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PETITIONER: COMMISSIONER OF INCOME TAX, CALCUTTA

       Vs.

RESPONDENT: JAIPURIA CHINA CLAY MINES (P) LTD.

DATE OF JUDGMENT: 01/11/1965

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C.

CITATION:  1966 AIR 1187            1966 SCR  (2) 449  CITATOR INFO :  E          1970 SC1667  (10,11)  R          1979 SC 117  (8)  E&D        1985 SC1720  (6,13)  F          1991 SC1322  (17)

ACT: Income  Tax Act 1922--s. 10(2)(vi),  proviso  (b)-Unabsorbed depreciation  for  previous  years-Whether can  be  set  off against  profits  under  other  heads  than  those  of   the business. 24(2) Effect of.

HEADNOTE: The Income Tax Officer, after deducting depreciation for the year and an amount in respect of losses, assessed the income of  the assessee for 1952-53 as nil.  He then  computed  the dividend  income  at Rs. 2,01,130 and determined  the  total income  at this figure and levied tax on it.   The  assessee had  in  its  favour  unabsorbed  depreciation  relating  to earlier  year aggregating to Rs. 76,857 and  contended  that this amount should be deducted from the dividend income; but the  Income  Tax Officer rejected this  contention  and,  in appeal, the Appellant Assistant Commissioner as well as  the Tribunal upheld his view.  The High Court, however, upon  a. reference, decided the issue in favour of the assessee. In  the appeal to this Court, it was also  contended,  inter alia, on behalf of the revenue that depreciation, although a permissible allowance under s. 1(K2) of -the Act, served  to compensate an assessee for the capital loss suffered by  him by way of depreciation of his assets and is a charge on  the profits  of a business; and that therefore  the  expression, "loss of profits and gains" in s. 24(1) did not include  any deficiency  resulting  from depreciation and  could  not  be included  in  the  amount which, could be  set  off  against income  profits or gains under other heads such,  as  income from property or dividends. HELD  :  The assessee was entitled to  have  the  unabsorbed depreciation  of  past  years set off  against  income  from sources  other than the business and therefore  against  the dividends. [450 B; 456 D] Case law reviewed.

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JUDGMENT: CIVIL APPELLATE JURISDICTION : C. A. No. 307 of 1964. Appeal from the, Judgement and Order dated 6th February 1962 of the Calcutta High Court in Income Tax Reference No. 72 of 1957. A.   V. Viswanatha Savitri, R. Ganapathy lyer, R. H.  Dhebar -and R.   N. Sachthey, for the appellant. K.   N.  Rajagopal  Sastri  and D.  N.  Mukherjee,  for  the respondent. The Judgment of the Court was delivered by Sikri,  J. This is an appeal by certificate granted  by  the High  Court of Calcutta against its judgment in a  reference made  to it under s. 66 of the Indian Income Tax  Act,  1922 (hereinafter re- 4 5 0 ferred  to as the Act.) The question referred to it  by  the Appellate Tribunal, at the instance of the assessee, was  as follows :               "Whether in the facts and circumstances of the               case, the 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 total income               of   the  previous  year  relevant   for   the               assessment year 1952-53." The  relevant facts and circumstances are as follows  :  The Income  Tax Officer assessing the respondent,  M/s  Jaipuria China Clay Mines (P) Ltd. Calcutta, hereinafter referred  to as  the  assessee, for the year1952-53  computed  its  total income at Rs. 14,041/- before charging depreciation for that year.   From  that figure he deducted depreciation  for  the year  amounting to Rs. 5,360/-, thus computing a  profit  of Rs.  8,681/-.   From this figure he deducted  an  equivalent amount, i.e., Rs. 8,681/-, in respect of losses during 1947- 48,  and he thus worked out the business income as nil.   He then  computed  the dividend income at  Rs.  2,01,130/-  and determined the total income at this figure and levied tax on it.    The  assessee  had  in  its  favour   an   unabsorbed depreciation  aggregating to Rs. 76,857/-, and it  contended before  the  Income  Tax Officer that  this  sum  should  be deducted from The income received from dividends, which,  if done,  would reduce the total income to Rs. 1,32,955/-,  but the Income Tax Officer refused to accede to this contention. The Appellant Assistant Commissioner upheld the order of the Income  Tax  Officer  and  the  assessee’s  appeal  to   the Appellate Tribunal met with the same fate.  The High  Court, however,  accepted  the  contention  of  the  assessee   and answered  the  question  referred, to it in  favour  of  the assessee. The answer to the question depends on the interpretation  of ss. 6, 10 and 24 of the Act.  We are concerned with the  law as it stood on April 1, 1952.  The scheme of the Act is that the  tax  is levied in respect of the total  income  of  the previous  year of every individual, Hindu Undivided  family, etc., and the total income consists of income under  various heads such as Salaries, Interest on Securities, Income  from Property,  Profits  and  gains of  business,  profession  or vocation,  and Income from other sources and Capital  gains. Various  sections  deal with how income, profits  and  gains under each head have to be computed.  Section 10 deals  with the  communication  of  profit and  gains  of  any  business carried  on  by an assessee, Section  10(2)  prescribes  the

