COMMISSIONER OF INCOME TAX, MEERUT, ETC. ETCversusM/S. VIRMANI INDUSTRIES PVT. LTD. ETC. ETC.

     COMMISSIONER OF INCOME TAX, MEERUT, ETC. ETC.                               A
                                       l'.

           M/S. VIRMANI INDUSTRIES PVT. LTD. ETC. ETC.

                            OCTOBER 12, 1995

           [B.P . .JEEVAN REDDY AND S.B. MAJMUDAR, JJ.)                          B

      Income Tax Act 1961-Section 32(2)-Claim of unabsorbed deprecia-
tion-May be set off against any incom<-ln any following year and if income
of that year was not sufficient, can be ca11ied fo1ward to tlte next following
yean till wiped out-Not necess01y to continue same or any business in fol-       C·
lowing year-Can claim against new business also sta1ted immediately or after
a la11se of tinie-Not necessa1y to use the sante or pa1t of the nzachine1y
against which set off claimed in lite following year(s).

      Expression 'profits and gains chargeable to tax'-S 32(2)-Meaning of
Refe1> to income under all heads.                                         D
      'Cany fo1ward of business' and 'unabsorbed depreciation '--Distinction
between.

       Appellant assessee who used to manufacture soap and oil in the
previous year, reievant to assessment year 1956-57, discontinued the same        E
and hired out the factory. Later, after a lapse of nearly 10 years, he started
manufacturing steel pipes using some of the old machinery, in the previous
year, relevant to assessment year 1965-66 and in the assessment proceed-
ings for that year, he claimed unabsorbed depreciation under S.32 (2) of
 l.T. Act against the said machinery. The J.T.O. and Appellate Assistant         F
Commissioner rejected the claim holding that the set off can be allowed
only when the business in the subsequent year was the same as in the
previous year. The Appellate Tribunal disagreed with them. On a Refer-
ence, the Allahabad High Court, relying on this Court's decision in Jaipwia
China Clay Mines (P) Ltd., (1966) 56 I.T.R. 555 and dissenting from
l!ombay High Court's decision in Sahu Rubbers Pvt. Ltd., (1963) 48 l.T.R.        G
464, came to the conclusion that 'profits and gains chargeable to tax' in S.
32 (2), I.T. Act, includes profits and gains not only from business but also
under other heads of income and if depreciation claim cannot be fully
covered in the Assessment year, the unabsorbed portion can be set off in
the next year and following years till it is wiped out. The Court distin-        H
                                      275
    276                    SUPREME COURT REPORTS (1995] SUPP. 4 S.C.R.

A   guished between 'carry forward business loss' and 'unabsorbed
    depreciation' and felt that it was not necessary to carry on the same
    business or use the same machinery in the following Assessment year or
    have depreciable assets but at the same time held that it was necessary to
    carry on some business to claim set off though there was no time bar for
    such a claim.
B
          In the other connected appeal, the Bombay High Court, on a refer-
    ence, followed the decision of the Allahabad High Court in C.J. T. v.
    Vinnani Industiies (P) Ltd., (1974) 97 I.T.R. 461 while distinguishing its
    own earlier decision in Salm Rubbe11 Pvt. Ltd., (supra), inter alia on the
C   ground that though S. 32 (2) of I.T. Act 1961 corresponds to the proviso
    to S. 10 (2)(vi) 01· I.T. Act 1922, this is an independent and substantive
    section and not a mere proviso.

          In Appeal to this Court, it was contented on behalf of the Revenue,
    that there was divergence of views between the various High Courts on the
D   interpretation of S. 32 (2) of I.T. Act, 1961. It was also submitted that the
    expression 'the following previous year' literally means what it says and
    cannot be any 'following previous year' and if the chain of setting of snaps,
    it cannot be restarted.

E          Allowing the Appeals, this Court

           HELD : 1. 'Profits and gains chargeable' in S.32(2) of I.T. Act 1961,
     refers to income under all heads of income specified in S.14 as has been
     repeatedly held by this Court.

F        . C.l. T v. Jaipwia China Clay Mines (P) Ltd., (1966) 59 I.T.R. 555 and
     Rajapalayam Mills Ltd. v. C.I. T., Madras, (1978) 115 J.T.R. 777, relied on.

