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Sunday, May 17, 2015

“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in holding that the unabsorbed depreciation should be allowed before the allowance of the unabsorbed investment allowance in computing income of the appellant/assessee for the Assessment Year 1991-1992, when the assessee had not claimed the unabsorbed depreciation in its income-tax return though it had claimed depreciation for the current year? Once the unabsorbed carried forward depreciation has become a part of the depreciation of the current year, it is not open to the assessee to bifurcate the two again and exercising its choice to claim the depreciation of the current year under Section 32(1) of the Act and take a position that since unabsorbed depreciation of the previous years is not claimed, it cannot be thrusted upon the assessee. The position would have been different if the assessee had not claimed any depreciation at all. However, once the depreciation is claimed and while giving deductions the depreciation is to be set off against the profits of the current year prior to the unabsorbed carried forward investment allowance, it is the entire depreciation, namely, the depreciation of the current year as well as the unabsorbed carried forward depreciation, which is to be taken into account as by virtue of the fiction created under Section 32(2) of the Act, carried forward depreciation also partakes the character of depreciation of the current year. This scrambled egg cannot be unscrambled now. Otherwise, it would amount to negating the legal fiction that is created by the said provision, even to the limited extent. In fact, the case falls within the ambit of the said limited extent of legal fiction and gets covered by it.

                                                                  REPORTABLE

                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                     CIVIL APPEAL NOS. 1812-1813 OF 2005


|SESHASAYEE PAPER & BOARDS LIMITED             |.....APPELLANT(S)          |
|VERSUS                                        |                           |
|DEPUTY COMMISSIONER OF INCOME TAX             |.....RESPONDENT(S)         |

                                   W I T H
                    CIVIL APPEAL NO.       4498  OF 2015
                 (ARISING OUT OF SLP (C) NO. 15251 OF 2008)

                               J U D G M E N T


A.K. SIKRI, J.
                 Leave granted in Special Leave Petition (Civil)  No.  15251
of 2008.

Facts, as they appear in Civil Appeal Nos.  1812-1813  of  2005,  are  taken
note of as the following substantial  question  of  law,  which  arises  for
consideration, is common in these appeals:
“Whether on the facts and in the circumstances of the case, the  Income  Tax
Appellate Tribunal is right in  holding  that  the  unabsorbed  depreciation
should  be  allowed  before  the  allowance  of  the  unabsorbed  investment
allowance in computing income of the appellant/assessee for  the  Assessment
Year  1991-1992,  when  the  assessee  had  not   claimed   the   unabsorbed
depreciation in its income-tax return though  it  had  claimed  depreciation
for the current year?

The aforesaid question has arisen for consideration in the following set  of
facts:

The appellant/assessee is a public limited company engaged in  the  business
of manufacturing paper.  It had filed its return under Section  139  of  the
Income Tax Act, 1961 (for short, the 'Act') for the Assessment Year  1991-92
declaring its income as 'Nil'.  In fact, the  income  for  that  year  after
showing exemptions, deductions and additions, which are to be made in  terms
of Sections 28 onward relating to computation of the  business  income,  was
arrived at ?2,87,15,912.  The assessee had unabsorbed  investment  allowance
of previous years.  It also  had  unabsorbed  depreciation  of  the  earlier
years.  In its  income-tax  return,  however,  it  chose  to  carry  forward
investment allowance and claimed set off of the said  unabsorbed  investment
allowance to the  extent  of  ?2,87,15,912,  thereby  showing  the  returned
income as 'Nil'.  According  to  the  Assessing  Officer,  it  was  not  the
investment allowance, but  unabsorbed  depreciation  of  the  earlier  years
which had to  be  set  off  first  by  giving  priority  to  the  unabsorbed
depreciation.  Therefore, instead of allowing the assessee to carry  forward
investment  allowance,  the  Assessing  Officer  adjusted   the   unabsorbed
depreciation of the earlier years,  namely  1983-84,  1985-86,  1986-87  and
1987-88 (part), and accepted 'Nil' income return as filed by  the  assessee,
but on the aforesaid basis.

