Seshasayee Paper and Board Ltd. v. Deputy Commissioner of Income-tax
[Citation -2015-LL-0515]

Citation 2015-LL-0515
Appellant Name Seshasayee Paper and Board Ltd.
Respondent Name Deputy Commissioner of Income-tax
Court SUPREME COURT
Relevant Act Income-tax
Date of Order 15/05/2015
Judgment View Judgment
Keyword Tags unabsorbed investment allowance • unabsorbed development rebate • carried forward depreciation • loss in speculation business • set off of business loss • unabsorbed depreciation • depreciation allowance • business or profession • accountancy principle • computation of income • development allowance • carried forward loss • income from business • written down value • deeming provision • unregistered firm • prescribed rate • returned income • business asset • time-limit • plant
Bot Summary: 1812-1813 of 2005, are taken note of as the following substantial question of law, which arises for consideration, is common in these appeals: Whether, on the facts and in the circumstances of the case, the Income- tax Appellate Tribunal is right in holding that the unabsorbed depreciation should be allowed before the allowance of the unabsorbed investment allowance in computing income of the appellantassessee for the assessment year 1991-92, when the assessee had not claimed the unabsorbed depreciation in its income- tax return though it had claimed depreciation for the current year The aforesaid question has arisen for consideration in the following set of facts: The appellant-assessee is a public limited company engaged in the business of manufacturing paper. The unabsorbed depreciation of the past years, thus, by legal fiction, becomes the depreciation of the year in question and can be set off against income chargeable under any head. There is, thus, actual depreciation which is to be calculated in that particular assessment year. As noted above, by legal fiction unabsorbed depreciation becomes depreciation of the year in question and gets added to the depreciation of the current year. Once the entire depreciation, namely, unabsorbed depreciation allowance of the previous year gets merged into the depreciation of the current year, it would become an integral part thereof. Dealing with the provisions of the 1922 Act first, it will be clear that proviso to section 10(2)(vi) is in two parts and provides for two things; its first part provides for a carry forward of unabsorbed depreciation and its second part provides for clubbing the said carried forward depreciation with the current year's depreciation and deeming the aggregate to be the current year's depreciation. Once the unabsorbed carried forward depreciation has become a part of the depreciation of the current year, it is not open to the assessee to bifurcate the two again and exercising its choice to claim the depreciation of the current year under section 32(1) of the Act and take a position that since unabsorbed depreciation of the previous years is not claimed, it cannot be thrusted upon the assessee. Once the depreciation is claimed and while giving deductions the depreciation is to be set off against the profits of the current year prior to the unabsorbed carried forward investment allowance, it is the entire depreciation, namely, the depreciation of the current year as well as the unabsorbed carried forward depreciation, which is to be taken into account as by virtue of the fiction created under section 32(2) of the Act, carried forward depreciation also partakes of the character of depreciation of the current year.