           Karam Illa/ti Md. Shafi v. C.I. T, (1929) 3 J.T.C. 456; A. Suppa11
     Chettiar & Co. v. C.l.T., (1929) 4 l.T.C. 211; Laxmiclzand Jaipwia Spg. &
G    ltvg. Mills; In Re;'(1950) 18 I.T.R. 919;Ambika Silk Mills Co. Ltd. v. C.I.T.,
     (1952) 22 I.T.R. 58; Balle1pur Col/ieiies v. C./. T, (1929) 4 J.T.C. 255; C.l. T
     v. Ravi lndusuies Ltd., (1963) 49 I.T.R. 145; C.l. T. v. Girdhaii/a/ Haiival-
     /abhdas Mills Co. Ltd., (1964) 51 J.T.R. 693 and C./. T v. B. Nagi Reddy,
     (1964) 51 l.T.R. 178, referred to.

H          2. Jn the absence of any words to that effect, it must be held that for
                    C.l.T. v. VIRMANI INDS. PVf. LTD.                   277

availing the benefit of S.32(2) of l.T. Act 1961, it is not necessary that the A
 business carried on in 'the following previous year' should be the same
business as was carried on in the preceding previous year. A look at
 Section 72 shows that where Parliament intended to provide such a limita-
tion, it did so expressly. East Asiatic Company Pvt. Ltd. v. C.I. T. (1986) 16
,1.T.R. 135 dissented from. [287-D]
                                                                               B
      3. It is not necessary that the assets which earned depreciation in
the preceding year should exist and should continue to he used for the
purpose of business in the following year. In the absence of any words in
sub-section (2) of S.32 of l.T. Act 1961, to that effect, this requirement
cannot be read into the sub-section. This is evident from the words 'or if     C
there is no such allowance for that previous year, be deemed to be the
allowance for the previous year' occurring in the sub-section. [287-G]

       4. 1\vo views are possible on the question whether it is necessary that
in the following year the assessee need to carry on business i.e., some or D
other business to avail of the benefit of the sub-section (2) of S.32 of I.T.
Act 1961; One is that since the sub-section speaks of unabsorbed deprecia-
tion being carried forward to the next year and 'added to the amount of
the allowance for depreciation for the following previous year and deemed
to be part of that allowance', contemplates existence of business in the
following year. The other view is that in as much as the sub-section (2) of E
S.32 of l.T. Act 1961, not only speaks of adding the unabsorbed deprecia-
tion allowance allowed in the following year but also says that in the
absence of such allowance, the carried forward depreciation allowance
shall be the allowance for that year, it means that in the following year the
assessee need not carry on any business or profession for availing the F
benefit of sub-section (2) of S 32 of l.T. Act 1961. The Court is inclined to
follow the second view that the unabsorbed depreciation allowance has not
only to be set off against other heads of income in the relevant previous
year but where it is carried forward it 'stands on exactly the same footing
as the current depreciation'. [288-A-D]
                                                                               G
     C.I. T. v. Jaipuria China Clay Mines (P) Ltd., (1966) 59 l.T.R. 555 and
Rajapalayam Mills v. CJ. T., M~dras, (1978) 115 l.T.R. 777 relied on.

      Indian Income Tax Act, Vol. II, by A.C. Sampath Iyengar 9th Edn,
1952, referred to.                                                     H
    278                       SUPREME COURT REPORT$ i1995) SUPP. 4 S.C.R.

A          5. In the light of interpretation of sub-section (2) of S. 32 of I.T. 1961
    affirmed by this Court In this judgment, what should have been done is this;
    the unabsorbed depreciation allowance relating to the assessment year
    1956-57, should have been set off against the income (income from property)
    in the following year i.e., in the following previous year (relevant to Assess-
    ment year 1957-58) and ifthe income in that year was not sufficient to absorb
B   the entire depreciation allowance so carried forward, it had to be carried
    forward to the next following year and so on. Only if some depreciation
    allowance still remains to be absorbed, it could have been set off against the
    total income for the Assessment year 1965-66. [289-A-B]

               C.J. T. v. Estate and Finance Ltd., (1978) 111 I.T.R. 119; approved.
c
            C.l. T. v. Dutt's Trnst Calicut, (1942) 10 l.T.R. 477; Tube Suppliers Ltd.
     v. C./. T., (1985) 152 I.T.R. 694; Hindustan Chemical Works Ltd. v. C./. T.,
     (1980) 124 I.T.R. 561; CJ.T. v. Kishnlal and Sons (Udyog) Pvt. Ltd., (1985)
     154 I.T.R. 735; Hyderabad Construction Co. Ltd. v. C./. T., (1981) 129 I.T.R.
D    81 and Additional Commissioner of Income Tax v. Kapi/a Textiles (P) Ltd., ·
     (1981) 129 I.T.R. 458, referred to.

