1. During the calendar year 1965 being the "previous year" for the assessment year 1966-67, the assessee filed a return declaring a loss of Rs. 99,973. While computing the loss, the assessee claimed depreciation of Rs. 13,427 on its assets. In addition to this claim, the assessee claimed set off of unabsorbed depreciation of Rs. 2,77,924 of the previous year against the total income for the assessment year 1966-67.

2. The assessee was formerly doing business in manufacture and sale of starch products. The machinery employed was sold away in 1964 to a concern known as Lakshmi Starch Factory.

3. The ITO disallowed Rs. 13,427 and negatived the claim for set off of the unabsorbed depreciation of the preceding years and made the following additions and assessed the same under the hear

"Business"

(i) Rs. 17,846. - Sums forfeited by the assessee as profit under section 41 (1).

(ii) Rs. 4,161. - Being the amount due to one Parameswaran, during the course of the business but not paid.

(iii) Rs. 5,8881. - Being the interest received from M/s. Lakshmi Starch Factory for the delayed payment of sale proceeds of the factory sold by the assessee in 1964.

4. The ITO computed the income of the assessee at Rs. 42,259 and demanded tax of Rs. 23,263.

The assessee preferred an appeal to the Appellate Assistant Commissioner, Special Range, Hyderabad. The AAC deleted the addition of Rs. 17,846 and allowed the interest of Rs. 5,881 received from Lakshmi Starch Factory as a deduction against the interest payments made by the assessee. He also allowed the claim of the assessee regarding the unabsorbed depreciation. As against the said order of the AAC, the department preferred an appeal questioning the decision of the AAC deleting the addition of Rs. 17,946 and Rs. 5,881 and also against the decision of the AAC holding that the unabsorbed depreciation should be added to the current depreciation and set off against the business income of the assessee. The assessee preferred an appeal to the Appellate Tribunal, against the finding of the AAC, in the matter of the depreciation allowance.

5. The Income-tax Appellate Tribunal passed a common order in the two appeals preferred by the department and the assessee. It upheld the department's contention regarding the unabsorbed depreciation. It negatived the contention of the assessee that the sum of Rs. 17,846 representing the security deposits which were forfeited was not assessable as the income of the assessee. The Appellate Tribunal held that they were in the nature of trading receipts of the assessee in which the appropriate was made.

6. The Tribunal referred the following questions for the opinion of the High Court :

"1. Whether, on the facts and in the circumstances of the case, the unabsorbed depreciation of Rs. 2,77,924 carried forward from the preceding assessment year and the depreciation of Rs. 13,427 claimed in the assessment year 1966-67 in respect of the starch factory can be set off against other business income computed for the assessment year 1966-67 ?

2. Whether, on the facts and in the circumstances of the case, the security deposits received from sub-contractors which were forfeited in the year of account relevant to the assessment year 1966-67 can be assessed as trading receipts in the assessment for that year ?"

7. It is seen that the first question referred consists of two parts, the first part relating to the unabsorbed depreciation carried forward from the preceding assessment years and the second relating to the depreciation of Rs. 13,427 claimed in the assessment year.

8. As far as the second part is concerned, under s. 32 (1) of the I. T. Act, depreciation is allowed in respect of machinery used for the purposes of the business or profession. It was found as a fact by the AAC that the appellant did not carry on any business or use any assets of the business during the previous year. This finding was not questioned in appeal. In view of the finding of fact given by the Tribunal below, it has to be taken that the appellant did not carry on any business or use any of the assets of the business in the relevant year. Hence the claim of the assessee for depreciation for the assessment year of Rs. 13,427 was rightly disallowed. The learned counsel for the assessee also very fairly conceded that the decision of the Tribunal was right on this aspect.

9. We now turn to the first part of the first question which deals with unabsorbed depreciation for the previous years. The Tribunal was of the view that the unabsorbed depreciation has to be given the same treatment as was given to the depreciation for the current year as the question of deducting the depreciation allowance from the present year will arise only if the business, to which the depreciation allowance relates, was carried on, and it follows that the unabsorbed depreciation also cannot be allowed. The Tribunal observed that the starch factory to which the unabsorbed depreciation relates was sold away in the preceding year of account itself. The question of setting off of the unabsorbed depreciation allowance against the income under the other heads of income from other business would not arise. The Tribunal, therefore, rejected the assessee's contention and upheld the department's plea and held that the assessee was not entitled to set off the unabsorbed depreciation against income from business or against income under any other head.

10. In this reference, before us Sri Y. V. Anjaneyulu, the learned counsel for the assessee, has submitted that the decision of the tribunal in regard to the question of set off of the unabsorbed depreciation is not correct. We consider that this contention has to be accepted and the first part of the first question has to be answered in favour of the assessee in view of the clear terms of s. 32 (2) of the I. T. Act and the abundance of authority in support of his contention.