JUDGMENT judgment of court was delivered by A. K. Sikri J.-Leave granted in Special Leave Petition (Civil) No. 15251 of 2008. Facts, as they appear in Civil Appeal Nos. 1812-1813 of 2005, are taken note of as following substantial question of law, which arises for consideration, is common in these appeals: "Whether, on facts and in circumstances of case, Income- tax Appellate Tribunal is right in holding that unabsorbed depreciation should be allowed before allowance of unabsorbed investment allowance in computing income of appellantassessee for assessment year 1991-92, when assessee had not claimed unabsorbed depreciation in its income- tax return though it had claimed depreciation for current year?" aforesaid question has arisen for consideration in following set of facts: appellant-assessee is public limited company engaged in business of manufacturing paper. It had filed its return under section 139 of Income-tax Act, 1961 (for short, "the Act") for assessment year 1991-92 declaring its income as "nil". In fact, income for that year after showing exemptions, deductions and additions, which are to be made in terms of section 28 onwards relating to computation of business income, was arrived at Rs. 2,87,15,912. assessee had unabsorbed investment allowance of previous years. It also had unabsorbed depreciation of earlier years. In its income-tax return, however, it chose to carry forward investment allowance and claimed set off of said unabsorbed investment allowance to extent of Rs. 2,87,15,912, thereby showing returned income as "nil". According to Assessing Officer, it was not investment allowance but unabsorbed depreciation of earlier years which had to be set off first by giving priority to unabsorbed depreciation. Therefore, instead of allowing assessee to carry forward investment allowance, Assessing Officer adjusted unabsorbed depreciation of earlier years, namely 1983-84, 1985-86, 1986-87 and 1987-88 (part), and accepted "nil" income return as filed by assessee but on aforesaid basis. assessee, however, was not satisfied with aforesaid treatment of setting off of unabsorbed depreciation instead of investment allowance. It filed appeal before Commissioner (Appeals). This appeal was, however, dismissed following judgment of Madras High Court in CIT v. Coromandel Steels Ltd.. assessee approached Tribunal. Tribunal also confirmed order of Commissioner (Appeals). assessee, still not satisfied, approached Madras High Court. Even High Court, vide impugned judgment dated September 15, 2004, has affirmed view taken by authorities below and dismissed appeal of assessee. As grievance still persists, present appeal questions treatment given to income-tax return in manner mentioned [1981] 130 ITR 856 (Mad). Seshasayee Paper and Boards Ltd. v. Deputy CIT [2005] 272 ITR 165 (Mad). above, which has come up for consideration after special leave to appeal was granted. It is in this backdrop question of law, which is to be answered and formulated above, relates to issue as to whether it is unabsorbed investment allowance which is to be allowed as set off in computing income of assessee for assessment year in question or unabsorbed depreciation. As pointed out above, in income-tax return assessee had claimed set off of unabsorbed investment allowance. However, this request is declined as, according to High Court, provisions of section 32 of Act mandate that precedence has to be given to unabsorbed depreciation before allowing unabsorbed investment allowance. plea of assessee before High Court was that in absence of any claim by assessee towards depreciation allowance, assessing authority could not erroneously assume that such claim would be untenable under provisions of Act and could not thrust deduction of carrying forward depreciation allowance, when assessee had chosen to have set off of unabsorbed investment allowance and it is assessee whose option should prevail. It was also argued that even if provision of law was not very clear and was susceptible to two interpretations, one which was more beneficial to assessee had to be given effect to. High Court took note of these contentions of assessee predicated on judgment of Punjab and Haryana High Court in Ram Nath Jindal v. CIT, in which said High Court held that Assessing Officer could not grant depreciation allowance when it was not claimed by assessee as there is no provision by which depreciation could be fictionally deemed to have been claimed and granted. It would be pertinent to point out that this judgment of High Court was in light of section 32 of Act which stood at material time and this very provision existed even in respect of assessment years 1991-92 and 1992-93 with which we are concerned. Therefore, High Court took cognizance of said judgment. High Court also noted another judgment of its own court in Guindy Machine Tools P. Ltd. v. CIT, which had followed judgment of this court in CIT v. Mahendra Mills wherein it was held that provision in respect of depreciation was for benefit of assessee and if assessee does not wish to avail of said benefit for some reason, it could not be forced upon him. Notwithstanding aforesaid [2001] 252 ITR 590 (P&H). [2002] 254 ITR 780 (Mad). [2000] 243 ITR 56 (SC). judgments, High Court observed that real issue was not whether assessee could be compelled to claim depreciation but if he fails to claim, what would be order of priority between unabsorbed depreciation allowance and unabsorbed investment allowance. On this purported "real" issue, High Court mentioned that since unabsorbed depreciation allowance gets precedence over unabsorbed investment allowance under provisions of Act which has been held by various High Courts (and those judgments of High Courts are taken note of), it is unabsorbed depreciation allowance which would be set off first. Arguments before us remain same which were advanced by assessee as well as Revenue in High Court. In order to appreciate these arguments and to answer controversy which has arisen, it is apposite to take note of provisions of section 32 of Act, as existed at relevant time. portion with which we are concerned reads as under: "32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by assessee and used for purposes of business or profession, following deductions shall, subject to provisions of section 34, be allowed-... (2) Where, in assessment of assessee (or, if assessee is registered firm or unregistered firm assessed as registered firm, in assessment of its partners) full effect cannot be given to any allowance under clause (ii) of sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to profits or gains chargeable being less than allowance, then, subject to provisions of sub- section (2) of section 72 and sub-section (3) of section 73, allowance or part of allowance to which effect has not been given, as case may be, shall be added to amount of allowance for depreciation for 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 allowance for that previous year, and so on for succeeding previous years." This section deals with depreciation in respect of certain assets which are mentioned in sub-section (1) of section 32 and owned wholly or partly by assessee and used for purpose of business or profession. nature of deductions that is to be allowed is also mentioned in sub-section (1). We are not directly concerned with this provision inasmuch as it is not in dispute that assessee herein was entitled to depreciation on its assets and amount of depreciation is also not in dispute. As mentioned above, in fact, depreciation of earlier orders could not be utilised by assessee in those years. Since provisions of Act permit assessee to accumulate unabsorbed depreciation of previous years with right to assessee to choose same in subsequent years, assessee herein had unabsorbed depreciation of previous years. This is so stipulated in subsection (2) of section 32, which has already been noted earlier. As per aforesaid provision, depreciation allowance or part thereof to which effect has not been given in particular assessment year owing to there being no profits or gains chargeable for that previous years or owing to profits and gains chargeable being less than allowance, such unabsorbed depreciation allowance is to be added to amount of allowance for depreciation for following previous year and it is "deemed to be part of that allowance for that previous year or succeeding previous years, as case may be". This is, however, subject to provisions of sub-section (2) of section 72 and sub-section (3) of section 73 of Act. What follows from above is that in case of loss in business income or insufficient profits to absorb depreciation allowance permitted by this section because of which reason depreciation allowance or some part thereof remains unabsorbed, it may be carried forward under this subsection to following year and set off against that year's profit, and so on for succeeding years. There is amendment in aforesaid provision with effect from April 1, 1996, which shall be taken note of subsequently at appropriate stage. However, as per provision which existed during relevant period and extracted above, carried forward depreciation allowance is deemed to be part of, and stands on exactly same footing as current depreciation for assessment year. unabsorbed depreciation of past years, thus, by legal fiction, becomes depreciation of year in question and can be set off against income chargeable under any head. There is, thus, actual depreciation which is to be calculated in that particular assessment year. To this, unabsorbed depreciation is to be added by application of aforesaid deeming provision and this entire depreciation, namely, that of current year as well as unabsorbed depreciation of previous years, can be allowed as depreciation in that particular assessment year or succeeding assessment years. This is subject to provisions of sections 72(2) and 73(3) of Act. Section 72 deals with carried forward and set off of business loss under head "Business or profession". This carried forward loss can be set off only against profits of any business or profession and is carried forward only for period of eight years. On other hand, in so far as carry forward of depreciation allowance to any subsequent year is concerned, same is without any time limit. Sub- section (2) of section 72 stipulates that where any allowance or part