Universal Cargo Carriers Inc. v. Commissioner Of Income-Tax

The Judgment of the Court was delivered by

Dipak Kumar Sen, J.:— This is a consolidated reference covering the income-tax assessments of Universal Cargo Carriers Inc. for the assessment year 1976-77 (the accounting year ending on January 31, 1976), Hellenic Lines Ltd. for the assessment years 1976-77 and 1977-78 (the accounting years ending on 31st December of the calendar years 1975 and 1976) and American Export Line Inc. for the assessment year 1976-77, the accounting year ending on January 31, 1976.

2. The facts found and not in dispute are, inter alia, that the assessees are non-resident companies carrying on business in shipping. The ships of the assessees plied in Indian waters during the relevant assessment years which made the assessees exigible to Indian income-tax in the relevant assessment years. The assessments in each of the cases were made under section 44B which was brought into the Income-tax Act, 1961, by the Finance Act, 1975, and came into effect on and from April 1, 1976. The said section reads as follows:

Section 44B.:—(1) Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent, of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head ‘Profits and gains of business or profession’.

(2) The amounts referred to in sub-section (1) shall be the following, namely:—

(i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and

(ii) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India.”

3. The assessees claimed that unabsorbed depreciation as also business loss suffered by them in previous years had been carried forward and should be adjusted against their profits and gains of business as computed under the new section.

4. The Income-tax Officer held that section 32 of the Act which provided for carrying forward of unabsorbed depreciation could not be brought into operation in view of the new section 44B and as such the assessees were not entitled to adjustment of unabsorbed depreciation brought forward from earlier years.

5. Being aggrieved, the assessees went up in appeal before the Appellate Assistant Commissioner. In the case of American Export Lines Inc., the Appellate Assistant Commissioner held in favour of the assessee and observed as follows:

“If the unabsorbed depreciation of earlier years does not constitute business loss to be adjusted under section 72, sub-section (2) of section 72 would prove to be an idle provision in the Act. If the unabsorbed depreciation of earlier years is to be adjusted under the provision of section 32(2) of the Act, there was no necessity to give clarification as to how the unabsorbed depreciation and the business loss should be adjusted against the income for the current year. Depreciation on assets is a charge on the revenue and unabsorbed depreciation in any year constitutes the business loss of that year to be carried forward and adjusted under section 72 of the Act. Section 32(2) of the Act, however, confers a benefit on the assessee to treat unabsorbed depreciation for the earlier years as depreciation for the current year so that unabsorbed depreciation for any year would be carried forward without any time-limit. Unabsorbed depreciation of the appellant company constitutes its business loss and should be carried forward and adjusted under section 72 of the Act. As section 32(2) is not applicable to a non-resident shipping company, such unabsorbed depreciation could not be treated as current year's depreciation. Nevertheless it constitutes part of the business loss of the company. The only limitation would be that being treated as business loss, the time-limit of eight years would be operative for carrying forward of such loss. Section 44B of the Act does not preclude operation of section 72 of the Act and, therefore, I am to hold that the Income-tax Officer should carry forward and adjust the unabsorbed depreciation against the income in subsequent years.”

6. In the appeals of the other assessees, the Appellate Assistant Commissioner took a contrary view and held, inter alia, as follows:

“So far as business principles and the principles of accountancy are concerned, there is no doubt that the argument of the learned representative is fully justified. Unfortunately for the assessee, so far as the income-tax law is concerned, a clear distinction is drawn between unabsorbed depreciation and business losses. There are two distinct sections dealing with these two items. Unabsorbed business loss is carried forward and set off by virtue of section 72. It can be carried forward only for a period of 8 assessment years immediately succeeding the assessment year for which the loss was first computed. So far as unabsorbed depreciation is concerned, it is on a different footing. Under section 32(2), unabsorbed depreciation is to be added to the amount of depreciation for the subsequent year and deemed to be part of the depreciation of the subsequent year. It can be carried forward indefinitely. In other words, unabsorbed depreciation of earlier years is to be treated as part of the depreciation of the year.