The assessee, however, was not satisfied with  the  aforesaid  treatment  of
setting off of the unabsorbed depreciation instead of investment  allowance.
 It filed appeal  before  the  Commissioner  (Appeals).   This  appeal  was,
however, dismissed following the  judgment  of  the  Madras  High  Court  in
Commissioner  of  Income  Tax  v.  Coromandel   Steels[1].    The   assessee
approached the Tribunal.  The Tribunal  also  confirmed  the  order  of  the
Commissioner (Appeals).  The assessee, still not satisfied,  approached  the
Madras High Court.  Even  the  High  Court,  vide  impugned  judgment  dated
September 15, 2004, has affirmed the view taken  by  the  authorities  below
and dismissed the appeal of the assessee.  As the grievance still  persists,
the present appeal questions the treatment given to  the  income-tax  return
in the manner mentioned above, which has come  up  for  consideration  after
special leave to appeal was granted.

It is in this backdrop the question of law, which  is  to  be  answered  and
formulated above, relates to the  issue  as  to  whether  it  is  unabsorbed
investment allowance which is to be allowed as  set  off  in  computing  the
income of the assessee for the assessment year  in  question  or  unabsorbed
depreciation.

As pointed out above, in the income-tax return the assessee had claimed  set
off of unabsorbed investment allowance.  However, this request  is  declined
as according to the High Court, provisions of Section 32 of the Act  mandate
that precedence has to be given to unabsorbed depreciation  before  allowing
unabsorbed investment allowance.

The plea of the assessee before the High Court was that in  the  absence  of
any claim by the assessee  towards  depreciation  allowance,  the  assessing
authority could not erroneously assume that such a claim would be  untenable
under the provisions of the Act  and  could  not  thrust  the  deduction  of
carrying forward depreciation allowance, when the  assessee  had  chosen  to
have set off of unabsorbed investment  allowance  and  it  is  the  assessee
whose option should prevail.  It was also argued that even if the  provision
of law was not very clear and was susceptible to  two  interpretations,  one
which was more beneficial to the assessee had to be given effect to.

The High Court took note of these contentions of the assessee predicated  on
the judgment of the Punjab and Haryana High Court in Ram Nath Jindal &  Anr.
v. Commissioner of Income Tax[2], in which the said  High  Court  held  that
the Assessing Officer could not grant the  depreciation  allowance  when  it
was not  claimed  by  the  assessee  as  there  is  no  provision  by  which
depreciation could be fictionally deemed to have been claimed  and  granted.
It would be pertinent to point out that this judgment of the High Court  was
in the light of Section 32 of the Act which stood at the material  time  and
this very provision existed even in respect of Assessment Years 1991-92  and
1992-93 with which  we  are  concerned.   Therefore,  the  High  Court  took
cognizance of  the  said  judgment.   The  High  Court  also  noted  another
judgment of its own Court in Guindy Machine Tools P.  Ltd.  v.  Commissioner
of Income Tax[3], which had followed judgment of this Court in  Commissioner
of Income-Tax v. Mahendra Mills[4] wherein it was held  that  the  provision
in respect of depreciation was for the benefit of the assessee  and  if  the
assessee does not wish to avail the said benefit for some reason,  it  could
not be forced upon him.  Notwithstanding the aforesaid judgments,  the  High
Court observed that the real issue was not whether  the  assessee  could  be
compelled to claim depreciation, but, if he fails to claim,  what  would  be
the  order  of  priority  between  unabsorbed  depreciation  allowance   and
unabsorbed investment allowance.  On this purported 'real' issue,  the  High
Court  mentioned  that  since   unabsorbed   depreciation   allowance   gets
precedence over the unabsorbed investment allowance under the provisions  of
the Act, which has been held by various High Courts (and those judgments  of
the High Courts are taken  note  of),  it  is  the  unabsorbed  depreciation
allowance which would be set off first.

