TMI Blog1981 (6) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... Ultimately, he carried forward this amount as unearned depreciation to be set off against the income of future years. The assessee was also carrying forward unabsorbed business loss of Rs. 75,720 from the assessment year 1965-66. The assessee filed an appeal to the AAC and among others claimed that the carried forward business loss of Rs. 75,728 first should be set off from the income of Rs. 3,11,857 and only the balance sum should be set off against the current depreciation of Rs. 3,18,430. This was rejected by the AAC. The assessee came in further appeal to the Tribunal. The learned advocate for the assessee relied on the decision of the Allahabad High Court in Mother India Refrigeration Industries (P.) Ltd. v. CIT [1971] 80 ITR 510, which followed the decision of the Supreme Court in Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555. The departmental representative, on the other hand, supported the order of the AAC and submitted that the current depreciation had to be allowed first before computation of income from business under s. 28 of the Act and the carried forward losses would have to wait till there were enough profits after absorbing the current depreciation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an allowance for that previous year and so on for the succeeding previous years. Sub-section (1) of s. 72 provides that where for any assessment year, the net result of the computation under the head " Profits and gains of business or profession " is a loss to the assessee, not being a loss sustained in a speculation business and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of s. 71, so much of the loss as has not been so set off or where the assessee has income only under the head " Capital gains " relating to the capital assets other than short-term capital assets and has exercised the option under sub-s. (2) of that section or where he has no income under any other head, the whole loss shall, subject to the other provisions of this chapte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able at the stage when losses carried forward can in law be applied to the reduction of a particular year's profits. The two must belong to the same level. In this connection reliance is placed on a passage in p. 374 in the case of Aluminium Corporation of India Ltd. v. CIT [1958] 33 ITR 367 (Cal). In that case, the Division Bench of this court, observed as follows (p. 374): " What clause (b) of section 24(2) contemplates is that there is some loss to be carried forward and what it says specifically is that there is some depreciation allowance 'also to be carried forward'. The crucial word, to my mind , is the word 'also'. It enjoins by implication that the depreciation allowance to be carried forward must also be a depreciation allowance available at the stage when losses carried forward can in law be applied to the reduction of a particular year's profits. The two must belong to the same level." Next he contends that in the Act of 1922, not main sections but provisos to relevant sections, have made provisions as to reduction. But the provisos should not be regarded as less important than the main sections. Maxwell on the Interpretation of Statutes, 12th Edn., P. St. J. Langan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it falls in the following year within clause (vi) and has to be deducted as allowance. If the legislature had not enacted proviso (b) to section 24(2), the result would have been that depreciation allowance would have been deducted first out of the profits and gains in preference to any losses which might have been carried forward under section 24, but as the losses can be carried forward only for six years under section 24(2), the assessee would in certain circumstances have in his books, losses which he would not be able to set off. It seems to us that the legislature, in view of this, gave a preference to the deduction of losses first. But it is wrong to assume that section 24(2) also deals with the carrying forward of the depreciation. This carry forward having been provided in section 10(2)(vi) and in a different manner, section 24(2) only deals with losses other than the losses due to depreciation." But, in this case the question before the Supreme Court was quite different. Herein the question was whether the unabsorbed depreciation allowance of previous years could be allowed to be set off against the income from other heads of income, i. e., from the heads of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrent year's depreciation is concerned it is always to be treated as the first charge on profits and gains earned by an assessee from a business and before this first charge is satisfied it would not be possible to arrive at a correct figure of the net profits and gains which would be chargeable to tax. This basic principle of accountancy has also been judicially recognised. It is only after deducting the current year's depreciation that carried forward losses should be adjusted. The allowances should be adjusted as follows-firstly, the current year's depreciation should be adjusted. Secondly, carried forward losses of earlier years have to be deducted and finally carried forward unabsorbed depreciation allowance of earlier years has to be adjusted. Sub-section (2) of section 32 is in two parts and provides for two things. Its first part provides for the carrying forward of unabsorbed depreciation and its second part provides for clubbing the said carried forward depreciation with the current year's depreciation and deeming the aggregate to be the current year's depreciation. This deeming provision in section 32(2) is not, however, absolute. It is subject to the provisions of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ote): " The assessee, which carries on the business of printing and publishing a daily newspaper and a weekly journal, claimed depreciation for the relevant assessment year 1970-71 in a sum of Rs. 1,87,303, whereas its income before deduction of depreciation was only Rs. 70,555. The assessee claimed that 'the carried forward business loss' should be set off against the income of the current year before deducting the depreciation of the relevant assessment year. The ITO rejected the plea and held that the depreciation of the current year must first be deducted from the current year's income and the balance unabsorbed depreciation must be carried forward to the succeeding assessment year. As there was no income left after deducting the depreciation of the current year, the ITO did not set off the 'carried forward business loss' against the revenue income of the current year. On appeal, the AAC agreed with the claim of the assessee and, on further appeal by the revenue, the Tribunal upheld the view of the AAC. On a reference: Held, that s. 32(2) of the I.T. Act, 1961, which provides for set off of unabsorbed depreciation against current year's income, and allows the ' carried forw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormally, the stage of considering unabsorbed depreciation would only arise for consideration after the computation of current year's business income is over. It is only then the question of unabsorbed depreciation allowance would arise and unabsorbed depreciation of previous year has to yield place to carried forward business losses for set off against the net profit from the current year's business activities ascertained after allowing depreciation for the current year." With due respect, for the reasons expressed by the Andhra Pradesh High Court, we are fully in agreement with the decision arrived at by it. We are also of the view that the business losses carried forward from the previous years cannot have precedence over the current depreciation allowance. Thus, s. 32(2) yields place to s. 72(2) of the Act and not vice versa. In this view of the matter, the Tribunal was not correct in holding that the business losses carried forward from the previous year would first be set off against the income and then only the balance of the income should be set off against the current depreciation. In this context of the matter, we answer the question in the negative and in favour of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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