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Commissioner of Income-tax Vs. Rampur Timber and Turnery Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 75 of 1969
Judge
Reported in[1973]89ITR150(All)
ActsIncome Tax Act, 1961 - Sections 32(1), 32(2), 41(1) and 41(2)
AppellantCommissioner of Income-tax
RespondentRampur Timber and Turnery Co. Ltd.
Appellant AdvocateDeokinandan and ;R.R. Misra, Advs.
Respondent AdvocateV. Sarup and ;J. Sarup, Advs.
Excerpt:
.....profits and gains of any business or profession 'carried on by the assessee at any time during the previous year 'shall be chargeable to income-tax under the head 'profits and gains of business or profession'.section 29 provides that income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43. obviously, therefore, in computing income from business, the provisions of section 32 as well as section 41 would be applicable. (i) formulated above, i should like to point out that normal depreciation in respect of buildings, machinery, plant or furniture owned by an assessee is allowable for any particular year under section 32(1) which postulates the satisfaction of two preconditions, namely, (i) that the business or profession must have..........assessment year 1955-56, continued to have income from property and was assessed thereupon from year to year. the unabsorbed depreciation of rs. 46,003 carried forward by the assessee from the assessment year 1954-55 was, obviously, available to it for set off against such income, from property.10. returning to the portions underlined* in sub-section (2) of section 32 above, it is clear that even if there is no depreciation allowance for any previous year, the unabsorbed depreciation of the past years shall be 'deemed to be the allowance for that previous year'. the learned judicial member has rightly pointed out that there may be various reasons for there being no depreciation allowance for any previous year. for instance, the assessee may not have carried on any business in that.....
Judgment:

Satish Chandra, J.

1. The Tribunal has submitted this statement of the case for opinion of this court on the following question of law :

' Whether, on the facts and in the circumstances of the case, the depreciation allowance determined for the assessment years 1951-52 to 1954-55 should be set off against the sum of Rs. 6.982 assessed under Section 41(2) '

2. During the previous year relevant to the assessment year 1962-63, the assessee received a refund of Rs. 6,982 by way of electricity charges. This sum had been allowed as an expenditure in an assessment prior to 1955-56 while the assessee was carrying on business. The assessee claimed that this refund was liable to be adjusted against the unabsorbed depreciation for the years 1951-52 to 1954-55 amounting to Rs. 46,003. The Judicial Member of the Tribunal upheld this contention while the Accountant Member was of the contrary opinion. According to him the refund which was chargeable to tax under Section 41(1) could not be adjusted against the depreciation for previous years because no business had been carried on in the previous year relevant to 1961-62 and that the machineries, etc., had not been used for that purpose during that year. In view of this difference of opinion, the matter was heard by the President of the Tribunal. We have perused the orders of the differing Members as also of Sri T. P. Mukerji, the President (who later joined the Bench of this court), and having heard learned counsel we are in entire agreement with the views expressed by the President. The learned President held :

This case has been referred to me under Section 255(4) of the Income-tax Act, 1961, by the learned Members of the Delhi Bench 'C' who had differed on the following question of law :'Whether the profit of Rs. 6,982 assessed under Section 41(1) should be set off against the depreciation allowance determined for the assessment years 1951-52 to 1954-55?'

3. The material facts have been set out in detail in the orders of the learned Members. To repeat them briefly, the assessee is a limited company, which was, uptill the year 1954-55, carrying on business in the manufacture of bobbins, etc. It stopped doing that business with effect from the previous year relevant to the assessment year 1955-56 though it continued to own the plant, machinery, etc. Thereafter, the assessee continued to be assessed only in respect of income from property which it owned and possessed.

4. Daring the previous year relevant to the assessment year 1962-63 under appeal, the assessee received a refund of Rs. 6,982 from the Hydel Electric Department out of electricity charges already paid by it in the above years when it was carrying on the business aforesaid. The electricity charges to which the refund related had been allowed to the assessee as an expenditure of the business in the preceding assessments. During the assessment for the assessment year 1962-63, the Income-tax Officer taxed the aforesaid amount of Rs. 6,982 as the business income of the assessee in view of the provisions of Section 41(1). The total income assessed for that year was Rs. 16,114 which consisted of the following two items :

Rs.

