M. N. CHANDURKAR C.J.


For the assessment year 1971-72, for which the relevant period of accounting ended on December 31, 1970, the assessee showed a total loss of Rs. 63, 53, 460 out of which, loss to the extent of Rs. 61, 84, 273 was carried forward from the earlier assessment year. Out of this figure of Rs. 61, 84, 273, it was not possible for the Tribunal to ascertain as to what amount constituted carried forward business loss and what amount was carried forward as unabsorbed depreciation. Admittedly, the assessee company did not have any business activities in the relevant previous year inasmuch as the assessee was engaged only in the collection of debts. The assessee however, on the strength of the decision of the Allahabad High Court in CIT v. Rampur Timber & Turnery Company Limited 1973 (89) ITR 150, claimed that the assessee should be deemed to be carrying on business and was entitled to set off the carried forward unabsorbed depreciation The Income-tax Officer, in the course of the assessment, found that the aggregate income of the assessee came to Rs. 2, 79, 427. The assessee's profit under section 41(2) of the Income-tax Act, 1961, was computed at Rs. 49, 802 against which unabsorbed depreciation of the assessment year 1963-64 of like amount was set off and income under section 41(2) was determined. The assessee was thus assessed on an income of Rs. 2, 79, 427.


The Appellate Assistant Commissioner also, in appeal filed by the assessee, confirmed the order of the Income-tax Officer. The assessee took the matter further in appeal to the Tribunal. The Tribunal rejected the contention of the assessee that since amounts were assessed under sections 41 (1) and 41(2) of the Income-tax Act, the business should be deemed to have been carried on by the assessee and the unabsorbed depreciation of the earlier years should also be brought forward and set off against income. The Tribunal, in a well-considered order, referred to the decision of this court in CIT v. Dutt's Trust, Calicut 1942 (10) ITR 477and took the view that that decision contemplated the physical carrying on of the business in which unabsorbed depreciation has resulted in the succeeding years if set off is to be claimed of unabsorbed depreciation against any other income. The Tribunal found that since the requirement of the carrying on of the business in which unabsorbed depreciation has resulted was necessary in order to entitle the assessee to set of the carried forward unabsorbed depreciation, the assessee was not entitled to set off such carried forward depreciation. The Tribunal also relied upon the decision of the Supreme Court in CIT v. Jaipuria China Clay Mines (P.) Ltd. 1966 AIR(SC) 1187, 1966 (59) ITR 555, 1966 (2) SCR 449, which, according to the Tribunal, did not approve of the decision of this court in CIT v. Nagi Reddi 1964 (51) ITR 17896Arising out of this order of the Tribunal, at the instance of the assessee, the following question has been referred to this court for our opinion.


"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the unabsorbed depreciation of earlier years could not be set off against the income from business under section 41(2), income from other sources and capital gains?" *


The decision of the question referred to this court depends considerably on the interpretation which can be placed on the provisions of section 32(2) of the Income-tax Act. Section 32(1) enumerates several deductions which are permissible

"in respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession" *


. There is no dispute that in so far as the substantive part of section 32(1) is concerned, deductions thereunder would be permissible in case the assets specified in section 32 are used for the purposes of the business or profession. Then comes section 32(2), the material part of which reads as follows.


"Where, in the assessment of the assessee ........ full effect cannot be given to any allowance under clause (i) or clause (ii) or clause (iia) or clause (iv) or clause (v) or clause (vi) of sub-section (1) or under clause (i) of sub-section (1 A) 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 and sub-section (3) of section 73, 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." *


