Dipak Kumar Sen, J.
1. American Export Isbrandtsen Lines Ltd. the assessee, an American shipping company, was assessed to income-tax in the assessment year 1972-73, the corresponding accounting year ending on December 31, 1971. In its return, the assessee disclosed a net loss. It also claimed a deduction of $ 1,00,53,970 under Section 32(1)(iii) of the I.T. Act, 1961, the deficiency arising from sale of two vessels belonging to the assessee sold during the accounting year at a price less than their written down value in the books. The assessee claimed that the same should be taken into account in computing its business loss and should be carried forward as a business loss under Section 72 of the Act.
2. The ITO rejected the claim of the assessee. He held that under the Act, the allowance provided in Section 32(1)(iii) was not meant to be carried forward as it had been excluded from Section 32(2). He held further that on an asset which ceases to exist in an accounting year, the allowance thereon must be restricted to such year only.
3. On appeal, the AAC upheld the decision of the ITO. He held that an assessee could claim deduction for unabsorbed depreciation only on an asset still in use. Where the asset was no longer in use, depreciation thereon, not absorbed was not intended to be allowed as deduction to be carried forward.
4. Being aggrieved, the assessee went up on further appeal before the Income-tax Appellate Tribunal. It was contended before the Tribunal that the loss to the assessee on the sale of the said assets had to be taken into account under Section 29 of the Act in computing the assessee's profits and gains of business and the provisions of Section 32 were required to be given effect to in their entirety. As a business loss, the same could be carried forward under Section 72 of the Act.
5. It was contended on behalf of the Revenue that as Section 32(2) of the Act contained special provisions for carrying forward of unabsorbed depreciation allowance, the general provisions of Section 72 could not be invoked to carry forward such unabsorbed depreciation as a business loss. The intention of the legislature was clear as the allowance under Section 32(1)(iii) was specifically excluded from Section 32(2).
6. The Tribunal held that allowances provided under Clauses (i), (ii), (iv) and (v) of Sub-section (1) of Section 32 were in respect of assets which were continued to be used in the business of an assessee. The Legislature conferred a benefit and the same, to the extent not absorbed in a particular assessment year, could be carried forward and set off against business profits of future years without limitation as long as the assets involved continued to be used in the business. The unabsorbed allowance under Clause (iii) of Section 32(1) being excluded from Section 32(2), such allowance should be presumed to be governed by Section 72 and could be carried forward as a business loss. The Tribunal held further that the allowance provided under ss. 30 to 43 of the Act to the extent that they were not absorbed could not be excluded from the purview of Section 32 which had to be read harmoniously with the special provision made for carrying forward of special allowances. The Tribunal noted that Section 72 did not either expressly or impliedly provide that an allowance under Section 32(1)(iii) should not be deducted from the business receipts in arriving at the profits and gains of the business.
7. The Tribunal accepted the contentions of the assessee and allowed the appeal.
8. On an application of the Revenue under Section 256(1) of the I.T. Act, 1961, the Tribunal has referred the following question, as a question of law arising out of its order, to this court for its opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the loss allowable as a deduction under Section 32(1)(iii) of the Income-tax Act, 1961, shall go into the net result of computation under the head 'Profits and gains of business or profession' for the purpose of carrying forward and setting off the business loss against the business profits of the future years under Section 72(1) of the said Act?'
9. In reiteration of the contentions of the Revenue in the proceedings below, learned advocate for the Revenue submitted at the hearing that Section 72 of the Act of 1961 contained a general provision for carrying forward and setting off of a business loss. Section 32 of the Act, on the other hand, contained a special provision for carrying forward of unabsorbed depreciation allowances. In view of the special provisions of Section 32, the assessee was not entitled to invoke the general provisions of Section 72. It was submitted further that the Legislature deliberately excluded the depreciation allowance provided under Section 32(1)(iii) from Section 32(2) which indicated that it was not the intention of the Legislature that the allowance under Section 32(1)(iii) would be carried forward.
