Dismissal of Special Leave Application against the Tribunal order will not make the Tribunal decision good and binding.
Set off of current year's depreciation gets priority for set off over the carried forward business loss.
Tribunal--DECISION--Dismissal of SLP against appellate order of Tribunal.
Dismissal of Special Leave Application against Tribunal order will not make that Tribunal decision good and binding.
On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in holding that the unabsorbed business loss brought forward from the earlier years should be set off before allowing the current year's depreciation.
2. The assessee is a company carrying on business in the manufacture of transformers and electric motors. In its return of income for the assessment year 1977-78, for which the previous year ended on 31-3-1977, it declared a total loss of Rs. 1,11,57,578, after deducting unabsorbed losses brought forward from earlier years and the investment allowance. While completing the assessment under Section 143(3) read with Section 144B of the Income-tax Act, 1961 ('the Act'), the TTO determine 1 the business income of the assessee for this year at Rs. 14,90,282. In computing this income, the ITO deducted depreciation of Rs. 5,61,180, representing current year's depreciation and then deducted investment allowance of Rs. 84,556. Thereafter the [TO allowed set off of the past losses brought forward from earlier years to the extent of Rs. 4,90,282 and determined the business income of the assessee at nil for this year.
3. The assessee preferred an appeal objecting to this action of the ITO and contended before the Commissioner (Appeals) that the investment allowance of Rs. 84,556 ought not to have been set off as a deduction against the current year's business income in view of the carry forward of business loss of the assessment year 1969-70. It was further argued that the business loss ought to be first set off against the business income of this year. In support of this contention, the assessee relied on the decision of the Tribunal, in IT Appeal No. 1502 (Bom.) of 1977-78, dated 15-6-1980. In this decision, the Tribunal had followed the decision of the Supreme Court in CIT v. Jaipuria China Clay Mines (P.) Ltd.  59 ITR 555 laying down the order in which various set off should be given, and upheld the contention of the assessee that first the brought forward loss should be set off prior to current year's depreciation. The Commissioner (Appeals) followed this decision of the Tribunal and directed the ITO to carry forward the investment allowance for set off to the next year, as the brought forward business loss was more than the current year's business income. Further, he directed the ITO to carry forward the current year's depreciation of Rs. 5,61,180 to the next year. According to the Commissioner (Appeals), the amount of income available for set off during this year against the brought forward business losses of earlier years would be Rs. 21,36,018 and that the depreciation amounting to Rs. 5,61,180 and investment allowance amounting to Rs. 84,556 relating to the current year would be allowed to be carried forward for set off against the income of the subsequent years. Accordingly, the Commissioner (Appeals) allowed the assessee's appeal and directed the ITO to modify the assessment as per his directions.
4. The revenue feels aggrieved by this order of the Commissioner (Appeals) and has come up in appeal to the Tribunal on the ground quoted above.
5. We have heard the learned Counsel on both sides and carefully considered their submissions in the light of the authorities placed before us.
6. In our view, the question raised in this appeal is directly concluded in favour of the revenue and against the assessee by two decisions, viz., the decision of the Gujarat High Court in the case of Monogram Mills Co. Ltd. v. CIT  135 ITR 122, and the decision of the Special Bench of the Tribunal, Delhi Bench 'A' in the case of ITO v. Hindustan Vacuum Glass Ltd.  1 SOT 396. In the first case, the Gujarat High Court has held as follows : (1) current year's depreciation--because that is the first charge on the receipts in the profit and loss account ; (2) carried forward business losses under Section 72(2) read with Section 72(1) ; (3) unabsorbed depreciation by virtue of the provisions of Section 32(2) ; (4) unabsorbed development rebate--because of the provisions of Clauses (i) and (ii) of Section 33(2) ; and Their Lordships have relied on the decision of the Supreme Court, in Cambay Electric Supply Industrial Co. Ltd. v. CIT  113 ITR 84, and while referring to the various commentaries on the Income-tax Act at pages 137 and 138 of the report, their Lordships have pointed out that in Kanga and Palkhivala's Law and Practice of Income-tax Vol. I, seventh edn., page 402, this very order of priority which their Lordships have mentioned, had been set out. Again, their Lordships have observed as follows : Under these circumstances, the conclusion that we have arrived at is the conclusion which has appealed to all the learned commentators on the law of income-tax and at least two of them have relied upon the specific wordings in the parenthesis in Sub-section (2) of Section 33 for the purpose of fixing this order of priority. Both, by way of process of interpretation and looking to the rationale, viz., preventing erosion of the capital base of the assessee's business the order of priority that we have mentioned earlier is the correct order of priority as between carried forward business losses, unabsorbed depreciation and unabsorbed development rebate of the previous years.
