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Monogram Mills Co. Ltd. Vs. Commissioner of Income-tax, Gujarat - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 174 of 1975
Judge
Reported in(1981)25CTR(Guj)283
ActsIncome Tax Act, 1961 - Sections 2(45), 4, 5, 5(1), 14, 28, 29, 30, 31, 32, 32(1), 32(2), 32(4), 32A, 33, 33(1), 33(1A), 33(2), 33(5), 33A, 34, 35, 36, 37, 38, 39, 40, 41, 41(2), 42, 43, 43A, 44C, 66, 69D, 70, 71, 72, 72(1), 72(2), 72(3), 72A, 73, 73(3), 74, 74A, 80, 80A, 80E, 80E(1), 80VV, 261 and 280-O
AppellantMonogram Mills Co. Ltd.
RespondentCommissioner of Income-tax, Gujarat
Appellant Advocate K.C. Patel, Adv.
Respondent Advocate G.N. Desai, Adv.
Excerpt:
direct taxation - deduction - section 32 (2) of income-tax act, 1961 - assessee company claimed that development rebate should be accorded priority over business lossess of earlier years and unabsorbed depreciation - tribunal held that development rebate cannot take precedence over unabsorbed depreciation and business losses - appeal - held, on correct interpretation of section 32 (2) carried forward and set off loss should be accorded priority to prevent erosion of capital base of assessee business. - - 3. the tribunal found that the views expressed by the well-known commentators on the i. [1976]104itr744(guj) ,as well as in cit v. patel is right when he urges that like the carried forward business losses (vide s. 32, the development rebate may lapse even though the assessee.....divan, c.j.1. in this case, at the instance of the assessee, the following question have been referred to us for our opinion : '(1) whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the carried forward development rebate of the earlier years cannot take precedence over the unabsorbed depreciation and business losses for the purpose of set off during the current year (2) whether the tribunal has erred in interpreting section 2(45) read in the context of sections 5, 33 and 72, etc., in determining the point at issue ?' 2. the facts leading to this reference are as follows : the assessment year under consideration is 1970-71, corresponding to calendar year 1969. the assessee is a limited company carrying on the business of manufacture and.....
Judgment:

Divan, C.J.

1. In this case, at the instance of the assessee, the following question have been referred to us for our opinion :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the carried forward development rebate of the earlier years cannot take precedence over the unabsorbed depreciation and business losses for the purpose of set off during the current year

(2) Whether the Tribunal has erred in interpreting section 2(45) read in the context of sections 5, 33 and 72, etc., in determining the point at issue ?'

2. The facts leading to this reference are as follows :

The assessment year under consideration is 1970-71, corresponding to calendar year 1969. The assessee is a limited company carrying on the business of manufacture and sale of cotton cloth. The ITO computed the income of the assessee at Rs. 15,92,301. From this he made certain deductions on account of telephone deposit, depreciation, business losses carried forward from earlier years and unabsorbed carried forward depreciation at Rs. 5,73,136. The ITO also assessed a share of profit from Monotes Sales Agency. The assessee, on the other hand, claimed that the development rebate should have been given priority over the business losses of earlier years and unabsorbed depreciation. The ITO did not agree with the contention of the assessee and rejected those contentions. Thereafter, the matter was taken up in appeal to the AAC, who agreed with the ITO and confirmed his order. Thereafter, the assessee took the matter in further appeal before the Income-tax Appellate Tribunal. Before that body the contention of the assessee was that the depreciation, development rebate and the losses should be set of in the following manner :

1. Current year's depreciation.

2. Carried forward development rebate.

3. current year's development rebate.

