JAGADISAN J. - This reference arises out of the assessment of one Nagi Reddy to income-tax for the assessment year 1956-57, the relevant 'previous year' being the calendar year 1955. He received in the year of account Rs. 72,426 and Rs. 5,142 as remuneration from the two companies, 'Vijaya Productions Ltd.' and 'B. N. K. Press Ltd.' respectively, of which he was the managing director. He claimed that this was business income assessable to tax under section to of the Act. This was not accepted by the Income-tax Officer, but on appeal, the Appellate Assistant Commissioner upheld the claim. The department filed an appeal to the Income-tax Appellate Tribunal which held that the amount is not to be dealt with under section 10 of the Act, but granted relief to the assessee in allowing a sum of Rs. 29,485 to be set off against the profits of the year. Both the assessee and the department filed an application under section 66 (1) of the Act before the Tribunal, and the following questions stand referred to us :
'1. Whether the additional remuneration of Rs. 77,569 from both the companies aforesaid constitute income assessable under section 10 ?
2. If the answer to the above question is in the negative, whether the depreciation allowance of Rs. 29,485 unabsorbed in the assessment of 1955-56 is available to be included in the computation of the profits from business for the year 1956-57 under proviso (b) to section 10 (2) (vi) ?'
Question No. 1 has been referred at the instance of the assessee and No. 2 at the instance of the department.
The assessee is the sole proprietor of a business called 'Chandamama Publications'. The business that was carried on was that of printer and publisher. He was the managing director of a company, Vijaya Productions Ltd., which carried on the business of producing films. He was also the managing director of another concern, called B. N. K. Press Ltd. It appears that he was deriving income from another film producing company called Vauhini Productions Ltd. He was appointed the managing director of Vijaya Productions Ltd., under an agreement dated August 3, 1949. By the terms of that agreement, he became entitled to a monthly remuneration of Rs. 500. The board of directors of the company, Vijaya Productions Ltd., passed a resolution on December 8, 1949, entitling the assessee to a remuneration of 12 1/2% of the net profits of the company. This was stated to be 'in consideration of his services as producer of the companys pictures.' The resolution expressly mentioned that this remuneration of 12 1/2% would be without prejudice to the terms and conditions set out in the managing directors agreement aforesaid. This resolution was ratified by the shareholders of the company at an extraordinary general meeting held on March 21, 1950.
The assessee entered into an agreement on August 27, 1951, with B. N. K. Press Ltd. The assessee was appointed as the managing director by the terms of this agreement for a term of 5 years, and his remuneration was fixed by clause 4 of the agreement in these terms : 'There shall be paid to Mr. B Nagi Reddy, the managing director, a fixed salary at the rate of Rs. 500 per month from the date of incorporation of the company. In addition to the above-said fixed salary, the said Mr. Nagi Reddy shall during the tenure of his office be paid a commission equivalent to 10% of the net profits of the company.'
For the calendar year 1954, the relevant previous year for the assessment year 1955-56, the assessment of Nagi Reddy was completed as follows :
Loss : Depreciation
Other sources :
Net loss carried forward
In that year the assessee did not receive the additional remuneration from Vijaya Productions Ltd. The business loss of Rs. 20,524 carried forward and the unabsorbed depreciation value of Rs. 29,485 were attributable only to the business of Chandamama Publications. The depreciation related to the plant and machinery of that business of printer and publisher.
In the calendar year 1955, the relevant previous year for the assessment year 1956-57, the assessee received Rs. 72,426 from Vijaya Productions Ltd., and Rs. 5,142 from B. N. K. Press Ltd., as additional remuneration on the percentage basis provided for in the terms of the resolution and the agreement. The assessee included these amounts in his returns under the head 'business', and the claimed that the loss of Rs. 50,009 (Rs. 20,524 carried forward loss plus Rs. 29,485 unabsorbed depreciation) should be adjusted and set off. The Income-tax Officer treated the additional remuneration as income from other sources under section 12 of the Act and refused to deduct the loss of Rs. 50,009. In the opinion of the Income-tax Officer the additional remuneration was not business income in the hands of the assessee as no business was carried on by him. The conduct of the assessee in including the additional remuneration as income from other sources in the return for the assessment year 1955-56 was held to be a bar on his part to claim such income as business income in the subsequent year. He completed the assessment as follows :
'Assessment completed by him is as follows :
Other source : Additional remuneration
Loss under business
The Appellate Assistant Commissioner differed from the Income-tax Officer and was of the opinion that the additional remuneration was business income which fell to be taxed under section 10 of the Act. The appellate authority rightly took the view that any admission made by the assessee with regard to the nature of the additional remuneration in the prior assessment year would not prevent the assessee from urging the true nature of the income in the subsequent year of assessment. Undoubtedly each year is a separate entity by itself, and the assessee cannot be bound by his act or conduct in one year in relation to his assessment for the subsequent year. In reaching the conclusion that the additional remuneration is covered by section 10 and not by section 7 or section 12, the Appellate Assistant Commissioner mainly relied on the decision of the Supreme Court in Lakshminarayan Ram Gopal v. Government of Hyderabad. The appellate decision was based on the construction of the agreements between the companies and the assessee. The agreements were construed as having brought about the relationship of principal and agent and not that of master and servant.
