Bombay High Court
Commissioner Of Income-Tax vs Premier Automobiles Ltd. on 2 April, 1993
Equivalent citations: [1994]206ITR1(BOM)
JUDGMENT Dr. B.P. Saraf, J.
1. This is a cross reference at the instance of the Revenue and the assessee and relates to three assessment years, viz., 1970-71, 1971-72 and 1972-73. Under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal referred one question at the instance of the assessee and two questions at the instance of the Revenue. Consequent to the reference of the second question at the instance of Revenue, which is renumbered for the sake of convenience as question No. 3, the assessee wanted a further question to be referred and the same was also referred by the Tribunal and it is numbered as question No. 4. The questions so referred by the Tribunal are set out below :
At the instance of the assessee :
"1. Whether, on the facts and in the circumstances of the case, the assessee-company could lawfully claim the development rebate in priority to depreciation allowance prescribed under section 32 of the Income-tax Act, 1961, while computing its total income for each of the assessment years 1970-71, 1971-72 and 1972-73 ?"
At the instance of the Revenue :
"2. Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to depreciation on the price paid for acquisition of drawings, blue prints, specification, process sheets and technical data from Henry Meadows Ltd. of England being 'plant' within the meaning of section 32 of the Income-tax Act, 1961, for each of the assessment years 1970-71, 1971-72 and 1972-73 ?
3. Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to depreciation on the expenditure of pounds 2,000 incurred by the assessee for the purchase of know-how from Messrs. Ricardo and Co. Engineering Ltd., U. K., while computing its income for the assessment year 1971-72 ?"
Consequent to above question No. 3, at the instance of the assessee :
"4. If the answer to question No. 3 is in the negative, whether, on the facts and circumstances of the case, the payment of pounds 2,000 made by the assessee to Messrs. Ricardo and Co. Engineers (1927) Ltd., U.K., was an allowable revenue expenditure ?"
2. At the outset, it may be mentioned that it was agreed by counsel for the parties that the questions referred to us at the instance of the Revenue, that is, questions Nos. 2 and 3 above, are covered by the decisions of this court. So far as question No.2 is concerned, it is covered by the decision of this court in the assessee's own case which is reported in Premier Automobiles Ltd. v. CIT [1984] 150 ITR 28. The entire amount paid by the assessee for acquisition of drawings, blue prints, specifications, process sheets and technical data, etc., in respect of which depreciation has been allowed by the Tribunal in this case to the assessee, has been held in the above case to be revenue expenditure and allowed as a deduction in the computation of the income of the assessee for the year in which the payment had been made. That being so, it is evident that the assessee cannot get any depreciation on the very same amount which had been allowed as a revenue expenditure.
3. In view of the above decision and the cost of the drawings, blue prints, specifications, etc., itself, having been held to be revenue expenditure, the answer to question No. 2 is self-evident, that is, the assessee is not entitled to depreciation on the price paid by him on acquisition of drawings, blue prints, process sheets and technical data from Henry Meadows Ltd. of England for the assessment years 1970-71, 1971-72 and 1972-73. This question is, therefore, answered in the negative and in favour of the Revenue and against the assessee.
4. Learned counsel for the assessee submitted before us that against the above decision of this court in the assessee's own case for the earlier year reported in Premier Automobiles Ltd. v. CIT [1984] 150 ITR 28, the Revenue has gone in appeal to the Supreme Court and, as such this court should give a direction that in the event of the decision of this court being reversed, the assessee would be entitled to depreciation. We think that it is premature at this stage to give any such direction. In the event of the decision of this court being reversed by the Supreme. In the event of the decision of this court being reversed by the Supreme Court, it is always open to the assessee to make suitable prayer before the Supreme Court for consequential orders. In that view of the matter, we are not inclined to give any such direction to meet the hypothetical situation that may arise in future in the event of reversal of the decision of this court by the Supreme Court.
5. As regards question No. 3, which is referred to at the instance of the Revenue, it is agreed by counsel for the parties that in view of the decisions of the Supreme Court in Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 and CIT v. Elecon Engineering Co. Ltd. [1987] 166 ITR 66, this question has to be answered in the affirmative, that is, in favour of the assessee and against the Revenue. We answer this question accordingly.