4. Carried forward losses from earlier years.

5. Unabsorbed depreciation.

3. The Tribunal found that the views expressed by the well-known commentators on the I.T. Act were against the contention urged on behalf of the assessee, but it was contended before the Tribunal, as it has also been contended before us, that none of these commentators has given any arguments and/or reasons in support of the view that, first, current year's depreciation, carried forward losses from the earlier years and unabsorbed depreciation should be allowed and, thereafter, carried forward development rebate and current year's development rebate should be allowed. The Tribunal held that when the plant or machinery was installed subsequent to December 31, 1957, the treatment of the development rebate is altogether different and it does not form part of the business loss. According to the Tribunal, if in a particular year, development rebate is not sufficient to be adjusted against the profits, the same can be carried forward. According to the Tribunal, under the scheme of s. 24(2) of the Indian I.T. Act, 1922 (hereinafter referred to as 'the 1922 Act'), development rebate comes last for the purpose of setting off. It may be pointed out that under the I.T. Act, 1961 (hereinafter referred to as 'the 1961 Act'), s. 33(2) is equivalent to s. 24(2) of the 1922 Act, so far as the question of carrying forward and setting off of unabsorbed development rebate is concerned.

4. In order to appreciate the contentions which have been urged on behalf of the assessee certain figures should be noted at this stage. In the assessment year under consideration, so far as the assessee is concerned, there was a total carried forward development rebate of Rs. 3,30,891. This unabsorbed development rebate was being carried forward from the year 1963-64. The assessee had carried forward business loss for the assessment year 1964-65. at Rs. 4,49,663 and carried forward unabsorbed depreciation for various years at Rs. 21,91,060. As we have pointed out above, the figure of the total profit before the provisions regarding the setting off of carried forward business losses, unabsorbed deprecation and unabsorbed development rebate could be considered was Rs. 15,91,801, because, out of the amount of Rs. 15,92,301, a small item of Rs. 500 on account of telephone deposit and sukhary account was allowed to be deducted and the figure finally arrived at was Rs. 15,91,801.

5. In order to appreciate the controversy arising in this case, it is also necessary to refer to some of the relevant provisions of the 1961 Act. Section 2(45) defines 'total income' as the total amount of income referred to in s. 5, computed in the manner laid down in the Act. Therefore, unless there is something inconsistent with this meaning in the subject or context or unless the context otherwise requires, the expression 'total income' used in the Act would mean total income computed in the manner laid down in the Act. Section 4 of the 1961 Act is the charging section and it provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions of the Act in respect of the total income of the previous year or years, as the case may be, of every person. Section 5 of the 1961 Act provides for the scope of total income and lays down that subject to the provisions of the Act, the total income in any previous year of a person who is a resident includes all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person or accrues or arises or is deemed to accrue or arise to his in India during such year. We are not concerned with clause (c) of s. 5(1) in this case.

6. Chapter IV of the 1961 Act deals with the computation of the total income and s. 15 deals with the heads of income. It provides that save as otherwise provided by the Act, all income shall, for the purpose of charge of income-tax and computation of total income, be classified under the following heads of income :

A. Salaries.

B. Interest on securities.

C. Income from house property.

D. Profits and gains of business or profession.

E. Capital gains.

F. Income from other sources.

7. We are concerned in this case with the group of sections under which computation of income under the head 'Profits and gains of business of profession' has to be carried out. Section 28 of the Act provides what income can be chargeable to income-tax under the head 'Profits and gains of business or profession'. Clause (1) of s. 28 provides that the profits and gains of any business or profession which was carried on by the asses see at any time during the previous year shall be chargeable to income tax. We are not concerned with the other parts of this section. Under s. 29 of this Act it has been provided that the income referred to in s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43A. Therefore, before the income of the assessee is computed under the head 'Profits and gains of business or profession' all sections - from s. 32 to 43A - will have to be borne in mind before arriving at the net figure of income under the head 'Profits and gains of business or profession'. Section 32 provides for depreciation. Under sub-s (1) of s. 32 it has been provided that in respect of depreciation of building, machinery, plant or furniture owned by the assessee and used for the purpose of the business or profession, the following deductions shall, subject to the provisions of s. 34, be allowed, Under sub-clause (ii) of sub-s (1) of s. 32 it has been provided that in the case of buildings, machinery, plant or furniture, other than ship covered by clause (i), such percentage on the written down value thereof as may in any case or class of cases be prescribed, is the depreciation allowance, Under sub-s. (2) of s. 32 provision is made for what can be called carrying forward of unabsorbed depreciation. It provides that 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) of sub-s. (1) 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-s. (2) of s. 72 and sub-s. (3) of s. 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.

