Unabsorbed Depreciation must be added to the following year's allowance; pre amendment computation applies for 1939.

Construction of proviso (b) to Section 10(2)(vi) governs whether unabsorbed depreciation at the end of accounting year 1938-39 could be included in the allowable depreciation for assessment year 1939. The proviso required adding unabsorbed allowances to the following year's depreciation; the 1939-40 amendments changing computation base and imposing temporal limits operated from 1 April 1940 and did not alter the mandatory effect for year 1939. Therefore the 1939 allowance is to be computed under the pre amendment formula-statutory percentage for 1939 plus unabsorbed depreciation from 1938-and that amount may be carried forward.

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Issues: Whether the unabsorbed depreciation as at the end of the accounting year 1938-39 could be treated as part of the allowable depreciation for the relevant assessment year (1939) and therefore carried forward and applied to subsequent assessment years.

Analysis: The issue turns on the proper construction of proviso (b) to Section 10(2)(vi) of the Income-tax Act, 1922, and the effect of the Income-tax (Amendment) Acts of 1939 and 1940. Prior to the 1939 amendment depreciation for a year comprised the statutory percentage for that year plus any unabsorbed depreciation from the previous year, since proviso (b) mandated that unabsorbed allowances "shall be added to the amount of the allowance for depreciation for the following year". The 1939 and 1940 amendments altered the basis for computation (substituting "written down value" for "original cost" for most assets and placing temporal limits on carry forward) but the amendments came into force from 1 April 1940 and did not alter the mandatory effect of proviso (b) for the year 1939. The accounting year in question ended 31 December 1939, which is not a year ending prior to 1 April 1939, so the unabsorbed depreciation of 1938 was capable of being added under the proviso. Therefore the allowance for 1939 must be calculated under the pre-1939-amendment formula, namely the statutory percentage for 1939 together with the unabsorbed depreciation brought forward from 1938.

Conclusion: The unabsorbed depreciation as at the end of 1938-39 forms part of the allowable depreciation for the year 1939 and may be carried forward and added to the depreciation allowance for subsequent assessment years. The decision is in favour of the assessee.

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