Commissioner of Income Tax, Calcutta Vs.
Jaipuria China Clay Mines (P) Ltd. [1965] INSC 234 (1 November 1965)
01/11/1965 SIKRI, S.M.
SIKRI, S.M.
SUBBARAO, K.
SHAH, J.C.
CITATION: 1966 AIR 1187 1966 SCR (2) 449
CITATOR INFO:
E 1970 SC1667 (10,11) R 1979 SC 117 (8)
E&D 1985 SC1720 (6,13) F 1991 SC1322 (17)
ACT:
Income Tax Act 1922--s. 10(2)(vi), proviso
(b)-Unabsorbed depreciation for previous years-Whether can be set off against
profits under other heads than those of the business. 24(2) Effect of.
HEADNOTE:
The Income Tax Officer, after deducting
depreciation for the year and an amount in respect of losses, assessed the
income of the assessee for 1952-53 as nil. He then computed the dividend income
at Rs. 2,01,130 and determined the total income at this figure and levied tax
on it. The assessee had in its favour unabsorbed depreciation relating to
earlier year aggregating to Rs. 76,857 and contended that this amount should be
deducted from the dividend income; but the Income Tax Officer rejected this
contention and, in appeal, the Appellant Assistant Commissioner as well as the
Tribunal upheld his view. The High Court, however, upon a. reference, decided
the issue in favour of the assessee.
In the appeal to this Court, it was also
contended, inter alia, on behalf of the revenue that depreciation, although a
permissible allowance under s. 1(K2) of -the Act, served to compensate an
assessee for the capital loss suffered by him by way of depreciation of his
assets and is a charge on the profits of a business; and that therefore the
expression, "loss of profits and gains" in s. 24(1) did not include
any deficiency resulting from depreciation and could not be included in the
amount which, could be set off against income profits or gains under other
heads such, as income from property or dividends.
HELD : The assessee was entitled to have the
unabsorbed depreciation of past years set off against income from sources other
than the business and therefore against the dividends. [450 B; 456 D] Case law
reviewed.
CIVIL APPELLATE JURISDICTION : C. A. No. 307
of 1964.
Appeal from the, Judgement and Order dated
6th February 1962 of the Calcutta High Court in Income Tax Reference No. 72 of
1957.
A. V. Viswanatha Savitri, R. Ganapathy lyer,
R. H. Dhebar -and R. N. Sachthey, for the appellant.
K. N. Rajagopal Sastri and D. N. Mukherjee,
for the respondent.
The Judgment of the Court was delivered by
Sikri, J. This is an appeal by certificate granted by the High Court of
Calcutta against its judgment in a reference made to it under s. 66 of the
Indian Income Tax Act, 1922 (hereinafter referred to as the Act.) The question
referred to it by the Appellate Tribunal, at the instance of the assessee, was
as follows :
"Whether in the facts and circumstances
of the case, the unabsorbed depreciation of the past years should be added to
the depreciation of the current year and the aggregate of the unabsorbed
depreciation and the current year's depreciation be deducted from the total
income of the previous year relevant for the assessment year 1952-53." The
relevant facts and circumstances are as follows : The Income Tax Officer
assessing the respondent, M/s Jaipuria China Clay Mines (P) Ltd. Calcutta,
hereinafter referred to as the assessee, for the year1952-53 computed its total
income at Rs. 14,041/before charging depreciation for that year. From that
figure he deducted depreciation for the year amounting to Rs. 5,360/-, thus
computing a profit of Rs. 8,681/-. From this figure he deducted an equivalent
amount, i.e., Rs. 8,681/-, in respect of losses during 194748, and he thus
worked out the business income as nil. He then computed the dividend income at
Rs. 2,01,130/and determined the total income at this figure and levied tax on
it. The assessee had in its favour an unabsorbed depreciation aggregating to
Rs. 76,857/-, and it contended before the Income Tax Officer that this sum
should be deducted from The income received from dividends, which, if done,
would reduce the total income to Rs. 1,32,955/-, but the Income Tax Officer
refused to accede to this contention.
