SESHASAYEE PAPER & BOARDS LIMITED versus DEPUTY COMMISSIONER OF INCOME TAX
[2015] 7 S.C.R. 1054, Supreme Court of India, 2015
Outcome: Dismissed (Dismissed)
Segment: Ratio
. II 
[2015) 7 S.C.R. 1054 
A 
SESHASAYEE PAPER & BOARDS LIMITED 
B 
,..,; 
v. 
DEeUTY COMMISSIONER OF INCOME TAX 
(Civil Appeal Nos.1812-1813of2005) 
MARCH 15, 2015 
[A.K. SIKRI AND R. F. NARIMAN, JJ.] 
c 
Income Tax Act, 1961- s. 32- Unabsorbed Depreciation 
- Whether the unabsorbed depreciation should be allowed 
before the allowance of the unabsorbed investment allowance 
in computing income of the assessee for the Assessment 
Year 1991-1992, when assessee had not claimed the 
o unabsorbed 'depreciation in its income-tax return though it 
had claimed depreciation for the current year- Held: By legal 
fiction unab$orbed depreciation becomes depr:eciation of the 
year in question and gets added to the depreciation of the 
current y.ear - Once the unabsorbed carried forward 
E depreciation .becomes part of the depreciation of the current 
year; it is no{ open to assessee to bifurcate the two again and 
claim depreciation of the current year and take a position 
that since unabsorbed depreciation of the previous years is 
not claimed,Jt cannot be thrusted upon the assessee - Once 
... ~ ' .. 
F depreciation is claimed and while giving deductions the 
depreciatio11.~ to be set off against the profits of the current 
year prior Jg the unabsorbed carried forward investment 
allowance. 
G 
DismissinB the appeals, the Court 
H 
HELD: 1.1 By legal fiction unabsorbed depreciation 
becomes depreciation of the year in question and gets 
1054 
MAY
SESHASAYEE PAPER & BOARDS LTD. v. DEPUTY 
1055 
COMMNR. OF INCOME TAX 
added to the depreciation of the current year. If that be A 
so, is it the right of the assessee to partly invoke the 
provisions of Section 32 when it comes t<?,~~.~reciation 
of the current year and still claim that it has th'e right not 
to claim unabsorbed depreciation allowance? On a plain 
reading of Section 32, it does not appear to be the B 
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 C 
assessee to claim set off of unabsorbed carried forward 
depreciation as well. A fortiorari, bifurcation thereof with 
option to claim depreciation of current y'·"r .only and 
contending at the same time that portion o(u~absorbed 0 
carried forward depreciation is not to be thrusted upon 
,.., 
him as it is not claimed, would not be permissible. [Para 
\-~· 
19) (1067-F-H; 1068-A-B] 
t~ ~· 
1.2 Once the unabsorbed carried'e+orward 
depreciation has become a part of the depreciation of E 
the current year, it is not open to the assessee't'o bifurcate 
the two again and exercising its choice t'o claim the 
depreciation of the current year under Section 32(1) of 
the Act and take a position that since unabsorbed F 
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 G 
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 H
1056 
SUPREME COURT REPORTS 
[2015) 7 S.C.R. 
A 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 
B 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. [Para 22].£1071-F-H; 1072-A-C] 
C 
1.3 Once the provision is read in the aforesaid 
manner, the aid of other interpretative tools which is 
sought to be taken by the counsel for the assessee, 
namely, the provision 1s to be given liberal construction; 
the scheme of the Act envisages giving preference in 
D the matter of deduction from income to those expiring 
by afflux of time, etc. would become irrelevant and pales 
into insignificance. [Para 23] [1072-D-E] 
Commissioner of Income Tax v. Coromandel Steels 
E (1981) 130 ITR 856; Ram Nath Jindal & Anr. v. 
Commissioner of Income Tax (2001) 252 17R 590; Guindy 
Machine Tools P Ltd. v. Commissioner of Income Tax (2002) 
254 ITR 7801; Commissioner of Income-Tax v. Mahendra 
Mills (2000) 243 ITR 56; Commissioner of Income-Tax, 
F Kanpur v. Mother India Refrigeration lndustnes P Ltd. (1985) 
155 ITR 711 - referred to. 
Case Law Reference 
G 
(1981) 130 ITR 856 
referred to. 
Para 5 
(2001) 252 ITR 590 
referred
to. 
Para 9 
(2002) 254 ITR 780 · 
referred to. 
Para 9 
H 
(2000) 243 ITR 56 
referred to. 
Para 9

SESHASAYEE PAPER & BOARDS LTD. v. DEPUTY 
1057 
COMMNR. OF INCOME TAX 
(1985) 155 ITR 711 
referred to. 
Para 20 
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 
1812-1813of2005. 