Arguments before us remain the same which were advanced by the  assessee  as
well as the Revenue in  the  High  Court.   In  order  to  appreciate  these
arguments and to answer the controversy which has arisen, it is apposite  to
take note of provisions of  Section  32  of  the  Act,  as  existed  at  the
relevant time.  The portion with which we are concerned reads as under:
“32. (1)  In respect of  depreciation  of  buildings,  machinery,  plant  or
furniture owned by the assessee and used for the purposes  of  the  business
or profession, the following deductions shall, subject to the provisions  of
section 34, be allowed-
                          xx          xx         xx
(2)  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 (ii) of  sub-section  (1)]  in  any  previous  year,
owing to there being no profits or gains chargeable for that previous  year,
or owing to the profits or gains chargeable being less than  the  allowance,
then, subject to the provisions of sub-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.”


This Section deals with depreciation in respect of certain assets which  are
mentioned in sub-section (1) of Section 32 and owned  wholly  or  partly  by
the assessee and used for  the  purpose  of  business  or  profession.   The
nature of deductions that is to be allowed is also mentioned in  sub-section
(1).  We are not directly concerned with this provision inasmuch  as  it  is
not in dispute that the assessee herein was entitled to depreciation on  its
assets and the amount of depreciation is also not in dispute.  As  mentioned
above, in fact, the depreciation of earlier orders could not be utilized  by
the assessee in those years.  Since the provisions of  the  Act  permit  the
assessee to accumulate the unabsorbed depreciation  of  the  previous  years
with right to the assessee to choose  the  same  in  subsequent  years,  the
assessee herein had unabsorbed depreciation of the previous years.  This  is
so stipulated in sub-section (2) of Section  32.,  which  has  already  been
noted earlier.

As per the aforesaid provision, the depreciation allowance or  part  thereof
to which effect has not been given in a particular assessment year owing  to
there being no profits or gains chargeable for that previous years or  owing
to profits  and  gains  chargeable  being  less  than  the  allowance,  such
unabsorbed depreciation allowance is to  be  added  to  the  amount  of  the
allowance for depreciation  for  the  following  previous  year  and  it  is
'deemed to be  part  of  that  allowance  for  that  previous  year  or  the
succeeding previous years, as the case may be'.  This is,  however,  subject
to the provisions of sub-section (2) of Section 72 and  sub-section  (3)  of
Section 73 of the Act.

What follows from the above is that in case of loss in the  business  income
or insufficient profits to absorb the depreciation  allowance  permitted  by
this Section, because of which reason depreciation allowance  or  some  part
thereof remains unabsorbed, it  may  be  carried  forward  under  this  sub-
section to the following year and set off against that  year's  profit,  and
so on for  succeeding  years.   There  is  an  amendment  in  the  aforesaid
provision with effect from April 01, 1996, which  shall  be  taken  note  of
subsequently at an appropriate stage.  However, as per the  provision  which
existed during the relevant period and extracted above, the carried  forward
depreciation allowance is deemed to be a part of, and stands on exactly  the
same footing as the current  depreciation  for  the  assessment  year.   The
unabsorbed depreciation of the past years, thus, by legal  fiction,  becomes
the depreciation of the year in question and can be set off  against  income
chargeable under any head.  There is, thus, actual depreciation which is  to
be calculated in that  particular  assessment  year.   To  this,  unabsorbed
depreciation is  to  be  added  by  the  application  of  aforesaid  deeming
provision and this entire depreciation, namely, that of the current year  as
well as unabsorbed depreciation of the previous years,  can  be  allowed  as
depreciation in that particular assessment  year  or  succeeding  assessment
years.  This is subject to the provisions of Sections  72(2)  and  73(3)  of
the Act.  Section 72 deals with carried forward  and  set  off  of  business
loss under the head 'business or profession'.   This  carried  forward  loss
can be set off only against the profits of any business  or  profession  and
is carried forward only for a period of eight years.   On  the  other  hand,
insofar as carry forward of depreciation allowance to  any  subsequent  year
is concerned, the same is  without  any  time  limit.   Sub-section  (2)  of
Section 72 stipulates that where any allowance or part thereof is under sub-
section (2) of Section 32 or sub-section (4) of Section  35  and  is  to  be
carried forward, effect shall first be  given  to  the  provisions  of  this
section.  Section 73, on the other hand,  deals  with  loss  in  speculation
business and subsequently mentions that such loss of a speculation  business
shall not be set off except against profits and gains, if  any,  of  another
speculation business.  Thus, losses of speculation business can be  set  off
only against profits and gains  of  another  speculation  business  and  not
against profits earned from other kinds  of  businesses.   Here  sub-section
(3) of Section 73,  which  finds  mention  in  Section  32(2),  states  that
provisions of sub-section (2) of Section 72 shall also apply in relation  to
speculation business.  We are not concerned  with  the  aforesaid  situation
arising out of sub-section (2) of Section 72 or sub-section (3)  of  Section
73.  However, the same are mentioned for the purpose of clarity as there  is
a reference to these provisions in Section 32(2).  Insofar  as  the  instant
case is concerned, it depends upon the meaning that is to be  given  to  the
deeming provision, as explained above.

