Commissioner of Income Tax vs Tarrapore Tea Company Ltd.

P.B. Mukharji, J.—In this Reference the only point which this Court has to answer is as follows:

Whether, on the facts and in the circumstances of the case, unabsorbed depreciation of the past years should be added to the depreciation of the current year and the aggregate of the unabsorbed depreciation and the current year''s depreciation be deducted from the income of the previous year from other heads relevant for the assessment year 1960-61.

The facts of the case are simple and short. The Assessee is a non-resident company doing business in India. Its income from business was computed at Rs. 3,13,435 and from interest on securities at Rs. 460 and from other sources at Rs. 71,146. There were brought forward losses from earlier years which were set off against the business income. The result was that such income was determined at nil. The Assessee also brought forward unabsorbed depreciation from earlier years which the Assessee claimed a set off against its income earned from other sources.

The income tax Officer rejected the. Assessee''s claim and the sum of Rs. 71,606 representing income from interest on securities and income from other sources was brought to tax. The Appellate Assistant Commissioner disagreed with the view taken by the income tax Officer and came to the conclusion that the unabsorbed depreciation brought forward from the earlier years had to be set off against the income from interest on securities and also against income from other sources.

The matter then was taken upto the Tribunal by the taxing authorities. The Tribunal relied on the decision of this Court reported in JAIPURIA CHINA CLAY MINES PRIVATE LTD. Vs. COMMISSIONER OR Income Tax, CALCUTTA., . On the basis of that authority the Tribunal dismissed the Department''s appeal. That is how the matter now comes up before us to answer the question quoted above.

Since the decision of the Tribunal the authority on which it relied has had the seal and approval of the Supreme Court, The Supreme Court in Commissioner of Income Tax, Calcutta Vs. Jaipuria China Clay Mines (P) Ltd., has laid down the law on this subject. In the first place it lays down that the unabsorbed depreciation of past years had to be added to the depreciation of the current year and the aggregate unabsorbed and current year''s depreciation had to be deducted from the total income of the previous year relevant to the year of assessment. In the second place the Supreme Court decision lays down that the income tax draws no distinction between the various allowances mentioned in Section 10(2) of the income tax Act. They have all to be deducted from the gross profits and gains of a business. According to commercial principles depreciation would be shown in the account and the profit and loss account would reflect the depreciation accounted for in its context. If the profits are not large enough to wipe out the depreciation the profit and loss account would show a loss. In the third place the Supreme Court lays down that the carrying forward of depreciation is provided for in Section 10(2)(vi) and Section 24(2) of the income tax Act only deals with losses other than losses "due to depreciation.

In that decision the Supreme Court further observed that, if Legislature had not enacted proviso (b) to Section 24(2), depreciation allowance would have been deducted out of the profits and gains in preference to any losses which might have been carried forward u/s 24. But as the losses can be carried forward only for six years u/s 24(2) (now amended to eight years), the Assessee would, in certain circumstances, have in his books losses which he would not be able to set off. The proviso (b) to Section 10(2)(vi) shows that the Legislature clearly assumes that effect can be given to depreciation allowance in the assessment of a partner.

Mr. Pal appearing for the Department had to face his major handicap against this decision. He tried to get out of the effect of this decision by putting forward two arguments, which he said, were not considered by the Supreme Court. He makes his argument in this way. The Assessee in this case before us has set off brought forward loss in the first instance against the current year''s profit in order to make his profit nil. Having done that Mr. Pal for the Department contends the Assessee is now trying to set off unabsorbed depreciation indefinitely against the income from other two heads, namely,

(i) Interest on securities and

(ii) income from other sources.

This, Mr. Pal says, he cannot do even on the basis of the Supreme Court decision.

It is difficult to uphold Mr. Pal''s submission having regard to the language of the decision of the Supreme Court. It should be said that the Supreme Court in that case specially from p. 560 traced the law and showed that the Legislature accepted the interpretation placed by the various High Courts on the Act as it stood before it was amended by Act XXV of 1953. The Supreme Court considered the earlier Lahore case in Karam Illahi Muhammad Shaft v. Commissioner of income tax (1935) 3 ITR 456. The Madras decision in A. Suppan Chettiar & Company v. Commissioner of income tax (1936) 4 ITR 211, the Nagpur decision in LAKSHMI NARAYAN SEN and SONS, LTD., IN RE., , LAXMICHAND JAIPORIA SPINNING AND WEAVING MILLS, IN RE., decision by the East Punjab High Court and also the Bombay High Court decision in Ambika Silk Mills Co. Ltd. Vs. Commissioner of Income Tax, Bombay City, . The Supreme Court thereafter pointed out at p. 561 of the report that after the amendment the same view was taken by the Bombay High Court in Commissioner of Income Tax, Bombay City I Vs. Ravi Industries Ltd., and also by the Gujrat High Court in Commissioner of Income Tax Vs. Girdharlal Harivallabhadas Mills Co. Ltd., . While discussing the post-amendment decisions, the Supreme Court points out that the only contrary view was that expressed by the Madras High Court in Commissioner of Income Tax, Madras Vs. B. Nagi Reddy, , but then the Supreme Court expressly says:

We are unable to agree with the view expressed in the last case. Having surveyed the case law, the Supreme Court in significant observations put forward their conclusions at p. 561 in the following way:

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 of 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 Section 24(2), the result would have 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 u/s 24, but as the losses can be carried forward only for six years u/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 Section 24(2) also deals with the carrying forward of depreciation. This carrying forward having been provided in Section 10(2)(vi) and in a different manner, Section 24(2) only deals with losses other than the losses due to depreciation.

The ratio of that decision of the Supreme Court, therefore, as reported in Commissioner of income tax v. Jaipuria China Clay Mines (P.) Ltd. Supra does not seem to leave any scope for the argument now put forward by Mr. Pal for the Department.

