1. The assessec is a company and the proceedings relate to its assessment for the assessment year 1969-70. The original return for the year was filed on 18-7-1969 disclosing loss of Rs. 50,736.
Subsequently, a revised return was filed on 20-8-1971 claiming a set off of brought forward loss against the income of the year even prior to the allowance of depreciation for the current year. However, the ITO held that the brought forward loss could not be given priority over the current year's depreciation in the matter of set off and for this purpose he made a reference to the comments of the learned commentators Kanga and Palkhivala in their latest treatise on Income-tax Law, Vol.
I, at page 38. Accordingly, the ITO completed the assessment determining the unabsor-bed depreciation for the year at Rs. 40,255, brought forward development rebate at Rs. 8,020 and the brought forward past losses were of course allowed to be carried forward in full. For reasons given in paragraphs 8 to 11 of his order and, in particular, following the Allahabad High Court decision in the case of Mother India Refrigeration Industries (P.) Ltd. v. CIT  80 ITR 510, the AAC accepted the assessee's submission that brought forward losses have priority not only over the unabsorbed depreciation of the past years but also over the current year's depreciation in the matter of set off.
2. It is for this reason that the department is in appeal before us. It is common ground that the assessee had unabsorbed depreciation, unabsor-bed development rebate as well as brought forward losses and its income in the year before allowance of current year's depreciation is Rs. 2,48,704. While according to the revenue the brought forward losses have priority over the brought forward unabsorbed depreciation only, it is the case of the assessee that once there is brought forward unabsorbed depreciation, such unabsorbed depreciation merges into the current year's depreciation in terms of Section 32(2) of the Income-tax Act, 1961 ('the Act') so much so that the entire depreciation whether brought forward or of current year is of one and the same quality. It is stated that if effect has to be given under the provisions of Section 72(2) of the Act, the brought forward losses will have to be given priority over the entire block of depreciation.
3. The parties have been heard at length. Shri C.V. Gupte, the learned senior departmental representative put forward the department's case very ably before us. The assessee's case was equally ably argued by the assessee's learned counsel, Shri O.P. Vaish. For the sake of brevity, instead of referring to their arguments, in detail, we propose to meet and deal with their rival contentions in the course of our order.
4. Before coming to the case law cited or distinguished by one or the other side, we consider it desirable to independently examine the purport and scope of Section 72(2) which reads as under : (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.
(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 (v) or Clause (vi) of Sub-section (1) or under Clause (i) of Sub-section (1A) 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 years.
It is evident from the above that strictly speaking the allowance under Section 32(2) or Section 35(4) of the Act is never to be carried forward in the sense the losses are. However, the expression 'to be carried forward' appears to be somewhat loosely worded but it really refers to the allowance or that part of the allowance to which effect could not be given owing to paucity of profits in the years to which such allowance pertains and such allowance or part of the allowance was to be added to the current year's allowance and so on and so forth. In any event, there is no serious dispute about it in these proceedings.
Therefore, we proceed on the basis that Section 72(2) refers to past unabsorbed depreciation in contradistinction with the current year's depreciation.
5. The second question that arises for consideration is what is the actual nature of merger of unabsorbed depreciation with the current year's depreciafion. Now, as we understand, the expression "then subject to the provisions of Sub-section (2) of Section 72..., the allowance ... to which effect has not been given ,...shall be added to..." is very significant. It indicates to our mind that the question of 'shall be added to' will arise only if there are no brought forward losses under Section 72(2). In other words, the merger where there are brought forward losses also either does not take place at all or is at least subject to the provisions of Section 72(2) so much so that the identity of the unabsorbed depreciation and current year's depreciation continues until the provisions contained in Section 72(2) have played their part.