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allowances which 4 51 have to be deducted before computing the profits and  gains; one  of  the  allowances  is  ’depreciation’,  and  this  Is provided  under subcl. (vi).  Proviso (b) to S. 10(2)  (vi). On  this a great deal of argument has been addressed  to  us and it reads as follows :               "(b) where, in the assessment of the  assessee               or  if the assessee is a registered  firm,  in               the  assessment of its partners,  full  effect               cannot  be given to any such allowance in  any               year not being a year which ended prior to the               last day of April, 1939, 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 allow-               ance  for depreciation for the following  year               and deemed to be part of that allowance, or if               there  is no such allowance for that year,  he               deemed to be the allowance for that year,  and               so on for succeeding years;" It may be mentioned that the words "in the assessment of the assessee  or  if the assessee is a registered firm,  in  the assessment  of  its partners" were inserted by S. 8  of  the Indian  Income Tax (Amendment) Act, 1953 (25 of  1953)  with effect  from  April 1, 1952.  The  next  relevant  statutory provision is S. 24, which provides for set off of losses  in computing aggregate income.  Relevant portions of S. 24  are in the following terms :               " 24(1) 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......               Provided that......               Provided further that when the assessee is  an               unregistered firm which has not been  assessed               under  the  provisions of clause (b)  of  sub-               section  (5)  of  section 23,  in  the  manner               applicable to a registered firm, any,such loss               shall  be  set off only  against  the  income,               profits and gains of the firm and not  against               the  income, profits and gains of any  of  the               partners  of the firm; and where the  assessee               is a registered firm, any loss which cannot be               set  off  against other  income,  profits  and               gains of the firm shall be apportioned between               the partners of the firm and they               45 2               alone shall be entitled to have the amount  of               the loss set off under this section.                (2)  Where  any  assessee  sustains  loss  of               profits or gains in any year, being a previous               year  not earlier than the previous  year  for               the assessment for the year ending on the 31st               day  of March, 1940, in any business,  profes-               sion or vocation and the loss cannot be wholly               set off under sub-section (1), so much of  the               loss  as is not so set off or the  whole  loss

