MYSORE PAPER MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee in this case is Mysore Paper Mills Ltd., and the assessment year is 1971-72. During the assessment year, after making necessary adjustments, the ITO arrived at a net income of Rs. 66,46,360. Against this income he set off the unabsorbed depreciation allowance of 1966-67 brought forward, amounting to Rs. 26,16,626 and unabsorbed depreciation allowance of 1967-68 brought forward to the extent of Rs. 40,29, 734. After making those adjustments it was found that the unabsorbed depreciation of 1967-68 was Rs. 26,29,705. He deducted certain capital gain amounting to Rs. 8,816 from the said sum resulting in the unabsorbed depreciation allowance of 1967-68 to be carried forward at Rs. 26,20,889. Since there was no balance of income left for setting off the unabsorbed development rebate allowable under s. 33 of the I.T. Act (hereinafter referred to as "the Act"), brought forward of 1966-67, he did not set off the unabsorbed development rebate before setting off the depreciation allowance the assessee filed an appeal before the AAC of Income-tax contending that the unabsorbed development rebate brought forward of the year 1966-67 should have been first adjusted before giving effect to s. 32(2) of the Act. THE AAC accepted the plea of the assessee and directed the ITO to reframe the assessment order in accordance with the case of the assessee in so far as the above question was concerned. Aggrieved by the order of the AAC the department filed an appeal before the Tribunal. THE Tribunal held that on a combined reading of s. 2(45), s. 32(2), s. 33(2) and s. 72(2) of the Act, it was not possible to allow deduction of the development rebate admissible under s. 33 before giving effect to the provisions of s. 32(2) which provided for the carrying forward of the unabsorbed depreciation allowance of the previous year subject to the provisions of s. 72(2). Accordingly, it allowed the appeal, set aside the order of the AAC on the above point and restored the order of the ITO. At the instance of the assessee, the Tribunal has referred the following two questions under s. 256(1) of the Act:

(2.) ALTHOUGH there are two questions referred to us the only question which arises for consideration as stated by T. V. Natarajan, learned counsel for the assessee, is: "whether the unabsorbed development rebate should be treated as part of loss which is allowed to be carried forward and allowed to be adjusted under s. 72(2) before the unabsorbed depreciation allowance under s. 32 can be set off against the income of a business while computing the tax liability of the assessee ?"

(3.) SRI Natarajan tried to contend that the unabsorbed development rebate allowed under s. 33 should be treated as part of the business loss which is allowed to be carried forward and given priority by reason of s. 72(2) over the unabsorbed depreciation allowance. We find it difficult to agree with this submission also. Section 33 does not actually deal with any trading loss as it is ordinarily understood. Under s. 33, Parliament has made provision by way of an incentive to businessmen who invest on new machinery or in modernising plant and equipment. In order to earn development rebate the assessee has to satisfy certain other conditions which are provided under s. 34 of the Act and the unabsorbed development rebate cannot be carried forward beyond 8 years as provided by the Act. In the circumstances, the unabsorbed development rebate cannot be treated as part of assessed loss which is allowed to be carried forward and given priority over the unabsorbed depreciation allowance of the previous years. The Tribunal was, therefore, right in allowing the appeal by the department.