6. It is also an agreed position that in view of the answer to question No. 3 being in favour of the assessee, question No. 4 does not arise and the same need be answered. Accordingly, we decline to answer question No. 4.
7. The only question left for our consideration is question No. 1, which has been referred at the instance of the assessee. For the sake of convenience, this question is reproduced below :
"Whether, on the facts and in the circumstances of the case, the assessee-company could lawfully claim the development rebate in priority to depreciation allowance prescribed under section 32 of the Income-tax Act, 1961, while computing its total income for each of the assessment years 1970-71, 1971-72 and 1972-73 ?"
8. As is evident from the question, the controversy relates to priority in the matter of set off of unabsorbed depreciation allowance and unabsorbed development rebate. The question is a pure question of law. No detailed discussion of the facts is needed except that the assessee in the present case has substantial amount of unabsorbed depreciation and unabsorbed development rebate which had been carried forward from year to year. The claim of the assessee was that as there was a time limit fixed under the Act for carrying forward of unabsorbed development rebate, it should be set off first against the current year's profit in the respective years and thereafter if any profit is left current year's profit in the respective years and thereafter if any profit is left, the unabsorbed depreciation should be adjusted. According to the Income-tax Officer, under the scheme of the Act, the unabsorbed development rebate can be adjusted development rebate and unabsorbed depreciation in the matter of set off against the current year's profits. For that purpose, we shall have to pursue the scheme of section 32 and 33 of the Act as also sections 72 and 73 thereof.
9. Section 32 of the Act deals with depreciation. Sub-section (2) thereof provides for carrying forward of the unabsorbed depreciation and allowance of the same in the succeeding years. Section 33 deals with development rebate. Sub-section (2) of section 33 provides for carry forward of unabsorbed development allowance for eight assessment years. Sections 32 and 33, as they stood at the material time, so far as relevant, read as follows :
"32. Depreciation. - (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed -. . . .
(2) Where, in the assessment of the assessee (or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners), full effect cannot be given to any allowance under clause (i) or clause (ii) or clause (iia) or clause (iv) or clause (vi) of sub-section (1) or under clause (i) of sub-section (1A) in any previous year, owning to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, 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 previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years."
"33. Development rebate. - (1)(a) In respect of new ship or new machinery or plant (other than officer appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of section 34, be allowed a deduction, in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, a sum by way of development rebate as specified in clause (b). . . .
(2) In the case of a ship acquired or machinery or plant installed after 31st day of December, 1957, where the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be, (the total income for this purpose being computed without making any allowance under sub-section (1) or sub-section (1A) of this section or sub-section (1) of section 33A or any deduction under Chapter VI-A or section 280-O) is nil or is less than the full amount of the development rebate calculated at the rate applicable thereto under sub-section (1) or sub-section (1A), as the case may be, -
(i) the sum to be allowed by way of development rebate for that assessment year under sub-section (1) or sub-section (1A) shall be only such amount as is sufficient to reduce the said total income to nil; and
(ii) the amount of the development rebate, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment year, and the development rebate to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the development rebate, if any, still outstanding shall be carried forward to the following assessment year, and so on, so however that no portion of the development rebate shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to the previous year in which the ship acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be."
10. Section 72 of the Act, which too has some relevance in deciding the controversy before us, deals with carry forward and set off of business losses. This section, so far as relevant reads :
"72. Carry forward and set off of business losses. - (1) Where for any assessment year, the net result of the computation under the head 'Profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where the assessee has income only under the head 'Capital gains' relating to capital asset's other than short-term capital assets and has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and -
(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year :
Provided that the business or profession for which loss was original computed continue to be carried on by him in the previous year relevant for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. . .
(2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section."
The relevant provision of section 73 is sub-section (3) which is in the following terms :
"73. Losses in speculation business. -. . . .
(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business."