The Appellant Assistant Commissioner upheld
the order of the Income Tax Officer and the assessee's appeal to the Appellate
Tribunal met with the same fate. The High Court, however, accepted the contention
of the assessee and answered the question referred, to it in favour of the
assessee.
The answer to the question depends on the
interpretation of ss. 6, 10 and 24 of the Act. We are concerned with the law as
it stood on April 1, 1952. The scheme of the Act is that the tax is levied in
respect of the total income of the previous year of every individual, Hindu
Undivided family, etc., and the total income consists of income under various
heads such as Salaries, Interest on Securities, Income from Property, Profits
and gains of business, profession or vocation, and Income from other sources
and Capital gains.
Various sections deal with how income,
profits and gains under each head have to be computed. Section 10 deals with
the communication of profit and gains of any business carried on by an
assessee, Section 10(2) prescribes the allowances which 4 51 have to be
deducted before computing the profits and gains;
one of the allowances is 'depreciation', and
this Is provided under sub cl. (vi). Proviso (b) to S. 10(2) (vi).
On this a great deal of argument has been
addressed to us and it reads as follows :
"(b) where, in the assessment of the
assessee or if the assessee is a registered firm, in the assessment of its
partners, full effect cannot be given to any such allowance in any year not
being a year which ended prior to the last day of April, 1939, owing to there
being no profits or gains chargeable for that year, or owing to the profits or
gains chargeable being less than the allowance, then, subject to the provisions
of clause (b) of the proviso to sub-section (2) of section 24, the allowance or
part of the allowance to which effect has not been given, as the case, may be,
shall be added to the amount of the allowance for depreciation for the
following year and deemed to be part of that allowance, or if there is no such
allowance for that year, he deemed to be the allowance for that year, and so on
for succeeding years;" It may be mentioned that the words "in the
assessment of the assessee or if the assessee is a registered firm, in the
assessment of its partners" were inserted by S. 8 of the Indian Income Tax
(Amendment) Act, 1953 (25 of 1953) with effect from April 1, 1952. The next
relevant statutory provision is S. 24, which provides for set off of losses in
computing aggregate income. Relevant portions of S. 24 are in the following
terms :
" 24(1) Where any assessee sustains a
loss of profits or gains in any year under any of the heads mentioned in
section 6, he shall be entitled to have the amount of the loss set off against
his income, profits or gains under any other head in that year......
Provided that......
Provided further that when the assessee is an
unregistered firm which has not been assessed under the provisions of clause
(b) of subsection (5) of section 23, in the manner applicable to a registered
firm, any,such loss shall be set off only against the income, profits and gains
of the firm and not against the income, profits and gains of any of the
partners of the firm; and where the assessee is a registered firm, any loss
which cannot be set off against other income, profits and gains of the firm
shall be apportioned between the partners of the firm and they 45 2 alone shall
be entitled to have the amount of the loss set off under this section.
(2) Where any assessee sustains loss of
profits or gains in any year, being a previous year not earlier than the
previous year for the assessment for the year ending on the 31st day of March,
1940, in any business, profession or vocation and the loss cannot be wholly set
off under sub-section (1), 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 carried
forward to the following year and set off against the profits and gains, if any,
of the assessee from the same business, profession or vocation for that year;
and if it cannot be wholly so set ,off, the amount of loss not so set off shall
be carried forward to the following year, and so on; but no loss shall be so
carried forward for more than six years, and a loss arising in the previous
years for the assessment for the years ending on the 31st day of March, 1940,
the 31st day of March, 1941, the 31st day of March, 1942, the 31st day of
March, 1943, and the 31st day of March, 1944, respectively, shall be carried
forward only for one, two, three, four and five years, respectively Provided
that(a)......
(b) where depreciation allowance is, under
clause (b) of the proviso to clause (vi) of sub-section (2) of section 10, also
to be carried forward, effect shall first be given to the provisions of this
sub-section;
(c) nothing herein contained shall entitle
any assessee, being a registered firm, to have carried forward and set off any
loss which has been apportioned between the partners, under the proviso to
sub-section (1), or entitle any assessee, being a partner in an unregistered
firm which has not been assessed under the provisions of clause (b) of
sub-section (5) of section 23 in the manner applicable to a registered firm, to
have carried forward and set off against his own income any loss sustained by
the firm;......
