TMI Blog1976 (9) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of Rs. 70,555 against the depreciation for that year and directed that the balance of Rs. 1,16,748 should be carried forward to the next year as the unabsorbed depreciation. It is common ground that there were carried forward business losses and the contention before the ITO on behalf of the assessee was that the amount of Rs. 70,555 should be set off not against the current year's depreciation but against the carried forward business losses. That contention was rejected by the ITO and he directed as above. Against the order of the ITO, the assessee took the matter in appeal to the AAC and it was contended that before deducting depreciation of the current year the loss carried forward from the earlier year should be set off and that the ITO had erred in deducting the amount of Rs. 70,555 out of the current year's depreciation of Rs. 1,87,303 and directing the carry forward of balance of the current year depreciation and the business losses brought forward from the earlier year. Following the decision of the Allahabad High Court in Mother India Refrigeration Industries (P.) Ltd. v. CIT [ 1971] 80 ITR 510, the AAC accepted the contention of the assessee and directed the ITO t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent heads of income. Section 29 provides that the income chargeable under the head of profits and gains of business or profession as set out in s. 28, shall be computed in accordance with the provisions contained in ss. 30 to 43A. Section 32(1) provides that in repect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, deductions shall, subject to the provisions of s. 34, be allowed. What is material for the purposes of this judgment is sub-s. (2) of s. 32. It provides that where, in the assessment of the assessee, full effect cannot be given to any allowance under cl. (i) or cl. (ii) or cl. (iv) or cl. (v) or cl. (vi) of sub-s. (1) or under cl. (i) of sub-s. (1A) in any previous year, or 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 previou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputed continued to be carried on by him in the previous year relevant for the assessment year under consideration. Under sub-s. (2) of s. 72, 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 this section. Under sub-s. (3) of s. 72, the business loss cannot be carried forward for more than eight years immediately succeeding the assessment year for which the loss was first computed. As has been pointed out in several cases, which we will hereinafter refer to, because business losses can only be carried forward for a period of eight years and unabsorbed depreciation can be carried forward indefinitely, the legislature appears to have given preference by provisions like ss. 72(2) and 72(3) to business losses over depreciation allowance. But, as a result of the decision of the Supreme Court in CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555, the law is now well settled that unabsorbed depreciation of previous year can be set off against income from any other head, but under the very provisions of 72(1), carried forward business losses being non-speculative b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in that case was dealing with the provisions of the Act of 1922, which were, in terms, identical with the terms of the different sections of the Act of 1961, to which we have hereinabove referred. Proviso (b) to section 24(2) of the Act of 1922 was similar to s. 72(2) of the Act of 1961 and proviso (b) to s. 10(2)(vi) of the Act of 1922 was similar to the provisions of s. 32(2) of the Act of 1961. The Allahabad High Court held that by virtue of prov. (b) to s. 24(2) of the Act of 1922, business losses have to be given priority over unabsorbed depreciation allowance. Under prov. (b) to s. 10(2)(vi) depreciation allowance which is carried forward merges into depreciation allowance for the succeeding year and after such merger, the unabsorbed depreciation allowance is to be deemed to be depreciation allowance for the current year. As business losses have to be given priority over unabsorbed depreciation allowance, there is no good reason why business losses which have been brought forward should not receive priority over current depreciation allowance, and it was held that for the relevant assessment years under consideration, the assessee was entitled to deduct the unabsorbed busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luminium Corporation of India Ltd. v . CIT [1958] 33 ITR 367 and the decision of the Bombay High Court in CIT v. Ravi Industries [1963] 49 ITR 145, the Gujarat High Court held that, firstly, the current year's depreciation should be adjusted against the current year's revenue income and then carried forward losses of earlier years have to be deducted and finally the carried forward unabsorbed depreciation allowance of earlier years has to be adjusted. In CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555, the question before the Supreme Court was altogether different from the question before us. The question there was whether unabsorbed depreciation allowance of previous years could be allowed to be set off against the income from