Case Note & Summary
The appeals before the Supreme Court arose from divergent views among High Courts on the interpretation of Section 32(2) of the Income-tax Act, 1961. The Revenue challenged decisions of the Allahabad High Court and Bombay High Court which held in favour of assessees on the carry forward of unabsorbed depreciation. The lead appeal, Civil Appeal No.1052 of 1976, involved an assessee that manufactured soap and oil in the assessment year 1956-57, ceased that business, and later started manufacturing steel pipes in the assessment year 1965-66 using part of the old machinery. In the earlier year, depreciation exceeded profits, resulting in unabsorbed depreciation. In 1965-66, the assessee claimed set off of that unabsorbed depreciation against profits of the new business. The Income Tax Officer and Appellate Assistant Commissioner rejected the claim on the ground that set off required the same business to be continued. The Income Tax Appellate Tribunal allowed the claim. On reference, the Allahabad High Court answered in the assessee's favour, holding that Section 32(2) does not require the same business to be continued; unabsorbed depreciation becomes part of the depreciation allowance for the following year and can be set off against any business income. The High Court also held there is no time limit of eight years and no requirement that the succeeding business should have depreciable assets. The Revenue appealed, citing conflicting decisions: the Madras High Court and some Bombay High Court decisions supported the same-business requirement, while Allahabad, Calcutta, Andhra Pradesh, Karnataka and later Bombay High Court decisions supported the assessee's view. The Supreme Court examined the legislative history of the provision, tracing it to the UK Income Tax Act and the Indian Income-tax Act, 1922 Section 10(2)(vi). It noted that the Vacha Committee recommended abolishing the special carry forward provision, but the Select Committee rejected that recommendation, confirming legislative intent to treat depreciation differently from business loss. The Court reproduced Section 32(2) as it stood, emphasizing that the allowance unabsorbed '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'. The Court noted that Section 72(2) gives priority to business loss carry forward but that unabsorbed depreciation is not subject to the same limitations. The reasoning of the High Court was found correct. The Supreme Court dismissed the Revenue's appeals and held that unabsorbed depreciation under Section 32(2) can be carried forward and set off against profits of any business in subsequent years without any time limit and without the same business condition.
Headnote
A) Income Tax - Unabsorbed Depreciation - Carry Forward and Set Off - Section 32(2) Income-tax Act, 1961 - Unabsorbed depreciation can be carried forward and set off against profits of any business in subsequent years, not necessarily the same business; the only condition is that assessee carries on some business in succeeding year - Held that the assessee was entitled to set off unabsorbed depreciation from assessment year 1956-57 against profits of 1965-66 despite change from soap/oil manufacture to steel pipes (Paras Not mentioned) B) Income Tax - Depreciation vs Business Loss - Priority and Nature - Sections 32(2), 72(2), 73(3) Income-tax Act, 1961 - Unabsorbed depreciation is distinct from business loss; business loss carry forward has time limit and same business condition, while unabsorbed depreciation has no such limitations - Held that Section 32(2) is an independent substantive provision, not a mere proviso, and must be given effect accordingly (Paras Not mentioned) C) Interpretation - Legislative History - Section 10(2)(vi) Indian Income-tax Act, 1922 and UK Income Tax Act, 1952 Section 323(2) - The provision originated from UK Act and was adopted in 1922 Act, retaining unlimited carry forward; the Vacha Committee recommendation to abolish special provision was rejected, indicating legislative intent to treat depreciation differently - Held that the provision as enacted in 1961 Act as Section 32(2) maintains that legislative intent (Paras Not mentioned)
Issue of Consideration
Whether unabsorbed depreciation under Section 32(2) of the Income-tax Act, 1961 can be carried forward and set off against profits of a different business in subsequent assessment years, even if the original business has been discontinued; whether the 'same business' requirement applicable to business loss under Section 72 applies to unabsorbed depreciation
Final Decision
The Supreme Court dismissed the appeals filed by the Revenue and held that unabsorbed depreciation under Section 32(2) of the Income-tax Act, 1961 can be carried forward and set off against profits of any business in subsequent years, not necessarily the same business, and without any time limit, provided the assessee carries on some business in the succeeding year.
Law Points
- Unabsorbed depreciation under Section 32(2) can be carried forward and set off against profits of any business in subsequent years
- not necessarily the same business
- no time limit applies
- Section 32(2) is an independent substantive provision distinct from business loss carry forward under Section 72
- legislative intent derived from UK Income Tax Act
- 1952 and Indian Income-tax Act
- 1922 supports unlimited carry forward without same business condition
