Supreme Court of India
COMMISSIONER OF INCOME TAX, KANPUR ETC.versusM/S. MOTHER INDIA REFRIGERATION INDUSTRIES (P) LTD. ETC.
- Citation
- 1985 INSC 175
- Decided
- 14 August 1985
- Disposal
- Appeal(s) allowed
- Bench
- V D TULZAPURKAR
Holding
Unabsorbed carried‑forward business losses cannot be given preference over current depreciation; current depreciation must be deducted first.
Summary
The Commissioner of Income Tax appealed against a High Court order that allowed M/s Mother India Refrigeration Industries to set off unabsorbed business losses before deducting the current year's depreciation for the assessment years 1951-52 and 1952-53. The issue was whether, under the Income Tax Acts of 1922 and 1961, unabsorbed carried‑forward losses could be given priority over current depreciation when computing total income. The Court examined the language of proviso (b) to s.10(2)(vi) and s.24(2) of the 1922 Act (and the analogous s.32(2) and s.72(2) of the 1961 Act) and held that the legal fiction created by the deeming provision only brings forward unabsorbed depreciation to the next year, not to override current depreciation. It further observed that the purpose of the provision is to prevent loss of depreciation benefits, not to alter the normal accounting rule that current depreciation is the first charge on profits. Consequently, the Court ruled that current depreciation must be deducted before any unabsorbed carried‑forward loss is set off. The Supreme Court allowed the Revenue's appeals, set aside the High Court decision, and restored the Tribunal's order.
Issues considered
- Whether unabsorbed carried‑forward business losses have priority over current year's depreciation under s.10(2)(vi) proviso (b) and s.24(2) proviso (b) of the Income Tax Act, 1922 (and s.32(2) and s.72(2) of the 1961 Act).
- Whether the legal fiction created by the deeming provision in proviso (b) to s.10(2)(vi) extends to give such losses preference over current depreciation.
- Whether the principle of commercial accountancy can be overridden by the statutory provisions concerning set‑off of losses and depreciation.
Legislation cited
- Income Tax Act, 1922s. 10(2)(vi) proviso (b), s. 24(2) proviso (b)
- Income Tax Act, 1961s. 32(2), s. 72(2)
Subjects
unabsorbed carried forward lossdepreciationincome taxset offlegal fictionsection 32section 72section 10section 24commercial accountancytax assessmentpriority of deductions
Judgment
556 •
A
COMMISSIONER OF INCOME TAX; KANPUR ETC.
v.
M/S. MOTHER INDIA REFRIGERATION
INDUSTRIES (P) LTD. ETC.
B AUGUST 14, 1985
[V.D. TULZAPURKAR, SABYASACHI MUKliARJI AND RANGANATH MISRA, JJ. J
Indian Income Tax •.ct, 1922, ss. 10(2) (vi) proviso (b) and
24 (2) proviso (b) -
c Income Tax Act, 1961. ss. 32(2) and 72 (2). -
'.
Unabsorbed carried forward losses and current deprecia-
tion - Deduction of - Unabsorbed carried forward losses cannot be
given preference over current depreciation while computing the
total inc~ of an assessee in an assessment year.
D The Respondent-assessee in the Civil Appeals had an
unabsorbed business loss of Rs. 67534 and unabsorbed depreciation
of Rs. l,78,154 at the end of assessment year 1950-51. The
respondent's income without taking into account the current
depreciation was Rs. 50,624 in 1951-52 and Rs. 64332 in 1952-53.
The amount of current depreciation was, however, Rs. 58,140 in
1951-52 and Rs. 44,580 in 1952-53. The respondent contended
- ..
E
before I.T.o. that before deducting the current depreciation from
the above profits the unabsorbed loss of the earlier year 1950-51
should be first set oft. The I.T.O. held that the carried forward
loss could not be given priority over the current year's depre-
ciation· in the matter of set off and completed the assessment
F accordingly. Aggrieved by the order of I •.T.o., the respondent
preferred appeals for both the years before the A.A.C. who accep-
ted the same holding that unabsorbed carried forward business
loss should be set off fl.rat in each year before deducting the,
current year's depreciation. On further appeals by the appellant-
Revenue the Appellate Tribunal restored the order of the I.T.O.
G But, the High Court in a reference at the instance of the
respondent-assessee answered the question in favour of the
assessee. Similar question of law arose for decision in the Tax
Reference Case.
