http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7  

PETITIONER: COMMISSIONER OF INCOME-TAX, MADRAS

       Vs.

RESPONDENT: S.   S. SIVAN PILLAI AND OTHERS

DATE OF JUDGMENT: 29/04/1970

BENCH: SHAH, J.C. BENCH: SHAH, J.C. HEGDE, K.S. GROVER, A.N.

CITATION:  1970 AIR 1667            1971 SCR  (1) 434  1970 SCC  (2) 180  CITATOR INFO :  D          1976 SC 606  (8,10)

ACT: Indian Income-tax Act, 1922, s. 15-C(1) & (4)- Share-holders whether entitled to exemption under sub-s. (4) when  company makes  no  profit  liable to  exemption  under  sub-s.  (1)- Unabsorbed depreciation carried forward under section  10(2) (vi) and 10(2) (vi-A)- Whether to be set off against  profit for  purpose  of determining profit under s. 10  Set-off  of depreciation  carried forward against profit  of  succeeding year whether takes place under s. 10(2) (vi) proviso (b)  or under S. 24(2).

HEADNOTE: Shri  Ganapathy Mills Co. Ltd., Distributed dividend to  its shareholders out of its business profits earned in the years ending  December  31,  1953  and  December  31,  1954.   The company, however carried in its accounts a large balance  of unabsorbed  depreciation  admissible under s. 10(2)  (vi)  & 10(2) (vi-a) of the Income-tax Act, 1922 and on that account it  had no taxable income in the relevant  assessment  years 1954-55  and  1955-56.   In  assessing  the  income  of  the shareholders for the assessment years the Income-tax Officer rejected the claim for exemption from tax Linder s.  15-C(4) of the Income-tax Act and brought the dividend to tax.  This order  was confirmed by the Income-tax  Appellate  Tribunal. The  High  Court,  in a reference, held  in  favour  of  the assessees.   With  certificate the  Revenue  appealed.   The question that fell for consideration were : (i) Whether  the High  Court’s view that unabsorbed depreciation of  previous years  must be ignored in computing the profits under s.  10 and the Implied assumption that unabsorbed depreciation  was carried  forward  and set-off under s. 22(4)  were  correct; (ii) Whether, the claim under s. 15-C(4) could be made  even when  there was no taxable profit for which exemption  could be claimed Linder s. 15-C(4). HELD : (i) Under proviso (b) to s. 10(2) (vi) the unabsorbed depreciation in an year is to be deemed the depreciation for the succeeding year into the accounts of which it is carried forward  and  the aggregate of depreciation in the  year  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7  

assessment  and the unabsorbed depreciation of the  previous year is deemed to be depreciation allowance for the year  of assessment.  The opinion of the High Court that in computing the  profits  of  an industrial ’undertaking  under  s.  10, unabsorbed  depreciation  for  the previous  years  must  be ignored is inconsistent with the plain terms of the proviso. [438 D-E; 439 D] The right to claim allowance of unabsorbed depreciation does not  arise out of s. 24(2) of the Act.  Under the scheme  of s.  15-C(4) profits and gains of an  industrial  undertaking must be determined under and in the manner provided by s. 10 of the Income-tax Act.  For that purpose all the  allowances under  sub-s. (2) are taken into account and  the  resultant amount forms a component of the taxable profits, By  proviso (b)  to s. 10 (2) (vi), the unabsorbed depreciation  in  the previous  year  is deemed depreciation  for  the  subsequent year,  and  there  is no room  for  making  any  distinction between  the unabsorbed depreciation for the  previous  year and  the  depreciation for the current year.  The  right  to appropriate the profits towards the unabsorbed  depreciation in  the  previous  year does not arise under  s.  24(2);  it arises by virtue of s. 10(2) (vi) proviso (b). [439 D-F] 435 (ii)The  right  of  the shareholders to  obtain  benefit  of exemption  under 15-C(4) depends upon the company  obtaining the benefit of exemption under sub-s. (1) of s. 157C for the exemption  from payment of tax on the dividend  received  by the  share-holders  is admissible only on that part  of  the profits or gains on which the tax is not payable by the com- pany under sub-s. (1). [439 HI On this view it must be held that the claim of  shareholders in  the  present  case  rightly  disallowed  by  the  taxing authorities. [435 H; 441 D] [Proviso  (b)  ’to  s.  24(2  held  inapplicable,  with  the observation that it deals merely with priority and does  not convert what is unabsorbed depreciation of the previous year which is deemed to be depreciation for the current year into loss "for the purpose of carry forward".[440 D] Commissioner of Income-tax, Calcutta v. Jaipuria China  Clay Mines (P) Ltd., 59 I.T.R. 555, referred to.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION: Civil Appeals Nos.  2321  to 2324 of 1966. Appeals from the judgment and order dated August 2, 1965  of the  Madras High Court in Tax Cases Nos. 198 to 201 of  1962 (References Nos. 114 to 117 of 1962). B.Sen, G. C. Sharma, R. N. Sachthey and B. D. Sharma, for the appellant (in all the appeals). Gobind Das and Lily Thomas, for the respondents (in all the, appeals). The Judgment of the Court was delivered by Shah,  J. Sri Ganapathy Mills Co. Ltd. distributed  divident to its shareholders out of the business profits earned by it in the years ending December 31, 1953 and December 31, 1954. The Company however carried in its accounts a large  balance of  unabsorbed depreciation admissible under s.  10(2)  (vi) and  S.  10 (2) (vi-a) of the, Income-tax Act, and  on  that account it had no taxable income in the relevant  assessment years 1954-55 and 1955-56. In  assessing  the  income, of  the  shareholders  for  the, assessment years 1955-56 and 1956-57 the Income-tax  Officer rejected their claim for exemption from tax under S. 15-C(4)