In other words, where the assessment is made under section 44B, the assessee is not entitled to any of the deductions mentioned in sections 28 to 43A. This contention is, therefore, rejected.”

7. Being aggrieved in the case of the American Export Lines Inc., the Revenue preferred an appeal before the Income-tax Appellate Tribunal. The American Export Lines Inc. filed a cross-objection in the said appeal. The other assessees, namely, the Universal Cargo Carriers Ltd. and the Hellenic Lines Ltd., preferred appeals to the Tribunal against the orders of the Appellate Assistant Commissioner passed in their respective cases. The above appeals and the cross-objection were consolidated and were heard and disposed of by the Tribunal by one order.

8. The Tribunal held that in construing section 44B, it gave a goby to the provisions of sections 28 to 43A which included section 32(2) providing for carry forward of unabsorbed depreciation. The Tribunal also considered section 72(1) of the Act and noted that the said section provided for carry forward of a loss which would be the net result of computation under all heads of income except capital gains.

9. Following the decision of the Supreme Court in CIT v. Jaipuria China Clay Mines (P.) Ltd., [1966] 59 ITR 555, the Tribunal held that the unabsorbed depreciation of the earlier years could be carried forward and set off only in the manner laid down by section 32(2) of the Income-tax Act, while section 72 dealt with other losses. The Tribunal held that to give a harmonious construction to the provisions of the two sections, viz., 72 and 32, unabsorbed depreciation could not be included in the loss for being carried forward under section 72 as loss.

10. The Tribunal allowed the appeal of the Revenue and rejected the appeals of the assessees.

11. On an application of the assessees under section 256(1) of the Income-tax Act, 1961, the following question has been referred as a question of law arising out of the order of the Tribunal for the opinion of this court:

“Whether, on the facts and in the circumstances of the case and on a correct interpretation of sections 72(1), 72(2), 72(3), 32(2) and 44B of the Income-tax Act, 1961, business loss attributable to unabsorbed depreciation as at the end of the accounting period relevant to the assessment [year 1975-76 in the case of each of the assessees had to be carried forward under section 72(2) of the Act and was available to be set off against the business income or income under other heads derived by each of the said assessees in the accounting period relevant to the assessment year 1976-77?”

12. At the hearing, the learned advocate for the assessees submitted that the fact that depreciation on the assets of the assessees was required to be carried forward in a particular manner under a particular section of the Act did not alter its character which was that of a loss. If the section of the Act which permitted carry forward of unabsorbed depreciation ceased to be operative, there was no reason why such depreciation could not be carried forward as a loss under the other section.

13. In support of his contentions, the learned advocate cited the following decisions:

(a) CIT v. National Syndicate, [1961] 41 ITR 225 (SC). This decision was referred to for the following observations of the Supreme Court (at p. 233):

“Loss in business may also take place if the equipment with which business is done is lost, destroyed, or depreciates or suffers in value. The law takes note of the loss, and, provided it has been computed and brought into the books of the business and written off, it can be claimed as a deduction.”

(b) CIT v. Jaipuria China Clay Mines (P.) Ltd., [1966] 59 ITR 555 (SC). This decision noted by the Tribunal was cited for the following observations of the Supreme Court (at p. 559):

“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. Therefore, 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.”

(c) CIT v. Coromandel Steels Ltd., [1981] 130 ITR 856 (Mad). This decision of a Division Bench of the Madras High Court was cited for the following observation (at p. 861):

“Depreciation is loss, though intangible, sustained by the assessee in running any machinery.”

