1975 (12) TMI 61 - HC - Income Tax

Depreciation Deduction Precedes Loss Adjustment in Tax Case

The High Court ruled in favor of the revenue, stating that current year's depreciation must be deducted before adjusting carried forward losses against ... Stamp Duty Issues Involved:1. Priority in adjustment between current depreciation, carried forward depreciation, and carried forward losses against profits and gains of the current year.2. Interpretation of deeming fiction under section 32(2) of the Income-tax Act, 1961.3. Applicability of the Supreme Court's decision in Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd. to the current case.4. Correctness of the Tribunal's decision to set aside the assessment order and remand the case for recalculation.Issue-wise Detailed Analysis:1. Priority in Adjustment:The core issue was whether the carried forward business loss of Rs. 2,43,339 should be deducted from the business profit of Rs. 2,18,488 before or after deducting the current depreciation of Rs. 27,047. The Income-tax Officer deducted the current depreciation first, resulting in a balance of Rs. 1,81,041, from which the carried forward loss was deducted, leaving a carried forward business loss of Rs. 61,898. The Tribunal, however, directed that the carried forward loss should be deducted first, followed by the current and unabsorbed depreciation.2. Interpretation of Deeming Fiction under Section 32(2):Section 32(2) allows unabsorbed depreciation to be carried forward and deemed as part of the current year's depreciation. However, this deeming fiction is subject to section 72(2), which prioritizes the adjustment of carried forward losses over carried forward depreciation. The court emphasized that the deeming fiction should not override the provisions of section 72(2), which ensures that carried forward losses are adjusted first to prevent them from becoming unadjustable after the permissible period.3. Applicability of the Supreme Court's Decision in Jaipuria China Clay Mines (P.) Ltd.:The Tribunal relied on the Supreme Court's decision in Jaipuria China Clay Mines (P.) Ltd., which discussed the treatment of carried forward depreciation and its adjustment. The Supreme Court had stated that carried forward depreciation should be treated as current year's depreciation. However, the High Court clarified that this deeming fiction is limited by section 72(2), which mandates that carried forward losses should be adjusted first.4. Correctness of the Tribunal's Decision:The Tribunal's decision to prioritize carried forward losses over current depreciation was contested. The High Court concluded that the Tribunal's interpretation was erroneous. The court held that current year's depreciation is the first charge on profits and gains of the business, and only after deducting current depreciation should carried forward losses be adjusted. This ensures that the net profits and gains are correctly ascertained for taxation purposes.Conclusion:The High Court ruled in favor of the revenue, holding that current year's depreciation must be deducted first from the profits and gains of the business before adjusting carried forward losses. The Tribunal's decision was set aside, and it was directed that the assessment be recalculated accordingly. The respondent-assessee was ordered to bear the costs of the revenue in this reference.