Case: Commissioner Of Income Tax, Calcutta Vs. Jaipuria China Clay Mines (P) Ltd

The relevant facts and circumstances are as follows: The Income-tax Officer assessing the respondent, M/s. Jaipuria China Clay Mines (P) Ltd. Calcutta, hereinafter referred to as the assessee, for the year 1952-53 computed its total income at Rs. 14,041 before charging depreciation for that year. From that figure he deducted depreciation for the year amounting to Rs. 5,360, thus computing a profit of Rs. 8,681. From this figure he deducted an equivalent amount, i.e., Rs. 8,681, in respect of losses during 1947-48, and he thus worked out the business income as nil. He then computed the dividend income at Rs. 2,01,130 and determined the total income at this figure and levied tax on it. The assessee had in its favour an unabsorbed depreciation aggregating to Rupees 76,857 and it contended before the Income-tax Officer that this sum should be deducted from the income received from dividends, which, if done, would reduce the total income to Rs. 1,32,955, but the Income-tax Officer refused to accede to this contention. The Appellant Assistant Commissioner upheld the order of the Income-tax Officer and the assessees appeal to the Appellate Tribunal met with the same fate. The High Court, however, accepted the contention of the assessee and answered the question referred to it in favour of the assessee.2. The answer to the question depends on the interpretation of Ss. 6, 10 and 24 of the Act. We are concerned with the law as it stood on 1-4-1952. The scheme of the Act is that the tax is levied in respect of the total income of the previous year of every individual, Hindu Undivided family, etc., and the total income consists of income under various heads such as Salaries, Interest on Securities, Income from Property, Profits and gains of business, profession or vocation, and Income from other sources and Capital gains. Various sections deal with how income, profits and gains under each head have to be computed. Section 10 deals with the computation of profit and gains of any business carried on by an assessee. Section 10 (2) prescribes the allowances which have to be deducted before computing the profits and gains; one of the allowances is depreciation, and this is provided under sub-cl. (vi). Proviso (b) to S. 10 (2) (vi). On this a great deal of argument has been addressed to us and it reads aswhere, in the assessment of the assessee or if the assessee is a registered firm, in the assessment of its partners, full effect cannot be given to any such allowance in any year not being a very which ended prior to the 1st day of April 1939, owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of Cl. (b) of the proviso to sub-s. (2) of S. 24. The allowance or part of the allowance to which effect has not been given as the case may be, shall be added to the amount of the allowance for depreciation for the following year and deemed to be part of the allowance, or if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeedingmay be mentioned that the words "in the assessment of the assessee or if the assessee is a registered firm, in the assessment of its partners" were inserted by S. 8 of the Income Tax (Amendment) Act, 1953 (25 of 1953) with effect from 1-4-1952. The next relevant statutory provision is S. 24, which provides for set-off of losses in computing aggregate income. Relevant portions of S. 24 are in the followingwhere any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in S. 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year.........Providedfurther that when the assessee is an unregistered firm which has not been assessed under the provisions of Cl. (b) of sub-s. (5) of S. 23, in the manner applicable to a registered firm, any such loss shall be set off only against the income, profits and gains of the firm and not against the income profits and gains of any of the partners of the firm; and where the assessee is a registered firm, any loss which cannot be set off against other income, profits and gains of the firm shall be apportioned between the partners of the firm and they alone shall be entitled to have the amount of the loss set off under this section.2. Where any assessee sustains loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on 31-3-1940, in any business, profession or vocation and the loss cannot be wholly set off under sub-s. (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income, shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year; and if it cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year, and so on: but no loss shall be so carried forward for more than six years, and a loss arising in the previous years for the assessment for the years ending on 31-3-1940, the 31st day of March, 1941, the 31st day of March, 1942, the 31st day of March, 1943, and the 31st day of March, 1944, respectively, shall be carried forward only for one, two, three, four and five years, respectively:Providedwhere 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;(c) nothing herein contained shall entitle any assessee, being a registered firm, to have carried forward and set off any loss which has been apportioned between the partners, under the proviso to sub-s. (1), or entitle any assessee, being a partner in an unregistered firm which has not been assessed under the provisions of Cl. (b) of sub-s. (5) of S. 23 in the manner applicable to a registered firm, to have carried forward and set off against his own income any loss sustained by the firm;............"

Reasoning: 7. After the amendment, the same view has been taken in Commissioner of Income Tax, Bombay City v. Ravi Industries Ltd.,ITR 145 (Bom), by the Bombay High Court, and in Commissioner ofv. Girdharilal Harivallabhadas Mills Co. Ltd.,ITR 693 (Guj), by the Gujarat High Court. The only contrary view which has been placed before us is that of the Madras High Court in Commissioner of Income Tax Madras v. B. Nagi Reddi, (1964) 51 ITR 178 (Mad)  , but we are unable to agree with the view expressed in the last case. The Madras High Court observed at p. 196 asour opinion, the statute leads one to the irresistible conclusion that the depreciation allowance must be a charge only on the profits. The limit of the charge is the limit of the profits. Theof profits will prevent the absorption of the allowance. There is no warrant for taking in and absorbing the depreciation allowance in the profit and loss account to work out a loss. If that were the true position, the provision for carrying forward the unabsorbed depreciation allowance would be wholly redundant, if notin view of the specific provision for the carrying forward of losses.The unabsorbed depreciation allowance is carried forward under proviso (b) to S. 10 (8) (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 Cl. (vi) and has to be deducted as allowance. If the Legislature had not enacted proviso (b) to S. 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 S. 24, but as the losses can be carried forward only for six years under S. 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 S. 24 (2) also deals with the carrying forward of depreciation. This carry forward having been provided in S. 10 (2) (vi) and in a different manner; S. 24 (2) only deals with losses other than the losses due to depreciation.