11. Section 32 (2) is in the following terms :

"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) or clause (vi) 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 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."

12. It is seen from this section that the unabsorbed depreciation for the previous years has to be added to the amount of the allowance for depreciation for the following previous year or if there is no such allowance, must be deemed to be the allowance for the previous year and so on for the succeeding previous years. The only condition required by s. 32 (2) is that the depreciation could not be given full effect to in the 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 that the depreciation. Section 32 (2) does not impose any other condition regarding continuance of the business or using of the assets. While under s. 32 (1) in respect of depreciation for the assessment year, it is expressly stated that it is in respect of machinery, etc., used for the purposes of the business or the profession, there is no such requirement under s. 32 (2).

13. In this connection, it will be useful to refer to s. 72 which deals with the carrying forward and set off of business losses. Under the proviso to s. 72 (1) (i), set off is allowed only on condition that the business or profession for which the loss was originally computed, continued to be carried on by him in the previous year relevant to the assessment year. In contrast to an express requirement regarding the continuance of the business or profession as a condition for set off of loss under s. 72 (1) (i), proviso, there is no such requirement in regard to unabsorbed depreciation under s. 32 (2). We, therefore, do no agree with the decision of the Tribunal that as the business was not continued and as the asset for which depreciation is claimed was not used as it was sold previous to the year of account, the unabsorbed depreciation could not be carried forward and set off.

14. In a series of decisions the above view has been taken by different High Courts including this court. In CIT v. Warangal Industries P. Ltd. , a Division Bench decision to which one of us was a party, the assessee which was a private limited company running an oil mill, sold its machinery on October 22, 1965, its accounting year being the year ending with Diwali and the concerned assessment year being 1967-68. The ITO held that the assessee did not carry on any business in the assessment year 1967-68 on the ground that the plant, machinery and building were sold on October22, 1965, and accordingly included the business income returned by the assessee under the hear "Other sources". He further computed the income under s. 41 (2) of the I. T. Act, 1961, rejecting the claim of the assessee in regard to the unabsorbed depreciation on the ground that it did not carry on business during the previous year. The same view was taken by the AAC and the Tribunal. This court held that by virtue of the Explanation to s. 41 (2) of the I. T. Act, a fiction is created and a business which is no longer in existence has to be treated as in existence during the previous year in the course of which the machinery was sold, discarded, demolished or destroyed; that in working out the profit under s. 41 (2), full effect must be given to the deeming fiction under s. 32 (2) as well; that the unabsorbed depreciation of the past year has to be added to the depreciation of the current year and the aggregate has to be deducted from the total income of the previous year and the assessee was entitled to have the unabsorbed depreciation set off against the income computed so far as the assessment year 1967-68 in concerned. It further pointed out 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. The learned judges followed the decisions of the Allahabad High Court in CIT v. Rampur TImber & Turnery Co. Ltd. [1973] 89 ITR 150, CIT v. Virmani Industries (P.) Ltd. [1974] 97 ITR 461 and also of the Bombay High Court in CIT v. Ravi Industries Ltd. [1963] 49 ITR 145. In a decision reported later, though it rendered a view different from its earlier one, in CIT v. Estate and Finance Ltd. [1978] 111 ITR 119, the Bombay High Court has also taken the same view. The learned judges observed that when enacting the provision regarding carry forward and set off of unabsorbed depreciation under s. 32 (2) of the I. T. Act, 1961, the Legislature could have imposed a condition that unabsorbed depreciation could be set off against the profits of a subsequent year only if the business in relation to which depreciation was allowed continued to exist in such year. The absence of such a restriction has to be construed in favour of the assessee. Hence, for the purpose of setting off unabsorbed depreciation carried forward from the previous year, it is not necessary that the business in respect of which the depreciation allowance was originally worked out should remain in existence in such a succeeding year.

15. The learned counsel for the revenue, Sri P. Rama Rao, however, relied upon a decision of the Madras High Court in CIT v. Dutt's Trust [1942] 10 ITR 477. Dealing with s. 10 (2) (vi) of the Indian I. T. Act, 1922, the learned judges held that s. 10 (2) (vi) could not be read as giving an assessee the right to deduct an allowance for depreciation in a business which had ceased to exist; that if the trustees had continued the cinema business they would certainly have been entitled to an allowance, but that business having ceased and the assets disposed of before the year of account, obviously they cannot ask for any allowance. Therefore, they answered the second question also in the negative.

