1985 PLP 734 (PTD)

CHANDURKAR, J.‑‑The assessee company carries on the business of manufacture of vegetable oil. In the assessment for the assessment year 1959‑60, the assessee had made a profit of Rs 10,342 in non‑speculative business and it claimed that this profit should be set off against the loss for non‑speculative business brought forward since the year 1954‑

55. The assessee further claimed that the balance of the non‑speculative loss for the year 1954‑55 should then be set off against the speculative profit of Rs 25,

570. The current year's depreciation for the assessment year 1959‑60 to which the assessee was entitled amounted to Rs. 35,769. and according to the assessee this should not be absorbed at all against the profits of the assessment year 1959‑60, but should be added to the depreciation brought forward from the earlier years and should be carried forward to the next year. The obvious intention was to see that the depreciation of the current year could be set off in future years and the business loss brought forward from the year 1954‑55 could be set off before it becomes impermissible to set off at the end of eight years.

2. The Income‑tax Officer declined to allow the current year's deprecia tion to be carried forward, and he adjusted the current year's depreciation amounting to Rs. 35,769 and determined the loss from non‑speculative business at Rs. 25,

427. This loss was adjusted by him against speculation profit of Rs. 25,

570. Thus, the figure of profit arrived at was Rs.

143. The meagre amount was then adjusted against the loss brought forward from the year 1954‑55, which was a sum equal to Rs. 3,21,

854. As the assessee's contention that the current year's depreciation should not be taken into account before determining the profit, but instead loss from non‑speculative business should be adjusted first was rejected by the Income‑tax Officer, the assessee appealed to the Appellant Assistant Commissioner, who upheld the order of the Income‑tax Officer.

3. The assessee then appealed to the Income‑tax Appellate Tribunal. The Tribunal took the view that the current year's depreciation had to be clearly distinguished from unabsorbed depreciation of the earlier years and that current year's depreciation was a clear charge before determining the profits of the business of the current year before any question of choice between unabsorbed depreciation and unabsorbed losses of earlier years could be considered. The Tribunal found that section 24(2) of the Income‑tax Act, 1922, ensures priority to earlier year's losses only against unabsorbed deprecia tion allowance brought forward from earlier years. Arising out of the Order of the Tribunal, the following two questions of law are referred under sec tion 66(1) of the Income‑tax Act, 1922 :‑ "(1) Whether, on the facts and in the circumstances of the case, non- speculative business profits of Rs. 10,342 should be set off against brought forward business losses of the earlier years before making any adjustment for depreciation for the year in question?. 2) Whether, on the facts and in the circumstances of the case, the losses in non‑speculative business brought forward from earlier years could be set off against speculation profit earned for the assessment year 1959‑60, before considering the set off of the current year's loss to non‑ speculative business against speculation profits?" The learned counsel for the assessee did not press question No.

