Vildirect: IncomeTax-caselaws-2004-VIL-340-MAD-DT

2004-VIL-340-MAD-DT

Equivalent Citation: [2005] 272 ITR 165, 193 CTR 641, 144 TAXMANN 812

MADRAS HIGH COURT

Date: 15.09.2004

SESHASAYEE PAPER AND BOARDS LIMITED

DEPUTY COMMISSIONER OF INCOME-TAX.

BENCH

Judge(s) : P. D. DINAKARAN., K. RAVIRAJA PANDIAN.

JUDGMENT

The judgment of the court was delivered by

P.D. Dinakaran J. - Both these appeals are preferred by the assessee. T.C. (A) No. 300 of 2001 is with reference to the assessment year 1991-92 and T.C. (A) No. 41 of 2002 is with reference to the assessment year 1992-93.

The assessee is a public limited company engaged in the business of manufacturing papers. The assessee filed its return under section 139 of the Income-tax Act for the assessment year 1991-92 declaring their income as "nil", which was arrived at after adjusting the carry forward investment allowance relating to the earlier years. The assessee-company claimed that the carry forward investment allowance may be absorbed in priority over the carry forward depreciation. However, the assessing authority, while passing the assessment order dated February 15, 1993, relating to the assessment year 1991-92, refused to accept the contention of the assessee and deducted the unabsorbed depreciation for the earlier years first, which reduced the taxable income to "nil". In his assessment order dated February 15, 1993, relating to the assessment year 1991-92, the assessing authority observed as follows:

"The assessee has claimed priority for carry forward of investment allowance over carry forward depreciation. The assessee's claim is untenable under the provisions of the Act as unabsorbed depreciation gets precedence over unabsorbed investment allowance and hence the assessee's claim is not acceded."

The said order of assessment dated February 15, 1993, relating to the assessment year 1991-92, was, on appeal, confirmed by the Commissioner of Income-tax (Appeals) by his order dated July 6, 1993, and in turn again on appeal, confirmed by the Income-tax Appellate Tribunal, by its order dated November 20, 2000, aggrieved by which the petitioner has preferred T.C. (A) No. 300 of 2001.

Pending the above appeal, the assessing authority by his order dated December 6, 1993, relating to the assessment year 1992-93 again refused to grant the benefit of deduction of carry forward of investment allowance and also refused to accept the deduction under section 80HHC before the set off of unabsorbed loss and unabsorbed depreciation, which was confirmed by the Commissioner of Income-tax (Appeals) by his order dated April 4, 1994. On further appeal, the Income-tax Appellate Tribunal, by an order dated September 19, 2001, accepted the contentions of the assessee with regard to the claim of deduction under section 80HHC, however following the earlier decision relating to the assessment year 1991-92, it held that the unabsorbed depreciation should first be allowed before allowing the carry forward of investment allowance, even for the assessment year 1992-93. Aggrieved by the said order dated September 19, 2001, with respect to the assessment year 1992-93, the assessee has preferred T.C (A) No. 41 of 2002.

Mr. Ramachandran, learned senior counsel appearing for the petitioner, raises the following substantial questions of law in the respective appeals:

T.C. (A) No. 300 of 2001:

(a) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in holding that the unabsorbed depreciation should be allowed before the allowance of the unabsorbed investment allowance in computing the income of the assessee for the assessment year 1991-92?

(b) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal having noticed that the appellant's case is that after quantifying the allowance of depreciation for each previous year, the assessee could exercise option not to claim the unabsorbed depreciation against the income of the current year and postpone such adjustment till unabsorbed investment allowance is absorbed, is right in coming to the conclusion that there was competition regarding the priority of claims and that the claim for depreciation should precede the claim for unabsorbed investment allowance?

(c) Whether, on the facts and in the circumstances of the case, the Tribunal having found that the assessee had not made a claim for set off of the unabsorbed depreciation, it is open to the assessing authority to set off the unabsorbed depreciation in computing the income for the year 1991-92, even without a claim from the assessee?

(d) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in directing the allowance of the unabsorbed depreciation relating to the previous year before the allowance of unabsorbed investment allowance carried forward from the previous years holding that the assessee is not entitled to the allowance of the unabsorbed investment allowance before allowance of the unabsorbed depreciation in computing the income for the assessment year 1991-92.?"

T.C. (A) No. 41 of 2002:

(a) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in holding that the unabsorbed depreciation should be allowed before the allowance of the unabsorbed investment allowance in computing income of the assessee for the assessment year 1992-93?

