1. This is a reference made by the Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal) under section 66 (1) of the Indian Income-tax Act (here in after referred to as the Act). The assessee is a limited liability company incorporated in the then State of Indore. It has a textile mill at Indore where the company carried on its business in the relevant years of manufacture and sale of textiles. The relevant assessment years are 1942-43, 1943-44, 1945-46, 1946-47 and 1947-48, the previous years being the calendar years 1941, 1942, 1944, 1945 and 1946. The facts relating to each year are identical, except that the figures may be different. The statement of case, therefore, refers to the facts relating to the assessment years 1942-43 only. The question referred to us is in the following terms :
'Whether on a proper construction of clause (b) of the proviso to section 10 (2) (vi) of the Indian Income-tax Act and on the facts and in the circumstances of this case the carried forward depreciation allowance of Rs. 5,98,482 has to be allowed against the total income of the assessee or against the total world income of the assessee ?'
2. The following facts referred to in the statement give rise to this question of law. The income earned by the assessee in British India in the assessment years 1940-41 and 1941-42 being more than the income earned by it outside British India, the assessee was treated as a resident for purposes of assessment of income-tax on it. The result was the assessee's total world income, that is, income earned in the Indore State as well as income earned in British India, was treated its total income. It appears that the amount of depreciation determined for those years could not be completely off-set against the profits of those years. The result was the unabsorbed depreciation amount amounting to Rs. 5,98,482 was carried forward to the assessment year 1942-43 for being adjusted in that year in accordance with law. In the assessment being adjusted in that year in accordance with law. In the assessment year 1942-43 the income earned by the assessee in the Indore State exceeded the income earned by it in British India. The result thereof was the assessee was treated as a non-resident for the purpose of the income-tax. It is not dispute that the legal consequences flowing from that position were that the assessee having been treated as a non-resident, the total income of the assessee would include only the income earned by it in British India and not the income earned by it outside British India. It was the assessee's contention that the unabsorbed depreciation allowance amounting to Rs. 5 lakhs and odd was adjustable only against its total income and not its world income. In other words, the unabsorbed depreciation allowance must be adjusted only against the profits earned by it in British India and not against the total world income of the assessee, that is, the entire income earned either in British India or outside British India. This contention of the assessee has not been accepted by the Tribunal and hence the reference.
3. In our opinion the decision of the Tribunal is right. Section 10 of the Act enumerates various heads of allowances, deduction in respect of which are allowed in computation of profits or gains of a business, profession or vocation. Clause (vi) of sub-section (2) relates to depreciation, and it provides for computation of depreciation allowance on certain principles. Class (b) of the proviso to this sub-clause (vi) provides :
'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 1st 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, be deemed to be the allowance for that year, and so on for succeeding years.'
4. In our opinion on the language of proviso (b) it is clear that the amount of unabsorbed depreciation allowance of the previous year assumes the same character and colour of the depreciation amount determined for the assessment year and the question whether the unabsorbed depreciation amount of the previous year is to be adjusted against the total income or total world income would depend on the determination of the question as to whether the depreciation amount determined for the assessment year is deductible against the total world income of the assessee. It is not in dispute that in the instance case the amount of depreciation determined for the assessment year 1942-43 was deductible against the total world income of the assessee. That being the position, in our opinion carried forward depreciation allowance of Rs. 5,98,482 has to be allowed against the total world income of the assessee.
5. The reference is answered accordingly. Assessee shall pay the costs of the department.
6. Reference answered accordingly.