SAHU RUBBERS PRIVATE LIMITED Vs. COMMISSIONER OF INCOME TAX
LAWS(BOM)-1962-8-12
HIGH COURT OF BOMBAY
Decided on August 03,1962

SAHU RUBBERS PRIVATE LTD. Appellant
VERSUS
COMMISSIONER OF INCOME TAX Respondents




JUDGEMENT

Y.S.TAMBE, J. - (1.)THIS is a reference under Sub -S. (1) of S. 66 of the Indian IT Act (hereafter referred to as the Act). We are here concerned with asst. yrs. 1956 -57 and 1957 -58, the corresponding account years being those ending with 31st August, 1955, and 31st August 1956, respectively. The assessee is private limited company, which at one time was carrying on the business of manufacture time before August 1, 1949, the labour working in the factory made terms of the demands made by the labour. It appears that some certain demands and the Industrial Tribunal had made an award in terms of the demands made by the labour. The assessee anticipating that it would not be profitable to work the factory if those demands were to be satisfied, closed its business on August 1, 1949, and commenced doing the business of importing trimobiles, clocks and cement and deal in those goods. This new business was commenced before the year ended 31st Aug., 1949. In April, 1950, the assessee again re -started its rubber shoes factory, but again closed that business a couple of years. In respect of the assets used for the shoe manufacturing business during the asst. yrs. 1950 -51 and 1951 -52 a total amount of depreciation amounting to Rs. 51,547 (Rs. 13,909 for 1950 -51 and Rs. 37,638 for 1951 -52) remained un -absorbed during those years and was therefore carried forward. This aforesaid amount of unabsorbed depreciation in respect of the assets used in the shoe manufacturing business was claimed as a deduction by the assessee from the profits of the asst. yrs. 1956 -57 and 1957 -58. As already stated, the assessee's business of manufacture and sale of rubber shoes was completely stopped within a couple of years after it re -commenced in the year 1950. In the accounting years the assessee was dealing only in trimobiles, clocks and cement. The claim of the assessee for deduction of the aforesaid amount of unabsorbed depreciation has been rejected by the income -tax authorities as well as by the Tribunal. On an application made by the assessee, the Tribunal has drawn up the statement of the case and referred to us the following question of law :
"On the facts and in the circumstances of the case, whether the depreciation to which full effect could not be given owing to there being no profits or gains chargeable for years 1950 -51 and 1951 -52 could either wholly or in part be added to the amount of the allowance for depreciation in the asst. yrs. 1956 -57 and 1957 -58 and be deemed to be a part of that allowance for those years ?"

(2.)THE question referred to us turns on the construction of the proviso (b) to cl. (vi) of Sub -S. (2) of s. 10 of the Act. Mr. Ramaswami, learned counsel for the assessee, contends that even though the assessee was not carrying on the business of manufacture and sale f rubber shoes he was entitled to set off the aforesaid un -absorbed depreciation against the profits and gains of his business for the two assessment years in question. According to Mr. Ramaswami, the continuance of the business is not a condition precedent to entitle the assessee to claim a set - off in respect of the unabsorbed depreciation of previous years. That can be set off, even if the business does not continue, against the profits made by the assessee in the subsequent years. It is his argument that the aforesaid proviso, since its amendment in 1941, is a substantive provision of law and has to be read with a part of the Chapter IV of the Act which deals with deductions and assessment. In support of his contention, he has referred us to the decisions reported in Ambica Silk Mills Co. Ltd. vs. CIT (1952) 22 ITR 58 (Bom), Keshavlal Premchand vs. CIT (1957) 31 ITR 7 (Bom), and Aluminium Corporation of India Ltd. vs. CIT. (1958) 33 ITR 367(Cal). We find it difficult to accept the contentions raised by Mr. Ramaswami.
Section 10 appears in the Third Chapter, which deals with taxable income. Sec. 6 enumerates various heads of income and provides that the profits and gains of these heads shall be chargeable to income -tax in the manner laid down in Chapter III. Sec. 7 deals with computation of income from salaries. Sec. 8 relates to computation of income from securities. Sec. 9 relates to computation of income from property; and S. 10 relates to computation of profits and gains of business profession and vocation. Material part of S. 10 is as follows :

"10. (1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely: (iv) in respect of insurance against risk of damage or destruction of buildings, machinery, plant, furniture, stocks or stores, used for the purposes of the business, profession or vocation, the amount of any premium paid; (vi) in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed Provided that (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 1st 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 cl. (b) of the proviso to Sub -S. (2) of S. 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, be deemed to be the allowance for that year, and so on for succeeding years."