There is no dispute that section 32(2) is an express provision which permits unabsorbed depreciation to be carried forward to the following year. When it is so carried forward, it is added to the amount of the allowance for depreciation for the previous year which follows the previous year in respect of which the depreciation remains unabsorbed. Statutorily, such carried forward depreciation is fictionally made a part of, the allowance for the following previous year. If in a given following previous year, there is no allowance permissible under section 32(1), then the carried forward depreciation allowance is taken to be the allowance for that previous year and so on for the succeeding previous years. The question which falls for consideration is whether, when section 32(2) fictionally makes the carried forward depreciation allowance a part of the succeeding previous years, it is necessary that the business must be carried on in the succeeding previous year also as is contemplated by section 32(1), or, whether, notwithstanding the fact that the machinery, plant or furniture in respect of which such depreciation allowance arose and has been carried forward are not used for the purposes of the business, the assessee is still entitled to set off the carried forward depreciation allowance against his other income. The question of setting off such carried forward depreciation allowance will arise only if primarily there is a right in the assessee to have the carried forward unabsorbed depreciation set off. We may mention that the main argument of the learned counsel for the assessee in this case is that the relevant words in the concluding portion of section 32(2) that such carried forward unabsorbed depreciation shall be deemed to be the allowance for the previous year have not been understood in their proper sense in the decisions which take the view that even for the purpose of setting off carried forward unabsorbed depreciation, it is necessary that the assets must be used for the purpose of business, or, in other words, the business must have been carried on by the assessee. The contention advanced by the learned counsel is based on a decision of the Andhra Pradesh High Court in Hyderabad Construction Co. Ltd. v. CIT 1981 (129) ITR 81, 1981 (5) TAXMAN 156, where a Division Bench of that court has taken the view that for the purpose of claiming set off of unabsorbed depreciation carried forward from the previous year, it was not necessary that the business in respect of which the depreciation allowance was originally worked out should remain in existence in such succeeding year. The reason for this conclusion was that the Division Bench of the Andhra Pradesh High Court found that unlike section 32(1) of the Income-tax Act, where the carrying on of the business has been imposed as a condition precedent for the purpose of deduction of current depreciation from the income of the relevant assessment year, section 32(2) of the Income-tax Act does not impose any such condition in the case of set off of unabsorbed depreciation against the income of the succeeding assessment years. Similarly, the learned judges referred to the terminology of section 72(1)(i) and the proviso and observed that in contrast to an express requirement regarding the continuance of the business or profession as a condition for set off of loss under section 72(1)(i), proviso, there was no such requirement in regard to unabsorbed depreciation under section 32(2). A similar view has been taken by the Karnataka High Court in Addl. CIT v. Kapila Textiles (P.) Ltd. 1981 (129) ITR 458, 1981 (22) CTR 76, 1981 (6) TAXMAN 229, 1981 (22) CTR(Kar) 76where a Division Bench of that High Court held that the benefit of carry forward and set off of unabsorbed depreciation under sub-section (2) of section 32 of the Income-tax Act, 1961, is not subject to the condition that the business must have been carried on by the assessee during the relevant previous year. The Gauhati High Court in CIT v. Singh Transport Co. 1980 (123) ITR 698, 1980 (15) CTR 164, 1980 (4) TAXMAN 86, has taken the view that unabsorbed depreciation is required to be set off and carried forward not by force of section 72 and/or section 73 of the Income-tax Act, 19611942 (10) ITR 477

, this court has taken the view that section 10(2)(vi) of the Indian Income-tax Act of 1922 could not be read as giving an assessee the right to deduct an allowance for depreciation in a business which had ceased to exist and that, therefore, the trustees in that case were not entitled to set off the unabsorbed depreciation of the general and cinema business discontinued prior to the year of account against the profits of the saw mill business of the year of account. The law, however, has been extensively considered in a recent decision of this court in Tube Suppliers Ltd. v. CIT 1985 (152) ITR 694. The assessee in that case carried on business in refractory works to manufacture fire bricks and also business in lamp factory and collapsible tubes. In the assessment year 1970-71, the business of lamp factory and collapsible tubes had ceased to exist. The assessee claimed setoff of the loss of the earlier year relating to the business of lamp works and collapsible tubes against the income from the business in the refractory works. The assessee also claimed that the unabsorbed depreciation relating to the collapsible tubes division and lamp factory should be carried forward and setoff against the income from the refractory business for the assessment year 1970-71. The facts which are found by the authorities were as follows.


1. The assessee originally carried on three businesses, namely, refractory works, lamp works and collapsible tubes, but it decided to close the business in lamp works and collapsible tubes long before the assessment year in question and those businesses were not carried on during the assessment year 1970-71.


2. During the said year in question, the assessee carried on business only in refractory works and, hence, the entire income returned for the said assessment year related only to the said business in refractory works.


3. The assessee had sold certain spares and machineries of the lamp works as well as the collapsible tubes and finished goods and loose tools during the year ending July 31, 1969, relevant to the assessment year 1970-71. The Tribunal held that the business in which the loss was originally sustained by the assessee was not carried on by it till the year in which the carried forward loss was sought to be set off and, hence, the assessee was not entitled to carry forward the unabsorbed loss in the business of collapsible tubes and set off the same against the income of the refractory works business. With regard to the unabsorbed depreciation, the Tribunal held that the business of the collapsible tubes factory and lamp works having ceased to exist before the assessment year 1970-71, the unabsorbed depreciation relating to those two businesses could not be permitted to be carried forward and set off against the income from a totally different business, viz., refractory works. We are concerned only with the second question which fell for consideration before this court. The second question was as follows:


"Whether the Tribunal was right in holding that the unabsorbed depreciation relating to the activity of collapsible tubes and lamp factory related to a business which ceased to exist and hence it cannot be set off against the income from refractory works determined for the assessment year 1970-71 ?" *


This court, after referring to the different provisions in Chapter IV of the Act which dealt with computation of total income and particularly sections 28, 30, 31, 32 and 33, observed as follows (p. 704)

"All these sections contemplate the user of the asset, whether it is building, plant or machinery for the purpose of the assessee's business and the deductions being allowed only in respect of the building, plant and machinery or furniture which have been used in the business. All the above sections presuppose the existence of a business and the user of the assets in the business. It is no doubt true, unabsorbed depreciation could be adjusted under the statute against the income from other heads, but the continuance of the business is an essential pre-requisite for allowing the assessee to carry forward the unabsorbed depreciation and its set off against the income .... Thus, in order to sustain the claim under section 32, the business should have been carried on in the accounting year and the deduction can be allowed only from the gross profits of specific business to which the business relates. From this it follows that no expenditure or other allowance can be claimed in respect of a business which has been discontinued before the commencement of the accounting year." *