7. In Hindustan Vacuum Glass Ltd.'s case (supra), the Special Bench of the Tribunal held as follows : 1. Strictly speaking, the allowance under Section 32(2) is never to be carried forward in the sense losses are. 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. Therefore, one has to proceed on the basis that Section 72(2) refers to past unabsorbed depreciation in contradistinction with the current year's depreciation.
2. Regarding the actual nature of the merger of unabsorbed depreciation with the current year's depreciation, it is clear from the language of Section 32(2) that the question of such a merger 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.
3. Accordingly, 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 Section 29 to Section 43A, the past losses will get priority over the unabsorbed depreciation, the identity of which is maintained in terms of Section 72(2).
8. These two decisions, in our view, are sufficient to dispose of the revenue's appeal in its favour. However, it was argued by Shri B.A.Palkhivala, the learned Counsel for the assessee, that in the present case we are not concerned with the question as to which of the two views expressed in the various decisions is correct. According to Shri Palkhivala, we are directly governed by the decision of the Tribunal, in the case of Gannon Norton Metal & Diamonds Dyes Ltd. [IT Appeal No.734 (Bom.) of 1974-75, dated 26-4-1975], since the said decision of the Tribunal has been affirmed by the Supreme Court, who refused to grant special leave to the department in S.L.P. (Civil) No. 394-A of 1977, dated, 24-8-1977. According to the learned Counsel, the decisions of the Bombay High Court and of the Supreme Court refusing to issue directions to the Tribunal to state a case, show that the Courts felt that the answer to the two questions raised by the revenue were so obvious and against the department and that, therefore, their Lordships have refused to direct a reference. The learned Counsel pointed out that this decision of the Tribunal was followed in later cases by the Tribunal, Bombay Bench 'D', in the case of Tata Merlin & Gerin Ltd. (Amalgamated with Voltas Ltd.) [IT Appeal Nos. 3634 and 3635 (Bom.) of 1980, dated 19-2-1982], and in the case of X.Y.Z. Ltd. [IT Appeal No.1502 (Bom.) of 1977-78], Bombay Bench 'A', reported in Taxes and Planning dated 15-6-1980. He, therefore, contended that the assessee was entitled to succeed in this appeal also in view of these three decisions of the Tribunal.
9. We have already referred to the decision of the Gujarat High Court, which is directly in point and which has followed the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd.'s case (supra). The decision of the Tribunal in the case of Gannon Norton Metal & Diamonds Dyes Ltd. (supra), relied on by the assessee's learned Counsel, is no doubt in favour of the assessee's contentions. However, the said decision has now to be understood in the light of the two decisions of the Gujarat High Court in Monogram Mills Co. Ltd.'s case (supra) and of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd.'s case (supra), as well as the Special Bench decision of the Tribunal in the case of Hindustan Vacuum Glass Ltd. (supra). The orders of the Bombay High Court as well as the Supreme Court dismissing the petition filed by the revenue under Section 256(2) of the Act and the special leave petition therefrom, only show that their Lordships were not satisfied that it was a fit case for directing the Tribunal to state a case and make a reference to the High Court, and nothing more.
They are not decisions on the merits of the controversy raised by the parties in the present case. We are, therefore, unable to accept the contentions of the learned Counsel of the assessee. We would, therefore, respectfully follow the decisions of the Gujarat High Court and of the Special Bench of the Tribunal, referred to above.
Accordingly, we reverse the order of the Commissioner (Appeals) and restore the order of the ITO in respect of the allowance of current depreciation amounting to Rs. 5,61,180 in computing the business income of the assessee for the assessment year under appeal.