SRINIVASAN J. - This is a petition under article 226 of the Constitution praying that the records of the Second Income-tax Officer, Tirunelveli, may be called for and the order of assessment quashed by the issue of a writ of certiorari. The petitioner is a private limited company carrying on transport business. In the account year ended December 31, 1957, the petitioner installed one bus and seven lorries. For the account year ended December 31, 1959, relevant to the assessment year 1960-61, the petitioner company claimed a carried forward loss of Rs. 49,446. This sum included an amount which represented the development rebate which had not been originally allowed in the assessment but which was later directed to be allowed by the Appellate Assistant Commissioner in appeal against the assessment for 1958-59. Together with this amount of development rebate, the total loss of profits came to Rs. 71,220 for the assessment year 1958-59. For the assessment year 1959-60 the total income available was a sum of Rs. 21,774. Deducting the loss carried forward from 1958-59, the assessee-petitioner claimed the balance of loss to be carried forward for the assessment year 1960-61 to be Rs. 49,446. In the assessment proceedings for 1960-61, however, the Income-tax Officer refused to allow this as an adjustable loss, on the ground that it represented unabsorbed development rebate. He purported to rely upon the Taxation Laws (Amendment) Act, 1960, in holding that transport vehicles are not entitled to any development rebate and therefore this sum was not allowable. After rejecting the contention, that the total income of the assessee was fixed at Rs. 31,560 and a tax demand of Rs. 10,370.15 was made for the assessment year 1960-61. The contention of petitioner is that the Income-tax Officer acted illegally and without jurisdiction in refusing to allow the set-off of the loss claimed and that the demand for tax made upon it for the assessment year 1960-61, followed by notices of demand for advance tax for the year 1962-63, puts it to considerable hardship on the basis of an erroneous interpretation of the provisions. It is in these circumstances that the petition has been filed.
In the counter-affidavit filed on behalf of the department, firstly, it is alleged that the assessee-petitioner has other ample and adequate remedies open to it by way of appeals in which it can canvass the correctness or otherwise of the disallowance by the Income-tax Officer; secondly, it is urged that though the carried forward loss in the assessment year 1959-60 aggregated to Rs. 71,220, that amount was made up of carried forward business loss in part and unabsorbed development rebate in part. It is claimed that on a proper construction of the proviso newly inserted in section 10 (2) (vib) of the Income-tax Act by the Taxation Laws (Amendment) Act of 1960, which came into force on April 1, 1960, the Income-tax Officer was right in disallowing any portion of the unabsorbed depreciation loss from being carried forward and adjusted against the profits or gains of the business. It is this contention that principally calls for determination.
We may at first dispose of the first contention raised by the department that the procedure by way of a petition under article 226 is not a proper remedy. We are not disposed to accept this contention at this stage of the proceedings. The petition has been admitted by this court notwithstanding the existence of remedies by way of appeal to the Appellate Assistant Commissioner and the Tribunal. As the petitioner rightly points out, on the basis that the disallowance is improper, it has been mulcted with a heavy payment of tax and this demand upon it by way of tax is likely to be recurrent for two or more years before the question is finally settled. Though it may finally succeed in appeal or reference, the incorrect application of the law has thrown a heavy burden upon it, having to meet the unlawful levy both in the year of assessment and in the succeeding years. This court admitted the petition accepting the position that, in the circumstances, relief, if possible by way of a writ, should not be denied. We are therefore disposed to accept the contention that the petition should not be dismissed for the reason that remedies by way of regular appeals are open to the assessee.
To recapitulate the contentions of either side, they are on the petitioners side that the unabsorbed development rebate had become part of the carried forward loss and it is not competent to the department to split up such carried forward loss and claim that only that portion which represented the carried forward loss of profits of the business should be adjusted against the profits of the succeeding year, leaving that portion of the carried forward loss nationally representing the development rebate to remain unadjusted in the event of there being not sufficient profits in the year. The department at first contended that by reason of the explanation to section 10 (2) (vi) introduced in 1958, no portion of the development rebate could be adjusted against subsequent profits. But, during the course of the arguments, Mr. Ranganathan fairly conceded that the Explanation introduced in 1958 would not apply. But he claimed, nevertheless, that the unabsorbed development rebate could retain its distinct character for the purpose of adjustment in future years and cannot merge into the general business loss. It is this contention that has to be examined.
Section 10 (2) (vi) of the Act deals with depreciation of buildings, machinery, plant or furniture. Clause (via) provides for additional depreciation allowance to be made in respect of buildings newly erected or of machinery or plant being new which has been installed after the 31st day of March, 1946. The allowance by way of development rebate is covered by clause (vib), which was introduced by the Finance Act, 1955. It grants a development rebate in respect of machinery and plant on certain conditions. They are that the machinery or plant should be new and should have been installed after the 31st of March, 1954, that it should be used wholly for the purpose of the business carried on by the assessee; and further that the particulars prescribed for the purpose of depreciation allowance under clause (vi) are furnished. This allowance by way of development rebate is in addition to the depreciation allowance that is covered by clause (vi) or clause (via). In so for as the present case is concerned, there is no dispute that the vehicles in question were installed in the transport business during the calendar year 1957. There is also no dispute that there has been a compliance with the requirements of the section. This clause was substituted by a new one by the Finance Act, 1958, but that made no material alteration in so far as the new machinery or plant installed after the 31st of March, 1954, is concerned. Two new Explanations to the provision were added. Explanation I sets out the manner in which the development rebate was to be adjusted against the income of the year and Explanation 2 provided for the method of carry forward of such development rebate for adjustment in succeeding years. As stated already, Mr. Ranganathan, for the department who initially contended that the method of adjustment of this development rebate against the profits should follow the provisions of Explanations 1 and 2 conceded that this Explanation 1 applies only to the case of machinery or plant installed after the 31st day of December, 1957, and Explanation 2 would also deal only with the development rebate allowed in accordance with the provisions of Explanation 1. In terms, therefore, these Explanations will have no application to machinery or plant installed before the 31st day of December, 1957.