(c) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in directing the allowance of the unabsorbed depreciation relating to the previous year before the allowance of unabsorbed investment allowance carried forward from the previous years holding that the assessee is not entitled to the allowance of the unabsorbed investment allowance before allowance of the unabsorbed depreciation in computing the income for the assessment year 1992-93?"

According to Mr. Ramachandran, learned senior counsel appearing for the appellant/assessee, in the absence of any claim by the assessee for deduction towards the depreciation allowance, the assessing authority cannot erroneously assume that such a claim would be untenable under the provisions of the Income-tax Act. He further contends that the assessee cannot be compelled to seek depreciation allowance if he has not chosen to do so and as a result, the unabsorbed investment allowance should be given priority over the unabsorbed depreciation. In other words, the assessing authority has erred in assuming that the assessee had claimed priority of the unabsorbed investment allowance over the unabsorbed depreciation when the assessee never claimed any depreciation allowance. In support of the above contentions, Mr. Ramachandran, learned senior counsel, places reliance on the following decisions:

(i) CIT v. Mahendra Mills [2000] 243 ITR 56 (SC);

(ii) Ram Nath Jindal v. CIT [2001] 252 ITR 590 (P&H);

(iii) Guindy Machine Tools P. Ltd. v. CIT [2002] 254 ITR 780 (Mad); and

(iv) CIT v. Sree Senhavalli Textiles P. Ltd. [2003] 259 ITR 77 (Mad).

The second limb of the argument of Mr. Ramachandran, learned senior counsel, is that a liberal interpretation should be given, which is more beneficial to the assessee, as held by the apex court in CIT v. South Arcot District Co-operative Marketing Society Ltd. [1989] 176 ITR 117 and Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188, 197, even though the decisions of the High Courts are otherwise as held in,-

(i) Shree Ramesh Cotton Mills Ltd. v. CIT [1979] 116 ITR 366 of the Calcutta High Court;

(ii) Monogram Mills Co. Ltd. v. CIT [1982] 135 ITR 122 of the Gujarat High Court;

(iii) CIT v. Coromandel Steels Ltd. [1981] 130 ITR 856 of the Madras High Court;

(iv) Calicut Modern Spinning and Weaving Mills Ltd. v. CIT [1985] 153 ITR 810 of the Kerala High Court; and

(v) Mysore Paper Mills Ltd. v. CIT [1979] 117 ITR 132 of the Karnataka High Court.

Per contra, Mrs. Pushya Sitharaman, learned senior counsel appearing for the Income-tax Department, contended that the law is well settled on the point that any unabsorbed depreciation allowance should be allowed before the unabsorbed investment allowance, irrespective of the facts, (i) whether the assessee claimed unabsorbed depreciation or not, and (ii) even assuming the order of priority should go, only the unabsorbed depreciation allowance should be allowed, as against the unabsorbed investment allowance, placing reliance on the Division Bench decisions of various High Courts, viz.,-

(i) Shree Ramesh Cotton Mills Ltd. v. CIT [1979] 116 ITR 366 of the Calcutta High Court;

(ii) Monogram Mills Co. Ltd. v. CIT [1982] 135 ITR 122 of the Gujarat High Court;

(iii) Calicut Modern Spinning and Weaving Mills Ltd. v. CIT [1985] 153 ITR 810 of the Kerala High Court;

(iv) Bihar State Industrial Development Corporation Ltd. v. CIT [1987] 165 ITR 671 of the Patna High Court;

(v) Utkal Machinery Ltd. v. CIT [1987] 167 ITR 119 of the Orissa High Court;

(vi) CIT v. Premier Automobiles Ltd. [1994] 206 ITR 1 of the Bombay High Court; and

(vii) Renusagar Power Co. Ltd. v. CIT (No. 2) [1999] 235 ITR 590 of the Allahabad High Court.

Mrs. Pushya Sitharaman, learned senior standing counsel for the Department, further contends that the liberal construction theory will not be applicable to the facts of the case in the matter of revenue placing reliance on the decision of the various High Courts in, -

(i) CIT v. Gujarat State Warehousing Corporation [1976] 104 ITR 1 of the Gujarat High Court;

(ii) CIT v. Coromandel Steels Ltd. [1981] 130 ITR 856 of the Madras High Court;

(ii) Mysore Paper Mills Ltd. v. CIT [1979] 117 ITR 132 of the Karnataka High Court.

