jaipuria China Clay Mines (P) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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