8. At this stage, it may be pointed out that s. 72 deals with carry forward and set-off of business losses. At a later stage we will deal with the concept of carry forward and set-off of business losses, but, at this stage, we may point out that s. 72(2) provides that where any allowance or part thereof is, under sub-s. (2) of s. 32 or sub-s. (4) of s. 35, to be carried forward, effect shall first be given to the provisions of s. 72. Therefore, before any depreciation allowance can be carried forward and set-off against the profits of the subsequent years, the carried forward business loss has first to be set off and, thereafter, effect can be given to the unabsorbed depreciation allowance. Under s. 33 of the Act, provision has been made for the development rebate and clause (a) of sub-s. (1) of s. 33 provides that 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 s. 33 and of s. 34, 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) of s. 33. In this case there is no controversy regarding the percentage at which the development rebate has to be worked out. What is really material in this case is s. 33(2), which provides that in the case of a ship acquired or machinery or plant installed after December 31, 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-s. (1) or sub-s. (1A) of s. 33 or sub-s. (1) of s. 33A or any deduction under Chap. VI-A or s. 280-0) is nil or is less than the full amount of the development rebate calculated at the rate applicable thereto under sub-s. (1) or sub-s. (1A), as the case may be, the sum to be allowed by way of development rebate for that assessment year under sub-s. (1) or sub-s. (1A) shall be only such amount as is sufficient to reduce the said total income to nil, and 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.

9. The Explanation to sub-s. (2) of s. 33 provides for a situation where for any assessment year development rebate is to be allowed in accordance with the provisions of sub-s. (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 is less than the aggregate of the amounts due to be allowed in respect of the development rebate of that particular year. The situation envisaged by the Explanation to sub-s. (2) of s. 33 does not arise in the present case.

10. Section 72 of the 1961 Act is in Chap. VI which deals with the aggregation of income and set-off or carry forward of loss. Chapter VI consists of sections commencing from s. 66 to 80. Section 69D deals with the aggregation of income. Section 70 deals with set-off or carry forward and set-off. It deals with set-off of loss from one source against income from another source under the same head of income. Thus, s. 70 deals with the intra-head adjustment of loss. Though the sources under the same head may be different in arriving at the net result, loss from one source may be set off against the profits and gains or income from another source and the net result has to be arrived at after this intra-heads arrangement. Section 71 on the other hand deals with the setting off of loss from one head against income from another. Thus, in the same year of assessment, loss from one head can be set-off against the income from another head. The requirement of both. 70 and s. 71 is that both intra-head adjustment and inter-heads adjustment must be during the same year of assessment. Section 72 deals with carry forward and set-off of business losses and it provides that 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 not wholly set off against income under any head of income in accordance with the provisions of s. 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-s. (2) of that section or where he has no income under any other head, the whole loss shall, subject to the other provisions of Chap. VI, be carried forward to the following assessment year and 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 to that assessment year; and 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. Sub-section (2) of s. 72 provides that where any allowance or part thereof is, under sub-s. (2) of s. 32 or sub-s. (4) of s. 35, to be carried forward, effect shall first be given to the provisions of s. 72.