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7  

of the Incometax Act, 1922, and brought-the dividend  income to  tax.   This.  order  was  confirmed  by  the  Income-tax Appellate Tribunal. The  Tribunal  referred the following question to  the  High Court of Madras for opinion : "Whether on the facts and in the circumstances of the  case, the assessees are entitled to the benefit of 436 S.15-C(4)  in respect of the dividend income  received  from Sri Ganapathy Mills Co. Ltd., Tinnevelly ?" The  High  Court answered the question in  the  affirmative. The  ,Commissioner of Income-tax has appealed to this  Court with a ,certificate under S. 66A(2) of the Income-tax Act. In  the  year  ending December 31,  1953,  the  Company  had ,earned in its business transactions a profit of Rs. 87,184, but it ,had no taxable profits, for the depreciation for the current  and  the previous years amounted  to  Rs.  2,83,343 which  was  an admissible allowance in  the  computation  of income under s. 10 of the Income-tax Act.  Since full effect could  not  be  given  to the  allowance,  the  Company  was entitled  to add to the depreciation for the following  year the  unabsorbed  depreciation  of  Rs.  1,96,159  under   s. 10(2)(vi)  proviso  (b).  In the year  ending  December  31, 1954,  the Company earned a profit of Rs. 4,36,821 ,and  the depreciation  admissible  for  the year  was  Rs.  2,41,809. Taking  into  account  the unabsorbed  depreciation  of  the previous _year in computing the taxable income, it was found that  the  Company  had  suffered  a  loss  of  Rs.,  1,147. Accordingly the Company had no taxable profits in either  of the two years and so tax was ,levied from the Company.   But the  Company had still distributed dividend out  of  profits earned  by it and the taxing authorities levied tax  on  the dividend received by the shareholders. The answer to the question referred to the Tribunal depend-, upon  the  true  interpretation of s.  15-C  of  the  Indian Income-tax  Act, 1922.  Section 15-C of the Income-tax  Act. insofar as it is ,relevant, provides               " (1) Save as otherwise hereinafter  provided,               the tax shall not be payable by an assessee on               so  much of the profits or gains derived  from               any  industrial  undertaking  to  which   this               section applies as do not exceed ,six per cent               per  annum  on  the capital  employed  in  the               undertaking, computed in accordance with  Such               rules  as  may be made in this behalf  by  the               Central Board of Revenue.               (2) .      .     .      .     .     .               (3)   The  profits or gains of  an  industrial               under,taking  to  which this  section  applies               shall  be  computed  in  accordance  with  the               provisions of section 10.               (4)   The tax shall not be payable by a share-               holder  in respect of so much of any  dividend               paid  or  deemed  to  be paid  to  him  by  an               industrial undertaking               4 3 7               as is attributable to that part of the profits               or gains on which the tax is not payable under               this section.                .    .   .    .     .     .    ." The  Company was an industrial undertaking to which s.  15-C applied.  It had in the two relevant years derived from  the industrial  undertaking  no  profits  or  gains  within  the meaning of sub-s. (1) read with sub-s. (3) of s. 15-C.   The profits  or gains derived the industrial undertaking  within

