ORDER
P.M. Jagtap, A.M.
This appeal of the assessee is directed against the order of learned Commissioner (Appeals), Udaipur, dated 9-9-1994.
2. Ground No. 1 [(a) and (b)] relates to the common issue of priority of set off of brought forward business loss and unabsorbed depreciation over unabsorbed investment allowance and deficiencies under section 80J.
3. The facts of the case in brief are that the assessee while returning his total income for assessment year 1991-92 adjusted the unabsorbed investment allowance prior to unabsorbed depreciation against the income of the current year. His claim as regards priority for set off between unabsorbed depreciation and unabsorbed investment allowance was rejected by the assessing officer in view of the provisions of section 32(2) and the legal position emanating from the decisions of the Hon'ble High Court of Patna in the case of Bihar State Industrial Development Corpn. Ltd. v. CIT : [1987]165ITR671(Patna) and that of Hon'ble Karnataka High Court in the case of Mysore Paper Mills Ltd. v. CIT : [1979]117ITR132(KAR) . The matter was carried before the Commissioner (Appeals) who upheld the order of the assessing officer considering that the legal position as discussed by the assessing officer was correct. Aggrieved by the same, the assessee is in appeal before us.
4. At the time of hearing before us the learned counsel for the assessee has raised various contentions in the matter of priority of set off of brought forward losses and allowances. For the sake of convenience, he also filed the written submissions, as per our directions, covering his entire arguments on this issue and we consider it worthwhile to reproduce the same as under :
'Ground No. 1 relates to priority of set off of business loss and unabsorbed depreciation, investment allowance and deficiency under section 80J. In this regard we would like to submit as under:
1.1 The relevant provisions in the Income Tax Act which govern the carry forward and set off of the aforesaid allowances are reproduced below :
Provisions relating to carry forward and set off of unabsorbed depreciation :
'32(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 (ii) of sub-section (1) in any previous year, owing to there being no profit 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 years.'
Provision relating to deficiency on account of investment allowance.
'32A(3) Where the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, or, as the case may be, the immediately succeeding previous year (the total income for this purpose being computed after deduction of the allowance under section 33 and section 33A), but without making any deduction under sub-section (1) of this section or any deduction under Chapter VI-A is nil or is less than the full amount of the investment allowance,
(i) the sum to be allowed by way of investment allowance for that assessment year under sub-section (1) shall be only such amount as is sufficient to reduce the said total income to nil; and
(ii) the amount of the investment allowance, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment year, and the investment allowance to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the investment allowance, if any, still outstanding shall be carried forward to the following assessment year and so on, so, however, that no portion of the investment allowance shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, as the case may be, the immediately succeeding previous year.'
Provisions relating to business loss :
'72(1) Where for any assessment year, the net result of the computation under the head 'profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and :
(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year :
Provided that 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; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on :... ..... ..... .....
(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.
(3) No loss other than the loss referred to in the proviso to sub-section (1) of this section shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.'
Deficiency under section 80J.
'80J(3) Where the amount of the profits and gains derived from the industrial undertaking or ship or business of the hotel, as the case may be, included in the total income (as computed without applying the provisions of section 64 and before making any deduction under Chapter VI-A) in respect of the previous year relevant to an assessment year commencing on or after the 1-4-1967 (not being an assessment year prior to the initial assessment year or subsequent to the fourth assessment year as reckoned from the end of the initial assessment year), falls short of the relevant amount of capital employed during the previous year, the amount of such shortfall, or, where there are no such profits and gains, an amount equal to the relevant amount of capital employed during the previous year (such amount, in either case, being hereafter, in this section, referred to as deficiency) shall be carried forward and set off against the profits and gains referred to in sub-section (1) as computed after allowing the deduction, if any, admissible under section 80HH or section 80HHA and the said sub-section (1) in respect of the previous year relevant to the next following assessment year and, if there are no such profits and gains for that assessment year, or where the deficiency exceeds such profits and gains, the whole or balance of the deficiency, as the case may be, shall be set off against such profits and gains for the next following assessment year and if and so far as such deficiency cannot be wholly so set off, it shall be set off against such profit and gains assessable for the next following assessment year and so on :
Provided that :
(i) in no case shall be deficiency or any part thereof be carried forward beyond the seventh assessment year as reckoned from the end of the initial assessment year;
(ii) Where there is more than one deficiency and each such deficiency relates to a different assessment year, the deficiency which relates to an earlier assessment year shall be set off under this sub-section before setting off the deficiency in relation to a later assessment year :... ..... ..... ..... .....
