Depreciation must be included in business loss computation for set-off under income-tax principles.

In computing a business loss for set-off under the Income-tax Act, depreciation must be taken into account and added to the loss. Section 10 governed computation of business profits and allowance for depreciation, but it did not create a separate rule for loss computation. The proviso to Section 10(2)(6)(b) was directed only to cases where depreciation could not be fully given effect because there were no profits or gains, and it did not exclude depreciation from the true business loss. The loss of profits or gains was treated as the year's commercial result, so ordinary commercial principles required diminution in the value of buildings, machinery, plant and furniture to be considered.

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Issues: Whether, in computing the loss of a business for the purpose of set-off under the Income-tax Act, depreciation calculated in the prescribed manner must be added to the business loss.

Analysis: Section 10 dealt with the computation of profits or gains of a business and the allowance for depreciation, but it did not lay down a rule for computing loss. The proviso to Section 10(2)(6)(b) was concerned with cases where full effect could not be given to depreciation because there were no profits or gains, and it was not treated as excluding depreciation from the computation of a true business loss. The phrase "loss of profits or gains" in Section 24 was understood as the result of the year's working, and the ordinary commercial principle that diminution in value of buildings, machinery, plant and furniture is to be taken into account applied equally when determining a loss.

Conclusion: Yes. Depreciation is to be taken into account in computing the business loss, and the assessee is entitled to have the loss increased by the amount of depreciation.

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