The prioritization of tax deductions mandates that carried forward business losses and unabsorbed depreciation take precedence over carried forward development rebates under the Income Tax Act.

1. In this case, at the instance of the assessee, the following questions have been referred to us for our opinion:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the carried forward development rebate of the earlier years cannot take precedence over the unabsorbed depreciation and business losses for the purpose of set off during the current year?
(2) Whether the Tribunal has erred in interpreting S.2(45) read in the context of S.5, S.33 and S.72, etc., in determining the point at issue?"

2. The facts leading to this reference are as follows:
The assessment year under consideration is 1970-71, corresponding to calendar year 1969. The assessee is a limited company carrying on the business of manufacture and sale of cotton cloth. The ITO computed the income of the assessee at Rs. 15,92,301. From this he made certain deductions on account of telephone deposit, depreciation, business losses carried forward from earlier years and unabsorbed carried forward depreciation at Rs. 5,73,136. The ITO also assessed a share of profit from Monotes Sales Agency. The assessee, on the other hand, claimed that the development rebate should have been given priority over the business losses of earlier years and unabsorbed depreciation. The ITO did not agree with the contention of the assessee and rejected those contentions. Thereafter, the matter was taken up in appeal to the AAC, who agreed with the ITO and confirmed his order. Thereafter, the assessee took the matter in further appeal before the Income - tax Appellate Tribunal. Before that body the contention of the assessee was that the depreciation, development rebate and the losses should be set off in the following manner:
1. Current year's depreciation.
2. Carried forward development rebate.
3. Current year's development rebate.
4. Carried forward losses from earlier years.
5. Unabsorbed depreciation.

3. The Tribunal found that the views expressed by the well - known commentators on the I.T. Act were against the contention urged on behalf of the assessee, but it was contended before the Tribunal, as it has also been contended before us, that none of these commentators has given any arguments and / or reasons in support of the view that, first, current year's depreciation, carried forward losses from the earlier years and unabsorbed depreciation should be allowed and, thereafter, carried forward development rebate and current year's development rebate should be allowed. The Tribunal held that when the plant or machinery was installed subsequent to December 31, 1957, the treatment of the development rebate is altogether different and it does not form part of the business loss. According to the Tribunal, if in a particular year, development rebate is not sufficient to be adjusted against the profits, the same can be carried forward. According to the Tribunal, under the scheme of s. 24(2) of the Indian I.T. Act, 1922 (hereinafter referred to as "the 1922 Act"), development rebate comes last for the purpose of setting off. It may be pointed out that under the I.T. Act, 1961 (hereinafter referred to as "the 1961 Act"), s. 33(2) is equivalent to s. 24(2) of the 1922 Act, so far as the question of carrying forward and setting off of unabsorbed development rebate is concerned. In order to appreciate the contentions which have been urged on behalf of the assessee certain figures should be noted at this stage. In the assessment year under consideration, so far as the assessee is concerned, there was a total carried forward development rebate of Rs. 3,30,891. This unabsorbed development rebate was being carried forward from the year 1963-64. The assessee had carried forward business loss for the assessment year 1964-65 at Rs. 4,49,663 and carried forward unabsorbed depreciation for various years at Rs. 21,91,060. As we have pointed out above, the figure of the total profit before the provisions regarding the setting off of carried forward business los