Judgment:
1. We find it convenient to dispose of these 4 appeals by the assessee for assessment years 1978-79,1979-80,1984-85 and 1985-86 by this consolidated order.
2. For the assessment years 1978-79 and 1979-80 assessee had not filed any returns of income within the time allowed under Section 139(1) or under Section 139(4). However, on 31st of March, 1983 returns of loss had been filed as under :-1978-79 Rs. 2,53,677.641979-80 Rs. 3,48,400.40 On 11-10-1985 assessee filed fresh returns for the two respective assessment years disclosing income as under :-1978-79 Rs. 6,0871979-80 Rs. 8,080 Tax of Rs. 2,878 and Rs. 3,818 for the assessment years 1978-79 and 1979-80 respectively had also been paid and challan attached with the returns of income. Since, the returns filed on 11th October, 1985 disclosed taxable income, the Assessing Officer issued notices under Section 148 on 16-5-1986 after recording reasons for the issue of such notices under Section 147(a). Assessee furnished returns in response to the notices under Section 148. These returns, however, did not disclose positive income. The figures of loss disclosed in the returns filed on 31st of March, 1983 were indicated in these returns as under :-1978-79 Rs. 2,53,6781979-80 Rs. 3,48,400 It was explained before the assessing officer that the returns filed on 11th of October, 1985 disclosing income of Rs. 6,087 and Rs. 8,080 for the respective assessment years were on the basis of unaudited accounts. However, after the accounts had been audited the final position had emerged that the assessee has in fact suffered losses. The ITO was requested to complete the assessment and allow to carry forward depreciation and investment allowance to subsequent years. It was also claimed that assessee was entitled to deduction under Section 80J. The ITO filed the proceedings by recording his reasons in the order-sheet for the assessment year 1978-79 as under :- In view of the reply of the 'a' dated 17-10-1986 proceedings under Section 147/ 148 are hereby filed. As stated by the 'a' return in compliance to notice under Section 148 has been filed on the basis of audited a/c whereas the return on the basis on which proceedings under Section 147(a) were commenced was based on unaudited a/c.
Since the return filed in compliance to notice under Section 148 is a return of loss and, therefore, no income chargeable to tax has escaped assessment, proceedings are filed - Anglo French Textile Co.
Ltd. v. CIT [1950] 18 ITR 906 (Mad.), K. Ch. Narasimhulu v. CIT [1957] 32 ITR 728 (AP). Proceedings are also filed in view of the fact that loss cannot be computed under Section 147(a). It can only be recomputed.
Carry forward of loss cannot be allowed as the return was not filed under Section 139 within the meaning of Section 80. Carry forward allowance for depreciation, investment allowance and claim under Section 139(4) is non est. Besides in the absence of any assessment these allowances cannot be carried forward. Besides, claim under Section 80J is also barred for the same reason. The case cited by the 'a' in its reply dated 17-10-1986 refers to the old Act of 1922 and is also distinguishable on facts. Whereas in that case the return filed was merely a belated return, the return filed here is time barred and non est.
The assessee filed appeals to the CIT (A) claiming that it was entitled to carry forward of unabsorbed depreciation, investment allowance and deduction under Section 80J and that the assessing officer should have completed the assessment under Section 147. Since, there was no assessment order or demand notice issued, none had been attached along with the memo of appeal. The CIT (A) disposed of the appeals of the assessee on merits. Relying upon the decision of the Supreme Court in the case of Anglo-French Textile Co. Ltd. v. CIT [1953] 23ITR 82 (wrongly typed out in CIT(A)'s order is K. Ch. Narasimhulu v. CIT [1957] 32 ITR 728 (AP). The appeals of the assessee were dismissed upholding the "filing of proceedings under Section 147" by the assessing officer.
3. Assessee is aggrieved and it is claimed that once a return had been filed in response to notice under Section 148 assessing officer was bound to complete the assessment and that the assessee was entitled to carry forward of unabsorbed depreciation, investment allowance and deduction under Section 80J. Reliance has been placed on the decision of Madras High Court in the case of Sathappa Textiles (P.) Ltd. v.Second ITO [1969] 71 ITR 260. It was further contended that for the carry forward of unabsorbed depreciation, investment allowance and deduction under Section 80J, the filing of return within the time allowed is not a condition precedent. In this connection, reliance was placed on the decision of the Tribunal in the case of Western Leasing & General Finance Co. Ltd. v. CIT 104 Taxman 52 (sic) (Trib.) where it has been held that unabsorbed depreciation is allowable to be carried forward despite loss return having been filed late.