The Income-tax Appellate Tribunal was of the view that the agreements were really service agreements which created a contract of employment and that the assessee cannot be said to be indulging in any business activity or carrying on any profession or vocation as a result of such agreements. The result was that the Tribunal held that the additional remuneration was assessable under section 7 of the Act. We have already stated that the Income-tax Officer treated the income as miscellaneous income under section 12.
The real question however is whether the income should be taxed under section 10 or not. If it is not taxable under section 10, it does not matter whether it is assessable to tax under section 7 or section 12.
Dealing with the question of depreciation allowance, this is how the Tribunal disposed of the contention of the assessee : 'The depreciation allowance of Rs. 29,485 carried forward from 1955-56 is in any circumstance a proper set-off. There can be no two opinion about it. The Income-tax Officer has not set it off in the assessment which he shall now do....... For the foregoing reasons, we direct the Income-tax Officer to amend the assessment by deducting therefrom only Rs. 29,485 being the depreciation carried forward referred to in paragraph 5 supra. The rest Rs. 20,524 shall not be available for set-off in this assessment.'
Question No. 1 has to be dealt with first, if that question is answered in favour of the assessee. Question No. 2 does not arise for consideration. The nature of the additional remuneration received by the assessee from the two companies has to be gathered from the terms of the two agreements, the status of the assessee as managing director and the true scope of the powers of and functions exercised by him vis-a-vis the two companies. We shall first refer to the deed of agreement dated August 3, 1949, between the assessee and Vijaya Productions Ltd. It provides that the assessee shall be the managing director of the company for a period of ten years from August 3, 1949, and for such period thereafter as may become necessary or till another managing director is appointed by the company. It confers an option on the assessee to resign his office at any time by giving the company six months notice of his intention to do so. The company however is bound not to revoke or cancel the assessees appointment as managing director for the stipulated period of ten years except in the event of the managing director being found guilty, by a competent court of law, of the offence of fraud, misrepresentation or breach of trust, in his duties as such managing director. The assessee became entitled to a monthly remuneration of Rs. 500. He covenanted and agreed that during the term of his office as managing director he will endeavour his best to promote the interest and the business of the company and would not divulge any of the secrets of the company. Subject to the control and supervision of the directors of the company, the assessee was placed in charge of the general management of the business and vested with the power of control over the companys finance and power of supervision over the staff of the company. Clause 7 of the agreement described in detail the various functions to be exercised by the assessee as the managing director acting on behalf of the company. It is unnecessary to set them out in detail. He is conferred authority to execute documents, to institute, conduct, and defend legal proceedings on behalf of the company, to appoint, employ, suspend and discharge, agents, managers and other kinds of employees and to do diverse other acts which the company in the usual course of the carrying on of its business would have to perform.
The agreement of the assessee dated August 27, 1951, with B. N. K. Press Ltd. is almost of the same pattern as his agreement with the Vijaya Productions Ltd. The difference between these two agreements is that while the additional remuneration payable by B. N. K. Press Ltd. on the percentage basis is mentioned in the agreement itself, there is no mention of such remuneration in the agreement with the Vijaya Productions. The additional remuneration of the assessee in respect of his work for the Vijaya Productions came to be fixed by a subsequent resolution of the board of directors, approved and ratified by the general body of the shareholders. So far as the powers and duties are concerned, both the agreements vested the assessee with all such powers as may be necessary to carry on the respective business of the two companies and as are incidental for the day-to-day administration of their affairs.
The question is whether the assessee can be said to have taken up any business activity by entering into these agreements. Learned counsel for the assessee frankly conceded that it would not be possible for him to contend that the assessee was carrying on any profession or vocation by reason of his having been appointed as managing director of two limited companies. There cannot of course be a profession of a managing director of limited companies, and even if an individual happens to be the managing director of various concerns, it cannot be said that his profession or vocation is that of a managing director.
