1965 PLP 373 (PTD)

??????????????? In accordance with section 10(2)(vi) the depreciation which has occurred in a year has to be deducted from the gross profits. Also, in accordance with the proviso if depreciation has not been given full effect to in a particular year either because of ,the fact that there were no profits or gains chargeable for that year or because the profits or gains chargeable were less than the depreciation allowance, then the unabsorbed depreciation of that year becomes a part of the depreciation of the succeeding year and if it is not absorbed even in that year it is carried to the next year and so on. The result of the proviso is that the depreciation, as long as it is not absorbed, goes on accumulating, and there is no limit to such accumulation except that it cannot exceed the original cost of the articles in respect of which depreciation is being allowed. The appellant contends that its total profits for a year should be computed after deducting not only the depreciation for that year, but also the whole of the unabsorbed depreciation of the previous years. This is not, however, the method which has been accepted by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal and even by the High Court. The method accepted by the Income-tax Authorities is that while computing the total profits of the appellant they allow depreciation for the year of assessment only, and having so computed the total profits they determine the Pakistan profits by applying the proportion of total receipts against Pakistan receipts. Having thus found the Pakistan profits they deduct from these profits what they call the Pakistan's share of the unabsorbed depreciation of the previous years, which share had already been calculated in the previous years by applying the proportion of total receipts against Pakistan receipts (of those years) to the total depreciation (of those years). To explain the matter further we will state what actually happened. In 1950-51 and 1951-52 the appellant suffered loss. The Incometax Officer first determined the gross loss for each of these years, then added to it the depreciation for that year and the result he called "net loss". Then he determined the Pakistan's share of this net loss in the same way as Pakistan's share of 'profits would be determined that is by applying the proportion of total receipts against Pakistan receipts. In the years 1952-53, 1953-54 and 1954-55 the company made profits. In these years the Incometax Officer first determined total profits giving the assessee benefit only for that year's depreciation, then determined Pakistan's profits by applying the above-mentioned proportion and having so determined the profits gave the assessee the benefit of the Pakistan's share of net loss which he had recorded in the previous years, and which share included a share of depreciation. To illustrate the point we reproduce below the relevant portion of the order of the Income-tax Officer for the year 1954-55: Rs. "Net Profit as per statement F1.3,839,146,46 Total world earnings F1.35,213,633,25 Earnings from carryings from Pak. ports Fl.7,164,651,47 Net profit for Pakistan 3,839,146,46 x 7,164,651,47 F1.781,091,00 35,213,633,24 or Pak. Rs. 6,85,167 Less: Unabsorbed loss for 1950-51 Rs. 2,50,618 4,34,549 Less: Unabsorbed loss for 1951-52 Rs. 3,02,335 Net profit after setting off the losses 1,32,214" ??????????????????????????????????????????????? The "unabsorbed loss" mentioned in the statement includes a share of depreciation as explained above. There does not appear to us to be any warrant for the procedure adopted by the Income-tax Authorities. Rule 33 is clear. It provides for the computation of the total profits of the assessee in accordance with our Income-tax Act and then to the sum so ascertained it applies the rule of proportion and thus discovers the profits of the assessee for Pakistan. On the other hand the Income-tax Authorities while computing the profits do not give the assessee benefit of the unabsorbed depreciation, but go on calculating Pakistan's proportion of net losses including depreciation in every year and give benefit of this to the assessee after applying the rule of proportion to the profits from which though depreciation for that year has been excluded previous depreciation has not been excluded. It is conceded before using that in case of residents all unabsorbed depreciation has to be allowed for computing their profits and that section 10(2)(vi) proviso has to be interpreted in accordance with the contention of the appellant, so far as residents are concerned. Learned counsel for the Income-tax Commissioner relies, however, on section 42(3) for the proposition that the ascertainment of proportional depreciation is justified in case of non-residents. Section 42(3) reads as under:- "42(3) In the case of a business of which all the operations are not carried out in Pakistan the profits and gains of the business deemed under this section to accrue or arise in Pakistan shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in Pakistan." We are unable to see how this provision helps the respondent. It just states a principle that only those profits or gains of non- N residents are liable to the charge of income-tax as are reasonably c, attributable to the operations carried out in Pakistan. It does v. not, however, state how the profits attributable to Pakistan are C to be calculated. A reference to section 59 of the Income-tax Act will show that the Legislature envisaged difficulty in the g assessment of income in such cases and it made express provision in that section for the framing of rules for calculation of income, profits and gains of "persons residing out of Pakistan". Rule 33 was framed to supply methods for such calculation. Section 42(3)IB does not provide any method of determination of profits. It will be of interest here to refer to the instructions issued by the Central Board of Revenue for the grant of depreciation allowance while computing profits of non-residents. Following is the instruction: "Depreciation begins to run from the first year in which the company is "assessed" in the taxable territories, that is, the first year in which its profits (or loss) were determined for the purpose of deciding whether it was liable to income-tax. Unabsorbed Depreciation, i.e., any balance of depreciation which cannot be allowed in any year owing to the profits not being sufficient to cover the full amount permissible under the rules in force in the taxable territories will be carried forward and allowed so far as possible in calculating the world profits according to the method followed in the taxable territories in the following year and if necessary in subsequent years provided that unabsorbed depreciation for 1938-39 and earlier years cannot be set off against an assessment for 1939-40 or any subsequent year. The proportion in the taxable territories receipts/total receipts is applied to the world-profits calculated according to the method followed in the taxable territories (if there are any such profits) and the result is the Pakistan income liable to tax. No further deduction is permissible from the amount thus arrived at on account of depreciation (unabsorbed or otherwise) or anything else. The due proportion of all allowances permissible is automatically set off against the Pakistan profits by the above method." This instruction is quite in accord with what we have stated above. It is true that the instruction has no legal force, but it does tell us the interpretation which the Department has itself been accepting. The Appellate Tribunal rejected the contention of the assessee for reasons which are contained in the paragraph reproduced below: "We have considered all the facts and think that the assessment as modified by Appellate Assistant Commissioner is correct and nothing further need be done. As the income of a non-resident is limited to the amount accruing or arising to it within the taxable territories we think that the depreciation allowance too has to be allowed on a. proportionate basis irrespective of the total amount due in respect of its world assets and its business activities outside its territorial jurisdiction. In view of the above facts we think that the order of the Appellate Assistant Commissioner is correct for all the relevant years. The appeals therefore fail and are dismissed." ??????????? It will be observed that there is no discussion at all in this paragraph of the question as to how if profits are to be computed in accordance with the proviso to section 10(2)(vi) it is possible not to deduct the unabsorbed depreciation. There is only a general observation by the Tribunal that as the income of the non-residents is limited to the amount accruing or arising to it within the taxable territories the depreciation allowance too has to be allowed on a proportionate basis. This general observation is of no avail when rule 33 enjoins computation of total profits in accordance with our Income-tax Act. The learned Judges of the High Court too did not explain how in the face of the proviso calculation of total profits could take place without giving allowance for unabsorbed depreciation. They were of the opinion that the depreciation allowance had to be "determined every year like the trading losses? regardless of the fact whether full effect to it can or cannot be given in that year" and that they could "not see how the unabsorbed depreciation allowance is to be carried forward and added to the depreciation allowance of the following year unless it is calculated". ??????????? It would be proper to explain here the reference in section 10(2)(vi) proviso to section 24(2)(b). In accordance with section 24 benefit for unabsorbed losses in any year is also to be given to the assessee in the succeeding years in which there may be profits. There is a difference, however, between the benefit which is given as depreciation and the benefit which is given as trading losses. Benefit for depreciation is given while computing the profits for a particular year. There is no benefit given for any previous unabsorbed losses while computing the profits but when profits have been computed benefit is given for losses before assessment takes place. The proviso to section 24(2)(b) says, however, that if there be in existence any unabsorbed depreciation the previous losses are to be deducted from the profits or gains before unabsorbed depreciation is allowed. This provision appears to have introduced a kind of anomaly. Although ordinarily profits for a year are arrived at without taking into consideration losses of previous years, if there be unabsorbed depreciation of some previous year then the losses have to be deducted before such depreciation is deducted so that the profits will have to be computed after giving benefit for previous losses. The reason for this provision appears to be that for allowing benefit of losses there is a time-limit of six years, after which period they cannot be carried forward whereas depreciation can go on accumulating the only limitation being that it cannot exceed the original cost. The Legislature did not regard it proper to deprive the assessee of the allowance for previous losses by first deducting the unabsorbed depreciation with the result that the losses may become wholly or partly. time-barred. However, the existence of this proviso does not interfere with the effect of rule

33. All unabsorbed depreciation becomes part of the depreciation of the succeeding year and has to be deducted for computation of profits. Our answer to the question referred is that in computing total profits under the second method mentioned in rule 33 ail unabsorbed depreciation has to be allowed and after profits are thus computed the proportion of total receipts against Pakistan receipts has to be applied to determine the profits for Pakistan. This appeal is accepted and the question answered as stated above. There is no order as to costs. A. H.??? ?????????????????????????????????????????????????????????????????????????????????????????????? Appeal accepted.