1.2. Section 32(2), it is submitted enacts a legal fiction to treat the unabsorbed depreciation as part of the current year's depreciation so that it is available for set off against income under all heads unlike business loss which can be set off only against business income. There is further no time-limit to the carry forward and set off of unabsorbed depreciation. The Supreme Court in the case of CIT v. Mother India Refrigeration Industries (P) Ltd. : [1985]155ITR711(SC) held that the avowed purpose of the legal fiction created by the deeming provision contained in section 32(2) of the Income Tax Act, 1961, is to make the unabsorbed carried forward depreciation partake of the same character as the current depreciation in the 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. Such being the purpose for which the legal fiction is created, their Lordships observed that the fiction cannot be extended beyond its legitimate field and will have to be confined to that purpose. In that case the legal fiction was sought to be extended to canvass that the unabsorbed carried forward losses should be given preference not merely over the unabsorbed carried forward depreciation but also over the current year's depreciation, since the two went together. Their Lordships held that the legal fiction could not be so extended.
1.3 That unabsorbed business losses have precedence over unabsorbed depreciation in the matter of set off, is clear from the combined reading of section 32(2) and section 72(2) of the Income Tax Act.
1.4. The deficiency on account of investment allowance is to be set off against the total income of the assessee assessable for a particular assessment year the total income for this purpose being computed without making any deduction under section 32A or under Chapter VI-A of the Act.
1.5. That issue for consideration is whether the total income against which the unabsorbed investment allowance is to be set off is the one after setting off unabsorbed depreciation or before such set off.
1.6. Chapter IV of the Income Tax Act containing sections 14 to 59 lays down the manner of computation of total income as defined in section 2(45) of the Act, i.e., total amount of income referred to in section 5 computed in the manner laid down in the Act. Section 5 of the Act defines the scope of total income depending upon the residential status of the assessee.
1.7. There is no specific provision in the Act providing for the order of precedence for the set off of unabsorbed investment allowance vis-a-vis unabsorbed depreciation. Considering that the deficiency on account of investment allowance can be carried forward for a limited period of eight years immediately succeeding the assessment year relevant to the previous year in which machinery or plant was installed/put to use, and that the set off of deficiency of investment allowance has precedence over the current year's claim as well it also fits in with the scheme of the Act if the unabsorbed investment allowance is given precedence in the matter of set off over unabsorbed depreciation.
1.8. The deficiency on account of deduction under section 80J as per sub-section (2) of that section can be set off only against profits and gains of the eligible undertaking after reducing any deduction admissible under section 80HH, but before allowing any other deduction under Chapter VI-A in computing the total income. In other words, the profits and gains derived from the industrial undertaking and forming part of the total income should be after setting off the deficiency under section 80J. The carry forward and set off of deficiency under section 80J is also for a limited period, the deficiency not being carried forward beyond the seventh year from the end of the initial assessment year in which the undertaking commenced manufacture or production of articles.
1.9. The position that thus emerges is as under :
(i) The deficiency on account of deduction under section 80J can be set off only against the profits and gains of the eligible undertaking (forming part of the total income of the assessee). The carry forward of the deficiency is for a limited period.
(ii) Unabsorbed business loss can be set off only against the business income. Such set off is not restricted to the business income derived from the unit in which the loss was incurred. The unabsorbed business loss carried forward for a limited period of 8 years.
(iii) Unabsorbed investment allowance can be set off against the total income of the assessee, being the aggregate of income under all heads of income. The unabsorbed amount of investment allowance can be claimed even as per the Act only for a limited period.
(iv) The unabsorbed depreciation is eligible for set off against aggregate income under all heads and the unabsorbed amount is carried forward indefinitely until it is fully absorbed.
1.10. It is, therefore, submitted that the unabsorbed allowance referred above should be set off in the following order :
(1) The deficiency on account of deduction under section 80J should first be set off against the profits and gains of the eligible industrial undertakings to arrive at the profits and gains which would form part of the total income.
(2) Against the aggregate business income including the profits and gains of the new industrial undertaking against which carried forward deficiency under section 80J of the same undertaking is already set off, the unabsorbed investment allowance should be set off.
