K.T. Thakore, Accountant Member -
(1.) THESE appeals which relate to the assessment years 1977-78 and 1978-79 are filed by the revenue. As both the appeals involve common grounds and contentions they are taken up together and disposed of by this combined order for the sake of convenience. The Division Bench, which heard the appeal originally, referred the matter to the President for constituting a Special Bench which was so constituted under Section 255(3) of the Income-tax Act, 1961 ("the Act"). THESE appeals, therefore, have come up for hearing before this Special Bench.
(2.) These appeals involve an interesting and complex point of law though the facts which govern the controversy are fairly simple and are not in dispute. The assessee is a company in liquidation. As per the order dated 26-6-1967 of the Gujarat High Court, the company was directed to be wound up under intimation to the official liquidator. The assessee's business used to be of manufacture and sale of cloth till July 1966.
For the assessment year under appeal the assessee has derived income from interest and rent chargeable under the head "Income from other sources" under Section 56, read with Section 57, of the Act. For the assessment year 1977-78, the assessee submitted his return showing a total income of Rs. 82,226, comprising interest income of Rs. 77,413 and rental income of Rs. 5,276. Against the income so returned the assessee claimed deduction of expenses amounting to Rs. 463. For the assessment year 1978-79, the assessee disclosed income from other sources, viz., interest at Rs. 51,697, and claimed expenses amounting to Rs. 14,757. Thus, the total income worked out to Rs. 36,940. For both the years the assessee claimed a set off of unabsorbed depreciation brought forward from the earlier years and it supported its claim by relying on the decision of the Allahabad High Court in CIT v. Rampur Timber & Turnery Co. Ltd.  89 ITR 150. The ITO negatived the assessee's claim, for both the years, for set off of unabsorbed depreciation. He, however, fairly stated that for the assessment years 1971-72 and 1973-74, the Tribunal had accepted the claim of the assessee but as the decision of the Tribunal was the subject-matter of further reference before the Gujarat High Court, he declined to consider the claim of the assessee for setting off of unabsorbed depreciation which was carried forward from the earlier years against the income from other sources brought to tax by him.
The matter thereafter was carried in appeal before the Commissioner (Appeals) who upheld that claim of the assessee, following the decision of the Tribunal in IT Appeal No. 263 (Ahd) of 1977-78 decided on 17-3-1978 as also the decision of the Tribunal in IT Appeal Nos. 860 to 862 decided on 20-3-1979.
(3.) BEING aggrieved the revenue has come up in appeal before us. The learned departmental representative pointed out at the outset that the controversy fell into a narrow compass and it related to setting off of the unabsorbed depreciation of Rs. 10,46,000 carried forward from the assessment year 1976-77 against the income from other sources as returned by the assessee. Shri Mittal submitted that Section 32(2) of the Act creates a fiction which deems the unabsorbed depreciation carried forward from earlier years as depreciation of the current year. There can be no quarrel against the fiction laid down in Section 32(2). But, according to Shri Mittal, the said fiction could be given effect to only if the assessee was found to be "carrying on business". In other words, the assessee must derive income chargeable under the head "Profits and gains of business or profession" under Section 28 of the Act. To put it differently according to Shri Mittal, carrying on of business was a condition precedent for the fiction to operate. The expression "profits and gains" of business under Section 28 postulates a business activity carried on by the assessee and if the income is derived from that source, then the claim for deduction would arise. The depreciation, whether unabsorbed or current could only come into picture when the income under the head "Profits and gains of business or profession" is computed. Therefore, even if the unabsorbed depreciation by virtue of fiction enacted in Section 32(2) is treated as depreciation for the current year, there must be income under the head "Profits and gains of business or profession" so that the allowance for depreciation could operate. In other words, according to Shri Mittal, the fiction enacted in Section 32(2) only treats unabsorbed depreciation on par with current depreciation and subject to the carry forward of losses, which has precedence by operation of Section 72, the said unabsorbed depreciation assumes the character and colour of current depreciation. The fiction could be extended to that limit only. But it could not be extended further so as to treat a business which has closed long back to be treated as the business in operation. In short, Shri Mittal's submission was that once the business as a source has become extinct, the claim for unabsorbed depreciation would lapse. Shri Mittal then pointed out that Section 32(1) provides for allowance of depreciation for which two conditions are necessary, viz., the asset must belong to the assessee and that the asset must be used during the previous year. If the business is in existence but the written down value of the asset has been reduced to nil, there is no case for allowance of depreciation. Similarly if the asset is not used in the previous year, the claim for depreciation also would not arise. However, when the business is not "carried on" in the previous year, then obviously there can be no case for allowance of current depreciation and so would be the case in regard to unabsorbed depreciation carried forward from the earlier years. Shri Mittal then referred to various authorities in support of the above proposition which he has canvassed before us. We shall consider these authorities a little later. Shri Mittal finally submitted that the earlier decision of the Tribunal on this point would require reconsideration in light of the above proposition canvassed by him,;