Citation Codes

Equivalent Citations

citation codes

Case Number

Case Referred No. 71 of 1975

Judges

B.J Divan, C.J
Chennakesav Reddy, J.

Acts

sub- Section (1), Sub-section (2), Sub-section (2A), Sub-section (3) or Sub-section (4)
provisions of Sub-section (2) of Section 72 and Subsection (3) of Section 73,
Clause (i) or Clause (ii) or Clause (iv) or Clause (v) of Sub-section (1)
Section 32(2) subject to the provisions of Section 41(5)
Section 10(2)(vi) of the Indian Income-tax Act, 1922,
provisions of Section 72(2) and Section 73(3)
Section 41(2) the benefit of Section 32(2)
Section 32(2) of the Income-tax Act, 1961.
Section 41(2) of the Income-tax Act, 1961,
Section 41(5) of the Income-tax Act, 1961,
provisions of Sections 32(2) and 41(2).
INCOME TAX ACT
Sub-section (2) of Section 32
provisions of Section 41(5),
provision of Section 41(2).

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Smart Summary

Summary of the Opinion (Divan, C.J.)

Factual and Procedural Background

The question for opinion was referred by the Appellate Tribunal at the instance of the revenue:

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to have the unabsorbed depreciation set off against the income computed for the assessment year 1967-68?"

The assessee is a private limited company operating an oil mill (previously at Jammikunta, later at Warangal). The company sold building, machinery and other assets on 22 October 1965 to M/s Adilabad Cotton Co. Private Ltd.; title to the immovable property was transferred on 19 February 1966, but the transfer document was registered only in October 1970. The previous year relevant to assessment year 1967-68 ended on 12 November 1966.

For that accounting year the assessee originally filed a return on 31 October 1967 declaring income of Rs. 6,213 and later filed a revised return on 2 September 1970 declaring income of Rs. 9,466. The Income-tax Officer, by order dated 25 February 1971, held that since the assessee had ceased doing business before the beginning of the previous year and the assets were sold on 22 October 1965, the income originally returned under the head "Business" should be treated under the head "Other sources" and computed profit under Section 41(2) at Rs. 43,496.

The Income-tax Officer rejected the assessee's claim to set off unabsorbed depreciation (amounting to Rs. 36,159 from 1957-58 to 1959-60 and Rs. 229 for assessment year 1962-63) on the ground that allowing depreciation under Section 32(2) required carrying on the business, which the assessee had ceased.

The assessee appealed to the Appellate Assistant Commissioner, who, relying on the Supreme Court decision in Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd., allowed set off of the unabsorbed depreciation (subject to verification). The department appealed to the Appellate Tribunal which dismissed the appeal, again rejecting the revenue's reliance on Section 41(5). The revenue then referred the question to this Court for opinion.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the assessee is entitled to have the unabsorbed depreciation set off against the income computed for the assessment year 1967-68?

Arguments of the Parties

Appellant (Revenue)'s Arguments

Reliance on Section 41(5) of the Income-tax Act, 1961: since the unabsorbed depreciation was not a past loss but a loss in the previous year in which the business ceased to exist, it cannot be set off against the income deemed under Section 41(2).
Reliance on the Bombay High Court's observations in Sahu Rubbers Private Ltd. v. Commissioner of Income-tax: to claim adjustment in a subsequent assessment year of unabsorbed depreciation from an earlier year, the assessee must establish that the business in respect of which depreciation was allowed continued in the previous year relevant to that assessment year; if that business no longer exists, unabsorbed depreciation cannot be adjusted in future years in respect of a different business.