(3) The unabsorbed business loss should be set off against the total income so arrived at.
(4) Unabsorbed depreciation should be set off against the balance total income remaining after giving effect to items at (1) to (3) above. The aforesaid is supported by decision of the Supreme Court in Garden Silk Weaving Factory v. CIT : [1991]189ITR512(SC) wherein the court has laid down the proposition that the carry forward of any depreciation as unabsorbed depreciation cannot arise until the stage of final assessment is reached and the total income of the assessee otherwise computed is insufficient to absorb the year's depreciation.
The Supreme Court referring to the provisions of section 32(2) of the Act at p. 525 of its judgment observed as under :
'Though the section, somewhat infelicitously, used the expression 'profits and gains' as it occurs in the statute in the fasiculous of sections dealing with the computation of business income, the question of the carry forward of unabsorbed depreciation has always been understood and interpreted as arising only after the intra-head and inter-head adjustments, referred to earlier, have been carried out.
This is because, where the depreciation allowance attributable to a particular business exceeds the profits otherwise computed for that business, the deduction of the depreciation allowance from such profits can only result in a 'loss' from that businessthis, however, is subject to a limitation that will be discussed later-and a business loss has to be set off against income from any other business, by way of intra-head adjustment, under section 70 and the income under any other head, by way of inter-head adjustment, under section 71. This principle indeed emerges even from the language of section 32(2) insofar as it implicitly recognises that the excessive depreciation of one business can be 'given effect to' against the profits and gains of another business in the same year. This indeed is a well settled proposition.'
1.11. Let us now refer to the available case precedents on the subject :
Monogram Mills Co. Ltd. v. CIT (1982) 135 ITR 122
The Gujarat High Court in this case held that the correct order of priority as between carried forward loss, depreciation and development rebate, is that unabsorbed depreciation has precedence over unabsorbed development rebate. The court observed that though there was no direct authority for the priority to be given between unabsorbed depreciation and carried forward development rebate under the provisions of section 32(2) and section 33(2) of the Act, the wording of section 33(2) made it clear that the total income against which unabsorbed development rebate could be set off had to be worked out by giving effect to the provisions of section 32(2). It was further observed by the court that as a result of the deeming section 32(2), after giving effect to the carry forward business losses and setting it off, the unabsorbed depreciation formed part of the current year's depreciation and had to be given effect. It was observed by the court that the 'profits and gains from business or profession' could be worked out only after giving the full effect to the provisions of section 32 including sub-section (2) of section 32.
1.12. Their Lordships were not influenced by the fact that unabsorbed development rebate could be carried forward only for a limited period and was likely to be lost at the end of eight years from the installation of plant and machinery if it was not set off. According to the court, the legislature had clearly intended that the unabsorbed development rebate should be set off after carried forward business losses and then unabsorbed depreciation.
1.13. The Gujarat High Court, in the aforesaid judgment, did not have the benefit of the Supreme Court decision in Mother India's case (supra) wherein the true effect of the deeming section in section 32(2) has been explained. The counsel for the assessee also did not plead that the deeming fiction enacted in section 32(2) was only for a limited purpose.
1.14. The unabsorbed depreciation is available for set off against the total income. The unabsorbed investment allowance is also available for set off against the total income, without taking into account the deduction on account of current year's investment allowance and other deductions. Section 32(2) does not provide the mechanism for set off of unabsorbed depreciation. There is nothing in the provisions of the Act to provide that the unabsorbed depreciation should have precedence over the unabsorbed investment allowance in the matter of set off against total income. If the unabsorbed depreciation has precedence over the unabsorbed investment allowance, it would result in not only the unabsorbed investment allowance but also the current year's investment allowance to take a back seat. This, could not have been the intention of the legislature. An approach to set off unabsorbed depreciation in preference to unabsorbed investment allowance is likely to frustrate the incentive given in the form of investment allowance to promote growth of industries and capitalisation.
CIT v. North Arcot District Co-operative Spg. Mills Ltd. : [1985]151ITR238(Mad)
1.15. The Madras High Court in this case held that relief under section 80J was allowable only after deduction of unabsorbed depreciation of the current year. The Madras High Court relied on the provisions of section 32(2) of the Act to hold the view that no distinction could be made between the current year's depreciation and the carry forward unabsorbed depreciation.
