TMI Blog1980 (8) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... From this he made certain deductions on account of telephone deposit, depreciation, business losses carried forward from earlier years and unabsorbed carried forward depreciation at Rs. 5,73,136. The ITO also assessed a share of profit from Monotes Sales Agency. The assessee, on the other hand, claimed that the development rebate should have been given priority over the business losses of earlier years and unabsorbed depreciation. The ITO did not agree with the contention of the assessee and rejected those contentions. Thereafter, the matter was taken up in appeal to the AAC, who agreed with the ITO and confirmed his order. Thereafter, the assessee took the matter in further appeal before the Income-tax Appellate Tribunal. Before that body the contention of the assessee was that the depreciation, development rebate and the losses should be set off in the following manner : 1. Current year's depreciation. 2. Carried forward development rebate. 3. Current year's development rebate. 4. Carried forward losses from earlier years. 5. Unabsorbed depreciation. The Tribunal found that the views expressed by the well-known commentators on the I.T. Act were against the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 1961 Act. Section 2(45) defines " total income " as the total amount of income referred to in s. 5, computed in the manner laid down in the Act. Therefore, unless there is something inconsistent with this meaning in the subject or context or unless the context otherwise requires, the expression " total income " used in the Act would mean total income computed in the manner laid down in the Act. Section 4 of the 1961 Act is the charging section and it provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions of the Act in respect of the total income of the previous year or years, as the case may be, of every person. Section 5 of the 1961 Act provides for the scope of total income and lays down that subject to the provisions of the Act, the total income in any previous year of a person who is a resident includes all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person or accrues or arises or is deemed to accrue or arise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (or, if the assessee is registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners) full effect cannot be given to any allowance under cl. (i) or cl. (ii) of sub-s. (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-s. (2) of s. 72 and sub-s. (3) of s. 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 amount of the allowance for depreciation for the following previous year and 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. At this stage, it may be pointed out that s. 72 deals with carry forward and set-off of business losses. At a later stage we will deal with the concept of carry forward and set-off of business losses, but, at this stage, we may point out that s. 72(2) provides that where any allowance or part thereof is under sub-s. (2) of s. 32 or sub-s. (4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the development rebate, if any, still outstanding shall be carried forward to the following assessment year and so on, so, however, that no portion of the development rebate shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to the previous year in which the, ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be. The Explanation to sub-s. (2) of s. 33 provides for a situation where for any assessment year development rebate is to be allowed in accordance with the provisions of sub-s. (2) in respect of ships acquired or machinery or plant installed in more than one previous year and the total income of the assessee assessable for that assessment year is less than the aggregate of the amounts due to be allowed in respect of the development rebate of that particular year. The situation envisaged by the Explanation to sub-s. (2) of s. 33 does not arise in the present case. Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (2) of s. 72 provides that where any allowance or part thereof is, under sub-s. (2) of s. 32 or sub-s. (4) of s. 35, to be carried forward, effect shall first be given to the provisions of s. 72. Though there is no direct authority for the priority to be given as between carried forward business loss, unabsorbed depreciation and carried forward development rebate under the provisions of s. 72(1), s. 32(2) and s. 33(2) of the 1961 Act, there is a direct authority of the Supreme Court relating to the priority to be given at the time of setting off of carried forward business loss and unabsorbed depreciation, in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC). In that case, the Supreme Court was concerned with the provisions of s. 80E of the 1961 Act as it then stood. Under that section special deduction was to be given at the rate of 8% on profits and gains attributable to the business of generation and distribution of electricity. The question was whether in arriving at the figure on the basis of which 8% deduction was to be calculated, the unabsorbed depreciation and unabsorbed development rebate were to be deducted. There the Supreme Court pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or machinery was installed or the ship was put into commission. He further stated that under the scheme of cls. (i) and (ii) of sub-s. (2) of s. 32 the current year's development rebate is relinquished to the unabsorbed development rebate from the previous years and under that scheme development rebate for the current year must be given effect to first before the provisions of carry forward and set-off of business loss under s. 72(2) and section 32(2) can be applied. It is incumbent upon the I.T. authorities to give development rebate for the current year and, therefore, carry forward and set off of the business loss and unabsorbed depreciation from the previous year will have to be relinquished to the lower order of priority as compared to the unabsorbed development rebate and development rebate of the current year. In this connection, the main burden of the argument of Mr. Patel was that the carry forward and set off of business loss, unabsorbed depreciation and unabsorbed development rebate must all be applied at the same stage, i. e., after the current year's depreciation has been treated as a first charge against the receipts of the year under consideration and thereafter be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y allowance under sub-section (1) or subsection (1A) of this section or sub-section (1) of section 33A or any deduction under Chapter VI-A or section 280-0 ". These words in the parenthesis make it clear that though under s. 2(45) of the Act " total income " means the total amount of income referred to in s. 5, computed in the manner laid down in this Act, for the specific purpose of sub-s. (2) of s. 33 when the total income is to be taken into consideration no deduction is to be