Supreme Court rules unabsorbed depreciation takes priority over investment allowance in income tax deductions.

Case Name:

Seshasayee Paper & Boards Limited vs. Deputy Commissioner of Income Tax

Civil Appeal Nos. 1812-1813 of 2005

Key Takeaways:

- The court interpreted Section 32(2) (of Income Tax Act, 1961) to mean that unabsorbed depreciation allowance must be treated as part of the current year's depreciation allowance.

- If depreciation is not claimed at all by the assessee, the assessing officer cannot thrust the deduction of depreciation allowance.

- The legal fiction created by Section 32(2) (of Income Tax Act, 1961) is limited to treating unabsorbed depreciation as part of current depreciation for set-off purposes.

Issue:

If an assessee does not claim depreciation allowance, can the assessing officer set off unabsorbed depreciation allowance against income before considering unabsorbed investment allowance?

Facts:

Seshasayee Paper & Boards Limited did not claim depreciation allowance for the assessment years 1991-92 and 1992-93. Instead, it sought to set off unabsorbed investment allowance against its income. However, the Assessing Officer set off the unabsorbed depreciation allowance first, following which the unabsorbed investment allowance was set off against the remaining income. The assessee challenged this treatment, arguing that its choice to set off investment allowance first should prevail.

Arguments:

- Assessee's arguments:

The assessing authority cannot thrust depreciation allowance when the assessee chose to set off investment allowance first. If the law is ambiguous, the interpretation beneficial to the assessee should be adopted.

- Revenue's arguments:

Unabsorbed depreciation allowance must be set off before considering other allowances as per Section 32(2) (of Income Tax Act, 1961).

Key Legal Precedents:

- Ram Nath Jindal & Anr. v. Commissioner of Income Tax:

The assessing officer cannot grant depreciation allowance when it is not claimed by the assessee.

- Guindy Machine Tools P. Ltd. v. Commissioner of Income Tax and Commissioner of Income-Tax v. Mahendra Mills:

The provision for depreciation allowance is for the benefit of the assessee, and it cannot be forced upon the assessee.

- Commissioner of Income-Tax, Kanpur v. Mother India Refrigeration Industries P. Ltd.:

This case interpreted Section 32(2) (of Income Tax Act, 1961) and the legal fiction created by the deeming provision, which treats unabsorbed depreciation as part of the current year's depreciation for set-off purposes.

Judgement:

The Supreme Court ruled in favor of the Revenue Department. The court held that if depreciation is not claimed at all by the assessee, the assessing officer cannot thrust the deduction of depreciation allowance. However, if depreciation is not claimed, the legal fiction created by Section 32(2) (of Income Tax Act, 1961) comes into play, treating unabsorbed depreciation as part of the current year's depreciation for set-off purposes. Therefore, unabsorbed depreciation allowance must be set off before considering unabsorbed investment allowance.

FAQs:

Q1: What is the significance of the court's decision?

A1: The court's decision clarifies the order of priority between unabsorbed depreciation allowance and unabsorbed investment allowance for deductions under the Income Tax Act. It establishes that unabsorbed depreciation allowance must be given precedence over unabsorbed investment allowance when setting off against income, even if the assessee did not claim depreciation allowance.

Q2: Can the assessing officer force depreciation allowance on the assessee?A2: No, the court upheld the principle that if depreciation is not claimed at all by the assessee, the assessing officer cannot thrust the deduction of depreciation allowance.

Q3: How did the court interpret Section 32(2) (of Income Tax Act, 1961)?

A3: The court interpreted the deeming provision in Section 32(2) (of Income Tax Act, 1961) to mean that unabsorbed depreciation allowance must be treated as part of the current year's depreciation allowance for set-off purposes. This legal fiction is limited to that extent and cannot be extended further.

Q4: What is the impact of this decision on assessees?

A4: Assessees who do not claim depreciation allowance but have unabsorbed depreciation allowance and unabsorbed investment allowance will be affected by this decision. The unabsorbed depreciation allowance will be set off against income before considering the unabsorbed investment allowance, potentially reducing the tax benefit.

