Commissioner Of Income-Tax v. Virmani Industries (P.) Ltd.

Gulati, J.:— The assessee is a private limited company. Up to the previous year, relevant to the assessment year 1956-57, the assessee was carrying on a business of manufacture of soap and oil. This business was stopped in 1955. The factory thereafter used to be let out on hire. In the previous year, relevant to the assessment year 1965-66, which is the year in dispute the assessee started a business of manufacture of steel pipes and a part of the old machinery used for the manufacture of soap and oil was utilised in the new business. In the year 1956-57, which was the last year of the business of manufacture of soap and oil, the Income-tax Officer had worked out depreciation, which could not be fully set off against the profits, and, as such, a part of the depreciation was left unabsorbed. In the assessment year in dispute the assessee claimed that the unabsorbed depreciation to the extent that it pertained to the old machinery utilised in the new business should be brought forward and set off against the profits of the new business. This claim of the assessee was turned down by the Income-tax Officer as well as by the Appellate Assistant Commissioner of Income-tax on the ground that unabsorbed depreciation could be allowed to be set off only if the old business to which it pertained had continued in existence in the assessment year under consideration. The Income-tax Appellate Tribunal on a second appeal has reversed this finding and has upheld the claim of the assessee. The Commissioner of Income-tax is aggrieved and at his instance the Tribunal has referred the following question for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the un-absorbed depreciation in respect of a part of the machinery used in the soap and oil manufacturing business which was again used for the new business of manufacture of steel pipes should be allowed to be set off against the profits of the new business of manufacture of steel pipes carried on by the assessee in the accounting period relevant to the assessment year 1965-66?”

2. Section 28 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), provides for the levy of tax on profits and gains of a business. Such profits have to be computed in accordance with the provisions contained in sections 30 to 43 of the Act (section 29). Section 32 provides for an allowance on account of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business (section 32(1) (ii)). Sub-section (2) of section 32 provides for carryforward of unabsorbed depreciation. That provision is material and reads:

“32. (2) Where, in the assessment of the assessee (or, if the assessee is a 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 clause (i) or clause (ii) or clause (iv) or clause (v) of subsection (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 subsection (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, 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.”

3. In plain language section 32 means that in the computation of net income arising from a business, deduction is to be allowed, on account of depreciation of buildings, plant and machinery, etc, used in the business at the prescribed rate. If such depreciation allowance cannot be completely absorbed by the “profits and gains chargeable to tax”, which expression includes profits and gains arising not only under the head “Business” but also under “other heads”, then the unabsorbed depreciation is treated to be the depreciation allowance for the next year and so on until it is completely wiped out.

4. There are similar provisions for set-off and carry-forward of losses. These provisions are to be found in sections 71 and 72 of the Act. Under section 71 of the Act, loss under one head (except the capital gains) is set off against income under any other head. Section 72 provides for the carryforward of unabsorbed loss arising under the head “Profits and gains of a business or profession”. Section 72(1) provides that if such loss cannot be set off against income under other heads, then the balance of the loss not so set off, shall be carried forward and set off against the profits and gains of the business of the next assessment year. However, there are two conditions for the carry-forward of loss:

“(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year:

Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year; and

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on:”

5. It would at once be clear that there is a difference between the carried-forward loss and carried-forward depreciation allowance. In the case of a carried-forward loss, it can be set off against the profits of a business of the succeeding year provided the business for which the loss was originally computed continued to be carried on in the succeeding year. There is no such requirement so far as the carried-forward depreciation allowance is concerned. It is not necessary that the business in respect of which the depreciation allowance was originally worked out should remain in existence in the succeeding year nor is it necessary that the business assets to which the depreciation pertains must be used in the business carried on in the succeeding year. All that is necessary is that an assessee must carry on some business in the succeeding year in which the set off of the unabsorbed depreciation is claimed. That is so, because a depreciation allowance is essentially a deduction allowable out of the gross profits of a business. If there is no business there can be no depreciation allowance. It is also not necessary that the business in the succeeding year must have some depreciable assets so that even if there is no depreciation allowance available to the assessee in the succeeding year, by fiction, the unabsorbed carried-forward depreciation of the earlier year shall be deemed to be the depreciation allowance of the succeeding year and shall be an allowable deduction out of the business profits. The other distinction is that while the unabsorbed loss can be carried-forward only for eight years, there is no time limit for the carry-forward of the unabsorbed depreciation. That is why section 72(2) provides that where unabsorbed depreciation and business loss are both to be carried forward, effect shall first be given to the business loss.

6. Now, in the instant case, after the assessment year 1955-56, the assessee did not carry on any business. It derived income by letting on hire the plant and machinery, etc., and this income was taxable under the head “Income from other sources”. So the unabsorbed depreciation could not be carried forward and set off against the income from other sources. In the assessment year in question the assessee started a business; hence the unabsorbed depreciation could be brought forward and allowed as a deduction in the computation of the business income.

7. The learned counsel for the department contends that since the assessee had discontinued its original business of manufacture of soap and oil in respect of which the unabsorbed depreciation had been computed, the same could not be allowed to be set off against the profits of the new business of the manufacture of steel and pipes. According to him, unabsorbed depreciation can be carried forward and set off only against the profits of the same business. For this proposition he places reliance upon a decision of the Bombay High Court in the case of Sahu Rubbers Private Ltd. v. Commissioner of Income-tax [1963] 48 I.T.R 464 Bom... In that case the Bombay High Court had to interpret the corresponding provision for the carried forward unabsorbed depreciation in the Indian Income-tax Act, 1922. In that case it was held that in order to claim adjustment in the subsequent year in respect of the unabsorbed depreciation of earlier year, the assessee must establish that the business in respect of which it was allowed, continued in the previous year relevant to the assessment year. That case fully supports the stand taken by the department, but, with respect, we are unable to agree with the view of the Bombay High Court, which is contrary to the plain language of section 32(2) of the Act. The Tribunal had tried to distinguish the Bombay High Court decision on the ground that while in the instant case a part of the machinery used in the old business was utilised in the new business, such was not the position in the case before the Bombay High Court. This distinction is not valid. We have already pointed out that for the purposes of section 32(2), it is not necessary either that the same business should be carried on in the succeeding year or that the depreciable assets of the original business should be utilised in the new business. So long as an assessee carries on some business in the year in which the set off is claimed, the unabsorbed depreciation by fiction becomes the depreciation allowance of that year even if that business has no depreciable assets. It is a well-known rule of interpretation of statutes that a legal fiction has to be carried to its logical conclusion by imagining, if necessary, something to exist which, in fact, does not exist. The view that we have taken finds support from the decision of the Supreme Court in the case of Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd. where their Lordships of the Supreme Court have drawn a distinction between the carried-forward losses and carried-forward depreciation allowance.

8. For the reasons stated above, we answer the question in the affirmative, in favour of the assessee and against the department. The assessee is entitled to costs, which we assess at Rs. 200.

Question answered in the affirmative.