Income Tax Appellate Tribunal - Pune
Vora Industries Tools (P.) Ltd. vs Income-Tax Officer on 6 August, 1991
Equivalent citations: [1991]39ITD116(PUNE)
ORDER
T.V.K. Natarajachandran, Accountant Member
1. This appeal by the assessee raises an interesting point for decision. The point is whether the loss of unabsorbed depreciation is to be allowed to be carried forward for the purpose of set off when the return was filed beyond the time specified under Section 139(1) of the Income-tax Act, 1961.
2. The relevant facts are that the assessee is a private limited company and carries on business. The assessment year concerned is 1985-86 for which the assessee followed calendar year as the previous year. It filed a return on 17-9-1985 declaring loss of Rs. 33,785. The ITO declined to carry forward the loss claimed on the ground that the return was filed beyond the extended time under Section 139(1), i.e., 31-8-1985 and not according to the provisions of Section 80 of the Income-tax Act, 1961. According to him, the profits and gains of business or profession are computed after allowing the deductions provided for in Sections 28 to 44 of the Income-tax Act, 1961, which includes Section 32 dealing with depreciation allowance. So the net loss includes also depreciation allowance. Inasmuch as the return was filed beyond extended time allowed under Section 139(1) not only business loss, but also the unabsorbed depreciation allowance included therein was declined to be carried forward by the ITO. However, the ITO determined the total income at Nil.
3. On appeal, the assessee raised several grounds and advanced several arguments to contend that depreciation allowance was quite different from business loss by relying on the provisions of Sections 32(2), 72(2) and 73(3) of the Income-tax Act, 1961. In short the case of the assessee was that Section 32(2) does not envisage the filing of return within the specified time under Section 139(1) or extended time before the unabsorbed depreciation could be carried forward and Section 80 is confined to business loss sustained which is sought to be carried forward. Reliance was placed on the judgment of the Madras High Court in the case of CTT v. Concord Industries Ltd. [1979] 119 ITR 458.
4. The CIT(A) rejected the contentions of the learned counsel of the assessee and upheld the order of the Assessing Officer. According to him, the phrase contained in Section 72, namely, "profits and gains of business or profession" is wider than "business loss" and covers loss computed under Sections 28 to 44 of the Income-tax Act, 1961 which includes depreciation also. In other words, the case of the CIT(A) was that depreciation is part of business loss and is part and parcel of the net result of profits and gains of business or profession computed. Reliance also was placed on the amendment made to Section 80 of the Income-tax Act, 1961 by the Taxation Laws (Amendment) Act, 1984 with effect from 1-4-1985. Further he distinguished the judgment of the Madras High Court in the case of Concord Industries Ltd. (supra) by stating that it contains the word "loss" only in contra-distinction to the phrase "net result of the computation under the head profits and gains of business or profession" as appearing in Section 72. Accordingly, he confirmed the assessment and dismissed the appeal filed by the assessee.
5. At the time of hearing, Shri C.C. Dalai, learned counsel of the assessee, filed a paper compilation containing the relevant commentary of Shri N.A. Palkhivala contained in the Law & Practice of Income-tax, 8th Edn. Vol. I at page 512 regarding carry forward of depreciation allowance and at page 873 regarding carry forward of loss according to which the unabsorbed depreciation is to be carried forward to the following year and set off against that year's profit and so on for succeeding years. The carried forward of depreciation allowance is deemed to be part of and stands on exactly the same footing as the current depreciation for the assessment year. The carried forward of unabsorbed depreciation is not governed or covered by Section 72 at all and is different from the carried forward of business loss under Section 72 of the Income-tax Act, 1961.
6. A copy of the order of the Tribunal, D Bench Calcutta in the case of Burrakur Coal Co. Ltd. v. ITO [1986] 16 ITD 475 has been filed wherein it has been held that the assessee is entitled to carry forward unabsorbed depreciation despite the fact that no valid return was filed by it. Reliance was also placed on the judgment of the Madras High Court in the case of Concord Industries Ltd. (supra) and the Kerala High Court judgment in the case of CIT v. Kalpaka Enterprises (P.)Ltd. [1986] 157 ITR 658. The Madras High Court held that Section 79 of the Income-tax Act, 1961 prohibiting carry forward of losses in the case of certain companies would not apply to unabsorbed depreciation and development rebate. The Kerala High Court also held likewise. He cited several other decisions which are applicable to registered firms with which I am not concerned. The submission of the learned counsel was that so far as the element of unabsorbed depreciation was concerned, there was no bar for carry forward for the purpose of set off in the next assessment year and therefore, the CIT(A) was not justified in confirming the order of the ITO rejecting the claim.
