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Calicut Modern Spinning and Weaving Mills Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberO.P. No. 909 of 1979
Judge
Reported in(1985)47CTR(Ker)145; [1985]153ITR810(Ker)
ActsIncome Tax Act, 1961 - Sections 33
AppellantCalicut Modern Spinning and Weaving Mills Ltd.
RespondentCommissioner of Income-tax
Appellant Advocate T.L. Viswanatha Iyer, Adv.
Respondent Advocate P.K.R. Menon, Adv.
Excerpt:
.....depreciation allowance development rebate cannot be deducted at all - result may be over period of years depreciation may continue to be carried forward and development rebate may never get chance of being actually allowed since right to rebate lapses after lapse of period - after wiping out such (balance) unabsorbed business loss and also unabsorbed depreciation question of any set off of unabsorbed development rebate can arise. - - the priority between unabsorbed depreciation and unabsorbed development rebate would be covered by the decision of the karnataka high court, while in respect of business loss, applying the same reasoning as in the said case and also the considerations which have been adverted to earlier, business loss would have precedence over both unabsorbed..........the assessee was that the company had a taxable income of rs. 24,67,658 to be set off against the loss carried forward from the previous years, the unabsorbed development rebate for the year 1966-67 onwards, or at any rate the unabsorbed development rebate for the year 1966-67 amounting to rs. 5,97,107 (for which the time to carry forward expired this year), should have been given priority in the adjustment and set off. the commissioner of income-tax--the first respondent--by ext. p3 order dated october 12, 1978, held that the unabsorbed development rebate relating to the year 1966-67 is not entitled to priority in the adjustment and set off as against the loss of the earlier years. in this o.p., the challenge is against exts. p-1 and p-3 orders passed by the respondents. 3. counsel for.....
Judgment:

Paripoornan, J.

1. In view of the importance of the questions raised in the case, a learned single judge of this court by order dated March 3, 1982, referred the above original petition to be heard by a Division Bench. The petitioner is a company carrying on business of spinning and weaving. It is an assessee to income-tax on the files of the second respondent. For the assessment year 1974-75 (year ending March 31, 1974), the net assessable income was fixed at Rs. 24,67,658. The assessable income was Rs. 28,77,301 before deducting depreciation allowance. From the net income arrived at, i.e., Rs. 24,67,658, the ITO set off the loss of the earlier years. For the years 1966-67, 1967-68, 1968-69, 1969-70 and 1970-71, the loss was set off in full and for the year 1971-72, the loss was set off in part to the extent of Rs. 87,259. The total loss of the previous years so set off from 1966-67 to 1971-72, which amounted to RS. 24,67,658, was deducted from the net income arrived at. In the result, the net assessable income was nil. In so doing, the ITO also specifically held that the balance of the loss in respect of the earlier assessment years is allowed to be carried forward to the next year as hereunder :

Rs.Business loss1971-722,05,9501972-733,18,9341973-74Nil1974-75Nil

2. The unabsorbed depreciation carried forward from the year 1966-67 up to 1972-73 was also allowed to be carried forward. Unabsorbed development rebate carried forward for the year 1966-67 was not allowed to be carried forward, as the time-limit therefor was over. But the unabsorbed development rebate from the years 1967-68 to 1974-75 was allowed to be carried forward. The order of assessment is Ext. P-1 dated December 24, 1976. The assessee filed a revision before the first respondent-Commissioner of Income-tax, Kerala. The main grievance of the assessee was that the company had a taxable income of Rs. 24,67,658 to be set off against the loss carried forward from the previous years, the unabsorbed development rebate for the year 1966-67 onwards, or at any rate the unabsorbed development rebate for the year 1966-67 amounting to Rs. 5,97,107 (for which the time to carry forward expired this year), should have been given priority in the adjustment and set off. The Commissioner of Income-tax--the first respondent--by Ext. P3 order dated October 12, 1978, held that the unabsorbed development rebate relating to the year 1966-67 is not entitled to priority in the adjustment and set off as against the loss of the earlier years. In this O.P., the challenge is against Exts. P-1 and P-3 orders passed by the respondents.

