1962-VIL-133-GUJ-DT

Equivalent Citation: [1964] 51 ITR 693 (Guj)

GUJARAT HIGH COURT

Income-tax Reference No 5 of 1961

Dated:03.10.1962

COMMISSIONER OF INCOME-TAX

Vs

GIRDHARLAL HARIVALLABHADAS MILLS CO. LTD

Bench

K. T. DESAI C.J. AND BHAGWATI, J.

STATEMENT OF CASE

By this application the Commissioner of Income-tax, Gujarat, requires the Tribunal to refer to the High Court a question of law which is said to arise out of the order of the Tribunal dated June 7, 1960, in I.T.A. No. 12180 of 1958-59. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order of the Tribunal, we hereby draw up a statement of the case and refer it to the High Court of Gujarat at Ahmedabad, under section 66(1) of the Indian Income- tax Act, 1922.

2. The assessee runs a textile mill. It also has income from property, interest, etc. The business profits for the previous year was determined at Rs 7,94,272, against which was set off Rs 1,30,529 for depreciation and development rebate, leaving the income for the previous year at Rs 6,63,743. The assessee had also carried forward loss of Rs 4,19,095 by adjusting which the business income was reduced to Rs 2,44,648. The assessee had unabsorbed depreciation of Rs 5,62,317 determined for the preceding years. The Income-tax Officer allowed a set-off of the unabsorbed depreciation of the preceding years only to the extent of the business income during the year under consideration, and as such the profit from business was determined at nil. The assessee also had income from property which was determined at Rs 5,614. The assessment was completed on a total income of Rs 5,614.

3. In appeal, the Appellate Assistant Commissioner held that by virtue of the provisions of section 10(2)(vi) the unabsorbed depreciation of the preceding year was to be treated as part of the depreciation allowance of the current year. He therefore held that the business income would not be determined at nil but at a negative figure of Rs 3,17,669 after setting off the unabsorbed depreciation of the preceding years against which the property income of Rs 5,614 was to be set off, so that the income for the previous year was to be assessed at nil and the balance of the depreciation was to be carried forward to subsequent years.

4. On further appeal by the Income-tax Officer, the Tribunal upheld the order of the Appellate Assistant Commissioner. The considerations which weighed with the Tribunal in arriving at their decision are contained in paragraph 3 of their order, which is annexed hereto as annexure " A " and forms part of the case.

5. On the above facts the following question of law is referred :

           " Whether the Appellate Tribunal was right in holding that the unabsorbed depreciation allowance of the earlier years deemed to be part of the depreciation allowance of the current year under section 10(2)(vi) of the Act can be set off against income under other heads ?"

6. The Commissioner of Income-tax wants the question to be framed as follows:

          " Whether the Appellate Tribunal was right in holding that the unabsorbed depreciation allowance of the earlier years deemed to be a part of depreciation allowance of the current year under section 10(2)(vi) of the Act can be set off, unlike other business losses, against income under other heads. "

We consider that the question as framed by us brings out the matter in issue.

