1. Dispute regarding whether unabsorbed depreciation from previous years can be set off against total income, including income from other sources, under the Indian Income Tax Act, 1922. (Para 1 )
Back
Next 
1965 Supreme(SC) 280
SUPREME COURT OF INDIA
J.C.Shah : K.Subba Rao : S.M.Sikri
Commissioner Of Income Tax, Calcutta
Versus
Jaipuria China Clay Mines Private Limited
Case No. : 307 of 1964
Date of Decision : 11/1/65
Advocates Appeared: Dhebar R.H. : Iyer R.Ganapathy : Mukherjee D.N. : Sachthey R.N. : Sastri A.V.Viswanatha : Sastri K.N.Rajagopal
Advocates:
A.V.VISHWANATHA SASTRI, D.N.MUKHERJI, K.N.RAJAGOPAL SASTRI, R.Ganapathy Iyer, R.H.Dhebar, R.N.SACH
A.V.VISHWANATHA SASTRI, D.N.MUKHERJI, K.N.RAJAGOPAL SASTRI, R.Ganapathy Iyer, R.H.Dhebar, R.N.SACH
Important Points
Unabsorbed depreciation carried forward under the Indian Income Tax Act, 1922, can be set off against total income, including income from other heads, and is not restricted to business profits or subject to the six-year time limit applicable to ordinary business losses.
Subject
Tax Law - Income Tax
Act Referred
Headnote
(A) Indian Income Tax Act, 1922 - Sections 6, 10, and 24 - Unabsorbed depreciation - Set off against total income - Unabsorbed depreciation, when carried forward under the proviso to Section 10(2)(vi), can be set off against total income, including income from other heads such as dividends, and is not restricted solely to profits and gains of the business. (Paras 5 and 6)
(B) Indian Income Tax Act, 1922 - Section 24(2) - Distinction between business losses and unabsorbed depreciation - Business losses carried forward under Section 24(2) are subject to a six-year limit and can only be set off against profits of the same business, whereas unabsorbed depreciation has no such time limit and can be set off against total income. (Paras 6 and 8)
(C) Interpretation of "assessment of the assessee" - The phrase indicates that the legislature contemplated that depreciation allowance could be given effect in the assessment of an assessee by setting it off against income, profits, and gains under other heads. (Para 5)
Facts of the case:
An assessee's business income for the assessment year was computed, and after deducting current depreciation and previous business losses, the business income became nil. The assessee also earned income from dividends. The assessee had a significant amount of unabsorbed depreciation from previous years and contended that this sum should be deducted from the dividend income to reduce the total taxable income. The tax authorities refused this deduction, but the High Court ruled in favor of the assessee.
Findings of Court:
The court found that the underlying objective of the Act is to assess the total income of an assessee. It held that the provisions for carrying forward depreciation under Section 10(2)(vi) are distinct from the provisions for carrying forward business losses under Section 24(2). The court observed that the legislature gave preference to the deduction of ordinary losses first, but this does not restrict the set-off of unabsorbed depreciation to business profits alone.
Issues: Whether unabsorbed depreciation of past years should be added to the depreciation of the current year and the aggregate of the unabsorbed depreciation and the current year's depreciation be deducted from the total income of the previous year, including income from other sources.
Ratio Decidendi: The court reasoned that the expression "in the assessment of the assessee" implies that depreciation can be set off against income from other heads. While Section 24(2) limits the carry-forward of ordinary business losses to six years and restricts their set-off to profits of the same business, Section 10(2)(vi) provides a separate mechanism for depreciation without such time limits or restrictions to a single head of income.
Result: Appeal dismissed.
(B) Indian Income Tax Act, 1922 - Section 24(2) - Distinction between business losses and unabsorbed depreciation - Business losses carried forward under Section 24(2) are subject to a six-year limit and can only be set off against profits of the same business, whereas unabsorbed depreciation has no such time limit and can be set off against total income. (Paras 6 and 8)
(C) Interpretation of "assessment of the assessee" - The phrase indicates that the legislature contemplated that depreciation allowance could be given effect in the assessment of an assessee by setting it off against income, profits, and gains under other heads. (Para 5)
Facts of the case:
An assessee's business income for the assessment year was computed, and after deducting current depreciation and previous business losses, the business income became nil. The assessee also earned income from dividends. The assessee had a significant amount of unabsorbed depreciation from previous years and contended that this sum should be deducted from the dividend income to reduce the total taxable income. The tax authorities refused this deduction, but the High Court ruled in favor of the assessee.
