Bhaskaran Nambiar, J.
1. The question of law referred to us for the opinion of this court reads thus :
' Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the provisions of Section 79 place a bar only on the carry forward and set off of losses and not of unabsorbed depreciation or unabsorbed development rebate '
2. The assessee is a company in which the public are not substantially interested. For the relevant year 1975-76, there were nine shareholders of the company for the accounting period ending on March 31, 1975. None of these shareholders was a shareholder on March 31, 1974.
3. For the assessment year 1974-75, an amount of Rs. 61,754 was computed to be carried forward, under three heads :
Rs.(i)unabsorbed depreciation21,815(ii)unabsorbed development rebate17,186(iii)business loss22,753
4. The Income-tax Officer, relying on Section 79 of the Income-tax Act, refused the relief of carry forward of any of these 'losses'. On appeal, the Appellate Assistant Commissioner held that development rebate and unabsorbed depreciation could be carried forward, notwithstanding Section 79. The assessee appealed to the Tribunal. The Tribunal reasoned thus :
'There is a discussion in the commentary on the Law and Practice of Income-tax by Kanga and Palkhiwala, 7th edition, volume-I, at page 385 of the four features which distinguished a loss from unabsorbed depreciation. It is clear that the term ' loss ' as used in Chapter VI does not include unabsorbed depreciation and development rebate. As a matter of fact, in Section 72(2), unabsorbed depreciation is referred to expressly as an allowance under Sub-section (2) of Section 32. The provisions of Section 79 place a bar only on the carry forward and set off of losses and not of unabsorbed depreciation or unabsorbed development rebate.........In view of thisfinding of the Appellate Assistant Commissioner that neither unabsorbed depreciation nor development rebate can be carried forward, we would give our finding that the carry forward of unabsorbed depreciation and unabsorbed development rebate is not hit by the provisions of Section 79 in the present case and the bar operates only in so far as the carry forward of unabsorbed loss is concerned as contradistinct from the other two items.'
5. The reference is, therefore, made at the instance of the Revenue and the answer to the question referred will depend on the crucial fact whether unabsorbed depreciation or unabsorbed development rebate constitute 'loss' to attract the statutory bar under Section 79 of the Act.
6. The counsel for the Revenue submits that unabsorbed depreciation and unabsorbed development rebate are both ' losses ' and that the word 'loss' occurring in Section 79 of the Act cannot have a restricted or a narrow meaning. Any loss--all commercial losses which include unabsorbed depreciation or unabsorbed development rebate--cannot thus escape the rigour of Section 79, so contends the counsel.
7. Let us, therefore, read Section 79 :
' 79. Carry forward and set off of losses in the case of certain companies.--Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless-
(a) on the last day of the previous year the shares of the company carrying not less than fifty-one per cent, of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent. of the voting power on the last day of the year or years in which the loss was incurred; or
(b) the Income-tax Officer is satisfied that the change in the shareholding was not effected with a view to avoiding or reducing any liability to tax.'
8. Chapter VI of the Income-tax Act, as the heading denotes, relates to 'Aggregation of income and set off or carry forward of loss '. Set off of loss from one source against income from another source under the same head of income is provided in Section 70, while set off of loss from one head against income from another is provided in Section 71. Business losses are mentioned in Section 72, accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation of a company is as per Section 72A, losses in speculation business are in Section 73, losses under the head ' Capital gains ' are dealt with under Section 74, losses from certain specified sources falling under the head ' Income from other sources ' are mentioned in Section 74A, losses of registered firms are contained in Sections 75 - 78 and thereafter there is the non obstante provision in Section 79. Section 79 overrides the other provisions in Chapter VI and not the other provisions in the Act itself as is clear from the opening words ' Notwithstanding anything contained in this Chapter '. The connotation of the expression ' loss ' occurring in Section 79 has thus to be understood in the context of the provisions contained in Chapter VI itself.