2. The argument that the current year's depreciation should be allowed to be carried forward and the loss from non‑speculation business should be given priority to be adjusted against the profits of the assessment year 1959‑60 has again been advanced before us. It is obvious that this argument is founded on the view taken by the Allahabad High Court in Mother India Refrigeration Industries (P) Ltd. v. Commissioner of Income‑tax U. P. (1971) 80 I T R 510). In that decision, the Allahabad High Court has taken the view that if, under proviso (b) to section 24(2) of the Income‑tax Act, 1922, business losses have to be given priority over unabsorbed depreciation allowance, and under proviso (b) to section 10(2) (vi), depreciation allowance which is carried forward merges into depreciation allowance for the succeeding year and after such merger, the unabsorbed depreciation allowance is to be deemed to be depreciation allowance for the current year, "there is no good reason why business losses which have been brought forward should not receive priority over current depreciation allow ance". If the decision of the Allahabad High Court is to be accepted as laying down the correct law, then obviously the contention on behalf of the assessee will have to be accepted. Mr. R. J. Joshi, Advocate, appearing on behalf of the Revenue has, however, referred us two decisions‑one of the Gujarat High Court and another of the Andhra Pradesh High Court‑wherein the view taken by the Allahabad High Court has been expressly dissented from, and it is pointed out that the current year's profit against which the business losses have to be set off cannot be ade4uately determined unless depreciation for the current year is taken into account on the basic principles of accounting. Commissioner of Income‑tax Gujarat v. Gujarat State Warehousing Corporation (1976) 104 I T R 1 (Guj.) is no doubt a decision which arose under the Income‑tax Act, 1961, but the same principles which govern the construction of sections 72(2) and 32(2) will apply to the case under the old Act where the relevant provisions were of section 24(2) proviso (b) and section 10 (2)(vi) proviso (b). Since the Gujarat High Court has elaborately discussed the matter and since we are in agreement with the view taken by the Gujarat High Court, it will suffice for us to refer to the view which the Gujarat High Court has taken. The Division Bench of the Gujarat High Court has pointed out that under section 72 (2) priority to carry forward losses is to tie given only where an allowance or part thereof is to be carried forward and that current year's depreciation is not a carried forward depreciation and when a question arises as to whether carried forward losses should be given priority in adjustment over current year's depreciation section 7(2) has do application. It was also pointed out that the definition of "income" given in section 2(24) shows that "income" includes profits and gains and the expression "profits and gains" means net profits and gains and further net profits and gains could not be ascertained without debiting the current year's depreciation to the profit and loss account. The Gujarat High Court referred to. Spicer & Pegler's Book on Practical Auditing and William Pickles' book on Accountancy, and pointed out that basic principles of accountancy show that before carried forward losses are adjusted against the profits and gains of business for the purposes of the particular assessment year, the current depreciation for that year must be deducted in order to arrive at the correct figure of net profits or gains. The Gujarat High Court found that these principles have been given judicial recognition by the Supreme Court in Commissioner of I. T., Jaipuria v. China Clay Mines (P) Ltd. (59 I T R 555: A I R 1966 S C 1187). In that case the Supreme Court has pointed out that the various allowances mentioned in section 10(2) of the Income‑tax Act, 1922, have to be deducted from the gross profits and gains of a business and observed that, according to the commercial principles, depreciation would be shown in the accounts and the profit and loss account would reflect the depriciation accounted for in the accounts. Thus, the decision in Jaipuria China Clay Mines (P) Ltd. (supra) showed that the taxable profits anal gains from a particular business could not be ascertained without deducting the current year's depreciation from the profits and gains. The Gujarat High Court, thus, expressly dissented from the view of the Allahabad High Court, because on basic principles of accountancy net profits which are chargeable to tax could not be assertained without deduct ing the current year's depreciation, and the carried forward losses could not, therefore, be given priority over the current year's depreciation.

4. A similar question fell for consideration before the Andhra Pradesh High Court in Additional Commissioner of Income‑tax A. P. v. Andhra Printers Ltd. (117 I T R 555 : 1977 Tax. L R 575). That was a case in which the assessee, which carried on the business of printing and publishing a daily newspaper and a weekly journal, claimed depreciation for the relevant assessment year 1970‑71 in a sum of Rs. 1,87,303 whereas its income before deduction of depreciation was only Rs. 70,

555. The assessee had claimed that the carried forward business loss should be set off against the income of the current year before deducting the depreciation of the relevant assessment year. The Andhra High Court took the view that section 32(2), which corresponded to section 10(2)(b) of the 1922 Act, which provides for set off of unabsorbed depreciation against current year's income and allows the carried forward business loss determined under section 72(1), which corresponds to section 24(1) of the 1922 Act, to take priority for the purposes of set off against the revenue income of the relevant assessment year, does not apply to the case of assessment of current year's income governed by section 32(1), which provides for deduction of depreciation relating to plant buildings and machinery, etc., in respect of the assessment year itself and which was not subject to section 72tZ). It was pointed out by the Andhra Pradesh High Court that in the first instance, the income of the current year must be ascertained, for the determination of which depreciation of the relevant accounting year must be determined and the same should be deducted from the revenue income of the relevant accounting year in accordance with sections 30 to 43‑A of the Income‑tax Act, and it is only thereafter that the question of set off of the business loss carried forward by the assessee against the revenue income arises. Thus, according to the Andhra Pradesh High Court, the business losses carried forward from the previous years cannot receive priority over the current depreciation allowance.

5. We are in respectful agreement with the view taken by the Gujarat High Court and the Andhra Pradesh High Court which is based on basic principles of accounting. The decision of the Allahabad High Court dues not discloses any reasoning on which the learned Judge came to the conclusion that they did. In this view of the matter, question No. 1 has to be answered) in the negative and against the assessee.

6. Accordingly, question No. 1 is answered in the negative and against the assessee. Question No. 2 is not answered as not pressed. The, assessee to pay the costs of this reference. M. B. A. Answered accordingly.