3. Counsel for the assessee, Mr. T. L. Viswanatha lyer, contended that the Revenue erred in not carrying forward the unabsorbed development rebate of the year 1966-67 amounting to Rs. 5,97,107 as against the net income arrived at for the year 1974-75 at Rs. 24,67,658. It was contended that the unabsorbed development rebate for the year 1966-67 of Rs. 5,97,107 should have been first set off, before setting off the loss of the prior years from 1966-67 to 1971-72. The period of eightyears enabling the assessee to carry forward the unabsorbed development rebate will expire by this year. It cannot be carried forward to the subsequent year in view of expiry of the time provided therefor. So, it should have been given priority. In the alternative, it was contended that out of the net income arrived at, i.e., Rs. 24,67,658, the ITO should have first set off the unabsorbed development rebate for 1966-67 amounting to Rs. 5,97,107 and then should have set off the business loss of Rs. 3,89,856 for the year 1966-67 before adjusting the loss, etc., of the years 1967-68 onwards. The fetter disabling the assessee to carry forward the loss of prior years beyond 8 years is confined to unabsorbed development rebate and business loss.It is not applicable in the case of unabsorbed depreciation. On the other hand, counsel for the Revenue, Mr. P.K. Ravidranatha Menon, sought to defend the order passed by the ITO and as confirmed by the first respondent, the Commissioner of Income-tax. We heard counsel at length.

4. Sections 32(1), 32(2), 33(1)(a), 33(2) read with the Explanation and Sections 72(1) and 72(2) of the I.T. Act, 1961, are relevant in this regard. They are extracted hereinbelow :

'32. Depreciation.--(1) 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--......

(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....

33. Development rebate.--(1)(a) In respect of a new ship or new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of Section 84, be allowed a deduction, in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, a sum by way of development rebate as specified in Clause (b).......

(2) In the case of a ship acquired or machinery or plant installed after the day of 31st December, 1957, where the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be, [the total income for this purpose being computed without making any allowance under Sub-section (1) or Sub-section (1 A) of this section or Sub-section (1) of Section 33A or any deduction under Chapter VI-A or Section 280-O] is nil or is less than the full amount of the development rebate calculated at the rate applicable thereto under Sub-section (1) or Sub-section (1A), as the case may be,--

(i) the sum to be allowed by way of development rebate for that assessment year under Sub-section (1) or Sub-section (1A) shall be only such amount as is sufficient to reduce the said total intome to nil; and

(ii) the amount of the development rebate, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment year and the development rebate to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the development rebate, if any, still outstanding shall be carried forward to the following assessment year and so on, so, however, that no portion of the development rebate shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be.

Explanation.--Where for any assessment year development rebate is to be allowed in accordance with the provisions of Sub-section (2) in respect of ships acquired or machinery or plant installed in more than one previous year, and the total income of the assessee assessable for that assessment year [the total income for this purpose being computed without making any allowance under Sub-section (1) or Sub-section (1A) of this section or Sub-section (1) of Section 33A or any deduction under Chapter VI-A or Section 280-O] is less than the aggregate of the amounts due to be allowed in respect of the assets aforesaid for that assessment year, the following procedure shall be followed, namely :--

(i) the allowance under Clause (ii) of Sub-section (2) shall be made before any allowance under Clause (i) of that sub-section is made ; and

(ii) where an allowance has to be made under Clause (ii) of Sub-section (2) in respect of amounts carried forward from more than one assessment year, the amount carried forward from an earlier assessment year shall be allowed before any amount carried forward from a later assessment year.......

72. Carry forward and set off of business losses.--(1) Where for any assessment year, the net result of the computation under the head 'Profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is notwholly set off against income under any head of income in accordance with the provisions of Section 71, so much of the loss as has not been so set off or, where the assessee has income only under the head 'Capital gains' relating to capital assets other than short term capital assets and has exercised the option under Sub-section (2) of that section or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and-

(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year :

Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year ; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.......