11. Though there is no direct authority for the priority to be given as between carried forward business loss, unabsorbed depreciation and carried forward development rebate under the provisions of s. 72(1), s. 32(2) and s. 33(2) of the 1961 Act, there is a direct authority of the Supreme Court relating to the priority to be given at the time of setting off of carried forward business loss and unabsorbed depreciation, in Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) . In that case, the Supreme Court was concerned with the provisions of s. 80E of the 1961 Act as it then stood. Under that section special deduction was to be given at the rate of 8% on profits and gains attributable to the business of generation and distribution of electricity. The question was whether in arriving at the figure on the basis of which 8% deduction was to be calculated, the unabsorbed depreciation and unabsorbed development rebate were to be deducted. There the Supreme Court pointed out that the important words in s. 80E(1) are those that appear in parenthesis, viz., 'was computed in accordance with the other provisions of the Act' and since it was income from business, the same, in view of s. 29, had to be computed in accordance with ss. 30 to 43, which would include s. 41(2) (providing for the balancing charge), s. 32(2) (providing for carry forward of depreciation) and s. 33(2) (providing for carry forward of development rebate), but, what is really material is that in this decision the Supreme Court also pointed out that s. 72(1) has a direct impact upon the computation under the head 'Profits and gains of business or profession'. Tulzapurkar J., speaking for the Supreme Court, pointed out at p. 97 of the report, that it was not possible to accept the view that s. 72 had no bearing on, or was unconnected with, the computation of the total income of an assessee under the head 'Profits and agains of business or profession'. Actually, s. 72(1) provides that where the net result of computation under the head 'Profits and agains of business or profession' is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of s. 71, so much of the loss as has not been so set off, subject to the other provisions of the Chapter, shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, of any business or profession for that assessment year. Therefore s. 72(1) has a direct impact upon the computation under the head 'Profits and agains of business or profession'. In other words, the correct figure of total income, which is otherwise taxable under the other provisions of the Act, cannot be arrived at without working out the net result of computation under the head 'Profits and gains of business or profession'

12. Mr. Patel, the learned counsel for the assessee, has urged before us that the provisions of ss. 29 to 71 should be first applied before the question of considering the carry forward and set-off of business losses or unabsorbed depreciation from the previous year under the provisions of s. 72(2) or s. 32(2), is taken into consideration. His contention is that, under the scheme of s. 33, development rebate is to be set off in lump sum in the earlier year relevant to the previous year in which the plant or machinery was installed or the ship was put into commission. He further stated that under the scheme of cls. (i) and (ii) of sub-s. (2) of s. 32 the current year's development rebate is relinquished to the unabsorbed development rebate from the previous years and under that scheme development rebate for the current year must be given effect to first before the provisions of carry forward and set-off of business loss under s. 72(2) and section 32(2) can be applied. It is incumbent upon the I.T. authorities to give development rebate for the current year and, therefore, carry forward and set off of the business loss and unabsorbed depreciation from the previous year will have to be relinquished to the lower order of priority as compared to the unabsorbed development rebate and development rebate of the current year.

13. In this connection, the main burden of the argument of Mr. Patel was that the carry forward and set off of business loss, unabsorbed depreciation and unabsorbed development rebate must all be applied at the same stage, i.e., after the current year's depreciation has been treated as a first charge against the receipts of the year under consideration and thereafter because of the provisions of s. 72(2) and s. 32(2) inter se carried forward business loss and unabsorbed depreciation, priority has to be given to the carried forward business loss. He, however, contended that because of the specific provision of s. 32(2), before current year's development rebate can be given effect to and deducted by virtue of the scheme of cls. (i) and (ii) of sub-s. (2) of s. 33, priority has to be given to the unabsorbed development rebate over the current year's development rebate and hence by virtue of the specific provision of s. 33(2) of the 1961 Act, unabsorbed development rebate from the previous year and current year's development rebate will both get priority over the carried forward business loss and unabsorbed depreciation from the previous year.