10. Learned advocate for the assessee contended to the contrary. He submitted that the allowance provided under Section 32(1)(iii) of the Act was not strictly speaking a depreciation. In the earlier Act, it was not placed under the head 'Depreciation'. The allowance granted under Section 32(1)(iii) of the present Act which corresponded with Section 10(2)(vii) of the Indian I.T. Act, 1922, was not a depreciation allowance but was a balancing allowance. Where an asset was sold at a profit, the surplus was added to the profit of the business. If the sale or destruction of an asset resulted in a loss, the same ought to be treated as a business loss.
11. In support of the respective contentions, the following decisions were cited at the Bar :
(a) Raghunath Prasad v. CIT : 28ITR45(All) . This decision of the Allahabad High Court was cited for the following observations in the judgment of one of the learned judges (p. 61):
'Where there are two provisions in an Act, one of which is specific or of a special character and the other of a general character, the specific or special provision qualifies the general one and ought to be applied in preference to and unaffected by the general one. In other words, where a special provision deals with a particular thing or class of things, a more general provision, even though its terms would cover the particular thing or class of things, is excluded from application thereto by reason of the particular provision. This is a well known principle that has been recognised by all the courts over a long period. ' (b) CIT v. National Syndicate : 41ITR225(SC) . The assessee in that case closed its business on February 28, 1946. Earlier, during the same accounting period and before its closure of business, the assessee had sold its machinery at a loss and claimed deduction of such loss under Section 10(2)(vii) of the Indian I.T. Act,. 1922, before its amendment in 1949.
The Supreme Court accepted the contentions of the assessee and observed as follows (p. 234):
'Now, the first condition precedent appears to be that the business must have been 'carried on by the assessee'. This is to be found in the first sub-section of Section 10. The second condition is that the building, machinery or plant must have been ' used for the purposes of the business'. This is to be found in Clause (iv) of the second sub-section of Section 10. The third condition is that the sale, etc., should have taken place during the year of account. This follows from the nature of the tax which is assessed and levied on the profits of the working of the previous year. The fourth condition is that the loss should have been brought into the books of the assessee and written off. This is provided by the first proviso. There is no other condition to be found expressly in the section or in the Act. It is nowhere stated that the business of the assessee should have been carried on for the whole year or that the machinery or plant should have been used for the whole of the accounting period. There are no words which would show that, if the assessee works only for a part of the year and then sells out, the loss that he incurs is not a business loss. or that he must pay tax on the small profit that he might have made, and bear the loss in addition '. (c) CIT v. Jaipuria China Clay Mines (P) Ltd. : 59ITR555(SC) . In this case, the Supreme Court considered Section 10(2)(vi) and Section 24(2) of the Indian I.T. Act, 1922, and observed as follows (p. 561):
'The unabsorbed depreciation allowance is carried forward under proviso (b) to Section 10(2)(vi) and the method of carrying it forward is to add it to the amount of the allowance or depreciation in the following year and deeming it to be part of that allowance; the effect of deeming it to be part of that allowance is that it falls in the following year within Clause (vi) and has to be deducted as allowance. If the legislature had not enacted proviso (b) to Section 24(2), the result would have been that depreciation allowance would have been deducted first out of the profits and gains in preference to any losses which might have been carried forward under Section 24, but as losses can be carried forward only for six years under Section 24(2), the assessee would in certain circumstances have in his books losses which he would not be able to set off. It seems to us that the legislature, in view of this, gave a preference to the deduction of losses first. But it is wrong to assume that Section 24(2) also deals with the carrying forward of depreciation. This carry forward having been provided in Section 10(2)(vi) and in a different manner, Section 24(2) only deals with losses other than the losses due to depreciation.' (d) Tube Suppliers Ltd. v. CIT : 152ITR694(Mad) . In this case, the Madras High Court, construing Section 32(1)(iii) of the Act of 1961, observed as follows (p. 702); 'The object of Section 32(1)(iii) is to see that when the assets used in his business are sold in any assessment year and the sale price falls short of the written down value, then the difference between the written down value and the actual sale value will be treated as a loss in the sale of assets and if that deficiency amount is written off in the books of the assessee, the assessee will get a depreciation allowance to the extent of the deficiency. That means the assessee can claim the relief under Section 32(1)(iii) only in the year when the assets are owned and used. The allowance granted under Section 32(1)(iii) has to be taken as a balancing allowance in respect of the assets sold or discarded or demolished or destroyed and to claim such a balancing allowance, it is necessary that the business to the assets of which the allowance relates should be carried on for at least some part of the relevant assessment year. If the business had been discontinued earlier, the allowance cannot be claimed against the profit of any separate and independent business carried on by the assessee.......'
