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income-tax Officer Vs. Rajaratna Naranbhai Mills Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1982)1ITD1044(Ahd.)
Appellantincome-tax Officer
RespondentRajaratna Naranbhai Mills Ltd.
Excerpt:
1. these appeals which relate to the assessment years 1977-78 and 1978-79 are filed by the revenue. as both the appeals involve common grounds and contentions they are taken up together and disposed of by this combined order for the sake of convenience. the division bench, which heard the appeal originally, referred the matter to the president for constituting a special bench which was so constituted under section 255(3) of the income-tax act, 1961 ("the act"). these appeals, therefore, have come up for hearing before this special bench.2. these appeals involve an interesting and complex point of law though the facts which govern the controversy are fairly simple and are not in dispute. the assessee is a company in liquidation. as per the order dated 26-6-1967 of the gujarat high court,.....
Judgment:
1. These appeals which relate to the assessment years 1977-78 and 1978-79 are filed by the revenue. As both the appeals involve common grounds and contentions they are taken up together and disposed of by this combined order for the sake of convenience. The Division Bench, which heard the appeal originally, referred the matter to the President for constituting a Special Bench which was so constituted under Section 255(3) of the Income-tax Act, 1961 ("the Act"). These appeals, therefore, have come up for hearing before this Special Bench.

2. These appeals involve an interesting and complex point of law though the facts which govern the controversy are fairly simple and are not in dispute. The assessee is a company in liquidation. As per the order dated 26-6-1967 of the Gujarat High Court, the company was directed to be wound up under intimation to the official liquidator. The assessee's business used to be of manufacture and sale of cloth till July 1966.

For the assessment year under appeal the assessee has derived income from interest and rent chargeable under the head "Income from other sources" under Section 56, read with Section 57, of the Act. For the assessment year 1977-78, the assessee submitted his return showing a total income of Rs. 82,226, comprising interest income of Rs. 77,413 and rental income of Rs. 5,276. Against the income so returned the assessee claimed deduction of expenses amounting to Rs. 463. For the assessment year 1978-79, the assessee disclosed income from other sources, viz., interest at Rs. 51,697, and claimed expenses amounting to Rs. 14,757. Thus, the total income worked out to Rs. 36,940. For both the years the assessee claimed a set off of unabsorbed depreciation brought forward from the earlier years and it supported its claim by relying on the decision of the Allahabad High Court in CIT v. Rampur Timber & Turnery Co. Ltd. [1973] 89 ITR 150. The ITO negatived the assessee's claim, for both the years, for set off of unabsorbed depreciation. He, however, fairly stated that for the assessment years 1971-72 and 1973-74, the Tribunal had accepted the claim of the assessee but as the decision of the Tribunal was the subject-matter of further reference before the Gujarat High Court, he declined to consider the claim of the assessee for setting off of unabsorbed depreciation which was carried forward from the earlier years against the income from other sources brought to tax by him.

3. The matter thereafter was carried in appeal before the Commissioner (Appeals) who upheld that claim of the assessee, following the decision of the Tribunal in IT Appeal No. 263 (Ahd) of 1977-78 decided on 17-3-1978 as also the decision of the Tribunal in IT Appeal Nos. 860 to 862 decided on 20-3-1979.

4. Being aggrieved the revenue has come up in appeal before us. The learned departmental representative pointed out at the outset that the controversy fell into a narrow compass and it related to setting off of the unabsorbed depreciation of Rs. 10,46,000 carried forward from the assessment year 1976-77 against the income from other sources as returned by the assessee. Shri Mittal submitted that Section 32(2) of the Act creates a fiction which deems the unabsorbed depreciation carried forward from earlier years as depreciation of the current year.

There can be no quarrel against the fiction laid down in Section 32(2).