The next contention was that by the Taxation Laws (Amendment) Act, 1960, a proviso was inserted with effect from April 1, 1960, in these terms :
'Provided further that no allowance... shall be made in respect of any machinery or plant which consists of office appliances or road transport vehicles.'
This proviso accordingly denied any development rebate to road transport vehicles and took them out of the category of machinery or plant in respect of which the main part of clause (vib) allowed development rebate. There is no doubt in our minds that this proviso is only prospective and cannot affect the development rebate which had been granted to road transport vehicles prior to April 1, 1960.
In so far as this proviso is concerned, it cannot be contended by the department that development rebate which had been granted in the previous years should be withdrawn, that is to say, if such development rebate remained unabsorbed development rebate should be extinguished altogether. Such a conclusion cannot follow from this provision.
But what is contended for by Mr. Ranganathan, for the department, is having regard to the underlying principle of the provisions contained in clause (vi), (via) and (vib), the distinct character of development rebate is maintained in the succeeding years and effect cannot be given to this quantum of development rebate which, if allowed to be adjusted, would convert the business profit into a loss. How this result is reached is somewhat difficult to follow, but the line of argument adopted by the learned counsel for the department is briefly as below :
The allowances granted under clause (vi), (via) and (vib) are not expenses incurred by the assessee in the running of his business. While an expenditure properly incurred for the purpose of the business goes to reduce the gross receipts of the profits, it is argued that an allowance cannot be given a similar scope. By way of analogy, Mr. Ranganathan refers to proviso (b) to section 10 (2) (vi), which enacts that if full effect cannot be given to depreciation allowance in any year for the reason that there are no profits or gains chargeable for the year or the profits or gains chargeable are less than such depreciation allowance, then such depreciation allowance is permitted to be carried forward subject to the provisions of section 24 (2), and such unabsorbed depreciation allowance is permitted to be accumulated in succeeding years to the extent to which any part of it is not capable of adjustment in any year. He argues that on the principle of this proviso to section 10 (2) (vi), the same method of adjustment of development rebate should be followed. It is true that in so far as above proviso is concerned, the depreciation allowance is kept apart, and section 24 which provides for the set-off of loss in computing the aggregate income, postpones the adjustment of carried forward depreciation allowance to the adjustment of other losses, that is to say, the business loss is distinguished from depreciation allowance and the carried forward business loss has to be set off first against the income and profits of any year before any part of the depreciation allowance carried forward becomes eligible for set-off. It is claimed by Mr. Ranganathan that the very same principle should be applied to the carried forward unabsorbed development rebate. We are really unable to accept this contention which virtually means the introduction of new provisions into the Act. Undoubtedly, what is granted by way of development rebate is an allowance, for section 10 (2) starts by saying that the profits or gains shall be computed after making the following allowances. Whether or not such adjustment results in net loss is immaterial. While the legislature has provided otherwise with regard to the depreciation allowance covered by section 10 (2) (vi) and incorporated a specific method of adjustment of that allowance in succeeding years, keeping the identity of the sum represented by such depreciation allowance distinct from other allowances, it has not thought fit to provide likewise in the case of development rebate. When once the development rebate is granted, it constitutes an allowance which has to be deducted from the gross profits of the business. Thereafter, the balance whether it represents a net profit or a net loss, is nothing more than the computation of the income and, in the absence of any provision analogous to that contained in the proviso to section 10 (2) (vi), we cannot accept the contention of the learned counsel that any portion of such net loss can be regarded as retaining in part the character of unabsorbed development rebate.
Mr. Ranganathans further contention that section 24 itself has the effect of recognising the source of a loss is again without substance. The argument is that section 24 (1) starts by saying that, 'where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6...' It is suggested that the expression 'loss of profits or gains under any of the heads' indicates only the loss of business profits or gains and not one into which an allowance has merged. It seems to us that under the head 'business' the resultant computation of the profits or gains can be reached only after all the allowances contemplated by section 10 (2) are given effect to, and except for depreciation covered by section 10 (2) (vi), every other kind of allowance has to be deducted from the gross profits or gains before the assessable profits can be reached, and when once that has been done, it is the result that represents the profits or gains under that head. Section 24 (2) does not therefore give any support to the contention that development rebate being an allowance, which is not in the nature of a business expenditure or business loss, must be segregated and treated separately.
It follows that the assessment made ignoring the requirement of the law with regard to the adjustment of the development rebate is clearly in violation of the provisions relevant thereto. The petition succeeds. The rule nisi is made absolute. The petitioner will be entitled to its costs. Counsels fee Rs. 100.