The decision of a Division Bench of this High Court although not directly on the point has many relevant observations expounding the law on this branch. That is the decision of Aluminium Corporation of India Ltd. Vs. Commissioner of Income Tax, West Bengal, Calcutta, . It is observed in that decision that there could be no competition between losses carried forward from the previous years and depreciation allowance in the current year (that is, the account-ling year for which the depreciation allowance is due) because in order to ascertain the profit of the current year the depreciation allowance would in any case have to be set off against the profits first. If after so setting off of the depreciation allowance of the current year against that year''s profits, an amount is left unabsorbed and the question of setting off of that unabsorbed depreciation arose in a future year in relation to the profits of that year then only proviso (b) to Section 24(2) of the Act would come into operation. This Division Bench makes the further observation that depreciation allowance in respect of a business should first be set off against the profits of that business in that year and, if it is not exhausted, it should be set off by virtue of Section 10(1) against the profits of other business carried on by the Assessee. If the allowance is still not exhausted then it is to be set off by virtue of Section 24(1) against the profits, if any, under the other heads of income. Section 24(2) comes into play after all that operations contemplated by Section 24(1) have been carried out. In considering this aspect of the case Chakravartti, C.J. also points out that what proviso (b) to Section 24(2) contemplates is that there is available an amount of depreciation allowance carried over from an earlier year and there is an amount of loss similarly carried forward to be set off against the balance of profits of the current year. Hence no question of priority as between setting off of depreciation allowance for the current year and the carried over loss of earlier years can ever arise. See also particularly the observations made by Chakravartti, C.J. at pp. 370 and 373 to 375. In our view these observations also answer the argument raised by Mr. Pal for the Department and add to our conclusion that the Department''s submissions are no longer open to argument.

The controversy of the nature raised by the question rests on the interpretation of Section 10(2)(vi) and Section 24 of the income tax Act. Section 10 appears in chap. Ill of the income tax dealing with ''taxable income'' and deals, inter alia, with the particular head of income, namely, profits and gains of business. Shorn of all qualifications and details the main object of Section 10 is to say that the tax shall be pay able by the Assessee on this head of profits and gains of business and that such profits and gains shall be computed after making certain allowances specified there. Among these one of these allowances specified is the one in Clause (vi) of Section 10(2) dealing with allowance in respect of depreciation. Proviso (b) to Section 10(2)(vi) of the Act there proceeds to provide for a case where full effect could not be given any allowance for depreciation for any year owing to there being no profits or gains chargeable for that year or owing to the profits (sic) gains chargeable being less than the allowance. Here this proviso expressly says that subject to the provisions of Clause (b) of the proviso to Sub-section (2) of Section 24, this allowance for depreciation to which effect has not been given 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 it shall be deemed to be the allowance for that year and so on for succeeding years. This is the relevant proviso on the point under discussion. This is what is called the unabsorbed depreciation. It is expressly made subject to the provisions of Section 24(2)(b) which incidentally does not deal with depreciation at all but deals with business losses. It is this combined effect of Section 10(2)(vi), proviso (b) and Section 24(2) of the income tax Act which presents difficult problems of interpretation and construction.

Section 24 appears in chap. IV of the income tax Act under the heading ''Deductions and assessments'' and deals particularly with set-off of loss in computing the aggregate income. The subject-matter of Section 24 is the loss in the business and not depreciation. What Section 10(2)(vi) did as we saw was to allow depreciation in the computation of income. What Section 24 does is to permit set-off for loss in business. Apparently, therefore, for the purposes of income tax a tacit distinction is made between depreciation and loss. In ordinary parlance or in ordinary economics depreciation may be taken as a part of the loss; but that is not so far the technical purposes of the income tax Act, particularly u/s 10(2)(vi) proviso and Section 24. The basic idea u/s 24 is, firstly, that where any Assessee sustains a loss in any year under any of the heads mentioned in Section 6, he shall be entitled to have the amount of that loss set off against his income, profits or gains under any other head in that year. That is a provision where the loss is set off against profit or vice versa for the year concerned and is not a provision for carrying forward the losses. The carrying forward of the losses is provided in Sub-section (2) of Section 24. The main idea of this Sub-section (2) is that where the loss in any business cannot be wholly set off under Sub-section (1), then so much of the loss which is not set-off-or the whole loss where the Assessee had no other head of income shall be carried forward to the following year and then follow certain sub-clauses. Sub-clause (iii) provides:

If the loss in either case cannot be wholly so set off, the amount of the loss not so set off shall be carried forward to the following year and so on (but no loss shall be so carried forward for more than eight years.)

This right to carry forward the loss from year to year is for the period of eight years. After eight years, this right is gone so far is the Assessee is concerned. There is no such limitation for carrying forward depreciation u/s 10(2)(vi), proviso (b). In other words, therefore, while there is an urgency to set off the loss from year to rear so that whatever has to be done has to be done within the limit of eight years. The proviso (b) to Sub-clause (iii) of Section 24(2) then proceeds.

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 subsection.

Therefore, loss has a preference in being carried forward to the right to carry forward the depreciation for the purpose of set off, and expressly recognised in this statutory provision.

The context of these sections and their actual text appear, therefore, to be against the submission on the method of computation which Mr. Pal for the Department argued, and which was nothing short of this, that in such a case the unabsorbed depreciation was not to be carried forward u/s 10(2), proviso (b) and the whole of the business profit should be utilised for set-off against the carrying forward loss u/s 24(2) of the Act.

Following, therefore, the Supreme Court decision we answer the question in this case in the affirmative.

The Assessee is entitled to the costs of this Reference.

A.C. Sen, J.

I agree.