The Division Bench which decided the Tube Suppliers Ltd.'s case 1985 (152) ITR 694 (Mad) had referred to the contrary view taken in CIT v. Estate and Finance Ltd. 1978 (111) ITR 119(Bom), CIT v. Rampur Timber and Turnery Co. Ltd. 1973 (89) ITR 150, CIT v. Virmani Industries (P) Ltd. 1974 (97) ITR 461, CIT v. Warrangal Industries (P) Ltd. 1977 (110) ITR 756, Hyderabad Construction Co. Ltd. v. CIT1981 (129) ITR 81, 1981 (5) TAXMAN 156 and Addl. CIT v. Kapila Textiles (P) Ltd. 1981 (129) ITR 458, 1981 (22) CTR 76, 1981 (6) TAXMAN 229, 1981 (22) CTR(Kar) 76. We have already referred to the two latter cases earlier. The Division Bench has also referred to the decision of the Bombay High Court in Hindustan Chemical Works Ltd. v. CIT 1980 (124) ITR 561, 1979 (1) TAXMAN 420, CIT v. Dutt's Trust, Calicut 1942 (10) ITR 477 and Sahu Rubbers (P) Ltd. v. CIT 1963 (48) ITR 464, which have taken the view that the continuation of the business is a condition precedent for carrying forward and setoff of the unabsorbed depreciation of the previous years. After noticing this conflict, this court observed as follows (p. 705).


"Thus, we find that there is a conflict of judicial opinion on the question whether the existence of the business is a sine qua non for carrying forward and set off of the unabsorbed depreciation in relation to that business. We are of the view that the decision in CIT v. Dutt's Trust 1942 (10) ITR 477, lays down the correct legal position. The said decision, as already stated, has been followed in Sahu Rubbers (P) Ltd. v. CIT 1963 (48) ITR 464. But these two decisions have not been followed in the later decision of the Bombay High Court in CIT v. Estate and Finance Ltd. 1978 (111) ITR 119, on the ground that the said two decisions are not supported by any reasoning. However, we find that in two later decisions in Kishandas Dilberdas v. CIT 1974 (96) ITR 638

and Hindustan Chemical Works Ltd. v. CIT 1980 (124) ITR 561, 1979 (1) TAXMAN 420, the Bombay High Court has held that the existence of the business in the accounting year is necessary for allowing set off of the unabsorbed depreciation carried forward."


The Division Bench thus took the view that the view taken in CIT v. Dutt's Trust 1942 (10) ITR 477 (Mad) and Hindustan Chemical Works Ltd. v. CIT 1980 (124) ITR 561, 1979 (1) TAXMAN 420 (Bom) are consistent with the statutory provisions and, therefore, the Tribunal appeared to be right in holding that the assessee in that case was not entitled to carry forward and set off the unabsorbed depreciation of the earlier years in the accounting year as the business in respect of which depreciation was claimed no longer existed.


The learned counsel for the Revenue has heavily relied, and in our opinion rightly so, on this decision of this court in Tube Suppliers Ltd. v. CIT 1985 (152) ITR 694, and his contention is that there is no reason why this decision should not be followed by this court especially when the decision is a well-considered decision. Now, so far as the decision in Tube Suppliers Ltd.'s case 1985 (152) ITR 694 is concerned, we must mention that it follows the decision of the Bombay High Court in Hindustan Chemical Works Ltd. 1980 (124) ITR 561, 1979 (1) TAXMAN 420, to which one of us was a party. The argument of Mr. Subramaniam, the learned counsel for the assessee, however is, as already mentioned, that these authorities do not recognise the significance of the phraseology used in section 32(2) when it refers to the fact that "the allowance or part of the allowance to which effect has not been given", shall not only be added to the amount of the allowance of depreciation for the following previous year but "shall be deemed to be part of that allowance", and in a given case, such allowance "shall be deemed to be the allowance for that previous year". According to the learned counsel, once the carried forward unabsorbed depreciation allowance is treated as an allowance for the following previous year, the fiction is given full effect and being an allowance for the following previous year, is entitled, by virtue of that fact, to be treated as an allowance and given effect to as such. The allowance can be given effect to only by setting it off against the business income irrespective of whether that particular business in respect of which the allowance arose was carried on or not. In our view, the only provision which enables the carried forward unabsorbed depreciation to be set off is the provision in section 32(1). The relevant provision with regard to the carry forward of unabsorbed depreciation under the Indian Income-tax Act, 1922, was section 10(2)(vi), proviso (b), which is identical to section 32(2) of the Income-tax Act, 1961. With reference to this provision in section 10(2)(vi), proviso (b), the Supreme Court in Jaipuria China Clay Mines (P) Ltd.'s case 1966 AIR(SC) 1187, 1966 (59) ITR 555, 1966 (2) SCR 449, observed as follows (p. 561)

