Venkataramaiah, J.:— The assessee in this case is M/s. Mysore Paper Mills Ltd. and the assessment year is 1971–72. During the assessment year, after making necessary adjustments; the ITO arrived at a net income of Rs. 66,46,360. Against this income he set off the unabsorbed depreciation allowance of 1966–67 brought forward, amounting to Rs. 26,16,626. and unabsorbed depreciation allowance of 1967–68 brought forward to the extent of Rs. 40,29,734. After making those adjustments it was found that the unabsorbed depreciation of 1967–68 was Rs. 26,29,705. He deducted certain capital gain amounting to Rs. 8,816 from the said sum resulting in the unabsorbed depreciation allowance of 1967–68 to be carried forward at Rs. 26,20,889. Since there was no balance of income left for setting off the unabsorbed development rebate allowable under s. 33 of the I.T Act (hereinafter referred to as “the Act”), brought forward of 1966–67, he did not give a set-off in that regard. Aggrieved by the order of the ITO declining to set off the unabsorbed development rebate before setting off the depreciation allowance the assessee filed an appeal before the AAC of Income-tax contending that the unabsorbed development rebate brought forward of the year 1966–67 should have been first adjusted before giving effect to s. 33(2) of the Act. The AAC accepted the plea of the assessee and directed the ITO to reframe the assessment order in accordance with the case of the assessee in so far as the above question was concerned. Aggrieved by the order of the AAC the department filed an appeal before the Tribunal. The Tribunal held that on a combined reading of s. 2(45), s. 32(2), s. 33(2) and s. 72(2) of the Act, it was not possible to allow deduction of the development rebate admissible under s. 33 before giving effect to the provisions of s. 32(2) which provided for the carrying forward of the unabsorbed depreciation allowance of the previous year subject to the provisions of s. 72(2). Accordingly, it allowed the appeal, set aside the order of the AAC on the above point and restored the order of the ITO. At the instance of the assessee, the Tribunal has referred the following two questions under s. 256(1) of the Act:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the unabsorbed depreciation brought forward must be takenas part of the current depreciation allowance and hence should be set off to the extent possible against the income of the year?
(2) If the answer to the first question is in the affirmative, whether the Tribunal was right in law in holding that the unabsorbed depreciation allowance of a later year should first be considered and set off before considering for set off the unabsorbed development rebate of an earlier year?”
2. Although there are two questions referred to us the only question which, arises for consideration as stated by Sri T.V Natarajan, learned counsel for the assessee, is: “whether the unabsorbed development rebate should be treated as part of loss which is allowed to be carried forward and allowed to be adjusted under s. 72(2) before the unabsorbed depreciation allowance under s. 32 can be set off against the income of a business while computing the tax liability of the assessee?”
3. In so far as the current year's depreciation allowance is concerned it is conceded on behalf of the assessee that it has to be first deducted from the profits land gains of the assessee before giving effect to the provisions of s. 33 of the Act.
4. The argument, however, is that since the chargeable income arising out of a business can be computed only after giving effect to all the provisions contained in ss. 30 to 43A as required by s. 29 of the Act the development rebate allowable under s. 33 also should be first adjusted before the unabsorbed depreciation allowance of the previous year can be deducted. We find it difficult to agree with the submission made on behalf of the assessee, in view of the mandate expressly stated in s. 32(2) of the Act that that provision should be read subject only to ss. 72(2) and 73(3) and to no other provision. Section 32(2) by a legal fiction treats the un-absorbed depreciation allowance of the previous year as forming part of the current year's depreciation allowance and it requires the authorities functioning under the Act to deal with it as such subject only to ss. 72(2) and 73(3). The true effect of ss. 32(2) and 72(2) has been explained by the High Court of Gujarat in CIT v. Gujarat State Warehousing Corporation, [1976] 104 ITR 1, relying upon the decision of the Supreme Court in CIT v. Jaipuria China Clay Mines (P.) Ltd., [1966] 59 ITR 555. The relevant part of the decision of the High Court of Gujarat reads as follows (pp. 8 and 9):
“It was contended by Shri Shah that the opening words of sub-section (2), namely, where any allowance or part thereof is to be carried forward, referred to a situation wherein provisions relating to the deeming fiction contemplated by sub-section (2) of section 32 come into play. According to Shri Shah, therefore, sub-section (2) of section 72 comes into play not merely where the question of the adjustment of carried forward allowance arises, but also where the deeming fiction contemplated by sub-section (2) of section 32 comes into existence. Since, according to this deeming fiction, carried forward depreciation allowance is to be added to the current year's depreciation allowance, and is to be treated as such, effect to sub-section (2) of section 72 can be given only by giving priority to the adjustment of carried forward losses over the adjustment of current year's as well as carried forward depreciation allowance.
