Carry-forward of depreciation against capital gains and rebate on full capital gains upheld under the Income-tax Act

Unabsorbed depreciation and business loss could be carried forward and set off against capital gains under the Income-tax Act, 1922 because the proviso to section 10(2)(vi) was read to cover profits or gains under any head of income, not only the same business. For super-tax rebate under section 17(7), the relevant figure was the full capital gains included in total income, not the residue after set-off under section 24. The constitutional challenge to section 12B was rejected, and the provision was treated as intra vires.

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Issues: (i) Whether the unabsorbed depreciation and business loss could be set off against capital gains under the Income-tax Act, 1922; (ii) whether, for rebate of super-tax under section 17(7), the relevant amount was the total capital gains or only the residue after set-off; (iii) whether section 12B of the Indian Income-tax Act was ultra vires the Indian Legislature.

Issue (i): Whether the unabsorbed depreciation and business loss could be set off against capital gains under the Income-tax Act, 1922.

Analysis: The scheme of sections 10, 24 and the proviso to section 10(2)(vi) was read together. The expression "profits or gains chargeable for that year" in the proviso was held not to mean only profits of the particular business, but profits or gains arising under any head of income. Unabsorbed depreciation could therefore be carried forward and absorbed against capital gains where business profits were insufficient.

Conclusion: The set-off against capital gains was permissible and the assessee's contention was rejected on this point.

Issue (ii): Whether, for rebate of super-tax under section 17(7), the relevant amount was the total capital gains or only the residue after set-off.

Analysis: Relief under section 17(7) depended on the amount of income actually chargeable under the head "capital gains" included in the total income. The computation under section 24 relating to set-off did not control the rebate calculation under section 17(7).

Conclusion: The rebate had to be computed on the total capital gains and not merely on the residue after set-off.

Issue (iii): Whether section 12B of the Indian Income-tax Act was ultra vires the Indian Legislature.

Analysis: The constitutional challenge was answered in line with the earlier references relied upon by the Court, and no departure from that position was made.

Conclusion: Section 12B was held not to be ultra vires.

Final Conclusion: The reference was answered by upholding the set-off of unabsorbed depreciation against capital gains, granting super-tax relief on the full capital gains, and rejecting the constitutional challenge to section 12B.

Ratio Decidendi: In construing the depreciation carry-forward and super-tax rebate provisions, income chargeable under any head in the total income may be brought into account, and the rebate under section 17(7) is determined by the gross capital gains included in total income rather than the balance after inter-head set-off.

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