The Judgment of the Court was delivered by

Paripoornan, J.:— In view of the importance of the questions raised in the case, a learned Single Judge of this Court by order dated 3-3-1982 referred the above Original Petition to be heard by a Division Bench. The petitioner is a company carrying on business of spinning and weaving. It is an assessee to income-tax on the files of the 2nd respondent. For the assessment year 1974-1975 (year ending 31-3-1974) the net assessable income was fixed at Rs. 24,67,658/-. The assessable income was Rs. 28,77,301/- before deducting the depreciation allowance. From the net income arrived at, i.e Rs. 24,67,658/-, the Income-tax Officer set off the loss of the earlier years. For the years 1966-1967, 1967-1968, 1968-1969, 1969-1970 and 1970-1971 the loss was set off in full and for the year 1971-1972 the loss was set off in part to the extent of Rs. 87,259/-. The total loss of the previous years so set off from 1966-1967 to 1971-1972 which amounted to Rs. 24,67,658/- was deducted from the net income arrived at. In the result, the net assessable income was nil. In so doing, the Income-tax Officer also specifically held that the balance of the loss in respect of the earlier assessment years is allowed to be carried forward to the next year as hereunder:

Business loss 1971-1972 … Rs. 2,05,950. 1972-1973 … Rs. 3,18,934. 1973-1974 … Nil. 1974-1975 … Nil.

2. The unabsorbed depreciation carried forward from the year 1966-1967, up to 1972-1973 was also allowed to be carried forward, Unabsorbed development rebate carried forward for the year 1966-1967 was not allowed to be carried forward, as the time limit therefor was over. But the unabsorbed development rebate from the years 1967-1968 to 1974-1975 was allowed to be carried forward. The order of assessment is Ext. P1 dated 24-12-1976. The assessee filed a revision before the 1st respondent-Commissioner, of Income-tax. Kerala. The main grievance of the assessee was that the company had a taxable income of Rs. 24,67,658/- to be set off against the loss carried forward from the previous years, the unabsorbed development rebate for the year 1966-1967 onwards, or at any rate the unabsorbed development rebate for the year 1966-1967 amounting to Rs. 5,97,107/- (for which the time to carry forward expired this year), should have been given priority in the adjustment and set off. The Commissioner of Income-tax-the 1st respondent by Ext. P3 order dated 12-10-1978 held that the unabsorbed development rebate relaing to the year 1966-1967 is not entitled to priority in the adjustment and set off as against the loss of the earlier years. In this O.P the challenge is against Exts. P1 and P3 orders passed by the respondents.

3. Counsel for the assessee Mr. T.L Viswanatha Iyer contended that the Revenue erred in not carrying forward the unabsorbed development rebate of the year 1966-1967 amounting to Rs. 5,97,107/- as against the net income arrived at for the year 1974-1975 at Rs. 24,67,658/. It was contended that the unabsorbed development rebate for the year 1966-1967 of Rs. 5,97,107 should have been first set off, before setting off the loss of the prior years from 1966-1967 to 1971-1972. The period of 8 years enabling the assessee to carry forward the unabsorbed development rebate will expire by this year. It cannot be carried forward to the subsequent year in view of expiry of the time provided therefor. So, it should have been given priority. In the alternative, it was contended that out of the net income arrived at i.e Rs. 24,67,658/- the Income-tax Officer should have first set off the unabsorbed development rebate for 1966-1967 amounting to Rs. 5,97,107/- and then should have set off the business loss of Rs. 3,89,856/- for the year 1966-1967 before adjusting the loss etc. of the years 1967-1968 onwards. The fetter disabling the assessee to carry forward the loss of the prior years up to 8 years is confined to unabsorbed development rebate and business loss. It is not applicable in the case of unabsorbed depreciation. On the other hand counsel for the Revenue Mr. P.K Ravindranatha Menon sought to defend the order passed by the Income-tax Officer and as confirmed by the 1st respondent, the Commissioner of Income-tax. We heard counsel at length.

4. Ss. 32(1), 32(2), 33(1)(a), 33(2) read with the explanation and Ss. 72(1) and 72(2) of the Income-tax Act 1961 are relevant in this regard. They are extracted herein below:

“32. Depreciation.-(1) in respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of S. 34, be allowed

(2) Where, in the assessment of the assessee (or, if the assessee is a registered firm 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 (ii-a) or clause (iv) or clause (v) or clause (vi) of sub-section (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 S. 72 and sub-section (3) of S. 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.

33. Development rebate—(1)(a) In respect of a new ship or new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of S. 34, be allowed a deduction, in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, a sum by way of development rebate as specified in clause (b).

