Court allows set-off of unabsorbed depreciation against income despite business discontinuation

The court held that unabsorbed depreciation from earlier years can be set off against the assessee's income of the relevant previous year, even if the business to which the depreciation related did not exist during that year. The court reaffirmed this position based on Section 32(2) of the Income-tax Act, 1961, and previous decisions. Contrary decisions by the Bombay and Madras High Courts were not persuasive. The court ruled in favor of the assessee, allowing the set-off of unabsorbed depreciation against other income, even if the business had discontinued. The Revenue was ordered to pay the costs of the reference.

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Issues Involved:
1. Whether unabsorbed depreciation carried forward from earlier years can be set off against the assessee's income of the relevant previous year even if the business to which such unabsorbed depreciation related did not exist during the year.

Issue-Wise Detailed Analysis:

1. Unabsorbed Depreciation Set-Off:
The primary issue in this case is whether the unabsorbed depreciation carried forward from earlier years can be allowed to be set off against the assessee's income of the relevant previous year, even if the business to which such unabsorbed depreciation related did not exist during the year. The Tribunal held that the unabsorbed depreciation could be set off, following the decision in CIT v. Kishanlal and Sons (Udyog) Pvt. Ltd. [1985] 154 ITR 735 (Cal).

Arguments and Counterarguments:
- Revenue's Argument: Mr. Sunil Mitra, representing the Revenue, argued that the decision in Kishanlal and Sons requires reconsideration in light of contrary decisions by the Bombay and Madras High Courts.
- Court's Response: The court was not persuaded by this argument. It reaffirmed the decision in Kishanlal and Sons, which held that Section 32(2) of the Income-tax Act, 1961, contains an independent provision for setting off unabsorbed depreciation carried forward from a preceding year. The deeming provision in the section must be given full effect, and it is not necessary for the business in respect of which depreciation was originally allowed to remain in existence in the succeeding year when set-off is claimed.

Contrasting Judgments:
- Bombay High Court in Hindustan Chemical Works Ltd. [1980] 124 ITR 561: Held that if the business does not exist during the relevant year, unabsorbed depreciation cannot be carried forward.
- Madras High Court in East Asiatic Co. (India) P. Ltd. v. CIT [1986] 161 ITR 135: Held that unabsorbed depreciation can only be carried forward if the business continues to exist in the succeeding year.
- Bombay High Court in Estate and Finance Ltd. [1978] 111 ITR 119: Held that unabsorbed depreciation can be set off against income in subsequent years even if the business has ceased to exist.

Supreme Court and Other High Courts:
- Supreme Court in CIT v. J. K. Hosiery Factory [1986] 159 ITR 85: Impliedly affirmed the decision in Estate and Finance Ltd., interpreting Section 32(2) in favor of the assessee.
- Gujarat High Court in CIT v. Deepak Textile Industries Ltd. [1987] 168 ITR 773: Held that unabsorbed depreciation can be set off against assessable income of a subsequent year, even if the business has ceased to exist.

Final Judgment:
The court, following its earlier decision in Kishanlal and Sons and the principles laid down by the Gujarat and Bombay High Courts, held that the unabsorbed depreciation could be set off against other income even if the business had discontinued. The question was answered in the affirmative and in favor of the assessee.

Leave to Appeal:
Mr. Mitra's oral prayer for leave to appeal to the Supreme Court was granted, considering that a certificate of fitness for leave to appeal had already been granted against a similar decision by the Andhra Pradesh High Court in Hyderabad Construction Co. Ltd. [1981] 129 ITR 81.

Costs:
The Revenue was ordered to pay the costs of the reference.

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