14. As has been held by this court in CIT v. Gujarat State Warehousing Corporation : [1976]104ITR1(Guj) , and in CIT v. Cambay Electric Supply Industrial Co. Ltd. : [1976]104ITR744(Guj) , as well as in CIT v. Amul Transmission Line Hardware Pvt. Ltd. : [1976]104ITR771(Guj) , under the provision of s. 72(2) to which the provision of s. 32(2) has been made subject, if there is a contest for priority as regards carried forward business loss and carried forward unabsorbed depreciation from the previous year, before the clubbing of the unabsorbed depreciation from the previous year with the current year's depreciation and the deeming fiction of treating the unabsorbed depreciation of the previous year as the current year's depreciation comes into operation, priority must be given to carried forward business loss. To that extent Mr. Patel is right but the question is as to what priority should be given to the carried forward unabsorbed development rebate. Because of the peculiar provisions of cls. (i) and (ii) of sub s. (2) of s. 33, as between current year's development rebate and unabsorbed development rebate from the previous year unlike in the case of carried forward business loss and unabsorbed depreciation, priority is given to the unabsorbed development rebate from the previous year and thereafter the current year's development rebate has to be set off.

15. However, in our opinion, this problem can be solved by closely analysing the provisions of sub-s. (2) of s. 33. In the body of that sub-section the material words, in our opinion, are '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'. These words in the parenthesis make it clear that though under s. 2(45) of the Act 'total income' means the total amount of income referred to in s. 5, computed in the manner laid down in this Act, for the specific purpose of sub-s. (2) of s. 33 when the total income is to be taken into consideration no deduction is to be made in respect of the allowances under sub-s (1) or sub-s. (1A) of s. 33 or sub-s. (1) of s. 33A or any deduction under Chap. VI-A consisting of s. 80A to s. 80VV, or s. 280-O for the annuity deposit. Therefore, a specially defined concept of total income has to be applied while working out the provisions of cls. (i) and (ii) of sub-s. (2) of s. 33. In order to give effect to the words in the parenthesis in sub-s. (2) of s. 33, one has first to compute the total income in the manner laid down in the Act and having thus computed it in the normal manner, the development rebate under sub-s. (1) or sub-s. (1A) of s. 33, the development allowance under sub-s. (1) of s. 33A, the special deductions under Chap. VI-A and the annuity deposits under s. 280-O, have all to be added back and it is only if the 'total income' thus arrived at after adding back is nil, or is less than the full amount of the development rebate calculated at the rate applicable thereto under sub-s. (1) of sbu-s. (1A), as the case may be, the provisions of cls. (i) and (ii) of sub-s. (2) of s, 33 come into operation. Because of these words in the parenthesis no other meaning can be given to the concept of total income which has been made specially applicable to sub-s. (2) of s. 33.

16. As pointed out by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. : [1978]113ITR84(SC) , s. 72(1) has a direct impact upon the computation under the head 'Profits and gains of business or profession'. Therefore, before arriving at the figure of total income to which various amounts just now narrated have to add back the carried forward business losses have to be set off and it is only after thus setting off of carried forward business losses from the previous years that the amount of profits and gains of business or profession, which is one of the heads of total income in view of s. 14, can be arrived at and it is only after arriving at the figure of total income in this manner that the additions back have to be made in the light of the words in the parenthesis of sub s. (2) of s. 33. If this setting-off of carried forward business losses is not done before arriving at the total figure of income in the manner contemplated by sub-s. (2) of s. 33, the direct impact of s. 72(1) could not be given effect to. It is at this stage that by virtue of the provisions of s. 72(2) after setting-off of carried forward business loss the unabsorbed depreciation will have to be set off and the unabsorbed depreciation and the deeming fiction of s. 32(2) will come into play only after the carried forward business losses have been set off against the profits and gains from the business or profession under s. 72(1).

17. After giving effect to the carried forward business losses and setting them off the deeming fiction would make the unabsorbed depreciation from the previous years the depreciation for the current year and under the scheme of s. 32 while working out the profits and gains from business or profession, full effect must be given to the provisions of s. 32(2). Section 32 is one of the sections in the group of sections from s. 29 to 43 and the income under the heading of 'Profits and gains of business or profession' can be worked out only after giving the full effect to the provisions of s. 32, including sub-s. (2) of s. 32. Therefore, by virtue of the specific words in the parenthesis of sub-s. (2) of s, 33 the total income of the assessee for the year under consideration has to be worked out by giving effect to the provisions of s. 32(1) thereafter to the provisions of s. 32(2) and at that stage the the development rebate (either current year's development rebate or unabsorbed development rebate from the previous year) has to be taken into consideration by virtue of the words occurring in the parenthesis in sub-s. (2) of s. 33.