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7  

the  meaning  of  sub-s. (1) of s.  15-C  are  not  business profits  : they are taxable profits computed  in  accordance with  the provisions of s. 10 of the Income-tax Act.   Under s.  15-C(1) no tax is payable by the industrial  undertaking on  its taxable profits equal to six per cent per  annum  of the  capital employed.  Sub-section (4) of s.  15-C  exempts the  shareholders of an industrial, undertaking to which  s. 15-C  applies, from liability to pay tax in respect  of  the dividend  paid  or deemed to be paid as is  attributable  to that  part of the profits or gains on which the tax  is  not payable under s. 15-C (1). Exemption under s. 15-C(1) from payment of income-tax is not related  to  the  business profits: it  is  related  to  the taxable profits.  The language of sub-s. (3) is clear :  the profits  or  gains of an industrial undertaking have  to  be determined under s. 10 of ,the Act.  Even if the undertaking has earned profits out of its commercial activity, if it has no taxable profits it cannot claim exemption from payment of tax  under  sub-s. (1) of s. 15-C; and it’  the  undertaking cannot  claim the benefit under sub-s. (1) the  shareholders will  not  get the benefit of sub-s. (4), for  there  is  no dividend  paid  which is attributable to that  part  of  the profits  or  gains on which the tax was not payable  by  the undertaking. The Company had no taxable profit in the year of accounts it did  not accordingly qualify for exemption from  payment  of tax  under sub-s. (1) and since there was- no  such  taxable profit, the dividend received by the shareholders could  not be  said to be attributable to that part of the  profits  or gains on which the tax was not payable under sub-s. (1).  On the  plain terms of s. 15-C the shareholders  cannot  obtain the benefit of exemption from payment of tax. We  are unable to agree with the High Court that  in  deter- mining   the   profits  of  the   Company   the   unabsorbed depreciation  of the previous years will not be  taken  into account.  Section 10 of the Income-tax Act, insofar as it is relevant, provides :               "(1)  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.               L12SupCI 70-14               438               (2)  Such profits or gains shall  be  computed               after               making the following allowances, namely:-                .    .    .   .    .    .    ." Clause (vi) deals with depreciation allowance in respect  of buildings, machinery, plant or furniture being the  property of  the assessee, at a sum equivalent to such percentage  on the  original cost thereof as may be prescribed.  Under  cl. (vi-a)  in  respect  of  buildings  newly  erected,  or   of machinery or plant being new which had been installed  after March  31,  1948,  a  further sum  which  is  deductible  in determining  the  written  down value equal  to  the  amount admissible under cl. (vi) is allowable.  If the depreciation under  cls. (vi) and (vi-a) cannot be given full  effect  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 cl. (b) of the proviso to sub-s. (2) of S. 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7  

year and deemed to be part of that allowance.  It tion of an year  is to be deemed depreciation for the  succeeding  year into  the  account of which it is carried forward,  and  the aggregate of the depreciation for the year of assessment and the  unabsorbed depreciation of the previous year is  deemed to  be  depreciation allowance for the year  of  assessment. The High Court, however, said that in computing the  profits of  the  year of an industrial undertaking  for  determining whether  the  benefit  of  exemption  under  s.  15-C(1)  is admissible, the unabsorbed depreciation cannot be taken into account.  The High Court observed:               "In effect, it computing the profits or  gains               for the purpose of section 15-C(1) and (4) the               only allowances that could be made in  respect               of   current   year’s  additional   or   extra               depreciation under section 10(2) (vi-a).   The               set  off  of losses under  section  24(2)  and               allowances    in   respect    of    unabsorbed               depreciation both under section 10(2) (vi) and               10(2)   (vi-a)  would  not  enter   into   the               computation under section 15-C(3).               It  is  true  that  when  the  net  result  of               assessment  on the company is taken  there  is               ’nil, profit and there might be no occasion at               all for the application of section 15-C.  But,               in  our view, it does not follow from it  that               on that ground the benefit of that section can               be   denied  to  the  shareholders  if  on   a               computation  of the profits and gains  of  the               industrial undertaking under               43 9               section 15-C(3), the company had made  profits               out  of which dividends had been paid  to  its               shareholders.   Where the company  has  ’nil,’               profits  under its final assessment, the  non-               application  of  section 15-C is not  due  the               fact  that it made no profits and it  was  not               entitled  to the benefit of  section  15-C(1).               But,  in  view of the overall  result  of  the               assessment,  there is no need for the  company               to  claim exception under that  provision,  as               there is no tax liability at all.  Viewed from               this angle, we consider that the  shareholders               are  entitled  to  take the  position  of  the               profits  or gains of the company  as  computed               under  sub-section  (3) of  section  15-C  and               subject  to the limits provided by  that  sub-               section,  and claim the benefit under  section               15-C(4)." The opinion of the High Court that in computing the  profits of  an  industrial  undertaking  under  s.  10,   unabsorbed depreciation  for  the previous years must  be  ignored,  is inconsistent  with the plain terms of s.  10(2)(vi)  proviso (b).  Again the assumption that the right to claim allowance of unabsorbed depreciation arises out of s. 24(2) of the Act is  in our judgment erroneous.  Under the scheme of s.  15-C the  profits or gains of an industrial undertaking  must  be determined under and in the manner provided by s. 10 of  the Income-tax  Act.  For that purpose all the allowances  under sub-s.  (2)  must be taken into account, and  the  resultant amount  forms  a  component of the taxable  profit.   If  by proviso (b) to s. 10 (2) (vi) the unabsorbed depreciation of the previous year is deemed depreciation for the  subsequent year,  there is no room for making any  distinction  between the  unabsorbed depreciation for the previous year  and  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7  