         '6. The two connected Appeals are remanded to the respective High
     Courts to be disposed of in accordance with law and this judgment. [290-F]

E         CIVIL APPELLATE JURISDICTION : Civil Appeal (NT) No.
     1052 of 1976 etc.

          From the Judgment and Order dated 25.4.73 of the Allahabad High
     Court in I.T.R. No 373 of 1971.

F              Dr. V. Gauri Shankar; S. Rajappa and S.N. Terdol for the Appel-
    . !ants.

               The Judgment of the Court was delivered by

G          B.P. JEEVAN REDDY, J. A common question arises in these three
     appeals. It relates to the meaning and interpretation of sub- section (2) of
     Section 32 of the Income-Tax Act. It would be enough if we state the facts
     in Civil Appeal No.1052 of 1976.

               The respondent-assessee, Virmani Industries Private Limited, was
H engaged in the manufacture of soap and oil during the previous year
      C.I.T. v. VIRMANI INDS. PVT. LTD. [B.P. JEEV AN REDDY, J.j          279

relevant to the Assessment year 1956-57. The business was stopped in that A
year whcreafler the factory was let out on hire. Ten years later, i.e., in the
previous year relevant to Assess111ent year 1965~66, the assessce started the
business of manufadure of steel pipes. For the purpose of this \lusiness a
part of the old machinery used in the manufacture of soap and oil was
utilised.
                                                                                 B
      ln the assessment proceedings relating to Assessment year 1956- 57,
depreciation under Section 32 (1) (ii) was found to be more than the profits
and gains of the assessee for that assessment year. In the assessment
proceedings relating to Assessment year 1965-66, the assessee claimed that
the unabsorbed depreciation, to the extent it pertained to the old               c
machinery utilised in the new business, should be brought forward and set
off against the profits of the new business. This claim was rejected by the
Income Tax Officer and by the Appellate Assistant Commissioner on the
ground that such a set off is permissible only where the business carried
on in the subsequent assessn1ent year is the same business which was
carried on in the earlier assessment year. The Income Tax Appellate              D
Tribunal, however, disagreed with the said view and upheld the assessee's
claim. Al the request of the Revenue, the Tribunal referred the following
question to the Allahabad High Court under Section 256 (J) of the Income
Tax Act, 1961 :
                                                                                 E
        "Whether on the facts and in the circumstances of the case the
        unabsorbed depreciation in respect of a part of the machinery used
        in the soap and oil manufacturing business which was again used
        for the new husincss of manufacture of steel pipes should be
        allowed to be set oil against the profits of the new business of
        manufacture of steel pipes carried on by the assessee in the             F
        accounting period relevant to the assessment year 1965-66 ?".

      The High Court answered the question in the affirmative, i.e., in
favour of the assessee. The High Court understood Section 32 (2) to mean:

      1. in computing the net income from the business, deduction is to be       G
allowed on account of depreciation of buildings, plants and machinery ,
etc. used in the business at the prescribed rate. If such depreciation
allowance cannot be completely absorbed by the "profits and gains charge-
able to tax" -which expression includes profits and gains arising not only
under the head "business" but also under other heads - then the unabsorbed       H
    280                   SUPREME COURT REPORTS [1995] SUPP. 4 S.C.R.

A   depreciation is treated to be the depreciation allowance for the next year
    and so on until it is completely wiped out.

           2. there is a distinction between business loss and unabsorbed
    depreciation. The limitations applicable to carrying forward of business
    loss do not apply to carrying forward of unabsorbed depreciation. In other
B   words, it is not necessary that the same business should be continued in
    the following assessment year nor is it necessary that the machinery which
    earned the depreciation in the previous year should also be used for the
    purpose of the business in the following year. All that is necessary is that
    the assessee must carry on some business in the succeeding year in which
c   the set off of the unabsorbed depreciation is claimed. If there is nu
    business, there can be no depreciation allowance but it does not follow that
    the business in the succeeding year should have some depreciable assets.
    Even if there are no depreciable assets, yet the unabsorbed depreciation
    of the previous year has to be carried forward and deemed to be the
D   depreciation allowance for the succeeding year. Similarly there is no limita-
    tion that the unabsorbed depreciation can be carried forward only for eight
    years.