(iv) Calicut Modern Spinning and Weaving Mills Ltd. v. CIT [1985] 153 ITR 810 of the Kerala High Court;

(v) Bihar State Industrial Development Corporation Ltd. v. CIT [1987] 165 ITR 671 of the Patna High Court;

(vi) Utkal Machinery Ltd. v. CIT [1987] 167 ITR 119 of the Orissa High Court; and

(vii) Renusagar Power Co. Ltd. v. CIT (No. 2) [1999] 235 ITR 590 of the Allahabad High Court.

Learned senior standing counsel appearing for the Revenue further contends that in the decision of our High Court in Coromandel Steels Limited's case [1981] 130 ITR 856, it has been clearly held that there is no ambiguity under the scheme of the statute and therefore it is not possible to apply any consideration based on the provisions being applied so as to be more advantageous to the assessee or to give the assessee a kind of choice in the matter of adjustment.

We have given our careful consideration to the submissions of both sides.

The pivotal question that arises for consideration in these appeals is, whether the unabsorbed depreciation should be allowed before the unabsorbed investment allowance and what would be the order of priority in claiming the unabsorbed depreciation and unabsorbed investment allowance.

It is true that in the decision of the apex court in Mahendra Mills' case 14 [2000] 243 ITR 56 referred to above, it is held that the income under the head "Profits and gains of business or profession" is taxable to income-tax under section 28 and the income under section 29 is to be computed in accordance with the provisions contained in sections 30 to 43A. It is for the assessee to see that the claim of depreciation is to his advantage or otherwise. If he does not wish to avail of that benefit for some reason or other, the benefit cannot be forced upon him. In Mahendra Mills' case [2000] 243 ITR 56 (SC), it was also held that the Assessing Officer cannot grant depreciation allowance when the same is not claimed by the assessee.

Following the ratio laid down by the apex court in Mahendra Mills' case [2000] 243 ITR 56, the Punjab and Haryana High Court in Ram Nath Jindal v. CIT [2001] 252 ITR 590, held that the Assessing Officer could not grant the depreciation allowance when it is not claimed by the assessee as there is no provision by which depreciation could be fictionally deemed to have been claimed and granted. It is thus held by the Punjab and Haryana High Court that when the assessee had not claimed any depreciation, it was not permissible for the Assessing Officer to allow depreciation when it was not claimed, while passing assessment orders for the relevant assessment years under section 143(1) of the Income-tax Act.

It is also true that this court in Guindy Machine Tools P. Ltd. v. CIT [2002] 254 ITR 780, following the ratio laid down in Mahendra Mills' case [2000] 243 ITR 56 (SC), held that a privilege, namely, the privilege of claiming depreciation cannot be turned into a disadvantage even when the assessee does not claim depreciation. An option given to the assessee, therefore, cannot be made into an obligation. Similar view was taken by this court in CIT v. Sree Senhavalli Textiles P. Ltd. [2003] 259 ITR 77, holding that depreciation need not be allowed to the assessee as the assessee had specifically withdrawn the claim made earlier by filing a revised return.

But, in the case on hand, it is not the issue whether the assessee could be compelled to claim depreciation allowance, but, if he fails to claim, what would be the order of priority between unabsorbed depreciation allowance and unabsorbed investment allowance.

As rightly pointed out by Mrs. Pushya Sitaraman, learned senior standing counsel appearing for the Revenue, the assessee declared the total income as "nil" for the assessment year 1991-92 mentioning a sum of Rs. 1,61,87,129 as current depreciation for income-tax purposes and Rs. 2,87,11,267 as unabsorbed depreciation carried forward and set off for the earlier years. The assessee declared the total income as "nil" for the assessment year 1992-93 mentioning a sum of Rs. 2,12,68,332 as current depreciation for income-tax purposes and Rs. 6,29,26,069 as unabsorbed depreciation carried forward and set off for the earlier years.

In our considered opinion, the assessing authority has, therefore, rightly decided that even though the assessee claimed priority for the carry forward of investment allowance over the carried forward depreciation, their claim was untenable under the provisions of the Act as the unabsorbed depreciation allowance gets precedence over the unabsorbed investment allowance, as held in a catena of decisions of various High Courts including that of this court in Coromandel Steels Limited's case [1981] 130 ITR 856, wherein it is held that priority should be given to unabsorbed depreciation allowance as against unabsorbed investment allowance. The claim of the assessee based on liberal construction was also rejected in the said decision.