In support of the contention that the assessee did carry on business considerable reliance has been placed by the learned counsel for the assessee on the decision of the Supreme Court in Lakshminarayan Ram Gopal v. Government of Hyderabad. The question that arose for consideration in that case was whether the assessee came within the ambit of section 2, clause (iv), of the Excess Profits Tax Regulation, Hyderabad. Under that regulation 'business' was defined as including any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture or any profession or vocation, but not including a profession carried on by an individual or by individuals in partnership, if the profits of the profession depended wholly or mainly on his or their personal qualifications. The assessee was a limited company incorporated under the Indian Companies Act. They were appointed as managing agents of another company called Ramgopal Mills Co. Ltd. There was an agency agreement between the Mills Co. and the assessee appointing them as agents for a period of thirty years on certain terms and conditions. The assessee throughout worked only as agents of the Mills Co. and did not attend to any other work. The assessee contended that the amounts received by them from the Mills Co. in the chargeable accounting periods were not taxable on the ground that it was not income, profits or gains from business and was outside the pale of the Excess Profits Tax Regulation. The Excess Profits Tax Officer negatived this contention and brought the amounts to tax.
The assessee appealed to the Deputy Commissioner of Excess Profits Tax and failed. On applications preferred by the assessee to the High Court under section 48 (3) of the Regulation, the following questions were directed to be referred : 1. Whether under the terms of the agreement the petitioner is an employee of the Mills Co. or is carrying on business 2. Whether the remuneration received from the mills is on account of services or is a remuneration for business The High Court answered the two questions against the assessee who thereupon preferred appeals to the Judicial Committee but eventually these appeals came to be heard by the Supreme Court. The Supreme Court also concurred with the view of the High Court and dismissed the assessees appeal. One important matter that has to be noted is that in that case the assessee was a company. The business activities of a company incorporated under the Companies Act must necessarily be confined to the memorandum of association. We must however observe that the Supreme Court did not base its conclusion solely upon this circumstance, though it is obvious that it was taken into account in arriving at the ultimate decision. The Supreme Court considered the question whether the managing agency agreement really disclosed a contract of employment of servant by a master or whether it amounted to the appointment of an agent by a principal. In a case where the relationship is that of a master and servant, the remuneration received by the servant, whether in the shape of monthly salary or in some other form, like gratuity, perquisites or other kind, the receipt can only fall to be taxed under section 7 of the Act. Whether an agent receives a remuneration from the principal it would not fall under section 7 but it would fall under section 10 if the agency that was carried on amounted to the carrying on of business or under section 12 if it failed to satisfy the test of business. This distinction is clearly pointed out by the Supreme Court at page 455. Bhagwati J. observed thus :
'If on the construction of these documents we arrive at the conclusion that the position of the appellants was not that of servants but the agents of the company, the further question would have to be determined whether the activities of the appellants amounted to the carrying on of business. If they were not the servants of the company the remuneration which they received would certainly not be wages or salary but if they were agents of the company the question would still survive whether their activities amounted to the carrying on of business in which case only the remuneration which they received from the company would be income, profits or gains from business.'
The Supreme Court point out that in order to constitute a business the activities of the assessee need not necessarily be concerned with several individuals or concerns, but that they would constitute business in spite of their being restricted to only one individual or concern. The test to be applied is thus formulated; what is relevant to consider is what is the nature and scope of these activities though either by chance or design these might be restricted to only one individual or concern. It is the nature and scope of these activities and not the extent of the operations which are relevant for these purposes.
It is significant to note that in the case before the supreme Court one of the objects of the assessee company as disclosed in its memorandum was to act as agents for Governments or authorities or for any bankers, manufacturers, merchants, shippers, joint stock companies and others and to carry on all kinds of agency business. Referring to this object, the Supreme Court observes at page 461 :
'When they acted as agents of the company which were manufacturers, inter alia, of cotton piece-goods they would be carrying on agency business within the meaning of this object.'
It is further pointed out by the Supreme Court that there was a continuity of operations which constituted the activities of the assessee in the general management of the companys business. The ground of decision of the Supreme Court holding that the managing agents, the assessee in that case, carried on business has been thus set out by Bhagwati J. at page 461 :
'There was nothing in the agency agreement to prevent the appellants from acting as the agents of other manufacturers, joint stock companies, etc., and the appellants could have as well acted as the agents of other concerns besides the company. All these factors taken into consideration along with the fixity of tenure, the nature of remuneration and the assignability of their rights, are sufficient to enable us to enable us to come to the conclusion that the activities of the appellants as the agents of the company constituted a business and the remuneration which the appellants received from the company under the terms of the agency agreement was income, profits or gains from business.'
This decision of the Supreme Court lays down quite lucidly, if we may say so with respect, the real principle which should govern a decision on the question whether a particular activity of the assessee constitutes a business or trading activity. The mere fact that the assessee was appointed as managing director of the two companies in the instant case would not by itself be sufficient to describe his functions under the agreements as being in the nature of a business pursuit. It may be that a managing director occupies a position similar to that of a managing agent of a limited company. But as pointed out by the Supreme Court, the establishment of the jural relationship of a principal and agent would not be sufficient to hold that the remuneration received by the agent from the principal was in the nature of a business income.