4. Our attention was drawn to Section 32(2) of the Income-tax Act, 1961 and Section 80 in support of the contention that unabsorbed depreciation cannot be equated with business losses and that Section 32(2) permits carry forward of unabsorbed depreciation without the strings attached to carry forward of business losses.
5. The DR, on the other hand, contended that the issue being covered by the decision of the Hon'ble Supreme Court in the case of Anglo-French Textile Co. Ltd. (supra) relied upon by the CIT (A) there is no merit in the appeals of the assessee.
6. We have given our careful consideration to the rival contentions. It is not disputed, in this case, that no return of income had been filed by the assessee within the time allowed under Section 139(1) or under Section 139(4). The returns filed on 31-03-1983 were non est for purpose of asst. under the provisions of Income-tax Act, 1961.
Similarly, the returns filed on 11-10-1985 disclosing income at Rs. 6,087 and Rs. 8,080 for assessment years 1978-79 & 1979-80 having been filed beyond the time allowed under Section 139(4) were also not valid returns under the provisions of the Income-tax Act. There was justification for the assessing officer for initiating action under Section 147(a) so as to adjust the tax paid by the assessee on the basis of invalid returns filed for assessment years 1978-79 and 1979-80 disclosing income. Thus, the notice issued under Section 148 on 16-5-1986 was issued in accordance with law. Assessee filed returns of income disclosing losses in response to notices under Section 148. The assessing officer on being satisfied that no income had escaped assessment filed the proceedings. The question before us is whether the assessing officer was bound to compute the loss and make the assessment in a case where notice under Section 148 had validly been issued but where it transpired that no income had escaped assessment. We shall have to refer to Section 147 which empowers the assessing officer to initiate proceedings for reassessment. For the sake of facility we reproduce Section 147 as under :- 147. Income escaping assessment-If the Assessing Officer has reason to believe, that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or re-assess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year.
It may also be useful to refer to Section 148 which is reproduced as under:- 148. Issue of notice where income has escaped assessment - (1) Before making the assessment, reassessment or recompilation under Section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, not being less than thirty days, as may be specified in the notice, a return or his income or the income of any other person in respect of which he is assessable under the Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act, so far as may be, apply accordingly as if such return were a return required to be furnished under Section 139.
(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.
On perusal of Section 147 read with Section 148 it is evident that the assessing officer is to make an assessment of escaped income. In this case, there is no material on record, except the returns filed by the assessee on 11-10-1985 disclosing some income, to suggest that there was escapement of income. Thus, it was open to the Assessing Officer to drop the, proceedings by filing the same. The contention that once notice under Section 148 is issued Assessing Officer is bound to complete the assessment seems attractive but when we take into account the power of reassessment under Section 147 it is abundantly clear that the assessment under the said section has got to be made in order to bring to tax the escaped income. Once, the Assessing Officer is satisfied that income has not escaped assessment even in a case where proceedings had been initiated, it is open to him to file the proceedings and he cannot be compelled to complete the assessment so as to make the assessment beneficial to the taxpayer and there is nothing in law to compel him to make the assessment. In the case of Anglo French Textile Co. Ltd. (supra) their Lordships of the Supreme Court have observed as under:- Where no return was filed by an assessee at any stage of the case disclosing any income profits or accounts at all and proceedings were later taken under Section 34, the assessee could not claim in the course of those proceedings that a certain loss should be determined and recorded. In this case, no return having been filed within the time allowed under any of the sub-sections of Section 139 (the returns having been filed beyond the time being non elf assessee has no right that the loss should be determined and recorded by way of assessment. Relying upon the decision of the Supreme Court referred to above we hold that assessing officer was not bound to make the assessment under Section 147 once he was satisfied that no income has escaped assessment.