9. Where a change in shareholding has taken place in a previous year in the case of a company (not being a company in which the public are substantially interested) no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous' year unless the conditions prescribed in Clause (a) or (b) are satisfied. Loss which could be carried forward for any year prior to the previous year, for which specific provision is made in this Chapter cannot be so carried forward and set off unless the conditions specified in Section 79 are fulfilled. The ' loss ' mentioned in Section 79 is thus relatable to the ' loss ' specifically provided for in the other provisions of the same Chapter. It is in respect of losses which could be carried forward and set off under this Chapter that Section 79 operates to limit that set off only to the previous year in question without extending it to any prior years.
10. It is contended that Section 72(2) in the same Chapter relates to ' unabsorbed depreciation ' or ' unabsorbed development rebate ' and thus Section 79 is attracted to these heads of losses.
11. Section 72(2) reads thus :
' 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. '
12. Section 72 provides for carry forward and set off of business losses and Sub-section (2) of this Section only provides a rule of priority under which set off of business losses shall have statutory preference over carry forward of allowances under Section 32(2) or Section 35(4) of the Act. Even this provision does not speak of ' unabsorbed depreciation ' or 'unabsorbed development rebate ' (sic) as losses; but describes them as ' allowances '.
13. It is now necessary only to refer to the provisions which enable 'unabsorbed depreciation' or 'unabsorbed development rebate' to be carried forward. ' Unabsorbed depreciation ' as an item of allowance which can be carried forward is specifically mentioned in Section 32(2) and 'unabsorbed development rebate' is provided for in Section 35(4) (sic), both the provisions occurring in Chapter IV of the Act. The Act does not treat or describe ' unabsorbed depreciation ' or ' unabsorbed development rebate' as losses and these items cannot be treated as losses for purposes of Section 79 alone. By excluding ' unabsorbed depreciation ' or ' unabsorbed development rebate ' from the context of the expression ' losses ' in Section 79, there is no attempt to give any narrow interpretation to the word .,' loss '. It cannot have, in any case, a wider definition to include items which are in fact not losses under the Act, at least for the purpose mentioned in Chapter VI.
14. There is no case before us that Clauses (a) and (b) of Section 79 are attracted. We are not called upon to consider whether these clauses are disjunctive or cumulative. The bar imposed under the main part of Section 79 is not attracted, as Section 79 does not apply to ' unabsorbed depreciation ' or ' unabsorbed development rebate '.
15. The counsel for the Revenue cited Lakshmichand Jaipuria Spinning and Weaving Mills, In re , a decision of the East Punjab High Court.
16. The Supreme Court was construing Section 10 (2)(vi) and proviso (b) to Section 24(2) of the 1922 Act (corresponding to Sections 34(2)(i) and 72 of the 1961 Act) in CIT v. Jaipuria China Clay Mines (P.) Ltd. : 59ITR555(SC) , wherein it was observed thus (at pp. 559, 561):
'The second consideration which is relevant is that the Act draws no express distinction between the various allowances mentioned in Section 10(2). They all have to be deducted from the gross profits and gains of a business. According to commercial principles, depreciation would be shown in the accounts and the profit and loss account would reflect the depreciation accounted for in the accounts. If the profits are not large enough to wipe off depreciation, the profit and loss account would show a loss. Therefore, apart from proviso (b) to Section 10(2)(vi), neither the Act nor commercial principles draw any distinction between the various allowances mentioned in Section 10(2); the only distinction is that while the other allowances may be outgoings, depreciation is not an actual outgoing......
The unabsorbed depreciation allowance is carried forward under proviso (b) to Section 10(2)(vi) and the method of carrying it forward is to add it to the amount of the allowance or depreciation in the following year and deeming it to be part of that allowance; the effect of deeming it to be part of that allowance is that it falls in the following year within Clause (vi) and has to be deducted as allowance. If the legislature had not enacted proviso (b) to Section 24(2), the result would have been that depreciation allowance would have been deducted first out of the profits and gains in preference to any losses which might have been carried forward under Section 24, but as the losses can be carried forward only for six years under Section 24(2), the assessee would in certain circumstances have in his books losses which he would not be able to set off. It seems to us that the Legislature, in view of this, gave a preference to the deduction of losses first. But it is wrong to assume that Section 24(2) also deals with the carrying forward of depreciation. This carry forward having been provided in Section 10(2)(vi) and in a different manner, Section 24(2) only deals with losses other than the losses due to depreciation.'