Section 2 (4) of the Indian Income-tax Act gives an inclusive definition of the word 'business'. It reads :
'2. (4) Business includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.'
The words 'trade' and 'business' are practically interchangeable for income-tax purposes. But as is explicit in the definition of business that term is of wider import than the term 'trade'. 'Trade' is defined in the Oxford Dictionary as involving a pecuniary risk, adventure, a speculation, commercial enterprise. Construing the expression 'trade' in the Industrial Courts Act, 1919, in National Association of Local Government Officers v. Bolton Corporation, Lord Wright observed at page 184 :
'... trade is not only in the etymological or dictionary sense, but in legal usage, a term of the widest scope. It is connected originally with the word tread and indicates a way of life or an occupation. In ordinary usage it may mean the occupation of a small shopkeeper equally with that of a commercial magnate. It may also mean a skilled craft. It is true that it is often used in contrast with a profession. A professional worker would not ordinarily be called a tradesman...'
Giving the word 'business' a meaning of the largest amplitude and construing it as a term of the widest scope, it cannot cover every human activity by which income is earned. In one sense it is no doubt true that every man is engaged in the business of earning a livelihood. But that it is not the business which can be covered even by the most extended sense in which it can be understood. Wages or remuneration received under contracts of employment are generally of a class different and distinct from income received in a commercial activity like purchase and sale, undertaking building contracts, functioning as commission agents and so on and so forth. It would be very unsafe to hold that every agent, whether he is called the managing agent of a company or the managing director of a company or the chief manager of a business concern, earns his or its income only by carrying on business by reason of the fact that the activity resulting in income relates to a business. The remuneration of an agent is only the quid pro quo of the services rendered and however much such an agent may represent a business, he cannot be said to be carrying on a business.
In Commissioner of Income-tax v. I. D. Varshani the assessee was the managing agent of a limited company. His remuneration was fixed at a certain percentage of the net profits or a monthly pay whichever he would elect at the end of each year. Under the articles of association of the company, the managing agent was given the right to manage the business of the company and to do all that may be necessary in connection with that business. In the year of account the assessee elected to receive his remuneration on the percentage basis. The Income-tax Officer treated his remuneration as business profits. On appeal the Appellate Tribunal held on a consideration of the facts and circumstances that though the assessee was called a managing agent, he was in fact the chief manager of the company and, therefore, the remuneration that he received was salary and not business income. On a reference to the High Court, it was held that it could not be said that there were no materials on which the Tribunal could come to the finding that the remuneration received by the assessee was salary and not income from business.
In Commissioner of Income-tax v. L. Armstrong Smith it was held by a Division Bench of the Bombay High Court that a director of a company, though not a servant of the company, is not prevented from entering into a contractual relationship with the company. In that case the articles of association of the company provided that the assessee was to be the chairman and managing director of the company until he resigned the office or died or ceased to hold at least one share in the capital of the company, that all the other directors were to be under his control, and that his remuneration was to be voted by the company at its annual general meeting. The assessee devoted his whole time to the management of the companys affairs. He received a sum of Rs. 48,000 as remuneration in the year of account. It was held that the remuneration was for managing the companys business, and arose from his contractual relationship with the company, and that therefore it fell to be taxed under section 7 of the Act. At page 609, Stone C. J. stated thus :
'We have been referred to quite a number of English cases the effect of which can, I think, be summarised by saying that a director of company as such is not a servant of the company and that the fees he receives are by way of gratuity, but that does not prevent a director or a managing director from entering into a contractual relationship with the company, so that, quite apart from his office of director he becomes entitled to remuneration as an employee of the company. Further that relationship may be created either by a service agreement or by the article themselves.'
In Commissioner of Income-tax v. Lady Navajbai Tata the question that arose for consideration was whether the sum of Rs. 40,000 received by the assessee as her remuneration from the company of which she was a director was salary chargeable under section 7 of the Act. The assessee was a permanent director in a limited company. She was not appointed either as manager or as managing director and she had no contract with the company outside the articles. She was consulted in all important matters by the directors under the articles of association of the company. It was to be managed by the directors and their remuneration was at the rate of Rs. 100 per mensem, and such further sum as may be voted to them by the company in general meeting. The assessee was paid a sum of Rs. 40,000 as remuneration. It was held that the assessee was not an employee or servant of the company, that the sum of Rs. 40,000 paid to her as directors remuneration was neither salary nor wages, but gratuity, and that as it was paid to her by virtue of her office as director, it did not fall to be taxed under section 7 but must be brought to tax under section 12.
