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PETITIONER: COMMISSIONER OF INCOME TAX, KANPUR ETC.

       Vs.

RESPONDENT: M/S. MOTHER INDIA

DATE OF JUDGMENT14/08/1985

BENCH: TULZAPURKAR, V.D. BENCH: TULZAPURKAR, V.D. MUKHARJI, SABYASACHI (J) MISRA RANGNATH

CITATION:  1985 AIR 1720            1985 SCR  Supl. (2) 556  1985 SCC  (4)   1        1985 SCALE  (2)236

ACT:      Indian Income Tax Act, 1922, ss. 10(2) (vi) proviso (b) and 24 (2) proviso (b)      Income Tax Act, 1961. ss. 32(2) and 72 (2). -      Unabsorbed   carried   forward   losses   and   current depreciation -  Deduction of  - Unabsorbed  carried  forward losses cannot  be given preference over current depreciation while computing  the total  income  of  an  assessee  in  an assessment year.

HEADNOTE:      The Respondent-assessee  in the  Civil Appeals  had  an unabsorbed  business   1088  of  Rs.  67534  and  unabsorbed depreciation of  Rs. 1,78,154  at the end of assessment year 1950-51. The respondent’s income without taking into account the current  depreciation was  Rs. 50,624 in 1951-52 and Rs. 64332 in  1952-53. The  amount of  current depreciation was, however, Rs.  58,140 in  1951-52 and  Rs. 44,580 in 1952-53. The respondent contended before I.T.O. that before deducting the  current   depreciation  from   the  above  profits  the unabsorbed 1088  of the earlier year 1950-51 should be first set off. The I.T.O. held that the carried forward 1088 could not be  given priority  over the current year’s depreciation in the  matter of  set  off  and  completed  the  assessment Accordingly.  Aggrieved   by  the   order  of   I.T.O.,  the respondent preferred  appeals for  both the years before the A.A.C. who accepted the same holding that unabsorbed carried forward business  1088 should  be set off first in each year before deducting the current year’s depreciation. On further appeals by  the appellant  Revenue  the  Appellate  Tribunal restored the  order of  the I.T.O.  But, the High Court in a reference  at   the  instance   of  the  respondent-assessee answered the  question in  favour of  the assessee.  Similar question of  law arose  for decision  in the  Tax  Reference Case.      Counsel for  the Revenue  contended before  the Supreme Court That  on proper  construction of the proviso (b) to s. 10(2)      (vi) read with the proviso (b) to s. 24(2) of the 1922 Act (equivalent 557 to 8.32(2)  read with  8.72(2)  of  the  1961  Act),  it  is