"The unabsorbed depreciation allowance is carried forward under proviso (b) to section 10(2)(vi) and the method of carrying it forward is to add it to the amount of the allowance of depreciation in the following year and deeming it to be part of that allowance; the effect of deeming it to be part of that allowance is that it falls in the following year within clause (vi) and has to be deducted as allowance. If the Legislature had not enacted proviso (b) to section 24(2), the result would have been that depreciation allowance would have been deducted first out of the profits and gains in preference to any losses which might have been carried forward under section 24, but as the losses can be carried forward only for six years under section 24(2), the assessee would in certain circumstances have in his books losses which he would not be able to set off. It seems to us that the Legislature, in view of this, gave a preference to the deduction of losses first. But it is wrong to assume that section 24(2) also deals with the carrying forward of depreciation. This carry forward having been provided in section 10(2)(vi) and in a different manner, section 24(2) only deals with losses other than the losses due to depreciation." *


The provision corresponding to section 24(2) of the 1922 Act is to be found in section 72(2) of the 1961 Act. Section 72(2) provides that where any allowance or part thereof is, under sub-section (2) of section 32 or subsection (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section. Having regard to the position set out by the Supreme Court in Jaipuria China Clay Mines (P) Ltd.'s case 1966 AIR(SC) 1187, 1966 (59) ITR 555, 1966 (2) SCR 449, the position in law is that while the carry forward provision is to be found in the proviso (b) to section 10(2)(vi), the deductibility is under section 10(2)(vi). The observations quoted above clearly indicate that when carried forward unabsorbed depreciation is treated as an allowance under section 32(2), it will become a deductible allowance only under section 32(1). The only effect of the provisions of section 32(2) is to treat the carried forward unabsorbed depreciation allowance on the same footing as a similar allowance for the relevant previous year. That is the limited purpose of the words which are used in the concluding portion of section 32(2). The deeming fiction can be carried undoubtedly to its logical conclusion but the effect of the deeming fiction will come to an end the moment it is treated as an allowance for the relevant previous year. The fiction cannot be carried further and it is an established proposition that a statutory fiction cannot be given effect to beyond the purpose for which it is intended. The purpose for which the fiction in section 32(2) is intended is merely for the purpose of treating such unabsorbed depreciation as an allowance for the purpose of deductibility under section 32(1). This fiction does not have tile effect of dispensing with the substantive condition in sub-section (1) prescribed as a condition for deductibility, namely, that the buildings, machinery, plant and furniture in respect of the allowance are used for the purposes of the business or profession. We are, therefore, unable to accept the argument advanced by the learned counsel for the assessee that when this court took the view with reference to the construction of sections 32(1) and 32(2) in Tube Suppliers Ltd.'s case 1985 (152) ITR 694 (Mad), that continuance of the business is a pre-requisite condition for set off of unabsorbed depreciation, that view is affected by the non-consideration of the effect of the concluding part in section 32(2). Even on first principles, we are satisfied that the view taken by this court in Tube Suppliers Ltd.'s case 1985 (152) ITR 694 (Mad) is the, only view which is possible. With respect, we are unable to agree with the view taken by the Andhra Pradesh and Karnataka High CourtsIt is true that the Bombay High Court has in CIT v. Estate and Finance Ltd. 1978 (111) ITR 119 (Bom), expressly took the view which is in favour of the assessee as canvassed by Mr. Subramaniam before us. In that, decision, the Division Bench declined to accept the decision of the same court in Sahu Rubbers Pvt. Ltd. v. CIT 1963 (48) ITR 464 (Bom), as a binding authority on the interpretation placed by the court and the true meaning to be given to the statutory provision enacted in section 32(2) of the Act of 1961. In Sahu Rubbers Private Ltd.'s case 1963 (48) ITR 464, Division Bench of the Bombay High Court has expressly taken the view that in order to claim adjustment in the assessment year of unabsorbed depreciation of an earlier year, the assessee must establish that the business, in respect of which it was allowed, continued in the previous year relevant to the assessment year and if that business is no more in existence, unabsorbed depreciation cannot thereafter be adjusted in the assessment of future years in respect of a different business. The later decision in Estate and Finance Ltd.'s case 1978 (111) ITR 119 (Bom) takes an exactly contrary view. In Sahu Rubbers Private Ltd.'s case 1963 (48) ITR 464, the Bombay High Court followed the earlier decision of this court in Dutt's Trust case 1942 (10) ITR 477. It is also undoubtedly true that the provisions which fell for consideration in Sahu Rubbers Private Ltd.'s case 1963 (48) ITR 464 were not those contained in section 32(2) of the 1961 Act but the provision with which the Bombay High Court was dealing with was the one in section 10(2)(vi), proviso (b). With reference to that provision, the Bombay High Court took the view that it was a provision as to the manner in which the unabsorbed depreciation allowance was to be adjusted which led to the only inference that, for its adjustment in the subsequent year, the business of the assessee must continue. It was then observed as follows (p. 470 of 48 ITR).