1) Leave granted in Special Leave Petition (Civil) No. 15251 of 2008.

2) Facts, as they appear in Civil Appeal Nos. 1812-1813 of 2005, are

taken note of as the following substantial question of law, which

arises for consideration, is common in these appeals:

“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in holding that the unabsorbed depreciation should be allowed before the allowance of the unabsorbed investment allowance in computing income of the appellant/assessee for the Assessment Year 1991-1992, when the assessee had not claimed the unabsorbed depreciation in its income-tax return though it had claimed depreciation for the current year?

3) The aforesaid question has arisen for consideration in the

following set of facts:

4) The appellant/assessee is a public limited company engaged in the business of manufacturing paper. It had filed its return under Section 139 (of Income Tax Act, 1961) (for short, the 'Act') for the Assessment Year 1991-92 declaring its income as 'Nil'. In fact, the income for that year after showing exemptions, deductions and additions, which are to be made in terms of Sections 28 onward relating to computation of the business

income, was arrived at ₹2,87,15,912. The assessee had unabsorbed investment allowance of previous years. It also had unabsorbed depreciation of the earlier years. In its income-tax return, however, it chose to carry forward investment allowance and claimed set off of the said unabsorbed investment allowance to the extent of ₹2,87,15,912, thereby showing the returned

income as 'Nil'. According to the Assessing Officer, it was not the investment allowance, but unabsorbed depreciation of the earlier

years which had to be set off first by giving priority to the unabsorbed depreciation. Therefore, instead of allowing the assessee to carry forward investment allowance, the Assessing Officer adjusted the unabsorbed depreciation of the earlier years, namely 1983-84, 1985-86, 1986-87 and 1987-88 (part), and accepted 'Nil' income return as filed by the assessee, but on the aforesaid basis.

5) The assessee, however, was not satisfied with the aforesaid treatment of setting off of the unabsorbed depreciation instead of investment allowance. It filed appeal before the Commissioner (Appeals). This appeal was, however, dismissed following the judgment of the Madras High Court in Commissioner of Income Tax v. Coromandel Steels. The assessee approached the Tribunal. The Tribunal also confirmed the order of the Commissioner (Appeals). The assessee, still not satisfied, approached the Madras High Court. Even the High Court, vide impugned judgment dated September 15, 2004, has affirmed the view taken by the authorities below and dismissed the appeal of the assessee. As the grievance still persists, the present appeal questions the treatment given to the income-tax return in the manner mentioned above, which has come up for consideration after special leave to appeal was granted.

6) It is in this backdrop the question of law, which is to be answered and formulated above, relates to the issue as to whether it is unabsorbed investment allowance which is to be allowed as set off in computing the income of the assessee for the assessment year in question or unabsorbed depreciation.

7) As pointed out above, in the income-tax return the assessee had claimed set off of unabsorbed investment allowance. However, this request is declined as according to the High Court, provisions of Section 32 (of Income Tax Act, 1961) mandate that precedence has to be given to unabsorbed depreciation before allowing unabsorbed investment allowance.

8) The plea of the assessee before the High Court was that in the absence of any claim by the assessee towards depreciation allowance, the assessing authority could not erroneously assume that such a claim would be untenable under the provisions of the Act and could not thrust the deduction of carrying forward depreciation allowance, when the assessee had chosen to have set off of unabsorbed investment allowance and it is the assessee

whose option should prevail. It was also argued that even if the provision of law was not very clear and was susceptible to two interpretations, one which was more beneficial to the assessee had to be given effect to.

