Unabsorbed depreciation cannot be carried into a different or new business once the original business has ceased; claim rejected.

Unabsorbed depreciation from a defunct business cannot be carried into or treated as part of depreciation for subsequent assessment years of a different or continuing business. The proviso governing adjustment of unabsorbed depreciation operates within the computation of profits and presupposes the continued existence of the business whose assets produced the allowance; the 1941 amendment altered priority between prior losses and unabsorbed depreciation but did not create an independent right to apply such depreciation to unrelated business profits. Consequently claims to adjust unabsorbed depreciation after cessation of the underlying business are rejected.

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Issues: Whether unabsorbed depreciation allowance in respect of assets of a business for years in which there were no profits or insufficient profits can be added to and treated as part of the depreciation allowance of subsequent assessment years where the underlying business has ceased to be carried on.

Analysis: The question turns on proviso (b) to clause (vi) of sub-section (2) of section 10 of the Income-tax Act, 1961, which prescribes the manner of adjustment of depreciation allowances when full effect cannot be given in a year owing to absence or insufficiency of profits. The proviso operates within the computation of profits and gains of the business and presupposes the existence of the business for which the depreciable assets were used, since it adds unabsorbed depreciation to the allowance for the following year or deems it the allowance for that year. The 1941 amendment introducing the reference to clause (b) of the proviso to sub-section (2) of section 24 only affects priority between prior losses and unabsorbed depreciation and does not convert proviso (b) into an independent substantive right to adjust unabsorbed depreciation against profits of an entirely different or new business. Allowing unabsorbed depreciation of a defunct business to be added to depreciation of a distinct continuing business would improperly reduce the written down value of assets of the continuing business without actual depreciation of those assets.

Conclusion: Unabsorbed depreciation of a business that has ceased cannot be added to or treated as part of the depreciation allowance of subsequent assessment years where that business is not continued; the claim to adjust such unabsorbed depreciation in the assessment years in question is rejected.

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