1951 (11) TMI 1 - SC - Income Tax

Appeal dismissed: unabsorbed depreciation from AY 1938-39 may be carried forward into AY 1940-41 and later years

SC dismissed the appeal, upholding the HC. The court held that unabsorbed depreciation from the accounting year relevant to AY 1938-39 could be carried ... Unabsorbed depreciation - Whether, Tribunal was right in holding that the unabsorbed depreciation at the end of the year 1938-39, which was not given effect to, in the subsequent years, could not be treated as part of the allowable depreciation for the relevant assessment years which are assessment years 1941-42, 1942-43 and 1943-44? Held that:- In the assessment year 1938-39, the assessee showed a certain unabsorbed depreciation in its accounts for the calendar year 1937,,that being the assessee's accounting year for the assessment year 1938-39. Under the unamended section, he was permitted to carry that amount forward into the accounting year 1938, add it to the depreciation for 1938 and treat the total amount as the ' allowance for the assessment year 1939-40. Now we come to the assessment year 1940-41. The amended,section applied here and the question is whether under the new law this figure could be carried forward into 1940-41. The first question which arises is whether the assessment year 1939-40 is an assessment year which ended prior to the 1st of April, 1939. It is evident that it is not, because it ended on the 31st of March, 1940. Therefore, it is not one of the excluded years. As it is not, and as, on the facts set out above, what must be regarded as the unabsorbed depreciation for the year 1939-40 could not be absorbed for the reason given in the amended section, it follows that it can be carried forward into the accounts of the assessment year 1940-41 and from there on to the accounts of the succeeding assessment years, if it is not absorbed meanwhile for the reasons given in the proviso. The section provides that in order to enable the unabsorbed depreciation to be carried forward to the succeeding year, it must be shown that full effect was not given in the previous year, owing to there being no profits or gains chargeable for the year, or, owing to the profits or gains chargeable being less, than the allowance. It was argued on behalf of the appellant that in the present case full effect could not be given to the unabsorbed depreciation not for the reasons stated in the section but on account of the failure of the assessee to take the matter in appeal against the assessment for 1940-41. In our opinion, this view is based on a misreading of the section. The words used in the section are :--' where full effect cannot be given ', and not 'where full effect has not been given.' It is not denied that the profits or gains were less than the depreciation allowance, and that being so the requirements of the section were satisfied. In our opinion, the view taken by the High Court on the limited question referred to it is correct, and we accordingly dismiss this appeal Issues:1. Interpretation of section 10(2)(vi) of the Indian Income-tax Act, 1922 regarding carry forward of unabsorbed depreciation.2. Application of the amended provision from 1939 and its impact on depreciation calculation.3. Determination of whether unabsorbed depreciation at the end of 1938-39 can be treated as part of the depreciation for subsequent years.4. Analysis of the legal fiction created by the provision for carrying forward unabsorbed depreciation.5. Examination of the effect of the amendment on the allowance for depreciation for specific assessment years.Analysis:The case involved an appeal from a judgment of the High Court at Calcutta regarding the interpretation of section 10(2)(vi) of the Indian Income-tax Act, 1922. The respondent company claimed that its unabsorbed depreciation at the end of 1938-39 should be considered part of the depreciation allowance for subsequent years. The High Court ruled in favor of the company, allowing the appeal to the Supreme Court. The central issue was whether the company could carry forward the unabsorbed depreciation and treat it as part of the depreciation for the relevant assessment years 1941-42, 1942-43, and 1943-44.The key provision in question was the clause stating that unabsorbed depreciation could be added to the amount of the allowance for depreciation for the following year and deemed to be part of that allowance for succeeding years. The Court analyzed the impact of the amendment in 1939, which changed the basis for depreciation calculation to the written down value for most assets. It was noted that the amendment specifically excluded carrying forward unabsorbed depreciation at the end of a year prior to April 1, 1939.The Court determined that the company was entitled to carry forward the unabsorbed depreciation at the end of 1938-39 based on the provisions of the unamended section applicable to the assessment year 1939-40. The Court clarified that the old law applied to every assessment year up to and including 1939-40. For the assessment year 1940-41, the amended section applied, allowing the company to carry forward the unabsorbed depreciation into subsequent years if not absorbed earlier.Regarding the argument that the company failed to appeal against the assessment for 1940-41, the Court emphasized that the section required showing that full effect could not be given to the allowance, not that it had not been given. As the profits were less than the depreciation allowance, the requirements of the section were met. Ultimately, the Court upheld the High Court's decision, dismissing the appeal and affirming the company's right to carry forward the unabsorbed depreciation.