Before we discuss this effect, let us take  note  of  some  of  the  nuances
regarding claim of depreciation allowance, which  have  been  laid  down  by
judicial pronouncements on interpretation of this provision.

It has been the consistent view of the Courts that  unabsorbed  depreciation
allowance should be allowed before the unabsorbed investment  allowance.  To
put it differently, unabsorbed depreciation is to be  given  precedence  and
is allowed to be set off first.  Some of the High Courts had  earlier  taken
the view that this would be so even if the  assessee  had  not  claimed  the
unabsorbed depreciation.  It is the necessary consequence of the  scheme  of
various provisions of the Act.  Section 32A of the  Act,  which  deals  with
investment allowance, was inserted by the  Finance  Act,  1976  with  effect
from 01.04.1976.  According to Circular No. 202 dated 05.07.1976  issued  by
CBDT [(1976) 105 ITR St 17],  the  combined  effect  of  the  provisions  of
Sections 32, 32A, 33, 33A  and  72  is  that  in  a  case  where  there  are
allowances in the nature of depreciation  allowance,  investment  allowance,
development rebate, development allowance and losses,  such  allowances  and
losses would be deductible in the order given  below,  in  cases  where  the
profits are insufficient to absorb all of them:
(i)   Current depreciation (Section 32(1))
      (ii)  Carried forward losses of earlier years (Section 72(1))
      (iii) Unabsorbed depreciation of earlier years (Section 32(2))
(iv)  Unabsorbed development rebate of earlier years (Section
            33(2)(ii)
(v)   Current development rebate (Section 33(2)(i))
(vi)  Unabsorbed development allowance of earlier years
            (Section 3A(2)(ii))
(vii) Current development allowance (Section 33A(2)(ii))
(viii)       Unabsorbed  investment  allowance  of  earlier  years  (Section
32A(3)(ii))

(ix)  Current investment allowance (Section 33A(3)(i))


            It emerges from sub-section (3) of Section 32A  that  unabsorbed
investment allowance takes precedence  over  current  investment  allowance.
However, this Court in Mahendra Mills (supra) took the view that  since  the
provision for depreciation is a benefit which enures  to  the  assessee,  if
the assessee does not wish to avail of that benefit for some reason, such  a
benefit cannot be forced upon him.  In that case, the Court  held  that  the
language of the provisions of Sections 32 and 34 of the Act is specific  and
admits of no  ambiguity.   Section  32  allows  depreciation  as  deduction,
subject  to  the  provisions  of  Section  34.   Section  34  provides  that
deduction  under  Section  32  shall  be  allowed  only  if  the  prescribed
particulars have been furnished.  It was specifically held that there is  no
mandatory duty on the officer to allow depreciation  if  the  assessee  does
not want to  claim  that.   The  provision  for  claim  of  depreciation  is
certainly for the benefit of the assessee.  If he does not wish to avail  of
that benefit for some reason, the benefit cannot be forced upon him.  It  is
for the assessee to see if the claim of depreciation is  to  his  advantage.
Income under the head “Profits and  gains  of  business  or  Profession”  is
chargeable to income-tax under Section 28 and income under Section 29 is  to
be computed in accordance with the provisions contained in  Sections  30  to
43A.  The argument that since Section 32 provides for  depreciation  it  has
to be allowed in computing  the  income  of  the  assessee  cannot,  in  all
circumstances, be accepted in view of the bar contained in Section  34.   If
Section 34 is not satisfied and the particulars are  not  furnished  by  the
assessee, his claim for depreciation under Section  32  cannot  be  allowed.
Section 29 is, thus, to be read with reference to other  provisions  of  the
Act.  It is not in itself a complete code.