(3.)SECTION 10 relates to computation of profits and gains of business, profession or vocation carried on by the assessee during the year. Sub -s. (2) of this section enumerates certain heads under which certain allowances are deducted from the gross profits and gains of the business. Clause (vi) of Sub -S. (2) entitles the assessee to get depreciation allowance in respect of such buildings, machinery, plant and furniture used for the purposes of business, profession or vocation by him during that year; proviso (b) to cl. (vi) deals with the manner in which the depreciation allowance determined is to be set off against the profits and gains of the assessee. Now, in the first instance, it provides that the amount of depreciation allowance determined in the manner provided in cl. (vi) of Sub -S. (2) is to be set off against the profits and gains of the assessee chargeable in that year. If there are no profits or if the available profits are not sufficient to absorb the amount of depreciation, proviso (b) further provides that such unabsorbed depreciation allowance is to be included in the depreciation allowance allowable to the assessee in the next year, or if there is no such allowance for that year, then the unabsorbed depreciation of the previous year is to be deemed the depreciation allowance of that year. This provision as to the manner in which the unabsorbed depreciation allowance is to be adjusted leads to the only inference that, for its continue. It postulates continuance of that business. If the business does not continue, then no question arises of ascertaining the depreciation allowance allowable for that year in respect of those depreciable assets. Now, when no question arises about the computation of depreciation allowance, the unabsorbed depreciation cannot be added to any depreciation, nor can it be substituted in its place.
In our opinion, in order to claim adjustment of unabsorbed depreciation of the previous year in the assessment year, the assessee must establish that his business is continuing. If the business is no more in existence, unabsorbed depreciation cannot thereafter be adjusted in the assessments of future years. Had the intention of the legislature been to adjust the unabsorbed depreciation allowance against the profits and gains chargeable to tax of the following year or years irrespective of whether that business continues or not, it would have said so. But it has not said so and the reason appears to be obvious. If unabsorbed depreciation in respect of assets of a defunct business is added to the depreciation allowance in respect of a running business of an assessee it would adversely affect the written down value of those assets without there being any depreciation thereof. In CIT vs. Dutt's Trust, Calicut (1942) 10 ITR 477 (Mad), the Madras High Court has held that the assessee was not entitled to set off unabsorbed depreciation of his cinema business discontinued prior to the year of account against the profits of saw mill business of the assessee in the year of account. No decision contrary to the one of the Madras High Court has been pointed out to us by Mr. Ramaswami. It is, however, his contention that the decision no more correctly states the law, inas much as proviso (b) has undergone a change by reason of its amendment in 1941 and that makes all the difference. Now, by the amendment in 1941, all that is introduced in proviso (b) is the clause "subject to the provisions of cl. (b) of the proviso to Sub -S. (2) of S. 24". We fail to see how any difference has been made by the introduction of this clause in the second proviso. All that has been done by that proviso is to postpone adjustment of the unabsorbed depreciation till adjustment of the previous loss. In other words, as between losses of previous years and the unabsorbed depreciation, priority is given to prior losses ; the reason being that if the prior losses are not absorbed within 8 years, the assessee loses the right to get them set off against the profits of the future years. Such, however, is not the case in the case of unabsorbed depreciation allowance which can be adjusted in subsequent years without there being any limitation of time.
This is a provision in the interest of the assessee. In the absence of this provision the result would have been that by the fiction created in proviso (b) unabsorbed depreciation allowance would become depreciation of the current year and for that reason it would have precedence over the adjustment of the prior losses. It is only to safe -guard the interest of the assessee that this clause has been introduced by the amendment. On the language of the proviso (b), in our opinion, it relates to the computation of the profits and gains of business of an assessee and deals with the same subject -matter as is dealt with in cl. (vi) of Sub -S. (2) of S. 10 and, therefore, is within the ambit and scope of cl. (vi), and is not an independent substantive provision of law. The three decisions on which reliance is placed by Mr. Ramaswami are, in our view, not of any assistance to the assessee. None of them deals with the question of adjustment of unabsorbed depreciation as against the profits of the subsequent years. In Ambica Silk Mills Co. Ltd. vs. CIT (supra), the question that arose for decision was whether the depreciation allowance of the current year could be set off against the income from other heads if the income of that particular business was not sufficient to absorb it and it was held that in such a case the amount of depreciation allowance could be adjusted against income from other heads. At page 64, the learned Chief justice observed:
"In our opinion the only proper interpretation that should be placed upon the expression 'profits or gains' is 'profits or -gains, not merely from the particular business in respect of which depreciation is claimed, nor profits or gains from any business conducted by the assessee, but the profits or gains which may accrue or arise to the assessee under any of the heads referred to in S. 6'."



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