The cases referred to by us indicate that the remuneration which a director or a managing director may receive from the company may either fall under section 7 or section 12, according to the terms of the agreement, and that it is not the name of the office in relation to which the income is derived which would determine the true nature of the income but only the powers and duties of the office holder under the terms of the agreement with the company. We do not think that, in the instant case, the assessee was carrying on any business under the terms of the two agreements referred to above. It is unnecessary for us to decide whether the additional remuneration is taxable under section 7 or under section 12. Suffice it to say that it is not business income under section 10 of the Act. In our opinion, question No. 1 has to be answered against the assessee.
The second question relates to the assessees right to depreciation allowance of Rs. 29,485 (which remained unabsorbed in the assessment of the year 1955-56) to be adjusted against and absorbed in the profits from the business for the assessment year 1956-57.
It is a sound principle of accountancy that charges for depreciation of plant and machinery should be debited in casting the profit and loss account of a business. From the commercial standpoint such depreciation allowance is just and necessary as undoubtedly the value of the plant and machinery gets diminished progressively by wear and tear. The expenditure for the acquisition of plant and machinery is course of a capital nature. But it is permitted to be written down year after year by a series of debits. A capital cost is thus wiped out by a succession of annual charges against revenue. Though this depreciation allowance is a capital loss it is permitted as a proper charge on the revenue as an expenditure. The other items of debit in the profit and loss account are expenses which constitute the real cost of earning the income.
In computing the business income chargeable to tax, depreciation allowance in respect of the buildings, machinery, plant and furniture can be claimed as provided for under section 10 (2) (vi) of the Act. The quantum of depreciation allowed is to be determined under rule 8 of the Income-tax Rules framed under section 50 of the Act. This has no relation to the annual wear and tear of the subject of depreciation but is an amount fixed by the statute nationally as the probable depreciation, though the actual depreciation might be greater or less than that figure. There is a specific provision, section 10 (2) (vi), proviso (b), enabling the assessee to carry forward the unabsorbed depreciation allowance from year to year. But there is one limitation and that is the total depreciation allowed to be written down from the value of the original cost should not exceed the original cost itself. The unabsorbed depreciation allowance can be projected and carried forward from year to year indefinitely. When and how does a depreciation allowance remain unabsorbed in a particular year and becomes available for being carried forward We have to look to section 10 (2) (vi), proviso (b), to get the answer. The material portion of the section is as follows :
'Where in the assessment of the assessee,...... full effect cannot be given to any such allowance in any year...... owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24, 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 year and deemed to be part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeeding years.........'
Section 24 (2), to which section 10 (2) (vi), proviso (b) is subject to, reads :
'24. (2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year......
Provided that - ......
(b) Where depreciation allowance is, under clause (b) of the proviso to clause (vi) of sub-section (2) of section 10, also to be carried forward, effect shall first be given to the provisions of this sub-section.'
Section 24 (1) provides that where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year. This means that in the same year business loss can be set off against income from property or income from interest on securities or against salaries received by the assessee.
The meaning of proviso (b) to section 10 (2) (vi) is, in our opinion, quite clear. Depreciation allowance can be debited only to profits or gains chargeable to tax. If there are no such profits or gains, the whole of the allowance, and if the profits or gains are less than the allowance, the excess of the allowance over the profits or gains, is the carried forward figure which gets into the next years account, and becomes part of the depreciation allowance allowable for that year. The profits or gains referred to in the proviso are those arising out of the business carried on by the assessee, and not from other sources.
Section 10 (1) provides that the taxes shall be payable by an assessee on the profits and gains of business, profession or vocation carried on by him. Section 10 (2) states that 'such profits or gains shall be computed after making the allowances specified in the various clauses.' There cannot be any doubt that the profits or gains mentioned in proviso (b) to clause (vi) of section 10 (2) are the business profits or the business gains which come in for computation under section 10. It is significant to note that the word 'income' which occurs in other parts of the enactment does not occur in this section.
It is not possible to miss the two outstanding features of this proviso. One is that the profits or gains against which depreciation allowance might be set off must arise out of the business, profession or vocation, and the other is that the profits or gains are not the gross receipts of the business 'but the chargeable profits or gains', namely, that which can be brought to tax. The word 'Profit' has to be understood in its natural and proper sense - in a sense which no commercial man would misunderstand (Lord Halsbury in Gresham Life Assurance Society v. Styles). In Ushers Wiltshire Brewery Ltd. v. Bruce Lord Parker observes thus, elucidating the expression 'profits and gains' :
'... the receipts appear on the one side and the costs and expenditure necessary for earning these receipts appear on the other side. Indeed, without such account it would be impossible to ascertain whether there were really any profits on which the tax could be assessed.'
