- (1.) THE Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated August 1, 1985, in respect of the assessment years 1975-7.6 and 1979-80 under Section 256(1) of the Income-tax Act, 1961 : " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that for the purpose of determining priorities, the profits and gains should be reduced by current depreciation but not by carried forward losses or depreciation or investment allowance for the purpose of relief under Section 80J ?"
(2.) THE brief facts of the case are that the Income-tax Officer first set off unabsorbed depreciation, development rebate and brought forward losses claimed under Section 80) for the earlier years before adjusting the deduction under Section 80J of the current year. THE order of the Income-tax Officer was confirmed in appeal. In the second appeal before the Tribunal it was observed that for the purpose of determining priorities, the profits and gains for the current year should be reduced by current depreciation allowable but not by the amount of carried forward losses or depreciation or investment allowance for the purpose of considering the relief under Section 80J. Section 80J reads as under : " 80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases. --(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under Section 80HH or Section 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the manner specified in subsection (1A) in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year) ; . . . . (2) THE deduction specified in Sub-section (1) shall be allowed in computing the total income, in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning (such assessment year being hereafter in this section, referred to as the initial assessment year) and each of the four assessment years immediately succeeding the initial assessment year : ..... (3) Where the amount of the profits and gains derived from the industrial undertaking or ship or business of the hotel, as the case may be, included in the total income (as computed without applying the provisions of Section 64 and before making any deduction under Chapter VI-A in respect of the previous year relevant to an assessment year commencing on or after the 1st day of April, 1967 (not being an assessment year prior to the initial assessment year or subsequent to the fourth assessment year as reckoned from the end of the initial assessment year) falls short of the relevant amount of capital employed during the previous year, the amount of such shortfall, or where there are no such profits and gains, an amount equal to the relevant amount of capital employed during the previous year (such amount, in either case, being hereafter in this section, referred to as deficiency) shall be carried forward and set off against the profits and gains referred to in Sub-section (1) [as computed after allowing the deductions, if any, admissible under Section 80HH or Section 80HHA and the said Sub-section (1)] in respect of the previous year relevant to the next following assessment year, and, if there are no such profits and gains for that assessment year, or where the deficiency exceeds such profits and gains, the whole or the balance of the deficiency, as the case may be, shall be set off against such profits and gains for the next following assessment year and if and so far as such deficiency cannot be wholly so set off, it shall be set off against such profits and gains assessable for the next following assessment year and so on :...." The deduction under Section 80J is on the basis of the capital employed. The question in the present case is with regard to the priorities in which different items should be adjusted against the profits. The Tribunal has come to the conclusion that the profits and gains should be reduced by current depreciation but not by carried forward losses or depreciation or investment allowance for the purpose of relief under Section 80J. If various provisions of the Act including Sections 32, 32A, 33, 33A and 72 are taken into consideration, it would be seen that the current year depreciation as contemplated by Section 32(1) of the Act is the first charge which gets priority. The next number comes of the carried forward business losses in accordance with Section 72(1) and (2) of the Act and then the unabsorbed depreciation comes at No. 3. The unabsorbed development rebate under Section 33(2)(ii) and the current year's development rebate under Section 32(1) come thereafter. The provisions of Section 72(2) are subject to the provisions of Section 32(2). The Delhi High Court in the case of Addl. CIT v. Indo-Austro Corporation P. Ltd. [1984] 149 ITR 329 and the Gujarat High Court in the case of Ahmedabad Manufacturing and Calico Printing Co. Ltd. v. CAT [1982] 137 ITR (616 while considering the scheme of priority between carried forward losses, unabsorbed depreciation and unabsorbed development rebate have also taken the same view. In the case of Rajapalayam Mills Ltd. v, CIT [1978J 115 ITR 777, it was observed by the apex court that when the profits or gains of a business for a particular assessment year are to be computed under Section 10, the current depreciation allowance for the assessment year in question is deductible under Clause (vi) of Section 10(2), but the depreciation allowance of the preceding years would be liable to be taken into account only if, and to the extent to which, it is not absorbed by the total income of the assessee computed under different heads and chargeable to tax for those assessment years. In view of the above, we are of the opinion that the Income-tax Appellate Tribunal was justified in holding that for the purpose of determining priorities, the profits and gains should be reduced by current depreciation but not by carried forward losses or depreciation or investment allowance for the purpose of relief under Section 80J. Consequently, the reference is answered in favour of the assessee and against the Revenue, No order as to costs.;