other heads of income, i.e., from heads of income other than non-speculative business. The assessment year under consideration before the Supreme Court was the assessment year 1952-53, and the total income of the assessee in the previous year relevant to that assessment year was computed at Rs. 14,041, before charging depreciation for that year. From that figure, the, ITO deducted depreciation for the year amounting to Rs. 5,360, thus computin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is true that the Supreme Court has pointed out that s. 24(2) of the Act of 1922, equivalent to s. 72 of the Act of 1961, deals with losses other than losses due to depreciation. But the main question that we have to consider is not about carried forward unabsorbed depreciation or carried forward business losses, but the current year's depreciation in computing current year's business income. At page 560 of [1966] 59 ITR, the Supreme Court pointed out that before the amendment of the relevant provisions of the Indian I.T. Act, 1922, in Ambika Silk Mills Co. Ltd. v. CIT [1952] 22 ITR 58 at page 65, the Bombay High Court had held : " If a business was worked at a loss in any particular year, the loss can be set off against any other head under section 24(1) ; if the loss cannot be fully set off then it can be carried forward to the next year, but then it can be only set off against the profits of that particular business and that set-off would be permissible to the assessee for a period of six years only. After six years the right to set-off would come to an end. But in the case of depreciation and to the extent that the loss was caused by depreciation being not fully absorbed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance by way of depreciation, therefore, loses all its character and attributes as an allowance when it is carried forward to the following year not being wholly absorbed during the current year. In view of the provision of section 10(2)(vi), prov. (b), when taken over to the following year, it still retains its character as depreciation allowance and gets added to the current depreciation of the following year when such current depreciation exists for the following year, or becomes current depreciation for the following year where no such current depreciation exists. The only difference which it has from the current depreciation for the following year is as provided under proviso (b) to section 24(2), namely, that its application will be postponed to the prior absorption of the carried forward losses of the previous year. " (Emphasis supplied by us) At page 149 of the report, after referring to the provisions of s. 10(2)(vi), prov. (b), of the Act of 1922, the Division Bench of the Bombay High Court observed : " It will be seen from the provisions which we have referred to above that the allowance which is permitted as by way of depreciation for the current year will be adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to be regarded as part of the depreciation allowance for the assessment year in question and the loss arising as a result thereof was liable to be dealt with under the provisions of section 24(1) to the extent that effect could be given thereto ...... The legislature has thus provided that the type of loss which could be carried forward for a limited number of years under section 24(2) should first be set off before the amount of unabsorbed depreciation allowance of previous years is not set off under section 24(1). It is to carry out this intention that the legislature has stated in proviso (b) to section 10(2)(vi) that the deeming provisions will apply ' subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24 '. " The Gujarat High Court also pointed out that the decision of the Calcutta High Court in Jaipuria China Clay Mines Private Ltd. v. CIT [1962] 46 ITR 707 (Which was subsequently affirmed by the Supreme Court in CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555) supported the view taken by it. In CIT v. Gujarat State Warehousing Corporation [1976] 104 ITR 1, the Gujarat High Court pointed out that in Aluminium Corporatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. For the reasons stated by the Gujarat High Court in CIT v. Gujarat state Warehousing Corporation [1976] 104 ITR 1 and for the reasons which we have hereinabove set out, we hold that there is no question of setting off carried forward business losses against the current year's revenue income (revenue income being defined in the manner as defined above). First, computation of current year's income must be made in accordance with the provisions of ss. 30 to 43A. Section 32(1) is one of those sections and it is only s. 32(2) which yields place to s. 72(2) and not s. 32(1), and that being the case, in computing current year's income, current year's depreciation must first be allowed and thereafter the business losses carried forward from the previous year. We respectfully disagree with the conclusion of the Allahabad High Court in Mother India Refrigeration Industries' case [1971] 80 ITR 510. Under these circumstances, we answer the question ..... X X X X Extracts X X X X X X X X Extracts X X X X
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