(2) In the case of a ship acquired or machinery or plant installed after the 31st day of December, 1957, where the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be, (the total income for this purpose being computed without making any allowance under sub-section (1) or sub-section (1A) of this section or sub-section (1) or S. 33A or any deduction under Chapter VI-A or S. 280-C) is nil or is less than the full amount of the development rebate calculated at the rate applicable thereto under sub-section (1) or sub-section (1 A), as the case may be,-

(i) the sum to be allowed by way of development rebate for that assessment year under sub-section (1) or sub-section (1A) shall be only such amount as is sufficient to reduce the said total income to nil; and

(ii) the amount of the development rebate, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment year, and, the development rebate to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year, computed in the manner aforesaid, to nil and the balance of the development rebate, if any still outstanding shall be carried forward to the following assessment year and so on, so however that no portion of the development rebate shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be.

Explanation.—Where for any assessment year development rebate is to be allowed in accordance with the provisions of sub-section (2) in respect of ships acquired or machinery or plant installed in more than one previous year, and the total income of the assessee assessable for that assessment year (the total income for this purpose being computed without making any allowance under sub-section (1) or sub-section (1 A) of this section or sub-section (1) of S. 33A or any deduction under Chapter VI-A or S. 280-O) is less than the aggregate of the amounts due to be allowed in respect of the assets aforesaid for that assessment year, the following procedure shall be followed, namely:—

(i) the allowance under clause (ii) of sub-section (2) shall be made before any allowance under clause (i) of that sub-section is made; and

(ii) where an allowance has to be made under clause (ii) of sub-section (2) in respect of amounts carried forward from more than one assessment year, the amount carried forward from an earlier assessment year shall be allowed before any amount carried forward from a later assessment year.

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72. Carry forward and set off of business losses.—(1) Where for any assessment year, the net result of the computation under the head “Profits and gains of business or profession” is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of S. 71, so much of the loss as has not been so set off or where the assessee has income only under the head “Capital gains” relating to capital assets other than short-term capital assets and has exercised the option under sub-section (2) of that section or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and

(i) it 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 that assessment year; and

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on:

(2) Where any allowance or part thereof is, under Sub-section (2) of S. 32 or sub-section (4) of S. 35, to be carried forward, effect shall first be given to the provision of this section.

5. Briefly stated, under S. 32(2) of the Act unabsorbed depreciation allowance of the earlier year or years shall be deemed to be part of that allowance for the current year. The current year's net assessable income will be arrived at after affording depreciation allowance. Ordinarily, in view of S. 32(2), the unabsorbed depreciation allowance of the previous year or years, should also be deducted. But S. 72(2) specifically provides that such unabsorbed depreciation allowance carried forward shall be given effect to only after giving effect to the provisions of S. 72. S. 72 provides for “carrying forward and set off” of business loss. The current year's income will be determined, after set off is given for the losses incurred in that year, against the profits and gains of business or profession, assessable for that year (current year). Thereafter, unabsorbed loss of the previous years carried forward shall also be set off against the balance assessable income of the current year. In other words, if there is unabsorbed depreciation allowance carried forward under S. 32(2) and unabsorbed business loss under S. 72(1), in view of S. 72(2) of the Act the business loss of the earlier years will be entitled to priority. According to counsel for the petitioner, this may be so, in view of the specific provision contained in S. 72(2) of the Act. Says counsel, S. 72(2) of the Act does not make any reference to S. 33(1) read with S. 33(2). S. 33(1) and (2) alone deal with the unabsorbed development rebate. The scheme of the Act will show that there is nothing either in S. 72 or anywhere else to the effect that S. 33(2) is subject to S. 72(2). On a combined reading of S. 32(1), 32(2), 33(1), 33(2). 72(1) and 72(2) of the Income-tax Act 1961, we are unable to accept the aforesaid contention of the counsel for the petitioner. In Commissioner of Income-tax v. Gujarat State Warehousing Corporation (104 ITR 1) at page 9 the court held as follows:

“It is no doubt true that sub-section (2) of S. 72 makes a reference to Sub-section (2) of S. 32. But simply because this reference is made, it does not follow that sub-section (2) of S. 72 brings in, even the deeming fiction, for treatment. Sub-section (2) of S. 32 is in two parts and provides for two things. Its first part provides for carrying forward of un-absorbed 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 S. 72 refers to an allowance which is to be “carried forward”, it refers to the first part of Sub-section (2) of S. 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 S. 32 is made “subject to” the provisions of sub-section (2) of S. 72. The fact that the deeming fiction of Sub-section (2) of S. 32 is not made absolute, and is to be operative subject to the provisions of sub-section (2) of S. 72 shows, beyond any dispute, that before giving effect to the deeming fiction, provisions of sub-section (2) of S. 72 have to be worked out, since the impact of sub-section (2) of S. 72 is only on “carried forward allowance”, it must follow that at the time of working out sub-section (2) of S. 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 S. 32(2) are thus circumscribed and limited by the operation of S. 72(2).”