But, according to Shri Mittal, the said fiction could be given effect to only if the assessee was found to be "carrying on business". In other words, the assessee must derive income chargeable under the head "Profits and gains of business or profession" under Section 28 of the Act. To put it differently according to Shri Mittal, carrying on of business was a condition precedent for the fiction to operate. The expression "profits and gains" of business under Section 28 postulates a business activity carried on by the assessee and if the income is derived from that source, then the claim for deduction would arise. The depreciation, whether unabsorbed or current could only come into picture when the income under the head "Profits and gains of business or profession" is computed. Therefore, even if the unabsorbed depreciation by virtue of fiction enacted in Section 32(2) is treated as depreciation for the current year, there must be income under the head "Profits and gains of business or profession" so that the allowance for depreciation could operate. In other words, according to Shri Mittal, the fiction enacted in Section 32(2) only treats unabsorbed depreciation on par with current depreciation and subject to the carry forward of losses, which has precedence by operation of Section 72, the said unabsorbed depreciation assumes the character and colour of current depreciation. The fiction could be extended to that limit only. But it could not be extended further so as to treat a business which has closed long back to be treated as the business in operation. In short, Shri Mittal's submission was that once the business as a source has become extinct, the claim for unabsorbed depreciation would lapse. Shri Mittal then pointed out that Section 32(1) provides for allowance of depreciation for which two conditions are necessary, viz., the asset must belong to the assessee and that the asset must be used during the previous year. If the business is in existence but the written down value of the asset has been reduced to nil, there is no case for allowance of depreciation. Similarly if the asset is not used in the previous year, the claim for depreciation also would not arise. However, when the business is not "carried on" in the previous year, then obviously there can be no case for allowance of current depreciation and so would be the case in regard to unabsorbed depreciation carried forward from the earlier years. Shri Mittal then referred to various authorities in support of the above proposition which he has canvassed before us. We shall consider these authorities a little later. Shri Mittal finally submitted that the earlier decision of the Tribunal on this point would require reconsideration in light of the above proposition canvassed by him, 5. Shri Ashok Shah, on behalf of the assessee, pointed out that though certain conditions are required to be fulfilled before the claim for current depreciation could be admitted and allowed under Section 32(1), the provisions of Section 32(2) do not lay down such condition. The submission canvassed on behalf of the revenue that continuance of business was sine qua non for allowance of the claim was not at all justified. In other words, it is not necessary to fulfil the condition relating to carrying on of business in the previous year, either same business or some business, in order to be exigible to claim for unabsorbed depreciation. Section 32(2) undisputedly creates a fiction and the fiction has to be taken to the logical end. It is not proper to boggle one's imagination when inevitable corollaries are faced as a result of taking the fiction to its logical end. Relying on the provisions of Section 32(2), which are reproduced here for the sake of convenience : 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 (it) 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 years.

