1985 (8) TMI 2 - SC - Income Tax

Deduct current-year depreciation before carried-forward business losses under proviso (b) to s.10(2)(vi)/s.24(2), legal fiction interpretation confirmed; tribunal view restored

Commissioner of Income-Tax, Kanpur Versus Mother India Refrigeration Industries Private Limited

SC held that current-year depreciation takes priority over unabsorbed carried-forward business losses when computing total income. The court interpreted ... Determination relates to the priority between current depreciation and unabsorbed carried forward business loss - scope and purpose of the legal fiction created under proviso (b) to s. 10(2)(vi) of the 1922 Act or under s. 32(2) - whether, on a proper construction of the relevant provisions of the concerned enactment, unabsorbed carried forward losses should have preference over current depreciation in the matter of set off or is the position vice versa while computing the total income of an assessee in the concerned assessment year ? - HELD THAT:- The Legislature enacted the proviso (b) to s. 24(2). And proviso (b) to s. 24(2) expressly states ' where depreciation allowance is, under cl. (b) of the proviso to cl. (vi) of sub-s. (2) of s. 10, also to be carried forward, effect shall first be given to the provisions of this sub-section '. In other words, it clearly provides that in the matter of set off, the unabsorbed business losses of the earlier years will have preference over unabsorbed depreciation that is required to be carried forward under proviso (b) to s. 10(2)(vi) and no preference over the current depreciation is intended. It is true that proviso (b) to s. 10(2)(vi) creates a legal fiction and under that fiction, unabsorbed depreciation either with or without current year's depreciation is deemed to be the current year's depreciation but it is well settled, as has been observed by this court in Bengal Immunity company Limited v. State of Bihar [1955 (9) TMI 37 - SUPREME COURT], that the legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field. Clearly, the avowed purpose of the legal fiction created by the deeming provision contained in proviso (b) to s. 10(2)(vi) is to make the unabsorbed carried forward depreciation partake of the same character as the current depreciation in the following year, so that it is available, unlike unabsorbed carried forward business loss, for being set off against other heads of income of that year. Since the provisions of the 1961 Act are in pari materia with the corresponding provisions under the 1922 Act, the same conclusion must follow under the 1961 Act, namely, that the current depreciation must be deducted first before deducting the unabsorbed carried forward business losses of the earlier years in giving set off while computing the total income of any particular year. The High Court's decision in the Civil Appeals is, therefore, set aside and that of the Tribunal is restored while in Tax Reference, the question referred to this court is answered against the assessee to the effect that the depreciation for the current year must first be deducted before deducting the unabsorbed carry forward business loss. Issues Involved:1. Priority between current depreciation and unabsorbed carried forward business loss in computing the total income of an assessee for the assessment years in question.Issue-wise Detailed Analysis:Priority between Current Depreciation and Unabsorbed Carried Forward Business LossFacts and Background:The assessment years in question are 1951-52 and 1952-53. The assessee had unabsorbed business loss and unabsorbed depreciation from the previous year (1950-51). The Income Tax Officer (ITO) set off the current year's depreciation against the profits before addressing the carried forward losses, which the assessee contested. The Appellate Assistant Commissioner (AAC) sided with the assessee, but the Appellate Tribunal restored the ITO's decision. The High Court, however, ruled in favor of the assessee, prompting the Revenue to appeal.Legal Provisions:The relevant provisions under the Indian Income-tax Act, 1922, include:- Section 10(2)(vi): Allows for depreciation allowance.- Proviso (b) to Section 10(2)(vi): Pertains to the carry forward of unabsorbed depreciation.- Section 24(2): Deals with the set-off of business losses.- Proviso (b) to Section 24(2): States that effect shall first be given to the provisions of this sub-section where depreciation allowance is also to be carried forward.Under the Income-tax Act, 1961, the corresponding provisions are:- Sections 32(1) and (2): Pertaining to depreciation allowances.- Sections 72(1) and (2): Concerning the set-off of business losses.Arguments by Revenue:The Revenue argued that the statutory provisions prioritize current year's depreciation over unabsorbed carried forward business losses. They contended that:- Current depreciation must be treated as the first charge on profits.- Tax is payable on net profits, which must account for current depreciation.- This approach aligns with commercial accountancy principles and the scheme of the Act.Arguments by Assessee:The assessee argued that:- The legal fiction created by the proviso (b) to Section 10(2)(vi) and Section 32(2) deems unabsorbed depreciation as part of the current year's depreciation.- This legal fiction should be fully applied, giving priority to unabsorbed carried forward losses.- Principles of commercial accountancy should not override statutory provisions.Court's Analysis:The court examined the statutory provisions and concluded:- The computation of business income must follow normal accountancy principles, including the deduction of current year's depreciation before addressing carried forward losses.- The legal fiction in proviso (b) to Section 10(2)(vi) and Section 32(2) aims to allow unabsorbed depreciation to be set off against income under other heads, not to prioritize it over current depreciation.- Proviso (b) to Section 24(2) explicitly states that unabsorbed business losses have priority over unabsorbed depreciation but not over current depreciation.Conclusion:The court held that:- Current depreciation must be deducted first before unabsorbed carried forward business losses.- The High Court's decision favoring the assessee was incorrect.- The Tribunal's decision was restored, and the question in the tax reference was answered against the assessee.Final Judgment:The court set aside the High Court's decision and restored the Tribunal's decision. The depreciation for the current year must be deducted before unabsorbed carried forward business loss. The assessees were ordered to pay the costs of the appeals and tax reference to the Department.