Depreciation allowance being thus a charge on the profits or gains which are brought to tax, it is necessary that there should be first the computation of such profits or gains before even the question of making allowance for depreciation can at all arise. In Ambika Silk Mills Co. Ltd. v. Commissioner of Income-tax, construing of section 10 (2) (vi), Chagla C.J. observed thus at page 64 :
'..... it is clear that profits or gains in this context mean profits or gains without taking into consideration the depreciation referred to in clause (vi).'
If on a calculation of profits or gains of a business excluding the debit for depreciation allowance it is found that there is no profit at all or that the business has suffered a loss, then the depreciation allowance cannot be added to swell the loss. If on a casting of the profit and loss account without bringing the debit of depreciation allowance it is found that there is an amount of profit which is however less than the permissible quantum of depreciation allowance, then it is only the excess of such allowance over the resulting profits that should be adjusted against the profits - which would really mean that the profits are wiped out. There cannot be in such a case an adjustment of the full amount of depreciation allowance so as to convert the profit into a loss. So much seems to be absolutely clear from the language of the statute. A few concrete illustrations would serve to bring out the meaning of the statute with a better precision than a general exposition. Let us take the following hypothetical cases :
(1) The depreciation allowance is Rs. 10,000 in a particular assessment year. There are no profits assessable to tax under section 10. The whole of Rs. 10,000 could be unabsorbed depreciation allowance eligible to be carried forward to the next assessment year. The depreciation allowance cannot be debited to the profit and loss account and treated as a loss to be set off against the income of the assessee under other heads or sources like 'property', 'interest on securities', etc.
(2) The depreciation allowance is Rs. 10,000 and the profits amount to Rs. 5,000. There can be a set-off Rs. 5000 of the allowance against the profits and no more. The adjustment can extend only up to the limit of the profits. There will, therefore, be neutralisation of the whole of the profits of Rs. 5,000. The unabsorbed balance of the allowance can go forward to the subsequent year. The full depreciation allowance of Rs. 10,000 cannot be a charge on the profit so as to lead to a resultant loss of Rs. 5,000.
(3) The depreciation allowance is Rs. 10,000. The assessee incurs a business loss of Rs. 10,000. This loss is arrived at by debiting all expenses necessary to earn the profits against the gross receipts. There are no other heads of income against which the loss can be set off. The allowance of Rs. 10,000 and the loss of Rs. 10,000 can be carried forward to the subsequent year.
(4) The brought forward depreciation allowance is Rs. 10,000 and the depreciation allowance in respect of the year to which it is brought forward is Rs. 5,000. The aggregate of the two would be the depreciation allowance available for adjustment in that year. The brought forward loss is Rs. 10,000. The profits come to Rs. 10,000. First, the carried forward loss has to be set off. This would mean that the profits are wiped out. No part of the depreciation allowance can be absorbed as there are no available profits. If the profits, however, are Rs. 15,000 there will remain a surplus profit of Rs. 5,000 after setting off the carried forward loss of Rs. 10,000. To the extent of this Rs. 5,000, the depreciation allowance can be adjusted. The balance of Rs. 10,000 of the depreciation allowance would remain unabsorbed.
In our opinion, the statute leads one to the irresistible conclusion that the depreciation allowance must be a charge only on the profits. The limit of the charge is the limit of the profits. The non-existence of profits will prevent the absorbing the depreciation allowance in the profit and loss account to work out a loss. If that were the true position, the provision for carrying forward the unabsorbed depreciation allowance would be wholly redundant, if not meaningless, in view of the specific provision for the carrying forward of losses.
We shall now refer to the decisions cited by the learned counsel for the assessee. The earliest case is that in Suppan Chettiar & Co. v. Commissioner of Income-tax. The assessee was an unregistered firm called Suppan Chettiar & Co. The carried on several businesses : (i) grocery and rice; (ii) money-lending; (iii) soda factory; (iv) rice mill; (v) foreign liquor shops and (vi) motor service. For the assessment year 1927-28 the firm returned an income of Rs. 2,745 from property, Rs. 253 from the motor business and Rs. 65,189 from their other businesses and claimed an allowance of Rs. 10,542 on account of depreciation in the motor business against the profits of that business, to the extent to which they were available, namely, Rs. 253 and the balance against the profits of their other businesses. The Income-tax Officer allowed only the sum of Rs. 253 and disallowed the balance holding that as they were not profits and gains in the motor business against which the balance of the depreciation could be allowed, it should be added to the amount of depreciation due for the following year under proviso (b) to section 10 (2) (vi). The assessee preferred an appeal to the Assistant Commissioner but did not succeed. At the instance of the assessee the Commissioner of Income-tax made a reference to the High Court. The question referred was : 'Whether where an assessee owns a number of businesses, A, B, C and D, and the profits and gains of business A are insufficient to cover the full depreciation admissible, under section 10 (2) (vi) of the Act, on the machinery, plant, etc., used for the purposes of that business, the excess depreciation can be set off against the profits and gains of other businesses, B, C, & D ?' This question was answered in the affirmative by this court. The contentions raised in that case was whether the depreciation allowance should be strictly confined only to the profits or gains of that particular business in respect of which the plant, building or machinery was used, or whether the allowance in whole or in part can be adjusted against the income of the other business of the assessee which might not have had the benefit of the subject-matter of the depreciation allowance.