18. Mr. Patel is right when he urges that like the carried forward business losses (vide s. 72(3)), carried forward unabsorbed development rebate from the previous year can be carried forward only for a period of 8 years under the provisions of sub-s. (2) of s. 33. Under the provisions of cl.(ii) of sub-s.(2) of s. 33, unabsorbed development rebate can be carried forward only to eight assessment years immediately succeeding the assessment years relevant to the previous year, in which the ship was acquired or machinery or plant in question was installed. It is possible, as Mr, Patel has argued, that if the interpretation that has appealed to us as set out above, were to be applied in some cases, the assessee may not be able to get the full benefit of unabsorbed development rebate from the previous years and at the end of eight years, as contemplated by clause (ii) of sub-s (2) of s. 32, the development rebate may lapse even though the assessee concerned has fully satisfied the requirement of s. 34, which lays down the conditions for claiming the development rebate, but, in our opinion, there is a reason why the Legislature has preferred carried forward business losses and unabsorbed depreciation from the previous years to unabsorbed development rebate in the order of priority. As is well known, depreciation, which is provided for in s. 32. is to protect the assessee against erosion of his capital. Current year's depreciation is the first charge on the receipts of the particular year in the profit and loss account, but so far as the unabsorbed depreciation from the previous year is concerned, though it is allowed to be carried forward indefinitely, such unabsorbed depreciation may destroy the capital basis of the assessee. Similarly, carried forward business losses would also eat away the net capital, particularly working capital of the assessee concerned, and in order to protect the capital of the assessee, which capital goes to earn income for the succeeding years, the Legislature had made a special provision for carrying forward business losses and unabsorbed depreciation and giving them priority over the development rebate. It is undoubtedly true, as Mr. Patel has emphasised by referring to the recommendations of the Taxation Enquiry Commission 1953-54, that the development rebate is granted as an incentive to all assessees with business activities and industrial activities to instal new plant and machinery and this incentive will not work if at the end of eight years, as contemplated by clause (ii) of sub-s. (2) of s. 33, the development rebate for a particular year lapses, but the Legislature seems to have preferred to give protection to the capital of the business by providing for a preference to the carried forward business losses and thereafter unabsorbed depreciation rather than to continue to give effect to the incentive in the shape of development rebate. Even if the development rebate is likely to be lost at the end of eight years after the installation of the plant or machinery or acquisition of the ship, as the case may be, in our opinion the Legislature has chosen the lesser evil between the two and has given preference to the carried forward business losses and then unabsorbed depreciation and thereafter unabsorbed development rebate.

19. It may be pointed out that there is no reference to sub-s. (1) or sub s. (2) of s. 72 in the provisions in sub-s. (2) of s. 33, where total income for the purpose of s. 33(2) has to be specially worked out in the manner indicated in that sub-section, particularly in the light of what is set out in the parenthesis of sub-s. (2) of s. 33. In the group of sections and sub-sections mentioned in that parenthesis, one does not find s. 72(1) which provides for carry forward and set-off of business losses from the previous years. It may be pointed out that when the Legislature wants to or does not want to exclude a particular section it says so and in the absence of a specific reference to s. 72 in the parenthesis in s, 33(2) it is not possible to exclude the business losses and carried forward business losses while giving effect to the provisions of s. 33(2) regarding the unabsorbed development rebate from the previous years.