A 
From the Judgment and Order dated 15.09.2004 of the B 
Division Bench of the High Court of Judicature at Madras in 
T.C (Appeals) Nos. 300/2001 and T.C. No. 41/2002. 
WITH 
CA No. 4498/2015 
Dr. Anitha Suman, Pratap Venugopal, Supriya Jain, 
Gaurav Nair, K.J. John & Co. for the Appellant. 
c 
K. Radhakrishnan, A. K. Srivastava, D.L. Chidanand, D 
Sadhana Sandhu, Anil Katiyar, B.V. Balaram Das for the 
Respondent. 
The Judgment of the Court was delivered by 
A.K. SIKRI, J. 1. Leave granted in Special Leave Petition E 
(Civil) No. 15251 of 2008. 
2. 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 F 
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 G 
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 H
1058 
SUPREME COURT REPORTS 
[20'15] 7 S.C.R. 
A 
year? 
3. The aforesaid question has arisen for consideration in 
the following set of facts: 
4. The appellanUassessee is a public limited company 
B 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 
C 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 previi0us years. It 
also had unabsorbed depreciation of the earlier years. In its 
0 
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 
E 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-
F 84, 1985-86, 1986-87 and 1987-88 (part), and accepted 'Nil' 
income return as filed by the assessee, but on the aforesaid
basis. 
5. The assessee, however, was not satisfied with the 
aforesaid treatment of setting off of the unabsorbed 
G 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 
H Stee/s1• The assessee approached the Tribunal. The 
1 (1981) 130 ITR 856
' 
, ( 
SESHASAYEE PAPER & BOARDS LTD. v. DEPUTY 
1059 
COMMNR. OF INCOME TAX [AK. SIKRI, J.] 
Tribunal also confirmed the order of the Commissioner A 
(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 B 
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. 
6. It is in this backdrop the question of law, which is to c 
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 qLJestion or unabsorbed 
depreciation. 
D 
7. 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 E 
that precedence has to be given to unabsorbed depreciation 
before allowing unabsorbed investment allowance. 
8. The plea of the assessee before the High Court was 
that in the absence of any claim by the assessee towards 
F 
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 G 
investment allowance and it is the assessee whose option 
should prevail. It was alsQ argued that even if the provision 
of law was not very clear and was susceptible to two 
H
1060 
SUPREME COURT REPORTS 
(2015] 7 S.C.R. 
A interpretations, one which was more beneficial to the 
assessee had to be given effect to. 
9. The High Court took note of these contentions of the 
assessee predicated on the judgment of the Punjab and 
B Haryana High Court in Ram Nath Jindal & Anr. v. 
Commissioner of Income Tax2, 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 
C 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 atthe material 
time and this very provision existed even in respect of 
Assessment Years 1991-92 and 1992-93 with which we are 
D 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 Tax3, which had followed 
judgment of this Court in Commissioner of i'ncome-Tax v. 
E Mahendra Mi/ls4 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 
F 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' 
G issue, the High Court mentioned that since unabsorbed 
depreciation allowance gets precedence over the unabsorbed 
investment allowance under the provisions of the Act, which 
2 (2001) 252 ITR 590 
3 (2002) 254 ITR 780 
H 4 (2000) 243 ITR 56
SESHASAYEE PAPER & BOARDS LTD. v. DEPUTY 
1061 
COMMNR. OF INCOME TAX [A.K. SIKRI, J.] 
has been held by various High Courts (and those judgments. A 
of the High Courts are taken note of), it is the unabsorbed 
depreciation allowance which would be set off first. 
10. Arguments before us remain the same which were 
advanced by the assessee as well as the Revenue in the High B 
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, 
c 
be allowed-
D 
xx 
xx 
xx 
(2) Where, in the assessment of the assessee [(or, ifthe 
assessee is a registered firm or an unregistered firm 
assessed as a registered firm, in the assessment of its E 
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 F 
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 G 
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." 
H
1062 
SUPREME COURT REPORTS 
[2015) 7 S.C.R. 
A 
11. 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-
B 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 
C 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 
0 had unabsorbed depreciation of the previous years. This is 
so stipulated in sub-section (2) of Section 32., which has 
already been noted earlier. 
12. As per the aforesaid provision, the depreciation 
allowance or part thereof to which effect has not been given in 
E 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 
F 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 
G 73 of the Act. 
13. 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 
H which reason depreciation allowance or some part thereof 
remains unabsorbed, it may be carried forward under this sub-
SESHASAYEE PAPER & BOARDS LTD. v. DEPUTY 
1063 
COMMNR. OF INCOME TAX [AK. SIKRI, J.] 
section to the following year and set off against that year's A 
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 B 
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. C 
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 D 
of the current year as well as unabsorbed depreciation of the 
previ0us 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 E 
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 F 
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 G 
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 H
1064 
SUPREME COURT REPORTS 
[2015] 7 S.C.R. 