Under the Indian Income-tax Act business income constitutes one head or source and the profits or gains of an assessee, who might happen to run several businesses, can come in only for one computation under that head. This seems to be the ratio of the decision in that case, at page 216 :
'... it is contended that this proviso allows only one way of treating the charge; that so much of it as cannot be neutralised by profits must not figure as an actual loss, but must be carried forward into the next years account. But neither from the language used, nor from any general considerations arising from the nature of the charge are we satisfied that this construction is correct. But for the proviso, depreciation stands upon the same footing, and should, so far as any intention to the contrary appears, be dealt with in the same way, as the other charges enumerated in the section... We do not think, therefore, that upon the terms of the section an assessee is precluded from adding the whole charge for depreciation to his other business charges, even though the result is to show a loss, and then claiming under section 24 to set off the loss against profit from other sources.'
The decision of the Bombay High Court in Ambika Silk Mills Co. Ltd. v. Commissioner of Income-tax lends support to the contention that the depreciation allowance can be placed on the debit side of the profit and loss account and be treated as a component which may entail a loss to the assessee and that such a loss can be adjusted against the income of the assessee under other heads applying section 24 (1) of the Act. The assessee in the Bombay case, Ambika Silk Mills Co. Ltd. made a business profit of Rs. 37,703 in respect of the assessment year 1948-49. The depreciation allowable under section 10 (2) (vi) was the sum of Rs. 52,985. In the same year, the assessee company had made a capital gain Rs. 90,400. Deducting Rs. 52,985 from the business profit of Rs. 37,703, a loss of Rs. 15,282 was arrived at. The question for consideration was whether this loss of Rs. 15,282 can be set off against the capital gain of Rs. 90,400. The Bombay High Court held that it can be so set off. Chagla C.J., delivering the judgment of the Bench, observed that though the plain meaning of the expression 'profits or gains' indicated in the context of the proviso that such profits or gains should be arrived at without taking into consideration the depreciation under clause (vi), yet the words of the proviso should yield to the general scheme of the Act. At page 64, he observed as follows :
'In our opinion the only proper interpretation that should be placed upon the expression profits or gains is profits or gains, not merely from the particular business in respect of which depreciation is claimed, nor profits or gains from any business conducted by the assessee, but the profits or gains which may accrue or arise to the assessee under any of the heads referred to in section 6.'
This conclusion was, according to the learned Chief Justice, 'actuated by tree powerful considerations'. The first consideration was that a proviso should never be construed in a manner which would nullify the effect of the main section and that a proviso should not be construed to defeat the scheme which the legislature intended to carry out. With respect to the learned judge, we are unable to agree with this mode of construction of a proviso in an enactment. There is no special rule of construction regarding provisos in any enactment. Generally, they operate to except out of the main enactment something which, but for them, would have been within it. It is true that the clear and unambiguous meaning of an enactment ought not to be whittled down by any implication derived from a proviso. A statute should be construed as a whole giving effect to all its parts; provisos are not less important than the main provisions. 'The proper course is to apply the broad general rule of construction which is that a section of an enactment must be construed as a whole, each portion throwing light if need be on the rest.' (Jennings v. Kelly; Curtis v. Maloney). A proviso is a useful guide in the selection of one or other of two possible constructions of words in the enactment (Craies on Statute Law, fifth edition, page 202). We do not think that it is a sound rule of construction to disregard the plain terms of a proviso, because it is a proviso and because it does not harmonise with the main scheme of an enactment. To ignore a proviso, with a view to give effect to the supposed general scheme of an enactment, would, in our opinion, result in misconstruction. The second consideration relied upon by the learned Chief Justice was the comity of judicial views taken by the different High Courts in the country and the desirability of an 'all India Statute', like the Indian Income-tax Act, receiving an uniform interpretation by the different High Courts. We agree that there is much to be said in favour of this view, but such uniformity cannot be secured at the cost of sacrificing the clear meaning of the terms of a statute. The third consideration was the interpretation, which found favour with the Bombay High Court, which was favourable to the assessee and that it is a well-settled principle in construing fiscal statutes to adopt that construction, wherever two interpretations are possible which is more favourable to the assessee. We respectfully agree with the learned Chief Justice that this is the proper way to construe a fiscal enactment. But the real question is 'are the words in section 10 (2) (vi) of the Act read along with proviso (b) susceptible of two interpretations ?' In our opinion, the terms of the proviso are so express and explicit that they cannot be nullified in the belief that the scheme of the Act is different from those terms. We, therefore, express our respectful dissent from this decision of the Bombay High Court.
