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Issues: Whether, under the Income-tax Act, 1922, the depreciation allowance of the current year had to be set off against that year's profits before giving effect to loss brought forward from earlier years, or whether the carried forward loss had to be adjusted first.
Analysis: The statutory scheme required depreciation of the current year to be deducted in computing business profits under section 10, and only after the current year's depreciation had been worked out could any unabsorbed balance be carried forward under proviso (b) to section 10(2)(vi). Clause (b) of section 24(2) operated at a different stage, namely where there was already carried forward depreciation available for set-off along with carried forward loss. The priority rule in section 24(2)(b) therefore applied only when both items were at the same stage of carry forward. In the present case, the current year's depreciation had not yet reached that stage, so there was no basis for giving precedence to the earlier year's loss over the current year's depreciation.
Conclusion: The loss brought forward from earlier years was not entitled to be set off first against the current year's profits. The current year's depreciation was rightly adjusted first, and the question referred was answered against the assessee and in favour of the Revenue.
Ratio Decidendi: The priority rule in section 24(2)(b) applies only to depreciation already carried forward to a future year, not to current-year depreciation that is being absorbed in computing the profits of that year.
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