This principle, thus,  is  grounded  in  the  reasoning  that  there  is  no
provision by which depreciation could be fictionally  deemed  to  have  been
claimed and granted and it is to be specifically claimed  by  the  assessee.
Further,  when  claiming  of  depreciation  is  a  privilege  given  to  the
assessee, it cannot be turned into a disadvantage  even  when  the  assessee
does not claim the depreciation.  Therefore, option  in  this  behalf  rests
with the assessee.

In the impugned judgment as well,  the  High  Court  accepts  the  aforesaid
legal position as this is so decided by this Court in Mahendra Mills's  case
(supra) and is a binding precedent. However, the aforesaid judgment  is  not
followed on the ground that real issue is something else.   Such  an  issue,
though already  noted  above,  is  stated  in  para  10.1  of  the  impugned
judgment, which reads as under:
“10.1  But, in the case on hand, it is not the issue  whether  the  assessee
could be compelled to claim depreciation allowance,  but,  if  he  fails  to
claim, what would be the order of priority between  unabsorbed  depreciation
allowance and unabsorbed investment allowance.”

Strangely, the issue is somewhat different, namely,  when  the  depreciation
allowance is not claimed, can it be said that the  assessee  has  failed  to
claim and in that case what would be the position?  According to  us,  there
is no question of failing to claim. Situation in  such  an  event  would  be
that depreciation is  not  claimed  at  all  and,  therefore,  the  position
mentioned in Mahendra Mills's case (supra) would follow.  To this extent  we
find that it was a wrong question posed by the High Court, which  led  to  a
wrong answer.

However, the matter does not rest there.  In the present case, the  assessee
in fact claimed the depreciation allowance insofar as it  pertained  to  the
current year.  At the same time, it did not want to claim  the  set  off  of
the unabsorbed depreciation  allowance  of  the  previous  years.   In  such
situation, the question is as to whether it  is  open  to  the  assessee  to
invoke the provisions of Section 32 of the Act by claiming  depreciation  of
the current year, but at the same time choose not to make  a  claim  of  set
off of unabsorbed depreciation allowance of the previous  years.   As  noted
above, by legal fiction unabsorbed depreciation becomes depreciation of  the
year in question and gets added to the depreciation  of  the  current  year.
If that be so, is it  the  right  of  the  assessee  to  partly  invoke  the
provisions of Section 32 when it comes to depreciation of the  current  year
and still claim that it has  right  not  to  claim  unabsorbed  depreciation
allowance?  On a plain reading of Section 32, it does not appear to  be  the
position.  Once the entire  depreciation,  namely,  unabsorbed  depreciation
allowance of the previous year gets merged  into  the  depreciation  of  the
current year, it would become  an  integral  part  thereof.   Legal  fiction
makes it one whole thereby making it possible to the assessee to  claim  set
off of unabsorbed carried  forward  depreciation  as  well.   A  fortiorari,
bifurcation thereof with option to claim depreciation of current  year  only
and contending at the same time that portion of unabsorbed  carried  forward
depreciation is not to be thrusted upon him as it is not claimed, would  not
be permissible.