7. The parties agree that the facts are correctly stated and no material facts have been omitted.

J. M. Thakore, Advocate-General, for the Commissioner.

K. H. Kaji, for the assessee.

JUDGMENT

The judgment of the court was delivered by

K.T. DESAI C.J.--This is a reference under section 66(1) of the Indian Income-tax Act, 1922. The assessee in this case is Girdharlal Harivallabhadas Mills Co. Ltd. The assessment proceedings relate to the assessment year 1957-58. The business profit for the relevant previous year of the assessee- company was determined at Rs 7,94,272. As against the amount of this profit, depreciation and development rebate amounting to Rs 1,30,529 was set off, leaving the income for the previous year from business at Rs 6,63,743. The assessee had carried forward the loss of Rs 4,10,095 from the preceding years. After giving a set-off for this amount, the business income was reduced to Rs 2,44,648. The assessee had an unabsorbed depreciation of Rs 5,62,317 in respect of the preceding years. The Income-tax Officer set off the unabsorbed depreciation of the preceding years to the extent of Rs 2,44,648, leaving a balance of Rs 3,17,669 as the unabsorbed depreciation for carry forward purposes. The assessee had also income falling under the head "income from property" which was determined at Rs 5,614. The Income-tax Officer assessed the assessee on a total income of Rs 5,614. The assessee appealed against the decision of the Income-tax Officer. The Appellate Assistant Commissioner held that by virtue of the provisions contained in section 10(2)(vi) the unabsorbed depreciation of the preceding years was to be treated as a part of the depreciation allowance for the year in question. He, therefore, permitted the amount of unabsorbed depreciation to be set off also against the income from property amounting to Rs 5,614 leaving a balance of Rs 3,12,055 as the unabsorbed depreciation for carry forward purposes. The matter was carried further to the Income-tax Appellate Tribunal. The Tribunal upheld the decision of the Appellate Assistant Commissioner, whereupon the Commissioner of Income-tax, Gujarat, applied to the Income-tax Appellate Tribunal for a reference under section 66(1). Thereupon, the Income-tax Tribunal has raised the following question and referred the same for our decision:

               "Whether the Appellate Tribunal was right in holding that the unabsorbed depreciation allowance of the earlier years deemed to be part of the depreciation allowance of the current year under section 10(2)(vi) of the Act can be set off against income under other heads?"

The Commissioner of Income-tax had desired that the question should be framed slightly differently. The question as required to be raised by the Commissioner was the following:

          "Whether the Appellate Tribunal was right in holding that the unabsorbed depreciation allowance of the earlier years deemed to be a part of depreciation allowance of the current year under section 10(2)(vi) of the Act can be set off, unlike other business losses, against income under other heads."

The learned Advocate-General, who appears on behalf of the Commissioner, has asked us to consider whether we should reframe the question as suggested by the Commissioner of Income-tax. In our view, what is sought to be done by the Commissioner is to emphasise a factor which will have to be borne in mind in answering the question. We will bear the factor in mind, but it is not necessary, for the purpose of clearly bringing out the point at issue, to alter the question as framed.

Dealing with the merits of the matter, it will be necessary first to refer to the provisions of section 10. Section 10(1) provides that the tax shall be payable by an assessee under the head "profits and gains of business, profession or vocation" in respect of the profits or gains of any business, profession or vocation carried on by him. Sub-section (2)(vi) provides that such profits or gains shall be computed after making an allowance in respect of depreciation of buildings, machinery, plant or furniture being the property of the assessee used for the purposes of business, profession or vocation, of a sum equivalent to such percentage on the written down value thereof as may in any case or class of cases be prescribed. Proviso (b) to section 10(2)(vi), to the extent that it is relevant, runs as under:

                  "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."

Under the aforesaid provisions, an unabsorbed depreciation of Rs 5,62,317 of the preceding years had been carried forward to the assessment year 1957-58. By virtue of what is contained in proviso (b) such unabsorbed depreciation was liable to be added to the amount of allowance for depreciation for the assessment year in question and was to be "deemed to be part of that allowance" for the said assessment year. The learned Advocate-General contends that this unabsorbed depreciation, even though it is deemed to be part of the depreciation allowance for the assessment year, is not available for the purpose of set-off against income arising under other heads (i.e., heads other than "profits and gains of business, profession or vocation") by reason of the use of the words in the said proviso "subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24".

We will now turn to the provisions contained in section 24 with a view to seeing whether there is anything contained in the provisions of clause (b) of the proviso to sub-section (2) of section 24 which would result in the sum of Rs 3,17,669 being the balance of the unabsorbed depreciation of the previous years not being available for the purpose of set-off against the income of Rs 5,614 under the head "income from property" for the assessment year 1957-58. Section 24(1) 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. There are several provisos to that sub-section to which it is not necessary to refer in the present case. The various heads mentioned in section 6 are the following:

(i) Salaries; (ii) Interest on securities; (iii) Income from property; (iv) Profits and gains of business, profession or vocation; (v) Income from other sources; and (vi) Capital gains.