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apparent that  unabsorbed  carried  forward  losses  of  the earlier years  have  been  given  priority  over  unabsorbed depreciation of  the earlier  years but not over the current year’s depreciation  for, under proviso (b) to 8. 10(2) (vi) it is  the carry  forward (actual words used are ’added to’) of unabsorbed  depreciation to  the following  previous year that is made subject to the proviso (b) to 8. 24(2), that is to say,  the preference  given  to  the  unabsorbed  carried forward losses  of the earlier years under proviso (b) to 8. 24(2) is  over the  unabsorbed depreciation and not over the current depreciation.  On the  other hand,  counsel for  the assessees strongly  relied upon  the legal  fiction  arising from the  deeming provision  contained in  priviso (b) to 8. 10(2) (vi) of the 1922 Act and S. 32(2) of the 1961 Act as a result whereof  the unabsorbed  depreciation is  not  merely carried forward to the following previous year but is deemed to  be  the  depreciation  for  that  year  and,  therefore, contended that  this entire  aggregate depreciation  is made subject to  proviso (b) to 8. 24(2) of the 1922 Act or to s. 72(2) (of  the 1961  Act).  Counsel  urged  that  his  legal fiction must  be given  full effect  without any reservation and, therefore, between the aggregate amount of depreciation and the unabsorbed carried forward losses priority has to be given to the latter in the matter of set off.      Allowing the  appeals and answering the question in the Tax Reference against the assessee, ^      HELD: 1.1  The unabsorbed carried forward losses cannot be given  preference over current depreciation in the matter of set  off  in  computing  an  assessee’s  income  for  any particular assessment year. 1567      1.2 A  close scrutiny of the relevant provisions of the 1922 Act  as also  the  1961  Act  clearly  shows  that  the computation of  income under  the head "profits and gains of business" of  any particular  assessment year is required to be done  after making certain allowances specified in sub-s. (2) of  8.10 of  the 1922  Act and  after  allowing  certain deductions in  accordance with  the provisions  contained in 88. 30 to 43-A of the 1961 Act; in other words it is the net profits and  gains after  the specified  deductions are made that are  subjected to  tax; one of such deductions pertains to  depreciation   allowance  at   the  prescribed  rate  of percentage of  the written down value of the business asset; and this is provided in s. 10 (2) (vi) of the 1922 Act in 8. 32(1) of  the 1961  Act. Upto  this stage  of computation no question of  either carry forward of unabsorbed depreciation of the earlier 558 years or  carry forward  of unabsorbed  business  losses  of earlier years arises. In other words, the normal accountancy principle has  to be  applied in  arriving at the net income from, business  for that year by debiting the Current year’s depreciation. The  question is  whether any  deviation  from this   normal rule of accountancy is contemplated by proviso (b to s. 10(2) (vi) read with proviso (b) to s. 24(2) of the 1922 Act  or by  s. 32(2) read with s. 72(2) of the 1961 Act and it  is here  that the  aspect of  proper construction of these provisions arises. [565 E-H, 566 A]      1.3 It  is clear  that proviso  (b) to 8. 10(2) (vi) of the 1922  Act 18  in two  parts and provides for two things; its first  part provides  for a  carry forward of unabsorbed depreciation and  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.   However,  carrying  forward  to  the

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unabsorbed depreciation ant the teeming provision in proviso (b) is  not absolute but is subject to the proviso (b) to s. 24(2). had  proviso (b)  to s. 24(2) not been enacted by the Legislature the-result  would have  been that  the aggregate depreciation would  have been  deducted  first  out  of  the profits and  gains  in  preference  to  unabsorbed  business losses which  might have been carried forward under s. 24(2) but as  such losses  can be carried forward only for limited number of  years the assessee would in certain circumstances have in  his books  losses which he might not be able to set off even  within the  time limit during which the set off is permitted.  In   order  to  prevent  such  a  situation  the legislature enacted  proviso (b) to s.24(2). And proviso (b) to 8.  24(2) expressly  states "where depreciation allowance 18 under clause (b) of the proviso to clause (vi) of sub-s.2 of s.10  also to  be carried  for rd,  effect shall first be given to the provisions of this sub-section. In other worts, lt clearly  provides that  in the  matter  of  set  off  the unabsorbed business  losses of  the earlier  years will have preference over  unabsorbed depreciation that is required to be carried forward under proviso (b) to s. 10(2) (vi) and no preference over  the current depreciation is intended. Since the provisions  of the 1961 Act are in pari materia with the corresponding  provisions   under  the  1922  Act  the  same conclusion must follow under the 1961 Act. [566 B,E, 567G]      Aluminium Corporation of India Ltd. v. C.I.T. 22 I.T.R. 367. C.I.T. Gujarat v. Gujarat State Warehousing Corporation 104 ITR 2, Add1. C.I.T. A.P. v. Andhra Printers Ltd. 147 ITR 555, ant  C.I.T. West Bengal-IV v.Malwa Sugar Mills Co. Ltd. 134 ITR 56 559      (2) It is true that proviso (b) to s.10(2) (vi) creates a     legal  fiction   and  under  that  fiction  unabsorbed depreciation  either   with  or   without   current   year’s depreciation is deemed to be the current year’s depreciation but it  is well  settled, as  has been  observed by  Supreme Court in  Bengal Immunity Company Ltd. v. The State of Bihar [1955] 2  SCR 603  at p. 606 that legal fictions are created only for  some definite purpose and these must be limited to the  purpose   and  should   not  be  extended  beyond  that legitimate field.  Clearly, the  avowed purpose of the legal fictions created  by the  deeming  provisions  contained  in proviso (b)  to s.  10(2) (vi)  is to  make  the  unabsorbed carried forward  depreciation partake  of the same character as the  current depreciation  in the following year, so that it is  available unlike  unabsorbed carried forward business 1088, for  being set  off against  other heads  of income of that year. [566 F-H, 567 A]      Jaipuria China  Clay Mines  (P) Ltd.  59 ITR 555 relied      upon.      C.I.T. Bombay v. Bavi Industries 49 ITR 145 approved.