A 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 
B 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 
C the deeming provision, as explained above. 
14. 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 
D interpretation of this provision. 
15.lt has been the consistent view of the Courts that 
unabsorbed depreciation allowance should be allowed before 
the unabsorbed investment allowance. To put it differently, 
E 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. 
F Section 32AoftheAct, 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 
G 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 
H cases where the profits are insufficient to absorb all of them:
SESHASAYEE PAPER & BOARDS LTD. v. DEPUTY 
1065 
COMMNR. OF INCOME TAX [AK. SIKRI, J.] 
(i) 
Current depreciation (Section 32( 1)) 
A 
(ii) 
Carried forward losses of earlier years (Section 
72(1)) 
(iii) Unabsorbed depreciation of earlier years (Section 
8 
32(2)) 
(iv) 
Unab~orbed development rebate of earlier years 
(Section 33(2)(ii) 
(v) 
Current development rebate (Section 33(2)(i)) 
C 
(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 
D 
E 
for depreciation is a benefit which enures to the assessee, if F 
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 G 
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 H
1066 
SUPREME COURT REPORTS 
[2015] 7 S.C.R. 
A 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" 
B 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 
C 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 
0 be read with reference to other provisions of the Act. It is not 
in itself a complete code. 
16. 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 
E 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 
F rests with the assessee. 
17. In the impugned
judgment as well, the High Court 
accepts the aforesaid legal position as this is so decided by 
this Court in Mahendra Mil/s's case (supra) and is a binding 
precedent. However, the aforesaid judgment is not followed 
G 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 
H 
the assessee could be compelled to claim depreciation
SESHASAYEE PAPER & BOARDS LTD. v. DEPUTY 
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COMMNR. OF INCOME TAX [A.K. SIKRI, J.] 
allowance, but, if he fails to claim, what would be the order A 
of priority between unabsorbed depreciation allowance . 
and unabsorbed investment allowance." 
18. Strangely, the issue is somewhat different, namely, 
when the depreciation allowance is not claimed, can it be said B 
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 Mil/s's case (supra) would follow. C 
To this extent we find that it was a wrong question posed by 
the High Court, which led to a wrong answer. 
19. However, the matter does not rest there. In the present 
case, the assessee in fact claimed the depreciation allowance D 
insofar as it pertained to the current year. At the same time, it 
did not want to claim the set off of the unabc;orbed 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 E 
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 F 
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 G 
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 H
1068 
SUPREME COURT REPORTS 
[:2015] 7 S.C.R. 
A 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 th rusted upon him as 
B it is not claimed, would not be permissible. 
20. 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 
C 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 
D 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. 
E She specifically referred to the following discussion in this 
behalf: 
F 
G 
"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 1iction created 
under proviso (b) to s. 10(2)(vi) of the 1922Actor unders. 
H 
5 (1985) 155 ITR 711
SESHASAYEE PAPER & BOARDS LTD. v. DEPUTY 
1069 
COMMNR. OF INCOME TAX [A.K. SIKRI, J.] 
32(2) of the 1961 Act. 
A 
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 B 
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 C 
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 D 
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 E 
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) F 
read with proviso (b) to s. 24(2) of the 1922 Act or by s.
32(2) read withs. 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 1922Actfirst, it 
will be clear that proviso (b) to s. 10(2)(vi) is in two parts G 
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 H
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SUPREME COURT REPORTS 
[2015) 7 S.C.R. 
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 car1ied 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 lih1ited to that 
purpose and should not be extended beyond that 
legitimate field. Clearly, the avowed purpose of the legal 
fiction created by the deemilJ,9 provision contqined in 
proviso (b) to s. 10(2)(vi) is to make the unabsorbed 
carried forward depreciation partake the same character
SESHASAYEE PAPER & BOARDS LTD. v. DEPUTY 
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COMMNR. OF INCOME TAX [A.K. SIKRI, J.] 
as the current depreciation in the following year, so that it A 
is available, unlike unabsorbed carried forward business 
loss, for being set off against other heads of income of 
that year." 
21. It is clear from the above that though the question there s 
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 C 
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 D 
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 E 
depreciation) over unabsorbed carried forward losses. 
22. 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 F 
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 G 
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 H
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SUPREME COURT REPORTS 
[2015] 7 S.C.R. 
A 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 
B 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 
C 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. 
23. Once we read the provision in the aforesaid manner, 
D 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 
E irrelevant and pales into insignificance. 
24. 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. 
F The appeals are, accordingly,
dismissed with costs. 
Nidhi Jain 
Appeals dismissed.