9) The High Court took note of these contentions of the assessee predicated on the judgment of the Punjab and Haryana High Court in Ram Nath Jindal & Anr. v. Commissioner of Income Tax, in which the said High Court held that the Assessing Officer could not grant the depreciation allowance when it was not claimed by the assessee as there is no provision by which depreciation could be fictionally deemed to have been claimed and granted. It would be pertinent to point out that this judgment of the High Court was in the light of Section 32 (of Income Tax Act, 1961) which stood at the material time and this very provision existed even in respect of Assessment Years 1991-92 and 1992-93 with which we are concerned. Therefore, the High Court took cognizance of the said judgment. The High Court also noted another judgment of its own Court in Guindy Machine Tools P. Ltd. v. Commissioner of Income Tax, which had followed judgment of this Court in Commissioner of Income-Tax v. Mahendra Mills wherein it was held that the provision in respect of depreciation was for the benefit of the assessee and if the assessee does not wish to avail the said benefit for some reason, it could not be forced upon him. Notwithstanding the aforesaid judgments, the High Court observed that the real issue was not whether the assessee could be compelled to claim depreciation, but, if he fails to claim, what would be the order of priority between unabsorbed depreciation allowance and unabsorbed investment allowance. On this purported 'real' issue, the High Court mentioned that since unabsorbed depreciation allowance gets precedence over the unabsorbed investment allowance under the provisions of the Act, which has been held by various High Courts (and those judgments of the High Courts are taken note of), it is the unabsorbed depreciation allowance which would be set off first.

10) Arguments before us remain the same which were advanced by the assessee as well as the Revenue in the High Court. In order to appreciate these arguments and to answer the controversy which has arisen, it is apposite to take note of provisions of Section 32 (of Income Tax Act, 1961), as existed at the relevant time. The portion with which we are concerned reads as under:

“32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34 (of Income Tax Act, 1961), be allowed-

(2) Where, in the assessment of the assessee [(or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm,

in the assessment of its partners)] full effect cannot be given to any allowance [under clause (ii) of sub-section (1)] in any previous year,

owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 (of Income Tax Act, 1961) and sub-section (3) of section 73 (of Income Tax Act, 1961), 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 previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so

on for the succeeding previous years.”

11) This Section deals with depreciation in respect of certain assets which are mentioned in sub-section (1) of Section 32 (of Income Tax Act, 1961) and owned wholly or partly by the assessee and used for the purpose of business or profession. The nature of deductions that is to be allowed is also mentioned in sub-section (1). We are not directly concerned with this provision inasmuch as it is not in dispute that the assessee herein was entitled to depreciation on its assets and the amount of depreciation is also not in dispute. As mentioned above, in fact, the depreciation of earlier orders could not be utilized by the assessee in those years. Since the provisions of the Act permit the assessee to accumulate the unabsorbed depreciation of the previous years with right to the assessee to choose the same in subsequent years, the assessee herein had unabsorbed depreciation of the previous years. This is so stipulated in sub-section (2) of Section 32 (of Income Tax Act, 1961)., which has already been noted earlier.

12) As per the aforesaid provision, the depreciation allowance or part thereof to which effect has not been given in a particular assessment year owing to there being no profits or gains chargeable for that previous years or owing to profits and gains chargeable being less than the allowance, such unabsorbed depreciation allowance is to be added to the amount of the allowance for depreciation for the following previous year and it is 'deemed to be part of that allowance for that previous year or the succeeding previous years, as the case may be'. This is, however, subject to the provisions of sub-section (2) of Section 72 (of Income Tax Act, 1961) and sub-section (3) of Section 73 (of Income Tax Act, 1961).

13) What follows from the above is that in case of loss in the business

income or insufficient profits to absorb the depreciation allowance

permitted by this Section, because of which reason depreciation

allowance or some part thereof remains unabsorbed, it may be

carried forward under this sub-section to the following year and

set off against that year's profit, and so on for succeeding years.