Shri Shah submitted that all that Section 32(2) provides is firstly to add the unabsorbed depreciation to the amount of allowance for depreciation, which is ordinarily understood as current depreciation, or when there is no such current depreciation, the unabsorbed depreciation be deemed to be the allowance for that previous year and so on for the succeeding previous years. Therefore, once by virtue of fiction unabsorbed depreciation assumes character and colour of current depreciation, all the conditions required for allowance of current depreciation must be deemed to have been fulfilled, with the result that it must be assumed notionally that the business is in existence during the previous year for which the unabsorbed depreciation is sought to be claimed. To put it differently, Section 32(2) requires, firstly to ascertain whether there is any depreciation for the previous year or whether there is any current depreciation. Secondly, the unabsorbed depreciation has to be added to the said current depreciation and, thirdly, the total depreciation so determined would be deemed to be the allowance for depreciation for that year. Further, if there is no current depreciation for any given year, then the unabsorbed depreciation by itself will become current depreciation for the previous year and that current depreciation, subject to the provisions of Sections 72 and 73, would be set off against the income under the other heads of income by virtue of the decision of the Supreme Court in the case of CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555. Shri Shah next pointed out that Section 32(2) is an independent section and not a proviso as was the case under the 1922 Act. Shri Shah next submitted that the conditions laid down in Section 32(1) are required to be fulfilled so that the claim for depreciation may come into existence and for coming into existence of such a claim, the user of machinery and ownership of machinery are necessary and requisite conditions ; but once these conditions stand fulfilled and the claim for depreciation, i.e., current depreciation, has come into existence and when such current depreciation could not be absorbed against the income from business or against income from any other head for a given year, the unabsorbed balance assumes the character of unabsorbed depreciation which in accordance with Section 32(2) is allowed to be carried forward year after year till such claim is exhausted. Therefore, once the condition in regard to the claim for depreciation, i.e., current depreciation stands fulfilled, by operation of fiction, in subsequent years the unabsorbed depreciation would stand on its own and it is not necessary to fulfil any other condition relating to existence of business or user of machinery for allowance of such a claim. Therefore, in order to consider the claim of the assessee in regard to the unabsorbed depreciation, the only thing to be looked at is whether there is unabsorbed depreciation in a given year ; if so, such unabsorbed depreciation has to be set off against income from any other head. In light of these submissions, Shri Shah canvassed before us that the income from interest as disclosed by the assessee for the respective years under appeal, which is chargeable under the head "Income from other sources", would be entirely set off against the unabsorbed depreciation of the past years. As a consequence, the assessee is not chargeable to tax for the respective years under appeal. Shri Shah supported his contentions, as aforesaid, by relying on various authorities to which a reference is made later.

6. We have considered the rival submissions. Before discussing the rival contentions in detail we first set out the provisions which are relevant for our purpose. Section 28 of the Act, which levies the charge under the head "Profits and gains of business or profession" is set out hereunder (omitting the provisions which are not necessary) : (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year ; Section 29 of the Act provides the manner in which the income from profits and gains of business or profession is required to be computed.

The said section reads as follows : The income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43A.Section 32(1), which deals with the current depreciation, is extracted hereunder (after omitting the words which are not necessary) : In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed-- Section 32(2) which deals with unabsorbed depreciation is already set out earlier.

Explanation : 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.

Section 28 brings to charge income under the head "Profits and gains of business or profession" in respect of business carried on by the assessee. Therefore, carrying on of business is a condition before the income under that head is brought to charge. The income under the head "Profits and gains of business or profession" is computed in accordance with Section 29. Now, unlike computation of income under other heads of income when the income is brought to charge under the head "Profits and gains of business or profession", the income is already determined in accordance with the commercial principles and, therefore, Section 29 provides that the income chargeable to tax under the above head has to be computed in the manner indicated in Sections 30 to 43A. Therefore, from the gross receipts of business only such expenses, as are permitted under Sections 30 to 37, are required to be deducted so as to bring the income under the head "Profits and gains of business or profession" to charge.

Section 32, which forms part of the group of Sections 30 to 37, deals with claim for deduction in respect of depreciation allowance. The claim for depreciation allowance broadly falls into two parts. First part relates to depreciation relating to the assets, viz., building, plant and machinery and furniture, which is owned by the assessee and used for the purpose of business or profession. The said depreciation, which is allowable in accordance with the provisions of Section 32(1) read with Section 34, is referred to in common parlance as current depreciation. Three conditions are required to be fulfilled. Firstly, the claim for depreciation must be in respect of business or profession which was carried on by the assessee at any time during the previous year. Secondly, the said assets to which depreciation is admissible are owned by the assessee. And lastly, the said assets used for the purpose of business or profession. Apart from these conditions the provisions of Section 34 stipulate further conditions but we are not concerned with the same in the present discussion. Now, the depreciation on the said assets has to be set off ordinarily against the profits and gains from business. However, if the amount of current depreciation allowance is more than the profits of the business and the said allowance does not absorb the" income falling under any head of income, that is to say, if full effect cannot be given to current depreciation in a given year, then such depreciation, which is referred to as unabsorbed depreciation, is allowed to be carried forward to the succeeding years subject to the provisions of Sections 72(2) and 73(3) of the Act. That apart Section 32(2) creates a fiction by which the unabsorbed depreciation become parts of the current depreciation of the succeeding year or years. However, while giving effect to the unabsorbed depreciation of earlier years, has the carried forward loss from business gains precedence. In other words, firstly the current depreciation allowance for the previous year will be set off against the profits and gains. If after setting off the said allowance any surplus is left, then the carried forward loss of the earlier year from business will be required to be set off and, thereafter, the unabsorbed depreciation will be set off against the profits and gains and if the unabsorbed depreciation is found to be in excess of the income under the head "Profits and gains of business or profession", such unabsorbed depreciation would be further set off against income from any other heads and even then the full effect could not be given to the unabsorbed depreciation, the said unabsorbed depreciation would be carried forward and would be set off in the succeeding year in the same manner.