"It (section 10(2)(vi), proviso (b)) 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." *


(Emphasis supplied by us) These observations, in our view, unequivocally lay down a proposition of law that for the purpose of the proviso (b) to section 10(2)(vi) which corresponds to section 32(2) of the 1961 Act, unabsorbed carried forward depreciation cannot be permitted as an allowance unless the business is continued. This becomes clear from the very question which was referred to the Division Bench which read as follows (at p. 468 of 48 ITR)


"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 the years 1950-51 and 1951-52 could either wholly or in part be added to the amount of the allowance for depreciation in the assessment years 1956-57 and 1957-58 and be deemed to be part of that allowance for those years ?" *


It is rather unusual that in spite of this positive view expressed by the Division Bench in Sahu Rubbers Private Ltd. case 1963 (48) ITR 464, that decision come to be distinguished in Estate and Finance Ltd.'s case 1978 (111) ITR 119 (Bom), on the ground that that decision principally turned on the question whether the statutory provision had to be interpreted and given effect to as a proviso or as an independent provision. A careful reading of Sahu Rubbers Pvt. Ltd. case1963 (48) ITR 464 (Bom) would indicate that when the Division Bench in that case observed that (p. 471):

"it is difficult to hold that the proviso (b) to clause (vi) of sub-section (2) of section 10 is a substantive provision of law by reason of the fact that the proviso to sub-section (2) of section 24 is a substantive provision of law" *


, these observations were made by the Division Bench while considering the argument advanced in that case on behalf of the assessee that the decision in Dutt's Trust's case 1942 (10) ITR 477 (Mad) did not correctly state the law inasmuch as proviso (b), after that decision, had undergone a change by reason of its amendment in 1941. The Division Bench found that by the amendment in 1941, all that was introduced in proviso (b) was the clause "subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24" *


. The Division Bench also explained as to what was the purpose of the proviso and the purpose, according to the Division Bench, was to postpone adjustment of the unabsorbed depreciation till adjustment of the previous loss, and it was pointed out that as between losses of previous years and the unabsorbed depreciation, priority is given to prior losses, a position which is now recognised by section 72(2) of the 1961 Act. The following observations will make the position more clear (p. 471 of 48 ITR).



"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 safeguard 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 clause (vi) of subsection (2) of section 10 and, therefore, is within the ambit and scope of clause (vi), and is not an independent substantive provision of law." *


The question as to whether the proviso was a substantive provision of law or not made no difference to the view expressed by the Division Bench that the decision in Dutt's Trust's case 1942 (10) ITR 477 (Mad) laid down the correct law. In Sahu Rubbers Pvt. Ltd.'s case 1963 (48) ITR 464 (Bom), the Division Bench has laid down a proposition of law that unabsorbed carried forward depreciation cannot be allowed unless the business in respect of which it was claimed continued in the previous year relevant to the assessment year.


There are two reasons why we are unable to agree with the view of the later Division Bench of the Bombay High Court in Estate & Finance Ltd.'s case 1978 (111) ITR 119, in preference to the view taken in Sahu Rubbers Pvt. Ltd.'s case 1963 (48) ITR 464. The first reason is that, as we have pointed out earlier, we are unable to read Sahu Rubbers Pvt. Ltd.'s case 1963 (48) ITR 464 (Bom), as anything other than an authority for the proposition which is expressly laid down in that decision. The second reason is that the later decision of the Supreme Court in CIT v. Mother India Refrigeration Industries (P.) Limited 1985 AIR(SC) 1720, 1985 (3) CompLJ 379, 1985 (155) ITR 711, 1985 (2) Scale 236, 1985 (4) SCC 1, 1985 (S2) SCR 556, 1986 (1) UJ 588, 1985 (48) CTR 176, 1985 (23) TAXMAN 8, 1985 SCC(Tax) 493, 1985 (48) CTR(SC) 176was called upon to decide the question as to whether in computing the profits and gains in a business for the current year, the depreciation for the current year must be deducted first before deducting the unabsorbed carried forward business losses of the earlier years.This question was being considered for the assessment years l951-52 and 1952-53. While holding that depreciation of the current year must be deducted first before deducting unabsorbed carried forward business loss of earlier years, the Supreme Court, with reference to the provisions in sections 32(1) and 32(2) and sections 72(l) and (2), after reproducing the provisions in section 10(2)(vi), proviso (b) and section 24(2) of the Act of 1922, observed as follows (p. 715)

"Under the 1961 Act, the material provisions are to be found in Sections 32(1) and 32(2) and sections 72(1) and 72(2) and it was not disputed that the material provisions in both the Acts are couched in substantially the same language. "


Then at page 717, the Supreme Court observed as follows.


" 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 show 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-section (2) of section 10 of the 1922 Act and after allowing certain deductions in accordance with the provisions contained in sections 30 to 34A 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 section 10(2)(vi) of the 1922 Act and in section 32(1) of the 1961 Act ...... The question is whether any deviation from this normal rule of accountancy is contemplated by proviso (b) to section 10(2)(vi) read with proviso (b) to section 24(2) of the 1922 Act or by section 32(2) read with section 72(2) of the 1961 Act, and it is here that the aspect of proper construction of these provisions arises." *


The Supreme Court then went on to explain the purpose of the legal fiction provided by the deeming provision in proviso (b) to section 10(2)(vi) as follows (p. 718).