Property income

9,132

Business income

6,982

16,114

5. The total business loss suffered by the assessee during the 4 assessment years 1951-52 to 1954-55 amounted to about Rs. 3 lakhs and unabsorbed depreciation for the same years amounted to Rs. 46,003, Both the learned Members are in agreement that the unabsorbed business loss for the past years could not be set off against the sum of Rs. 6,982 which was assessed as business income of the assessee, for the assessment year 1962-63, under the provisions of Section 41(1). The Members have, however, differed on the question of the set-off of unabsorbed depreciation against the same amount. The learned Accountant Member is of the view that the unabsorbed depreciation could not be carried forward and set off against the income determined under Section 41(1), because, in the first place, the building, plant and machinery owned by the assessee were not used for the purpose of business in the previous year relevant to the assessment year 1962-63 and, secondly, because no business was carried on by the assessee during the said previous yeir. The learred Judicial Member was of the view that unabsorbed depreciation could be carried forward, under the provisions of Section 32(2) even if the business had ceased to exist and the plant and machinery were not used for the purposes of business. In his opinion, the provisions of Section 32(2) under which unabsorbed depreciation can be carried forward are independent of the provisions of Section 32(1) under which depreciation is allowable in the year in which business is carried on and the plant and machinery are used.

6. As the learned Judicial Member has observed, the question which presents itself in this case is not covered by authorities and should be regarded as res Integra. I have considered carefully the relevant provisions of law bearing on the question and am inclined to agree with the view taken by the learned Judicial Member.

7. Section 28 of the Income-tax Act, 1961, says that the profits and gains of any business or profession 'carried on by the assessee at any time during the previous year ' shall be chargeable to income-tax under the head ' profits and gains of business or profession'. Section 29 provides that income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43. Obviously, therefore, in computing income from business, the provisions of Section 32 as well as Section 41 would be applicable. There is no dispute in the present case that the sum of Rs. 6,982 is assessable under Section 41(1) as the business income of the assessee for the relevant previous year. The questions to be decided here are two-fold :

(i) Whether the unabsorbed depreciation of Rs. 46,003 can be carried forward to the assessment year 1962-63, in the circumstances of the present case, even though the business ceased to be carried on from and after the assessment year 1955-56 ?

(ii) If so, whether such unabsorbed depreciation can be set off against the sum of Rs. 6,982 assessed as income from business under Section 41(1) '

8. Taking up question No. (i) formulated above, I should like to point out that normal depreciation in respect of buildings, machinery, plant or furniture owned by an assessee is allowable for any particular year under Section 32(1) which postulates the satisfaction of two preconditions, namely, (i) that the business or profession must have been carried on in that year and (ii) that such building, machinery, plant or furniture has been 'used' for the purpose of the business or profession. It is possible, however, that depreciation to which an assessee might be entitled in any particular year cannot be fully allowed on account of paucity of profits of the business or profession for that year and in such case the amount of depreciation which cannot be so allowed which is usually called unabsorbed depreciation, is carried forward to the succeeding years under the provisions of subsection (2) of Section 32. The material terms of Section 32(2) lay down that where, in the assessment of an assessee full effect cannot be given to any depreciation allowance in any previous year owing to there being no profits or gains chargeable for that previous year or owing to profits and gains chargeable being less than the allowance, then, 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. I have underlined* the words above to show that even if no depreciation is allowable for any particular year, the unabsorbed depreciation of the preceding year shall ' be deemed to be the allowance for that previous year '. I would, however, advert to this aspect of the matter presently. Reverting to Sub-section (2) of Section 32, it is manifest that it is an independent provision. Its operation has not been made to depend upon the fulfilment of the two conditions precedent referred to above which must be satisfied before allowance for normal depreciation can be given under Sub-section (1) of Section 32. In this context, the learned Judicial Member has observed as follows :

' When, however, we come to Section 32(2) it is not the question of fresh allowance for depreciation for fresh use of the machinery in the following previous year but it is the question of allowing the benefit of the unallowed portion of the depreciation allowance for the use of the machinery for the purposes of his business in the preceding previous year, to which the assessee has already become qualified. '