7. The learned departmental representative, on the other hand, supported the orders of the authorities. On his part, he relied on the observations of their Lordships of the Supreme Court contained in the Head Notes in the case of Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512 which reads as under :
Unabsorbed depreciation is indeed a part of the' loss'. This is so because, in the first place, depreciation is a normal outgoing, though in a sense notional, which has to be debited in the computation of the profits of a business on commercial principles (quite apart from statute) and it is difficult to say why, when such deduction yields a negative figure of profits, it cannot be a 'loss' as generally understood.
In view of the aforesaid observations, the learned departmental representative contended that the element of unabsorbed depreciation formed part of net loss and therefore, unless the return is filed within the time specified under Section 139(1), the assessee is not entitled to carry forward and set off such loss in the subsequent year. He referred to Section 80 of the Income-tax Act, 1961 as amended by Taxation Laws (Amendment) Act, 1984 with effect from 1 -4-1985 according to which no loss which had not been determined in pursuance of a return filed within the time allowed under Section 139(1) or within such further time as may be allowed by the ITO shall be carried forward and set off under Sub-section (1) of Section 72 or Sub-section (2) of Section 73 or Sub-section (1) of Section 74 or Sub-section (3) of Section 74A. Therefore, he urged that the CIT(A) was quite justified in his decision and his order has to be upheld.
8. In reply, the learned counsel for the assessee referred to the observations of their Lordships of the Supreme Court contained in the Head Notes at page 513 in the same case of Garden Silk Weaving Factory (supra) which reads as under:-
There is nothing anomalous or absurd in the statute providing for a dissection of the amount of loss for purposes of carry forward and providing for a special or different treatment to unabsorbed depreciation in this regard although it is a component element of the genus described as "loss".
Section 32(2) itself contains an inbuilt mechanism for recalling to the firm's "file" the balance that remains out of the unabsorbed depreciation of the firm divided and allocated to the partners. It is plain, on the language of this provision, that the benefit of the carry forward is to be given to the assessee. Where the assessee is other than a registered firm or an unregistered firm assessed as a registered firm, this is very plain.
In view of the aforesaid observations of their Lordships, he submitted that Section 80 of the Income-tax Act, 1961 does not bar the claim of the assessee for carry forward and set off of unabsorbed depreciation.
9. After due consideration of submissions of the parties, I am of the opinion that the assessee is entitled to carry forward unabsorbed depreciation. To begin with, it is necessary to highlight or bring to focus the exact nature of the loss under consideration. From the statement of computation of total income for the year ending 31st December, 1984 contained in the paper compilation, it is seen that the profits of the business amounted to Rs. 1,29,007 against which depreciation allowance of Rs. 1,62,792 has been claimed by the assessee on the written down value of the plant and machinery of Rs. 10,85,280 at the rate of 15% per annum. The profits were not sufficient to absorb depreciation allowance claimed by the assessee with the result the net computation resulted in loss of Rs. 33,785. Therefore, it is clear that the loss, sustained by the assessee is actually the unabsorbed depreciation allowance for the assessment year 1985-86.
10. It is well known that depreciation allowance is granted as an incentive for capital formation and industrial development. The cost of the machinery or plant is allowed to be recouped by granting depreciation allowance so that when the machinery becomes obsolete or worn out, it could be replaced by the depreciation allowance already granted and accumulated for purchasing new plant or machinery. The philosophy behind granting of depreciation allowance is sustained growth of industry which would yield recurring income and consequently recurring tax revenue to the department. It is not an unconditional concession granted to the assessee, but on the other hand, it is a conditional grant only. In case the plant and machinery on which depreciation allowance is granted is sold, the Act contains built-in provision to recoup the depreciation allowance already granted from the sale proceeds of the plant and machinery. In other words, whatever depreciation allowance has been granted to the assessee while carrying on business is recouped when the plant and machinery is not used for business but sold out for consideration. Viewed from this angle, the unabsorbed depreciation cannot be strictly called a loss, as understood in commercial parlance, though under the statute it assumes the nature of loss of business. Therefore, the unabsorbed depreciation can be said to be a "specie" of the large genus "loss".
11. Nonetheless, the distinct character or nature of the depreciation allowance holds out when unabsorbed depreciation allowance is carried forward along with unabsorbed development rebate or unabsorbed business loss in which case specific provisions are there regarding rule of priority in the matter of set off. This is evident from the observations of the Supreme Court in the following-decided cases, viz.:
(1) In the case of CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 (SC) The unabsorbed depreciation allowance is carried forward under proviso (b) to Section 10(2)(vi) and the method of carrying it forward is to add it to the amount of the allowance or depreciation 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 Clause (vi) and has to be deducted as allowance. If the legislature had not enacted proviso (b) to Section 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 Section 24, but as the losses can be carried forward only for six years under Section 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 Section 24(2) also deals with the carrying forward of depreciation. This carry forward having been provided in Section 10(2)(vi) and in a different manner, Section 24(2) only deals with losses other than the losses due to depreciation.