Counsel for the Revenue contended before the Supreme Court
H that on proper construction of the proviso (b) to s. 10(2) (vi)
read with the proviso (b) to s. 24(2) of the . 1922 Act (equivalent
C.I.T. v. MOTHER INDIA INDUSTRIES 557
A
to s.32(2) read with s.72(2) of the l96l Act), it is apparent
that unabsorbed carried forward losses of the earlier years have
been given priority over unabsorbed depreciation of the earlier
years but not over the current year's depreciation for, under
proviso (b) to s. l0(2) . (vi)· it is the carry forward (actual
words used are 'added to') of unabsorbed depreciation to the
B
following previous year that is made subject to the proviso (b)
to s •. 24(2), that is to say, the preference given to the un-
absorbed carried forward losses of the earlier years under pro-
viso (b) to s. 24(2) is over the Unabsorbed depreciation and not
over the current depreciation. On the other hand, counsel for the
assessees strongly relied upon the legal fiction arising from the
deeming provision contained in priviso (b) to s. 10(2) (vi) of
c
the 1922 Act and s. 32(2) of the 1961 Act as a result whereof the
unabsorbed depreciation is not merely carried forward to the
·'/ following previous year but is deemed to be the depreciation for
that year and, therefore, contended that this entire aggregate
depreciation is made subject to proviso (b) to s. 24(2) of the
D
1922 Act or to s. 72(2) (of the 1961 Act). Co•msel urged that
his legal fiction must be given full effect without any reserva-
tion and, therefore, between the aggregate amount of' depreciation
and the unabsorbed carried forward losses priority has to be·
given to the latter in the matter of set off.
Allowing the appeals and answering the question in the Tax
Reference against ~he assessee,
IDW>: l. l The unabsorbed carried forward losses cannot be
given preference over current depreciation in the matter of set
off in computing an assessee's income for any particular assess-
ment year. [567 H]
F
1.2 A close scrutiny of the relevant pro~isions of the 1922
Act as also the l961 Act clearly shows that the computation of
income under the head "profits and gains of .business" of any
particular assessment year is required to be done after making
certain allowances specified. in sub-a. (2) of s.10 of the 1922 G
Act and after allowing certain deductions in accordance with the
provisions contained in ss. 30 to 43-A of the 1961 Ait; in other
words it is the net profits and gains after the specified deduc-
tions are made that are subjected to tax; one of such deductions
pertains to depreciation allowance at the prescribed rate of
percentage of the written down value of the business asset; and H
this is provided in s. 10 (2) (vi) of the 1922 Act in s. 32(1) of
the 1961 Act. Upto this stage of, computation no question of
either carry forward of unabsorbed depreciation of the earlier
558 SUPREME COURT REPORTS [l985j SUPP.2 s.c.R.
A
years or carry forward of unabsorbed business losses of earlier
years arises. In other words, the normal accountancy principle
has to be applied in arriving at the net income from, business
for that year 'by debiting the current year's depreciation. The
question is whether any deviation from this normal rule of
accountancy is contemplated by proviso (b) to s. 10(2) (vi) read
ll
with proviso (b) to s. 24(2) of the 1922 Act or by s. 32(2) read
with S• 72(2) of the 1961 Act and it is here that the aspect of
proper construction of these provisions arises. (565 E-H, 566 A)
1.3,It is clear that proviso (b) to s. 10(2) (vi) of the
1922 Act is in two parts and provides for two things; its first
part provides for a carry forward of unabsorbed depreciation and
c its second part provides for clubbing the said carried forward
depreciation with the current year's depreciation and deeming the
aggregate to be the current year's devreciation. However, carry-
ing fortiard to the unabsorbed depreciation and the deeming provi-
sion in proviso (b) is not absolute but is subject to the proviso
(b) to s. 24(2). Had proviso (b) to s. 24(2) not been enacted by
the Legislature the result would have been that the aggregate
D
depreciation would have, been deducted first out of the profits
and gains in preference to unabsorbed business losses which might
have been carried forward under s. 24(2) but as such losses can
be carried forward only for limited nwnber of years the assessee
would in certain circ1DDStances have in his books losses which he
might not be able to set off even within the time limit during
E
which the set off is permitted. In order to prevent such a situa-
tion the legislature enacted proviso (b) to s.24(2).And proviso
(b) to s. 24(2) expressly states "where depreciation allowance is
under clause (b) of the proviso to clause (vi) of sub-s.2 of s.10
also to he carried forward, effect shall first be given, to the
provisions of this sub-section. In other words, it clearly
F
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 f orwafd under proviso
(b) to s. 10(2) (vi) and no preference over the current deprecia-
tion is intended. Since the provisions of the 1961 Act are in
pari materia with the corresponding provisions under the 1922 Act
G the same conclusion must follow under the 1961 Act. (566 B,E,
567G)
Al1e1gfma Corporation of IDdia Ltd. V• c.1:r. 22 I.T.R.