There is an amendment in the aforesaid provision with effect from

April 01, 1996, which shall be taken note of subsequently at an

appropriate stage. However, as per the provision which existed

during the relevant period and extracted above, the carried

forward depreciation allowance is deemed to be a part of, and

stands on exactly the same footing as the current depreciation for

the assessment year. The unabsorbed depreciation of the past

years, thus, by legal fiction, becomes the depreciation of the year

in question and can be set off against income chargeable under

any head. There is, thus, actual depreciation which is to be

calculated in that particular assessment year. To this, unabsorbed

depreciation is to be added by the application of aforesaid

deeming provision and this entire depreciation, namely, that of the

current year as well as unabsorbed depreciation of the previous

years, can be allowed as depreciation in that particular

assessment year or succeeding assessment years. This is

subject to the provisions of Sections 72(2) and 73(3) of the Act.

Section 72 (of Income Tax Act, 1961) deals with carried forward and set off of business loss

under the head 'business or profession'. This carried forward loss

can be set off only against the profits of any business or

profession and is carried forward only for a period of eight years.

On the other hand, insofar as carry forward of depreciation

allowance to any subsequent year is concerned, the same is

without any time limit. Sub-section (2) of Section 72 (of Income Tax Act, 1961) stipulates

that where any allowance or part thereof is under sub-section (2)

of Section 32 (of Income Tax Act, 1961) or sub-section (4) of Section 35 (of Income Tax Act, 1961) and is to be carried

forward, effect shall first be given to the provisions of this section.

Section 73 (of Income Tax Act, 1961), on the other hand, deals with loss in speculation

business and subsequently mentions that such loss of a

speculation business shall not be set off except against profits

and gains, if any, of another speculation business. Thus, losses

of speculation business can be set off only against profits and

gains of another speculation business and not against profits

earned from other kinds of businesses. Here sub-section (3) of

Section 73 (of Income Tax Act, 1961), which finds mention in Section 32(2) (of Income Tax Act, 1961), states that

provisions of sub-section (2) of Section 72 (of Income Tax Act, 1961) shall also apply in

relation to speculation business. We are not concerned with the

aforesaid situation arising out of sub-section (2) of Section 72 (of Income Tax Act, 1961) or

sub-section (3) of Section 73 (of Income Tax Act, 1961). However, the same are mentioned

for the purpose of clarity as there is a reference to these

provisions in Section 32(2) (of Income Tax Act, 1961). Insofar as the instant case is

concerned, it depends upon the meaning that is to be given to the

deeming provision, as explained above.

14) Before we discuss this effect, let us take note of some of the

nuances regarding claim of depreciation allowance, which have

been laid down by judicial pronouncements on interpretation of

this provision.

15) It has been the consistent view of the Courts that unabsorbed depreciation allowance should be allowed before the unabsorbed

investment allowance. To put it differently, unabsorbed depreciation is to be given precedence and is allowed to be set off first. Some of the High Courts had earlier taken the view that this would be so even if the assessee had not claimed the unabsorbed depreciation. It is the necessary consequence of the scheme of various provisions of the Act. Section 32A (of Income Tax Act, 1961), which deals with investment allowance, was inserted by the Finance Act, 1976 with effect from 01.04.1976. According to Circular No. 202 dated 05.07.1976 issued by CBDT [(1976) 105 ITR St 17], the combined effect of the provisions of Sections 32, 32A, 33, 33A and 72 is that in a case where there are allowances in the nature of depreciation allowance, investment allowance,

development rebate, development allowance and losses, such allowances and losses would be deductible in the order given below, in cases where the profits are insufficient to absorb all of them:

(i) Current depreciation (Section 32(1) (of Income Tax Act, 1961))

(ii) Carried forward losses of earlier years (Section 72(1) (of Income Tax Act, 1961))

(iii) Unabsorbed depreciation of earlier years (Section 32(2) (of Income Tax Act, 1961))

(iv) Unabsorbed development rebate of earlier years (Section 33(2)(ii) (of Income Tax Act, 1961)

(v) Current development rebate (Section 33(2)(i) (of Income Tax Act, 1961))

(vi) Unabsorbed development allowance of earlier years (Section 3A(2)(ii) (of Income Tax Act, 1961))

(vii) Current development allowance (Section 33A(2)(ii) (of Income Tax Act, 1961))

