Kochu Thommen, J.:— At the instance of the Commissioner of Income-tax, Kerala, Ernakulam, the following question has been referred to us by the Income-tax Appellate Tribunal, Cochin Bench.

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in holding that the assessee, a company (in liquidation) during the assessment year 1963–64, is entitled to carry forward and set off the unabsorbed depreciation of the assessment year 1963–64 and earlier years against the profits worked out under section 41(2) for the assessment year 1970-71?”

[From the facts stated by the Tribunal, it would appear that the year 1963–64 has been mistakenly referred to in the question as the assessment year, whereas it should have been mentioned as the accounting year]. The assessee-company went into liquidation during the financial year 1963-64. Returns were filed by the official liquidator for the subsequent years including 1970-71. The accounting year for 1970–71 was the financial year 1969-70. During that accounting year some plant, machinery and furniture belonging to the assessee were sold for Rs. 1,08,743. Of this sum, Rs. 1,00,000 represented the sale of plant and machinery and the balance represented the sale of furniture. The plant and machinery were the subject-matter of depreciation in the earlier assessment years, but as the assessee did not make any profit, the depreciation which remained unabsorbed had to be carried forward from year to year. During the assessment year 1963–64 when the assessee went into liquidation it had an unabsorbed depreciation of Rs. 1,81,019. In the return filed by the assessee, no profit under section 41(2) of the Income-tax Act, 1961, was disclosed. A note was, however, added in the return showing “value realised by sale of plant and machinery is less than book value”. No income was shown.

2. The Income-tax Officer estimated the written down value of the plant and machinery for the purpose of section 41(2) at Rs. 35,692 and adjusted the same against Rs. 1,00,000 being the sale price of plant and machinery. He thus arrived at a profit of Rs. 64,308 which was held to be assessable under section 41(2). On appeal by the assessee, the Appellate Assistant Commissioner held that the assessee was entitled under section 32(2) to treat the unabsorbed depreciation allowance of the earlier years as depreciation allowance for the year previous to the assessment year 1964–65 and set off the same against the profits computed under section 41(2) for the assessment year 1970-71.

3. The department filed an appeal before the Tribunal. The assessee did not question before the Tribunal the correctness of the computation of the written down value or the profit under section 41(2). The only question-which was considered by the Tribunal was whether the unabsorbed depreciation brought forward from the earlier years was available to the assessee for a set-off against the profits under section 41(2) for the assessment year in question. Following the decision of the Allahabad High Court in Commissioner of Income-tax v. Rampur Timber & Turnery Co. Ltd., [1973] 89 ITR 150 (All), the Tribunal held that the unabsorbed depreciation of the past years was available as depreciation allowance in the relevant previous year and it could be set off against the profits determined as assessable under section 41(2) for the assessment year 1970-71.

4. Section 32 of the Act allows certain deductions in respect of depreciation of buildings, machinery, plant or furniture owned by an assessee and used for the purpose of his business or profession. Sub-section (2) of that section allows an assessee to carry forward any unabsorbed depreciation allowance to the following previous year and set off the same against that year's profits, and so on for succeeding previous years. This sub-section reads as follows:

“(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) or clause (vi) of subsection (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.”

5. The unabsorbed depreciation of the past is thus treated as the depreciation allowance for the relevant previous year in which the business ceased to exist.

6. Sub-section (5) of section 41 says:

“(5) Where the business or profession referred to in this section is no longer in existence and there is income chargeable to tax under subsection (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 as may be, be set off against the income chargeable to tax under the sub-section's aforesaid.”

7. These provisions indicate that the carried forward unabsorbed depreciation is available for set-off against the income chargeable to tax under subsection (2) of section 41.

8. Sub-section (2) of section 41 reads:

“(2) 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:…….

Explanation.— 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.”

9. In the instant case, although the plant and machinery were sold only in the accounting year 1969–70, and the business of the company had ceased to exist during 1963–64, it is by means of the fiction introduced in the Explanation that the profits earned by the assessee by such sale are to be treated as the chargeable income of the business of the previous year in which the amounts were received. In other words, the Explanation projected the business into the relevant previous year in which the profits were received, thereby making such receipts chargeable to tax under the subsection.

10. The legislature having introduced the fiction to bring to charge the receipt by sale of plant and machinery in the relevant previous year as the income of the business of that previous year, although the business had ceased to exist earlier, one cannot, to quote Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council, [1952] AC 109, [1951] 2 All ER 587 (HL), permit one's imagination to boggle when it comes to the inevitable corollaries of the state of affairs introduced by the fiction. Consequently, the income computed under sub-section (2) of section 41, which with the aid of the Explanation is made chargeable to tax even when the business was no longer in existence in the relevant previous year, has to be, before it is charged, subjected to a set-off against the carried forward depreciation allowance by giving full play to the provisions of sub-section (2) of section 32 and sub-section (5) of section 41. In our view, the Tribunal correctly followed the principle laid down by the Allahabad High Court in the decision cited above, although that decision turned on the interpretation of sub-section (1) of section 41 which on this point is identical to subsection (2) of section 41.

11. Counsel for the revenue brought to our notice the decision of the Supreme Court in Commissioner Of Income Tax, Madras v. The Ajax Products Limited, [1965] 55 ITR 741 (SC). In that case the court examined the provisions of section 10(2)(vii) of the Indian Income-tax Act, 1922, and held that even after the 1949 amendment of that Act, it was necessary that during the whole or a part of the previous year, the business should have been carried on by the assessee in order that the excess realised on the sale of building, machinery or plant, could be treated as profits of the business under the second proviso to that sub-section. In our view, the sub-section considered by the Supreme, Court is not in pari materia with the provisions under consideration in the instant case and, therefore, that decision is of little help for the present purpose. We are of the view that since the business of the assessee should be deemed to have been in existence in the accounting year relevant to the, assessment year 1970–71, the unabsorbed depreciation of the past years is available as the depreciation allowance in the relevant accounting year in which the company closed its business, and such allowance can be set off against the sum computed in terms of section 41(2) for the assessment year 1970-71. In the circumstances, we answer the question referred to us in the affirmative, that is, in favour of the assessee and against the department.

12. A copy of this judgment, under the seal of the High Court and the signature of the Registrar, shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.