Mr. Sastri, learned 'counsel for the revenue,
urges that depreciation, although a permissible allowance under s. 10(2) of the
Act, serves to compensate an assessee for the capital loss suffered by him by
way of depreciation of his assets. He says that if it bad not 453 been
expressly allowed as allowance, it would have been treated as capital
expenditure and would have been excluded. He further says that depreciation is
a charge on the profits of a business. Bearing these two factors in mind, he
urges that the expression "loss of profits and gains" in s. 24(1)
does not include any deficiency resulting from depreciation and, therefore, an
assessee Is not entitled to ask the Department to include the depreciation in
the amount which can be set off against income, profits and gains under other
heads such as income from property or dividends. Mr. Rajgopala Sastri for the
assessee relies on the history of the legislation and a number of authorities
to support the judgment of the High Court.
Apart from authority, looking at the Act as
it stood on April 1, 1952, it is clear that the underlying idea of the Act is
to assess the total income of an assessee. Prima facie, it would be unfair to
compute the total income of an assessee carrying on business without pooling
the income from business with the income or loss under other heads. The second
consideration which is relevant is that the Act draws no express distinction
between the, Various allowances mentioned in s. 10(2).
They all have to be deducted from the gross
profits and gains of a business. According to commercial principles,
depreciation would be shown in the accounts and the profits and loss account
would reflect the depreciation accounted for in the accounts. If the profits
are not large enough to wipe off depreciation, the profit and loss account
would show a loss.
Therefore, apart from proviso (b) to s. 10(2)(vi),
neither the Act nor commercial principles draw any distinction between the
various allowances mentioned in s. 10(2); the only distinction is that while
the other allowances may be outgoings, depreciation is not an actual outgoing.
Bearing these two considerations in mind, if
one looks at the language of proviso (b) to S. 10(2)(vi); the first question
that arises is : What is the meaning of the expression "in the assessment
of the assessee or if the assessee is a registered firm, in the assessment of
the partners, full effect cannot be given to any such allowance in any
year" ? It would be noted that the words used are "in the assessment
of the assessee or the assessment of the partners". Taking the case of the
partners of a registered firm, the assessment must be their individual
assessments, i.e. assessments in which the profits from the firm and other
sources are pooled together. The Legislature is clearly assuming that effect
can be given to depreciation allowance in the assessment of a partner; the only
way effect can be given in the assessment of a partner is by setting 4 54 it
off against income, profits and gains under other heads. The learned counsel
for the revenue tried to meet this inference by suggesting that what the
Legislature contemplated was an assessment of those partners who were carrying
on other business.
But in our opinion this suggestion is
unsound.
What would happen if a partnership consists
of four partners, two carrying on other business and two carrying on no other
business, Mr' Sastri was unable to explain. Now, if this is the inference to be
drawn from these words, it is quite clear that the words "no profits or
gains chargeable for that year" are not confined. to profits and gains
derived from the business whose income is being computed under S.10.
It appears that the Legislature accepted the
interpretation placed by various High Courts on the Act as it stood before it
was amended by Act 25 of 1953. In 1930, the Lahore High Court in Messrs Karam
Ilahi Muhammad Shafi v. The Commissioner of Income Tax, Delhi(1) held that
depreciation on buildings and machinery can be set off against gains and
profits accrued to the owner of those buildings and machinery from other
sources such as rental from house property during the year in question-. In A
Suppan Chettiar & Co. v. The Commissioner of Income-Tax, Madras('-') the
Madras High Court held that "where the profits and gains of a business are
insufficient to cover the full depreciation allowance under section 10(2) (vi)
of the Income-tax Act on the machinery, plant, etc., used for the purposes of
that business, the excess depreciation can be set off against the profits and
gains of other business or from other sources." In Ballarpur Collieries v.