1.16. The Madras High Court also did not have the benefit of the Supreme Court decision in CIT v. Mother India Registration Industries (P) Ltd. (supra). The assessee did not also argue that the legal fiction enacted in section 32(2) was only for limited period, namely, the deemed unabsorbed depreciation as part of the current years depreciation so that it was available for set off against all heads of income.
CIT v. Kerala Balers Ltd. : [1988]169ITR364(Ker)
1.17. The Kerala High Court in this case held that the unabsorbed development rebate had first to be set off against the profit of the new industrial undertaking and thereafter against other income and if there remained any profit derived from the industrial undertaking after set off, the deficiency under section 80J(3) carried forward could be adjusted.
1.18. In the case before the Kerala High Court, the counsel for the assessee did not point out to their Lordships that the deficiency under section 80J could only be set off against the profits derived from the industrial undertaking while the unabsorbed development rebate could be set off against the total income including income derived from sources other than the industrial undertaking.
1.19. However, respectfully submitting, all the aforesaid decisions are influenced by the fiction created in section 32(2) that unabsorbed depreciation will form part of depreciation of the current year. The scope of that fiction has, however, been explained by the Hon'ble Supreme Court in the case of CIT v. Mother India Refrigeration Industries (P) Ltd. (supra). Their Lordships have observed that the avowed purpose of the legal fiction created in section 32(2) to the effect that unabsorbed depreciation shall form part of the current year's depreciation is to facilitate set off of unabsorbed depreciation against all heads of income unlike unabsorbed business loss which can only be set off against business income.
We shall also draw your hon'ble attention to a recent decision of Hon'ble High Court of Rajasthan in the case of CIT v. Premier Vegetable Product . In this case the Hon'ble High Court had held that for the purposes of determining the priorities the profits and gain should be reduced by current depreciation but not by carry forward loss or depreciation or investment allowance for the purposes of relief under section 80J of the Income Tax Act. In view of this jurisdictional High Court decision and other decisions it is submitted that priorities of set off of business loss, investment allowance unabsorbed depreciation and deficiency under section 80J may kindly be allowed as claimed by the appellant.'
5. In reply, the learned Departmental Representative submitted that section 80J is part of Chapter VI-A and, therefore, contended that priority has to be given to other carried forward allowances over the deficiency under section 80J. He further submitted that the decisions allowed to be carry forward for limited period are generally given priority in respect of set off while computing the total income. He also submitted that the assessing officer has elaborately dealt with this issue in his order and urged that the same may be perused while deciding this issue. He, therefore, contended that the Commissioner (Appeals) was fully justified in upholding the order of the assessing officer on this issue.
6. We have considered the rival submissions and also perused the relevant material on record including the decisions cited by the learned counsel for the assessee as well as those relied upon by the assessing officer. After going through the submissions made by the learned counsel for the assessee, it is observed that heavy reliance is placed by him on the decision of Hon'ble Supreme Court in the case of CIT v. Mother India Refrigeration Indus. (P) Ltd. : [1985]155ITR711(SC) while seeking that the settled position in respect of priority for setting off of brought forward losses and allowances need to be reviewed. Before we consider the various contentions raised by the learned counsel for the assessee on this issue, we may make it clear here that although he has made an attempt to enlarge the said issue by raising various arguments, the scope for this issue involved in the appeal before us, has arising out of the impugned orders of the authorities below, is very limited and so ultimately our decision would be circumscribed to cover the issue only to the extent involved in the case before us. So consciously keeping aware of this aspect, we proceed further to consider and decide this issue.
7. It is observed that the issue relating to set off of deficiency under section 80J has been elaborately considered by the assessing officer on pages 3 and 4 of his assessment order and the relevant portion of the same is reproduced below :
'Regarding set off of deduction under section 80J clause (1) of first proviso of section (3) clearly points out that in no case shall the deficiency or any part thereof be carried forward beyond seventh assessment year as reckoned from the end of the initial assessment year. The initial assessment year is mentioned as the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles. Therefore, it is clear that the deduction under section 80J cannot be set off in an assessment year which is beyond seventh year from the end of initial assessment year. In the instant case the initial assessment year is assessment year 1982-83 and more than seven years have since lapsed. Thus, no set off of deduction under section 80J whether relating to assessment year 1982-83 or subsequent assessment years can be allowed in this year. Section 80J is clear on this point that the assessment year relating to unabsorbed deficiency is not important for time-limit of carry forward. What is relevant is the initial assessment year and in case more than seven years have lapsed after the end of the initial assessment year or subsequent assessment years cannot be set off against the income of such assessment year which is after the lapse of seven assessment years from the initial assessment year. In view of this no unabsorbed deduction under section 80J will be allowed to set off against the income of this assessment year.'
