V.G Oak, C.J:— This is a reference under section 66 of the Indian Income-tax Act, 1922, hereafter referred to as the Act. The assessee is a limited company. The assessment years are 1951-52 and 1952-53.

2. After the assessment year 1950-51, there was an unabsorbed loss of Rs. 67,534 and unabsorbed depreciation of Rs. 1,78,154. In the assessment year 1951-52 the business income before making any deductions amounted to Rs. 50,624. The Income-tax Officer adjusted the current depreciation amounting to Rs. 58,140 as against the business income amounting to Rs. 50,624. It was ordered that the balance of depreciation amounting to Rs. 7,516 should be carried forward. The result was that the total unabsorbed depreciation carried forward amounted to Rs. 1,85,670. It was further decided that the entire unabsorbed loss amounting to Rs. 67,534 should be carried forward. At the time of assessment for 1952-53 the business income was found to be Rs. 64,232. Depreciation allowance for that year amounted to Rs. 44,580. The Income-tax Officer adjusted the current depreciation against the business income of the assessee. The net income came to Rs. 19,652. That net income was again adjusted against the unabsorbed business loss amounting to Rs. 67,534. There were thus a balance of unabsorbed loss to the extent of Rs. 47,832 and unabsorbed depreciation amounting to Rs. 1,85,670. These unabsorbed amounts under the two heads were carried forward.

3. In appeal the Appellate Assistant Commissioner directed that for both the assessment years business loss which had been brought forward should be adjusted before allowing depreciation for those years. When the matter went before the Appellate Tribunal, Allahabad, the Tribunal decided that the manner of adjustment by the Appellate Assistant Commissioner was incorrect. Departmental appeals for the two assessment years were therefore allowed by the Tribunal.

4. At the instance of the assessee, the following question of law has been referred by the Tribunal to this court:

“Whether, for the assessment years 1951-52 and 1952-53, the assessee was entitled to deduct the unabsorbed business loss at the end of the assessment year 1950-51 before setting off the depreciation allowance of Rs. 58,140 and Rs. 44,580 respectively for these years?”

5. It will be seen that the problem raised in this reference is that of priority between unabsorbed loss and current depreciation. According to the department, current depreciation has to be deducted from the business income for any assessment year before considering unabsorbed loss. On the other hand, the assessee has urged that unabsorbed business loss must be adjusted before considering the current depreciation allowance.

6. The answer to the question depends upon a proper interpretation of sections 10 and 24 of the Act. According to sub-section (2) of section 10, an assessee is entitled to certain allowances by way of deduction from business income. Clause (vi) of sub-section (2) deals with allowance for depreciation. Proviso (b) to section 10(2)(vi) states:

“Where in the assessment of the assessee…. owing to there being no profits or gains chargeable for that year or owing to profits or gains chargeable being less than the allowance, then, subject to the provisions of clause (b) of the proviso to Sub-section (2) of section 24, 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 year and deemed to be part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeeding years.”

7. Two points may be noted about this provision. Firstly, unabsorbed depreciation allowance is to be carried forward to the succeeding year. Secondly, after such transfer the depreciation allowance for the earlier year is to be deemed to be part of the allowance for the succeeding year.

8. Section 24 provides for set off of loss in computing aggregate income. Sub-section (1) of section 24 provides for set off of loss of profits or gains under one head against profits or gains under any other head in the same year. Sub-section (2) of section 24 states:

“Where any assessee sustains a loss of profits or gains in any year…. in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (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…

9. Proviso (b) to sub-section (2) states:

“Where depreciation allowance is, under clause (b) of the proviso to clause (vi) of sub-section (2) of section 10, also to be carried forward, effect shall first be given to the provisions of this sub-section.”

10. Learned counsel for the assessee placed strong reliance upon proviso (b) to Sub-section (2) of section 24. Dr. Misra appearing for the department contended that in the present case the assessee cannot raise the question of unabsorbed depreciation, because the two items mentioned in the question before the court relate to current depreciation and not unabsorbed depreciation. It is true that the two sums mentioned in the question relate to current depreciation. But we cannot overlook the fact that in the present case there were also items of unabsorbed depreciation. We are not answering any abstract question of law. The question before us is whether, in the circumstances of the case, the assessed is entitled to claim priority for unabsorbed business loss over depreciation allowance for the current year. The assessee is therefore entitled to rely on the facts of the case in support of its contention.

11. In Commissioner Of Income-Tax, Bombay City I v. Ravi Industries Ltd. [1963] 49 I.T.R 145 Bom. the question before the Bombay High Court was whether certain unabsorbed depreciation allowance could be set off against income under other heads. The question was answered in the affirmative. On page 150, it was observed:

“…… availability of the carried forward depreciation for setting off against the gains of the business of the following year will be postponed to the first absorption of the carried forward losses of the business from earlier years, if there are any. Except for this qualification the unabsorbed depreciation added to the current year's depreciation has the same character and colour as the current depreciation for the following year.”

12. It was further observed at page 155:

“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.”

13. In that case the question of priority of unabsorbed loss did not directly arise.

14. The Tribunal has relied on the decision of the Calcutta High Court in Aliminium Corporation of India Ltd. v. Commissioner of Income-tax [1958] 33 I.T.R 367 Cal... The assessee-company showed a profit of Rs. 9 lakhs and odd. The company was entitled to a depreciation allowance amounting to Rs. 12 lakhs and odd. There was also an amount of Rs. 27,000 being the loss carried forward from earlier years. The Income-tax Officer set off the depreciation allowance against the profits and directed the amounts of unabsorbed depreciation and loss carried forward from earlier years to be carried over to the next year separately. It was held that the procedure adopted by the Income-tax Officer was correct. It was observed at page 376:

“…… no question of a priority as between the setting off of the depreciation allowance for the current year and the carried over loss of earlier years can ever arise.”

15. That observation no doubt lends support to the stand taken by the department. It may, however, be pointed out that in that case there was no question of unabsorbed depreciation. The Income-tax Officer merely set off current depreciation against the gross profit for a certain year. The combined effect of sections 10 and 24 of the Act came up for discussion before the Supreme Court in Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd. Their Lordships of the Supreme Court observed at page 561 thus:

“The unabsorbed depreciation allowance is carried forward under pro viso (b) to section 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 of that allowance; the effect of deeming it to be part of that allowance is that 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.”

16. In that passage the Supreme Court recognised the broad principle that in the matter of carry forward, business losses should receive priority ov???r depreciation allowance. Dr. Misra conceded that by virtue of proviso (b) to Sub-section (2) of section 24, business losses have to be given priority over unabsorbed depreciation allowance. We have seen that under proviso (b) to section 10(2)(vi), depreciation allowance which is carried forward merges into depreciation allowance for the succeeding year. After such merger, the unabsorbed depreciation allowance is to be deemed to be direct allowance for the current year. If business losses have to be given priority over unabsorbed depreciation allowance, there is no good reason why depreciation (sic) losses which have been brought forward should not receive priority over current depreciation allowance. The procedure adopted by the Appellate Assistant Commissioner in this respect appears to be correct.

17. We, therefore, answer the question referred to the court in the affirmative, and in favour of the assessee. The Commissioner of Income-tax, U.P, shall pay the assessee Rs. 200 as costs of this reference.