20. We may point out that under s. 72A of the 1961 Act, which came into effect from April 1, 1978, under the Finance (No. 2) Act, 1977, it has been provided that where there has been an amalgamation of a company owning an industrial undertaking or a ship with another company and the Central Government on the recommendation of the specific authority, is satisfied that the conditions laid down therein, are fulfilled, then the Central Government may make a declaration to that effect and thereupon notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or allowance for depreciation, as the case may be, of the amalgamated company for the previous year in which the amalgamation was effected, but the unabsorbed development rebate of the amalgamated company is not be deemed the unabsorbed development rebate of the amalgamating company. Thus, in s. 72A, the Legislature has clearly laid down a distinction between the business losses which have been carried forward in the case of the amalgamating company and the unabsorbed depreciation allowances of the amalgamating company on the one hand and the unabsorbed development rebate of the amalgamated company on the other.

21. In a similar manner, the Legislature has also made a specific provision in the Explanation to s. 44C of the 1961 Act. Section 44C, which came into effect from June 1, 1976, after being inserted by the Finance Act, 1976, has brought the concept of adjusted total income and the Explanation to s. 44C provides that for the purpose of s. 44C 'adjusted total income' means the total income computed in accordance with the provisions of this Act, without giving effect to the allowance referred to in s. 44C or in s. 32 or the deduction referred to in s. 32A or s. 33 or s. 33A or the first proviso to clause (ix) of sub-s (1) of s. 36 or any loss carried forward under sub-s. (1) of s. 72 or sub-s (2) of s. 73 or sub-s (1) of s. 74 or sub-s. (3) of s. 74A or the deductions under Chap. VI-A. Therefore, the legislative practice clearly is that, after computing the total income in accordance with the provisions of the Act, the total income for the purpose of a particular section has to be modified or adjusted. The Legislature clearly provides as to how this is to be done. Clause (i) of Explanation to s. 44C clearly shows that for the purpose of 'adjusted total income' in the context of s. 44C, the carried forward business losses, unabsorbed depreciation and development rebate under s. 33 are all to be brought back and are not to be excluded while considering the 'adjusted total income'.

22. Section 44A sets out a special provision for a deduction in case of trade, professional or similar associations. There also the Legislature has provided that certain expenditures are not to be considered as a part of the total income for the purpose of that section. At the end we have the provisions of s. 80E which was under consideration before the Supreme Court in Cambay Electric Supply Industrial Co.'s case : [1978]113ITR84(SC) . The Legislature has used the words 'as computed in accordance with the other provisions of the Act' and, therefore, all the provisions of the Act including section 72 were brought into play, as held by the Supreme Court, while considering the provisions of s. 80E (prior to its amendment by the Finance (No. 2) Act, 1967).

23. These different instances of the legislative practice as occurring in the different sections of the Act clearly go to show that whenever the Legislature wants to define the 'total income' in the context of a particular provision of the Act, may be s. 80E or s. 44A or s. 44C, clear indications, as to how the total income for the purposes of that particular section or sub-section is to be computed, are given by the Legislature. Under these circumstances, the scheme of priority as between the carried forward business losses, unabsorbed depreciation and unabsorbed development rebate, which Mr. Patel has asked for in this case, cannot be said to be the correct order or priority. In our opinion, the correct order of priority is as under :

(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 s. 72(2) read with s. 72(1) ; (3) unabsorbed depreciation by virtue of the provisions of s. 32(2) ; (4) unabsorbed development rebate - because of the provisions of cls. (i) and (ii) of s. 33(2); and (5) current year's development rebate.

24. We find that all the commentators on the I.T. Act, 1961, have also mentioned in their respective commentaries this very order of priority, but, barring one or two, none of the commentators have given any reason in support of their conclusion regarding this order of priority. In Kanga and Palkhivala's The Law and Practice of Income Tax, 7th Edn., Vol I at p. 402, this very order of priority that we have mentioned hereinabove has been set out, but no reasoning have been given in support of this conclusion.

25. Similarly, in A. N. Aiyar's Income Tax Act, 1961, 2nd Edn., at p. 824, the same order of priority as we have mentioned, has been set out but barring the reference to the decision of this court in CIT v. Gujarat State Warehousing Corporation : [1976]104ITR1(Guj) , there is no reason advanced why this order of priority has been preferred by the learned commentator.