JUDGMENT:      CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1570- 1571 of 1973 and Tax Reference Case No. 15 of 1983.      From the  Judgment and  Order  dated  4.9.1970  of  the Allahabad High Court in Income Tax Reference No. 340 of 1964 .      B.B. Ahuja  and Miss A. Subhashini for the appellant in C.A.Nos. 1570-71 of 1973.      Harish Salve  and Mrs.  A.K. Verma for the appellant in Tax Ref. No. 15 of 1983.      S.T. Desai,  R.S. Suri and Sudhir Kumar Sajawan for the

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respondents in C.A.Nos. 1570-1571 of 1973.      B.B. Ahuja  and Miss  A. Subhashini for the respondents in Tax Ref. No. 15 of 1983.      Harish Salve,  Joel  Peres  and  Mrs.  A.K.  Verma  for intervenors.      The Judgment of the Court was delivered by      TULZAPURKAR, J.  In these appeals and the tax reference the common question arising for determination relates to the priority 560 between current  depreciation and unabsorbed carried forward business loss  that is to say which should be deducted first while computing  the total  income of  an assessee  for  the concerned assessment year.      The facts  giving rise  to the  above question  in  the civil appeals  are these. The concerned assessment years are 1951-53. At  the end of assessment year 1950-51 there was an unabsorbed  business   loss  of  Rs.  67534  and  unabsorbed depreciation of  Rs. 1,78,154. The assessee’s income without taking into  account the current depreciation was Rs. 50,624 in 1951-52 and Rs. 64,332 in 1952-53. The assessee contended before  the   ITO  that   before   deducting   the   current depreciation from  the above  profits the unabsorbed loss of the earlier  year 1950-51  should be  first set off. The ITO did not  accept the contention and what he did was that from the profit  of Rs.  50,624  for  1951-52,  the  depreciation allowance  for   that  year  amounting  to  Rs.  58,140  was partially set off and the balance of the depreciation of Rs. 7516 was  ordered to be carried forward with the result that the total  unabsorbed depreciation  carried forward amounted to Rs.  1,85,670. It  was further  directed that  the entire unabsorbed loss  amounting  to  Rs.  67534  should  also  be carried forward. Similarly, in 1952-53 the full depreciation allowance of  that year  amounting to  Rs. 44580 was set off against the  income of  Rs. 64,232;  the net  income of  Rs. 19652 (Rs.  64232 minus  Rs. 44580) was utilised for setting off a part of the carried forward business loss of Rs. 67534 leaving a  balance of  unabsorbed loss  to the extent of Rs. 47832. Both  the unabsorbed  amounts (Rs.  1,85,670 and  Rs. 47,832) were  directed to  be carried  forward. Aggrieved by the ITO’s  refusal to  give preference  in the matter of set off to  the earlier  carried forward  business  loss  before deducting the  current  year’s  depreciation,  the  assessee preferred appeals  for both  the years  and the AAC accepted the  assessee’s  contention  and  directed  that  unabsorbed carried forward  business loss  should be  set off  first in each year  before deducting the current year’s depreciation. The Department  preferred further  appeals to  the Appellate Tribunal and  relying upon the decision of the Calcutta High Court in  Aluminium Corporation  of India Ltd. v. C.I.T., 33 I.T.R.  367,   the  Tribunal   accepted   the   Department’s contention and  restored the ITO’s decision. at the instance of the  assessee the  following question was referred to the High Court for its opinion:           "Whether for  the  assessment  years  1951-52  and           1952-53, the  assessee was  entitled to deduct the           unabsorbed  business   loss  at  the  end  of  the           assessment year 561           1950-51,  before   setting  off  the  depreciation           allowance  of Rs.58,140 and Rs. 44580 respectively           for these years? " After referring  to the  relevant provisions  of the  Indian Income Tax  Act 1922,  namely, ss.10  and  24,  particularly proviso (b)  to 8.  10(2) (vi)  and s. 24(2) Proviso (b) the