Respondent (Assessee)'s Arguments

The unabsorbed depreciation aggregating Rs. 36,388 from earlier years related to the business whose assets were sold; when profit is computed by virtue of the deeming fiction under Section 41(2), unabsorbed depreciation under Section 32(2) must be given effect and set off.
Relied on the Supreme Court decision in Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd. to support this position; the Appellate Assistant Commissioner accepted this contention and directed set off subject to verification.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd. (Supreme Court)	Supporting the proposition that unabsorbed depreciation must be given effect when profit is computed under the deeming fiction; used to allow set off.	The Appellate Assistant Commissioner and the Tribunal relied upon this Supreme Court decision; the Court treated it as supporting the assessee's entitlement to set off.
Commissioner of Income-tax v. Rampur Timber & Turnery Co. Ltd. (Allahabad High Court)	Interpreted the interplay of provisions so as to arrive at the same conclusion as this Court (i.e., supporting allowance of unabsorbed depreciation under the deeming fiction).	The Court noted that the Allahabad High Court had come to the same conclusion as drawn here regarding giving effect to the deeming fiction in Section 32(2).
Commissioner of Income-tax v. Virmani Industries (P.) Ltd. (Allahabad High Court)	Similarly concluded in line with the principle that unabsorbed depreciation must be given effect under the deeming fiction.	The Court cited this decision as another instance where the same conclusion was reached by the Allahabad High Court.
Commissioner of Income-tax v. Ram Industries Ltd. (Bombay High Court) [1963] 49 ITR 145 (Bom)	Explained that depreciation allowance is first applied to income of the business where allowed; excess is available against other business incomes or other heads, carried forward and added to next year's depreciation, with carried forward losses absorbing profits first where applicable.	The Court quoted and relied on this exposition to support the rule that unabsorbed depreciation of past years must be added to current year's depreciation and deducted from total income.
Sahu Rubbers Private Ltd. v. Commissioner of Income-tax (Bombay High Court) [1963] 48 ITR 464 (Bom)	Held that to claim adjustment of unabsorbed depreciation in a later assessment year the assessee must establish that the business in respect of which depreciation was allowed continued in the previous year; if that business no longer exists, unabsorbed depreciation cannot be adjusted in future years in respect of a different business.	The revenue relied on observations in this case; the Court discussed this authority but concluded that the deeming fiction in Section 32(2) (and subsequent jurisprudence and Jaipuria) leads to a contrary effect in the present context.
Root Industries' case [1963] 49 ITR 145 (Bom)	Explained effect of the deeming fiction formerly in Section 10(2)(vi) (now Section 32(2)) and its application after the Supreme Court decision in Jaipuria.	The Court treated the Bombay High Court's exposition in Root Industries' case as correctly explaining that unabsorbed depreciation of past years must be added to current year's depreciation for deduction.

Court's Reasoning and Analysis

The Court began by identifying the key statutory provisions: Section 41(2) (and its Explanation) and Section 32(2) of the Income-tax Act, 1961.

Section 41(2) creates a deeming fiction: where assets used in a business are sold and the moneys payable exceed written down value, that excess is chargeable to tax as income of the business of the previous year in which the moneys became due. The Explanation to Section 41(2) stipulates that if the moneys become due in a previous year in which the business is no longer in existence, the sub-section applies as if the business were in existence in that previous year.

Section 32(2) also contains a deeming fiction: where an allowance for depreciation could not be fully given effect to in a previous year because profits were insufficient or nil, the unallowed part is to be added to the allowance for the following previous year and deemed to be part of that allowance, and so on.

The Court analyzed the interplay between these two deeming fictions. It observed that the deeming fiction under Section 32(2) is expressly made subject only to the provisions of Section 72(2) and Section 73(3), and not to Section 41(5) or any other provision. Consequently, the fiction in Section 32(2) is not, at least by express text, subordinated to Section 41(5).

Given that Section 41(2) (by its Explanation) deems the business to continue for the year in which the proceeds became due, the correct approach is to compute the profit under Section 41(2) and then determine whether the benefit of Section 32(2) (i.e., carry-forward and adjustment of unabsorbed depreciation) is available. Because the legislature did not make the deeming fiction under Section 32(2) subject to Section 41(5), full effect must be given to the deeming fiction of Section 32(2) when working out the profit under Section 41(2).

The Court further supported its textual analysis with prior judicial decisions: it noted that the Allahabad High Court and the Bombay High Court (in the Ram/Root Industries exposition) had reached conclusions consistent with giving effect to unabsorbed depreciation under the deeming fiction. Although the revenue relied on Sahu Rubbers (Bombay High Court) for a contrary proposition, the Court concluded that the combined effect of Section 32(2), Section 41(2) (and its Explanation), and the Supreme Court decision in Jaipuria point to allowing the unabsorbed depreciation to be set off against income computed under Section 41(2).

On that basis the Court held that the Tribunal was correct in allowing set off of unabsorbed depreciation against the income computed under Section 41(2) for assessment year 1967-68.

Holding and Implications

Holding: The question is answered in the affirmative in favour of the assessee and against the revenue. The assessee is entitled to have the unabsorbed depreciation set off against the income computed for the assessment year 1967-68 (including income computed under Section 41(2)).

Implications:

The Tribunal's and the Appellate Assistant Commissioner's decisions allowing set off of unabsorbed depreciation were upheld.
The Court ordered that the Commissioner of Income-tax pay the costs of this reference to the assessee; advocate's fee Rs. 250.
No broader novel precedent was proclaimed beyond the application of existing deeming provisions (Sections 32(2) and 41(2)) as interpreted with reference to the cited authorities; the decision's direct effect is to allow the assessee the set off in this case.

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Commissioner Of Income-Tax, A.P v. Warangal Industries Pvt. Ltd.