thereof is under sub-section (2) of section 32 or sub-section (4) of section 35 and is to be carried forward, effect shall first be given to provisions of this section. Section 73, on other hand, deals with loss in speculation business and subsequently mentions that such loss of speculation business shall not be set off except against profits and gains, if any, of another speculation business. Thus, losses of speculation business can be set off only against profits and gains of another speculation business and not against profits earned from other kinds of businesses. Here subsection (3) of section 73, which finds mention in section 32(2), states that provisions of sub-section (2) of section 72 shall also apply in relation to speculation business. We are not concerned with aforesaid situation arising out of sub-section (2) of section 72 or sub-section (3) of section 73. However, same are mentioned for purpose of clarity as there is reference to these provisions in section 32(2). In so far as instant case is concerned, it depends upon meaning that is to be given to deeming provision, as explained above. Before we discuss this effect, let us take note of some of nuances regarding claim of depreciation allowance, which have been laid down by judicial pronouncements on interpretation of this provision. It has been consistent view of courts that unabsorbed depreciation allowance should be allowed before unabsorbed investment allowance. To put it differently, unabsorbed depreciation is to be given precedence and is allowed to be set off first. Some of High Courts had earlier taken view that this would be so even if assessee had not claimed unabsorbed depreciation. It is necessary consequence of scheme of various provisions of Act. Section 32A of Act, which deals with investment allowance, was inserted by Finance Act, 1976, with effect from April 1, 1976. According to Circular No. 202, dated July 5, 1976, issued by Central Board of Direct Taxes ([1976] 105 ITR (St.) 17), combined effect of provisions of sections 32, 32A, 33, 33A and 72 is that in case where there are allowances in nature of depreciation allowance, investment allowance, development rebate, development allowance and losses, such allowances and losses would be deductible in order given below, in cases where profits are insufficient to absorb all of them: to absorb all of them: (i) Current depreciation (section 32(1)) (ii) Carried forward losses of earlier years (section 72(1)) (iii) Unabsorbed depreciation of earlier years (section 32(2)) (iv) Unabsorbed development rebate of earlier years (section 33(2)(ii)) (v) Current development rebate (section 33(2)(i)) (vi) Unabsorbed development allowance of earlier years (section 3A(2)(ii)) (vii) Current development allowance (section 33A(2)(ii)) (viii) Unabsorbed investment allowance of earlier years (section 32A(3)(ii)) (ix) Current investment allowance (section 33A(3)(i)) It emerges from sub-section (3) of section 32A that unabsorbed investment allowance takes precedence over current investment allowance. However, this court in Mahendra Mills (supra) took view that since provision for depreciation is benefit which enures to assessee, if assessee does not wish to avail of that benefit for some reason, such benefit cannot be forced upon him. In that case, court held that language of provisions of sections 32 and 34 of Act is specific and admits of no ambiguity. Section 32 allows depreciation as deduction, subject to provisions of section 34. Section 34 provides that deduction under section 32 shall be allowed only if prescribed particulars have been furnished. It was specifically held that there is no mandatory duty on officer to allow depreciation if assessee does not want to claim that. provision for claim of depreciation is certainly for benefit of assessee. If he does not wish to avail of that benefit for some reason, benefit cannot be forced upon him. It is for assessee to see if claim of depreciation is to his advantage. Income under head "Profits and gains of business or profession" is chargeable to income-tax under section 28 and income under section 29 is to be computed in accordance with provisions contained in sections 30 to 43A. argument that since section 32 provides for depreciation it has to be allowed in computing income of assessee cannot, in all circumstances, be accepted in view of bar contained in section 34. If section 34 is not satisfied and particulars are not furnished by assessee, his claim for depreciation under section 32 cannot be allowed. Section 29 is, thus, to be read with reference to other provisions of Act. It is not in itself complete code. This principle, thus, is grounded in reasoning that there is no provision by which depreciation could be fictionally deemed to have been claimed and granted and it is to be specifically claimed by assessee. Further, when claiming of depreciation is privilege given to assessee, it cannot be turned into disadvantage even when assessee does not claim depreciation. Therefore, option in this behalf rests with assessee. In impugned judgment as well, High Court accepts aforesaid legal position as this is so decided by this court in Mahendra Mills' case (supra) and