- Bookmark
- Share
- CaseIQ
Commissioner Of Income-Tax, Bombay City I v. Ahmedabad Electricity Co. Ltd.
Structured Summary of the Opinion (Kantawala, J.)
Factual and Procedural Background
This reference arises under section 66(1) of the Indian Income-tax Act, 1922. The central question referred for determination was whether "the unabsorbed depreciation allowance of the previous years deemed to be part of depreciation allowance of the current year under proviso (b) to section 10(2)(vi) of the Act can be set off against income under other heads?"
The assessee is a public limited company. For the assessment year 1961–62 (previous year ending 31 March 1961), the assessee's business income before depreciation was Rs. 1,19,67,810; depreciation for the year was claimed as Rs. 51,80,953, leaving business income after current-year depreciation of Rs. 67,86,857.
There existed unabsorbed depreciation from prior years. The entire Rs. 67,86,857 was set off against that earlier unabsorbed depreciation, reducing business income under section 10 to nil; nonetheless, after that set-off, an unabsorbed depreciation balance of Rs. 6,98,190 remained.
The assessee also had income from securities of Rs. 1,98,169 and capital gains of Rs. 17. The assessee claimed to set off the remaining unabsorbed depreciation (reported in the opinion as either Rs. 6,98,190 or alternatively Rs. 6,68,190 in one place — the court treated the unabsorbed part of Rs. 6,98,190 as the relevant balance) against the income from securities and capital gains, i.e., income under heads other than business.
The Income-tax Officer rejected that claim. The Appellate Assistant Commissioner confirmed the rejection. On appeal, the Income-tax Appellate Tribunal (the Tribunal) found the question had been decided in Commissioner Of Income-Tax, Bombay City I v. Ravi Industries Ltd. ([1963] 49 I.T.R. 145 Bom.) and directed that the set-off claimed by the assessee should be allowed against the interest on securities and capital gains.
Legal Issues Presented
- Whether the unabsorbed depreciation allowance of previous years (deemed part of the current year's depreciation under proviso (b) to section 10(2)(vi)) can be set off against income under other heads (specifically interest on securities and capital gains).
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax, Bombay City I v. Ravi Industries Ltd. [1963] 49 I.T.R. 145 (Bom.) | The Tribunal regarded this decision as deciding the question in favour of allowing set-off of unabsorbed depreciation against income under other heads. | The Tribunal relied on this decision and directed that the set-off of the portion of the unabsorbed depreciation be allowed against interest on securities and capital gains. The High Court (this court) notes the Tribunal's reliance when recounting the procedural history. |
| Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 I.T.R. 555; [1966] 2 S.C.R. 449 (S.C.) | The Supreme Court held that unabsorbed depreciation of past years must be added to the current year's depreciation and the aggregate deducted from the total income of the previous year; the Income-tax Act draws no distinction between allowances in section 10(2), and effect may be given to depreciation by setting it off against income under other heads. | The court treated the ratio of this Supreme Court decision as directly applicable to the facts of the present case, accepted the revenue's concession that Jaipuria decides the issue, and applied that ratio to answer the reference in the assessee's favour. |
Court's Reasoning and Analysis
The Court proceeded by first stating the precise question referred under section 66(1). It then summarized the relevant factual matrix: the amounts of business income before and after current-year depreciation, the carry-forward unabsorbed depreciation balance, and the non-business incomes (interest on securities and capital gains) against which the assessee sought to set off the remaining unabsorbed depreciation.
The procedural history up to the Tribunal's decision was recounted: the ITO and Appellate Assistant Commissioner rejected the assessee's cross-head set-off claim; the Tribunal allowed it relying on the Ravi Industries decision.
On the central legal point, counsel for the revenue (Mr. Joshi) conceded that the question was concluded not only by the Bombay High Court decision in Ravi Industries but also by the Supreme Court's decision in Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd. The Court accepted that concession.
The Court summarized the Supreme Court's reasoning in Jaipuria: the Income-tax Act does not draw distinctions between the various allowances in section 10(2); such allowances are to be deducted from gross profits and gains of a business. Commercial accounting principles show depreciation in the profit and loss account; if profits are insufficient to absorb depreciation, a loss results. Viewed in this way, it would be unfair to assess total income without pooling business income with income (or loss) under other heads. The legislature's treatment (including provisions dealing with partners) demonstrates that the only practical way to give effect to depreciation in assessment is by permitting set-off against income under other heads.
On that basis — and given the direct applicability of the Supreme Court's ratio — the Court concluded that the assessee was entitled to set off the unabsorbed part of depreciation (the remaining Rs. 6,98,190) against income from interest on securities and capital gains.
Holding and Implications
Holding: The Court answered the referred question in the affirmative. In the Court's words, the assessee was entitled to claim a set-off in respect of the unabsorbed part of depreciation of Rs. 6,98,190 against income from interest on securities and capital gains.
DISPOSITION: The reference is answered in the affirmative and the revenue was ordered to pay the costs of the assessee.
Implications: The direct effect is that the specific assessee's claim to set off the remaining unabsorbed depreciation against income under other heads is allowed and the revenue must bear costs. The opinion relies on existing higher authority (the Supreme Court in Jaipuria) and a prior High Court decision (Ravi Industries) to reach this conclusion; the Court did not purport to lay down any novel legal principle beyond applying those precedents.