16. In CIT v. Nagi Reddy [1964] 51 ITR 178 (Mad), it was observed by another Division Bench of the Madras High Court that the statute leads one to the irresistible conclusion that the depreciation allowance must be a charge only on the profits; that the limit of the charge is the limit of the profits; that the non-existence of the profits will prevent the absorption of the allowance; and that there is no warrant for taking in and absorbing the depreciation allowance in the profit and loss account to work out the loss.

17. The learned counsel for the revenue also drew our attention to an earlier decision of the Bombay High Court in Sahu Rubbers P. Ltd. v. CIT [1963] 48 ITR 464. In that case it was held the 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. The decision of the Bombay High Court in Sahu Rubbers Ltd. v. CIT [1963] 48 ITR 464 (Bom) was considered at length in CIT v. Estate and Finance Ltd. [1978] 111 ITR 119 (Bom), which has already been referred to earlier. It was observed that the said decision (Sahu Rubbers P. Ltd. v. CIT) does not constitute a binding authority on the interpretation to be placed by the court on the true meaning to be given to the statutory provision enacted in section 32 (2) of the Act of 1961 and that this provision was intended as a separate provision in the 1961 Act.

18. The learned judges were considering the proviso to s. 10(2) (vi) of the Indian I. T. Act of 1922, not as an independent substantive provision. On the other hand, they preferred to follow the decisions of the Allahabad High Court in CIT v. Rampur Timber & Turnery Co. Ltd. [1973] 89 ITR 150 and CIT v. Virmani Industries (P.) Ltd. [1974] 97 ITR 461. As far as the decision of the Madras High Court in CIT v. Dutt's Trust [1942] 10 ITR 477 is concerned, the learned judges were dealing with s. 7 as also s. 10 (2) (vi) of the Act of 1922. In CIT v. Nagi Reddy [1964] 51 ITR 178 (Mad) the same view was taken though no reference was made to the decision in CIT v. Dutt's Trust. Dealing with CIT v. Nagi Reddy, their Lordships of the Supreme Court Observed in CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555, that they were unable to agree with the view expressed in that case after extracting the passage which has already been referred to by us. Their Lordships observed (p. 561) :

"The unabsorbed depreciation allowance is carried forward under proviso (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."

19. We are inclined to prefer the view expressed by the Bombay High Court in CIT v. Estate and Finance Ltd. [1978] 111 ITR 119, of the Allahabad High Court in CIT v. Rampur Timber & Turnery Co. Ltd. [1973] 89 ITR 150 and CIT v. Virmani Industries (P.) Ltd. [1974] 97 ITR 461 and of this court in CIT v. Warangal Industries P. Ltd. [1977] 110 ITR 756, to the view expressed earlier by the Madras High Court in CIT v. Dutt's Trust [1942] 10 ITR 477 and of the Bombay High Court in Sahu Rubbers Ltd. v. CIT [1963] 48 ITR 464 on s. 10 (2) (vi) of the Indian I. T. Act, 1922. Therefore, we answer the first part of the first question in favour of the assessee.

20. Sri Anjaneyulu, learned counsel for the assessee, argues that the unabsorbed depreciation which is carried forward has to be set off not only against the business income but against the entire total income and has relied upon the decisions in CIT v. Ahmedabad Electricity Co. Ltd. [1973] 89 ITR 77 (Bom) and CIT v. Girdharlal Harivallabhadas Mills Co. Ltd. [1964] 51 ITR 693 (Guj). Though these decisions support his contention, unfortunately the question which has been referred to us is only whether the unabsorbed depreciation which has been carried forward can be set off against the business income. It is not, therefore, open to us in this reference to consider the question whether it can be set off against the total income or not. It is open to the assessee to urge the matter before the Tribunal after it is seized of this case of receiving our opinion on the reference.

21. Before leaving this part of the case, we may advert to the submission made by Sri Rama Rao, that the question referred to us is whether the unabsorbed depreciation carried forward from the preceding assessment year can be set off against other business income computed for the assessment year 1966-67, and the question assumes that depreciation can be carried forward, and the only question referred to us is whether such depreciation carried forward, can be set off. The question whether such unabsorbed depreciation allowance can be carried forward at all, is not referred to us and, therefore, it cannot be the subject-matter of opinion by us. We fail to see any substance in this submission. In our view, the question whether the unabsorbed depreciation can be carried forward. There can be no doubt that unless it is carried forward, it cannot be set off. Therefore, it becomes necessary for us also to go into the question whether the unabsorbed depreciation can be carried forward and then give our opinion on the question whether such depreciation can be set off.

22. The second question referred to us for our opinion is whether the security deposits which were forfeited in the year of account, can be assessed as trading receipts in the assessment for that year. Learned counsel for the assessee says that in view of the fact that we have answered the first question in favour of the assessee, no purpose would be served by answering the second question and he is, therefore, not pressing for a decision on that question. There will be no order as to costs.