Case: SESHASAYEE PAPER AND BOARDS LIMITED Vs. DEPUTY COMMISSIONER OF INCOME TAX

4. 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 Rs. 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 Rs. 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.  5. 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 CIT v. Coromandel Steels Ltd. [1981] 130 ITR 856 /5 Taxman 168 . 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.  6. 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.  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 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 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.  9. 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 & Jagjivan Ram v. CIT [2001] 252 ITR 290/[2003] 131 Taxman 56 ,  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 Tolls (P.) Ltd. v. CIT [2002] 254 ITR 780/[2003] 128 Taxman 790 (Mad.) , which had followed judgment of this Court in CIT v. Mahendra Mills/Arun Textile C/Humphreys/Glassgow Consultants [2000] 243 ITR 56 /109 Taxman 225 (SC)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.

Court's reasoning:
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.n (2) of Section 72 stipulates that where any allowance or part thereof is undern (2) of Section 32 orn (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. Heren (3) of Section 73, which finds mention in Section 32(2), states that provisions ofn (2) of Section 72 shall also apply in relation to speculation business. We are not concerned with the aforesaid situation arising out ofn (2) of Section 72 orn (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 aboveIt 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 tox 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 codeOn 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 permissible21. 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 lossesThe 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 it23. 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 insignificance24. 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.