The Gujarat High Court in Monogram Mills' case [1982] 135 ITR 122, apart from placing reliance of the various opinions of the authorities viz., Kanga and Palkhivala's The law and Practice of Income-tax, 7th edition, Vol. I, at page 402, A.N. Aiyar's Income-tax Act, 1961, 2nd edition, at page 824, Iyengar on Income-tax, 6th edition., Vol. I at page 837, Chaturvedi & Pithisaria's Income-tax Law, 2nd edition, at page 1128, and V.S. Sundaram's The Law of Income-tax in India, has clearly held that both, by way of process of interpretation and looking to the rationale, viz., preventing erosion of the capital base of the assessee's business, the order of priority, viz., that the unabsorbed depreciation allowance gets priority over the unabsorbed investment allowance, is a correct order even as per the scheme of the Act. The relevant portion of the judgment in Monogram Mills' case [1982] 135 ITR 122 (Guj) reads as follows:

"The scheme of priority as between the carried forward business losses, unabsorbed depreciation and unabsorbed development rebate, which Mr. Patel has asked for in this case, cannot be said to be the correct order of priority. In our opinion, the correct order of priority is as under:

(1) current year's depreciation-because that is the first charge on the receipts in the profit and loss account;

(2) carried forward business losses under section 72(2) read with section 72(1);

(3) unabsorbed depreciation by virtue of the provisions of section 32(2);

(4) unabsorbed development rebate-because of the provisions of clauses (i) and (ii) of section 33(2); and

(5) current year's development rebate.

We find that all the commentators on the Income-tax Act, 1961, have also mentioned in their respective commentaries this very order of priority, but, barring one or two, none of the commentators have given any reason in support of their conclusion regarding this order of priority. In Kanga and Palkhivala's The Law and Practice of Income-tax, 7th edition, Vol. I, at page 402, this very order of priority that we have mentioned hereinabove has been set out, but no reasoning have been given in support of this conclusion.

Similarly, in A.N. Aiyar's Income-tax Act, 1961, 2nd edition, at page 824, the same order of priority as we have mentioned, has been set out but barring the reference to the decision of this court in CIT v. Gujarat State Warehousing Corporation [1976] 104 ITR 1, there is no reason advanced why this order of priority has been preferred by the learned commentator.

In Iyengar on Income-tax, 6th edition, Vol. 1, at page 837, the order of priority at which we have arrived at, has been mentioned but again no reason has been given. Similar is the position so far as Chaturvedi and Pithisaria's Income Tax Law, 2nd edition, at page 1128, is concerned.

We may, however, point out that some of these commentators in their books do mention the relevant provisions like section 72(1) and section 33(2) against the different items mentioned in the order of priority. Jindal's Income Tax Past and Present, 3rd edition, at page 437, while mentioning this order of priority, says that development rebates are notional losses and can be set off against any other head of income in future years. Sections 32(2) and 33(2) are exceptions to section 71 which allows inter-head set off only in the year of occurrence of loss.

In V.S. Sundaram's the Law of Income Tax in India, 9th edition, page 465, the question of priority has been considered and it has been pointed out that there can be no question of priority as between current year's depreciation allowance and development rebate. Total income has first to be arrived at before considering development rebate. Unabsorbed depreciation of earlier years is treated as additional depreciation of later years under section 32(2).

Therefore, when section 33(2) talks of the total income being computed, without making any allowance under sub-section (1), i.e., for the deduction of the rebate, but after making all other deductions, it follows that unabsorbed depreciation of earlier years will have first to be deducted before development rebate is deducted. The absence of a provision, as in sections 72(2) and 73(3), may, therefore, deprive assessees of a part of the rebate owing to the eight years limit. But cases are unlikely to occur in practice having regard to business conditions of these days.

Mr. Patel is right when he says that the view that such cases of development rebate of earlier years being not available to the assessees concerned owing to the lapse of eight years are unlikely to occur in practice, is unfortunately not correct in some of the cases now coming up before the Income-tax authorities, the case before us being an instance of one of such cases.

In Depreciation, Investment Allowance, Development Rebate and Balancing Charge in Income Tax, by Ramesh C. Sharma, at page 223, the question of priority has been dealt with and there also the learned author, like V.S. Sundaram has relied upon the specific language of section 33(2).

In Chopra's Income Tax Law and Practice, 2nd edition, at page 860, the learned author has set out the order of priority as we have mentioned earlier, and explains that the expression "total income" in section 33(2) means the total income computed without making any allowance under sections 33(1), 33(1A), 33A, Chapter VI-A and section 280-O.

We note that in the 11th edition of the Law of Income Tax in India by V.S. Sundaram at page 1022, whatever has been stated in the earlier edition has been reiterated without any change.