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High Court  answered the question in favour of the assessee. The Revenue  has challenged  the High  Court’s view in these appeals.      The facts  in the  Tax Reference are briefly these. For the assessment  year 1969-70  the assessee-company  filed  a return  on  18.7.1969  disclosing  a  1088  of  Rs.  50,736; subsequently  a   revised  return  was  filed  on  20.8.1971 claiming a  set off  of the  carried forward 1088 of earlier years against the income of that year even before making any allowance for  the current year’s depreciation. the ITO held that the  carried forward  1088 could  not be given priority over the  current year’s  depreciation in  the matter of set off and  completed the assessment determining the unabsorbed depreciation for  the year  at Rs.  40,255, brought  forward development rebate of Rs. 8,020 and the carried forward past losses were allowed to be carried forward in full. In appeal the AAC,  following the decision of the Allahabad High Court in the  case of  Mother India  Refrigeration Industries  (P) Ltd. (which  decision is the subject matter of civil appeals before us)  accepted  the  assessee’s  contention  that  the carried forward  losses have  priority  not  only  over  the unabsorbed depreciation  of the past years but also over the current year’s  depreciation in  the matter  of set off. The Department preferred an appeal to the Appellate Tribunal and the Tribunal  took the  view that unabsorbed carried forward losses  of   the  earlier  years  will  have  priority  over unabsorbed deprecation of the earlier years but not over the current year’s  depreciation. In  coming to  this conclusion the Tribunal  placed certain  construction on  the  relevant provisions of  the 1961 Act, namely, ss. 32(2) and 72(2). In other words  it preferred  the views  of the  Calcutta  High Court in  Aluminium Corporation’s case (supra) and of Andhra Pradesh High  Court in  Addl. Commissioner of Income-tax- v. Andhra Printers  Ltd., 117  I.T.R. 555,  in so  far  as  the competition for  priority  was  between  unabsorbed  carried forward 1088  and current  depreciation. At  the instance of the assessee  in  view  of  conflict  of  decisions  between various High  Courts the Tribunal has referred the following question of law for this Court’s opinion under s. 257 of the Income Tax Act, 1961: 562           "Whether on  the facts and in the circumstances of           the case,  the depreciation  for the  current year           should first  be  deducted  before  deducting  the           unabsorbed carried  forward business losses having           regard to the provisions of s. 72 (2) read with 8-           32 (2) of the Income Tax Act, 1961?"      Since the  answer to  the question  raised depends upon proper construction  to be placed on the relevant provisions of the  1922 Act as also of 1961 Act it will be necessary to set out the relevant provisions. Under the 1922 Act s. 10(2) (vi) permits,  while computing profits or gains of business, a deduction  by way  of depreciation allowance in respect of buildings, machinery, plant or furniture of a sum equivalent to such  percentage on the written down value thereof as may be prescribed.  Then comes  proviso  (b)  to  the  aforesaid provision which is material. The relevant portion of proviso (b) (omitting unnecessary words) runs thus:           "(b) Where  in the assessment of the assessee full           effect cannot  be given  in any  such allowance in           any year  owing to there being no profits or gains           charge able 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 of sub-s(2) of s. 24, the allowance or