(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. '

5. Briefly stated, under Section 32(2) of the Act, unabsorbed depreciation allowance of the earlier year or years shall be deemed to be part of that allowance for the current year. The current year's net assessable income will be arrived at after affording depreciation allowance. Ordinarily, in view of Section 32(2), the unabsorbed depreciation allowance of the previous year or years should also be deducted. But Section 72(2) specifically provides that such unabsorbed depreciation allowance carried forward shall be given effect to only after giving effect to the provisions of Section 72. Section 72 provides for 'carrying forward and set off' of business loss. The current year's income will be determined, after set off is given for the losses incurred in that year, against the profits and gains of business or profession, assessable for that year (current year). Thereafter, unabsorbed loss of the previous years carried forward shall also be set off against the balance assessable income of the current year. In other words, if there is unabsorbed depreciation allowance carried forward under Section 32(2) and unabsorbed business loss under Section 72(1), in view of Section 72(2) of the Act, the business loss of the earlier years will be entitled to priority. According to the counsel for the petitioner, this may be so, in view of the specific provision contained in Section 72(2) of the Act. Says counsel, Section 72(2) of the Act, does not make any reference to Section 33(1) read with Section 33(2). Section 33(1) and (2) alone deal with the unabsorbed development rebate. The scheme of theAct will show that there is nothing either in Section 72 or anywhere else to the effect that Section 33(2) is subject to Section 72(2).

6. On a combined reading of Sections 32(1), 32(2), 33(1), 33(2), 72(1) and 72(2) of the I.T. Act, 1961, we are unable to accept the aforesaid contention of the counsel for the petitioner. In CIT v. Gujarat State Warehousing Corporation : [1976]104ITR1(Guj) , at page 9, the court held as follows :

'It is no doubt true that Sub-section (2) of Section 72 makes a reference to Sub-section (2) of Section 32. But simply because this reference is made, it does not follow that Sub-section (2) of Section 72 brings in, even the deeming fiction, for treatment. Sub-section (2) of Section 32 is in two parts and provides for two things. Its iirst part provides for carrying forward of unabsorbed depreciation and in its second part provides for clubbing the said carried forward depreciation with the current year's depreciation and deeming the aggregate to be the current year's depreciation. Therefore, when Sub-section (2) of Section 72 refers to an allowance which is to be 'carried forward', it refers to the iirst part of Sub-section (2) of Section 32, which enables an assessee to carry forward unabsorbed depreciation and not the second part which creates the deeming fiction. This is evident from the fact that this second part of Sub-section (2) of Section 32 is made ' subject to ' the provisions of Sub-section (2) of Section 72. The fact that the deeming fiction of Sub-section (2) of Section 32 is not made absolute, and is to be operative subject to the provisions of Sub-section (2) of Section 72 shows, beyond any dispute, that before giving effect to the deeming fiction, provisions of Sub-section (2) of Section 72 have to be worked out; since the impact oj Sub-section (2) of Section 72 is only on 'carried forward allowance', it must follow that at the time of working out Sub-section (2) of Section 72, the concept of the deeming fiction should not enter into our consideration. Thus, the extent and the operation of the said deeming fiction of Section 32(2) are thus circumscribed and limited by the operation of Section 72(2).'

7. In Mysore Paper Mills Ltd. v. CIT : [1979]117ITR132(KAR) , a Division Bench of the Karnataka High Court, after citing with approval the above decision of the Gujarat High Court, took the view that if the current year's depreciation allowance must be first adjusted before giving effect to Section 33, the entire unabsorbed depreciation allowance must be deducted because for all intents and purposes, subject only to Sections 72(2) and 73(3), it is current year's depreciation itself. The question before the Karaataka High Court was a competition between the unabsorbed development rebate of the earlier years as against the unabsorbed carried forward depreciation of earlier years. Dealing with the argument that the unabsorbed development rebate allowed under Section 33 is part of the business loss allowed to be carriedforward and so it should be given priority by reason of Section 12(2) over the unabsorbed depreciation allowance (Section 32(2)), the court held as follows (p. 136):

'Section 33 does not actually deal with any trading loss as it is ordinarily understood. Under Section 33, Parliament has made provision by way of an incentive to businessmen who invest on new machinery or in modernising plant and equipment. In order to earn development rebate, the assessee has to satisfy certain other conditions which are provided under Section 34 of the Act, and the unabsorbed development rebate cannot be carried forward beyond 8 years as provided by the Act. In the circumstances, the unabsorbed development rebate cannot be treated as part of assessed loss which is allowed to be carried forward and given priority over the unabsorbed depreciation allowance of the previous years.'