Notwithstanding the above, the endeavour of  the  learned  counsel  for  the
assessee is to show that the assessee has such a right.  In  this  direction
it is argued that though by legal fiction unabsorbed depreciation  allowance
is carried forward to the assessment year in question and becomes a part  of
depreciation allowance of that year, it retains its identity inasmuch as  it
is brought forward only because of deeming provision which is to be  applied
to  that  limited  extent  and  no  further.   In  order  to  support   this
hypothesis, learned counsel referred to  the  judgment  in  Commissioner  of
Income-Tax, Kanpur v.  Mother  India  Refrigeration  Industries  P.  Ltd.[5]
where nature of carried forward depreciation  allowance  on  application  of
deeming provision is explained by the Court.  She specifically  referred  to
the following discussion in this behalf:
“Having regard to the aforesaid rival contentions, it  will  be  clear  that
the real issue that arises for our consideration in this  case  is  whether,
on a proper  construction  of  the  relevant  provisions  of  the  concerned
enactment, unabsorbed carried forward losses  should  have  preference  over
current depreciation in the matter of set off or is the position vice  versa
while computing the total income of an assessee in the concerned  assessment
year?  And the answer to this question depends on what  is  the  true  scope
and purpose of the legal fiction created under proviso (b) to  s.  10(2)(vi)
of the 1922 Act or under s. 32(2) of the 1961 Act.

            At the outset, it may be stated that a  close  scrutiny  of  the
relevant provisions of the 1922 Act as also the 1961 Act clearly shows  that
the computation of income under the head “Profits and gains of business”  of
any particular assessment year is required to be done after  making  certain
allowances specified in sub-s.(2) of  s.  10  of  the  1922  Act  and  after
allowing certain deductions in accordance with the provisions  contained  in
ss. 30 to 43A of the 1961 Act; in other words, it is  the  net  profits  and
gains after the specified deductions are made that  are  subjected  to  tax;
one of such deductions pertains to depreciation allowance at the  prescribed
rate of percentage of the written down value  of  the  business  asset;  and
this is provided in s. 10(2)(vi) of the 1922 Act and  in  s.  32(1)  of  the
1961 Act.  Up to this stage of computation,  no  question  of  either  carry
forward of unabsorbed depreciation of the earlier years or carry forward  of
unabsorbed business losses of earlier years arises.   In  other  words,  the
normal accountancy principle has to  be  applied  in  arriving  at  the  net
income  from  business  for  that  year  by  debiting  the  current   year's
depreciation.  The question is whether any deviation from this  normal  rule
of accountancy is contemplated by proviso (b)  to  s.  10(2)(vi)  read  with
proviso (b) to s. 24(2) of the 1922 Act or by s. 32(2) read  with  s.  72(2)
of the 1961 Act, and it is here that the aspect of  proper  construction  of
these provisions arises.  Dealing  with  the  provisions  of  the  1922  Act
first, it will be clear that proviso (b) to s. 10(2)(vi)  is  in  two  parts
and provides for two things; its first part provides for a carry forward  of
unabsorbed depreciation and its second part provides for clubbing  the  said
carried forward  depreciation  with  the  current  year's  depreciation  and
deeming the aggregate to  be  the  current  year's  depreciation.   However,
carrying forward of the unabsorbed depreciation and  the  deeming  provision
in proviso (b) are not absolute but are subject to the  proviso  (b)  to  s.
24(2).  Had proviso (b) to s. 24(2) not been  enacted  by  the  Legislature,
the result would have been that the aggregate depreciation would  have  been
deducted first out of the profits and  gains  in  preference  to  unabsorbed
business losses which might have been carried forward under s. 24(2) but  as
such losses can be carried forward only for limited  number  of  years,  the
assessee would in certain circumstances have in his books  losses  which  he
might not be able to set off even within the  time-limit  during  which  the
set  off  is  permitted.   In  order  to  prevent  such  a  situation,   the
Legislature enacted the proviso (b) to s. 24(2).   And  proviso  (b)  to  s.
24(2) expressly stated “where depreciation allowance is, under  cl.  (b)  of
the proviso to cl. (vi) of sub-s. (2) of s. 10, also to be carried  forward,
effect shall first be given to the  provisions  of  this  sub-section”.   In
other words, it clearly  provides  that  in  the  matter  of  set  off,  the
unabsorbed depreciation  that  is  required  to  be  carried  forward  under
proviso (b) to s. 10(2)(vi) and no preference over the current  depreciation
is intended.