Question answered in the affirmative.
Kantawala, J.:— By this reference under section 66(1) of the Indian Income-tax Act, 1922, the question that is referred for our determination is as under:
“Whether, on the facts and in the circumstances of the case, the unabsorbed depreciation allowance of the previous years deemed to be part of depreciation allowance of the current year under proviso (b) to section 10(2)(vi) of the Act can be set off against income under other heads?”
2. The assessee is a public limited company and the question referred to us relates to the assessment year 1961–62, the relevant previous year being the financial year ending March 31, 1961.
3. The income of the assessee from business under section 10 before allowing depreciation was Rs. 1,19,67,810. Out of that, depreciation for the year was deducted as amounting to Rs. 51,80,953.
4. After taking into account the depreciation for the current year, the income left over was Rs. 67,86,857. Besides, there was unabsorbed depreciation of the previous year in respect of which a set-off was claimed. The whole of the sum of Rs. 67,86,857 was permitted to be set off against the unabsorbed depreciation of the previous year. After taking such set-off into account, the income from business under section 10 was calculated as rupees nil. Notwithstanding such set-off, there still remains unabsorbed depreciation allowed to be carried forward in the sum of Rs. 6,98,190. Apart from the income from business, the assessee had also income from securities amounting to Rs. 1,98,169 and the capital gains of Rs. 17. On behalf of the assessee, the remaining portion of the unabsorbed depreciation of Rs. 6,68,190 was claimed by way of set-off against the income from interest on securities and capital gains and that is under the head “Other than income from from”. Such contention of the assessee was rejected by the Income-tax Officer. On appeal by the assessee, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. Against that decision, the assessee preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal found that the question was decided in the case of Commissioner Of Income-Tax, Bombay City I v. Ravi Industries Ltd. [1963] 49 I.T.R 145 Bom... The Tribunal took the view that, in view of the said decision, the claim made by the assessee was justified and it directed that the set-off of the portion of the unabsorbed depreciation should be allowed aginst the interest on securities and capital gains.
5. Mr. Joshi, on behalf of the revenue, has fairly conceded that the ques tion involved in this reference is not only concluded by the decision of this court in the case of Ravi Industries Ltd.. but it is concluded by the decision of the Supreme Court in Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 I.T.R 555, [1966] 2 S.C.R 449 S.C.. As the ratio of the decision of the Supreme Court directly applies to the facts of the present case, further controversy between the parties does not arise. In the case before the Supreme Court, the total income of the respondent-company for the assessment year 1952–53 before charging depreciation was Rs. 14,041. After deducting depreciation of Rs. 5,360 the Income-tax Officer computed the profit of Rs. 8,681 against the whole of which he set off losses of an earlier year. The Income-tax Officer then computed the dividend income of the respondent at Rs. 2,01,130, determined the total income at that figure and levied tax on it. The res pondent claimed that the unabsorbed depreciation aggregating to Rs. 76,857 should be deducted from the dividend income reducing the total income thereby to Rs. 1,32,955. The Income-tax Officer rejected the claim. On these facts the High Court took the view that the unabsorbed depreciation of past years had to be added to depreciation of the current year and the aggregate unabsorbed and current year's depreciation had to be deducted from the total income of the previous year relevant to the assessment year 1952-53. The Supreme Court points out that the Income-tax Act draws no distinction between the various allowances mentioned in section 10(2). They have all to be deducted from the gross profits and gains of a business. According to commercial principles, depreciation would be shown in the accounts and the profit and loss account would reflect the depreciation accounted for in its accounts. If the profits are not large enough to wipe off the depreciation, the profit and loss account would show a loss. At page 559 it is observed apart from authority, looking at the Act as it stood on April 1, 1952, it is clear that the underlying idea of the Act is to assess the total income of an assessee. Prima facie, it would be unfair to compute the total income of an assessee carrying on business without pooling the income from business with the income or loss under other heads. The second consideration which is relevant is that the Act draws no express distinction between the various allowances mentioned in section 10(2). They all have to be deducted from the gross profits and gains of a business. According to commercial principles, depreciation would be shown in the accounts and the profit and loss account would reflect the depreciation accounted for in the accounts. If the profits are not large enough to wipe off depreciation, the profit and loss account would show a loss. Thereafter, apart from proviso (b) to section 10(2)(vi), neither the Act nor commercial principles draw any distinction between the various allowances mentioned in section 10(2); the only distinction is that, while the other allowances may be outgoings, depreciation is not an actual outgoing. A little later it is pointed out that the legislature clearly assumes that effect can be given to depreciation allowance in the assessment of a partner. The only way effect can be given in the assessment of a partner is by setting it off against income, profits and gains under other heads.
6. Thus, it is clear that the assessee was entitled to claim a set-off in respect of the unabsorbed part of depreciation of Rs. 6,98,190 against income from interest on securities and capital gains. Accordingly, our answer to the question referred to us is in the affirmative. The revenue will pay the costs of the assessee.
Question answered in the affirmative.
Alert