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         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  nd deemed  to be  a part  of  that           allowance, or  if there  is no  such allowance for           that year  be deemed  to be the allowance for that           years, and so on for succeeding years . " Section  24  provides  for  setting  of  1088  in  computing aggregate income. Sub-s.(1) thereof provides for setting off of 1088 of pro- fits or gains under one head against profits or gains  under any  other head  in the  same year. Sub-s(2) thereof runs thus:           "(2) Where any assessee sustains a 1088 of profits           or gains  in any year, in any business, profession           or vocation, and the 1088 cannot be wholly set off           under sub-s.(1)  so much  of the 1088 as is not so           set off  or the  whole 1088 where the assessee had           no other  head of  income shall be carried forward           to the following year, and 563           (i).........           (ii) Where  the 1088  was sustained  by him in any           other business,  profession or  vocation  (meaning           other than  speculative business), it shall be set           off against  the profits  and gains if any, if any           business, profession or vocation carried on by him           in  that   year:  provided   that  the   business,           profession or  vocation  in  which  the  1088  was           originally sustained continued to be carried on by           him in that year; Then comes proviso (b) to sub-s (2) which is material and it runs thus           "(b) Where  depreciation allowance is under clause           (b) of  the proviso  to clause (vi) of sub-s(2) of           s. 10,  also to  be carried, effect shall first be           given to the provisions of this sub-section;"      Under the  1961 Act  the material  provisions are to be found in  s. 32(1)  and (2)  and s. 72(1) and (2) and it was not disputed  that the  material provisions in both the Acts are couched  in substantially  the same  language. Two  more things which are common under both the Acts need be noticed. Unabsorbed carried forward business 1088 can be set off only against business income of the following year or years while depreciation can  be deducted  from income  under any  other head; further  while the former can be carried forward for a limited number  of years as specified in the enactment there is no  time limit prescribed for carrying forward unabsorbed depreciation.      Counsel  for   the  revenue   urged  that   on   proper construction of  the proviso  (b) to s. 10(2) (vi) read with the proviso  (b) to  s. 24(2) of the 1922 Act (equivalent to s. 32(2)  read with s. 72(2) of the 1961 Act) it is apparent that unabsorbed  carried forward losses of the earlier years have been given priority over unabsorbed depreciation of the earlier years  but not  over the current year’s depreciation for, under  priviso (b)  to s.  10(2) (vi)  it is  the carry forward (actual  words used  are ’added  to’) of  unabsorbed depreciation to  the following  previous year  that is  made subject to  the proviso (b) to s. 24(2), that is to say, the preference given to the unabsorbed carried forward losses of the earlier  years under proviso (b) to s. 24(2) is over the unabsorbed   depreciation   and   not   over   the   current depreciation. Counsel 564 further urged  that such  construction is in accord with the

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basic  and   well   recognized   principle   of   commercial accountancy that  in computing  the  profits  and  gains  of business for  a particular  year  that  year’s  depreciation (meaning current  depreciation) is  always to  be treated as the first  charge on such profits and gains and that is also the scheme of the Act. According to him tax is pay  able  on the  total income of the concerned year, that such income includes  profits and  gains of  a business, that the profits and  gains must  mean net  profits and gains and net profits and gains cannot be ascertained without debiting the current year’s  depreciation to the profits and 1088 account of that  year and it is in accordance with this principle of commercial accountancy that preference to unabsorbed carried forward losses  has not been given over current depreciation but has  been given  over the unabsorbed depreciation of the earliers year  in the  matter of  set off.  In fact, counsel contended that  having regard  to well settled principles of accountancy and  the aforesaid  provisions of  the Act there can be  no competition  between current  year’s depreciation must be  deducted first  before unabsorbed  carried  forward losses are  set off.  In support  of his submissions counsel relied upon  four decisions:  Aluminium Corporation of India Ltd. v.  C.I.T. (supra)  C.I.T. Gujarat,  v.  Gujarat  State Warehousing Corporation  104 I.T.R.  1, Addl. C.I.T. A.P. v. Andhra Printers Ltd. 147 I.T.R. 555 and C.I.T., West Bengal- IV v. Malwa Sugar Mills CO. Ltd. 134 I.T.R. 56. In all these decisions the view taken is that current depreciation has to be deducted first before unabsorbed carried forward business losses are  set off.  He pointed  out that the High Court in deciding the  question in favour of the assessee referred to a decision  of this  Court in  Jaipuria China Clay Mines (P) Ltd. 59  I.T.R. 555  and relied on certain observations made therein but  the point  that arose for decision in that case was  entirely  different  and  the  observations  cannot  be divorced from the context of the Point decided therein.      On the  other hand,  counsel for  the assessee  in  the appeals and the tax reference strongly relied upon the legal fiction arising  from the  deeming  provision  contained  in proviso (b) to 8. 10(2) (vi) of the 1922 Act and 8. 32(2) of the 1961 Act as a result whereof the unabsorbed depreciation is not merely carried forward to the following previous year but is  deemed to  be the  depreciation for  that  year  and according to  counsel this  entire aggregate depreciation is made subject to proviso (b) to s. 24(2) (of the 1922 act) or to s. 72(2) (of the 1961 Act). Counsel urged that this legal fiction must  be given  full effect  without any reservation and, therefore, between the aggregate amount of 565 depreciation  and  the  unabsorbed  carried  forward  losses priority A  has to  be given  to the latter in the matter of set off.  It was  further urged that the revenue cannot rely upon the  principles of commercial accountancy, however well settled or  well recognised  these might  be,  in  order  to achieve a  result contrary  to  what  is  warranted  by  the express provision  of the statue including the legal fiction if any,  created  therein;  in  other  words  principles  of commercial accountancy,  if they  are modified  or  deviated from by statute, cannot be allowed to prevail over statutory provision. It  was also  urged that  the construction of the relevant provisions  suggested by the assessee and which has been accepted  by the  High Court  has some  advantages  and therefore should  be preferred to the construction suggested by the revenue.      Having regard  to the  aforesaid rival  contentions  it will be  clear that  the real  issue  that  arises  for  our