Reference was made to the decision of the East Punjab High Court in Laxmichand Jaiporia Spinning and Weaving Mills, In re. The facts in the case were that the assessees income from the property for the assessment year 1942-43 was Rs. 2,897. The income from other sources was computed at Rs. 360. The income from the mills, without providing for depreciation under section 10 (2) (vi), amounted to Rs. 8,228. The permissible depreciation allowance was Rs. 23, 990. The assessee had to his credit unabsorbed balance of the depreciation allowance brought forward from the preceding year amounting to Rs. 27,012. The depreciation allowances were aggregated and the total of Rs. 51,002 was deducted from the business profit of Rs. 8,228 and a loss of Rs. 42,774 was arrived at. The department contended that the depreciation should not be taken into account or included in the profit and loss account to compute a loss available for adjustment under other heads of income. The High Court held that where the profits and gains from business are sufficient to cover the full depreciation allowance under section 10 (2) (vi) of the Indian Income-tax Act, the excess depreciation can be treated as loss of profits and gains within the meaning of section 24. The High Court followed the decision in Ballarpur Collieries v. Commissioner of Income-tax. At page 927, the learned judges observed as follows :
'There is no reason why the allowance for depreciation in clause (vi) should be treated differently for the purpose of computing from that given in other clauses. Section 24 provides for the set-off which is allowable to an assessee and the whole income is to be determined after the profits and losses including allowances in section 10 (2) have been all added together...'
With great respect to the learned judges, we must observe that this view does not give due weight to the language of the proviso. We are unable to agree with this decision either.
Learned counsel for the assessee has placed before us a typed copy of the judgment of the Calcutta High Court in Income-tax Reference No. 72 of 1957. This decision does not appear to have been reported in any of the law reports. It is unnecessary to refer to the facts of the case. Suffice it to say that the Calcutta High Court has followed the decision of the Bombay High Court in Ambika Silk Mills Co. Ltd. v. Commissioner of Income-tax and that of the East Punjab High Court in Laxmichand Jaiporia Spinning and Weaving Mills, In re.
The learned judges observed as follows :
'On this view of the section it appears to me that as there was no loss in the business of the assessee during the relevant year apart from the unabsorbed depreciation, it was open to the assessee to set off the whole of the depreciation towards the income from dividends.'
In view of what we have already stated in respect of the decision of the Bombay High Court and that of the East Punjab High Court, we must observe that we cannot agree with this view of the Calcutta High Court.
In the instant case, the business income of the assessee consists of that from the 'Head Office' and that from the 'Chandamama Publications'. The 'Head Office' business has resulted in a loss of Rs. 26,176 in the year of account, relevant to the assessment year 1956-57. The income from 'Chandamama Publications' has been computed by the Income-tax Officer in the sum of Rs. 17,866. The depreciation allowance admissible in respect of the business of 'Chandamama Publications' has been worked out as a sum of Rs. 32,050. The income of Rs. 17,866 has been deducted from the depreciation allowance of Rs. 32,050 and a net loss of Rs. 14,184 has been arrived at. This sum of Rs. 14,184 has been added to the loss of the 'Head Office' business, Rs. 26,176, and the total loss of Rs. 40,360 has been set off under section 24 (1) as against the other income of the assessee, totalling Rs. 95,941. In this computation, the unabsorbed depreciation allowance of the assessment year 1955-56, namely, Rs. 29,485, has not come in for calculation at all. We do not think that the mode of computation adopted by the Income-tax Officer is correct. He should undoubtedly have added the depreciation of Rs. 29,485 of the assessment year 1955-56 to the depreciation allowance of the subsequent year 1956-57, namely, Rs. 32,050, and allowed the whole or part of the aggregate amount as against the business income of the assessee. The only business income that was available was Rs. 17,866.
This profit can certainly be completely wiped out. But, we do not see any basis for working out a loss in the manner done by the Income-tax Officer. But we are not now immediately concerned with the computation of the assessable income of the assessee.
It follows that question No. 2 has to be answered in the following manner : The depreciation allowance of Rs. 29,485 unabsorbed in the assessment year 1955-56 is available to be added to the depreciation allowance permissible for the year 1956-57 and the aggregated amount can be set off against the business profits of Rs. 17,866 and thereby neutralize the profit but the carried forward depreciation allowance cannot be treated as a loss available for set off against the income of the assessee from other sources. The question is answered accordingly.
The assessee having failed completely will pay the costs of the department Counsels fees Rs. 250.