          In view of the above understanding of section 32 {2), the High Court
    held that the assessee was entitled to set off the unabsorbed depreciation
E   allowance relating to the Assessment year 1956-57 against the income of
    the assessment year 1965-66. The High Court disagreed with the view taken
    by the Bombay High Court in Sahu Rubbers P1ivate Limited v. Commis-
    sioner of Income Tax, (1963) 48 I.T.R. 464. It was of the opinion that the
    view taken by it is supported by the decision.of this Court in Commissioner
F   of Income Tax v. Jaipwia China Clay Mines (P) Limited, (1966) 59 l.T.R.
    555.

          While it is not necessary to state the facts in Civil Appeal No. 2849
    of 1977, it is sufficient to state that in this decision the Bombay High Court
    followed the decision of the Allahabad High Court in Commissioner of
G   Income Tax v. Vinnani Industries (P) Ltd., (1974) 97 I.T.R. 461. It distin-
    guished its earlier decision in Sahu Rubbers Private Limited as one
    rendered with reference to the proviso to Section 10 {2) (vi) of the Indian
    Income Tax Act, 1922. The Court held that though the said proviso
    corresponds to section 32(2) of the present Act, even so the fact that it was
H   only a proviso, and not a substantive provision, did colour the decision in
       C.l.T. v. VIRMANIINDS. PVT. LTD. [B.P. JEEVAN REDDY, l.]           281

Sahu Rubbe1' Private Limited. The Court pointed out that under the               A
present Act Section 32 (2) is an independent and a substantive provision.

        It is brought to our notice by Dr. Gauri Shankar, learned counsel for
 the appellant-Revenue that there has been a divergence of opinion among
 the High Courts in the country as to the meaning and interpretation of
                                                                                 B·
 section 32(2). He referred to the decision of the Madras High Court in
 East Asiatic Conipany Private Lbnited v. Conunissioner of Inconie Tax,
 (1986) 1611.T.R. 135 taking the view that for claiming the benefit of Section
 32 (2), it has to be established that the assessee was carrying on the same
 business as in the previous year and that if the business is not in existence
in the following year, the unabsorbed depreciation of the previous year          C
 cannot be adju.sted in such following year. It accepted the decision of the
 Bombay High Court in Sahu Rubbers P1ivate Limited as laying down the
correct law and disagreed with the basis and reasoning on which the said
 decision was distinguished in the later decision of that Court in Commis-
sio11er of Income Tax v. Estate and Fi11ance Limited (1978)111 I.T.R. 119.       D
 Dr. Gauri Shankar brought to our notice that Madras High Court had
 indeed taken the said view even earlier in Co111n1issioner of Inco1ne Tax v.
Dutt's Tnist, Calicut, (1942)10 I.T.R. 477 and Tube Suppliers Ltd. v. Com-
missio11er of Income Tax, (1985) 152 I.T.R. 694. Counsel further pointed
out that in yet another decision of the Bombay High Court in Hindustan
Chemical Works Ltd. v. Commissio11er of Income Tax, (1980) 124 I.T.R. 561,       E
a similar view has been expressed. Dr. Gauri Shankar has fairly brought to
our notice that besides the Allahabad High Court in Vimiani and the
Bombay High Court in Estate and Finance Limited, the Calcutta High
Court in Commissioner of Income Tax v. Kishanla/ and Sons (Udyog) Pvt.
Ltd. (1985) 154 I.T.R. 735, Andhra Pradesh High Court in Hyderabad               F
Constniction Co. Ltd. v. Commissioner"!Jf Income Tax, (1981) 129 l.T.R. 81
and Karnataka High Court in Additional Commissioner of Income Tax v.
Kapila Textiles (P) Ltd., (1981) 129 I.T.R. 458 have taken a view similar to
the one taken by the Allahabad High Court in Vim1ani.

     The provision in Section 10(2) (vi) of the Indian Income Tax Act, G
1922 owes its origin to the U.K. Income Tax Act, which was prior to its
consolidation in 1952, administered through the provisions made in the
Annual Finance Acts. The Finance Act of 1918, read with some changes
made in 1925, dealt with this specific provision. This provision (which
appeared later as section 323 (2) of the U.K. Income Tax Act, 1952) was H
    282                   SUPREME COURT REPORTS [1995) SUPP. 4 S.C.R.

A   as follows:

             "Where full effect cannot be given to any such allowance as
             aforesl:lid in any year 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, the allowance or part of the al-
B            lo\vance to which effect h<:ts not been given, as the case may be,
             shall, for the purpose of making the assessment for the following
             year, be added to the amount of such allowances as aforesaid for
             that year, and be deemed to be part of those allowances, or, if
             there are no such allowances for that year, be deemed to be the
c            allowances for that year, and so on for succeeding years."

