1963 PLP 193 (PTD)

Ss. 4‑A (c), 10 (2) (vi) Depreciation‑Company‑Unabsorbed depreciation allowance during period when company was resident owing to Indian income exceeding foreign income‑Whether should be set‑off against total world income in year in which it is non resident owing to foreign income exceeding Indian income. The assessee was a company incorporated at Indore outside British India which ran a textile mill. Its income in British India relevant to the assessment years 1940‑41 and 1941‑42 exceeded its income outside British India and it was treated as a resident for purposes of assessment to Indian income‑tax. For the assessment year 1942‑43 its income outside British India exceeded its British Indian income and the company was treated as a non‑resident for that year. The question was whether the unabsorbed depreciation amounting to Rs. 5,98,482 which was carried forward to that year had to be adjusted against its total world income or only its total income : Held, that the unabsorbed depreciation had to be allowed against the total world income of the company for the assess ment year 1942‑43 and not merely its total income for that year. STATEMENT OF CASE By these applications, the assessee requires the Appellate Tribunal to refer to the High Court questions of law arising out of the Tribunal's consolidated order in I. T. A. Nos. 1346 to 1360. of 1955‑56, dated May 4, 1956. Inasmuch as, in our opinion, a question of law does arise, we hereby draw up a statement of the case and refer the same to the High Court of Judicature at Bombay under section 66 (1) of the Indian Income‑tax Act, 1922.

2. The relevant assessment years are 1942‑43, 1943‑44, 1945‑46, 1946‑47 and 1947‑48, the previous years being the calendar years 1941, 1942, 1944, 1945 and 1946. The facts relating to all the years are identical except that the figures are different. We, therefore, confine ourselves to the facts relating to the assessment year 1942‑43.

3. The assessee is a limited liability company incorporated in the State of Indore. It has a textile mill at Indore where it carries on the business of manufacture and sale of textiles. The total sales effected by the company in the previous year relevant for the assessment year 1942‑43 amounted to Rs. 92,45,

151. The Income‑tax Officer held that the sales effected to merchants in British India came to Rs. 35,87,218 while according to the finding of the Appellate Assistant Commis sioner out of this figure is also to be excluded sales of Rs. 1,77,139 held to have been effected at Indore. Out of these sales of Rs. 34,10,079 again before the Tribunal there was no dispute. in regard to ‑the sales of Rs. 19,30,020 which amount was admitted to have been received in British India and the income thereon was liable to be assessed on receipt basis [section 4 (1) (a)]. The dispute before the Tribunal was in regard to the income on the balance of the sales of Rs. 14,80,059 as also in regard to the computation of profit on sales of Rs. 7,36,156 being sales to Government of India, Supply Department. The said sum of Rs. 14,80,059 is composed of the following items (1) Sales in pursuance of offers or contracts completed by the company's shops at branches in British Rs. 6,66,787 (3) India and passed on to Indore for execution 10,02,642‑--3,35,355 (2) Sales in pursuance of offers or contracts completed by brokers or agents in British India and passed on to Indore 2,91,891 (4) (3) Sales in cases where merchants and brokers visit Indore but contracts were finally signed in British India 3,85,214 (5) (4) Sales to British India merchants 3,13,306 (9) (The figures in brackets, at the extreme right side show the item Nos. as used by the Appellate Assistant Commissioner).

4. The first contention of the assessee related to the sales of Rs. 7,36,156 on which the profit was worked out on pro portionate basis, i.e., the profit on these sales was taken in the same proportion as the total profit would bear to the total sales, i.e., in the same way as profit on the sales of the balance of Rs. 11,93,864 received in British India was worked out. The total of these two items comes to Rs. 19,30,020 and the pro portionate profit worked out by the Appellate Assistant Commissioner with which the Tribunal agreed was as follows : (19,30,020 x 28,76,986) / 92,45,151 equal to Rs. 5,99,

512. It was contended by the assessee in regard to sales to Government that the margin of profit was less but it was found by the Tribunal in agreement with the department that no separate accounts having been maintained in respect of these sales it was not possible to work out the margin of profit actually earned on these sales. The proportionate profit had to be worked out and this was worked out in the way stated hereinabove. The assessee's grievance is not as to the applica tion of rule 33, but to the quantum of the estimate. It was contended that it should have been inferred that the assessee could not make profit to the same extent as he would make on the sales to outsiders. In our opinion, the quantum of the profit made on such sales is a question of fact and no question of law arises therefrom.

5. Regarding the balance of the sales amounting to Rs. 14,80,059 here again by application of rule 33, 331/3 % gross profit has been estimated. There being no separate accounts, no separate profit was worked out on these sales and there being a common account in respect of all the sales effected by the assessee company it was not possible to separately work out the profit on these sales and hence rule 33 was applied. The amount of profit computed again, in our opinion, is a question of fact and no question of law arises therefrom.

6. The next contention of the assessee before the Tribunal was in respect of the depreciation allowance of Rs. 5,95,

482. The assessee was held to be a resident and ordinarily resident company in the assessment years 1940‑41 and 1941‑

42. During these years the assessee's income arising in British India was more than its income arising outside British India. However, the profits in these years were not sufficient to cover the entire depreciation allowance. The depreciation allowance to the extent of Rs. 5,98,482 had therefore to be carried forward. It is claimed that this carried‑forward depreciation should be deducted or allowed against the total income of the assessee under section 4 of the Indian Income‑tax Act and not against the total world income of the assessee, i.e., the entire income which accrued or arose to the assessee either in British India or outside British India. Section 10 (2) (vi), proviso (b), of the Indian Income‑tax Act reads as follows : "Where, in the assessment of the assessee or if the assessee is a registered firm, in the assessment of its partners, full effect cannot be given to any such allowance in any year not being a year which ended prior to the 1st day of April 1939, owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of clause (b) of the proviso to subsection (2) of section 24, 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 year and deemed to be part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeeding years." (italics ours). The Tribunal in agreement with the department, relying on this proviso, held that the depreciation carried forward became merged with the depreciation allowance for the assessment year 1942‑43 and became the depreciation allowance of that year and therefore the entire a depreciation allowance has to be adjusted against the total world income and not only against the total income of the assessee. A copy of the Tribunal's order is annexed hereto as annexure "A" and forms part of the case.

7. On the above facts and circumstances of this case, the following question of law arises "Whether on a proper construction of clause (b) of the proviso to section 10 (2) (vi) of the Indian Income‑tax Act and on the facts and in the circumstances of this case the carried forward depreciation allowance of Rs. 5,98,482 has to be allowed against the total income of the assessee or against the total world income of the assessee ?"

8. The parties accept the statement of the facts as set out above. At the special request of the assessee, the assessment orders, the grounds of appeal before the Appellate Assistant Commissioner and the Tribunal are annexed and marked annexures "B", "C" and "D", respectively. N. A. Palkhivala with Kaka for Assessee. G. N. Joshi with R. J. Joshi for Commissioner.