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consideration  in   this  case   is   whether,   on   proper construction of  the relevant  provisions of  the  concerned enactment unabsorbed  carried  forward  losses  should  have preference over  current depreciation  in the  matter of set off or  is the position vice versa while computing the total income of  an assessee in the concerned assessment year? And the answer  to this  question depends  on what  is the  true scope and purpose of the legal fiction created under proviso (b) to  s. 10(2)  (vi) of  the 1922 Act or under s. 32(2) of the 1961 Act.      At the outset it may be stated that a close scrutiny of the relevant provisions of the 1922 Act as also the 1961 Act clearly shows  that the computation of income under the head profits and  gains of  business of any particular assessment year is  required to be done after making certain allowances specified in  sub-s(2) of  s.10 of  the 1922  Act and  after allowing  certain   deductions  in   accordance   with   the provisions contained  in ss.  30 to 43-A of the 1961 Act; in other words  it is  the net  profits  and  gains  after  the specified deductions are made that are subjected to tax; one of such deductions pertains to depreciation allowance at the prescribed rate  of percentage  of the written down value of the business  asset; and this is provided in s.10(2) (vi) of the 1922  Act and  in s.32  (1) of  the 1961  Act. Upto this stage of  computation no question of either carry forward to unabsorbed  depreciation  of  the  earlier  years  or  carry forward of  unabsorbed  business  losses  of  earlier  years arises. In other words, the normal accountancy principle has to be  applied in  arriving at  the net income from business for that  year by  debiting the current year’s depreciation. The question  is whether any deviation from this normal rule of accountancy is contemplated by proviso (b) to 566 s. 10(2)  (vi) read  with proviso (b) to s.24(2) of the 1922 Act or by s. 32(2) read with s. 72(2) of the 1961 Act and it is here  that the  aspect of  proper construction  of  these provisions arises.  Dealing with  the provisions of the 1922 Act first,  it will  be clear  that proviso  (b) to s. 10(2) (vi) is  in two parts and provides for two things; its first part provides for a carry forward of unabsorbed depreciation and its  second part  provides for clubbing the said carried forward depreciation  with the  current year’s depreciation. However, carrying forward of the unabsorbed depreciation and the deeming  provision in proviso (b) is not absolute but is subject to  the proviso  (b) to  s.24(2). Had proviso (b) to s.24(2) not been enacted by the Legislature the result would have been  that the  aggregate depreciation  would have been deducted first out of the profits and gains in preference to unabsorbed business  losses which  might have  been  carried forward under  s. 24(2)  but as  such losses  can be carried forward only  for limited number of years the assessee would in certain  circumstances have  in his books losses which he might not  be able  to set  off even  within the  time limit during which  the set  off is permitted. In order to prevent such a  situation the  legislature enacted proviso (b) to s. 24(2). And  proviso (b)  to s.  24(2) expressly states where depreciation allowance  is, under  clause (b) of the proviso to clause  (vi) of  sub-s.2 of  s.10,  also  to  be  carried forward effect  shall first  be given  to the  provisions of this sub-section.  In other  words, it clearly provides that in the  matter of  set off the unabsorbed business losses of the earlier  years  will  have  preference  over  unabsorbed depreciation that  is required  to be  carried forward under proviso (b)  to s.  10(2) (vi)  and no  preference over  the current depreciation is intended.