6. Coming now to the case law, we find that the Allahabad Hight Court decision in Mother India Refrigeration Industries case (supra) is in favour of the assessee while the decisions of the other High Courts are against the assessee and in favour of the revenue. However, noticing the facts of each case, we find that the most of the cases are distinguishable. For instance, in some cases there was unabsorbed depreciation under Section 32(2). The question involved was of priority over the current year's depreciation only. In other cases, the dispute was not as regards the priority over the current year's depreciation over the past year's loss and the controversy was only as regards the priority between the past losses and unabsorbed depreciation. In fact, it is seen that three distinct views have been taken by the different High Courts in this regard, namely : 1. According to the Allahabad High Court, which represents one view, the brought forward losses have to be given priority not only over the past unabsorbed depreciation but also over the current year's depreciation in the matter of set off.
2. According to the Karnataka High Court, the unabsorbed depreciation does not get priority over the past losses in terms of Section 72(2) as, in terms of Section 32(2), such unabsorbed depreciation merges into and becomes part of the current year's depreciation and Section 72(2), according to this High Court, certainly does not provide for priority over the current year's depreciation.
3. The third view which is taken by a number of other High Courts is that in the case of an assessee where there are brought forward losses as well as past unabsorbed depreciation, the unabsorbed depreciation does not merge into the current year's depreciation or if it merges it does so subject to the provisions of Section 72(2), so much so that in the matter of set off past losses will get priority over the unabsorbed depreciation but not over the current year's depreciation.
7. Out of the aforesaid three views, the middle course appears to us to give a correct and fair and reasonable interpretation. Accordingly, we hold that the unabsorbed depreciation does not lose its identity in the case of an assessee where brought forward past losses have also to be set off and, therefore, while the current year's income will have to be computed under Sections 29 to 43A, the past losses will get priority over the unabsorbed depreciation, the identity of which is maintained as stated above in terms of Section 72(2).
8. The last argument advanced on behalf of the assessee was that when two views are possible, the one in favour of the subject should be adopted. In this connection, it may not be out of place to observe that the Allahabad High Court as well as other High Courts in the cases, which we will be referring to hereafter, have explained and relied upon the Supreme Court decision in the case of CIT v. Jaipuria China Clay Mines (P.) Ltd.  59 ITR 555. The above said rule of interpretation is applicable only when the two views are equally reasonable and not just when one view has been taken without much discussion. On going through the decisions relied upon by the parties, we do not agree with the learned counsel for the assessee that the aforesaid rule of interpretation supports his client's case.
9. Before concluding, we would like to refer, in brief, to the cases cited by the parties before us.
1. The facts in the Bombay High Court decision in the case of CIT v. Ravi Industries Ltd.  49 ITR 145 were entirely different. The issue therein was not of priority between the unabsorbed depreciation, current year's depreciation and past losses. The issue was whether unabsorbed depreciation can be set off against the income of that business only or whether as a current depreciation it can be set off against all other income of the assessee of the following year. It was held that unabsorbed depreciation becomes the current year's depreciation for this purpose and, therefore, could not be set off against not only the business income but also other income of the assessee. This case is clearly distinguishable.
2. The issue in the case of Raj Narain Agarwala v. CIT  75 ITR 1 (Delhi) is also similar to that of the aforesaid case of the Bombay High Court except that in this case the assessee was a registered firm and when full effect to the depreciation allowance was not given in any past year, the carried forward unabsorbed depreciation had become depreciation of the current year in the hands of the partners. The question was whether such unabsorbed depreciation in the hands of the partner who was no longer carrying on the said business, could be set off against his other income. The decision was in favour of the assessee.
3. The decision in the case of Ballarpur Collieries Co. v. CIT  92 ITR 219 (Bom.) is also distinguishable, as in that case the issue was different, viz., what should be done with the unabsorbed depreciation of the current year after it is distributed amongst the partners and after it is found that it has not been set off fully against the other partners' income The Court held that in such a situation the unset off depreciation revert back to the firm and becomes unabsorbed depreciation of the firm within the meaning of proviso (b) to Section 10(2)(vi) of the 1922 Act which is corresponding to the provisions of Section 32(2) of the 1961 Act.
This case is thus clearly distinguishable.
4. The last case cited is the Gauhati High Court decision in the case of CIT v. Singh Transport Co.  123 ITR 698. The issue in that case has been different and the Court has taken the same view as the Bombay High Court has taken in the case of Ballarpur Collieries Co. (supra).
