G.K Mitter, J.:— This is a reference under section 66(1), of the Indian Income-tax Act which turns on the interpretation of section 10(2)(vi) read with proviso (b) thereto and section 24(2) read with proviso (b) thereto. The question framed is as follows:
“Whether, in the facts and circumstances of the case, the unabsorbed depreciation of the past years should be added to the depreciation of the current year and the aggregate of the unabsorbed depreciation and the current year's depreciation be deducted from the total income of the previous year relevant for the assessment year 1952–53?”
2. The assessee is a company which had more than one source of income. The assessment year in question is 1952–53, the previous accounting year ending on June 30, 1951. During the year of assessment the total income from the business of the assessee computed by the Income-tax Officer was Rs. 14,041 before charging depreciation for the year which was fixed at Rs. 5,360. Deducting the depreciation from the total income mentioned above the assessee had a net income for that year amounting to Rs. 8,681. The assessee was however disclosing losses for the past years and there stood in its favour an unabsorbed depreciation aggregating Rs. 76,857 besides losses. Out of the losses the Income-tax Officer gave a set-off of Rs. 8,681 against the income of the year and finally computed business income to be nil for that year. The company had income from dividends received in that year amounting to Rs. 2,01,130. The total income for the year was computed by the said officer at Rs. 2,01,130 leaving the unabsorbed depreciation to be carried forward.
3. It was contended by the assessee that the depreciation for the year should not only be Rs. 5,360 but should be reckoned to be the total of the said sum along with the unabsorbed depreciation of Rs. 76,857, namely, Rs. 82,217. It was further claimed that under proviso (b) to section 10(2)(vi) the whole of the unabsorbed depreciation of prior years should be deducted from the business income resulting in a loss of Rs. 68,176. Under section 24(1) the deficiency under the head of business should be set off against the profits under other heads reducing the total income proportionately to Rs. 1,32,955. The question which arises is which of the two views is correct. Under section 6 of the Act income, profits and gains fall under several distinct heads which have to be computed separately according to the different sections from 7 to 12B. “Profits and gains of business, profession or vocation” come under section 10. Under this section profits and gains have to be computed after making the allowances mentioned in clauses (i) to (xv) of sub-section (2). One of such allowances, viz., under clause (vi), is depreciation of buildings, machinery, plant or furniture which has to be calculated at prescribed rates. Inasmuch as the income from a business may not be enough to meet all the allowances, specially that of depreciation, the Act provides for the carrying forward of the depreciation allowance to subsequent years in so far as the same is not absorbed by the profits and gains of a year. The relevant portion of section 10(2)(vi), clause (b), provides that “where, in the assessment of the assessee… full effect cannot be given to any such allowance in any year… owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24, 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 year and deemed to be part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeeding years.”
4. In my view, this means that if depreciation for a particular year is X and the unabsorbed depreciation for the previous years is Y then for the year for which the depreciation is calculated at X the allowance admissible is X+Y and this is to be treated as the depreciation for the year in place of X. In computing the profits or gains of a business under section 10 allowance must be made for depreciation to the extent of X+Y. If the income, profits or gains of the year are not sufficient to cover the full total of X + Y the balance which is left over must be carried for ward to the next year and so on. There is no limit to the number of years in which this can be done but the aggregate of all allowances in respect of depreciation cannot in any case exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be.
5. So far I have been dealing with the case of an assessee who has only one business but if the assessee has more than one business or if he has several heads under which he derives his income, section 24 of the Act has got to be taken into consideration in computing his total income. If the assessee has several businesses in respect of each of which he can claim depreciation the total of the different amounts under the head “depreciation” must be taken into account and deducted from the total of his income from the different businesses so as to find the net result under the head “business, profession or vocation”. If he wants to set off loss incurred under the above head against his income, profits or gains under any other head in that year he can do so under section 24(1) of the Act which provides that “where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year”. The result is that if his business returns a loss under the head “income” he can set off the same towards his income from securities or from properties or capital gains or under “other sources”. If a complete set-off of loss cannot be had under section 24(1) he can carry the loss forward to the following year under sub-section (2) of section 24, the relevant portion of which provides:
“where any assessee sustains a loss of profits or gains in any year…….. under the head ‘profits and gains of business, profession or vocation’ and the loss cannot be wholly set off under sub-section (1), the portion not so set off shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year; and if it cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year, and so on; but no loss shall be so carried forward for more than six years……….
Provided that—…..
(b) where depreciation allowance is under clause (b) of the proviso to clause (vi) of sub-section (2) of section 10, also to be carried forward, effect shall first be given to the provisions of this sub-section.”
6. I must confess that the language used in section 24 is far from clear but it appears to me to mean that when there is a loss in a business, profession or vocation, either because full depreciation cannot be provided for or because the expenses overtop the income received the assessee can claim the benefit of sub-section (1) of section 24 so far as his income, from heads other than business, profession or vocation will allow. If however such loss or depreciation cannot be fully set off towards income under other heads the assessee can carry forward the loss as well as the unabsorbed depreciation to the following year. To give effect to section 24(2) read with proviso (b) the assessee must first set off the business loss carried forward from the previous year against the income, profits or gains of the same business in the following year and if after doing this there is a surplus the same can be utilised for meeting the unabsorbed depreciation of the previous years which under section 10(2)(vi), proviso (b), becomes depreciation for the said following year. In other words in giving effect to section 24(2) one must first set off the loss and then the depreciation. This seems to be logical in view of the fact that loss can be carried forward to six years only whereas depreciation can be carried forward ad infinitum.