"Clearly, the avowed purpose of the legal fiction created by the deeming provision contained in proviso (b) to section 10(2)(vi) is to make the unabsorbed carried forward depreciation partake of 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. That this is so becomes clear from this COURT's observations in Jaipuria China Clay Mines (P.) Ltd.'s case 1966 AIR(SC) 1187, 1966 (59) ITR 555, 1966 (2) SCR 449, appearing at page 561 of the report which runs thus'The unabsorbed depreciation allowance is carried forward under proviso (b) to section 10(2)(vi) and the method of carrying it forward is to add it to the amount of the allowance of depreciation in the following, year and deeming it to be part of that allowance ; the effect of deeming it to be part of that allowance is that it falls in the following year within clause (vi) and has to be deducted as allowance.'" *


The Supreme Court cited with approval the decision of the Bombay High Court in CIT v. Ravi Industries Ltd. 1963 (49) ITR 145 (Bom), where the court has observed that the unabsorbed depreciation does not lose its character and attributes when it is carried forward to the following year and that such unabsorbed depreciation of the earlier year, which is carried forward to the current year and which is deemed to be of the current year under proviso (b) of section 10(2)(vi), can be set off, unlike other business losses, against income under other heads. The Supreme Court then observed that such being the purpose for which the legal fiction is created, it is difficult to extend the same beyond its legitimate field and will have to be confined to that purpose. Dealing with the provisions of the 1961 Act, the Supreme Court observed at page 719 as follows.


"Since the provisions of the 1961 Act are in pari materia with the corresponding provisions under the 1922 Act, the same conclusion must follow under the Act of 1961, namely, that the current depreciation must be deducted first before deducting the unabsorbed carried forward business losses of the earlier years in giving set off while computing the total income of any particular year." *


It is important to point out that though the decision in Estate and Finance Ltd.'s case 1971 (111) ITR 119 (Bom) is not referred to in this decision, the learned judge who delivered the judgment of the Supreme Court in Mother India Refrigeration Industries P. Ltd.'s case 1985 AIR(SC) 1720, 1985 (3) CompLJ 379, 1985 (155) ITR 711, 1985 (2) Scale 236, 1985 (4) SCC 1, 1985 (S2) SCR 556, 1986 (1) UJ 588, 1985 (48) CTR 176, 1985 (23) TAXMAN 8, 1985 SCC(Tax) 493, 1985 (48) CTR(SC) 176 was himself a party to the decision in the former case, as he then was, in the Bombay High Court. This latter decision of the Supreme Court clearly creates an infirmity in the view which is taken by the Division Bench in Estate and Finance Ltd.'s case 1978 (111) ITR 119

(Bom), in as much as the relevant provisions of the 1922 Act and the 1961 Act have been held to be in pari materia. Further, the Supreme Court in Mother India Refrigeration Industries (P.) Ltd.'s case 1985 AIR(SC) 1720, 1985 (3) CompLJ 379, 1985 (155) ITR 711, 1985 (2) Scale 236, 1985 (4) SCC 1, 1985 (S2) SCR 556, 1986 (1) UJ 588, 1985 (48) CTR 176, 1985 (23) TAXMAN 8, 1985 SCC(Tax) 493, 1985 (48) CTR(SC) 176, has expressly laid down the limit to which the fiction created under the proviso (b) to section 10(2)(vi) of the 1922 Act can be carried. As already pointed out, the fiction created was limited to make the unabsorbed carried forward depreciation partake of 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 the other income of that year. This view taken in the context of proviso (b) to section 10(2)(vi) of the 1922 Act would also govern the scope of the fiction in section 32(2) of the 1961 Act and with this decision of the Supreme Court, it would be difficult to carry the fiction beyond what according to the Supreme Court was the limit to which such fiction can be carried. Therefore, with great respect to the learned judges who delivered the decision in Estate and Finance Ltd.'s case 1978 (111) ITR 119 (Bom), we are reluctant to follow that decision and we are inclined to follow the decision in Sahu Rubbers Private Ltd.'s case 1963 (48) ITR 464 (Bom), which, in our view, was rightly followed by this court in Tube Suppliers Ltd.'s case 1985 (152) ITR 694There are two other decisions which have been referred to us by the learned counsel for the assessee. Those decisions are : CIT v. Virmani Industries (P.) Ltd. 1974 (97) ITR 461 (All) and CIT v. Kishanlal and Sons (Udyog) Pvt. Ltd. 1985 (154) ITR 735, 1985 (47) CTR 37, 1986 (25) TAXMAN 96, 1985 (47) CTR(Cal) 37.


(Cal). Having regard to what we have said earlier, we do not think it necessary to deal with these decisions further.


An argument was then advanced before us that the unabsorbed depreciation should have been made deductible under section 71(1) of the Income-tax Act, 1961. Section 71 (1) reads as follows.