367, c.r.r. Gujarat v. Gujarat: state Varebouaing Corporation 104
ITR 2, Add!. c.r.r. A.P. y, .Andhra PrinteQ Ltd. 147 ITR 555, and
H
c.1.r. West lleagal-IV y, llahia ~ Hills Co. Ltd. 134 ITR 56
c.1.r. v. MOTHER INDIA INUUST!UES [TULZAPUHKAR, J.J 559
(2) It is true that proviso (b) to s.10(2) (vi) creates a A
legal fiction and under that fiction unabsorbed depreciation
either with or without current Yl'llr's depreciation is deemed to
be the current.year's depreciation but it is well settled, as has
been observed by Supreme Court in Bengal llllllllnity Company Ltd. v.
l'be State of Bibar [1955] 2 SCR 603 at p. 606 that legal fictions
are created only for some definite purpose and these must. be B
limited to the purpose and should not be extended beyond that
legitimate field. Clearly, the avowed purpose of the legal
fictions created by the deeming provisions 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 depre-
ciation in the followihg year, so that it i.s available unlike c
unabsorbed carried forward business loss, for being set off
against other heads of income of ·that year. (566 F-i!, 567 A]
Jaipuria China Clay !lines (P) Ltd. 59 ITR 555 relied upon.
; c.1.T. Bombay v. Ravi Industries 49 ITR 145 approved. D
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1570-1571
of 1973 and Tax Reference Case No. 15 of 1983.
From the Judgment and Order dated 4.9.1970 of the Allahabad
High Court in Income Tax Reference No. 340 of 1964 •
E
B.Jl. Ahuja and Miss A. Subhashini for the appellant in
C.A•Nos. 1570-71 of 1973.
Barish Sa!.ve and Mrs. A.K. Verma for the appellant in Tax
Ref. No. 15 of 1983.
F
S.T. Desai, R.S. Suri and Sudhir Kumar Sajawan for the
respondents in c.A.Nos. 157~1071 of 1973.
B.B. Ahuja and Miss A. Subhashini for the respondents in
Tax Ref; No. 15 of 1983 •
• G
Barish Salve, Joel Peres and.· Mrs, A.K. Verma for
intervenors.
The Judgment of the Court was delivered by
TULZAPURKAR, J. In these appeals and the tax reference the H
common question arising for determination relates to the priority
560 SUPREME COURT REPORTS [1985] SUPP.2 s.c.R.
A between current depreciation and unabsorbed carried forward
business loss that is to say which should be deducted first while
computing the total income of an assessee for the concerned
assessment year.
The facts giving rise to the above question in the civil
B appeals are these. The concerned assessment years are 1951-53. At
the end of assessment year 1950-51 there was an unabsorbed busi-
ness loss of Rs. 67534 and unabsorbed depreciation of
Rs .1, 78 ,154. The assessee' s income without taking into account
the current depreciation was Rs.50,624 in 1951-52 and Rs. 64,332
in 1952-53. The assessee contended before the ITO that before
deducting the current depreciation from the above profits the
c unabsorbed loss of the earlier year 1950-51 should be first set
off. The ITO did not accept the contention and what he did was
that from the profit of Rs.50,624 for 1951-52, the depreciation
allowance for that year amounting to Rs. 58,140 was partially set
off and the balance of the depreciation of Rs. 7516 was ordered
to be carried forward with the result that the total unabsorbed
depreciation carried forward amounted to Rs. 1,85,670. It was
D further directed that the entire unabsored loss amounting to Rs.
67534 should also be carried forward. Similarly, in 1952-53 the
full depreciation allowance of that year amounting to Rs .44580
was set off against the income of Rs. 64,232; the net income of
Rs. 19652 (Rs. 64232 minus Rs. 44580) was utilised for setting
off a part of the carried forward business loss of Rs. 67534
leaving a !Jalance of unabsorbed loss to the extent of Rs.47832.