Under these circumstances, the conclusion that we have arrived at is the conclusion which has appealed to all the learned commentators on the law of income-tax and at least two of them have relied upon the specific wordings in the parenthesis in sub-section (2) of section 33 for the purpose of fixing this order of priority. Both, by way of process of interpretation and looking to the rationale, viz., preventing erosion of the capital base of the assessee's business, the order of priority that we have mentioned earlier is the correct order of priority as between carried forward business losses, unabsorbed depreciation and unabsorbed development rebate of the previous years."

It is settled law that under section 32(2) of the Income-tax Act, 1961, a legal fiction has been created that unabsorbed depreciation of the earlier year shall form part of the current year's depreciation allowance and, therefore, it shall have to be dealt with accordingly subject, however, to the provisions of sections 72(2) and 72(3). Under section 72, the unabsorbed depreciation shall be carried forward to a subsequent year and it shall be deemed to form part of that year's depreciation and shall be set off against the profits of that year subject to the provisions of sub-section (2) thereof. From the above provisions, it is clear that before setting off the carried forward unabsorbed depreciation of the earlier year, the depreciation of the current year shall have to be deducted and then after setting off of the loss, the unabsorbed depredation, which is also treated as the current year's depreciation, shall be adjusted. Therefore, the carried forward unabsorbed depreciation of the earlier year has to be taken as a part of the current year's depreciation allowance and to be set off, to the extent possible, against income of the current year. There is no specific provision in the Act to specify the order of priority for allowing unabsorbed depreciation of the earlier years in the subsequent years, vis-a-vis carried forward unabsorbed development rebate. This is because development rebate is not a traditional loss or expenditure in the ordinary sense of the term. It is intended to give an incentive to business to investment in machinery or in modernisation of plant and equipment. It is available to an assessee on fulfilment of certain conditions specified in the Act and in the event of non-availability of sufficient profit to enable allowance of the same in the year of acquisition, a provision has been made for carry forward of the same for a period of eight years. In the case of unabsorbed depreciation, there is no time limit. The scheme of the Act makes it clear that between unabsorbed development rebate and the unabsorbed depreciation, the latter will have priority in respect of set off against the profits of subsequent years, vide the decision of the Bombay High Court in CIT v. Premier Automobiles Ltd. [1994] 206 ITR 1, wherein the decision of various High Courts in Mysore Paper Mills Ltd. v. CIT [1979] 117 ITR 132 (Karn); CIT v. Coromandel Steels Ltd. [1981] 130 ITR 856 (Mad); Calicut Modern Spinning and Weaving Mills Ltd. v. CIT [1985] 153 ITR 810 (Ker); Bihar State Industrial Development Corporation Ltd. v. CIT [1987] 165 ITR 671 (Patna) and Utkal Machinery Ltd. v. CIT [1987] 167 ITR 119 (Orissa), were followed.

It is all the more pertinent to refer that the apex court in CIT v. Mother India Refrigeration Industries P. Ltd. [1985] 155 ITR 711, held as follows:

"In computing the profits and gains of a business for the current year, depreciation for the current year must be deducted first before deducting the unabsorbed carried forward business losses of earlier years."

We are equally unable to accept the second limb of the argument of Mr. Ramachandran, learned senior counsel appearing for the petitioner, that liberal interpretation should be given, which is more beneficial to the assessee, relying on CIT v. South Arcot District Co-operative Marketing Society Ltd. [1989] 176 ITR 117 (SC) and Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC), because it is a settled law that where there is no ambiguity in the provisions of the statute it is not possible to apply any consideration based on the provision being so applied as to be more advantageous to the assessee or to give the assessee a kind of choice in the matter of adjustment, vide Coromandel Steels Ltd.'s case [1981] 130 ITR 856 (Mad) Therefore, the decisions relied on on behalf of the assessee, namely, South Arcot District Co-operative Marketing Society Limited's case [1989] 176 ITR 117 (SC) and Bajaj Tempo Limited's case [1992] 196 ITR 188 (SC) are not applicable to the facts of the case on hand, inasmuch as, we do not find any ambiguity to hold that unabsorbed investment allowance should be given priority over the unabsorbed depreciation in arriving at the total income for the purpose of income-tax under the Scheme of the Act.

Hence, finding the contentions raised on behalf of the assessee as devoid of merit and lacking legal sanction, the pivotal question, viz., whether the unabsorbed depreciation should be allowed before the unabsorbed investment allowance and what would be the order of priority in claiming the unabsorbed depreciation and unabsorbed investment allowance, is answered against the assessee and in favour of the Revenue. Accordingly, these appeals are liable to be dismissed and are therefore dismissed.

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