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
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
