K. Shivashankar Bhat, J. - (1.) THE question referred to us under section 256 of the Income-tax Act, 1961 ("the Act"), read thus : "(1) Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law while holding that when once a valid revised return was filed by the assessee, it completely effaces and obliterates the original return and, therefore, it is only the revised return that has to be taken into account for the purpose of making the assessment ? (2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that for purposes of allowing the entertainment expenses under section 37(2A) of the Income-tax Act, the profits and gains of the business should be taken to be the income without setting off the brought forward losses and unabsorbed depreciation of earlier years and right in granting relief or Rs. 25,000 to the asssessee-company ?"
(2.) AN answer to the second question would aid in solving the problem under the first question and, therefore, we proceed to consider the second question with reference to the facts. The assessment year in question is 1979-80. The assessee claimed certain entertainment allowance under the provisions of section 37(2A) of the Act. The Income-tax Officer, however, held that the carried forward depreciation allowance of the previous year will have to be set off along with other allowances before arriving at the income under the head "Profits and gains of business" in question. The assessee appealed to the Commissioner of Income-tax (Appeals). The assessee contended before the Commissioner that the assessee has not claimed this allowance while computing the profits from business and, therefore it cannot be thrust upon the assessee. The Commissioner of Income-tax (Appeals) did not accept this contention and dismissed the appeal under this head. The assessee appealed to the Appellate Tribunal. Para 4 of the order of the appellate Tribunal itself shows that the appeal pertained to the disallowance of entertainment expenditure claimed by the assessee to the extent of Rs. 29,615 and this question was linked with the question of allowing depreciation allowance which was carried forward from the previous year, actually, the assessee-company had claimed this allowance in the original return but, while filing the revised return, the assessee had omitted to claim the same. The Income-tax Officer has ignored the omission made by the assessee and allowed the allowance of depreciation on the ground that he has to tax the real income of the assessee for which purpose the statutory allowance will have to be granted. The assessee had contended that, when the revised return was a valid return, the Income-tax Officer could not have referred to the withdrawn original return. That is how the first question referred to us has arisen. Independently of the first question, the Revenue also contended before us that, for the purpose of section 37(2A), while computing the profits from the business, the statutory allowance will have to be reckoned and should be deducted from the receipts even though the assessee fails to claim the deduction. The Appellate Tribunal held that the Income-tax Officer should not have referred to the original return at all since the assessee had filed a revised return and the original return stands obliterated. Regarding the interpretation of sub-clause (i) of section 37(2A) the Tribunal observes : "If it were the intention of the Legislature that the profits and gains of business or profession over which the entertainment expenditure is allowable should be the figure after allowing the brought forward losses and carried forward depreciation, then it would have stated so in section 37(2A) itself. The taxing statute should always be strictly construed and whenever there is any ambiguity the benefit of doubt should go to the assessee." The Appellate Tribunal refers to the income-tax return form which supported its conclusion. The Appellate Tribunal also referred to section 72(1) which governs cases of brought forward losses. Accordingly, the Tribunal held the claim of the assessee.
(3.) MR. Chandrakumar, learned counsel for the Revenue, contended that the approach of the Appellate Tribunal was erroneous when it said that section 37(2A) in no way refers to section 32(2) (that is, the depreciation allowance) specifically for exclusion while computing the profits and gains. It is true as rightly pointed out by learned counsel that section 37(2A)(i) does not in terms state that the depreciation allowance shall be considered and deducted before arriving at the profits and gains of the business. The said provision specifically mentions exclusion of the allowances under section 32A, 33 and 33A from being deducted before arriving at the profits. Therefore, learned counsel for the Revenue is certainly right when he contends that all other provisions governing the allowance would operate and whatever allowances are deductible will have to be deducted. Under section 14, the "Heads of income" are stated against A and C to F. Profits and gains of business or profession comes under D. Chapter IV of the Act has been further sub-divided providing for the computation of various heads of income from A and C to F. Under sub-division D commencing with section 28 onwards and before reaching section 45, there are several provisions which govern the computation of profits and gains of business or profession. Section 29, in clear terms, directs as to how the income thereunder will have to be computed and that is to be in accordance with the provisions contained from section 30 onwards and before reaching section 45. The depreciation as an allowance deductible is referred to in section 32. Sub-section (1) of the said section provides for the computation of the depreciation allowance. Sub-section (2) thereof provides for the carrying forward of the said allowance if, during a particular year, the allowance cannot be deducted because of want of sufficient profits or gains to the extent the depreciation allowance cannot be deducted for want of sufficient profits. It is to be carried forward during the subsequent years. For this purpose, the carried forward unabsorbed allowance is deemed to be part of the next year's allowance and so on. In other words, sub-section (2) of section 32 creates a legal fiction to the effect that the unabsorbed depreciation allowance of the previous year is part of the current year's allowance. The fiction nowhere goes beyond this declaration. Further, sub-section (2) of section 32 is subjected to the provisions of section 72(2) [reference to section 73 is omitted here as unnecessary]. To understand section 72(2), the main provision of section 72 stated in its sub-section (1) will have to be referred to. According to sub-section (1) of section 72, where the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee and such a loss cannot be set off against the income from any other head of income in accordance with section 71, the balance of such a loss may be carried forward to the following assessment year to be set off as stated in the said sub-section (1), that is, firstly, it shall be set off against the profits and gains, if any, of any business or profession and if it is not possible to do so, then it shall be carried forward to the following assessment year and so on. As per section 72(3), this carrying forward is limited to a period of eight assessment years.;