"71. Set off of loss from one head against income from another.-(1) Where in respect of any assessment year the net result of the computation under any head of income other than 'capital gains' is a loss and the assessee has no income under the head 'Capital gains', he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head." *


The learned counsel for the assessee contends that since the provisions of section 71 (1) expressly provide that if the net result of the computation under any head of income other than capital gains is a loss and the assessee has no income under the head "capital gains", he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head, the unabsorbed depreciation to be carried forward is a loss and that loss is now meant expressly permissible to be set off against the income of the assessee under any other head. This argument, however, in our view, proceeds on a misapprehension that the loss contemplated by section 71 includes the allowances which are made permissible under section 32. At the very outset, it may be pointed out that section 32(2) does not refer to any loss as such. Section 32(1) refers to deduction which is permissible and section 32(2) refers to allowance or part of the allowance to which effect has not been given in section 32(1) and it further refers to such allowance being added to.



"the amount of the allowance for depreciation for the following previous year" *


. This allowance is further deemed to be part of the allowance for the following previous years. Section 32(2), therefore, refers to deduction permissible under section 32(1) as an allowance. In any case it is too late in the day to contend that sections 71 and 72 also refer to unabsorbed depreciation allowances. Section 71 cannot be read in isolation, but has to be read as a part of the scheme contained in sections 70 to 80. Sections 70, 71 and 72, if read carefully would show that all these three sections deal only with business losses. Section 70 initially provides that where the net result for any assessment year in respect of any source falling under any head of income other than "capital gains" is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. Section 71 comes into operation after section 70 exhausts itself. Section 71 permits the loss referred to in section 70 to be set off against the income of the assessee under any other head. When we come to section 72, we find that it operates at a stage after sections 70 and 71 have been given effect to, because it expressly provides that where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, then so much of the loss as has not been so set off, or where the assessee has income only under the head "Capital gains" relating to capital assets other than short-term capital assets and has exercised the option under sub-section (2) of that section or where he has no income under any other head, the whole loss shall, subject to the other provisions of Chapter VI, be carried forward to the following assessment year. Clauses (i) and (ii) of sub-section (1) of section 72 provide as to how this carried forward loss has to be set off. We have, therefore, two provisions for carry forward. One is in respect of carry forward of loss and the other is in respect of carry forward of unabsorbed depreciation. The provision for carry forward of business loss is in section 72(1). The provision for carry forward of unabsorbed depreciation is in section 32(2). When there is an express provision for carry forward of unabsorbed depreciation in section 32(2), there cannot be again a provision for the same in section 72(1). Even otherwise, the very placement of section 72 also indicates that what is intended to be carried forward under section 72 is business loss which it was not possible to set off under any head of income as provided in sub-section (2) of section 71. Sections 71 and 72, therefore, clearly refer to a business loss, the concept of which is entirely different from the concept of allowable deduction under section 32(1) which is permitted to be carried forward under section 32(2). This position is further made clear in section 72(2) which reads as follows.



"Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section." *


The provision in section 72(2) would clearly indicate that what is contemplated by section 32(2) and what is contemplated by section 72(1) are entirely different concepts and when the question of set off of carried forward depreciation and carried forward losses arises, section 72(2) provides that effect has to be first given to section 72 before effect is given to the other two provisions mentioned therein. Though even on a construction of sections 71 and 72, it is difficult to accept the contention of the learned counsel for the assessee, the matter now stands concluded in so far as this court is concerned. In CIT v. Concord Industries Limited 1979 (119) ITR 4, this court was dealing with the scope of section 79 of the Income-tax Act, 1961, which is one of the provisions falling within the group of provisions dealing with set off and carry forward and set off. While dealing with the scope of section 79, this court observed at page 463 as follows.


"The result is, the treatment of depreciation is different from loss as seen from section 72(2) itself. That is why section 72(2) also provides for a priority in the matter of carry forward and set off of unabsorbed depreciation before the loss is set off. If, therefore, for the purpose of section 72, losses would not include depreciation, then, as far as section 79 also is concerned, the same position would have to hold good." *


We may also refer to a decision of the Bombay High Court in BallarPur Collieries Co. v. CIT 1973 (92) ITR 219in which, after referring to the decision of the Supreme Court in Jaipuria China Clay Mines (P.) Ltd. 1966 AIR(SC) 1187, 1966 (59) ITR 555, 1966 (2) SCR 449, dealing with the provisions of section 24(2) of the 1922 Act which now corresponds to section 72(2) of the 1961 Act, it was observed as follows (p. 230)

"It is thus clear that even though for certain purposes of set-off, loss occasioned on account of unabsorbed depreciation is dealt with under section 24 of the Act, it does not lose its character or nature as unabsorbed depreciation and is carried forward not by virtue of the provisions of section 24(2) but by virtue of the express provisions of section 10(2)(vi), proviso (b)." *