(d) CIT v. Mother India Refrigeration Industries (P.) Ltd., [1985] 155 ITR 711 (SC). This decision of the Supreme Court was cited for the following observations (p. 718):

“It is true that proviso (b) to section 10(2)(vi) creates a legal fiction and under that fiction, unabsorbed depreciation either with or without the current year's depreciation is deemed to be the current year's depreciation but it is well settled, as has been observed by this court in Bengal Immunity Company Limited v. State of Bihar, [1955] 2 SCR 603, 606 : 6 STC 446, that legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field. Clearly, the avowed purpose of the legal fiction created by the deeming provision contained in proviso (b) to section 10(2)(vi) is to make the unabsorbed carried forward depreciation partake of the same character as the current depreciation in the following year, so that it is available, unlike unabsorbed carried forward business loss, for being set off against other heads of income of that year. That this is so becomes clear from this court's observations in faipuria China Clay Mines (P.) Ltd.'s case, [1966] 59 ITR 555, appearing at page 561 of the report which runs thus:

‘The unabsorbed depreciation allowance is carried forward under proviso (b) to section 10(2)(vi) and the method of carrying it forward is to add it to the amount of the allowance for 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.’”

14. The learned advocate for the Revenue contended to the contrary. He drew our attention to the memorandum explaining the provisions in the Finance Bill, 1975, where the new section 44A which was in the process of being brought into the statute had been discussed. The relevant part of the said memorandum is as follows [1975] 98 ITR (Statutes) 194, 195:

“Taxation of shipping profits derived by non-residents.—Under the existing law, taxable profits of foreign shipping enterprises are determined by suitably apportioning their global profits between their Indian business and foreign business or on the basis of ‘voyage accounts’. Difficult and complicated issues arise in such assessments, particularly in relation to depreciation (including unabsorbed depreciation of earlier years), the balancing charge/allowance and the apportionment of overhead expenses. This makes the task of Income-tax Officers very onerous and, further, there is likely to be a loss of revenue due to the inability of the Income-tax Officers to get all the relevant data and evidence necessary for examining the admissibility of various expenses.”

15. On a consideration of the relevant statutory provisions, it appears to us that business loss as contemplated in section 72 of the Income-tax Act, 1961, is the net result of a particular computation under the head “Profits and gains of business on such computation, business loss in a particular year is determined and after which it can be carried forward.

16. So far as depreciation is concerned, the Income-tax Act, 1961, provides for compensation of the same by an allowance. Such allowance by itself is not a loss but if it cannot be absorbed in a particular year against business income, then it is carried forward as unabsorbed depreciation allowance under section 32(2). This unabsorbed depreciation allowance does not enter into the computation of the business loss of the assessee in that particular year.

17. In the subsequent year, such unabsorbed depreciation allowance is treated to be a part of the depreciation allowance of the succeeding year and the assessee is entitled to claim absorption in respect of the same in the succeeding year.

18. On a strict reading of section 72, it cannot be said that unabsorbed depreciation allowance of an assessee is a business loss, particularly as it does not enter into the computation contemplated under the said section.

19. If a depreciation allowance cannot be and is not absorbed in a particular year from the point of view of an accountant, the business suffers a loss, but for the purpose of enabling an assessee to obtain the advantage of carrying forward such unabsorbed depreciation allowance and having it adjusted against the business income of the subsequent year, unabsorbed depreciation allowance and the business loss carried forward must be treated as separate.

20. In view of the clear language of section 44B, it appears to us that while it is open to the assessee to claim adjustment of business loss of past years which have been carried forward against its business income computed under the said section, it is not open to the assessee to put unabsorbed depreciation carried forward in the same bracket as carried over business loss and also seek such adjustment of the same qua loss. The assessee must come strictly within the four corners of the section in order to be entitled to the advantage.

21. Incidentally, we note that in the scheme of the new section 44B, the concept of business loss will be irrelevant inasmuch as in the computation of income under the said section, the income of the assessee cannot go beyond “nil”.

22. For the above reasons, the question referred is answered in the negative and in favour of the Revenue. In the facts and circumstances, there will be no order as to costs.

Mukul Gopal Mukherji, J.:— I agree.