Now, the controversy has arisen in regard to the setting off of unabsorbed depreciation and the controversy could be conveniently divided into three parts. Firstly, whether the unabsorbed depreciation could be set off against the income from the same business in respect of which the claim for current depreciation had arisen. Secondly, whether the unabsorbed depreciation could be set off even after the closure of the business in respect of which the claim for depreciation allowance had arisen but the assessee is having income from some business. Thirdly, the business to which the claim for depreciation relates is no longer in existence and there is no other business carried on by the assessee but by virtue of fiction enacted in Section 41 the business is deemed to be continued for the purpose of bringing to tax notional income falling under Section 41 to charge. And, lastly, when there is no income from business at all, in effect, no business is carried on at all and the assessee is not having any notional income from business and the claim for unabsorbed depreciation exists, whether such claim could be considered for set off against income from any other head. The consideration of the assessee's claim is material because if the claim for unabsorbed depreciation is admitted, then the assessee would get a set off against income derived from any other head of income. This is so because of the decision of the Supreme Court in Jaipuria China Clay Mines (P.) Ltd. (supra). It may be mentioned here that the essential distinction between the carried forward loss and the carried forward unabsorbed depreciation allowance is that the loss under the head "Profits and gains of business or profession" could be carried forward and set off only against the income from business in subsequent year and not under any other head of income while the unabsorbed depreciation which, by fiction enacted in Section 32(2), becomes depreciation allowance of the previous year, that is to say, assumes character of current depreciation, by virtue of the fiction enacted in Section 32(2), such unabsorbed depreciation could be set off against income from any other head of income in any previous year. We may add in passing that the carried forward loss is subject to the time limit of 8 years while the unabsorbed depreciation could be carried forward indefinitely. The other essential distinction is that the loss of each year remains distinct and separate inasmuch as the claim of earned forward loss for each year is subject to the limit of 8 years from the year in which the said loss had occurred, while the unabsorbed depreciation assumes character of current depreciation by virtue of fiction, as stated above, and merges with the current depreciation subject, of course, to provisions of Sections 72(2) and 73(3).

7. The cases which fall in first category, viz., continuance of the same business in respect of which the claim for depreciation had arisen, initially presents no difficulty in allowing the claim of the assessee even if there is no current depreciation as a result of written down value being reduced to nil. In other words, if the same business is carried on by the assessee in the previous year and there is no current depreciation admissible, the assessee would still be entitled to the set off of unabsorbed depreciation if the same business is continued and as a consequence such depreciation could be set off against income falling under any other head.