Reference may be made to the decision of the Madhya Pradesh High Court in the case of Co-operative Marketing Society Ltd. v. OT [1983] 143 ITR 99, In this case, a notice under Section 148 had been issued on the premises that the income had escaped assessment. Assessee filed returns declaring losses for assessment years 1972-73 and 1973-74 in pursuance to the notices issued under Section 148, Assessee had not filed any returns nor was it assessed for the relevant assessment years before the issue of notices under Section 148. The assessing officer computed the losses in the relevant assessment years to carry them forward for the purpose of set off in the subsequent years on the ground that the returns were not filed within the time allowed by Section 139. The AAC affirmed the order of the ITO. On appeal, the Tribunal held that since the returns were filed after service of notice under Section 148 they could not be treated as returns filed in pursuance of the provisions of Section 139. The plea of the assessee that the returns had been filed under Section 139(4)(a) was also rejected by the Tribunal.
7. On a reference, the Madhya Pradesh High Court held that since the returns had been filed within the time allowed under Sub-section (4) of Section 139, the losses determined by the assessing officer for the relevant assessment years could be said to be losses determined in pursuance of the returns filed under Section 139. Assessee was, thus, held to be entitled to the benefit of carry forward and set off of losses computed by the assessing officer. Reliance was placed on the decision of the Supreme Court in the case of CIT v. Kulu Valley Transport Co. (P.) Ltd. [ 1970] 77 ITR518.
8. This decision of the Madhya Pradesh High Court is inapplicable to the facts of this case. Firstly, no return had been filed by the assessee within the time allowed under Section 139(4) either voluntarily or in response to notice under Section 148. Secondly, no assessment has been made by the assessing officer and we have already held that the assessing officer could not be compelled to frame the assessment in a case where the assessing officer is satisfied that no income had escaped assessment.
9. Before winding up on this issue we consider it necessary to make a reference to the decision of the Supreme Court in the case of V.Jaganmohan Rao v. CIT [1970] 75 ITR 373. In this case, the Hon'ble Supreme Court has laid down that once proceedings under Section 34 of the 1922 Act (corresponding provision to Section 148 of the 1961 Act) are validly initiated, the assessing officer has not only the jurisdiction but it is his duty to levy tax on the entire income i.e., escaped assessment during that year. This decision is also inapplicable to the facts of this case. The principle would be applicable in a case where the income has escaped assessment and once proceedings are validly initiated it becomes the duty of the assessing officer to make an assessment of the entire income that had escaped assessment. But in the case of the nature before us it is the admitted position that no income had escaped assessment and, therefore, the mere fact that proceedings had been initiated would not compel the assessing officer to make the assessment.
10. Considering the totality of the circumstances of this case in the light of the above judicial analysis we are of the view that the decision of the CIT (A) does not call for any interference. The appeals of the assessee are accordingly dismissed for the assessment years 1978-79 and 1979-80.
11. For the assessment year 1984-85 the related issue is regarding the carry forward and set off of unabsorbed depreciation. For the assessment year 1984-85 assessee had sought set off and adjustment of loss for assessment years 1978-79 and 1979-80. The same was denied on the ground that the returns had not been filed by the assessee under Section 139(4) and accordingly, the same could not be allowed to be carry forward and set off. On appeal, the CIT (A) has declined to allow carry forward and set off of unabsorbed depreciation for the assessment years 1978-79 and 1979-80 on the ground that no assessment had been made by the assessing officer, for these two respective assessment years and, therefore, the assessee was not entitled to carry forward and set off of the unabsorbed depreciation. Reliance has been placed on the decision in Brooke Bond & Co. Ltd. v. CIT [1970]77ITR 220 (Cal.).
The decision of the Madras High Court in the case of Sathappa Textiles (P.) Ltd. (supra) has been distinguished.
12. Assessee is aggrieved and it is claimed that the conditions as per Section 80 of the Income-tax Act, 1961 for carry forward and set off of business losses are not applicable to the unabsorbed depreciation. Our attention was drawn to the provisions of Section 32(2) of the Income-tax Act, 1961 in support of the contention that carry forward and set off of unabsorbed depreciation was regulated under a specific provision of law and accordingly, the general provision under Section 80 would be inapplicable. According to the Id. counsel unabsorbed depreciation for assessment years 1978-79 and 1979-80 was to be treated as part of depreciation for assessment year 1984-85 as it was the first year when such unabsorbed depreciation could be absorbed - profits of the year being sufficient to absorb the depreciation. It was accordingly urged that the orders of the revenue authorities be set aside and suitable deduction allowed to the assessee.