6. In Mysore Paper Mills Ltd. v. Commissioner of Incometax (117 ITR 132) a Division Bench of the Karnataka High Court after citing with approval the above decision of the Gujarat High Court, took the view, that if the 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. The question before the Karnataka High Court was a competition between the unabsorbed development rebate of the earlier years as aga inst the unabsorbed carried forward depreciation of earlier years. Dealing, with the argument that the unabsorbed development rebate allowed under S. 33 is part of the business loss allowed to be carried forward and so it should be given priority by reason of S. 72(2) over the unabsorbed depreciation allowance (S. 32(2)), the court held as follows:

“S. 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.”

7. In Commissioner of Income-tax v. Coromandel Steels Ltd. (130 ITR. 856) at page 863 after referring to the decision of the Karnataka High Court in Mysore Paper Mills case (117 ITR. 132) the Madras High Court held as follows:

“In that case, the competition for adjustment was between carried forward depreciation and carried forward development rebate. It was held that carried forward depreciation had precedence over unabsorbed development rebate. The same consideration which applied to determine the priority in this manner would equally apply to the present case also. In fact, in the present case, there is unabsorbed depreciation and also unabsorbed development rebate and in addition there are business losses, which were brought forward. The priority between unabsorbed depreciation and unabsorbed development rebate would be covered by the decision of the Karnataka High Court, while in respect of business loss, applying the same reasoning as in the said case and also the considerations which have been adverted to earlier, business loss would have precedence over both unabsorbed depreciation as welt as unabsorbed development rebate.”

8. Kanga and Palkhivala in The Law and Practice of Incometax, 7th Edn. (1976) Vol. 1, page 402 state as follows:

“In cases where an assessee is entitled to both depreciation and development rebate, the question arises as to which should be deducted first. Having regard to the provisions of S. 33(2), this question has to be considered by reference to the date when the assets were installed.

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In respect of assets installed on or after 1st January 1958, the position emerging from a combined reading of Ss. 2(45), 32(2), 33(2), 33A(2) and 72(2) is that the allowances and losses should be deducted in the order in which they are enumerated below, in a case where the profits are insufficient to absorb all of them:

First, current depreciation (s 32(1); secondly, carried forward losses of earler years (s. 72(1)); thirdly, unabsorbed depreciation of earlier years (s. 32(2)); fourthly, unabsorbed development rebate of earlier years (s. 33(2)(ii)); fifthly, current development rebate (s. 33(2)(1)); sixthly, unabsorbed development allowance of earlier years (s. 33A(2)(ii)); and seventhly, current development allowance (s. 33A(2)(i)).

Therefore, in a case where there is unabsorbed depreciation allowance, the development rebate cannot be deducted at all. The result of this may welt be that, over a period of eight years, the depreciation may continue to be carried forward and the development rebate may never get a chance of being actually allowed since the right to the rebate lapses after eight years.”

9. In Chaturvedi and Pithiasaria's Income Tax Law, 3rd Edn (1981) Vol. I, at page 958 it is stated as follows:

“Where there are claims for absorption of current depreciation, unabsorbed depreciation, carried forward business loss and unabsorbed development rebate, the order of precedence for set off and absorption will be: firstly, the current depreciation is to be deducted from the current profits; secondly, the carried forward business loss is to be set off because of the fact that the legal fiction of S. 32(2) has been made subject to the provisions of S. 72(2); thirdly, the unabsorbed depreciation is to be set off; and lastly, the unabsorbed development rebate shall come up for set off (Mysore Paper Mills Ltd. v. CIT, (1979) 117 ITR 132 (Karn.); CIT v. Coromandel Steels Ltd., (1982) 130 ITR 856 (Mad)).”

10. We see no reason to differ from the reasoning of the Gujarat, Karnataka and the Madras High Courts in the decisions referred to above. In the light of the aforesaid decisions we see no error of law or error of jurisdiction in Exts. P1 and P3 orders. The Revenue has set off the unabsorbed business loss of the earlier years and still there is balance left over on that count. That apart there is unabsorbed depreciation which is carried forward for the subsequent years. It is only after wiping out such (balance) unabsorbed business loss and also the unabsorbed depreciation, the question of any set off of the unabsorbed development rebate can or will arise. No such contingency arose for consideration in this case. In the circumstances, we are of the view that there is no error or other infirmity in Ext. P1 or Ext. P3 orders as contended by the petitioner's counsel. The Original Petition is dismissed. There shall be no order as to costs.

Dismissed.

11. Immediately after the Judgment was pronounced counsel for the petitioner, Mr. T.L Viswanatha Ayyar, orally prayed for the grant of a certificate for appeal to the Supreme Court of India. We are not satisfied that the case involves any substantial question of law of general importance which needs to be decided by the Supreme Court. Leave rejected.

12. Leave rejected.