8. The cases, which fall in second category, relate to a situation where the business in respect of which the depreciation was allowed has ceased to exist but the assessee is having some income from business chargeable to tax under Section 28. In other words, though the same business has been discontinued but there is some business from which the income is derived. The question, therefore, arises whether the assessee is entitled to claim set off of unabsorbed depreciation in such a contingency. The Bombay High Court in case of Sahu Rubbers (P.) Ltd. v. CIT [1963] 48 ITR 464 have 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. 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. The principle laid down in the decision of the Bombay High Court came up for consideration before the Bombay High Court in the case of CIT v. Estate & Finance Ltd. [1978] 111 ITR 119 and in that decision the principle laid in Sahu Rubbers (supra) was not followed. While dealing with the latter decision, it is stated as follows : When enacting the provision regarding carry forward and set off of unabsorbed depreciation under Section 32(2) of the Income-tax Act, 1961, the Legislature could have imposed a condition that unabsorbed depreciation could be set off against the profits of a subsequent year only if the business in relation to which depreciation was allowed continued to exist in such year. The absence of such a restriction has to be construed in favour of the assessee where two interpretations are possible, the court should take the interpretation that is favourable to the assessee bearing in mind that a taxing statute is being construed. Therefore, under the provisions of Section 32(2) for the purpose of setting off of unabsorbed depreciation carried forward from a preceding year, it is not necessary that the business in respect of which the depreciation allowance was originally worked out should remain in existence in such succeeding year.

The decision in Sahu Rubbers (P.) Ltd. v. CIT [1963] 48 ITR 464 (Bom.) does not constitute a binding authority on the interpretation to be placed by the court and the true meaning to be given to the statutory provision enacted in Section 32(2) of the 1961 Act. The difference between the proviso to Section 10(2)(vi) of the 1922 Act and Section 32(2) is not a difference in phraseology. But the provision contained in Section 32(2) is not a proviso to any provision computing depreciation. It is an independent provision.

The decision in Sahu Rubber's case principally turned on the question whether the statutory provision had to be interpreted and given effect to as a proviso or as an independent provision. In that case a limited effect was given to the legal fiction contained in the proviso principally because the fiction was provided for in the enactment by way of a proviso. (p. 119) In coming to the above decision their Lordships have followed the view of the Allahabad High Court in CIT v. Virmani Industries (P.) Ltd. [1974] 97 ITR 461 quoted below : An unabsorbed loss can be carried forward only for eight years but there is no time limit for the carry forward of unabsorbed depreciation. In the case of a carried forward loss it can be set off against the profits of a business in a succeeding year provided the business for which the loss was originally computed continues to be carried on in the succeeding year. There is no such requirement so far as the carried forward depreciation allowance is concerned.

It is not necessary that the business in respect of which the depreciation allowance was originally worked out should remain in existence nor is it necessary that the business assets to which the depreciation pertains must be used in the business carried on in the succeeding year. All that is necessary is that the assessee must carry on some business in the succeeding year in which the set off of unabsorbed depreciation is claimed. So long as an assessee carries on some business in the year in which the set off is claimed, the unabsorbed depreciation by fiction becomes the depreciation allowance of that year even if that business has no depreciable assets.

It is clear from the above authorities that if the assessee carries on some business in which the claim for set off of unabsorbed depreciation is made, the assessee would be entitled to such a set off but it is important to note that the condition for allowance of the claim is that the assessee must carry on some business. As a consequence the excess of unabsorbed depreciation over business income could be set off against income falling under any other head. Balance of excess, if any, could be carried forward.

9. The third category relates to a situation where no business is carried on by the assessee in a previous year but the business is treated as having been in existence by virtue of fiction. We shall deal with the cases which deal with this category.

In CIT v. Rampur Timber & Turnery Co. Ltd. [1973] 89 ITR 150 (All.) the facts were that the assessee, which was carrying on business in the manufacture of bobbins, etc., stopped the business with effect from the previous year relevant to the assessment year 1955-56 though it continued to own the plant and machinery, etc. Thereafter, the assessee continued to be assessed only in respect of income from property which it owned. During the relevant previous year, the assessee received a refund of Rs. 6,982 from Electricity Department which was brought to tax under Section 41(1) of the Act. The assessee had also unabsorbed depreciation of Rs. 46,003 relating to earlier years. Allowing the claim of the assessee, it was held thus : ...The benefit of unabsorbed depreciation could be availed of by an assessee in any subsequent year without satisfaction of the preconditions attaching to Sub-section (1) of Section 32 of the Act and it is not necessary that in such subsequent year the assessee actually carried on the business and the asset in question was used for the purpose of the assessee's business. 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....

