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Commissioner of Income-tax, Tamil Nadu-ii, Madras Vs. North Arcot District Co-operative Spinning Mills Limited - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 629 and 630 of 1978 (Reference Nos. 374 and 375 of 1978)
Judge
Reported in(1984)42CTR(Mad)51; [1985]151ITR238(Mad)
ActsIncome Tax Act, 1961 - Sections 32, 32(1), 32(2), 80J and 84; Income Tax Act, 1922 - Sections 15C
AppellantCommissioner of Income-tax, Tamil Nadu-ii, Madras
RespondentNorth Arcot District Co-operative Spinning Mills Limited
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateP. Veeraraghavan, Adv.
Excerpt:
.....32, 32 (1), 32 (2), 80b, 80j, and 84 of income tax act, 1961 and section 15c of income tax act, 1922 - whether tribunal right in finding that for purpose of computing profits under section 80j (1), unabsorbed depreciation of earlier years will have to be set off after determination of current years relief under section 80j - section 32 (2) deems unabsorbed depreciation of earlier year as depreciation of current year which has to be taken note of in computation of total income of current year - deduction under section 80j will come only after total income determined under provision of act as per section 80b (2) - if relief under section 80j granted before allowance granted for unabsorbed depreciation it will alter priorities contemplated by statute - section 80j cannot override section..........could be deducted first before the relief under s. 80j is worked out and deducted from the current year's profits. the reasoning of the tribunal is contained in paragraph 14 of the order which is as follows : 'the brought forward depreciation alone remains to be considered. there is no brought forward business loss to be considered in the assessee's case. accordingly, the unabsorbed depreciation will be set off lastly or carried forward.' 7. as will be seen from the extract given, the tribunal has not given any reason as to why it felt that the unabsorbed depreciation will be set off lastly or carried forward. it is not, therefore, possible for us to understand the mind of the tribunal as to why it held that the unabsorbed depreciation will have to be set off lastly after the deduction.....
Judgment:

Ramanujam, J.

1. At the instance of the Revenue, the following common question of law has been referred to this court :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's findings that for the purpose of computing the profits of the industrial undertaking under section 80J(1), the unabsorbed depreciation of the earlier years will have to be set off last after the determination of the current year's relief under section 80J is sustainable in law ?'

2. The assessee is a co-operative society and the ITO computed its total income for the assessment year 1971-72, as follows :

Rs. Rs. Rs.'Interest on securities 2,000Business income before allowanceof depreciation 11,51,247Less : Depreciation for current year 5,58,678Brought forward depreciation 6,36,173 11,84,860(sic) 412---------- ------33,613(sic) 2,412----------- ------

3. Balance depreciation to be carried forward 31,201 Development rebate :

Assessment years Rs.1967-68 7,20,4051968-69 66,5591969-70 nil1970-71 1,16,2701971-72 27,324----------9,30,558'----------

4. The assessee was entitled to deduction under s. 80J to the extent of Rs. 2,81,972 for the said assessment year. As the income computed was a loss, the ITO held that the said sum of Rs. 2,81,972 will be carried forward and set off against the income, if any, in the subsequent years. Similarly, for the assessment year 1972-73, the ITO computed the income as under :

Rs. Rs. Rs.'Interest on securities 2,000Business-spinning mills-income beforedepreciation 13,75,960Inadmissible as per audited statement 4,000---------13,79,960Less : Current depreciation 5,47,9042. Allowance u/s. 32(1)(v) 13,7893. Bonus actually paid 80,0784. Brought forward depreciation 31,201 6,72,972---------- ---------7,06,988Less : Brought forward develop-ment rebate 9,03,234---------1,96,246Current year development rebate 67,350--------- 2,63,596Remaining development rebate to be carried forward 2,61,596'---------

5. The ITO computed the relief to which the assessee was entitled under s. 80J at Rs. 2,90,226 and directed that this should be carried forward and set off against the income, if any, in the subsequent years.