7. On this view of the section it appears to me that as there was no loss in the business of the assessee during the relevant year apart from the unabsorbed depreciation, it was open to the assessee to set off the whole of the depreciation towards the income from dividends.
8. The only authority directly in point which was cited at the Bar is the case of Ambika Silk Mills Co. Ltd. v. Commissioner of Income-tax [1952] 22 I.T.R 58. There the assessee made a capital gain of Rs. 90,400 by sale of some machinery. The total assessable profit as computed by the Income-tax Officer before providing for depreciation in respect of the year of account amounted to Rs. 37,703. The total depreciation allowable under the Act in respect of the year under reference amounted to Rs. 52,985. The Income-tax Officer ascertained the assessee's business loss at Rs. 15,282 (Rs. 52,985 minus Rs. 37,703). This was set off against the capital gains of Rs. 90,400 and the assessable income was fixed at Rs. 75,118. The question before the Tribunal was “what was the maximum depreciation which was allowable to the assessee for the year under reference under the second proviso to section 10(2)(sic)”. In that case the assessment year was 1948–49. Chagla C.J, who felt considerable difficulty in construing the proviso in question, said:
“In our opinion the only proper interpretation that should be placed upon the expression ‘profits or gains’ is ‘profits or gains’, not merely from the particular business in respect of which depreciation is claimed, nor profits or gains from any business conducted by the assessee, but the profits or gains which may accrue or arise to the assessee under any of the heads referred to in section 6. Therefore if the assessee has been assessed to income under the head ‘capital gains’ as he has been in this case, viz., to the extent of Rs. 90,400, and if depreciation has been absorbed only to the extent of Rs. 52,985, he is entitled to set off the balance of Rs. 15,282 against the capital gains of Rs. 90,400, thus showing his total income at the figure of Rs. 75,118.”
9. The learned Chief Justice went on to add:
“Therefore, by enacting section 10(2)(vi) and the proviso and section 24(2)(b) what the Legislature had in mind was this: if a business was worked at a loss in any particular year, the loss can be set off against any other head under section 24(1); if the loss cannot be fully set off then it can be carried forward to the next year, but then it can be only set off against the profits of that particular business and that set-off would be permissible to the assessee for a period of six years only. After six years the right to set off would come to an end. But in the case of depreciation and to the extent that the loss was caused by depreciation being not fully absorbed there would be no limit to the carrying forward of that depreciation, and that depreciation can be set off at any time so long as the business showed a profit in the future.”
10. On behalf of the Revenue great stress was laid on the last portion of the above quotation, namely, “the depreciation can be set off at any time so long as the business showed a profit in the future” and it was argued that unabsorbed depreciation in a business can only be set off against its profits if and when made. I do not think that was what the learned Chief Justice meant because his conclusion as shown from the following paragraph was that “…….. the department was right when, it contended that the sum of Rs. 15,282 which could not be set off against profits could be set off against the capital gains, viz., Rs. 90,400”.
11. The conclusion of the learned, Chief Justice was that unabsorbed depreciation which could not be fully set off against profits of the business for the year could be set off against income from any other head mentioned in section 6.
12. According to the decision in the Bombay case therefore the conclusion would be in the assessee's favour, namely, that the whole of the unabsorbed depreciation of Rs. 76,857 carried forward to the year of assessment should be added to the depreciation for the year and Set off against the dividend income. In the case of Laxmichand Jaiporia Spinning and Weaving Mills, In re, the question at issue was whether having regard to proviso (b) to section 10(2)(vi) that part of the depreciation allowance (to which effect could not be given) could be treated as loss of profits under the head “business” and apportioned amongst the partners under proviso 2 to section 24(1) of the Indian Income-tax Act. In this case in the previous year ending Kartik Vadi 14, 1998, relevant to the assessment year 1942–43, the assessee's income from property was computed at Rs. 2,897 and its income from other sources was computed at Rs. 360. Its income from the mills without providing for depreciation under section 10(2)(vi) amounted to Rs. 8,228. The depreciation allowance permissible to the assessee for the year of account was Rs. 23,990. The assessee had also to its credit unabsorbed balance of the depreciation allowance brought forward from the preceding year amounting to Rs. 27,012. According to the assessee the depreciation for the year, viz., Rs. 23,990 was to be added to the unabsorbed balance of depreciation, viz., Rs. 27,012, and the total of Rs. 51,002 was to be deducted from the business profit of Rs. 8,228 showing the total business loss as Rs. 42,774. It was contended on behalf of the revenue that section 24(2) proviso (b) should be read in such a manner that depreciation should not be included in the words “loss of profits” occurring in that sub-section. This was negatived by the East Punjab High Court. Construing the above provisions of the Act the learned judges of the East Punjab High Court observed:
“…….if a man has suffered loss of income due to any cause other than depreciation that loss is first to be deducted and then the depreciation and there seems to be a good reason for it. The former cannot be carried forward for more than six years and the latter can be carried forward up to any term of years. This is really to stop the Income-tax Officers giving a set-off of an item which can be taken into consideration at any time rather than to a loss which cannot be set off after six years.”
13. In my view, therefore, the question should be answered in favour of the assessee and the unabsorbed depreciation of the past year should be added to the depreciation of the current year and the aggregate be deducted from the total income of the previous year relevant for the assessment year 1952–53. The assessee will have the costs of this reference.
Ray, J.:— I agree.
14. Question answered accordingly.