Findings of Court:
The court found that the underlying objective of the Act is to assess the total income of an assessee. It held that the provisions for carrying forward depreciation under Section 10(2)(vi) are distinct from the provisions for carrying forward business losses under Section 24(2). The court observed that the legislature gave preference to the deduction of ordinary losses first, but this does not restrict the set-off of unabsorbed depreciation to business profits alone.
Issues: Whether unabsorbed depreciation of past years should be added to the depreciation of the current year and the aggregate of the unabsorbed depreciation and the current year's depreciation be deducted from the total income of the previous year, including income from other sources.
Ratio Decidendi: The court reasoned that the expression "in the assessment of the assessee" implies that depreciation can be set off against income from other heads. While Section 24(2) limits the carry-forward of ordinary business losses to six years and restricts their set-off to profits of the same business, Section 10(2)(vi) provides a separate mechanism for depreciation without such time limits or restrictions to a single head of income.
Result: Appeal dismissed.
Legal Category Hierarchy
Table of Contents
2. Revenue argues depreciation is a charge on business profits only; assessee contends it can be set off against total income including other heads. (Para 3 )
3. The court observed that total income assessment requires pooling various heads and the statutory language allows depreciation to be set off against non-business income. (Para 4 , 5 , 6 , 7 )
4. Unabsorbed depreciation can be set off against total income, including other heads, as it is part of the overall assessment of the assessee. (Para 5 , 8 )
5. Appeal dismissed; the High Court's decision allowing the set-off of unabsorbed depreciation against total income is upheld. (Para 9 )
6. Can unabsorbed depreciation be set off against income from other sources?
Yes, unabsorbed depreciation can be set off against total income, including income from other sources, as the assessment of the assessee involves pooling income from various heads. (Para 4 , 5 , 6 )
7. What is the distinction between carrying forward business losses and unabsorbed depreciation?
Business losses are carried forward under Section 24(2) for a limited period of six years, while unabsorbed depreciation is carried forward under Section 10(2)(vi) without such a time limit. (Para 6 , 8 )
8. Which takes priority for set-off: ordinary business losses or unabsorbed depreciation?
Pursuant to the proviso (b) to Section 24(2), ordinary business losses are set off first before giving effect to the deduction of unabsorbed depreciation. (Para 6 , 8 )
S.M.SIKRI,J.
(1) THIS is an appeal by certificate granted by the High court of Calcutta against its judgment in a reference made to it under s. 66 of the Indian Income Tax Act, 1922 (hereinafter referred to as the Act.) The question referred to it by the Appellate tribunal, at the instance of the assessee, was as follows : `Whether in the facts and circumstances of the case, the unabsorbed depreciation of the past years should be added to the depreciation of the current year and the aggregate of the unabsorbed depreciation and the current years depreciation be deducted from the total income of the previous year relevant for the assessment year 1952-53.` 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 year1952-53 computed its total income at Rs. 14,041.00 before charging depreciation for that year. From that figure he deducted depreciation for the year amounting to Rs. 5,360.00, thus computing a profit of Rs. 8,681.00. From this figure he deducted an equivalent amount, i.e., Rs. 8,681.00, 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. 2,01,130.00 and determined the total income at this figure and levied tax on it. The assessee had in its favour an unabsorbed depreciation aggregating to Rs. 76,857.00, 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. 1,32,955.00, 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 1/04/1952. 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 S. deal with how income, profits and gains under each head have to be computed. Section 10 deals with the communication 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 subcl. (vi). Proviso (b) to S. 10(2) (vi). On this a great deal of argument has been addressed to us and it reads as follows : `(b) where, 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 year which ended prior to the last 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 clause (b) of the proviso to Ss. (2) of section 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 that allowance, or if there is no such allowance for that year, he deemed to be the allowance for that year, and so on for succeeding years;` It may be mentioned that the words `in the assessment of the assessee or if the assessee is a registered firm, in the assessment of i