is binding precedent. However, aforesaid judgment is not followed on ground that real issue is something else. Such issue, though already noted above, is stated in paragraph 10.1 of impugned judgment, which reads as under: "10.1 But, in case on hand, it is not issue whether assessee could be compelled to claim depreciation allowance, but, if he fails to claim, what would be order of priority between unabsorbed depreciation allowance and unabsorbed investment allowance." Strangely, issue is somewhat different, namely, when depreciation allowance is not claimed, can it be said that assessee has failed to claim and in that case what would be position? According to us, there is no question of failing to claim. Situation in such event would be that depreciation is not claimed at all and, therefore, position mentioned in Mahendra Mills' case (supra) would follow. To this extent we find that it was wrong question posed by High Court, which led to wrong answer. However, matter does not rest there. In present case, assessee in fact claimed depreciation allowance in so far as it pertained to current year. At same time, it did not want to claim set off of unabsorbed depreciation allowance of previous years. In such situation, question is as to whether it is open to assessee to invoke provisions of section 32 of Act by claiming depreciation of current year but at same time choose not to make claim of set off of unabsorbed depreciation allowance of previous years. As noted above, by legal fiction unabsorbed depreciation becomes depreciation of year in question and gets added to depreciation of current year. If that be so, is it right of assessee to partly invoke provisions of section 32 when it comes to depreciation of current year and still claim that it has right not to claim unabsorbed depreciation allowance? On plain reading of section 32, it does not appear to be position. Once entire depreciation, namely, unabsorbed depreciation allowance of previous year gets merged into depreciation of current year, it would become integral part thereof. Legal fiction makes it one whole thereby making it possible to assessee to claim set off of unabsorbed carried forward depreciation as well. fortiori, bifurcation thereof with option to claim depreciation of current year only and contending at same time that Page 172 of 272 ITR. portion of unabsorbed carried forward depreciation is not to be thrusted upon him as it is not claimed, would not be permissible. Notwithstanding above, endeavour of learned counsel for assessee is to show that assessee has such right. In this direction it is argued that though by legal fiction unabsorbed depreciation allowance is carried forward to assessment year in question and becomes part of depreciation allowance of that year, it retains its identity inasmuch as it is brought forward only because of deeming provision which is to be applied to that limited extent and no further. In order to support this hypothesis, learned counsel referred to judgment in CIT v. Mother India Refrigeration Industries P. Ltd. where nature of carried forward depreciation allowance on application of deeming provision is explained by court. She specifically referred to following discussion in this behalf: "Having regard to aforesaid rival contentions, it will be clear that real issue that arises for our consideration in this case is whether, on proper construction of relevant provisions of concerned enactment, unabsorbed carried forward losses should have preference over current depreciation in matter of set off or is position vice versa while computing total income of assessee in concerned assessment year? and answer to this question depends on what is true scope and purpose of legal fiction created under proviso (b) to section 10(2)(vi) of 1922 Act or under section 32(2) of 1961 Act. At outset, it may be stated that close scrutiny of relevant provisions of 1922 Act as also 1961 Act clearly shows that computation of income under 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 1922 Act and after allowing certain deductions in accordance with provisions contained in sections 30 to 43A of 1961 Act; in other words, it is net profits and gains after specified deductions are made that are subjected to tax; one of such deductions pertains to depreciation allowance at prescribed rate of percentage of written down value of business asset; and this is provided in section 10(2)(vi) of 1922 Act and in section 32(1) of 1961 Act. Up to this stage of computation, no question of either carry forward of unabsorbed depreciation of earlier years or carry forward of unabsorbed business losses of earlier years arises. In other words, normal accountancy principle has to be applied in arriving at net [1985] 155 ITR 711, 717 (SC). income from business for that year by debiting current year's depreciation. 