6. The assessee appealed to the AAC in respect of the assessment for both the assessment years 1971-72 and 1972-73. The AAC affirmed the order of the ITO. Thereafter, the assessee appealed to the Tribunal. Before the Tribunal, the assessee questioned the method of computation of the profits of a new industrial undertaking for the purpose of working out the relief under s. 80J. According to the assessee, the relief under s. 80J should be given first before allowing deduction for carried forward loss or carried forward development rebate or carried forward depreciation. The Tribunal held that the carried forward loss and the unabsorbed development rebate of the earlier years have to be taken note of before granting relief under s. 80J. But the carried forward unabsorbed depreciation will, however, be taken note of only after granting the relief under s. 80J. The decision of the Tribunal so far as it relates to the unabsorbed development rebate and the carried forward business loss is against the assessee. The assessee has not questioned it by seeking a reference. Therefore, the view of the Tribunal that the carried forward unabsorbed loss or the unabsorbed development rebate has to be deducted in the computation of total income first before working out the relief to which the assessee is liable under s. 80J is not under challenge before us. It is only the view taken by the Tribunal that the unabsorbed depreciation will have to be set off lastly after working out the relief under s. 80J that is challenged by the Revenue. Therefore, the only question we are called upon to consider in this case is whether the unabsorbed depreciation, which is carried forward from the earlier years, could be deducted first before the relief under s. 80J is worked out and deducted from the current year's profits. The reasoning of the Tribunal is contained in paragraph 14 of the order which is as follows :

'The brought forward depreciation alone remains to be considered. There is no brought forward business loss to be considered in the assessee's case. Accordingly, the unabsorbed depreciation will be set off lastly or carried forward.'

7. As will be seen from the extract given, the Tribunal has not given any reason as to why it felt that the unabsorbed depreciation will be set off lastly or carried forward. It is not, therefore, possible for us to understand the mind of the Tribunal as to why it held that the unabsorbed depreciation will have to be set off lastly after the deduction under s. 80J is given. The question is whether the view taken by the Tribunal that the unabsorbed depreciation will have to be set off lastly after the deduction is allowed in respect of the relief under s. 80J is legally sustainable.

8. As already stated, the Tribunal has given elaborate reasons to hold that so far as the carried forward development rebate and the current year's development rebate concerned, they should be deducted first before s. 80J relief is given for the current year and afterwards the s. 80J deficiency brought forward from the earlier years will have to be considered. We do not see why the reasoning given by the Tribunal with reference to the development rebate will not apply to the unabsorbed depreciation is concerned, it has to take precedence before the relief under s. 80J is given, and it has given reasons as to why the depreciation of the current year should take precedence over the relief under s. 80J. However, the Tribunal has not given any reason as to why the unabsorbed depreciation should be taken different from the current year's depreciation. We are of the view that no distinction could be made between the current year's depreciation and the carried forward unabsorbed depreciation of the earlier years in view of the specific provisions of s. 32(2) of the I.T. Act. The Tribunal appears to have overlooked the said provision while making a distinction between the current year's depreciation and the unabsorbed depreciation of the earlier years. Section 32(1) deals with the current year's depreciation and it says that it will be a charge on the profits earned in that year. Section 32(2) is in the following terms :

'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 (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.'

9. A perusal of sub-s. (2) of s. 32 will indicate that the carried forward unabsorbed depreciation of the earlier years should be deemed to be part of the allowance contemplated by s. 32(1) and the computation of the taxable income should be made on that basis. Section 32(2) does not, on the face of it, say that the carried forward unabsorbed depreciation will be treated as a separate deduction different from the current year's depreciation under s. 32(1). Sub-s. (2) contemplates the unabsorbed depreciation being added as current year's depreciation and the deduction being allowed under s. 32(2) on that basis. When s. 32(2) treats the unabsorbed depreciation of the earlier years as part of the current year's depreciation by a deeming clause, then, for the purpose of a deduction, it should be treated as current year's depreciation. As already stated, the Tribunal has held that the current year's depreciation should be allowed first before the deduction is allowed under s. 80J. However, it has ignored the fact that the unabsorbed depreciation has to be treated as forming part of the current year's depreciation. As already stated, the Tribunal has overlooked sub-s. (2) of s. 32 and has made a distinction between the current year's depreciation and the unabsorbed depreciation of the earlier years and has stated that so far as the current year's depreciation is concerned, it will take precedence over the deduction contemplated under s. 80J but so far as the unabsorbed depreciation is concerned, it will come last after the deduction under s. 80J is allowed. Giving due effect to sub-s. (2) of s. 32 which deems unabsorbed depreciation of the earlier years as part of the current year's depreciation, the deduction under s. 32(1) must relate to both the current year's depreciation as well as the depreciation of the earlier years. Therefore, the Tribunal is not right in postponing the deduction towards unabsorbed depreciation of the earlier years till deduction under s. 80J is allowed. Though this is sufficient for answering the question referred to us, having regard to the fact that the counsel on both sides referred to certain decisions touching on the point, we would briefly consider the relevancy of the said decisions cited at the bar.