           This provision was adopted almost verbatim in the Indian Income
    Tax Act , 1922. As in the U.K. Act , the Indian Act also did not place any
    limit regarding the number of years upto which unabsorbed depreciation
    could be claimed for set off.
D
           In 1936, an Income Tax Inquiry Committee, headed by J.B. Vacha,
    looked into the provision and made recommendation that as the allowance
    for depreciation is on account of loss i'n the value of land and machinery,
    such loss should only be regarded as an expense of the year in which it
E   occurred and, therefore, depreciation should be allowed each year as
    expense in determining profit or loss of the year along with the other items
    of expenditure, as for instance, rent, insurance charges, etc. And the
    resultant loss, if any should be carried forward and dealt with in the general
    section on carry forward. The committee recommended that the special
    provision for carry forward of depreciation without limit of time should be
F   abolished. This recommendation along with some others, was incorporated
    in this Bill introduced in the Assembly, but the Select Committee did not
    approve of the recommendation and retained the original clause as it stood,
    thus placing tho carry forward of de'preciation on a different footing from
    carry forward of loss. [See Para 454 of the Indian Income Tax Act , Vol.
G   II by AC. Sampath Iyengar, !Vth Edn., 1952].

          The provision in the Income Tax Act,1922 remained unamended till
    1961. The provision as it stood in 1937 was as follows :

             "Where full effect cannot be given to any such allowance in any
H            year owing to there being no profits or gains chargeable for that
•


          C.I.T. v. VIRMANI INDS. PVT. LTD. [B.P.JEEVAN REDDY,J.]             283

            year, or owing to the profits or gains chargeable being less than A
            the allowance, the allowance or part of the allowance to which
            effect has not been given, as the case may he, 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."                              B

          The above pro'"sion was enacted in the 1961 Act as Section 32(2).
    The additional word "previous" after the word ''following" is the result of a
    drafting change suggested by the Xllth Report of the Law Commission,
    which gave the draft for a new enactment of the Income Tax Law. [This
    drnft Bill given by the Law Commission was the basis of the Income tax
                                                                                     c
    Act, 1961].

          Let us now turn to section 32(2) and also note certain other relevant.
    provisions. Section 32(1) of the Income-Tax Act provides for depreciation
    on buildings, machinery, plant, etc. owned by the assessec and used for the D
    purpose of the business or profession. The rates of depreciation vary.
    Sub-section (2) of Section 32, as it stood at the relevant time, read thus :

            "32(2) where, in the assessment of the assessee or, if the assessee
            is a registered firm (or an unregistered firm assessed as ~ registered
            firm, in the assessment of its partners) full effect cannot be given     E
            to any allowance under clause (i) or clause (ii) or clause (iv) or
            clause (v) of sub-section (1) 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 section73, the allowance or part of the allowance to       F
            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 am! <leeme<l tu 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           G
            previous years.n

                                                              (Emphasis added)

         Section 57 provides for deductions out of income from other sources
    chargeable under section 56. One of the deductions provided by Clause (ii)       H
    284                   SUPREME COURT REPORTS [1995) SUPP. 4 S.C.R.

A   of Section 57 is the depreciation provided by sub-section (1) as well as
    sub-section (2) of section 32.

          Inasmuch as section 32(2) refers to sub-section (2) of section 72 and
    sub-section (3) of section 73, it would be appropriate to reproduce the said
    provisions. Sub-section (2) of section 72 says :
B
                 "(2) 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."

    (One of the reasons for providing this preference in favour of business loss
c   may be the time-limit of eight years applicable thereto besides the other
    limitation that for availing of the said benefit, the business carried on in
    the subsequent year should be the same business as was carried on in the
    preceding year.)

D            Sub-section (3) of section 73 reads:

             "(3) In respect of allowance on account of depreciation or capital
             expenditure on scientific research, the provisions of sub-section (2)
             of section 72 shall apply in relation to speculation business as they
             apply in relation to any other business."
E
          We may first consider the meaning of the expression" profits or gains
    chargeable". On first impression, the said expression appears to refer only
    to profits or gains of business or profession chargeable under section 28.
    But this court has repeatedly held that the said expression is not so