9. I am in complete agreement with the learned Judicial Member that the benefit of unabsorbed depreciation can be availed of by an assessee in any subsequent year without satisfaction of the preconditions attaching to Sub-section (1) of Section 32 and it is not necessary for the assessee to show that in such subsequent year the assessee actually carried on the business and the asset in question was used for the purposes of such business. The decision of the Supreme Court in the case of Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd., [1966] 59 I.T.R. 555 ; [1966] 2 S.C.R. 449 (S.C.). is an authority for the view that unabsorbed depreciation can be carried forward and set off even against profits under heads other than business. It is implicit in the dictum laid down by their Lordships that if in any particular year there is no income from business, but there is income from other heads, the unabsorbed depreciation carried forward from the past years, will be available for set-off against such income from other heads. In this particular case, as already stated, the assessee, who stopped doing business of manufacture of bobbins in the previous year relevant to the assessment year 1955-56, continued to have income from property and was assessed thereupon from year to year. The unabsorbed depreciation of Rs. 46,003 carried forward by the assessee from the assessment year 1954-55 was, obviously, available to it for set off against such income, from property.

10. Returning to the portions underlined* in Sub-section (2) of Section 32 above, it is clear that even if there is no depreciation allowance for any previous year, the unabsorbed depreciation of the past years shall be 'deemed to be the allowance for that previous year'. The learned Judicial Member has rightly pointed out that there may be various reasons for there being no depreciation allowance for any previous year. For instance, the assessee may not have carried on any business in that year at all or he may not have used the machinery, etc., for the purposes of his business in that year and other like factors. Whatever be the reasons, unabsorbed depreciation would be available for adjustment by virtue of the clear provisions of Sub-section (2) of Section 32 underlined* above. It is common ground that in the present case no business was carried on by the assessee in the relevant previous year and the machinery, etc., which the assessee continued to own and possess, were not used for the purpose of the business. Therefore, there was no depreciation allowance available to the assessee for that year and the case falls directly within the terms of Section 32(2) underlined* above. Hence, the unabsorbed depreciation shall be deemed to be the allowance for the relevant previous year. I, therefore, agree with the learned Judicial Member that the sum of Rs. 6,982, which has been assessed as the business income of the assessee for the relevant previous year, is liableto be set-off against the unabsorbed depreciation of Rs 46,003, carried forward from the assessment year 1954-55.

11. The matter can be looked at from another angle. As already noted, the sum of Rs. 6,982, has been assessed as the business income of the assessee, although no business was carried on by the assessee in that year. This is because Section 41(1) creates a legal fiction whereby the refund of Rs. 6,982 received by the assessee in the relevant previous year ' shall be deemed to be profits and gains cf business ' of that year, although the business in respect of which the amount in question had been allowed as a deduction in the past was not in existence in that year. It is a well-known legal principle that a statutory fiction to has be carried to i1s logical conclusion. The principle has been enunciated by Lord Asquith in memorable words in the ease of East End Dwellings Co. Ltd. v. Finsbury Borough Council, [1952] A.C. 109 ; [1951] 2 AH E.R. 587, 599 (H.L.). :

' If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. ... the statute says that you must imagine a certain state of affairs. It does not say that, having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs. '

12. In the present case, the statute says that the sum of Rs. 6,982 shall be deemed to be the business income of the assessee for the relevant previous year, although in fact the business has ceased to exist. If the amount in question is deemed to be income from business, and we do not let our imagination to boggle at that point, the inevitable corollary, according to the dictum laid down by Lord Asquith, would be that the business would be deemed to have been carried on in that year. Hence, the unabsorbed depreciation of the past would be available as the depreciation allowance for the relevant previous year and set off against the sum of Rs. 6,982, deemed to be business income of the assessee for that year.

13. In any view of the matter, the question referred to me has to be answered in the affirmative.

14. We entirely agree with the reasoning that appealed to the learned President and we feel that we cannot usefully add to it. Under the circumstances, we would answer the question referred to us in the affirmative, in favour of the assessee and against the department. The asses ee would be entitled to its costs which we assess at Rs. 200. The counsel's fee is also assessed at the same figure.


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