11. We have perused the above section. Under section 32(2) of the Act, a legal fiction has been created that unabsorbed depreciation of the earlier year shall from part of the current year's depreciation allowance and, therefore, it shall have to be dealt with accordingly subject, however, to the provisions of sections 72(2) and 72(3) of the Act. Thus, under section 72, the unabsorbed depreciation shall be carried forward to a subsequent year and it shall be deemed to from part of that year's depreciation and shall be set off against the profits of that year subject to the provisions of sub-section (2) thereof. From these provisions, it is clear that before setting off the carried forward unabsorbed depreciation of the earlier year, the depreciation of the current year shall have to be deducted and then after setting off of the loss, the unabsorbed depreciation, which is also treated as the current year's depreciation, shall be adjusted. Therefore, the carried forward unabsorbed depreciation of the earlier year has to be taken as a part of the current year's depreciation allowance and to be set off, to the extent possible, against the income of the current year. There is no specific provision in the Act to specify the order of priority for allowing unabsorbed depreciation of the earlier years in the subsequent years, vis-a-vis, carried forward unabsorbed development rebate. That is because development rebate is not a traditional loss or expenditure in the ordinary sense of the term. It is intended to give an incentive to a business to invest in machinery or in modernisation of plant and equipment. It is available to an assessee on fulfilment of certain conditions specified in the Act and in the event of non-availability of sufficient profit to enable the allowance of the same in the year of acquisition, a provision has been made for carry forward of the same for a period of eight years. The entire controversy has assumed importance because this time-limit. In the case of unabsorbed depreciation, there is no time-limit. In the case of unabsorbed development rebate, there is a time-limit of eight years. However, on perusal of the scheme of the Act, we are satisfied that between unabsorbed development rebate and unabsorbed depreciation, the letter will have priority in respect of setting off against the profits of subsequent years.
12. This view of ours gets support from a decision of the Karnataka High Court in Mysore Paper Mills Ltd. v. CIT [1979] 117 ITR 132, where dealing with a similar controversy, it was held as follows (at page 136) :
"Section 33 does not actually deal with any trading loss as it is ordinarily understood. Under section 33, Parliament has made provision by way of an incentive to businessmen who invest in new machinery of in modernising plant and equipment. In order to earn development rebate, the assessee has to satisfy certain other conditions which are provided under section 34 of the Act and the unabsorbed development rebate cannot be carried forward beyond eight years as provided by the Act. In the circumstances, the unabsorbed development rebate cannot be treated as part of the assessed loss which is allowed to be carried forward and given priority over the unabsorbed depreciation allowance of the previous years."
13. The Madras High Court in CIT v. Coromandel Steels Ltd. [1981] 130 ITR 856, while dealing with a similar controversy, also held that unabsorbed development rebate of earlier years would come up for consideration only after allowance of (a) carried forward business loss, and (b) carried forward depreciation.
14. It was also observed that while deducting depreciation also, the current year's deprecation will be deducted first and then, in view of the provisions of section 72(2) of the Act, the carried forward business loss shall be adjusted and thereafter the unabsorbed depreciation. It was stated in clear terms that unabsorbed development rebate comes up for consideration only after there two allowances.
15. The above decision were followed by the Kerala High Court in Calicut Modern Spg. and Wvg. Mills Ltd. v. CIT [1985] 153 ITR 810, where it was held that it is only after setting off of unabsorbed business loss and unabsorbed depreciation that the question of unabsorbed development rebate can arise. The Kerala High Court also referred to the decision of the Gujarat High Court in CIT v. Gujarat State Warehousing Corporation [1976] 104 ITR 1 and the ratio of the same was followed.
16. The Patna High Court in Bihar State Industrial Development Corporation Ltd. v. CIT [1987] 165 ITR 671 also took a similar view. It was held that the brought forward unabsorbed development rebate is not to be given preference over the brought forward unabsorbed depreciation and losses in allowing set off against the current year's income.
17. An identical view has been taken by the Orissa High Court in Utkal Machinery Ltd. v. CIT [1987] 167 ITR 119. It was held (at page 120) :
"In view of the specific provision under section 72(2) of the Act, depreciation is to be adjusted first. Only thereafter the question of setting off the unabsorbed development rebate would arise."