Divan, C.J.

1. In this case, at the instance of the revenue, the following question has been referred to us for our opinion by the Appellate Tribunal:

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to have the unabsorbed depreciation set off against the income computed for the assessment year 1967-68 ?"

2. In the instant case, we are concerned with the assessment year 1967-68. The assessee is a private limited company. It was running an oil mill at Warangal and earlier at Jammikunta. The assessee-company sold the building, machinery, etc., on October 22, 1965, to M/s. Adilabad Cotton Co. Private Ltd. and the title to the immovable property was transferred on February 19, 1966, but the document of transfer was registered in October, 1970. The previous year relevant to the assessment year 1967-68 ended on November 12, 1966. For that accounting year, the assessee originally returned an income of Rs. 6,213 by Its return filed on October 31, 1967. Subsequently, a revised return was filed on September 2, 1970, declaring an income of Rs. 9,466. By his order dated February 25, 1971, the Income-

tax Officer observed That since the assessee had ceased doing business before the beginning of the previous year relevant to the assessment year under consideration and the plant, machinery, building, etc., were sold on October 22, 1965, the assessee did not carry on any business and the income of Rs. 6,213 returned by the assessee under the head "Business" should be considered under the head "Other sources". The Income-tax Officer computed the profit under Section 41(2) of the Income-tax Act, 1961, at Rs. 43,496. He refected the claim of the assessee in regard to the unabsorbed depreciation on the ground that there was unabsorbed depreciation pertaining to the years 1957-58 to 1959-60 and it amounted to Rs. 36,159 and that there was unabsorbed depreciation of Rs. 229 pertaining to the assessment year 1962-63. These two items of unabsorbed depreciation remained to be adjusted under Section 32(2). According to the Income-tax Officer, since the condition precedent to allowing depreciation allowance under Section 32(2) was carrying on the business and the assessee had stopped the business prior to the beginning of the previous year, a deduction was not allowed. The assessee appealed to the Appellate Assistant Commissioner and contended before him that there was unabsorbed depreciation aggregating to Rs, 36,388 from the earlier years and this depreciation was in respect of the business which had ceased to exist when the assets were sold and the contention was that when profit was being computed by virtue of the deeming fiction under Section 41(2), unabsorbed depreciation under Section 32(2) has to be given effect. The Appellate Assistant Commissioner accepted the assessee's contention in the light of the decision of the Supreme Court in Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd. . He directed the Income-tax Officer to give set off of the unabsorbed depreciation subject to verification of the actual amounts thereof.

3. Against the decision of the Appellate Assistant Commissioner, the department took the matter in appeal before the Appellate Tribunal and at that stage, reliance was placed on Section 41(5) of the Income-tax Act, 1961, and it was contended that since the unabsorbed depreciation was not any loss that was incurred in the past, but was only a loss incurred in the previous year in which the business ceased to exist, that cannot be set off. This argument was rejected by the Tribunal and relying upon the decision of the Supreme Court in Jaipuria China Clay Mines (P.) Ltd.'s case , the Tribunal dismissed the appeal, and, thereafter, at the instance of the revenue, the question hereinabove set out has been referred to us for our opinion.

4. The clue to the solution of the question that has been referred to us is in the provision of Section 41(2). Under that sub-section :

Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value Shall be chargeable to income-tax as income of the business or profession. of the previous year in which the moneys payable for the building, machinery, plant or furniture became due.

5. Under the Explanation to Section 41(2) where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year. It is obvious, therefore, that by virtue of the Explanation to Section 41(2) a deeming fiction is created and by virtue of that deeming fiction, the business which is no longer in existence is for the purposes of Section 41(2) deemed to be in existence in the previous year .in the course of which the machinery, plant or furniture in respect of which depreciation has been allowed in earlier years is sold, discarded, demolished or destroyed. There is another deeming fiction which is to be found in Section 32(2) of the Income-tax Act, 1961. Under that sub-section.

"Where, in the assessment of the assessee....full effect cannot be given to any allowance under Clause (i) or Clause (ii) or Clause (iv) or Clause (v) of Sub-section (1) or under clause (i) of sub-section (1a) 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-section (2) of Section 72 and Subsection (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."

6. It is obvious that the deeming fiction created by Sub-section (2) of Section 32 is only subject to the provisions of Section 72(2) and Section 73(3) and is not subject to any other provisions of the Income-tax Act. It is, therefore, clear that the fiction created under Section 32(2) is not subject at any rate to Section 41(5). The sole reliance which has been placed before us on behalf of the revenue is on Section 41(5), That sub-section provides :

"Where the business or profession referred to in this section is no longer in existence and there is income chargeable to tax under sub-

Section (1), Sub-section (2), Sub-section (2A), Sub-section (3) or Sub-section (4) in respect of that business or profession, any loss, not being a loss sustained in speculation business or under the head 'capital gains', which arose in.

that business or profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year shall, so far as may be, be set off against the income chargeable to tax under the sub-sections aforesaid."