5. The contention of Shri Shah is not acceptable. It is no doubt true that sub-section (2) of section 72 makes a reference to sub-section (2) of section 32. But simply because this reference is made, it does not follow that sub-section (2) of section 72 brings in, even the deeming fiction, for treatment. sub-section (2) of section 32 is in two parts and provides for two things. Its first part provides for carrying forward of unabsorbed depreciation and in its second part provides for clubbing the said carried forward depreciation with the current year's depreciation and deeming the aggregate to be the current year's depreciation. Therefore, when sub-section (2) of section 72 refers to an allowance whichis to be carried forward, it refers to the first part of sub-section (2) of section 32, which enables an assessee to carry forward unabsorbed depreciation and not the second part which creates the deeming fiction. This is evident from the fact that this second part of sub-section (2) of section 32 is made subject to the provisions of sub-section (2) of section 72. The fact that the deeming fiction of sub-section (2) of section 32 is not made absolute, and is to be operative subject to the provisions of sub-section (2) of section 72 shows, beyond any dispute, that before giving effect to the deeming fiction, provisions of sub-section (2) of section 72 have to be worked out, since the impact of sub-section (2) of section 72 is only on carried forward allowance, it must follow that at the time of working out sub-section (2) of section 72, the concept of the deeming fiction should not enter into our consideration. Thus, the extent and the operation of the said deeming fiction of section 32(2) are thus circumscribed and limited by the operation of section 72(2).”
6. It is seen from the extract of the decision of the Gujarat High Court set out above that but for s. 32(2) being made subject to s. 72(2), by reason of the legal fiction enacted in s. 32(2), the entire unabsorbed depreciation allowance would have been treated as current year's depreciation and deducted even before the carried forward loss is deducted. If that is so it has to be held, in view of the concession made by the learned counsel for the assessee, that current year's depreciation allowance must be first adjusted before giving effect to s. 33, the entire unabsorbed depreciation allowance must be deducted because for all intents and purposes, subject only to ss. 72(2) and 73(3), it is current year's depreciation itself.
7. Sri Natarajan tried to contend that the unabsorbed development rebate allowed under s. 33 should be treated as part of the business loss which is allowed to be carried forward and given priority by reason of s. 72(2) over the unabsorbed depreciation allowance. We find it difficult to agrde with this submission also. Section 33 does not actually deal with any trading loss as it is ordinarily understood. Under s. 33, Parliament has made provision by way of an incentive to businessmen who invest on, new machinery or in modernising plant and equipment. In order to earn development rebate the assessee has to satisfy certain other conditions which are provided under s. 34 of the Act and the unabsorbed development rebate cannot be carried forward beyond 8 years as provided by the Act. In the circumstances, the unabsorbed development rebate cannot be treated as part of assessed loss which is allowed to be carried forward and given priority over the unabsorbed depreciation allowance of the previous years. The Tribunal was, therefore, right in allowing the appeal by the department.
8. The questions referred to us are answered accordingly and against the assessee. No costs.