Commissioner Of Income-Tax, West Bengal Iv v. M/S. Malwa Sugar Mills Co. Ltd.

Sudhindra Mohan Guha, J.:—This reference, at the instance of the Commissioner of Income Tax, West bengal IV, Calcutta, under S. 256(1) of the Income Tax Act, 1961, relates to the assessment year 1968-1969 for which the relevant previous year ended on 30th June, 1967.

2. The assessee is a manufacturer of sugar. As per its profits and loss account for the year under reference, there was a loss of Rs. 73,535/-. The Income Tax Officer after disallowing the depreciation claimed and some other expenses determined it at a profit of Rs. 3,15,064. Out of this, he deducted profit on sale of fixed assets of Rs. 3,207/- resulting in a net profit of Rs. 3,11,857/-. The depreciation claimed in this years, as per rules, worked out to Rs. 3,18,430/-. This was set off by the Income Tax Officer against the profit of Rs. 3,11,857/- as worked out above resulting in a net loss of Rs. 6,573/- (Rs. 3,18,430 minus Rs. 3,11,857), Ultimately, he carried forward this amount as unearned depreciation to be set off against the income of future years. The assessee was also carrying forward unabsorbed business loss of Rs. 75,720/- from the assessment year 1965-1966.

3. The assessee filed an appeal to the Appellate Assistant Commissioner and among others claimed that the carried forward business loss of Rs. 75,728/- first should be set off front the income of Rs. 3,11,857/- and only the balance sum should be set of against the current depreciation of Rs. 3,18,430/-. This was rejected by the Appellate Assistant Commissioner.

4. The assessee came in further appeal to the Tibunal. The learned Advocate for the assessee relied on the decision of the Allahabad High Court in Mother India Refrigeration Industries (P) Ltd. v. Commissioner of Income Tax, reported in 80 ITR 510, which followed the decision of the decision of the Supreme Court in Jaipuria China Clay Mines Private Ltd. reported in 59 ITR 555.

5. The departmental representative, on the other hand supported the order of the Appellate Assistant Commissioner and submitted that the current depreciation had to be allowed first before computation of income from business under S. 28 of the Act and the carried forward losses would have to await till there were enough profits after absorbing the current depreciation.

6. The Tribunal found that the case of the assessee was on all fours with that of the Allahabad High Court in Mother India Refrigeration Industries (P) Ltd. In that case also the Income Tax Officer first adjusted the current depreciation and the business losses were set off only thereafter. Following the principle laid down in that case, the Tribunal directed in the case of the assessee that the unabsorbed business loss of Rs. 75,728/- should first be set off against the income of Rs. 3,11,857/- and only the balance of the income should be set off against the current depreciation of Rs. 3,18,430. The unaborsed depreciation was directed to be carried forward to be set off against the income of future years.

7. In these facts, the following question was referred to this Court for its opinion:

“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the business carried forward from earlier years should be set off before deducting the depreciation allowance for the year under consideration?”

8. In the above facts a very short point which calls for our consideration is whether after deducting the current year's depreciation the carried forward losses should be adjusted or the carried forward business losses should beset off against the current depreciation.

9. The Tribunal following the decision of the Allahabad High Court in the case of Mother India Refrigeraiation Industries (P) Ltd. v. Commissioner of Income Tax U.P 80 ITR 510 held that the unabsorbed business loss would first be set off against the income and only the balance of income should be set off against the current depreciation. The unabsorbed depreciation was directed to be carried forward to be set off against the future income. Such findings have been challenged by the Revenue.

10. Mr. S.K Mitra, learned Advocate for the Revenue draws out attention to S. 32(2) and S. 72(2) of the Act of 1961. Sub-section (2) of S. 32 provides that where in the assessment of the assesse, the full effect cannot be given to any allowance under clause (i) or clause (ii) or clause (iv) and (v) or clause (vi) of sub-s (1) or under clause (i) of sub-s. (1A) in any previous year or owing to there being no profits or gains chargeable for the previous year, or owing to profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-s. (20(e) of S. 72 and sub-s (3) of S. 73, the allowance or part of the allowances to which effect has not been given, as the case may be, shall be added to the amount of the allowances for depreciation in the following previous year and deemed to be profit of that allowances, or if there is no such allowance for that year previous year, be deemed to be an allowance for that previous year and so on for the succeeding previous years. Sub-section (1) of S. (72) provides that where for any assessment year, the net result of the computation under the head ‘profits and gains on business or profession’ is a loss to the assessee, not being the loss sustained in a speculation business and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of S. 71, so much the loss as has not been set off or where the assessee has an income only under the head “capital gains” relating to the capital assets other than short term capital assets and has exercised the option under sub-s (2) of that section and where he has no income under any other head, the whole loss shall, subject to all other provisions of this Chapter (namely Chapter VI) be carried forward to the following assessments year and under clause (i) of S. 72(1) the carried forward business loss shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year, provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for the assessment year under consideration. Under sub-clause (2) of S. 72 where any allowance or a part thereof is under sub-s. 32 or sub-s. (4) of S. 35 to be carried forward, the effect shall first be given to the provisions of this section. Under sub-s. (3) of S. 72, the business loss cannot be carried forward for more than three 8 years immediately succeeding the assessment year.