Both the unabsorbed amounts (Rs. 1,85,670 and Rs. 47,832) were
directed to be carried forward. Aggrieved by the ITO's refusal to )-
give preference in the matter of set off to the earlier carried
forward business loss before deducting the current year's depre-
ciation, the assessee. preferred appeals for both the years and
F the AAC accepted the assessee's contention and directed that un-
absorbed carried forward business loss should be set off first in
ea.ch year before deducting the current year's depreciation. The
Department preferred further appeals to the Appellate Tribunal
and relying upon the decision of the Calcutta High Court in
Abnnin1um Corporation of India Ltd. v. C.I.T., 33 I.T.R. 367, the
G Tribunal accepted the Department's contention and restored the
ITO's decision. at the instance of the assessee the following
question was referred to the High Court for its opinion:
"Whether. for the assessment years 1951-52 and 1952-53,
the assessee was entitled to deduct the unabsorbed
H business loss .at the end of the assessment year
,-
C.I.T. v. MOTHER INDIA INDUSTRIES [TIJLZAPURKAR,J. J 561
1950-51, befo''le setting off the depreciation allowance A
of Rs.58,140 and Rs. 44580 respectively for these
years?"
After referring to the relevant provisions of the Indian Income
Tax Act 1922, namely, ss.10 and 24, particularly proviso (b) to
s. 10(2) (vi) and s. 24(2) Proviso (b) the High Court answered B
the question in favour of the assessee. The Revenue has challen-
ged the High Court's view in these appeals.
The facts in the Tax Reference are briefly these. For the
assessment year 1969-70 the assessee-<:ompany filed a return on
18.7.1969 disclosing a loss of Rs. 50,736; subsequently a revised C
return was filed on 20.8.1971 claiming a set off of the carried
forward loss of earlier years against the income of that year
even before making any allowance for the current year's d~precia
tion. the ITO held that the carried forward loss could not be
given priority over the current year's depreciation in the matter
of set off and completed the assessment determining the unabsor- D
bed depreciation for the year at Rs. 40,255, brought forward
development rebate. of Rs. 8,020 and the .carried forward past
losses were allowed to be carried forward in full. In appeal the
MC, following the decision of the Allahabad High Cc,o.irt in the
case of Mother India Refrigeration Industries (P) Ltd. (which
decision is the subject matter of civil appeals before us)
accepted the assessee 1 s contention that the· carried forward E
losses have priority not only over the unabsorbe.d depreciation of
the past years but also over the current year'S depreciation in
the matter of set off. The Department preferred an appeal to the
Appellate Tribunal and the Tribunal took the view that unabsorbed
carried forward losses of the earlier years will have priority
over unabsorbed depreication of the earlier years but not over F
the current YE!ar's depreciation. In coming to this conclusion the
Tribunal placed certain construction on the relevant provisions
of the 1961 Act, namely, ss. 32(2) and 72(2). In other words it
preferred the views of the Calcutta High Court in AJ.w!ni,..
Corporation's case (supra) and of Andhra Pradesh High Court in
Addl. Coomssioner of Incme-tax v. Andhra Printers Ltd., 117 G
I.T.R. 555, in so far as the competition for priority was between
unabsorbed carried forward loss. and current depreciation. At the
instance of the assessee in view of conflict of decisions between
various High Courts the Tribunal has referred the following
question of law for this Court's opinion imder s. 257 of. the
Income Tax Act, 1961: · H
562 SOI'REME COURT REPORTS [1985] SUPP.2 s.c.R.
"Whether on the facts and in the circumstances of the
case, the depreciation for the current year should
first be deducted before deducting the unabsorbed
carried forward business losses having regard to the
provisions of s. 72 (2) read with s. 32 (2) of the
Income Tax Act, 1961?"
Since the answer to the question raised depends upon proper
construction to be placed on the relevant provisions of the 1922
Act as also of. 1961 Act it will be necessary to set out the
relevant provisions• Under the 1922 Act s. 10(2) (vi) permits,
while computing profits or gains of business, a .deduction by way
of depreciation allowance in respect of buildings. machinery.
c plant or furniture of a sum equivalent to such percentage on the
written down value thereof as may be prescribed. Then <;omes
proviso (b) to the aforesaid provision which is material. The
relevant portion of proviso (b) (Omitting unnecessary words) runs
thus:
[ "(b) Where in the assessment of the asses see full
:. •effect cannot be. given in any such allowance in any
D year owing'to there being no profits or gains charge-
able for that year, or owing to. the profits or gains
chargeable being less than the allowance, then,
1, • subject to the provisions of clause (b) of the proviso
· , of sub-s(2) of s. 24, the allowance or part of the
' allowance to whicn effect has not been given, as the
E case may be, shall be added to the amount of the
, · allowance for depreciation for the following year nd
, , deemed to be a part of that allowance, or i f there is
' no such allowance for that year be deemed to be the
' allowance ·for that years, and so on for succeeding
·years."