10. In Ashok Motors Ltd. v. CIT : [1961]41ITR397(Mad) , this court has specifically held that before an assess can be held eligible for any exemption under s. 15C of the Indian I.T. Act with respect to an industrial undertaking, there should be profits which should be derived from the industrial undertaking, that the exemption cannot operate in respect of any profit derived by the assessee from any trade or business other than the industrial undertaking and that if there are no profits, no question of granting the exemption under s. 15C arises. In that case, the assessee derived profits from an industrial undertaking as well as other trade activities. For the relevant assessment year, the total profits of the composite business came to Rs. 4,44,462. There was unabsorbed depreciation relating entirely to the industrial undertaking which had to be carried forward. The ITO computed the assessee's profits from the industrial undertaking at Rs. 2,53,198 which after adjusting the unabsorbed depreciation left a balance of Rs. 4,715. The Officer gave exemption under s. 15C of the I.T. Act in respect of the sum of Rs. 4,715 alone and brought to tax the sum of Rs. 1,91,264 pertaining to its other business activities. On a reference to this court, at the instance of the assessee, this court held that the procedure adopted by the ITO deducting all these unabsorbed depreciation before giving exemption under s. 15C was in conformity with the provisions of s. 15C and that the assessee was entitled to exemption under that section only in respect of the sum of Rs. 4,715. Section 15C of the old Act is the provision corresponding to the present s. 80J except that s. 80J provides for the carrying forward of the unabsorbed relief to the subsequent years while s. 15C did not make provision for carry forward. The decision is a clear authority for the proposition that unabsorbed depreciation has to be adjusted as against the profits before the relief under s. 80J is computed. The above decision of this court has been followed in Asian Cables Corporation Ltd. v. CIT [1981] 134 ITR 34 . In CIT v. Sivan Pillai : [1970]77ITR354(SC) , the Supreme Court had occasion to consider the scope of s. 15C(1) of the Indian I.T. Act, 1922. In that case, the Supreme Court expressed the view that under the scheme of s. 15C, the profits or gains of an industrial undertaking must be determined under and in the manner provided by s. 10 of the I.T. Act, that for that purpose, all the allowances under sub-s. (2) must be taken into account, and the resultant amount forms a component of the taxable profit, that, if by proviso (b) to s. 10(2)(vi), the unabsorbed depreciation of the previous year is deemed depreciation for the subsequent year, there is no room for making any distinction between the unabsorbed depreciation for the previous year and the depreciation for the current year, that the right to appropriate the profits towards the unabsorbed depreciation of the previous year does not arise under s. 24(1) : it arises by virtue of s. 10(2)(vi) and that in computing the profits of an industrial undertaking for any year under s. 15C(3), the unabsorbed depreciation of earlier years cannot be ignored. Again, this is a clear authority from the Supreme Court to support the view taken by us with reference to ss. 32(1) and 32(2). The deduction is only under s. 32(1) and not under s. 32(2). The purpose of s. 32(2) is only to take on the unabsorbed depreciation of the current year so that the deduction can be allowed under s. 32(1). The principle of the said decision squarely applies to the case before us. The proviso (b) to s. 10(2)(vi) corresponds to s. 32(2) of the present Act. The following observation of the Supreme Court is pertinent (page 359 of 77 ITR) :

'Under the scheme of section 15C, the profits or gains of an industrial undertaking must be determined under and in the manner provided by section 10 of the Income-tax Act. For that purpose all the allowances under sub-section (2) must be taken into account, and the resultant amount forms a component of the taxable profit. If by proviso (b) to s. 10(2)(vi), the unabsorbed depreciation of the previous year is deemed depreciation for the subsequent year, there is no room for making any distinction between the unabsorbed depreciation for the previous year and the depreciation for the current year. The right to appropriate the profits towards the unabsorbed depreciation of the previous year does not arise under s. 24(1); it arises by virtue of s. 10(2)(vi), proviso (b).

We are also unable to agree with the High Court that if an industrial undertaking has distributed dividend, the shareholders will be entitled to exemption from payment of tax on that dividend, even if the company is not entitled to claim exemption from liability to pay tax under subsection (1) of section 15C.'