F
    confined and that it refers to income under all the heads of income
    specified in section 14. In Jaipwia China Clay Mines (P) Limited, the facts
                                                                                        1
    were these: the total income of the respondent-assessee for the Assessment
    year 1952-53 before charging depreciation was Rs.14,041. After deducting
    depreciation of Rs.5,360, the lnconie Tax Officer computed the profit at
    Rs.8,681. Against this profit, he set off the losses of an earlier year. Having
G   done this, the Income Tax Officer computed the income of the assessee
    from dividends at Rs.2,01,130 and levied tax on it. The assessee claimed
    that the unabsorbed depreciation aggregating to Rs.76,857 should be
    deducted from the dividend and if it is so done, the total income would get
    reduced to Rs.1,32,955. The Income Tax Officer rejected the claim. When
    the matter was ultimately carried to this Court, it took note of the opening
H   words of sub- section, viz., 11where, in the assessment of the assessee of if
      C.IT. v. VIRMANI INDS. PVT. LTD. [B.P. JEEVAN REDDY, J.]               285

the assessee is a registered firm, in the assessment of its partners, full effect   A
cannot be given to any such allowance ....... " and held on that basis that the
expression 1'profits or gains chargeable'1 in the said sub-section is not·
confined to profits and gains from business or profession but takes within
its ambit all heads of income. This Court was of the opinion that while
amending Section 10(2)(vi) of the Indian Income Tax Act, 1922 by the
Amendment Act 25 of 1953, the Parliament has accepted the interpretation            B
placed upon the said expression by several High Comts to the above effect.
It referred to the decisions of Lahore High Court in Karam Ilahi Muham-
mad Shafi v. Commissioner of Income Tax, (1929) 3 l.T.C. Madras High
Court in A. Suppan Chettiar & Co. v. Commissioner of Income Tax, (1929)
4 I.T.C. 211 East Punjab High Court in Laxmichand Jaipuria Spg. & Wvg.
Mills, In re (1950) 18 l.T.R. 919 and Bombay High Court in Ambika Silk
                                                                                    c
Mills Co. Ltd. v. Commissioner of Income Tax, (1952) 22 l.T.R. 58 besides
the judgment of the Judicial Commissioner, Nagpur in Ballmpur Collieries
v. Commissioner of Income Tax, (1929) 4 J.T.C. 255 interpreting the said
expression as covering all heads of income. The Court further pointed out
that even after the said amendment the Bombay and Gujarat High Courts D
have taken the same view in Con11nissioner of Inconze Tax v. Ravi Industries
Ltd., (1963) 49 l.T.R. 145 and Commissioner of Income Tax v. Girdhralal
Halivallabhdas Mills Company Limited, (1964) 51 l.T.R. 693, respectively.
The contrary view taken by the Madras High Court in Commissioner of
Income Tax v. B. Nagi Reddy, (1964) 51 l.T.R. 178 was disapproved. The
court then observed :                                                        E

         "Bearing these two considerations in mind, if one looks at the
         language of proviso (b) to section 10(2)(vi), the first question that
         arises is: what is the meaning of the expression 11 in the assessment.
         Of the asses.sec or if tht' asses.sec is a registered firm, in the         F
         assessment of the partners, full effect cannot be given to any such
         allowance in any year '! 11 Taking the case of the partners of a
         registered firm, the assessment must be their individual assessment,
         i.e., assessments in which the profits from the tirm and other
         sources are pooled together. The legislature is clearly assuming G
         that effect can be given lo depreciation allowance in the assessment
         of a partner ; the only way effect can be given in the assessment
         of a partner is by selling it off against income, profits and gains
         under other heads. The learned counsel for the revenue tried lo
         meet this inference by suggesting that what the legislature con-
         templated was an assessment of those partners who were carrying H
    286                    SUPREME COURT REPORTS (1995] SUPP. 4 S.C.R.

A           on other business. But in our opinion this suggestion is unsound.
            What would happen if a partnership consists of four partners, two
            carrying on other business and two carrying on no other husiness,
            Mr. Sastri was unable tn explain. Now, if this is the inference to
            be drawn from these words, it is quite clear that the words " no
            profits or gains chargeable for that year" are not confined to profits
B           and' gains derived from the business \Vhose incon1e is being com-
            puted under section 10."

         To the same effect is the decision in Rajapalayam Mills Ltd. v.
    Commissio11er of Income Tax Madras, (1978) J15 I.T.R. 777. The Court
C   observed that when the profits or gains of a business for a particular
    assessment year are to be computed under Section 10 (of 1922 Act), the
    current depreciation allowance for the assessment year in question
    is deductible under clause (vi) of Section 10(2), but the depreciation
    allowance of the preceding years would be liable to be taken into account
    only if, and to the extent to which it is not absorbed by the total i11come
D   of the assessee computed under different heads and chargeable to tax for
    those assessment years. The Court observed :

            "Now, it is well settled, as a result of the decision of this court in
            C.l. T. v. Jaipuria Chi11a Clay Mines (P) LtJ., (1966) 59 !TR 555
            (SC), that the words 'no profits or gains chargeable for that year'
E
            are not confined to profits and gains derived from the business
            whose income is being computed under s.10, but they refer to the
            totality of the profits or gains computed under the various heads
            and chargeable to tax."