Under section 24(1) apart from cases covered by the various provisos, the loss sustained under any of the heads mentioned in section 6 in any year is liable to be set off against the income, profits or gains under any other head in that year. By virtue of the deeming provisions contained in proviso (b) to section 10(2)(vi) the amount of depreciation allowance which has remained unabsorbed and which has been carried forward from the preceding years is liable to be treated as part of the depreciation allowance for the assessment year in question and the loss arising by reason of taking the same into account is liable to be treated as a loss under the head "profits and gains of business, profession or vocation" for the assessment year and if section 24(1) stood by itself such loss would be liable to be set off against income, profits or gains under any other head. Then comes section 24(2) which provides that where any assessee sustains a loss of profits or gains in any year....in any business, profession or vocation, and the loss cannot be wholly set off or the whole loss, where the assessee had no other head of income, shall be carried forward to the following year, and (i) where the loss was sustained by him in a business consisting of speculative transactions, it shall be set off only against the profits and gains, if any, of any business in speculative transactions carried on by him in that year; (ii) where the loss was sustained by him in any other business, profession or vocation, it shall be set off against the profits and gains, if any, of any business, profession or vocation carried on by him in that year, provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year; and (iii) if the loss in either case cannot be wholly 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 carried forward for more than eight years. Sub-section (2) of section 24 comes into operation where an assessee sustains a loss in any year and the loss cannot be wholly set off in that year under sub-section (1), so that where effect could be given to the provisions contained in section 24(1), the provisions of section 24(2) are not attracted. If the matter had stood without the provisos to sub-section (2) of section 24, the result would have been that by reason of the deeming provision referred to above the unabsorbed depreciation allowance of the preceding years was liable to be regarded as part of the depreciation allowance for the assessment year in question and the loss arising as a result thereof was liable to be dealt with under the provisions of section 24(1) to the extent that effect could be given thereto.

I will now refer to proviso (b) to section 24(2) on which great reliance has been placed on behalf of the Commissioner. That proviso runs as under:

"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."

The proviso lays down that effect should first be given to the provisions contained in sub-section (2) of section 24 before proceeding to deal with the unabsorbed depreciation allowance of the preceding years under the provisions contained in section 24(1). In effect, what is provided is that where loss has been carried forward from the preceding years which arises otherwise than on account of unabsorbed depreciation allowance, the same shall first be set off under the provisions of section 24(2) before the amount of unabsorbed depreciation allowance of the preceding years is set off under the provisions of section 24(1). It may be noticed that at the relevant time losses under section 24(2) could not be carried forward for more than eight years. There is not such limitation in connection with the unabsorbed amount of depreciation allowance. The Legislature has thus provided that the type of loss which could be carried forward for a limited number of years under section 24(2) should first be set off before the amount of unabsorbed depreciation allowance of previous years is not set off under section 24(1). It is to carry out this intention that the Legislature has stated in proviso (b) to section 10(2)(vi) that the deeming provisions will apply "subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24". There is nothing in proviso (b) to section 24(2) which supports the contention of the learned Advocate-General. Under the circumstances, the sum of Rs 3,17,662 being the balance of the unabsorbed depreciation would be available for the purpose of set-off against the income of Rs 5,614 under the head "income from property".

There is a decision of the Calcutta High Court in the case of Jaipuria China Clay Mines Private Ltd. v. Commissioner of Income-tax*, to which the learned Advocate-General very fairly invited our attention, which lends support to the aforesaid conclusion.

Our answer to the question is in the affirmative. The applicant will pay to the respondent the costs of the reference.

Question answered in the affirmative.