Current year depreciation takes priority over carried forward business loss in income computation under the Income-tax framework.

Current year depreciation is deducted first in computing business profits and total income; the deeming fiction for unabsorbed depreciation is limited to carrying that allowance forward and does not override the normal computation rule. Unabsorbed carried forward business loss may be set off only after current depreciation has been allowed, because the carry forward provisions for business loss do not rank ahead of current year depreciation. The provisions under the 1922 Act and the corresponding 1961 Act are to be read consistently with ordinary commercial accountancy. The result is against the assessee and in favour of the Revenue.

---

---

Issues: Whether, for the purpose of computing total income, the depreciation for the current year must be deducted first, or whether unabsorbed carried forward business loss has priority over such current depreciation.

Analysis: Under the relevant provisions of the Indian Income-tax Act, 1922 and the corresponding provisions of the Income-tax Act, 1961, current year depreciation is part of the computation of business income at the threshold stage. The deeming fiction attached to unabsorbed depreciation operates only for the limited purpose of carrying that depreciation forward and treating it as depreciation of the following year, so that it may receive the statutory treatment given to depreciation in that year. That fiction does not extend to displace the ordinary rule that current depreciation is first deducted in arriving at business profits. The carry forward provisions relating to business loss give priority over carried forward depreciation, but they do not place carried forward loss ahead of current year depreciation. The two sets of provisions are in pari materia and must be read consistently with the normal principle of commercial accountancy.

Conclusion: The current year's depreciation must be deducted first, and only thereafter can the unabsorbed carried forward business loss be set off. The answer is against the assessee and in favour of the Revenue.

---