The Commissioner of Income Tar, Central Provinces (3), the Court of the
Judicial Commissioner, Nagpur, held that the partners of the assessee, a
registered firm owning collieries, were entitled to set off depreciation
against the other income of the members of the firm under s. 24 of the Income
Tax Act. In Laxmichand Jaipuria Spinning and Weaving Mills, In re(1), the East
Punjab High Court arrived at the same conclusion. The High Court further held
that "the object of proviso (b) to sub-section (2) of section 24 is only
to give preference to ordinary losses incurred by an assessee in regard to set-off
over the loss which comes under clause (b) of the proviso to sub-section (2)
(vi) of section 10.
Where set off is to be given for different
kinds of losses other than those due to depreciation such losses must be. set
off first and then (1) 3 Income Tax Cases 456; I.L.R. 11 Lahore 38.
(2) 4 Income Tax Cases 211; I.L.R. 53 Madras
702 (3) 4 Income Tax Cases 255; A.I.R. 1930 Nag.
183 (4) 18 A.I.R. 919 455 the loss due to
depreciation." In Ambika Silk Mills Co. Ltd. v.. Commissioner of IncomeTax(1)
the Bombay High Court understood the effect of proviso (b) to s. 10(2) (vi) and
proviso(b) to s. 24 (2) as follows :
"If a business was worked at a loss in
any particular year, the loss can be set off against any other head under
section 24(1); if the loss cannot be fully set off then it can be carried
forward to the next year, but then it can be only set off against the profits
of that particular business and that set-off would be permissible to the
assessee for a period of six years only. After six years the right to set-off
would come to an end. But in the case of depreciation and to the extent that
the loss was caused by depreciation being not fully absorbed there would be no
limit to the carrying forward of that depreciation, and that depreciation can be
set off at any time so long as the business showed a profit in the
future." After the amendment, the same view has been taken in Commissioner
of Income-Tax, Bombay City v. Ravi Industries Ltd. (2) by the Bombay High
Court, and in Commissioner of Income-Tax J. Girdharilal Harivallabhadas Mills
Co. Ltd. (3) by the Gujarat High Court. The only contrary view which has been
placed before is that of the Madras High Court in Commissioner of Income tax
Madras v. B. Nagi Reddy (4 ) , but we are unable to agree with he view
expressed in the last case. The Madras High Court observed at p. 196 as follows
:
"In our opinion, the statute leads one
to the irresistible conclusion that the depreciation allowance must be a charge
only on the profits. The limit of the charge is the limit of the profits. The
non-existence of profits will prevent the absorption of the allowance.
There is no warrant for taking in and
absorbing the depreciation allowance in the profit and loss account to work out
a loss.
If that were the true position, the provision
for carrying forward the unabsorbed depreciation allowance would be wholly
redundant, if not meaningless, in view of the specific provision for the
carrying forward of losses." The unabsorbed depreciation allowance is
carried forward under proviso (b) to s. 10(2)(vi) and the method of carrying it
forward is to add it to the amount of the allowance or depreciation (1) 22
I.T.R. 58, 65 (2) 49 I.T.R. 145.
(3) 51 I.T.R. 693. (4) 51 I.T.R. 178.
456 'in the following year and deeming it to
be part of that allowance; -the effect of deeming it to be part of that
allowance is that it falls in the following year within cl. (vi) and has to be
deducted as allowance. If the Legislature had not enacted proviso (b) to s.
24(2), the result would have been that depreciation allowance would have been
deducted first out of the profits and gains in preference to any losses which
might have been carried forward under s. 24, but as the losses can be carried
forward only for six years under s. 24(2), the assessee would in certain
circumstances have in his books losses which he would not be able to set off.
It seems to us that the Legislature, in view of this, gave a preference to the
deduction of losses first. But it is wrong to assume that s. 24(2) also deals
with the carrying forward of depreciation. This carry forward having been
provided in s. 10(2)(vi) and in a different manner; s. 24(2) only deals with
losses other than the losses due to depreciation.
In conclusion, we agree with the High Court
that the question -referred to it should be answered in favour of the assessee.
In the ,result, the appeal fails and is dismissed with costs.
Appeal dismissed.
Back