            It is true that proviso (b) to  s.  10(2)(vi)  creates  a  legal
fiction and under that  fiction,  unabsorbed  depreciation  either  with  or
without current year's depreciation is  deemed  to  be  the  current  year's
depreciation but it is well settled, as has been observed by this  court  in
Bengal Immunity Company Limited v. State of Bihar [1955] 2 SCR 603,  606;  6
STC 446, that the legal fictions are created only for some definite  purpose
and these must be limited to that purpose and should not be extended  beyond
that legitimate field.  Clearly, the avowed purpose  of  the  legal  fiction
created by the deeming provision contained in proviso (b)  to  s.  10(2)(vi)
is to make the unabsorbed carried forward  depreciation  partake   the  same
character as the current depreciation in the following year, so that  it  is
available, unlike unabsorbed carried forward business loss,  for  being  set
off against other heads of income of that year.”

It is clear from the above that though the  question  there  was  different,
namely, precedence  of  carried  forward  business  loss  over  the  carried
forward unabsorbed depreciation or vice versa,  what  is  important  is  the
interpretation that is given to Section 32(2) of the  Act  and  particularly
the deeming provision  thereof  which  creates  legal  fiction.   The  Court
clarified that the avowed purpose of the legal fiction  created  by  deeming
provision contained in Section 32(2) of the Act is to  make  the  unabsorbed
carried forward depreciation partake  the  same  character  as  the  current
depreciation in  the  following  year,  so  that  it  is  available,  unlike
unabsorbed carried forward business loss for being  set  off  against  other
heads of income of that year.  On that basis, the Court answered that  since
unabsorbed carried forward depreciation  had  become  part  of  the  current
depreciation, the entire depreciation had to be  given  preference  (current
as well as unabsorbed carried forward depreciation) over unabsorbed  carried
forward losses.

We do not understand as to how the aforesaid judgment  helps  the  assessee.
On the contrary, it goes against the assessee while answering  the  question
which has arisen  in  the  instant  appeals.  Once  the  unabsorbed  carried
forward depreciation has become a part of the depreciation  of  the  current
year, it is not open  to  the  assessee  to  bifurcate  the  two  again  and
exercising its choice to claim the depreciation of the  current  year  under
Section 32(1)  of  the  Act  and  take  a  position  that  since  unabsorbed
depreciation of the previous years is not claimed,  it  cannot  be  thrusted
upon the assessee.  The position would have been different if  the  assessee
had not claimed any depreciation at all.  However, once the depreciation  is
claimed and while giving deductions  the  depreciation  is  to  be  set  off
against the profits of the current year  prior  to  the  unabsorbed  carried
forward investment allowance, it is the  entire  depreciation,  namely,  the
depreciation of the current year as well as the unabsorbed  carried  forward
depreciation, which is to be taken into account as by virtue of the  fiction
created under Section 32(2) of the Act, carried  forward  depreciation  also
partakes the character of depreciation of the current year.  This  scrambled
egg cannot be unscrambled now.  Otherwise, it would amount to  negating  the
legal fiction that is created by the said provision,  even  to  the  limited
extent.  In fact, the case falls  within  the  ambit  of  the  said  limited
extent of legal fiction and gets covered by it.

Once we read the provision  in  the  aforesaid  manner,  the  aid  of  other
interpretative tools which is sought to be taken by the learned counsel  for
the assessee, namely, the provision is to  be  given  liberal  construction;
the scheme  of  the  Act  envisages  giving  preference  in  the  matter  of
deduction from income to those  expiring  by  afflux  of  time,  etc.  would
become irrelevant and pales into insignificance.

The upshot of the aforesaid discussion is to decide the question  formulated
against the assessee and in favour of the Revenue, though  for  our  reasons
contained in this judgment.  The appeals are,  accordingly,  dismissed  with
costs.

                             .............................................J.
                                                                (A.K. SIKRI)



                             .............................................J.
                                                     (ROHINTON FALI NARIMAN)

NEW DELHI;
MARCH 15, 2015.
-----------------------
[1]   (1981) 130 ITR 856
[2]   (2001) 252 ITR 590
[3]   (2002) 254 ITR 780
[4]   (2000) 243 ITR 56
[5]   (1985) 155 ITR 711

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