11. According to Mr. Mitra proviso (b) to S. 24(2) of the Act of 1922 is similar to S. 72(2) of the Act of 1961 and proviso (b) to S. 10(2)(vi) of the Act of 1922 is similar to the provisions of S. 32(2) of the Act of 1961. According to Mr. Pranab Kr. Pal, learned advocate for the assessee, there are material differences between the relevant provisions of the Act of 1922 and that of the Act of 1961. He draws our attention to Ss. 28 to 44D consisting of Para D in Chapter IV which, according to him deal with computation of profits and gains of business or profession. Chapter IV according to him deals with computation of total income and computation of income under different heads of income. Then, he contends that S. 29 provides that the income chargeable under the head of profits and gains of business or profession as set out in S. 28 shall be computed in accordance with the provisions contained in Ss. 30 to 43A. Section 32(1) provides that in respect of depreciation of building etc. owned by the assessee and used for the purpose of business or profession, deduction shall subject to the provisions of S. 34 be allowed. Mr. Pal then lays stress on the word ‘also’ in proviso (b) to sub-s. (2) of S. 24 of the Act of 1922. But what clause (b) of S. 24(2), according to Mr. Pal, contemplates is that there is some loss to be carried forward and what it says specifically is that some depreciation allowance ‘also to be carried forward’. The word ‘also’ implies that the depreciation allowance to be carried forward must also be the depreciation allowance available at the stage when losses carried forward can in law be applied to the reduction of a particular year's profits. The two must belong to the same level. In this connection reliance is placed on a passage in page 374 in the case of Alluminium Corporation of India Ltd. v. Commissioner of Income Tax, West Bengal-33 ITR 367. In that case, the Division Bench of this Court, observed as follows:

“What clause (b) of S. 24(2) contemplates is that there is some loss to be carried forward and what it says specifically is that there is some depreciation allowance ‘also to be carried forward’. The crucial word, to my mind, is the word ‘also’. It enjoins by implication that the depreciation allowance to be carried forward must also be a depreciation allowance available at the stage when losses carried forward can in law be applied to the reduction of a particular year's profits. The two must belong to the same level.”

12. Next he contends that in the Act of 1922 not main sections but provisos to relevant sections have made provisions as to reduction. But the provisos should not be regarded as less important then the main sections. Maxwell on the Interpretation of Statutes (12th Edition), P. St. John's Langan deals with construction of provisos and at pages 190-191 observations have been made as follows:

“If a proviso cannot reasonably be construed otherwise than as contradicting the main enactment, then the proviso will prevail on the principle that ‘it speaks the less intention of the makers’.”

13. In this view of the matter provisos should also be equally taken into consideration along with the main sections to find the intention of the legislature. We are of the opinion that proviso (b) to S. 10(2)(vi) and provision (b) to S. 24(2) of the Act of 1922 are almost similar to the provisions of S. 32(2) and S. 72(2) respectively of the Act of 1961.

14. On this background, we propose to discuss the various decisions cited before us. In the case of Mother India Refrigeration Industries (Private) Limited v. Commissioner of Income Tax, U.P 80 ITR 510 the Division Bench of the Allahabad High Court held that.

“By virtue of proviso (b) to S. 24(2) of the Indian Income Tax Act, 1922, business losses have to be given priority over unabsorbed depreciation allowance. Under provision (b) to S. 10(2)(vi), depreciation allowance which is carried forward merges into depreciation allowance for the succeeding year and after such merger, the unabsorbed depreciation allowance is to be deemed to be depreciation allowance for the current year. As business looses have to be given priority over unabsorbed depreciation allowance, there is no good reason why business losses which have been brought forward should not receive priority over current depreciation allowance.

Held, on the facts, that for the assessment years 1951-1952 and 1952-1953, the assessee was entitled to deduct the unabsorbed business loss at the end of the assessment year 1950-1951, before setting off the respective depreciation allowances for these years.”