7. Really speaking, Section 41(5), as Mr. Dasaratharama Reddy for the assessee rightly points out, is meant for the benefit of the assessee and for seeing to it that he has the benefit of the deeming fiction under Section 41(2). The business is deemed to have continued, though it has ceased to exist. For purposes of making assessment under Section 41(2), loss incurred in that previous, year or in which profit is deemed to have occurred shall also be taken into consideration provided of course it is not a loss due to speculative business or is not a capital gain. Therefore, so far as the proper approach to this problem is concerned, one must find out as to what is the exact amount of profit under Section 41(2) and in respect of which year and whether if the business has been in existence by virtue of the fiction under Section 41(2) the benefit of Section 32(2) would be available so far as the unabsorbed depreciation is concerned. Since the legislature itself has not made the deeming fiction under Section 32(2) subject to the provisions of Section 41(5) or any other section, it is obvious that in working out the due profit under Section 41(2), full effect must be given to the deeming fiction arising under Section 32(2) as well. This is purely from a bare reading of the provisions of Sections 32(2) and 41(2). We find that the Allahabad High Court had also come to the same conclusion in Commissioner of Income-tax v. Rampur Timber & Turnery Co. Ltd. and Commissioner of Income-tax v. Virmani Industries (P.) Ltd. . The Bombay High Court in Commissioner of Income-tax v. Ram Industries Ltd. [1963] 49 ITR 145 (Bom) has also held:

"Depreciation allowance permitted under Section 10(2)(vi) is available in the first place in the computation of the income of the business in which the depreciation is allowed, and is adjusted against the profits and gains of that business. If the depreciation allowance is larger than the profits or gains in that business, so that an excess remains after the profits and gains are absorbed, such excess comes under Section 10(1) for absorption of the profits, and gains of other businesses, if any, carried on by the assessee.

If a balance of the depreciation allowance is left even thereafter, that balance is available for set-off against the assessee's income from any other head during that year. If there is still a balance left over it is taken to the following year and if there is current depreciation for the following year it is added on to that current depreciation and is deemed to be a part of it.

The balance carried forward to the following year is available for adjustment in the same manner as the current depreciation for that year except in the case where there are also carried forward losses of the earlier years, in which case the carried forward losses are first absorbed against the profits and gains of the business before the carried forward part of the depreciation allowance is adjusted."

8. It is clear that so far as the unabsorbed depreciation from the previous years is concerned it is allowable from any income from any source whatsoever in the subsequent years of account and that principle being clear, it is obvious that, notwithstanding the provisions of Section 41(5), full effect must be given to the deeming fiction under Section 32(2). Mr. Rama Rao for the revenue relied on certain observations of the Bombay High Court in Sahu Rubbers Private Ltd. v. Commissioner of Income-tax [1963] 48 ITR 464 (Bom). In that case it was held that in order to claim adjustment in the assessment year of unabsorbed depreciation of an 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, and if that business is no more in existence, unabsorbed depreciation cannot thereafter be adjusted in the assessment of future years in respect of a different business. But the effect of the deeming fiction now embodied in Section 32(2) which was formerly embodied in Section 10(2)(vi) of the Indian Income-tax Act, 1922, has been, in our opinion, correctly explained by the Bombay High Court itself in Root Industries' case [1963] 49 ITR 145 (Bom) particularly after the decision of the Supreme Court in Commissioner of Income" tax v. Jaipuria China Clay Mines (P.) Ltd. . It is clear that the unabsorbed depreciation of past years has to be added to the depreciation of the current year and the aggregate unabsorbed and current year's depreciation has to be deducted from the total income of the previous years.

9. In view of this discussion, it is clear that the Tribunal was right in holding that the assessee was entitled to have the unabsorbed depreciation set off against the income computed even though it might be income under Section 41(2) so far as the assessment year 1967-68 is concerned.

10. Under these circumstances, we answer the question referred to us in the affirmative, that is, in favour of the assessee and against the revenue. The Commissioner of Income-tax will pay the costs of this reference to the assessee. Advocate's fee Rs. 250.

Commissioner Of Income-Tax, A.P v. Warangal Industries Pvt. Ltd.

Summary of the Opinion (Divan, C.J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant (Revenue)'s Arguments

Respondent (Assessee)'s Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax, A.P v. Warangal Industries Pvt. Ltd.

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