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    It is  true the  proviso (b)  to s.10(2)(vi)  creates a legal fiction and under that fiction unabsorbed depreciation either with o. without current year’s depreciation is deemed to be  the  current  year’s  depreciation  but  it  is  well settled, as  has been  observed  by  this  Court  in  Bengal Immunity Company  Limited v.  The State  of Bihar  [1955]  2 S.C.R. at  p.606, that  legal fictions  are created only for some definite  purpose and  these must  be limited  to  that purpose and  should not  be extended  beyond that legitimate field. Clearly,  the avowed  purpose of  the  legal  fiction created by the deeming provision contained in proviso (b) to s.10(2) (vi)  is to  make  the  unabsorbed  carried  forward depreciation partake  of the  same character  as the current depreciation in the following year, so that it is available, unlike unabsorbed  carried forward  business loss, for being set off against other heads of income of 567 that year.  That this  is so becomes clear from this Court’s observations in  Jaipuria China  Clay Mines  (P)  Ltd.  case (supra) appearing at p. 561 of the Report which run thus:           "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  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.      In CIT  Bombay v.  Ravi Industries  49 I.T.R.  145, the same position  has been  clarified by the Bombay High Court. The Court has observed that the unabsorbed depreciation does not lose  its character  and attributes  when it  is carried forward to the followings year; such unabsorbed depreciation of the earlier year, which is carried forward to the current year and  which is  deemed to  be of  the current year under proviso (b)  of s.10(2)  (vi) can  be set  off, unlike other business losses,  against income  under  other  heads.  Such being the  purpose for which the legal fiction is created it is difficult  to extend the same beyond its legitimate field and will have to b confined to that purpose. It is therefore not possible  to accept  the contention  of Counsel  for the assessees that  because of  the legal fiction the unabsorbed carried forward losses should be given preference not merely over the  unabsorbed carried  forward depreciation  but also over the  current year’s  depreciation.  There  is  thus  no modification of  nor  deviation  from  the  basis  and  well recognised  principle   of  commercial  accountancy  by  the statute as is contended by counsel for the assessees.      Since the  provisions of  the  1961  Act  are  in  pari materia with the corresponding provisions under the 1922 Act the same  conclusion must  follow under  the 1961 Act namely the current  depreciation  must  be  deducted  first  before deducting the  unabsorbed carried forward business losses of the earlier  years in  giving set  off while  computing  the total income of any particular year.      Having regard  to the  above discussion  it seems to us clear that unabsorbed carried forward losses cannot be given preference over  current depreciation  in the  matter of set off in  computing an  assessee’s income  for any  particular assessment year and as 568 such the  question has  been correctly  decided In Aluminium Corporation’s case and Malwa Sugar Mills case (supra) by the Calcutta  High   Court,   in   Gujarat   State   Warehousing

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Corporation’s case  (supra) by the Gujarat High Court and in Andhra Printers’case  (supra) by  the  Andhra  Pradesh  High Court. In  the impugned  judgment in  the Civil  Appeals the High Court  has relied on some observations of this Court in Jaipuria China  Clay Mines  case (supra) but that case dealt with  a   different  point   altogether  and   as  such  the observations made  in the  context of  the points that arose for decision  there would  be of  no avail. The High Court’s decision in  the Civil  Appeals is  therefore set  aside and that of  the Tribunal is restored while in Tax Reference the question referred  to this  Court in  answered  against  the assessee to the effect that the depreciation for the current year must  first be deducted before deducting the unabsorbed carry forward business loss. The assessee will pay the costs of the appeals and tax reference to the Department. M.L.A.                                      Appeals allowed. 569