Indian Kanoon - Search engine for Indian Law

tax Officer observed That since the assessee had ceased doing business before the beginning of the previous year relevant to the assessment year under consideration and the plant, machinery, building, etc., were sold on October 22, 1965, the assessee did not carry on any business and the income of Rs. 6,213 returned by the assessee under the head "Business" should be considered under the head "Other sources". The Income-tax Officer computed the profit under Section 41(2) of the Income-tax Act, 1961, at Rs. 43,496. He refected the claim of the assessee in regard to the unabsorbed depreciation on the ground that there was unabsorbed depreciation pertaining to the years 1957-58 to 1959-60 and it amounted to Rs. 36,159 and that there was unabsorbed depreciation of Rs. 229 pertaining to the assessment year 1962-63. These two items of unabsorbed depreciation remained to be adjusted under Section 32(2). According to the Income-tax Officer, since the condition precedent to allowing depreciation allowance under Section 32(2) was carrying on the business and the assessee had stopped the business prior to the beginning of the previous year, a deduction was not allowed. The assessee appealed to the Appellate Assistant Commissioner and contended before him that there was unabsorbed depreciation aggregating to Rs, 36,388 from the earlier years and this depreciation was in respect of the business which had ceased to exist when the assets were sold and the contention was that when profit was being computed by virtue of the deeming fiction under Section 41(2), unabsorbed depreciation under Section 32(2) has to be given effect. The Appellate Assistant Commissioner accepted the assessee's contention in the light of the decision of the Supreme Court in Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd. . He directed the Income-tax Officer to give set off of the unabsorbed depreciation subject to verification of the actual amounts thereof.

5. Under the Explanation to Section 41(2) where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year. It is obvious, therefore, that by virtue of the Explanation to Section 41(2) a deeming fiction is created and by virtue of that deeming fiction, the business which is no longer in existence is for the purposes of Section 41(2) deemed to be in existence in the previous year .in the course of which the machinery, plant or furniture in respect of which depreciation has been allowed in earlier years is sold, discarded, demolished or destroyed. There is another deeming fiction which is to be found in Section 32(2) of the Income-tax Act, 1961. Under that sub-section.

7. Really speaking, Section 41(5), as Mr. Dasaratharama Reddy for the assessee rightly points out, is meant for the benefit of the assessee and for seeing to it that he has the benefit of the deeming fiction under Section 41(2). The business is deemed to have continued, though it has ceased to exist. For purposes of making assessment under Section 41(2), loss incurred in that previous, year or in which profit is deemed to have occurred shall also be taken into consideration provided of course it is not a loss due to speculative business or is not a capital gain. Therefore, so far as the proper approach to this problem is concerned, one must find out as to what is the exact amount of profit under Section 41(2) and in respect of which year and whether if the business has been in existence by virtue of the fiction under Section 41(2) the benefit of Section 32(2) would be available so far as the unabsorbed depreciation is concerned. Since the legislature itself has not made the deeming fiction under Section 32(2) subject to the provisions of Section 41(5) or any other section, it is obvious that in working out the due profit under Section 41(2), full effect must be given to the deeming fiction arising under Section 32(2) as well. This is purely from a bare reading of the provisions of Sections 32(2) and 41(2). We find that the Allahabad High Court had also come to the same conclusion in Commissioner of Income-tax v. Rampur Timber & Turnery Co. Ltd. and Commissioner of Income-tax v. Virmani Industries (P.) Ltd. . The Bombay High Court in Commissioner of Income-tax v. Ram Industries Ltd. [1963] 49 ITR 145 (Bom) has also held:

8. It is clear that so far as the unabsorbed depreciation from the previous years is concerned it is allowable from any income from any source whatsoever in the subsequent years of account and that principle being clear, it is obvious that, notwithstanding the provisions of Section 41(5), full effect must be given to the deeming fiction under Section 32(2). Mr. Rama Rao for the revenue relied on certain observations of the Bombay High Court in Sahu Rubbers Private Ltd. v. Commissioner of Income-tax [1963] 48 ITR 464 (Bom). In that case it was held that in order to claim adjustment in the assessment year of unabsorbed depreciation of an earlier year, the assessee must establish that the business in respect of which it was allowed continued in the previous year relevant to the assessment year, and if that business is no more in existence, unabsorbed depreciation cannot thereafter be adjusted in the assessment of future years in respect of a different business. But the effect of the deeming fiction now embodied in Section 32(2) which was formerly embodied in Section 10(2)(vi) of the Indian Income-tax Act, 1922, has been, in our opinion, correctly explained by the Bombay High Court itself in Root Industries' case [1963] 49 ITR 145 (Bom) particularly after the decision of the Supreme Court in Commissioner of Income" tax v. Jaipuria China Clay Mines (P.) Ltd. . It is clear that the unabsorbed depreciation of past years has to be added to the depreciation of the current year and the aggregate unabsorbed and current year's depreciation has to be deducted from the total income of the previous years.