26. In Iyengar on Income Tax, 6th Edn., Vol. I, at p. 837, the order of priority at which we have arrived at, has been mentioned but again no reason has been given. Similar is the position so far as Chaturvedi and Pithisaria's Income Tax Law, 2nd Edn., at p 1128, is concerned.

27. We may, however, point out that some of these commentators in their books do mention the relevant provisions like s. 72(1) and s. 33(2) against the different items mentioned in the order of priority. Jindal's Income Tax Past and Present, 3rd Edn., at p. 437, while mentioning this order of priority, says that development rebates are notional losses and can be set off against any other head of income in future years. Sections 32(2) and 33(2) are exceptions to s. 71 which allows inter-head set-off only in the year of occurrence of loss.

28. In V. S. Sundaram's the Law of Income Tax in India, 9th Edn., p. 465, the question of priority has been considered and it has been pointed out that there can be no question of priority as between current year's depreciation allowance and development rebate. Total income has first to be arrived at before considering development rebate. Unabsorbed depreciation of earlier years is treated as additional depreciation of later years under s. 32(2). Therefore, when s. 33(2) talks of the total income being computed, without making any allowance under sub-s. (1) i,e., for the deduction of the rebate, but after making all other deductions, it follows that unabsorbed depreciation of earlier years will have first to be deducted before development rebate is deducted. The absence of a provision, as in ss. 72(2) and 73(3), may, therefore, deprive assessees of a part of the rebate owing to the eight-years limit. But cases are unlikely to occur in practice having regard to business conditions of these days.

29. Mr. Patel is right when he says that the view that such cases of development rebate of earlier years being not available to the assessees concerned owing to the lapse of eight years are unlikely to occur in practice, is unfortunately not correct in some of the cases now coming up before the I.T. authorities, the case before us being an instance of one of such cases.

30. In Depreciation, Investment Allowance, Development Rebate and Balancing Charge in Income Tax, by Ramesh C. Sharma, at p. 223, the question of priority has been dealt with and there also the learned author, like V. S. Sundaram, has relied upon the specific language of s. 33(2).

31. In Chopra's Income Tax Law and Practice, 2nd Edn., at p. 860, the learned author has set out the order of priority as we have mentioned earlier, and explains that the expression 'total income' in s. 33(2) means the total income computed without making any allowance under ss. 33(1), 33(1A), 33A, Chap. VIA and s. 280-O.

32. We note that in the 11th Edn. of the Law of Income Tax in India by V. S. Sundaram at p. 1022, whatever has been stated in the earlier edition has been reiterated without any change.

33. 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-s (2) of s. 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.

34. In P. K. Badiani v. CIT : [1976]105ITR642(SC) , the Supreme Court has held that the allowance of initial depreciation or development rebate, unlike normal depreciation, is in no sense a deductible item of cost or expenditure in the process of settlement of the commercial profits ; although it does not form part of the assessable profits, undoubtedly it does form part of the commercial profits, and thus, as we have pointed out above in the order of priority, current year's depreciation is the first charge on the property from the commercial point of view, is the view upheld by the Supreme Court in P. K. Badiani's case : [1976]105ITR642(SC) .

35. Under these circumstances, we answer the questions referred to us as follows :

Question No. 1 : In the affirmative, i.e., in favour of the revenue and against the assessee.

Question No. 2 : In the negative, i.e., in favour of the revenue and against the assessee. The assessee will pay the costs of this reference to the Commissioner. After the pronouncement of the above judgment, Mr. Patel, for the aesessee, has orally applied under s. 261 of the Act for a certificate for appeal to the Supreme Court. In our opinion, the question of law involved in this case is a substantial question of law. There is no direct authority on the interpretation of s. 32(2) of the Act in the manner in which we have interpreted it. It is no doubt true that all the commentators have taken the same view that we have taken in this case, but there is no direct decision of the Supreme Court on this pint and hence the certificate is granted.


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