The decision was followed by this court in CIT v. Nagapatinam Import and Export Corporation1979 (119) ITR 444, 1979 (10) CTR 197, 1980 (3) TAXMAN 150, 1979 (10) CTR(Mad) 197. The fact that sections 71 and 72 did not deal with carried forward unabsorbed depreciation is also highlighted by the decision of the Gujarat High Court in CIT v. Shri Subhlaxmi Mills Ltd. 1983 (143) ITR 863 and the decision of the Kerala High Court in CIT v. Kalpaka Enterprises (P.) Ltd. 1986 (157) ITR 658, 1986 (51) CTR 160, 1986 (24) TAXMAN 167, 1986 (2) TLR 249. The Gujarat High Court was concerned with the question as to whether section 79 of the Income-tax Act, 1961, was concerned only with the business losses. Unusually, the argument in that case was advanced on behalf of the Revenue that section 79 applies to unabsorbed depreciation also. This argument was rejected. Referring to the allowance permissible under sections 32(2) and 33(2), the Gujarat High Court observed as follows (at p. 664 of 157 ITR).


"These are allowances which are being permitted to the assessee and it is very difficult to say that depreciation allowance is incurred or development rebate is incurred in view of the language of sections 32 and 33. It must be held that depreciation is allowed and development rebate is allowed if the conditions of the relevant sections are satisfied but they are not incurred by the assessee. Therefore, by the use of the words 'loss incurred' and the reference to the Chapter in which section 79 occurs, it is obvious that the contention urged on behalf of the Revenue that the provisions of section

79 apply to unabsorbed depreciation allowance which has been carried forward or to unabsorbed development rebate which has been carried forward from the immediately preceding assessment year, must be rejected." * The view of this court in CIT v. Concord Industries Ltd. 1979 (119) ITR 458, 1979 (13) CTR 312, 1979 (13) CTR(Mad) 312 and the decision of the Gujarat High Court in Shri Subhlaxmi Mills Ltd.'s case 1983 (143) ITR 863were followed by the Kerala High Court in CIT v. Kalpaka Enterprises (P.) Ltd. 1986 (157) ITR 658, 1986 (51) CTR 160, 1986 (24) TAXMAN 167, 1986 (2) TLR 249 (Ker). It would not, therefore, be possible to accept the argument that the unabsorbed carried forward depreciation should be set off under section 71(1) of the Income-tax Act, 1961. An argument was then advanced relying on the provisions of section 41(1) and section 41(2) of the Income-tax Act, 1961. The argument is that the fiction which is created by the Explanation to section 41(2) of the Act must be given benefit of to the assessee and that this fiction must also be utilised for the purpose of section 32(2). With respect, this argument is to be rejected without any consideration. Section 41(2) is provision which enables the Revenue in a case where a capital asset of the kind mentioned therein owned by the assessee and which has been used for the purpose of his business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such assets exceed the written down value, then so much of the excess as does not exceed the difference between the actual cost and the written down value, becomes chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due. We are not, in this case, concerned with the two provisos, but there is an Explanation which reads as follows. "Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year." * The object of the Explanation is very clear. The object is that where a certain amount which becomes chargeable to income-tax under section 41(2) is to be considered and the business for which the capital asset was used is no longer in existence in the relevant previous year, then the Explanation provides that the provisions of section 41(2) will apply notwithstanding the fact that the business is no longer in existence. It is for that purpose that the fiction is created that the business or profession will be treated as being in existence. It is difficult to see how the limited fiction which is created by the Explanation, the limit being manifest in the Explanation itself, so as to work out the liability under section 41(2), can be extended beyond the purpose for which it is incorporated. There is no warrant for the proposition that this fiction should be extended to the rights under section 32(2) of the Act. This argument must, therefore, be rejected. The last argument advanced before us was with reference to the definition of "written down value" in section 43(6) of the Act. Section 43 in clause (6) thereof defines "written down value" and Explanation 3 to that definition reads as follows: "Any allowance in respect of any depreciation carried forward under sub-section (2) of section 32 shall be deemed to be depreciation 'actually allowed'." * The Explanation, in other words, really defines what is the meaning of depreciation actually allowed and the words "actually allowed" are to be found in sub-clause (b) of the definition of "written down value" in clause (6) of section 43. In view of sub-clause (b) of the definition of "written down value", in the case of assets acquired before the previous year, the It "written down value" would mean the actual cost to the assessee less all depreciation actually allowed to him under this Act or under the Indian Income-tax Act, 1922, or any Act repealed by that Act or under any executive orders issued when the Indian Income-tax Act, 1886 (Act 2 of 1886), was in force. It is difficult for us to see how the Explanation which only gives us the meaning of the words "actually allowed" can affect our construction of the provisions of section 32(1) and section 32(2). As we have already pointed out, we have taken the view that though the unabsorbed depreciation can be carried forward under section 32(2) and it becomes allowable under section 32(1), the condition required to be satisfied under section 32(1) must be satisfied. The Explanation given in the definition of "written down value" does not in any way affect our construction of section 32(1)Having considered the arguments of the learned counsel for the Revenue and the assessee at considerable length, we must answer the question referred to us in the affirmative and against the assessee. The assessee shall pay the costs of this reference. Counsel's fee Rs. 1, 000.