F
Section 24 provides for setting of loss in computing aggregate
income. Sub-s.(l) thereof provides for setting off of loss of
pro- fits or gains under one head against profits or gains under
any other.head in the same year. Sub--s(2) thereof runs thus:
G "(2) Where any assessee sustains a loss of profits or
gains in any year, in any business, profession or
( v_ocation, and the loss cannot be wholly set off under
sub-s.(lJ so much of the loss as is not so set off or
the whole loss where the assessee had no other head·of
income shall be carred forward to the following year .•
H and
C.I..T .• v. MOTHER INDIA INDUSTRIES [TULZAPURKAR, J.J 563
(i) . .... ·····-·· A
(ii) Where the loss was sustained by him in any
other business, profession or vocation {meaning
other than speculative business), it shall be set
off against the profits and gains if any, if any
business, profession or vocation carried on by him B
in that year: provided that the business,
profession or vocation in which the loss was origi-
nally sustained continued to be carried on by him
in that year;"
Then comes proviso {b) to sub-s (2) which is material and it runs c
thus:
"(b) Where depreciation allowance is under .clause (b)
of the proviso to clause (vi) of sub-s ( 2) of s. 10,
also to.be carried, effect shall first be given to the
provisions of this sub-section;" D
Under the 1961 Act the material provisions are to be found
in s. 32(1) snd (2) and s. 72(1) and (2) snd i t was not disputed
that the material provisions in both the Acts are couched in
substantially the same langUage. Two m:ire things which are comnon
under both the Acts need be noticed. Unabsorbed carried forward
business loss can be set off only against business income of the E
following year or years while depreciation can be deducted from
income under any other head; further While the former can be
carried forward for a limited number of years as specified in the
enactment there· is no time ·limit prescribed for carrying forward
unabsorbed depreciation.
F
Counsel for the revenue urged that on proper construction of
the proviso {b) to s. 10(2) (vi) read with the proviso {b) ·to s.
24(2) of the 1922 Act (equivalent to s. 32(2) read with s. 72(2)
of the 1961 Act) it is apparent that unabsorbed carried forward
· · ., losses of .the earlier years have been given priority over
·.unabsorbed depreciation of the earlier years but not over the G
··current year's depreciation for, under .priviso {b) to s. 10(2)
(vi) it is the carry forward (actual words used are 'added ·to')
of unabsorbed depreciation to the following previous year that is
made subject to the proviso (b) to s. 24(2), .that is to say, the
preference given to the unabsorbed carried forward losses of the
earlier years under proviso (b) to s. 24(2) is over the unsbsor- H
bed depreciation and not over the current depreciation. Counsel
564 SUPREME COURT REPORTS (1985] SUPP.2 s.c.R.
A further urged that such construction is in accord with the basic
and well recognised principle of comnercial accountancy that in
computing the profits and gains of business for a particular year
that year's depreciation (meaning current depreciation) is always
to be treated as the first charge on such prof its and gains and
that is also the scheme of the Act. According to him tax is pay-
B able on the totoal income of the concerned year, that such income
includes profits and gains of a business, that the profits and
gains must mean net profits and gains and net profits and gains
cannot be ascertained without debiting the current year's
depreciation to the profits and loss account of that year and it
is in accordance with this principle of comnercal accountancy
that preference to unabsorbed carried forward losses has not been
c given over current depreciation but has ·been given over the
unabsorbed depreciation of the earlier• year in the matter of set
off. In fact, coUn.el contended that having regard to well sett-
led principles of accountancy and the aforesaid provisions of the
Act there can be no competition between current year's deprecia-
tion 1111st be deducted first before unabsorbed carried forward
losses are set off. In support of his subnissions counsel relied
D upon four decisiorui: 411wfnf1w Corporl!tion of I:adia Ltd. v.
