Court rules unabsorbed depreciation can't offset income without ongoing business.

The court held that unabsorbed depreciation from earlier years cannot be set off against income from business, income from other sources, and capital gains unless the business is carried on in the succeeding year. The court rejected the argument that the fiction in section 32(2) eliminates the need for ongoing business activities. The decision emphasized that sections 71 and 72 are not applicable for setting off unabsorbed depreciation as they pertain to business losses, not depreciation allowances. The assessee was directed to bear the costs of the reference.

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Issues Involved:
1. Whether the unabsorbed depreciation of earlier years could be set off against the income from business u/s 41(2), income from other sources, and capital gains.

Summary:

Issue 1: Set off of Unabsorbed Depreciation Against Income
The assessee showed a total loss of Rs. 63,53,460 for the assessment year 1971-72, with Rs. 61,84,273 carried forward from earlier years. The Tribunal could not ascertain the split between carried forward business loss and unabsorbed depreciation. The assessee, relying on CIT v. Rampur Timber & Turnery Company Limited [1973] 89 ITR 150 (Allahabad High Court), claimed entitlement to set off the carried forward unabsorbed depreciation despite having no business activities in the relevant year.

The Income-tax Officer computed the assessee's profit u/s 41(2) of the Income-tax Act, 1961, at Rs. 49,802 and set off the unabsorbed depreciation from the assessment year 1963-64 against this profit. The assessee was assessed on an income of Rs. 2,79,427. This was upheld by the Appellate Assistant Commissioner and subsequently by the Tribunal, which referred to CIT v. Dutt's Trust, Calicut [1942] 10 ITR 477, emphasizing that the business in which unabsorbed depreciation arose must be carried on in the succeeding years to claim set off.

Interpretation of Section 32(2)
The court focused on the interpretation of section 32(2) of the Income-tax Act, which allows unabsorbed depreciation to be carried forward and added to the depreciation allowance for the following year. The court examined whether the business must be carried on in the succeeding year for the set-off of unabsorbed depreciation. The assessee's counsel cited decisions from the Andhra Pradesh High Court (Hyderabad Construction Co. Ltd. v. CIT [1981] 129 ITR 81) and Karnataka High Court (Addl. CIT v. Kapila Textiles (P.) Ltd. [1981] 129 ITR 458), which did not require the business to continue for claiming set off.

Contrary Decisions and Precedents
However, the court noted contrary decisions from its jurisdiction, including CIT v. Dutt's Trust [1942] 10 ITR 477 and Tube Suppliers Ltd. v. CIT [1985] 152 ITR 694, which required the business to be carried on for set off. The court also referred to the Supreme Court's decision in CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555, which supported the view that unabsorbed depreciation must be treated as an allowance for the following year, requiring the business to continue.

Conclusion
The court concluded that the business must be carried on in the succeeding year to claim set off of unabsorbed depreciation. The court rejected the argument that the fiction in section 32(2) dispenses with the requirement of carrying on the business. The court also dismissed the applicability of sections 71 and 72 for setting off unabsorbed depreciation, emphasizing that these sections deal with business losses, not depreciation allowances.

Final Decision
The court answered the referred question in the affirmative, holding that the unabsorbed depreciation of earlier years could not be set off against the income from business u/s 41(2), income from other sources, and capital gains. The assessee was ordered to pay the costs of the reference.

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