Carry-forward of State loss denied, but Part B depreciation must be included in aggregate depreciation computation.

A loss incurred in an Indian State could not be carried forward under section 24(2) where the first proviso to section 24(1) excluded any initial set-off and the relevant State law did not itself permit carry-forward; the claim therefore failed. Depreciation allowed under Part B State law, however, had to be included in computing aggregate depreciation and written down value under the removal of difficulties order, because the statutory scheme required all relevant depreciation to be taken into account; this aspect was allowed. The reference thus produced mixed answers, with the assessee succeeding only on the depreciation computation issue.

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Issues: (i) Whether loss incurred in an Indian State, which could not be set off under the first proviso to section 24(1), could nevertheless be carried forward under section 24(2) and set off against taxable profits in a later year. (ii) Whether depreciation allowed under Part B State law had to be taken into account for computing aggregate depreciation and written down value under the relevant removal of difficulties order.

Issue (i): Whether loss incurred in an Indian State, which could not be set off under the first proviso to section 24(1), could nevertheless be carried forward under section 24(2) and set off against taxable profits in a later year.

Analysis: The right to carry forward a loss under section 24(2) was treated as dependent on the loss being of a kind to which section 24(1) could initially apply. Where the proviso to section 24(1) excluded set-off because the loss arose in an Indian State, the loss could not be treated as one that was capable of being set off in the first instance. The removal of difficulties order preserved carry-forward rights only where the relevant State law itself permitted such carry forward. Since the State law here did not permit it, the assessee could not invoke section 24(2) to create a new right by reason of integration.

Conclusion: The question was answered in the negative and against the assessee.

Issue (ii): Whether depreciation allowed under Part B State law had to be taken into account for computing aggregate depreciation and written down value under the relevant removal of difficulties order.

Analysis: The computation scheme under section 10(2)(vi) required the aggregate of depreciation allowances to be considered for the ceiling on depreciation. The reference in the order to sub-clause (c) necessarily involved the operation of sub-clause (b) because the aggregate could not be worked out without taking into account depreciation that had been carried forward or otherwise allowed. The substituted explanation made this position express by deeming the expression to include depreciation taken into account in computing written down value or carried forward under Part B State law.

Conclusion: The question was answered in the affirmative and in favour of the assessee.

Final Conclusion: The assessee failed on the carry-forward of the State loss but succeeded on the depreciation computation issue, so the reference was disposed of with mixed answers on the two questions.

Ratio Decidendi: A loss can be carried forward under section 24(2) only if it is a loss to which section 24(1) could initially apply, and depreciation under a Part B State law must be counted in the statutory computation of aggregate depreciation and written down value where the order adopts that computation scheme.

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