A perusal of the above observations of the assessing officer makes it explicitly clear that the unabsorbed deduction/deficiency under section 80J was not considered as allowed to be set off against the income of the assessee for the relevant previous year in view of the clear provisions contained in clause (i) of the first proviso to sub-section (3) of the said section. This matter was carried by the assessee in the first appeal before the learned Commissioner (Appeals) who upheld the assessing officer's order on this issue. In the second appeal before us, this issue has been contested by the assessee vide ground No. 3 but at the time of hearing, the learned counsel for the assessee has conceded that this issue is squarely covered against the assessee by the decision of the Hon'ble Supreme Court in Premier Cable Co. Ltd. v. CIT : [1999]237ITR202(SC) . In effect it is observed that the assessee is held to be not entitled for set off of the deficiency under section 80J against the income of the current year and that being so the question of deciding the priority of such deficiency for setting off against the current year's income does not arise at all.
8. The only issue which now survives for our consideration is regarding set off of brought forward business loss and unabsorbed depreciation prior to the unabsorbed investment allowance.
9. The legal position in respect of priority of unabsorbed business loss and unabsorbed depreciation over unabsorbed development rebate and unabsorbed investment allowance is well settled by the various judicial pronouncements, including the well-discussed decision of Hon'ble Gujarat High Court in the case of Monogarm Mills Co. Ltd. v. CIT (1982) 135 ITR 122. However, the learned counsel for the assessee has insisted for the review of this priority position on the basis of the decision of Hon'ble Supreme Court in the case of CIT v. Mother India Refrigeration Ltd. (supra) wherein the scope and purpose of the legal fiction created by the provisions of section 32(2) is discussed. Moreover, in the absence of any specific provision in the Act to specify the order of priority for allowing the unabsorbed loss and allowances, he has sought that the relevant provisions be interpreted in a manner which are beneficial to the assessee.
10. From the perusal of the aforesaid judgment of the Hon'ble Supreme Court on which heavy reliance is placed by the learned counsel for the assessee, it is evident that the real issue involved for the consideration was whether on proper construction of the relevant provisions of the concerned enactment, unabsorbed carried forward losses should have preference over the current depreciation in the matter of set off while computing the total income of the assessee in the concerned assessment year. It, therefore, reveals that the assessee therein contended that the legal fiction created under section 32(2) should be so extended to treat the current depreciation of the relevant year as unabsorbed depreciation and that being so, the unabsorbed carried forward losses should be given preference over the current year's depreciation also. While rejecting this contention, the Hon'ble Supreme Court discussed the real purpose and scope of the legal fiction and held that the said legal fiction is created to make unabsorbed carried forward depreciation partake of the same character as the current depreciation so that the same is available for being set off against other heads of income also. In that case before the Hon'ble Apex Court the assessee had sought to interpret the purpose of such legal fiction in the other way round so as to consider the current year's depreciation as unabsorbed depreciation so that the unabsorbed carried forward business loss will get priority in terms of set off against the current year's income.
11. It is a settled position of law that the legal fiction created under the statute cannot be extended beyond its legitimate purpose. However, at the same time it is also well known rule of interpretation of statutes that a legal fiction has to be carried to its logical conclusion and in this case, such logical conclusion seems to be that the unabsorbed depreciation has to be considered as current year's depreciation for all its intents and purpose, subject, however, to the provisions of sections 72(2) and 73(3), as held by Hon'ble Bombay High Court in the case of Mysore Paper Mills Ltd. v. CIT : [1973]89ITR77(Bom) . In the aforesaid case before the Hon'ble Supreme Court, the assessee had sought to apply the legal fiction in a reverse way in order to treat the current depreciation as unabsorbed depreciation and their Lordships have rightly rejected the assessee's plea in view of the legitimate purpose of the deeming provisions.