12. The relevant provisions of the statutes may be noted Indian I.T. Act, 1922--
'Section 70.--(1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business......carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely :......
(vi) In respect of depreciation of such buildings, machinery plant or furniture being the property of the assessee, a sum equivalent....... to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed......
(vii) In respect of any such.........machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the.........machinery or plant, as the case may be, is actually sold or its scrap value :
Provided that such amount is actually written off in the books of the assessee :
Provided further that where the amount for which any such building machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place.'
Income-fax Act, 1961:
Section 29.--Income from profits and gains of business or profession, how computed.--The income referred to in Section 28 shall be computed in accordance with the provisions contained in ss. 30 to 43A.
Section 32,--In respect of depreciation of......machinery, plant......... owned by the assessee and used for the purposes of the business.........the following deductions shall, subject to the provisions of section 34, be allowed.........
(iii) In the case of any......... machinery, plant.........which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such............machinery, plant............ together with the amount of scrap value, if any, fall short of the written down value thereof I
Provided that such deficiency is actually written off in the books of the assessee.........
(2) Where, in the assessment of the assessee.........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 subsection (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.
Section 72.--Where for any assessment year, the net result of the computation under the head 'Profits and gains of business.........' 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 Section 71, so much of the loss as has not been so set off or where the assessee has income only under the head 'Capital gains' relating to capital assets other than short-term capital assets and has exercised the option under Sub-section (2) of that section or where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year and--
(i) it shall be set off against the profits and gains, if any, of any business.........carried on by him and assessable for that assessment year:
Provided that the business............for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.........
(3) No loss (other than the loss referred to in the proviso to Sub-section (1) of this section) shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.'
The contention of the assessee that the allowance provided under Section 32(1)(iii) is not strictly speaking a depreciation allowance is of substance. In the earlier Act, this allowance did not come under the head 'Depreciation'. In the later Act, however, the general heading of Section 32 is 'Depreciation'.
13. The said allowance, in our view, can be correctly described as a balancing allowance to be given effect to in computing the business income of an assessee. This is specifically provided in Section 29 of the present Act.
14. The allowances on account of depreciation as provided in Clauses (i), (ii), (iv), (v) and (vi) of Section 32(1) have to be taken into account in computing the profits and gains of a business, but the special and specific provision of Section 32(2) is that if in any particular assessment year, full effect cannot be given to the said depreciation allowance, the chargeable profits or gains being less than the allowance, then subject to the provision of Section 72(2), the same can be carried forward to be added to the allowance for depreciation in the succeeding assessment year.
15. A balancing allowance under Section 32(1)(iii) cannot be carried forward as an allowance for depreciation under s, 32(2). But under the mandatory provisions of Section 29, the same has to be taken into account in the computation of the profits and gains of the business and if such profits and gains fall short of the allowance, then the computation would result in a negative income, that is a loss. Such loss has to be carried forward as a loss, under Section 72.
16. A depreciation allowance, if it cannot be set off in a particular assessment year, can be carried forward to future assessment years as long as the assets involved exist and are used. But a loss once computed cannot be carried forward for more than eight succeeding assessment years under Section 72(3).
17. For the above reasons, we answer the question referred in the affirmative and in favour of the assessee. In the facts and cirumstances, we do not make any order as to costs.
G.N. Ray, J.
18. I agree.