F            an<l added:

             It is, ther~fore, clear that effect must be given to depreciation
             11



            allowance first against lhe profits or gains of the perticular business
            whose income is being computed under S. 10 and if the profits of
            that business are not sufficient to absorb the depreciation
G           allowance, the allowance to the extent to which it is not absorbed
            would be set off against the profits of any other business and if a
            part of the depreciation allowance still remains unabsorbed, it
            would be liable to be set off against the profits or gains chargeable
            under any other head and it is only if some part of the depreciation
H           allowance still remains unabsorbed that it can be carried forward
             C.l.T. v. V!RMANI INDS. PVT. LTD. [B.P.JEEVAN REDDY.J.]            287

               to the next assessment year ....... But where any part of the A
               depreciation allowance remains unabsorbed after being set off
               against the total income chargeable to tax, it can be carried forward
               under prov. (b) to cl. (vi) to the following year and set off against
               the year's income and so on for succeeding years. The method
               adopted by the statute for achieving this result is that the carried B
               forward depreciation allowance is deemed to be part of and stands
               on exactly the same footing as the current depreciation for the
               assessment year and is thus allowable as a deduction under cl. (vi)."

            Both these decisions are rendered by a Bench of three learned
       Judges aod.are binding upon us.                                                 C

              The next question is whether for availing the benefit of Section 32(2),
       is it necess~ry that the business carried on in "the following previous year"
       should be the same business as was carried on in the preceding previous
       year as has been held by the Madras High Court i~ East Asiatic Company
       Private Limited.We are of the opinion that in the absence of aoy words to D
       th_at effect, no such requirement ought to be read into the said sub-section.
       A look at section 72 shows that where the Parliament intended to provide
       such a limitation, it did so expressly. Section 72 deals with carry-forward
       and set off of business loss. The proviso to clause (1) of sub-section(l) of
       section 72 expressly provides that such a course is permissible only where      E
       "the business or profession for which the loss was originally computed
       continued to be carried on by him in the previous year relevant for that
       assessment year". In the absence of any words to that effect, it must be held
       that for availing the benefit of section 32(2), it is not necessary that the
       business carried on in the following year is the same business as was carried
       on in the previous year.                                                        F

              The other question is whether the assets which earned the deprecia-
       tion in the preceding year should exist and should continue to be used for
       the purpose of business in the following year. In the absence of any words
       in the said sub-section to that effect, we cannot read this requirement also G
       into the said sub- section. This is evident from the words " or if there is no
       such allowance for that previous year, be deemed to be the allowance for
                        11
       the previous year occurring in the sub-section.

             Yet another question which has to be answered before we can answer
       the question concerned in this appeal is whether it is necessary that in the H



111.
    288                   SUPREME COURT REPORTS [1995] SUPP. 4 S.C.R.

A   following year the assessee must carry on business, i.e., some or other
    business, to avail of the benefit of the said sub-section ? Two vie\vs arc
    possible in this behalf, viz., (I) since the sub-section speaks of unabsorbed
    depreciation being carried forward lo the next year and ''added it the
    amount of the allowance for depreciation for the following previous year
    and deemed to be part of that allowance" the sub-section necessarily
B
    contemplates existence of a business in the following year and (2) inasmuch
    as the sub-section not only speaks of adding the unabsorbed depreciation
    to the depreciation allowance allowed in the following year but also says
    that in the absence of such allowance, the carried forward depreciation
    allowance shall be the allowance for that year it means that in the following
c year the assessee need not carry on any business or profession for availing
    the benefit of sub-section (2) of section 32. We are inclined to adopt the
    second of the above two views having regard to the decisions of this Court
    in Jaipwia China Clay Mines (P) Limited and Rajapalayam Mills Limited.
    We have extracted the relevant observations from both the judgments
    hcreinabove, which say that the unabsorbed depreciation allowance has- not
D
    only to be set off against other heads of income in the relevant previous
    year but where it is carried forward, it "stands on exactly the same footing
    as the current depreciaiion 11 •