(viii) Unabsorbed investment allowance of earlier years (Section 32A(3) (of Income Tax Act, 1961)(ii

(ix) Current investment allowance (Section 33A(3)(i) (of Income Tax Act, 1961))

It emerges from sub-section (3) of Section 32A (of Income Tax Act, 1961) that unabsorbed investment allowance takes precedence over current investment allowance. However, this Court in Mahendra Mills (supra) took the view that since the provision for depreciation is a benefit which enures to the assessee, if the assessee does not wish to avail of that benefit for some reason, such a benefit cannot be

forced upon him. In that case, the Court held that the language of the provisions of Sections 32 and 34 of the Act is specific and admits of no ambiguity. Section 32 (of Income Tax Act, 1961) allows depreciation as deduction, subject to the provisions of Section 34 (of Income Tax Act, 1961). Section 34 (of Income Tax Act, 1961) provides that deduction under Section 32 (of Income Tax Act, 1961) shall be allowed only if the prescribed particulars have been furnished. It was specifically held that there is no mandatory duty on the officer to allow depreciation if the assessee does not want to claim that. The

provision for claim of depreciation is certainly for the benefit of the assessee. If he does not wish to avail of that benefit for some reason, the benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. Income under the head “Profits and gains of business or Profession” is chargeable to income-tax under Section 28 (of Income Tax Act, 1961) and income under Section 29 (of Income Tax Act, 1961) is to be computed in accordance with

the provisions contained in Sections 30 to 43A. The argument that since Section 32 (of Income Tax Act, 1961) provides for depreciation it has to be allowed in computing the income of the assessee cannot, in all circumstances, be accepted in view of the bar contained in Section 34 (of Income Tax Act, 1961). If Section 34 (of Income Tax Act, 1961) is not satisfied and the particulars are not furnished by the assessee, his claim for depreciation under Section 32 (of Income Tax Act, 1961) cannot be allowed. Section 29 (of Income Tax Act, 1961) is, thus, to be read with reference to other provisions of the Act. It is not in itself a complete code.

16) This principle, thus, is grounded in the reasoning that there is no

provision by which depreciation could be fictionally deemed to have been claimed and granted and it is to be specifically claimed by the assessee. Further, when claiming of depreciation is a privilege given to the assessee, it cannot be turned into a disadvantage even when the assessee does not claim the depreciation. Therefore, option in this behalf rests with the

assessee.

17) In the impugned judgment as well, the High Court accepts the aforesaid legal position as this is so decided by this Court in Mahendra Mills's case (supra) and is a binding precedent. However, the aforesaid judgment is not followed on the ground that real issue is something else. Such an issue, though already noted above, is stated in para 10.1 of the impugned judgment,

which reads as under:

“10.1 But, in the case on hand, it is not the issue whether the assessee could be compelled to claim depreciation allowance, but, if he fails to claim, what would be the order of priority between unabsorbed depreciation allowance and unabsorbed investment allowance.”

18) Strangely, the issue is somewhat different, namely, when the depreciation allowance is not claimed, can it be said that the assessee has failed to claim and in that case what would be the position? According to us, there is no question of failing to claim. Situation in such an event would be that depreciation is not claimed at all and, therefore, the position mentioned in Mahendra Mills's case (supra) would follow. To this extent we find that it was a wrong question posed by the High Court, which led to a wrong answer.

19) However, the matter does not rest there. In the present case, the

assessee in fact claimed the depreciation allowance insofar as it

pertained to the current year. At the same time, it did not want to

claim the set off of the unabsorbed depreciation allowance of the

previous years. In such situation, the question is as to whether it

is open to the assessee to invoke the provisions of Section 32 (of Income Tax Act, 1961) of

the Act by claiming depreciation of the current year, but at the

same time choose not to make a claim of set off of unabsorbed

depreciation allowance of the previous years. As noted above, by

legal fiction unabsorbed depreciation becomes depreciation of the

year in question and gets added to the depreciation of the current

year. If that be so, is it the right of the assessee to partly invoke

the provisions of Section 32 (of Income Tax Act, 1961) when it comes to depreciation of the