C.l.T. (supra) c.1.T. Gujarat, v. Gujarat State WarebousiDg
Corporation 104 I.'f.R. 1, .Addl. C.1.T. A.P. v. Aodbra Prlnters
Ltd. 147 I.T.R. 555 and c.1.T •• West Bengal-IV v. llalva Sugar
ltUls Co. Ltd. 134 I.T.R. 56. In all these decisions the view
taken is that current depreciation has to be deducted first
E before unabsorbed carried forward business losses are set off. He
pointed out that the High Court in deciding the question in
favour of the assessee referred to a decision of this Court in
Jaipuria Ql1na Clay ll:lnes (P) Ltd. 59 I. T.R. 555 and relied on
certain observations made therein but the point that arose for
decision in that case was entirely different and the observations
F cannot be divorced from the context of the point decided therein.
On the other hand, counsel for the assessee in the appeals
and the· tax reference strongly relied upon the legal fiction
arising from the deeming provision contained in proviso {b) to s.
10(2) (vi) of the 1922 Act and s. 32(2) of the 1961 Act as a
G result whereof the unabsorbed depreciation is not merely carried
forward to the following previous year but is deemed to be the
depreciation for that year and according to counsel this entire
aggregate depreciation is made subject to proviso (b) to s. 24(2)
(of the 1922 act) or to s. 72(2) (of the 1961 Act). Counsel urged
that this legal fiction 1111st be given full effect without any
H reservation arid, therefore, between the aggregate amount of
C.I.T. v. MOTHER INDIA INDUSTRIES [TULZAPURKAR, J.] 565
•
depriciation and the unabsorbed carried forward losses priority A
has to be given to the latter in the matter of set off, It was
further urged that the revenue cannot rely upon the principles of
connnercial accountancy, however well settled or well recognised
these might be, in order to achieve a result contrary to what is
warranted by the express provision of the statue including the
legal fiction if any, created therein; in other words principles B
of connnercial accountancy, if they are modified or deviated from
by statute, cannot be allowed to prevail over statutory
provision. It was also urged that the construction of the
relevant provisions suggested by the assessee and which has been
accepted by the High Court has some advantages and therefore
should be preferred to the construction suggested by the revenue. c
!laving regard to the aforesaid rival contentions it will be
clear that the real issue that arises for our consideration in
this case is whether, on proper construction of the l'elevant pro-
visions of the concerned enactment unabsorbed carried forward
losses should have preference over current depriciation in the D
matter of set off or is the position vice versa while computing
the total income of all assessee in the concerned assessment year?
And the answer to this question depends on what is the true 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) of the 1961 Act.
At the outset it may be stated that a close scrutiny of the E
relevant provisions of the 1922 Act as also the 1961 Act clearly
shows that the computation of income under the head "profits· and
gains of business" of any particular assessment year is required
to be done after making certain allowances specified in sub-s(2)
of S• 10 of the 1922 Act and after allowing certain deductions in
accordance with the provisions contained in ss. 30 to· 43-A of the F
1961 Act; in other words it is the net profits and gains after
the specified deductions are made that .are subjected to tax; one
of such deductions pertains to depreciation allowance at the
prescribed rate of percentage of the· written down· value of the
business asset; and thiR is provided in s.10(2) (vi) of the 1922
Act and in s.32 (1) of the 1961 Act. Upto this stage of computa- G
tion no question of either carry forward to unabsorbed
depreciation of the earlier years or carry forward of unabsorbed
business losses of earlier years arises. In other words, the
normal accountancy principle has to be applied in arriving at the
net income from business for that year by debiting the current
year ''s depreciation. The question is whether any deviation from H
thls normal.rule of accountancy is contemplated by proviso (b) to
566 SUPREME COURT REPORTS [1985] SUPP.2 s.c.R.
A s. 10(2) (vi) read with proviso (b) to s.24(2) of the 1922 Act or
by s. 32(2) read with s. 72(2) of the 1961 Act and it is here
that the aspect of proper construction of these provisions
arises. Dealing with the provisions of the 1922 Act first, it
will be clear that proviso (b) to s. 10(2) (vi) is in two parts
and provides.for two things; its first part provides for a carry
B forward of unabsorbed depreciation and its second part provides
for clubbing the said carried forward depreciation with the
current year's depreciation. However, carrying forward of the
unabsorbed depreciation and the deeming provision in proviso (b)
is not absolute but is subject to the proviso (b) to s.24(2).