          Now, coming back to the facts of this case, the assessee had carried
E on a business in the accounting year relevant to the Assessment year
    1956-57. Then there was a gap of about eight years whereafter he started
    a new business in the accounting year relevant to the Assessment year
    1965-66. In the intervening years, he was in receipt of income from property
    only. The assessee did not claim that the unabsorbed depreciation relating
F   lo the Assessment Year 1956-57 should be set off against the property
    income in the said intervening years. He made such a claim only when he
    commenced another business in the accounting year relevant to the Assess-
    ment year 1965-66, i.e:, in the assessment proceedings relating to Assess-
    ment year 1965-66. Probably, the asscssee was under the impression that
    he was not entitled to set off the unabsorbed depreciation until and unless
G   he had income from business in the following year. (He seems to have been
    under yet another impres.'>ion, viz., not only should he have business income
    in the following year to claim the benefit of section 32(2) but also that the
    very same assets should also be used for the business in the following year.
    This is evident from the fact that hcs claim for setting off the unabsorbed
H   depreciation allowance was confined to the extent it pertained to the old
         C.l.T. v. VIRMANI INDS. PVT. LTD. [B.P.JEEVAN REDDY,J.]          289

machinery utilised in the new business.) In the light of the interpretation A
of sub-section (2) of section 32 affirmed by us in this judgment, however,
what should have been done is this : the unabsorbed depreciation al-
lowance relating to the Assessment year 1956-57 should have been set off
against the income (income from properly) in the following year, i.e., in
the following previous year (relevant to Assessment year 1957-58) and if
                                                                             B
the income in that year was not sufficient to absorb the entire depreciation
allowance so carried forward, it had to be carried forward to the next
following year and so no. Only if some depreciation allowance still
remained to be absorbed, it could have been set off against the total income
for the Assessment year 1965-66.
                                                                                 c
       It is true that the question which was referred to the Tribunal under
section 256(1) of the Income Tax Act merely raises the question whether
the unabsorbed depreciation pertaining to the Assessment year 1956-57
can be carried forward and set off against the income for the accounting
year relevant to the Assessment year 1965-66, yet we thought it necessary        D
to clarify the true position of law. We answer the aforesaid question in the
following words :

      If after setting off the unabsorbed depreciation allowance relating to
the Assessment year 1956-57 against the income or the following assess-
ment years, any depreciation allowance still remained unabsorbed it could        E
have been set off against the income for the accounting period relevant to
the Assessment year 1965- 66.

       In the light of the views expressed by us hereinabove, it is not
necessary to go into the question raised hy-Dr. Gauri Shankar, learned           F
counsel for the Revenue \vith respect to the meaning of the words " the
following previous year." The contention of the learned counsel was that
the said expression means literally what it says and it does not mean any
following previous year. Hi..s submission was that if the chain of setting off
snaps for the reason that there is no income in any of the following years,
it snaps once for all and that the process of setting off cannot be restarted.   G

       For the above reasons, Civil Appeal No. 1052 of 1976 is disposed of
in the above terms and the question referred by the Tribunal under Section
256 (l) of the Income Tax Act, 1961 is answered in the terms aforesaid No
costs.                                                                           H
    290                   SUPREME COURT REPORTS [1995) SUPP. 4 S.C.R.

A         The question referred to the High Court in Civil Appeal No.2849. of
    1977 runs th us :

             "Whether on a proper interpretation of sections 56, 57 (ii) and
             32(2) of the Income-tax Act, 1961, the unabsorbed depreciation
             of Rs.70,700 brought forward since 1952-53 could be set off against
B            the business income assessed in the assessment year 1963-64 when
             the source in respect of which the depreciation was computed has
             ceased to exist"?

          Since the facts of this appeal are rather involved and we did not have
    the assistance of the counsel for the asses see (the assessee remained
c   unrepresented), we think it appropriate to remand the matter to the High
    Court for disposal afresh in accordance with law and this judgment. This
    appeal is allowed accordingly. No costs.

          CIVIL APPEAL N0.7372 OF 1995:
D         The High Court has refused to answer the reference, made at the
    instance of the Revenue, on the ground that the Revenue has failed to file
    the paper-book inspite of a period of ten years having elapsed since the
    reference. At the same time, the Court noted the submission of the learned
    counsel for the Revenue that the question referred herein is concluded by
E   the decision of the said Court (Bombay High Court) in Estate and Finance
    Limited. In view of our judgment in Estate and Finance Limited, we allow
    this appeal also and remit the same to the High Court with a request to
    dispose it of according to. law and in the light of this judgment.

          No costs.
F
    !.M.A.                                                    Appeals allowed.