COMMISSIONER OF INCOME TAX, KANPUR ETC. vs. M/S. MOTHER INDIA REFRIGERATION INDUSTRIES (P) LTD. ETC.

CIVIL APPEAL No. 1570/1973Supreme Court1985 INSC 17514 August 1985Bench: 3 JudgesAuthor: V.D. TULZAPURKAR, SABYASACHI MUKHERJI, RANGANATH MISRA B13 pages
AI SummaryAllowed

What were the facts?

The assessee, M/s. Mother India Refrigeration Industries (P) Ltd., had unabsorbed business losses of Rs. 67,534 and unabsorbed depreciation of Rs. 1,78,154 at the end of assessment year 1950-51. For assessment years 1951-52 and 1952-53, the assessee's income before current depreciation was Rs. 50,624 and Rs. 64,332 respectively, while current depreciation was Rs. 58,140 and Rs. 44,580. The assessee contended that unabsorbed losses from 1950-51 should be set off before deducting current depreciation. The Income Tax Officer (ITO) rejected this, holding that carried forward losses could not be prioritized over current depreciation. The Appellate Assistant Commissioner (AAC) allowed the assessee's appeal. The Appellate Tribunal restored the ITO's order. However, the High Court, on reference, ruled in favor of the assessee. A similar issue arose in a Tax Reference Case.

What did the Supreme Court hold?

The Supreme Court held that unabsorbed carried forward losses cannot be given preference over current depreciation in the matter of set off while computing an assessee's income for any particular assessment year. The Court reasoned that while Section 10(2)(vi) proviso (b) of the 1922 Act (and Section 32(2) of the 1961 Act) creates a legal fiction to deem unabsorbed depreciation as current year's depreciation, this is subject to Section 24(2) proviso (b) of the 1922 Act (and Section 72(2) of the 1961 Act). This latter proviso expressly states that where depreciation allowance is to be carried forward, effect shall first be given to the provisions of that sub-section, meaning unabsorbed business losses of earlier years have preference over unabsorbed depreciation to be carried forward. However, this preference is not intended over current depreciation. The purpose of the legal fiction is to allow unabsorbed depreciation to be set off against other heads of income, not to grant it priority over current depreciation. The Court set aside the High Court's judgment in the Civil Appeals, restoring the Tribunal's order, and answered the Tax Reference question against the assessee, holding that current year's depreciation must be deducted first before deducting unabsorbed carried forward business losses.

What were the issues?

1. Whether unabsorbed carried forward business losses can be given preference over current depreciation while computing the total income of an assessee in an assessment year, under Section 10(2)(vi) proviso (b) read with Section 24(2) proviso (b) of the Indian Income Tax Act, 1922 (equivalent to Section 32(2) read with Section 72(2) of the Income Tax Act, 1961)? Assessee's contention: The legal fiction created by the deeming provision in Section 10(2)(vi) proviso (b) of the 1922 Act (and Section 32(2) of the 1961 Act), which treats unabsorbed depreciation as current year's depreciation, must be given full effect. Therefore, the aggregate depreciation should be subject to Section 24(2) proviso (b) of the 1922 Act (or Section 72(2) of the 1961 Act), giving priority to unabsorbed carried forward losses over the aggregate depreciation. Revenue's contention: On proper construction of the relevant provisions, unabsorbed carried forward losses have priority over unabsorbed depreciation of earlier years, but not over current year's depreciation. The preference given to unabsorbed carried forward losses under Section 24(2) proviso (b) is over unabsorbed depreciation, not current depreciation.

Which sections of the Income-tax Act were involved?

Section 10(2)(vi),Section 24(2),Section 32(2),Section 72(2)

AI-generated summary — verify with the full judgment below

A B c D E F G 556 • COMMISSIONER OF INCOME TAX; KANPUR ETC. v. M/S. MOTHER INDIA REFRIGERATION INDUSTRIES (P) LTD. ETC. AUGUST 14, 1985 [V.D. TULZAPURKAR, SABYASACHI MUKliARJI AND RANGANATH MISRA, JJ. J Indian Income Tax • .ct, 1922, ss. 10(2) (vi) proviso (b) and 24 (2) proviso (b) - Income Tax Act, 1961. ss. 32(2) and 72 (2). - '.

Unabsorbed carried forward losses and current deprecia- tion - Deduction of - Unabsorbed carried forward losses cannot be given preference over current depreciation while computing the total inc~ of an assessee in an assessment year.

The Respondent-assessee in the Civil Appeals had an unabsorbed business loss of Rs. 67534 and unabsorbed depreciation of Rs. l,78,154 at the end of assessment year 1950-51. The respondent's income without taking into account the current depreciation was Rs. 50,624 in 1951-52 and Rs. 64332 in 1952-53. The amount of current depreciation was, however, Rs. 58,140 in 1951-52 and Rs. 44,580 in 1952-53. The respondent contended before I.T.o. that before deducting the current depreciation from the above profits the unabsorbed loss of the earlier year 1950-51 should be first set oft. The I.T.O. held tha

The order continues below.

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