12. As mentioned hereinabove, the legal position in respect of correct order of priority for set off of unabsorbed losses and allowances has been laid down in the various detailed and well-reasoned judgment and there being no contradictory decisions brought to our notice, the legal position can be considered as well settled on this issue. The provisions of relevant sections have been extensively discussed and interpreted in the various judicial pronouncements and there appears to be no confusion or contradiction in the conclusion drawn by various courts on this issue. That being so, we are of the opinion that principle of beneficial interpretation would not apply to this issue, as there is no doubt about the true scope and ambit of the relevant provisions of the Act.
12A. In order of decide the priority of brought forward business loss and unabsorbed depreciation over the unabsorbed investment allowance involved in this case, it is relevant to refer to sub-section (3) of section 32A which reads as under :
'(3) Whether the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, as the case may be, the immediately succeeding previous year (the total income for this purpose being computed after deduction of the allowances under sections 33 and 33A, but without making any deduction under sub-section (1) of this section or any deduction under Chapter VI-A is nil or is less than the full amount of the investment allowance.' :
A perusal of this section clearly shows that the total income for the purpose of section 32A(3) is computed after deduction of unabsorbed development rebate under section 33 and unabsorbed development allowance under section 33A and clause (a) of Explanation to the said section further makes it clear that investment allowance comes in the order of priority only after the said two items.
13. The issue of priority between unabsorbed depreciation and unabsorbed development rebate in respect of setting off against the profits of subsequent years came up for consideration before the Hon'ble Kerala High Court in the case of Calicut Modern Spinning and Weaving Mills Ltd. v. CIT : [1985]153ITR810(Ker) wherein it has been held that carry forward depreciation has precedence over the unabsorbed development rebate and question of set off of unabsorbed development rebate would arise only after the wiping out of unabsorbed business looses and also of the unabsorbed depreciation. Here again the argument may be advanced that the benefit of decision of Hon'ble Apex Court in the case of CIT v. Mother India Refrigeration (P) Ltd. (supra) was not available to the Hon'ble Kerala High Court. However, in the subsequent judgment delivered by the Hon'ble Bombay High Court in the case of CIT v. Premier Automobiles Ltd. : [1994]206ITR1(Bom) , wherein the aforesaid decision of Hon'ble Supreme Court has not only just been referred to but also relied upon, it is reiterated that the unabsorbed depreciation will have priority over the unabsorbed development rebate in respect of setting off. In this detailed and well-reasoned judgment, the Hon'ble Bombay High Court has elaborately considered the controversy involved in this issue because of the time-limit prescribed for carry forward of the unabsorbed development rebate and observed that if the assessee does not adjust the unabsorbed depreciation of earlier year against the income of next year, loses it once for all with no right to claim the same in a subsequent year from computing the total income.
14. The resultant position which, therefore, emerges clearly from the reading of section 32A(3) and the decisions of the Hon'ble Kerala High Court (supra) and Hon'ble Mumbai High Court (supra) is that the brought forward business loss and unabsorbed depreciation get priority over the unabsorbed investment allowance in respect of setting off against the profits of the subsequent years and this well settled position will continue to remain the same even after the decision of the Hon'ble Supreme Court in the case of CIT v. Mother India Refrigeration (P) Ltd. (supra). We, therefore, find no mistake in the impugned order of the learned Commissioner (Appeals) on this issue and accordingly decline to interfere.
14B. Ground No. 2 relates to the availability of unabsorbed investment allowance for assessment year 1982-83 in assessment year 1991-92 whereas ground No. 3 relates to the set off of deficiency of deduction under section 80J.
14C. At the time of hearing, the learned representatives of both the sides agreed that both these issues stand squarely covered in favour of the revenue and against the assessee by the decision of Hon'ble Supreme Court in the case of Premier Cable Co. Ltd. v. CIT (supra).
14D. We have considered the rival submissions and also perused the material on record. We have also gone through the judgment of Hon'ble Apex Court in the case of Premier Cable Co. Ltd. v. CIT (supra) wherein it has been held that unabsorbed development rebate can be carried forward only for eight assessment years that follow the assessment year in which the relief was first earned irrespective of the fact that assessee did not have a previous year relevant to a particular assessment year which fell within the span of this period. In the matter of carry forward of deficiency under section 80J, the Hon'ble Apex Court has held therein that such deficiency can be carried forward only in the specified years that follow the assessment year in which the relief was first earned. As such considering the facts of the case and following the said decision of Hon'ble Supreme Court, we uphold the impugned order of Commissioner (Appeals) on this issue.