17. We are afraid that the observations support the assessee rather than the Revenue.
18. The view we take has the support of the Madras High Court in its decision in CIT v. Concord Industries Ltd. : 119ITR458(Mad) , which in turn followed its earlier decision in CIT v. Madras Wire Products : 119ITR454(Mad) and which again, in its turn, followed an earlier decision in CIT v. Nagapatinatn Import & Export Corpn. : 119ITR444(Mad) , in which it is held thus (at p. 447):
' However, the Act thus makes a distinction between the unabsorbed allowance of depreciation and other losses. It has already been seen that Section 72(2) of the Act provides that 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 Section 72. In other words, Section 72(2) contemplates the loss other than the unabsorbed depreciation being given a priority in the matter of set-off, as there is a time-limit within which such loss can be adjusted. Under Section 72(3), the loss other than from depreciation is eligible for being carried forward and set off only for a period of eight assessment years immediately succeeding the assessment year for which the loss was first computed; in the case of unabsorbed depreciation allowance, there is no such time-limit. The Legislature has, therefore, made a specific provision for priority in setting off the loss other than the unabsorbed depreciation allowance so that the unabsorbed depreciation allowance can be carried forward if necessary without any time-limit and set off in the appropriate succeeding years. It is thus clear that there is a separate identity maintained under the statute with reference to the unabsorbed depreciation allowance though at the time of computation, it forms part of 'loss'. It may be that at the time of allocation among the partners, the unabsorbed depreciation is taken along with any other loss that may have been sustained by the registered firm ; but this identity of unabsorbed depreciation is required to be maintained in order to enable it to be set off against the future income separately and independently of the other losses. If we approach the construction of Section 32(2) in the light of the above background, there appears to be no difficulty in construing the reference.'
19. So also the Gujarat High Court in CIT v. Shri Subhlaxmi Mills Ltd. : 143ITR863(Guj) held thus (at p. 877):
' Section 79 contemplates that no loss incurred in any year prior to the previous year can be carried forward if the other conditions of Section 79 are satisfied. This Section 79 forms part of Chapter VI and it is connected with the carry forward and set off of losses which are provided for in Section 72 onwards. Moreover, Section 32(2) which deals with depreciation allowances and carrying forward of unabsorbed depreciation allowance and Section 33(2) which deals with the carrying forward of development rebate which has not been absorbed in the preceding assessment year, deal with certain allowances being made while computing the total income from profits and gains from business. These are allowances which are being permitted to the assessee and it is very difficult to say that a depreciation allowance is incurred or development rebate is incurred in view of the language of Section 32 and Section 33. It must be held that depreciation is allowed and development rebate allowed if the conditions of the relevant Sections are satisfied but they are not incurred by the assessee. Therefore, by the use of the words 'loss Incurred' and the reference to the Chapter in which Section 79 occurs, it is obvious that the contention urged on behalf of the Revenue that the provisions of Section 79 apply to unabsorbed depreciation allowance which has been carried forward or to unabsorbed development rebate which has been carried forward from the immediately preceding assessment year, must be rejected. In our opinion, on a pure grammatical construction, in view of the reference to the Chapter, Incurring of losses and in view of the fact that Section 79 forms part of the whole scheme adumbrated from Section 72 onwards, this contention urged on behalf of the Revenues-must be rejected.'
20. In the result, we answer the question in the affirmative, in favour of the assessee and against the Revenue.
21. The assessee will be entitled to costs.
22. A copy of this judgment shall be sent under the seal of the court and the signature of the Registrar to the Income-lax Appellate Tribunal,. Cochin Bench.