15. It may be noted that in coming to the decision the Allahabad High Court relied on a passage from the decision of the Supreme Court in the case of Commissioner of Income Tax v. Jaipuria China Clay Mines (P) Ltd. 59 ITR 555 at page 561 which reads as follows:

“The unabsorbed depreciation allowance is carried forward under proviso (b) s. 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. If the legislature had not enacted proviso (b) to S. 24(2), the result would have been that depreciation allowance would have been deducted first out of the profits and gains in preference to any losses which might have been carried forward under S. 24, but as the losses can be carried forward only for six years under S. 24(2) the assessee would in certain circumstances have in his books losses which he would not be able to set off. It seems to us that the legislature, in view of this, gave a preference to the deduction of losses first. But it is wrong to assume that S. 24(2) also deals with the carrying forward of the depreciation. This carry forward having been provided in S. 10(2)(vi) and in a different manner. S. 24(2) only deals with losses other than the losses due to depreciation. But, in this case, the question before the Supreme Court was quite different. Herein the question was whether the unabsorbed depreciation allowance of previous years could be allowed to be set off against the income from other heads of income, i.e from the heads of income other than non speculative business. In the case of Commissioner of Income Tax, Calcutta v. Jaipuria China Clay Mines (P) Ltd. 59 ITR 555, the Supreme Court further observed as follows:

“The total income of the respondents for the assessment year 1952-1953 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. 201,130 determined the total income at that figure and levied tax on it. The respondent claimed that unabsorbed depreciation aggregating to Rs. 76,857 in its favour should be deducted from the dividend income reducing the total income thereby to Rs. 1,32,956/-.”

16. Thus, the Supreme Court was to decide whether the unabsorbed depreciation allowance carried forward from the previous year could be set off against the income from dividend. The point involved therein was not whether the carried forward business loss should get precedence over the current year's depreciation in respect of income from business. The relevant passage of the Supreme Court has been quoted earlier.

17. The Gujarat High Court in the case of Commissioner of Income Tax, Gujarat v. Gujarat State Ware Housing Corporation, 104 ITR 1 also relying upon certain observations in the case of 55 ITR 555 dissented from the view of the Allahabad High Court and having the basic principles of accountancy took upon an opposite view and held as follows:

“Section 72(2) of the Income Tax Act, 1961 makes it clear that priority to carried forward losses should be given only where an allowance or part thereof is to be carried forward. It is obvious that current year's depreciation is not a carried forward depreciation and when a question arises as to whether carried forward losses should be given priority in adjustment over current year's depreciation S. 72(2) has no application. The definition of income given in S. 2(24) shows that ‘income’ includes profits and gains. The expression ‘profits and gains’ means net profits and gains Net profits and gains cannot be ascertained without debiting the current year's depreciation to the profit and loss account. The basic and well recognised principles of accountancy show that so far as the current year's depreciation is concerned it is always to be trusted as the first charge on profits and gains earned by the assessee from a business and before this first charge is satisfied it would not be possible to arrive at a correct figure of the net profits and gains which would be chargeable to tax. This basic principle of accountancy has also been judicially recognised. It is only after deducting the current year's depreciation that carried forward losses should be adjusted. The allowances should be adjusted as follows — firstly, the current year's depreciation should be adjusted. Secondly, carried forward losses of earlier years have to be deducted and finally carried forward unabsorbed depreciation allowance of earlier years has to be adjusted.

Sub-section (2) of S. 32 is in two parts and provides for two things. Its first part provides for the carrying forward of unabsorbed depreciation and 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. This deeming provision in S. 32(2) is not, however, absolute. It is subject to the provisions of S. 72(2) and 73(3). Sections 72(2) and 73(3) deal with the carry forward and set off losses. If the deeming fiction contemplated by S. 32(2) were operative without being subject to S. 72(2) then the current depreciation as well as the carried forward depreciation would be the first charge on profits and gains of a business. The result of cases in which carried forward losses contemplated by S. 72 would not have any chance of being adjusted even for the period of eight successive years. After the end of eight years their adjustment would become impossible. In order to prevent such a situation, the legislature has enacted S. 72(2) and made the deeming fiction of S. 32(2) subject to it. Sub-s. (2) of S. 72 states that if in a case the depreciation allowance is required to be carried forward by S. 32(2) effect shall first be given to the provisions of S. 72(2).”

Hence held that before carried forward loss contemplated by S. 72 is set off against the profits and gains of business, for a particular assessment, the said profits and gains of business shall be ascertained after deducting the current year's depreciation. In this case, their Lordships pointed out that in the case reported in 33 ITR 357 the Calcutta High Court had in terms observed that there could be no competition as between the losses carried forward from the previous years and the depreciation of the accounting year for which the depreciation allowance was due because in any year ascertained profits of the current year and depreciation allowance would, in any case, have to be set off against the profits first.