Alternatively, Section 41(1) of the Act creates a legal fiction 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 had ceased to exist. If so, the inevitable corollary of that fiction 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 should be set off against the sum of Rs. 6,982 deemed to be business income of the assessee of the previous year. (p. 151) It is material to note that in this case the assessee had income which was brought to tax under Section 41(1) and their Lordships were of the view that the legal fiction enacted in Section 41(1) should be carried to the logical end.

To the like effect is the decision of the Karnataka High Court in Addl.

CIT v. Kapila Textiles (P.) Ltd. [1981] 129 ITR 458 in which it is stated that benefit of carry forward and set off of unabsorbed depreciation under Sub-section (2) of Section 32 is not subject to the condition that the business must have been carried on by the assessee during the previous year. Such condition is only applicable for claiming set off of unabsorbed losses. In this case also, the fact shows that the assessee had income chargeable to tax under Section 41(2) and that it had ceased to carry on the business much earlier. A similar view was also taken by the Kerala High Court in CIT v. Official Liquidator, New Era Mfg. Co. Ltd. [1977] 109 ITR 262 as also in Eastern Cold Storage (P.) Ltd. v. CIT [1981] 7 Taxman 185 (Cal.). A view to the like effect is also found in Hyderabad Construction Co. Ltd. v. CIT [1981] 129 ITR 81 (AP).

A reading of the above decision shows that for purpose of claiming deduction of depreciation under Section 32(1), the twin conditions regarding the user of machinery for the purpose of business and ownership of machinery, etc., are requisite conditions but same is not true in regard to set off of unabsorbed depreciation under Section 32(2) which stands on its own and existence of business is not a condition precedent for allowance of the claim. It should, however, be noted that in all these cases the assessee had notional income chargeable under Section 41 which lays down that the business would be deemed to be in existence even if in fact the business is not actually carried on. In the above situation, therefore, excess of unabsorbed depreciation over the deemed business income could be set off against income falling under any other head and balance, if any, could be carried forward.

10. Now we turn to a situation where there is no income from business either actual or deemed or notional and the claim for unabsorbed depreciation is made. In Brooke Bond & Co. Ltd. v. CIT [1970] 77 ITR 220 (Cal.) it was held that the question of allowance of unabsorbed depreciation would only arise when there was a computation of business income under Section 10 of the 1922 Act in the current year. If there was no assessment under Section 10, there will be no question of any allowance under proviso to Section 10(2)(w) of the 1922 Act. In Hindustan Chemical Works Ltd. v. CIT [1980] 124 ITR 561 (Bom.) a similar question arose relating to set off of unabsorbed depreciation.

In that case the assessee-company had completely stopped its business and had gone out of business and the only source of income for the company was income from property. The company did not carry on any business. It was, therefore, held that it was not entitled either to claim depreciation or a right to set off unabsorbed depreciation carried forward.

11. Now the learned counsel for the assessee strenuously contended that the provisions of Section 32(2), as they stand by themselves, have not been construed in the above cited decisions. He, firstly, pointed out that there was an essential distinction between the provisions as they stood under the 1922 Act, and the 1961 Act inasmuch as the right to carry forward unabsorbed depreciation was engrafted as a proviso in the 1922 Act, whereas under the 1961 Act the claim for unabsorbed depreciation is set out as a sub-section independent of Section 32(1) which deals with current depreciation. It was submitted before us that the only condition for considering the claim for unabsorbed depreciation was that a depreciation should be unabsorbed. No further condition relating to existence of some or same business is required to be satisfied. Placing this claim on the phraseology used in Section 32(2), it was pointed out that as soon as the unabsorbed depreciation assumes colour or character of current depreciation by virtue of the fiction, the fiction must be taken to its logical end by assuming that the business is also deemed to be in existence.