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 1922 Act or by section 32(2) read with section 72(2) of 1961 Act, and it is here that aspect of proper construction of these provisions arises. Dealing with provisions of 1922 Act first, it will be clear that proviso (b) to section 10(2)(vi) is in two parts and provides for two things; its first part provides for carry forward of unabsorbed depreciation and its second part provides for clubbing said carried forward depreciation with current year's depreciation and deeming aggregate to be current year's depreciation. However, carrying forward of unabsorbed depreciation and deeming provision in proviso (b) are not absolute but are subject to proviso (b) to section 24(2). Had proviso (b) to section 24(2) not been enacted by Legislature, result would have been that aggregate depreciation would have been deducted first out of profits and gains in preference to unabsorbed business losses which might have been carried preference to unabsorbed business losses which might have been carried forward under section 24(2) but as such losses can be carried forward only for limited number of years, assessee would in certain circumstances have in his books losses which he might not be able to set off even within time-limit during which set off is permitted. In order to prevent such situation, Legislature enacted proviso (b) to section 24(2) and proviso (b) to section 24(2) expressly stated'where depreciation allowance is, under clause (b) of proviso to clause (vi) of sub-section (2) of section 10, also to be carried forward, effect shall first be given to provisions of this sub-section'. In other words, it clearly provides that in matter of set off, unabsorbed business losses of earlier years will have preference over unabsorbed depreciation that is required to be carried forward under proviso (b) to section 10(2)(vi) and no preference over current depreciation is intended. It is true that proviso (b) to section 10(2)(vi) creates legal fiction and under that fiction, unabsorbed depreciation either with or without current year's depreciation is deemed to be current year's depreciation but it is well settled, as has been observed by this court in Bengal Immunity Co. Ltd. v. State of Bihar [1955] 2 SCR 603, 606; [1955] 6 STC 446 (SC), that legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field. Clearly, avowed purpose of legal fiction created by deeming provision contained in proviso (b) to section 10(2)(vi) is to make unabsorbed carried forward depreciation partake of same character as current depreciation in 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." It is clear from above that though question there was different, namely, precedence of carried forward business loss over carried forward unabsorbed depreciation or vice versa, what is important is interpretation that is given to section 32(2) of Act and particularly deeming provision thereof which creates legal fiction. court clarified that avowed purpose of legal fiction created by deeming provision contained in section 32(2) of Act is to make unabsorbed carried forward depreciation partake of same character as current depreciation in 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. On that basis, court answered that since unabsorbed carried forward depreciation had become part of current depreciation, entire depreciation had to be given preference (current as well as unabsorbed carried forward depreciation) over unabsorbed carried forward losses. We do not understand as to how aforesaid judgment helps assessee. On contrary, it goes against assessee while answering question which has arisen in instant appeals. Once unabsorbed carried forward depreciation has become part of depreciation of current year, it is not open to assessee to bifurcate two again and exercising its choice to claim depreciation of current year under section 32(1) of Act and take position that since unabsorbed depreciation of previous years is not claimed, it cannot be thrusted upon assessee. position would have been different if assessee had not claimed any depreciation at all. However, once depreciation is claimed and while giving deductions depreciation is to be set off against profits of current year prior to unabsorbed carried forward investment allowance, it is entire depreciation, namely, depreciation of current year as well as unabsorbed carried forward depreciation, which is to be taken into account as by virtue of fiction created under section 32(2) of Act, carried forward depreciation also partakes of character of depreciation of current year. This scrambled egg cannot be unscrambled now. Otherwise, it would amount to negating legal fiction that is created by said provision, even to limited extent. In fact, case falls within ambit of said limited extent of legal fiction and gets covered by it. Once we read provision in aforesaid manner, aid of other interpretative tools which is sought to be taken by learned counsel for assessee, namely, provision is to be given liberal construction; scheme of Act envisages giving preference in matter of deduction from income to those expiring by efflux of time, etc., would become irrelevant and pales into insignificance. upshot of aforesaid discussion is to decide question formulated against assessee and in favour of Revenue though for our reasons contained in this judgment. appeals are, accordingly, dismissed with costs. *** Seshasayee Paper and Board Ltd. v. Deputy Commissioner of Income-tax
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