15. Ground No. 4 [Parts (a) and (b)] relates to the disallowance of Rs. 1,86,183 in respect of textile cess under section 43B.
16. In support of this ground, the learned counsel for the assessee has advanced detailed arguments in his written submissions as follows :
'Reg. ground No. 4(a) and (b), which relates to disallowance of Rs. 1,86,183 under section 43B of the Income Tax Act : This disallowance has been made by the assessing officer treating it to be disallowable under section 43B. The assessee-company is manufacturers of yarn and, therefore, comes under the category of textile industry. During the year under consideration the appellant collected a sum of Rs. 1,86,183 as cess and credited the same as liability. The appellant-company neither debited any amount in respect of cess duty to its profit & loss account nor made any claim of deduction in respect of cess duty. When there was no claim of the deduction the question of applicability of the provision of section 43B would not arise. Section 43B provides that certain expenditure otherwise allowable would only be allowed on its actual payment, i.e., in the year of payment. The assessee-appellant did not make any claim of deduction and, therefore, the question of allowability of cess duty would not arise and therefore the provision of section 43B would not be applicable.
The assessing officer, however, held that in view of the Hon'ble Supreme Court decision in the case of Chowringhee Sales Bureau (P) Ltd. : [1973]87ITR542(SC) and Sinclair Murray & Co. (P) Ltd. : [1974]97ITR615(SC) the cess collected by the assessee is trading receipt and, therefore, this liability is clearly covered under clause (a) of section 43B of the Act. He accordingly covered under clause (a) of section 43B of the Act. He accordingly added a sum of Rs. 1,86,183 as income of assessee-company.
In this connection it is submitted that the decisions referred by the assessing officer relate to sales-tax. The Hon'ble Supreme Court in the above referred two decisions held that sales-tax collected would form part of trading account. Whereas in this case the amount collected represents the textile cess and not the sales-tax. It is, therefore, submitted that ratio of the Hon'ble Supreme Court decision in the above referred cases would not apply to the facts of the present case.
To appreciate the facts of the case one has to analyse the nature of textiles committee cess duty. As per Textiles Committee Act, 1963, the Government of India would appoint a committee to achieve the object which are specified in section 4 of the Textiles Committee Act, 1963. As per section 5A to achieve the objects of the Act there shall be levied and collected a cess on all textiles and all textile machinery manufacturing in India a cess duty not exceeding 1 per cent ad valorem as the Central Government may by notification in the Official Gazette fix. Thus, this cess duty is leviable and is levied on all kinds of textiles and textile machinery. The funds so collected would be utilised for the objects as enumerated in section 4 which is generality provides for betterment of textile industry. From the provisions of section 4 it would be noted that the function of the committee appointed under Textiles Committee Act, 1963, is to promote the textile industry as a whole. Therefore, the cess duty so levied is to finance the function of the committee which in turn looks after the promotion of textile industry. It is, therefore, submitted that collection of textile cess cannot be equated with the sales-tax. It is altogether a different duty and cannot be treated to be a trading receipt.
To explain we are submitting photo copies of some of the bills. From the bills your honour would notice that sales-tax was charged after including freight and insurance in the cost of the goods. After charging sales-tax the cess is calculated on the total amount, i.e., inclusive of sales-tax. This clearly indicates that while the sales-tax has been treated as part of trading receipt whereas cess was treated as separate item. It may also kindly be noted that for the purposes of sales-tax cess duty is not included in the turnover. The sales-tax is charged on the turn over excluding the cess duty. Whereas the cess duty is charged on the turnover including the sales-tax. This fact has been accepted by the sales-tax authorities also. It is, therefore, submitted that the cess duty cannot be treated to be a part of trading receipts.
From the copies of the billing your honour would also notice that the collection of charity is also not treated as a part of trading receipt. We shall draw your honour's attention to the decision of the Hon'ble Allahabad High Court in the case of CIT v. Tarachand Surajmal : [1996]217ITR315(All) wherein the Hon'ble High Court held that market fee received from customers and payable to Mandi Samiti would not be includible in the income of the assessee. It is submitted that the ratio of the decision of the Hon'ble High Court Allahabad is squarely applicable on the facts of the present case in hand. We shall also draw your attention to the decision of the Hon'ble High Court of Rajasthan in the case of Hari Industries v. CIT . Reference may kindly he had to the decision of the Hon'ble Supreme Court in the case of CIT v. Bijli Cotton Mills (P) Ltd. : [1979]116ITR60(SC) . It is, therefore, submitted that the cess so collected by the assessee-appellant cannot be and should not be treated as a trading receipt and, therefore, addition made by the assessing officer in this regard deserves to be deleted.'