In support of this proposition, as pointed out earlier, it was urged that the fiction must be carried to a logical end. It is trite to say that the fiction enacted in the section has to be considered for the purpose for which it is so enacted and at the same time the fiction must be carried to the logical end. In this connection, we may usefully refer to the following passage which is found in the judgment of the Madhya Pradesh High Court in the case of CIT v. Chhotelal Kanaiyalal [1971] 80 ITR 656. In that case, dealing with the fiction enacted in Section 271(2), it was observed thus : Section 271(2) of the Income-tax Act, 1961, creates a statutory fiction by directing a registered firm to be treated as an unregistered firm for the computation of penalty. It has been well said that the rules of construction hunt in pairs. So, in construing a provision creating a statutory fiction, two rules operate, the statutory fiction should be carried to its logical conclusion, but the fiction cannot be extended beyond the language of the section by which it is created or by importing another fiction. The solution is found by harmoniously applying the rules." (p. 661) In light of these observations, it can be stated that there is no quarrel with the proposition that the fiction must be carried to the logical end but it cannot be extended so as to create fiction upon fiction.

Therefore, if we were to accept the submission canvassed on behalf of the assessee, we will have to hold by fiction that the business which was in fact and truth discontinued is deemed to be in existence. Such a contingency is not predicated in dealing with the claim for set off of unabsorbed depreciation. There are two reasons for this conclusion. Firstly, the Legislature when it has intended to create a fiction about the existence of business, it has specifically so provided as it would be evident from the set of sub-sections as set out in Section 41. The Explanation to Section 41, which we have referred to earlier, clearly provides for such a contingency, viz.. the business being notionally in existence.

Secondly, Section 28 in terms brings to charge income from profits and gains in respect of the business "carried on by the assessee".

This provision, therefore, postulates that there must be some business activity if not the same business activity in respect of which the income is sought to be computed. If there is no income which falls under Section 28, then tinabsorbed depreciation allowance being a claim for deduction would not operate even with the aid of fiction. The fiction, according to us, is limited for treating the unabsorbed depreciation on par with current depreciation. The conclusion which we draw in the instant case can also be supported if we look to the provisions of Section 32(1)(iii) which deals with the claim for terminal allowance. Before the claim for terminal allowance under the said provisions could be considered, it. is necessary that the business must be in existence in the previous year. If the business has come to an end, the claim for terminal allowance would not survive. However, in case of balancing charge which is brought to tax under Section 41(2) by virtue of fiction enacted under Section 41(2), such balancing charge could be brought to tax even after the business has ceased to exist.

Therefore, in the absence of specific provisions relating to fictional existence of business, in order to allow the claim for unabsorbed depreciation, the claim for unabsorbed depreciation cannot be allowed on its own without having any income from business either actual, deemed or notional. It must be remembered that the provisions of Section 32, like Section 41, form part of the same set of section referred to in Section 29 which deals with computation of income under the head "Profits and gains of business or profession.

12. In light of the above discussion, therefore, we come to the conclusion that the assessee is not entitled to set off of unabsorbed depreciation against the income from the head "Income from other sources".

13-14. [These paras are not reproduced here as they involve minor issues.] 15. To sum up, we recapitulate the question which is referred to us as follows : Whether the assessee is entitled to set off of unabsorbed depreciation of the earlier year and brought forward against the income from other sources Our decision is that the assessee is not entitled to such a set off because the business in respect of which the depreciation is claimed had ceased to exist and the assessee is not having any income from business at all either actual or notional. The assessee will be entitled to carry forward unabsorbed depreciation if, firstly, there is income from same business, secondly, if there is income from some business and, lastly, if there is income from business which is said to have been notionally carried on by virtue of fiction enacted in Section 41. If, however, there is no such income and the source of income from business or profession is extinct, then the unabsorbed depreciation cannot be allowed to be carried forward and, consequently, could not be set off against income from any other sources.


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