13. We have given careful consideration to the rival contentions. The issue before us is as to whether on the facts and in the circumstances of this case, assessee will be entitled to carry forward and set off of unabsorbed depreciation of assessment years 1978-79 and 1979-80 amounting to Rs. 40,790 and Rs. 39,347 for the respective assessment years. As already observed the returns of income for the assessment years 1978-79 and 1979-80 had not been filed within the time allowed under Section 139(1) or 139(4), no assessment has been made in response to notices under Section 148 we have held that the assessing officer could not be compelled to compute the loss in a case of this nature where the assessing officer is satisfied that no income had escaped assessment. That being so, the position that emerges is that neither any return had been filed by the assessee within the time allowed under Section 139(4) nor has any assessment been made by the assessing officer for these two assessment years under any of the provisions of the Act. The question, therefore, is as to whether the assessee would be entitled to carry forward and set off of unabsorbed depreciation.
The contention on behalf of the assessee that carry forward and set off of unabsorbed depreciation is governed under Section 32(2) is in our view acceptable as depreciation and business loss have been treated distinctly under several provisions of the Act. The conditions for the carry forward and set off of business losses under Section 80 would not be applicable to the unabsorbed depreciation which is regulated under Section 32. There being a special provision for carry forward and set off of unabsorbed depreciation, we are of the view that Section 80 is not a bar in the case of unabsorbed depreciation.
14. We shall now consider as to whether assessee is entitled to carry forward and set off of unabsorbed depreciation for assessment years 1978-79 and 1979-80. We reproduce hereunder Section 32 of the Act: 32. Depreciation. - (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed -** ** ** (2) Where, in the assessment of the assessee (or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners) full effect cannot be given to any allowance under Clause (if) 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 Section 73, 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 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 the allowance for that previous year, and so on for the succeeding previous year.
15. In order to appreciate the circumstances under which Section 32 comes into play, we shall have to revert back to Section 29 of the Act.
Section 29 of the Income-tax Act provides that income from profits and gains of business or profession shall be computed in accordance with the provisions contained in Sections 32 to 43(c). Section 32 of the Act will come into picture only when as assessment is to be made of the profits and gains of business or profession. For assessment years 1978-79 and 1979-80 there has been no computation of income under the head income from business. Thus, there was no occasion for applying the provisions of Section 32 of the Act in computation of income from business. Sub-section (2) of Section 32 is to be read with Sub-section (1) which provides for allowance of depreciation in respect of buildings, machinery, plant or furniture owned by the assessee. Sub- section (2) will come into force when effect cannot be given to the allowance of depreciation under Sub-section (1). So, in a case where there has been no assessment under any of the provision of the Act, Sub-section (2) will not, in our view, operate for carry forward and set off of depreciation - whether any depreciation remains unabsorbed not having been determined.
16. It can be argued on behalf of the assessee that in the case of the loss assessee had no obligation to file the return of income under Section 139 unless it wanted to get the loss determined and set off against the profits of future. Since, assessee had admittedly suffered losses in the two assessment years there was no obligation for. filing of the return or for determination of loss. Admittedly, there is no obligation upon the assessees, who have suffered losses, to file the returns of income. Nevertheless in our view if an assessee is desirous of getting the benefits of Section 32(2) it is necessary for it to file the return and get the depreciation computed unless there is computation of income under the provisions of the Act, one cannot come to second step of considering whether full effect could or could not be given to the claim of depreciation. Sub-section (2) starts with the words "where in the assessment of the assessee... full effect cannot be given to any allowance under Clause (ii) of Sub-section (1) in any previous year...". It is, thus, clear that Sub-section (2) of Section 32 presupposes an assessment in the case of an assessee, where full effect cannot be given in the circumstances referred to in the said sub-section. Since, in this case, there has been no assessment for assessment years 1978-79 and 1979-80 the question of carry forward and set off of unabsorbed depreciation does not arise. We accordingly reject the claim of the assessee that it is entitled to carry forward and set off of unabsorbed depreciation for assessment years 1978-79 and 1979-80 against the profits of assessment year 1984-85.
17 to 21. [These paras are not reproduced here as they involve minor issues.}