made in respect of the allowances under sub-s. (1) or sub-s. (1A) of s. 33 or sub-s. (1) of s. 33A or any deduction under Chap. VI-A consisting of s. 80A to s. 80VV, or s. 280-0 for the annuity deposit. Therefore, a specially defined concept of total income has to be applied while working out the provisions of cls. (i) and (ii) of sub-s. (2) of s. 33. In order to give effect to the words in the parenthesis in sub-s. (2) of s. 33, one has first to compute the total income in the manner laid down in the Act and having thus computed it in the normal manner, the development rebate under subs. (1) or sub-s. (1A) of s. 33, the development allowance under sub-s. (1) of s. 33A, the special deductions under Chap. V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions from s. 29 to s. 43 and the income under the beading of " Profits and gains of business or profession " can be worked out only after giving the full effect to the provisions of s. 32, including sub-s. (2) of s. 32. Therefore, by virtue of the specific words in the parenthesis of sub-s. (2) of s. 33, the total income of the assessee for the year under consideration has to be worked out by giving effect to the provisions of s. 32(1) thereafter to the provisions of s. 32(2) and at that stage the development rebate (either current year's development rebate or unabsorbed development rebate from the previous year) has to be taken into consideration by virtue of the words occurring in the parenthesis in sub-s. (2) of s. 33. Mr. Patel is right when he urges that like the carried forward business losses (vide s. 72(3)), carried forward unabsorbed development rebate from the previous years can be carried forward only for a period of 8 years Under the provisions of sub-s. (2) of s. 33. Under the provisions of cl. (ii) of sub-s. (2) of s. 33, unabsorbed development rebate can be carried forward only to eight assessment years immediately succeeding the assessment years relevant to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncentive in the shape of development rebate. Even if the development rebate is likely to be lost at the end of eight years after the installation of the plant or machinery or acquisition of the ship, as the case may be, in our opinion, the Legislature has chosen the lesser evil between the two and has given preference to the carried forward business losses and then unabsorbed, depreciation and thereafter unabsorbed development rebate. It may be pointed out that there is no reference to sub-s. (1) or subs. (2) of s. 72 in the provisions in sub-s. (2) of s. 33, where total income for the purpose of s. 33(2) has to be specially worked out in the manner indicated in that sub-section, particularly in the light of what is set out in the parenthesis of sub-s. (2) of s. 33. In the group of sections and sub-sections mentioned in that parenthesis, one does not find s. 72(1) which provides for carry forward and set-off of business losses from the previous years. It may be pointed out that when the Legislature wants to or does not want to exclude a particular section it says so and in the absence of specific reference to s. 72 in the parenthesis in s. 33(2), it is not possible to exclude the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income for the purpose of a particular section has to be modified or adjusted. The Legislature clearly provide, as to how this is to be done. Clause (i) of Explanation to s. 44C clearly shows that for the purpose of "adjusted total income " in the context of s. 44C, the carried forward business losses, unabsorbed depreciation and development rebate under s. 33 are all to be brought back and are not to be excluded while considering the " adjusted total income". Section 44A sets out a special provision for a deduction in case of trade, professional or similar associations. There also the Legislature has provided that certain expenditures are not to be considered as a part of the total income for the purpose of that section. At the end we have the provisions of s. 80E which was under consideration before the Supreme Court in Cambay Electric Supply Industrial Co.'s case [1978] 113 ITR 84. The Legislature has used the words " as computed in accordance with the other provisions of the Act " and, therefore, all the provisions of the Act including section 72 were brought into play, as held by the Supreme Court, while considering the provisions of s. 80E (prior to its amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their books do mention the relevant provisions like s. 72(1) and s. 33(2) against the different items mentioned in the order of priority. Jindal's Income Tax Past and Present, 3rd Edn., at p. 437, while mentioning this order of priority, says that development rebates are notional losses and can be set off against any other head of income in future years. Sections 32(2) and 33(2) are exceptions to s. 71 which allows inter-head setoff only in the year of occurrence of loss. In V. S. Sundaram's the Law of Income Tax in India, 9th Edn., p. 465, the question of priority has been considered and it has been pointed out that there can be no question of priority as between current year's depreciation allowance and development rebate. Total income has first to be arrived at before considering development rebate. Unabsorbed depreciation of earlier years is treated as additional depreciation of later years under s. 32(2). Therefore, when s. 33(2) talks of the total income being computed, without making any allowance under sub-s. (1), i. e., for the deduction of the rebate, but after making all other deductions, it follows that unabsorbed depreciation of earlier years will have first to be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough it does not form part of the assessable profits, undoubtedly it does form part of the commercial profits, and thus, as we have pointed out above in the order of priority, current year's depreciation is the first charge on the property from the commercial point of view, is the view upheld by the Supreme Court in P. K. Badiani's case [1976] 105 ITR 642. Under these circumstances, we answer the questions referred to us as follows : Question No. 1 : In the affirmative, i. e., in favour of the revenue and against the assessee. Question No. 2 : In the negative, i. e., in favour of the revenue and against the assessee. The assessee will pay the costs of this reference to the Commissioner. After the pronouncement of the above judgment, Mr. Patel, for the assessee, has orally applied under s. 261 of the Act for a certificate for appeal to the Supreme Court. In our opinion, the question of law involved in this case is a substantial question of law. There is no direct authority on the interpretation of s. 32(2) of the Act in the manner in which we have interpreted it. It is no doubt true that all the commentators have taken the same view that we have taken in this case, but th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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