depreciation for the current year.  The right to appropriate the  profits  towards  the unabsorbed  depreciation  of  the previous year does not arise under s. 24 ( 1); it arises  by virtue of s. 10 (2) (vi) proviso (b) We are also unable. to agree with the High Court that if  an industrial   undertaking  has  distributed   dividend,   the shareholders  will be entitled to exemption from payment  of tax on that dividend, even if the Company is not entitled to claim  exemption from liability to pay tax under sub-s.  (1) of  s.  15-C.  The right of the shareholders to  obtain  the benefit  of  exemption  under s.  5-C(4)  depends  upon  the Company obtaining the benefit of exemption under sub-s.  (1) of  s.  15-C, for the exemption from payment of tax  on  the dividend received by the shareholders is admissible only  in that part of the profits or gains on which the tax is not payable by the Company under sub-s. (1). 440 Section 24(2) proviso (b) on which reliance was placed  has, in our judgment, no application.  That proviso enacts                "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." Sub-section  (2) of S. 24 deals with "the  carry-forward  of losses" and proviso (b) to S. 24(2) sets out the sequence in which  the  losses  carried  forward  and  the  depreciation allowance which remains unabsorbed in the previous year  are to be allowed.  Whether any practical effect may be given to the terms of proviso (b) to s. 24(2), in the view which this Court  has taken in Commissioner of Income-tax, Calcutta  v. Jaipuria  China Clay Mines (P) Ltd.(1) is a matter on  which we need express no opinion.  If on its plain terms,  proviso (b)  to  s. 24(2) deals merely with priority  and  does  not convert what is unabsorbed depreciation of the previous year which  is deemed to be depreciation for the current  year’,- into  loss for the purpose of carry-forward," sub-s. (2)  of s.   24  proviso (b) presents no difficulty in  the  present case. This Court in Jaipuria China Clay Mines’ case(1) held that unabsorbed depreciation of past years cannot be kept out  of accounts in determining the net income of an assessee for  a particular  year; it has to be set off against  the  profits from  other  heads.  In that case the assessee had  for  the year  1952-53 a total business income of Rs. 14,000 odd  and the  depreciation  amounted  to  Rs.  5,360.   The  assessee company had a large dividend incomes.  The tax-payer claimed that the unabsorbed depreciation of the previous year should be  deducted from the dividend income and the  total  income liable  to tax be reduced.  The Income-tax Officer  rejected the  claim.   This Court observed that  the  Income-tax  Act draws   no  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.   Accordingly  the’ unabsorbed  depreciation of the past years must be added  to the  depreciation of the current year, and the aggregate  of the   unabsorbed  depreciation  and  the    current   year’s depreciation  must be deducted from the total income of  the year  relevant to the assessment year in question.   If  the profits  do  not wipe out the depreciation, the  profit  and loss account would show a loss.  The Court further  observed that  "carry-forward of depreciation is provided for" in  s. 10(2)  (vi), and s. 24(2) only deals with losses other  than the losses

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7  

(1)  59 I.T.R. 555. 441 due to depreciation.  That decision clearly establishes that depreciation  in  respect  of a business has  in  the  first instance to be set off as an allowance  against the  profits from the business, profession or vocation.   If          the depreciation exceeds the profits and there is no other income from any other head, the depreciation may be carried forward to  the  next year.  If, there is a profit from  some  other head, then the unabsorbed depreciation of a particular  year under   the  head  "Profits  and  gains  of  the   business, profession  or vocation" will be set off against such  other income. In  the  case in hand, the Company had no  other  source  of income.   The  depreciation  allowance  admissible  in   the assessment years exceeded-the business profits.  The Company had  no  taxable profit in the two years in  question.   The Company  could  not  claim exemption  from  payment  of  tax provided  in  s.  15-C  (1); and  no  dividend  having  been distributed out of the taxable profits there was no dividend attributable  to that part of the profits which were  exempt from  tax in the ’hands of the shareholders.  The answer  to the  question submitted by the Tribunal is recorded  in  the negative. The appeals must therefore be allowed.  Having regard to the Circumstances  of the case, the Parties will bear their  own costs in this Court and in the High Court. Appeals allowed.  ’G. C. 442