(2) In the case of Garden Silk Weaving Factory (supra) In our view, there is nothing anomalous or absurd in the statute providing for a dissection of the amount of loss for purposes of carry forward and providing for a special or different treatment to unabsorbed depreciations in this regard although it s a component element of the genus described as 'loss'.
12. The question now arises is whether such unabsorbed depreciation allowance claimed in the return filed by the assessee on 17-9-1985 is entitled to be carried forward to the subsequent year for the purpose of set off or not. The ITO relied on the provisions of Section 80 of the Income-tax Act, 1961 which enjoins that to be eligible for carry forward of loss of business, the return should have been filed in accordance with provisions of Section 139(1) of the Income-tax Act, 1961.
The section for the assessment year 1985-86 stood as under:
Section 80: Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of are turn filed (within the time allowed under Sub-section (1) of Section 139 or within such further time as may be allowed by the Income-tax Officer) shall be carried forward and set off under Sub-section (1) of Section 72 or Sub-section (2) of Section 73 or Sub-section (1) of Section 74 (or Sub-section (3) of Section 74A).
The Taxation Laws (Amendment) Act, 1984 has substituted the phrase "within the time allowed under Sub-section (1) of Section 139 or within such further time as may be allowed by the Income-tax Officer" for the words "under Section 139". Thus the amendment made by the Taxation Laws (Amendment) Act, 1984 has narrowed down the scope of claim of carried forward of loss considerably. In this case, the ITO has extended time for filing the return till 31-8-1985 and the return was filed on 17-9-1985 after a delay of 17 days only. Strictly speaking the return filed is not one within the time allowed under Section 139(1) or within the time extended. Inasmuch as it has been demonstrated earlier that the loss under consideration is not a business loss, but only unabsorbed depreciation allowance, the case of the assessee will not fall squarely within the requirement of Section 139(1) for the purpose of carry forward and set off.
13. The Madras High Court in the case of CIT v. Speed-A-Way (P.) Ltd. [1967] 65 ITR 351 (App.), held that the carrying forward of unabsorbed depreciation did not fall under Section 24(2) of 1922 Act (corresponding to sections 72(1) and 73(2) of 1961 Act) and did not therefore depend upon compliance with Section 22(2A) of 1922 Act (corresponding to Sections 80 and 139(3)of 1961 Act). It was also held that the return in that case fell squarely within Section 22(3) of 1922 Act (equivalent to Section 139(4) and 139(5) of 1961 Act).
14. In the case of Sri Hari Mills Ltd. v. First ITO [1967] 65 ITR 348, the Madras High Court held likewise. In that case, the assessee filed loss return for the current year 1956 relevant for 1957-58- on 12-3-1959 claiming depreciation allowance of Rs. 56,280 and development rebate of Rs. 1,34,317 against trading profit of Rs. 64,131. The ITO considered the return to be null and void since it was not filed within the assessment year and made an assessment ignoring the loss returned in view of Section 22(2 A) of the Income-tax Act, 1922 and refused to carry forward the same. With regard to carry forward of unabsorbed depreciation, the Court held that carrying forward of depreciation did not fall under Section 24(2) and did not depend on compliance with Section 22(2A) and the return fell squarely within Section 22(3) and the order of the ITO was wrong. In particular, their Lordships of the Madras High Court have pointed out that the Act did not require two separate returns for the purpose of claiming business loss and unabsorbed depreciation. The composite return filed would serve both Sections 22(2) and 22(2A) and if that part of the return which related to carried forward business loss was filed out of time specified under Section 22(2A) it did not ipso facto and ipso jure follow that the return should be rejected insofar as it is under Section 22(2) of the Income-tax Act, 1922. In other words, their Lordships have held that depreciation did not fall within the ambit of Section 24(2) and consequently set off of carried forward unabsorbed depreciation will not depend on the compliance of Section 22(2A). In fact the case of the assessee is much better than the case of Sri Hari Mills Ltd. (supra) wherein both the elements of unabsorbed depreciation allowance and development rebate were involved. At the time of hearing in that case, the assessee conceded that there was no specific enabling provision for carrying forward of development rebate with the result the gamut of the decision pertained to carry forward of unabsorbed depreciation only. Therefore, the ratio decidendi of the Madras High Court in the case of Sri Hari Mills Ltd. (supra) squarely applies to the case of the assessee on hand.