18. Andhra Pradesh High Court in the case of Additional Commissioner of Income Tax, Andhra Pradesh v. Andhra Printers Ltd. 117 ITR 555 not only considered but also fully discussed all the cases on the point in issue and following the decision of the Gujrat High Court in the case of Commissioner of Income Tax, Gujrat v. Gujrat State Ware Housing Corporation reported in 104 ITR 1 dissented from the decision of the Allahabad High Court in the case of Mother India Refrigeration Industries (Private) Ltd. v. Commissioner of Income Tax reported in 80 ITR 510. It also distinguished the decision of the Supreme Court in the case of Commissioner of Income Tax v. Jaipuria China Clay Mines (Private) Ltd. reported in 59 ITR 555. The Andhra Pradesh High Court observed as follows:

“The assessee, which carries on the business of printing and publishing a daily newspaper and a weekly journal, claimed depreciation for the relevant assessment year 1970-1971 in a sum of Rs. 1,87,303/-, whereas its income before deduction of depreciation was only Rs. 70,555/-. The assessee claimed that ‘the carried forward business loss’ should be set off against the income of the current year before deducting the depreciation of the relevant assessment year. The Income Tax Officer rejected the plea and held that the depreciation of the current year must first be deducted from the current year's income and the balance unabsorbed depreciation must be carried forward to the succeeding assessment year. As there was no income left after deducting the depreciation of the current year, the Income Tax Officer did not set off the ‘carried forward business loss’ against the revenue income of the current year. On appeal, the Appellate Assistant Commissioner agreed with the claim of the assessee and, on further appeal by the revenue, the Tribunal upheld the view of the Appellate Assistant Commissioner on a reference:

Held, that S. 32(2) of the I.T Act, 1961 which provides for set off of unabsorbed depreciation against current year's income and allows the ‘carried forward business loss’ determined under S. 72(1) of the Act to take priority for the purpose of set off against the revenue income of the relevant assessment year does not apply to the case of assessment of current year's income governed by S. 32(1) of the I.T Act, which provides for deduction of depreciation relating to plant, buildings and machinery, etc. in respect of the assessment year itself and which is not subject of S. 72(2). In the first instance, the income of the current year must be ascertained, for the determination of which depreciation of the relevant accounting year must be determined, and the same should be deducted from the revenue income of the relevant accounting year in accordance with Ss. 30 to 43A of the I.T Act. It is only thereafter the question of set off of the business loss carried forward by the assessee against the revenue income arises. Therefore, the business losses carried forward from the previous years cannot receive priority over the current depreciation allowance.”

19. As to the legal fiction or deeming fiction the Court observes at pages 566-567 as follows:

“It is true as Mr. Parvatha Rao appearing for the assessee before us has emphasised that, according to the decision of the Supreme Court in Commissioner Of Income Tax, Delhi v. S. Teja Singh (1959) 35 ITR 408, it is a rule of interpretation well settled that in construing the scope of a legal fiction it would be proper and even necessary to assume all those facts on which alone the fiction can operate. The Supreme Court pointed out citing the observations of Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council (1952) AC 109 (HL), that when the statute says that you must imagine a certain state of affairs, it does not say, that having done so, you must cause or permit your imagination to boggle when it comes, to the inevitable corollaries of that state of affairs.”

These observations were re-affirmed by the Supreme Court in Addl. ITO v. E. Alfred (1962) 44 ITR 442. But, because the deeming fiction under S. 32(2) says that unabsorbed depreciation of previous year shall be deemed to be the current year's depreciation and is subject to the operation of S. 72(2), the whole question requires careful consideration and the very deeming fiction having been made subject to the operation of S. 72, we have to examine under what circumstances the deeming fiction can be allowed to operate. Normally, the stage of considering unabsorbed depreciation would only arise for consideration after the computation of current year's business income is over. It is only then the question of unabsorbed depreciation allowance would arise and unabsorbed depreciation of previous year has to yield place to carried forward business losses for set off against the net profit from the current year's business activities ascertained after allowing depreciation for the current year”.

20. With due respect for the reasons expressed by the Andhra Pradesh High Court we are fully in agreement with the decision arrived at by it. We are also of the view that the business losses carried forward from the previous years cannot have precedence over the current depreciation allowance. Thus, S. 32(2) yields place to S. 72(2) of the Act and not vice versa. In this view of the matter the tribunal was not correct in holding that the business losses carried forward from the previous year would first be set off against the income and then only the balance of the income should be set off against the current depreciation.

22. In this context of the matter we answer the question in the negative and in favour of the Revenue.

Each party will pay and bear its own costs.

Sabyasachi Mukharji, J.:—I agree.

Question answered in the negative and in favour of the assessee.