Had proviso (b) to s.24(2) not been ella'Cted by the Legislature
the result would have been that the aggregate depreciation would
c have been deducted first out of the profits and gains in
preference to unabsorbed business losses which might have been
carried forward under s. 24(2) but as such losses -can be carried
forward only for limited number of years the assessee would "in
certain circumstances have in his books losses which he might not
be able to set off even within the time limit during which the
set off is permitted. ln order to prevent such a situation the
D legislature enacted proviso (b) to s. 24(2). And proviso (.b) to
s. 24(2) expressly states "where depreciation allowance is, under
clause (b) of the proviso to clause (vi) of sub-s.2 of s.10, also
to be carried forward effoct shall first be given to the
provisions of this sub-section." In other words, it clearly pro-
vides that in the matter of set off the unabsorbed business
E los8es 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 deprecia-
tion is intended.
It is true the proviso (b) to s.10(2)(vi) creates a legal
F 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 lleDgal lllmwity Company Limited v. The
State of Bi.bar [1955j 2 s.c.R. at p.606, that legal fictions are
created only for some definite purpose and these must be limited
G 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
H business loss, for being set off against other heads of income of
c.r.T. v. MOTHEK INDIA INDUSTRIES [TULZAPURKAR, J.J 567
A
that year. That this is so becomes clear from this Court's obser-
vations in Jaipuria Qdoa Clay Mines (P) Ltd. case (supra)
appearing at P• 561 of the· Report which run thus:
"The · unabsorbed depreciation allowance is carried
forward under proviso (b) to s.10(2) (vi) and the B
method .of carrying i t forward is to add it to the
amount of the allownce or depreciation in the
following year ·and deeming· it to be part of that
allowance; the effect of deeming i t to be ·part of that
allowance is that it falls, in the following year
within cl. (vi) and has to be deducted as allowance." C
In CIT llclmbay v. Ravi Industries 49 LT .R. 145, the same
position has been clarified by the Bombay High Court. The Court
has observed that the unabsorbed depreciation does not lose its
character and attributes when it is carried forward to the
followings year; such unabosrbed depreciation of the earlier D
year, which is carried forward to the current year and which is
deemed to be of the current year under proviso (b) of s.10(2)
(vi) can be set off, unlike other business losses, against income
under other heads. Such being the purpose for which the legal
fiction is created it is difficult to extend the same beyond its
legitimate field and will 'have to· be confined to that purpose. It
is therefore not possible t9·accept the contention of Counsel for E
the assessees that because of the legal fiction the unabsorbed
carried forward losses should be given preference not merely over
the unabsorbed carried forward depreciation but also over the
current year's deprec~ation. There is thus no modification of nor
deviation from the basis and _well recognised principle of
corrnnercial accountancy by the statute as is contended by counsel F
for the assessees.
Since the provisions of the 1961 Act are in ~ materia
with the corresponding provisions under the 1922 Act the same
conclusion must follow under the 1961 Act namely the current
depreciation must be dedudcted first before deducting the G
unabsorbed carried forward business losses of the earlier years
in giving set off while computing the total income of any parti-
cular year.
Having regard to the above discussion it seems to us clear
that unabsorbed carried forward losses cannot be given preference H
over current depreciation in the matter of set off in computing
an assessee 's income for any particular assessment year and as
5b8 SUPREME COURT REPORTS [1985] SUPP.2 s.c.R.
A
such the question has been correctly decided in Al1p1n1,.,.
Corporation's case and Halwa Sugar Hills case (supra) . by the
Calcutta High Court, in Gujarat State Warehousing Corporation's
case (supra) by the Gujarat High Court and in Aodhra Printers•
B case (supra) by the Andhra Pradesh High Court. In the impugned
judgment in the Civil Appeals the High Court has relied on some
observations of this Court in Jaipuria <llina Clay Mines case
(supra) but that case dealt with a different point altogether and
as such the observations made in the context of the points that
c arose for decision there would be of no avail. The High Court's
decision in the Civil App..als is therefore set aside and that of
the Tribunal is restored while in Tax Reference the question
referred to this Court in answered against the assessee to the
effect that the depreciation for the currenc year must first be
D deducted before deducting the unabsorbed carry forward business
loss. The assessee will pay the costs of the appeals and tax
reference to the Department.
Appeals allowed.
Search Indian case law
Ask in plain English, not just keywords. 25,000 AI words free, no card.
Try "unabsorbed carried forward loss"Sign in to search