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             where  the  assessee  had  no  other  head  of               income,  shall  be  carried  forward  to   the               following year and set off against the profits               and  gains, if any, of the assessee  from  the               same business, profession or vocation for that               year; and if it cannot be wholly so 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 so  carried  forward               for more than six years, and a loss arising in               the previous years for the assessment for  the               years  ending on the 31st day of March,  1940,               the  31st day of March, 1941, the 31st day  of               March, 1942, the 31st day of March, 1943,  and               the  31st  day of March,  1944,  respectively,               shall  be carried forward only for  one,  two,               three, four and five years, respectively               Provided that-               (a)......               (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;               (c)   nothing  herein contained shall  entitle               any assessee, being a registered firm, to have               carried forward and set off any loss which has               been  apportioned between the partners,  under               the proviso to sub-section (1), or entitle any               assessee,  being a partner in an  unregistered               firm  which  has not been assessed  under  the               provisions of clause (b) of sub-section (5) of               section  23  in  the manner  applicable  to  a               registered  firm, to have carried forward  and               set  off  against  his  own  income  any  loss               sustained by the firm;......               Mr. Sastri, learned ’counsel for the  revenue,               urges    that   depreciation,    although    a               permissible  allowance under s. 10(2)  of  the               Act, serves to compensate an assessee for  the               capital  loss  suffered  by  him  by  way   of               depreciation  of his assets.  He says that  if               it bad not               453               been expressly allowed as allowance, it  would               have  been treated as capital expenditure  and               would  have  been excluded.  He  further  says               that  depreciation is a charge on the  profits               of  a business.  Bearing these two factors  in               mind,  he urges that the expression  "loss  of               profits  and  gains"  in  s.  24(1)  does  not               include   any   deficiency   resulting    from               depreciation  and, therefore, an  assessee  Is               not entitled to ask the Department to  include               the  depreciation in the amount which  can  be               set  off  against income,  profits  and  gains               under other heads such as income from property               or  dividends.  Mr. Rajgopala Sastri  for  the               assessee   relies  on  the  history   of   the               legislation  and  a number of  authorities  to               support the judgment of the High Court.               Apart from authority, looking at the Act as it               stood  on April 1, 1952, it is clear that  the               underlying  idea of the Act is to  assess  the               total income of an assessee.  Prima facie,  it

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             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  s.  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 profits 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   s.               10(2)(vi),  neither  the  Act  nor  commercial               principles  draw any distinction  between  the               various allowances mentioned in s. 10(2);  the               only  distinction  is  that  while  the  other               allowances  may be outgoings, depreciation  is               not an actual outgoing.               Bearing  these two considerations in mind,  if               one looks at the language of proviso (b) to S.               10(2)(vi); the first question that arises is :               What is the meaning of the expression "in  the               assessment of the assessee or if the  assessee               is a registered firm, in the assessment of the               partners,  full effect cannot be given to  any               such  allowance  in any year" ?  It  would  be               noted   that  the  words  used  are  "in   the               assessment  of the assessee or the  assessment               of  the  partners".  Taking the  case  of  the               partners of a registered firm, the  assessment               must  be  their individual  assessments,  i.e.               assessments in which the profits from the firm               and  other sources are pooled  together.   The               Legislature  is clearly assuming  that  effect               can be given to depreciation allowance in  the               assessment  of a partner; the only way  effect               can be given in the assessment of a partner is               by setting               4 54               it off against income, profits and gains under               other  heads.   The learned  counsel  for  the               revenue  tried  to  meet  this  inference   by               suggesting    that   what   the    Legislature               contemplated   was  an  assessment  of   those               partners who were carrying on other  business.               But in our opinion this suggestion is unsound.               What would happen if a partnership consists of               four partners, two carrying on other  business               and  two  carrying on no other  business,  Mr’               Sastri was unable to explain.  Now, if this is               the inference to be drawn from these words, it               is  quite clear that the words "no profits  or               gains  chargeable  for  that  year"  are   not               confined.  to profits and gains  derived  from               the  business whose income is  being  computed               under S.10.               It  appears that the Legislature accepted  the               interpretation  placed by various High  Courts               on  the Act as it stood before it was  amended               by  Act 25 of 1953.  In 1930, the Lahore  High               Court in Messrs Karam Ilahi Muhammad Shafi  v.

