1985 (1) TMI 48 - HC - Income Tax

Court prioritizes setting off business losses before development rebate

The court dismissed the original petition, upholding the priority of setting off business losses and unabsorbed depreciation before unabsorbed development ... Carry Forward And Set Off, Developement Rebate Issues Involved:1. Priority of setting off unabsorbed development rebate versus business loss from previous years.2. Interpretation of relevant sections of the Income Tax Act, 1961, specifically sections 32, 33, and 72.Detailed Analysis:1. Priority of Setting Off Unabsorbed Development Rebate Versus Business Loss from Previous Years:The petitioner, a company engaged in spinning and weaving, contested the Income Tax Officer's (ITO) decision regarding the setting off of losses and unabsorbed development rebate for the assessment year 1974-75. The ITO set off the business losses from previous years against the net income of Rs. 24,67,658, resulting in a nil net assessable income. The petitioner argued that the unabsorbed development rebate for 1966-67, amounting to Rs. 5,97,107, should have been prioritized for set off before the business losses, as the period for carrying forward the development rebate was expiring.The court examined sections 32(1), 32(2), 33(1)(a), 33(2), 72(1), and 72(2) of the Income Tax Act, 1961. Under section 32(2), unabsorbed depreciation allowance of the previous years is deemed part of the current year's depreciation allowance. However, section 72(2) stipulates that the unabsorbed depreciation allowance is to be given effect only after setting off the business losses of earlier years.The court referred to precedents, including CIT v. Gujarat State Warehousing Corporation [1976] 104 ITR 1 (Guj), Mysore Paper Mills Ltd. v. CIT [1979] 117 ITR 132 (Kar), and CIT v. Coromandel Steels Ltd. [1981] 130 ITR 856 (Mad), which established that business losses should be set off before unabsorbed depreciation and development rebate. The court concluded that the unabsorbed development rebate does not take priority over unabsorbed business losses and depreciation.2. Interpretation of Relevant Sections of the Income Tax Act, 1961:The court analyzed the interplay between sections 32, 33, and 72. Section 32 deals with depreciation, section 33 with development rebate, and section 72 with the carry forward and set off of business losses. The court emphasized that section 72(2) explicitly provides that unabsorbed depreciation allowance carried forward is to be given effect only after setting off business losses. The court rejected the petitioner's argument that section 33(2) should take precedence over section 72(2), noting that the legislative scheme does not support such an interpretation.The court cited authoritative texts, including Kanga and Palkhivala's 'The Law and Practice of Income Tax' and Chaturvedi and Pithisaria's 'Income Tax Law,' which outline the precedence of set-offs in cases of insufficient profits. According to these texts, the order of set-offs is: current depreciation, carried forward business losses, unabsorbed depreciation, unabsorbed development rebate, and current development rebate.The court found no error in the ITO's assessment order (Ext. P-1) and the Commissioner's order (Ext. P-3), which prioritized the set off of business losses and unabsorbed depreciation over the unabsorbed development rebate. The court dismissed the original petition, affirming the correctness of the Revenue's approach.Conclusion:The original petition was dismissed, with the court upholding the ITO's and Commissioner's decisions. The court ruled that business losses and unabsorbed depreciation must be set off before unabsorbed development rebate. The petitioner's request for a certificate for appeal to the Supreme Court was also rejected, as the court found no substantial question of law of general importance.