1957 (8) TMI 25 - HC - Income Tax

Court prioritizes current year's depreciation over carried forward losses for set off

ALUMINIUM CORPORATION OF INDIA LTD. Versus COMMISSIONER OF INCOME-TAX, WEST BENGAL

ALUMINIUM CORPORATION OF INDIA LTD. Versus COMMISSIONER OF INCOME-TAX, WEST BENGAL - [1958] 33 ITR 367 (Cal) Issues Involved:1. Whether the depreciation allowance of Rs. 12,52,117 for the current year should be set off against the profits of Rs. 9,56,479 of the same year before setting off the loss carried forward from previous years amounting to Rs. 27,359.Detailed Analysis:1. Depreciation Allowance Set Off Against Current Year Profits:The applicant (assessee) showed a profit of Rs. 9,56,479 without deducting the depreciation for the year, which amounted to Rs. 12,52,117. The Income-tax Officer set off the depreciation against the profit, resulting in a loss of Rs. 2,95,638 for the year. This amount was carried forward as unabsorbed depreciation. The applicant contended that the loss carried forward from earlier years, Rs. 27,359, should first be set off against the profit of Rs. 9,56,479, and the balance should then be set off against the current year's depreciation allowance. This would result in a single carry forward amount of Rs. 3,22,997 as unabsorbed depreciation.2. Tribunal's Decision:The Appellate Tribunal rejected the applicant's contention, holding that the net profit or loss for the year could only be determined after charging the depreciation for the year as an expense. Consequently, the unabsorbed depreciation amounting to Rs. 2,95,638 and the loss from previous years, Rs. 27,359, were both carried forward separately.3. Legal Provisions:The relevant legal provisions include proviso (b) to section 10(2)(vi) and clause (b) of section 24(2) of the Income-tax Act. Proviso (b) to section 10(2)(vi) states that if full effect cannot be given to the depreciation allowance due to profits being less than the allowance, the unabsorbed depreciation should be added to the depreciation allowance for the following year. Clause (b) of section 24(2) directs that effect should first be given to the provisions of sub-section (2) of section 24, which deals with the carry forward and set off of losses.4. Priority of Set Off:The judgment emphasized that depreciation allowance for the current year must first be set off against the profits of the same year, as per section 10(1) and section 24(1). Only after this set off can any unabsorbed depreciation be carried forward. Section 24(2) comes into play only after the operation of section 24(1) has been completed. The court noted that the process of setting off current year's depreciation against the year's profits does not involve section 24(2) until the operation under section 24(1) is complete.5. Analytical Conclusion:The court concluded that the losses carried forward from earlier years and the depreciation allowance for the current year belong to different stages of the assessment procedure. The losses from earlier years can only be set off after the current year's depreciation has been fully accounted for. Therefore, there is no competition between the two at the stage of setting off the current year's depreciation against the profits of the same year. The carried forward loss of Rs. 27,359 should not be set off against the current year's profit of Rs. 9,56,479 before accounting for the current year's depreciation allowance.6. Final Judgment:The court answered the referred question in the affirmative, upholding the Income-tax Officer's method of setting off the current year's depreciation against the year's profits before considering the carried forward loss. The Commissioner of Income-tax, West Bengal, was awarded the costs of the reference.Separate Judgments:Both judges, Chakravartti, C.J. and Guha, J., delivered a unanimous judgment, agreeing on the interpretation and application of the relevant provisions of the Income-tax Act.