current year and still claim that it has right not to claim

unabsorbed depreciation allowance? On a plain reading of

Section 32 (of Income Tax Act, 1961), it does not appear to be the position. Once the entire

depreciation, namely, unabsorbed depreciation allowance of the

previous year gets merged into the depreciation of the current

year, it would become an integral part thereof. Legal fiction

makes it one whole thereby making it possible to the assessee to

claim set off of unabsorbed carried forward depreciation as well.

A fortiorari, bifurcation thereof with option to claim depreciation of

current year only and contending at the same time that portion of

unabsorbed carried forward depreciation is not to be thrusted

upon him as it is not claimed, would not be permissible.

20) Notwithstanding the above, the endeavour of the learned counsel

for the assessee is to show that the assessee has such a right. In

this direction it is argued that though by legal fiction unabsorbed

depreciation allowance is carried forward to the assessment year

in question and becomes a part of depreciation allowance of that

year, it retains its identity inasmuch as it is brought forward only

because of deeming provision which is to be applied to that

limited extent and no further. In order to support this hypothesis,

learned counsel referred to the judgment in Commissioner of

Income-Tax, Kanpur v. Mother India Refrigeration Industries

P. Ltd.5 where nature of carried forward depreciation allowance

on application of deeming provision is explained by the Court.

She specifically referred to the following discussion in this behalf:

“Having regard to the aforesaid rival contentions, it will be clear that the real issue that arises for our consideration in this case is whether, on a proper construction of the relevant provisions of the concerned enactment, unabsorbed carried forward losses should have preference over current

depreciation in the matter of set off or is the position vice versa while computing the total income of an assessee in the concerned assessment year? And the answer to this question depends on what is the true scope and purpose of the legal fiction created under proviso (b) to s.10(2)(vi) of the 1922 Act or under s. 32(2) of the 1961 Act. At the outset, it may be stated that a close scrutiny of the relevant provisions of the 1922 Act as also the 1961 Act clearly shows that the computation of income under the head “Profits and gains of business” of any particular assessment year is required to be done after making certain allowances specified in sub-s.(2) of s. 10 of the 1922 Act and after allowing certain deductions in

accordance with the provisions contained in ss. 30 to 43A of the 1961 Act; in other words, it is the net profits and gains after the specified deductions are made that are subjected to tax; one of such deductions pertains to depreciation allowance at the prescribed rate of percentage of the written down value of the business asset; and this is provided in s. 10(2)(vi) of the 1922 Act and in s. 32(1) of the 1961 Act. Up to this stage of computation, no question of either carry forward of unabsorbed depreciation of the earlier years or carry forward of unabsorbed business losses of earlier years arises. In other words, the normal accountancy principle has to be applied in arriving at the net income from business for that year by debiting the current year's depreciation. The question is whether any deviation from this normal rule of accountancy is contemplated by proviso (b) to s. 10(2)(vi) read with proviso (b) to s. 24(2) of the

1922 Act or by s. 32(2) read with s. 72(2) of the 1961 Act, and it is here that the aspect of proper construction of these provisions arises. Dealing

with the provisions of the 1922 Act first, it will be clear that proviso (b) to s. 10(2)(vi) is in two parts and provides for two things; its first part provides for a carry forward of unabsorbed depreciation and its second part provides for clubbing the said carried forward depreciation with the current year's depreciation and deeming the aggregate to be the current year's depreciation. However, carrying forward of the unabsorbed depreciation and the deeming provision in proviso (b) are not absolute but are subject to the proviso (b) to s. 24(2). Had proviso (b) to s. 24(2) not been enacted by the

