Carryforward of unabsorbed depreciation after business cessation allowed as deduction against other income u/s32(2)

Whether unabsorbed depreciation may be carried forward and set off despite cessation of business: the HC held that s.32(2) creates a legal fiction treating unabsorbed depreciation as part of the allowance for subsequent years irrespective of actual business operations, and that s.41(1) and governing SC authorities support treating carried-forward depreciation as deductible even against income from other heads; absence of current-year business does not preclude the deduction. Result: the carried-forward unabsorbed depreciation was allowed to be set off against the assessable income for the assessment years 1969-70 and 1970-71 in favour of the assessee.

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Issues: Whether, notwithstanding that the assessee had sold its textile business and ceased manufacture in 1964-65, the unabsorbed depreciation from earlier years could be carried forward and set off against assessable income for the assessment years 1969-70 and 1970-71.

Analysis: The question is governed by section 32(1) and the deeming provision in section 32(2) of the Income-tax Act, 1961, read subject to sections 72(2) and 73(3). Section 32(1) prescribes the factual prerequisites for current-year depreciation (ownership, user and use for business). Section 32(2) creates a legal fiction making unabsorbed depreciation of a prior year deemed to be the allowance for the following year and succeeding years where full effect could not be given earlier. Established authorities (including Jaipuria China Clay Mines) interpret such legal fictions to include assuming the facts necessary to give effect to the fiction so as to permit set off against income under other heads. The fiction in section 32(2) is for the purpose of enabling taxpayers to avail the depreciation already earned but not allowed earlier; it is not confined to years in which the assessed business actually operates. Distinctions between the fiction in section 32(2) and the different deeming provisions in section 41 do not negate the assumption required by section 32(2). Relevant procedural definitions of "previous year" do not prevent an assessee without active business operations from having a previous year for other sources of income. Authorities and principles cited support treating carried forward unabsorbed depreciation as deemed current-year allowance for the purpose of set off.

Conclusion: The unabsorbed depreciation carried forward from earlier years is allowable to be carried forward and set off against the assessable income for the assessment years 1969-70 and 1970-71 despite the assessee having ceased the textile manufacturing business in 1964-65; the question is answered in favour of the assessee.

Ratio Decidendi: The deeming provision of section 32(2) of the Income-tax Act, 1961 operates to treat unabsorbed depreciation of prior years as part of the allowance for subsequent years by assuming the factual prerequisites necessary to give effect to that fiction, thereby permitting carry forward and set off of such unabsorbed depreciation against total income even where the original business has ceased.

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