11. In Mettur Chemical and Industrial Corporation Ltd. v. CIT : [1977]107ITR352(Mad) , the question that arose was whether the deduction under s. 33 of the development rebate should take precedence over the deduction under s. 84 or whether it should be postponed till the deduction under s. 84 is given. This court observed (at p. 359) :

'The manner of computation laid down in the Act is provided for in section 14. The manner of computation varies with reference to the several heads of income. We are concerned here with the profits and gains of business or profession. This is classified as head 'D' and the provisions relevant for this purpose are sections 28 to 44. Section 33 is included in those provisions and cannot be ruled out of consideration for the purpose on hand. If section 84 had provided for the exclusion of relief under section 33 for the present purpose, then the position would have been different. But the language of section 84(5), as we have already seen, enjoins the computation in accordance with the provisions contained in Chapter IV-D. Therefore, the development rebate allowable under section 33 has to be taken as a deduction for this purpose.'

12. This court took the view that the deduction of the development rebate allowable under s. 33 should be made first and the deduction to which the assessee will be entitled under s. 84 will have to be worked our later. In Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) , the Supreme Court, giving effect to the words 'as computed in accordance with the other provisions of the Act', occurring in s. 80E(1), held that before deduction is made under s. 80E as it stood prior to the amendment by the Finance (No. 2) 1967, the income from business in view of s. 29 has to be computed in accordance with ss. 30 to 43A which would include s. 32(2) providing for carry forward of depreciation, s. 33(2) providing for carry forward of development rebate and s. 41(2) providing for the balancing charge. Therefore, the relief under s. 80E can be considered only after giving effect to the provisions of provisions of ss. 32(2), 33(2) and 41(2). If the principle laid down by the Supreme Court is accepted, then we have to take it that s. 80J in this case does not override s. 32(2).

13. In CIT v. Patiala Flour Mills Co. P. Ltd. : [1978]115ITR640(SC) , the Supreme Court specifically considered the question regarding the computation of profits for the purpose of grant of relief under s. 80J(1). The Supreme Court expressed that it is clear from the language of s. 80J(1) that the profits or gains of a new industrial undertaking from which deduction of the relevant amount of capital employed during a particular assessment year is allowable under that provision, are the profits or gains includible in the computation of the total income chargeable to tax, that, therefore, whatever be the profits or gains of the new industrial undertaking computed for the purpose of arriving at the total income chargeable to tax, would have to be taken to be the profits or gains for applying the provision contained in s. 80J(1), that the language of s. 80J(1) is clear and explicit and leaves no doubt that the profits or gains of the new industrial undertaking for the purpose of allowing the deduction provided therein, have to be computed in the same manner in which they would be computed in determining the total income chargeable to tax and a deduction has then to be made from such profits or gains, of the relevant amount of capital employed during the assessment year in question and that it is impossible to see how, by any process of construction, even by turning and twisting the language of s. 80J(1), it can be held that for the purpose of allowing the deduction contemplated thereunder, the profits or gains of the new industrial undertaking must be computed in a manner different from that in which they would be computed in determining the total income chargeable to tax. The Supreme Court further pointed out that s. 80J(1) does not create a legal fiction that for the purpose of applying the same, the profits or gains of the new industrial undertaking shall be computed as if the new industrial undertaking were the only business of the assessee right from the date of its establishment or the losses, depreciation allowance or development rebate in respect of the new industrial undertaking for the past assessment years were not set off against the profit from other businesses. In CIT v. Coromandel Steels Ltd. : [1981]130ITR856(Mad) , this court again held that first comes the deduction of the depreciation of the current year and then as between unabsorbed business loss carried forward and unabsorbed depreciation, business loss has priority over unabsorbed depreciation and has to be allowed, that the unabsorbed development rebate comes up for consideration only after those two allowances, and that the assessee has no choice in the matter as the statute determines the priorities.

14. As already stated, s. 32(2) deems the unabsorbed depreciation of the earlier years as the depreciation of the current year which has to be taken note of in the computation of the total income of the current year. The deduction under s. 80J will come in only after the total income is determined under the other provision of the Act as per s. 80B(2). If, as held by the Tribunal, the relief under s. 80J is to be granted before the allowance is granted for unabsorbed depreciation, then it will alter the priorities contemplated by the statute. We are of the view that s. 80J cannot override s. 32(2). Further, all the decisions referred to above clearly support the contention put forward by the Revenue before us. We cannot, therefore, agree with the order of the Tribunal in this regard. We answer the question in the negative and in favour of the Revenue. The Revenue will get costs from the assessee. Counsel's fee Rs. 500 (One set).


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