15. In the case of Concord Industries Ltd. (supra), the Madras High Court considered the question of carry forward and set off of losses of a company in which change of shareholding had taken place attracting the provisions of Section 79 of the Income-tax Act, 1961 and held in view of different treatment of depreciation from loss as seen from Section 72(2) losses would not include depreciation as far as Section 79 also is concerned. In that case also the contention of the revenue that once a loss is computed after allowance of depreciation, the loss would have to be taken as such without taking up its content was rejected. The Kerala High Court held likewise in the case of Kalpaka Enterprises (P.) Ltd. (supra). In the case of Universal Cargo Carriers Inc. v. CIT [1987] 165 ITR 209, the Calcutta High Court held that unabsorbed depreciation allowance does not enter into the computation of the business loss of the assessee and on a strict reading of Section 72, it cannot be said that unabsorbed depreciation allowance is a business loss. The Allahabad High Court observed in the case of CIT v. Virmani Industries (P.) Ltd. [1974] 97 ITR 461, that the legal fiction brought about by 'the deeming provision under Section 32(2) had to be carried to its logical conclusion. Considering the aforesaid decisions, the irresistible conclusion is that the return filed by the assessee is a valid return and the claim for carry forward of unabsorbed depreciation is not barred by Section 80 of the Income-tax Act, 1961.
16. In this connection, it is also necessary to refer to the relevant provision regarding depreciation allowance. Section 32(2) at the relevant point of time reads as under:
Section 32(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 (0 or Clause (if) or Clause (iia) or Clause (iv) or Clause (v) or Clause (vi) of Sub-section (1) or under Clause (i) of Sub-section (1 A) in any previous year owing 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 year.
It is provided that the unabsorbed depreciation shall be carried forward and added to the amount of depreciation allowance in the subsequent previous year and it shall be deemed part of that allowance or if there is no such allowance for that previous year, it shall be deemed to be the allowance for that previous year and so on for the succeeding previous years. Therefore, Section 32(2) itself is a self-contained provision for the carrying forward and set off of unabsorbed depreciation by virtue of deeming fiction of law and it is only subjected to the provisions of sections 72(2) and 73(3) of the Income-tax Act, 1961.
17. Section. 72(2) provides that "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." This shows that in the event of carry forward of both business loss and unabsorbed depreciation, priority should be given to the carry forward of business loss. If there is no such carry forward of business loss, as in the instant case, there is no question of priority called for. Coming to Section 73(3) it provides that "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." In other words, speculation loss would be given priority over the unabsorbed depreciation as it applies in the case of non-speculation business. Thus, both sections 72(2) and 73(3) only provide for order of priority in case of rival claims of set off of business loss, speculation business loss and unabsorbed depreciation.
18. A question may arise as to whether the assessee would be entitled to carry forward and set off the unabsorbed depreciation, if the business in which the depreciation allowance was granted is not continued in the subsequent year. There is judicial controversy in this matter, though the preponderance of the decisions is in favour of the assessee, namely, that even if the same business is not continued in the subsequent year, nonetheless, the assessee would be entitled to claim the benefit of carry forward and set off of unabsorbed depreciation. The judgment of the Supreme Court in the case of jaipuria China Clay Mines (P.) Ltd. (supra) and in the latest case of Garden Silk & Weaving Factory (supra) lend support to the liberal view. It is seen from the appellate order which is a combined order for the assessment years 1985-86 and 1986-87 that the income assessed for the assessment year 1986-87 is Rs. 44,480 which shows that the assessee carried on business in the subsequent year also. Therefore, the assessee is entitled to. set off of unabsorbed depreciation carried forward from the assessment year 1985-86 against profits of the assessment year 1986-87.
19. Another aspect is also required to be considered in this connection, namely, whether the direction of the Income-tax Officer that the assessee is not entitled to carry forward unabsorbed depreciation is binding on the Income-tax Officer who makes the subsequent assessment or not. The Supreme Court in the case of CFT v. Manmohan Das [1966] 59 TR 699 at page 702 observed, inter alia, as under:
Whether the loss of profits or gains in any year may be carried forward to the following year and set off against the profits and gains of the same business, profession or vocation under Section 24(2) has to be determined by the ITO who deals with the assessment of the subsequent year. It is for the ITO dealing with the assessment in the subsequent year to determine whether the loss of the previous year may be set off against the profits of that year. A decision recorded by the ITO who computes the loss in the previous year under Section 24(3) that the loss cannot be set off against the income of the subsequent year is not binding on the assessee.
In view of the aforesaid ratio decidendi, the ITO making subsequent assessment is not bound by the order of the predecessor and he is bound to give effect to the unabsorbed depreciation carried forward from the earlier year.
20. Considering all the facts and circumstances of the case and the judicial dicta, I uphold the claim of the assessee and consequently, set aside the order of the CIT(A) and direct the ITO to carry forward the unabsorbed depreciation for the purpose of set off in the subsequent assessment year 1986-87.
21. The appeal is allowed.