Legislature, the result would have been that the aggregate depreciation would have been deducted first out of the profits and gains in preference to

unabsorbed business losses which might have been carried forward under s. 24(2) but as such losses can be carried forward only for limited number of years, the assessee would in certain circumstances have in his books losses which he might not be able to set off even within the time-limit during which the set off is permitted. In order to prevent such a situation, the Legislature enacted the proviso (b) to s. 24(2). And proviso (b) to s. 24(2) expressly stated “where depreciation allowance is, under cl. (b) of the proviso to cl. (vi) of sub-s. (2) of s. 10, also to be carried forward, effect shall first be given to the provisions of this sub-section”. In other words, it clearly provides that in the matter of set off, the unabsorbed

depreciation that is required to be carried forward under proviso (b) to s. 10(2)(vi) and no preference over the current depreciation is intended.

It is true that proviso (b) to s. 10(2)(vi) creates a legal fiction and under that fiction, unabsorbed depreciation either with or without current year's depreciation is deemed to be the current year's depreciation but it is well settled, as has been observed by this court in Bengal Immunity Company Limited v. State of Bihar [1955] 2 SCR 603, 606; 6 STC 446, that the legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field. Clearly, the avowed purpose of the legal fiction created by the deeming provision contained in proviso (b) to s. 10(2)(vi) is to make the

unabsorbed carried forward depreciation partake the same character as the current depreciation in the following year, so that it is available, unlike

unabsorbed carried forward business loss, for being set off against other heads of income of that year.”

21) It is clear from the above that though the question there was

different, namely, precedence of carried forward business loss

over the carried forward unabsorbed depreciation or vice versa,

what is important is the interpretation that is given to Section

32(2) of the Act and particularly the deeming provision thereof

which creates legal fiction. The Court clarified that the avowed

purpose of the legal fiction created by deeming provision

contained in Section 32(2) (of Income Tax Act, 1961) is to make the unabsorbed

carried forward depreciation partake the same character as the

current depreciation in the following year, so that it is available,

unlike unabsorbed carried forward business loss for being set off

against other heads of income of that year. On that basis, the

Court answered that since unabsorbed carried forward

depreciation had become part of the current depreciation, the

entire depreciation had to be given preference (current as well as

unabsorbed carried forward depreciation) over unabsorbed

carried forward losses.

22) We do not understand as to how the aforesaid judgment helps the

assessee. On the contrary, it goes against the assessee while

answering the question which has arisen in the instant appeals.

Once the unabsorbed carried forward depreciation has become a

part of the depreciation of the current year, it is not open to the

assessee to bifurcate the two again and exercising its choice to

claim the depreciation of the current year under Section 32(1) (of Income Tax Act, 1961) of

the Act and take a position that since unabsorbed depreciation of

the previous years is not claimed, it cannot be thrusted upon the

assessee. The position would have been different if the assessee

had not claimed any depreciation at all. However, once the depreciation is claimed and while giving deductions the depreciation is to be set off against the profits of the current year prior to the unabsorbed carried forward investment allowance, it is the entire depreciation, namely, the depreciation of the current year as well as the unabsorbed carried forward depreciation, which is to be taken into account as by virtue of the fiction created under Section 32(2) (of Income Tax Act, 1961), carried forward depreciation also

partakes the character of depreciation of the current year. This scrambled egg cannot be unscrambled now. Otherwise, it would amount to negating the legal fiction that is created by the said provision, even to the limited extent. In fact, the case falls within the ambit of the said limited extent of legal fiction and gets covered by it.

23) Once we read the provision in the aforesaid manner, the aid of

other interpretative tools which is sought to be taken by the

learned counsel for the assessee, namely, the provision is to be

given liberal construction; the scheme of the Act envisages giving

preference in the matter of deduction from income to those

expiring by afflux of time, etc. would become irrelevant and pales

into insignificance.

24) The upshot of the aforesaid discussion is to decide the question

formulated against the assessee and in favour of the Revenue,

though for our reasons contained in this judgment. The appeals

are, accordingly, dismissed with costs.

(A.K. SIKRI)

(ROHINTON FALI NARIMAN)

NEW DELHI;

MAY 15, 2015.