10.2 In the following two cases there was no brought forward unabsorbed depreciation and to that extent the controversy in the case before us is somewhat different. However, the ratio of the decisions is evidently against the assessee.
1. In the case of Aluminium Corporation of India Ltd. v. CIT  33 ITR 367 (Cal.), the facts were that the assessee had no brought forward unabsorbed depreciation and the dispute was as regards priority between the brought forward losses and the current year's depreciation. The High Court held that depreciation allowance for the current year in respect of a business should first be set off against the profits of that business in that year and that there could be no competition between loss carried forward from previous years and the depreciation allowance for the current year. It is thus evident that the question that unabsorbed depreciation of the earlier years had merged into the depreciation of the current year so as to make it one block or lump was not in issue which was not considered.
2. The facts in the case of Addl. CIT v. Andhra Printers Ltd.  117 ITR 555 (AP) are no doubt slightly different inasmuch as there was no carried forward or unabsorbed depreciation and the dispute was only as regards priority between the past losses and the current year's depreciation. It was held that the income of the current year must, in the first instance, be ascertained for determination of which the depreciation of the current year has to be, allowed like all other deductions contemplated in Sections 33 to 40(3)(a) and that the question of set off of the business loss carried forward can possibly arise only thereafter.
10.3 In the case of Mysore Paper Mills Ltd. v. CIT  117 ITR 132 (Kar.), the assessee had both unabsorbed depreciation carried forward and the carried forward losses of the earlier years. There was no dispute that the current year's depreciation has to be set off against the income of the year first and the dispute was limited to whether or not there was priority in terms of Section 72(2) between the carried forward unabsorbed depreciation and the carried forward losses of the earlier years. Their Lordships have taken the view that since in view of Section 32(2) unabsorbed depreciation of an earlier year becomes current year's depreciation, it has to be set off against the income of the current year first to the extent possible. However, it is to be noted that this decision has been given on the basis of contention made by the counsel for the assessee that current year's depreciation allowance must be first adjusted before giving effect to Section 33. In any event, we are not taking this extreme view.
10.4 In the case of Jaipuria Chain Clay Mines (supra), the assessee's income for the assessment year 1952-53 before charging depreciation was Rs. 14,041. After deducting depreciation of Rs. 5,360 pertaining to the current year, the income was computed at Rs. 8,681 against which the ITO set off losses of earlier years. The ITO then computed the dividend income of the assessee at Rs. 2,01,130, determined the total income at that figure and levied tax on it. The assessee claimed that unabsorbed depreciation aggregating to Rs. 76,857 in its favour should be deducted from the dividend income, reducing the total income thereby to Rs. 1,32,155. The issue, thus, was as regards the character of unabsorbed depreciation in the following year, ie., when it becomes the depreciation for the current year in terms of proviso (b) to Section 10(2)(vi) of the 1922 Act. All observations made by their Lordships of the Supreme Court have to be read in that context and that is the reason why we have preferred to follow other High Courts decisions in preference to the Allahabad High Court decision in the case of Mother India Refrigeration Industries (supra). It is evident that the High Court in that case has made the following observations without discussion : ...If business losses have to be given priority over unabsorbed depreciation allowance, there is no good reason why depreciation (sic) losses which have been brought forward should not receive priority over current depreciation allowance....(p. 514) 10.5 On the other hand, in the case of CIT v. Gujarat State Warehousing Corporation  104 ITR 1 (Guj.), it was clearly held that the current year's depreciation should be adjusted first against the income of the year and then if there are both carried forward losses of the earlier years and carried forward unabsorbed losses and also unabsorbed depreciation, priority should be given to carried forward losses in terms of Section 72(2). Their Lordships have, in our view, correctly applied the principles laid down by the Supreme Court in the case of Jaipuria China Clay Mines (supra). As regards the facts, it has to be noted that the assessee had both unabsorbed depreciation and the past losses carried forward and there was also a claim for depreciation for the current year. The facts of this case are, thus on all fours, with that of the assessee before us.