8. In CIT v. Coromandel Steels Ltd. : [1981]130ITR856(Mad) , after referring to the decision of the Karnataka High Court in Mysore Paper Mills' case : [1979]117ITR132(KAR) , the Madras High Court held as follows :

'In that case, the competition for adjustment was between carried forward depreciation and carried forward development rebate. It was held that carried forward depreciation had precedence over unabsorbed development rebate. The same consideration which applied to determine the priority in this manner would equally apply to the present case also. In fact, in the present case, there is unabsorbed depredation and also unabsorbed development rebate and in addition there are business losses, which were brought forward. The priority between unabsorbed depreciation and unabsorbed development rebate would be covered by the decision of the Karnataka High Court, while in respect of business loss, applying the same reasoning as in the said case and also the considerations which have been adverted to earlier, business loss would have precedence over both unabsorbed depreciation as well as unabsorbed development rebate.'

9. Kanga and Palkhivala in The Law and Practice of Income Tax, 7th edn(1976), vol. 1, page 402, states as follows :

'In cases where an assessee is entitled to both depreciation and development rebate, the question arises as to which should be deducted first. Having regard to the provisions of Section 33(2), this question' has to be considered by reference to the date when the assets were installed...... In respect of assets installed on or after 1st January, 1958, the position emerging from a combined reading of Sections 2(45), 32(2), 33(2), 33A(2) and 72(2) is that the allowances and losses should be deducted in the order in which they are enumerated below, in a case where the profits are insufficient to absorb all of them :

first, current depreciation (Section 32(1));

secondly, carried forward losses of earlier years (Section 72(1));

thirdly, unabsorbed depreciation of earlier years (Section 32(2)) ;

fourthly, unabsorbed development rebate of earlier years (Section 33(2)(ii)) ;

fifthly, current development rebate (Section 33(2)(i));

sixthly, unabsorbed development allowance of earlier years (Section 33A(2)(ii)); and

seventhly, current development allowance (Section 33A(2)(i)).

Therefore, in a case where there is unabsorbed depreciation allowance, the development rebate cannot be deducted at all. The result of this may well be that, over a period of eight 'years, the depreciation may continue to be carried forward and the development rebate may never get a chance of being actually allowed since the right to the rebate lapses after eight years.'

10. In Chaturvedi and Pithisaria's Income Tax Law, 3rd edn. (1981), vol. 1, at page 958, it is stated as follows :

'Where there are claims for absorption of current. depreciation, unabsorbed depreciation, carried forward business loss and unabsorbed development rebate, the order of precedence for set off and absorption will be: firstly, the current depreciation is to be deducted from the current profits; secondly, the carried forward business loss is to be set off because of the fact that the legal fiction of Section 32(2) has been made subject to the provisions of Section 72(2); thirdly, the unabsorbed depreciation is to be set off; and, lastly, the unabsorbed development rebate shall come up for set off (Mysore Paper Mills Ltd. v. CIT : [1979]117ITR132(KAR) ; CIT v. Coromandel Steels Ltd. : [1981]130ITR856(Mad) ).'

11. We see no reason to differ from the reasoning of the Gujarat, Karnataka and the Madras High Courts in the decisions referred to above. In the light of the aforesaid decisions, we see no error of law or error of jurisdiction in Exts. P-1 and P-3 orders. The Revenue has set off the unabsorbed business loss of the earlier years and still there is balance left over on that count. That apart, there is unabsorbed depreciation which is carried forward for the subsequent years. It is only after wiping out such (balance) unabsorbed business loss and also the unabsorbed depreciation, the question of any set off of the unabsorbed development rebate can or will arise. No such contingency arose for consideration in this case. In the circumstances, we are of the view that there is no error or other infirmity in Ext. P-1 or Ext. P-3 orders as contended by the petitioner's counsel.

12. The original petition is dismissed. There shall be no order as to costs.

13. Immediately after the judgment was pronounced, counsel for the petitioner, Mr. T.L. Viswanatha Iyer, orally prayed for the grant of a certificate for appeal to the Supreme Court of India. We are not satisfiedthat the case involves any substantial question of law of general importance which needs to be decided by the Supreme Court. Leave rejected.


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