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             The Commissioner of Income Tax, Delhi(1)  held               that  depreciation on buildings and  machinery               can  be  set  off against  gains  and  profits               accrued  to the owner of those  buildings  and               machinery  from other sources such  as  rental               from   house  property  during  the  year   in               question-.  In A Suppan Chettiar & Co. v.  The               Commissioner  of Income-Tax,  Madras(’-’)  the               Madras High Court held that "where the profits               and  gains of a business are  insufficient  to               cover  the full depreciation  allowance  under               section  10(2) (vi) of the Income-tax  Act  on               the  machinery,  plant,  etc.,  used  for  the               purposes   of   that  business,   the   excess               depreciation  can  be  set  off  against   the               profits  and gains of other business  or  from               other sources." In Ballarpur Collieries v. The               Commissioner of Income Tar, Central  Provinces               (3),  the Court of the Judicial  Commissioner,               Nagpur,   held  that  the  partners   of   the               assessee, a registered firm owning collieries,               were entitled to set off depreciation  against               the  other income of the members of  the  firm               under  s.  24  of  the  Income  Tax  Act.   In               Laxmichand   Jaipuria  Spinning  and   Weaving               Mills,  In re(1), the East Punjab  High  Court               arrived  at  the same  conclusion.   The  High               Court further held that "the object of proviso               (b)  to sub-section (2) of section 24 is  only               to give preference to ordinary losses incurred               by  an assessee in regard to set-off over  the               loss  which  comes  under clause  (b)  of  the               proviso to sub-section (2) (vi) of section 10.               Where  set  off is to be given  for  different               kinds  of  losses  other  than  those  due  to               depreciation  such  losses must  be.  set  off               first and then               (1) 3 Income  Tax Cases 456; I.L.R. 11  Lahore               38.               (2)   4 Income Tax Cases 211; I.L.R. 53 Madras               702               (3) 4 Income  Tax Cases 255; A.I.R. 1930  Nag.               183               (4) 18 A.I.R. 919                                    455               the loss due to depreciation." In Ambika  Silk               Mills  Co.  Ltd. v.. Commissioner  of  Income-               Tax(1)  the Bombay High Court  understood  the               effect  of  proviso (b) to s. 10(2)  (vi)  and               proviso(b) to s. 24 (2) as follows :               "If  a  business was worked at a loss  in  any               particular  year,  the  loss can  be  set  off               against any other head under section 24(1); if               the  loss cannot be fully set off then it  can               be carried forward to the next year, but  then               it can be only set off against the profits  of               that  particular  business  and  that  set-off               would  be  permissible to the assessee  for  a               period of six years only.  After six years the               right to set-off would come to an end.  But in               the  case  of depreciation and to  the  extent               that the loss was caused by depreciation being               not fully absorbed there would be no limit  to               the carrying forward of that depreciation, and               that  depreciation can be set off at any  time

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             so long as the business showed a profit in the               future." After  the  amendment,  the  same view  has  been  taken  in Commissioner  of Income-Tax, Bombay City v. Ravi  Industries Ltd.      (2) by the Bombay High Court, and in  Commissioner of Income-Tax J.    Girdharilal  Harivallabhadas  Mills  Co. Ltd.  (3) by the Gujarat Hgh Court.  The only contrary  view which  has been placed before is is that of the Madras  High Court  in Commissioner of Income’ax Madras v. B. Nagi  Reddy (4 ) , but we are unable to agree with he view expressed  in the last case.  The Madras High Court observed at p. 196  as follows :               "In our opinion, the statute leads one to  the               irresistible conclusion that the  depreciation               allowance  must  be  a  charge  only  on   the               profits.  The limit of the charge is the limit               of the profits.  The non-existence of  profits               will prevent the absorption of the  allowance.               There   is  no  warrant  for  taking  in   and               absorbing  the depreciation allowance  in  the               profit  and loss account to work out  a  loss.               If that were the true position, the  provision               for    carrying   forward    the    unabsorbed               depreciation   allowance   would   be   wholly               redundant, if not meaningless, in view of  the               specific provision for the carrying forward of               losses." The  unabsorbed  depreciation allowance is  carried  forward under proviso (b) to s. 10(2)(vi) and the method of carrying it  forward is to add it to the amount of the  allowance  or depreciation (1) 22 I.T.R. 58, 65 (2) 49 I.T.R. 145. (3) 51 I.T.R. 693. (4) 51 I.T.R. 178. 456 ’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  cl. (vi)   and  has  to  be  deducted  as  allowance.   If   the Legislature  had  not enacted proviso (b) to s.  24(2),  the result  would  have been 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  under  s.  24, but as the  losses  can  be  carried forward  only  for six years under 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 s.   24(2)   also  deals  with  the  carrying   forward   of depreciation.  This carry forward having been provided in s. 10(2)(vi)  and  in a different manner; s. 24(2)  only  deals with losses other than the losses due to depreciation. In  conclusion,  we  agree  with the  High  Court  that  the question -referred to it should be answered in favour of the assessee.  In the ,result, the appeal fails and is dismissed with costs. Appeal dismissed.