18. Reference may also be made to the decision of the Supreme Court in CIT v. Mother India Refrigeration Industries P. Ltd. [1985] 155 ITR 711. In this case, the Supreme Court while dealing with the question of carrying forward and set off of unabsorbed business loss of earlier years observed (headnote) :
"In computing the profits and gains of a business for the current year, depreciation for the current year must be deducted first before deducting the unabsorbed carried forward business losses of earlier years."
19. We are in full agreement with the various decisions referred to above. We are of the clear opinion that unabsorbed depreciation will have priority in the matter of set off over unabsorbed development rebate.
20. Learned counsel for the assessee submitted before us that it is an option of the assessee to claim depreciation or not. In support of this contention, reliance was placed on a decision of this court dated November 2, 1992, in Income-tax Reference No. 192 of 1977 - CIT v. East India Cotton Association Ltd. In that case, following the decision in CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd. [1989] 177 ITR 443 (Bom), this court held that the assessee had an option to claim or not to claim the entire or part of the depreciation or not to claim it at all. The Income-tax Officer is not entitled to force depreciation on an unwilling assessee.
21. We have perused the above decision. In our opinion, the ratio of the above decision is clear. Under section 32 of the Act, the assessee is entitled to allowance of depreciation. It is for him to claim the same. If he does not claim the same or wants to forgo the same, he is free to do so. This judgment does not say anything about carry forward of depreciation which has not been claimed by the assessee in the particular year. So far as the current year's depreciation is concerned, it is for the assessee to claim the same or not to claim the same. If he does not claim it, he loses the depreciation. There is no question of any depreciation allowable for that year and in that event the question of any unabsorbed depreciation of that year will not arise. This decision, however, cannot be carried any further to contend that the assessee is free not to claim depreciation in the year to which it pertains but carry forward the same to the subsequent year or years as it likes. This also applies to set off of carried forward unabsorbed depreciation. By a legal fiction, that is treated as part of the depreciation of that year. The assessee has no option to stop the set off of the same against the current years' profits. If he can do so, and does so, the natural outcome is that it will cease to be the depreciation die to the assessee during that year and the question of carrying forward the same to a subsequent year as unabsorbed depreciation will not arise. In that view of the matter, it is clear that the assessee has the option to claim or not to claim depreciation of the particular year. So far as unabsorbed depreciation of earlier years is concerned, it has to be adjusted against the income of next year, otherwise, it has to be adjusted against the income of next year, otherwise, it cannot be taken into account in any subsequent year for computing the total income. This view of ours gets full support from the decision of the Calcutta High Court in Shree Ramesh Cotton Mills Ltd. v. CIT [1979] 116 ITR 366. In this case, it was clearly held (headnote) :
"The provisions of section 32(2) read with sections 72 and 73 of the Act and clause (v) of Annexure-I of Appendix-II to the Income-tax Rules, 1962, clearly show that unless the unabsorbed depreciation is adjusted in the next previous accounting year, it cannot be taken into account later on for the purpose of computation of the total income of the assessee in any subsequent year."
22. Thus, it is clear that what section 32 allows an assessee is the deduction by way of depreciation of an asset of an amount calculated as a percentage of the written down value thereof as may be prescribed. It is for the assessee to claim the same and furnish the requisite particulars. If the assessee does not claim the same, it cannot be allowed. But in that case, there will be no depreciation for that year which can be said to be unabsorbed to be carried forward to a subsequent year under section 32(2) of the Act. In other wires, an assessee who does not claim deduction for the depreciation allowable to him under section 32 of the Act in the particular year, loses it once for all. He is not entitled to claim the same in a subsequent year thought he will again be entitled in that subsequent year to claim depreciation for that year.
23. In view of the foregoing discussion, we answer question No. 1 referred to us at the instance of the assessee, in the negative, that is, against the assessee and in favour of the Revenue.
24. Under the facts and circumstances of the case, we make no order as to costs.