17. In reply the learned Departmental Representative relied on the orders of the authorities below and submitted that the textile cess is just like a sales-tax and, therefore, contended that the same forms part of trading receipts. Regarding the claim of expenditure in respect of textile cess, he submitted that the assessee has followed a different accounting treatment which is not very relevant and contended that such different accounting treatment does not change the nature of transactions which is undoubtedly trading. He further submitted that the Textiles Committee Act, 1963, is a Parliamentary Act and hence the provisions of section 43B are clearly applicable to the textiles cess collected under the said Act. He, therefore, contended that the Commissioner (Appeals) was fully justified in confirming the disallowance under section 43B and urged that his order may be upheld.
18. We have considered the rival submissions and perused the relevant material on record. We have also considered the various decisions cited by the assessee as well as those relied upon by the assessing officer. The learned counsel for the assessee has contended that the assessee has not claimed deduction in respect of taxable cess and hence according to him the provisions of section 43B are not applicable as the same cover only those tax and duties which are allowed as deduction from the income. Before we deal with this contention of the learned counsel for the assessee, it is relevant to consider the exact nature and character of the textile cess involved in this case. It is observed that the assessing officer has treated the taxable cess collected by the assessee as trading receipt relying on the decisions of the Hon'ble Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. v. CIT : [1973]87ITR542(SC) and Sinclair Murray & Co. (P) Ltd. v. CIT : [1974]97ITR615(SC) . The learned counsel for the assessee, however, has submitted that this reliance is misplaced because the said decisions of the Hon'ble Apex Court relate to sales-tax, whereas in the present case, the amounts collected represent the taxable cess. It is observed that in the case of Chowringhee Sales Bureau (P) Ltd. (supra) their Lordships referred to its earlier decision reported in 12 STC 476 wherein the court had observed that when the seller passes on the tax and the buyer agrees to pay the same in addition to the price, the tax is really part of the entire consideration and the distinction between the two amounts tax and price loses all significance. Further, the reliance was also placed by their Lordships upon the following observations of Goddard L.J. in Love v. Norman Wright (Builders) Ltd. (1944) 1 All ER 618 :
'Where an article is taxed, whether by purchase tax, customs duty, or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consideration, though made up of cost plus profit plus tax, So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up, or whether the seller has included tax or not.'
After considering these observations as a so the other relevant aspects, the Hon'ble Supreme Court held that tax or duty which forms part of the whole consideration paid by the purchaser to the seller is the trading receipt and accordingly should be included in the turnover of the assessee. It is thus clear that the ratio of this decision not only applies in respect of sales-tax but also to all taxes, duties, cess and other levies which form part of the sale consideration inasmuch as the same is received by the seller from the purchaser at the very time of effecting sale and thus, in turn is includible in the turnover. In the present case before us, the textile cess, as appears from the record, forms part of the sale consideration received by the assessee from its customers and this fact has not been disputed, which makes it clear that the same is covered by the decision of Hon'ble Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. (supra).
19. When it stands established that the textile cess receipts are part of the assessee's sale consideration/turnover, the proper accounting treatment has to be that the same are carried to the credit side of the profit & loss account as part of the assessee's turnover and corresponding payments/debits are reflected separately in the profit & loss account as expenditure. Instead the assessee, in the present case, has opened a separate account and entered all the credit and debit transactions in respect of textile cess to the said account which has resulted into non-reflection/hiding of the true nature and character of these transactions. Although these debit and credit entries having compensating effect may not have any bearing on the amount of profit or loss, the immediate and inherent effect of such improper accounting treatment is that in the final analysis of profit & loss account these items do not appear at all and as a result give a misleading picture especially in establishing the mischief of section 43B. It is, therefore, necessary in such cases to look beyond the accounting treatment given by the assessee and assess the actual effects of such transactions to ascertain their exact nature and character. The inherent accounting effects of the transactions in respect of textile cess are, in fact, two-fold and as the same are squared off by the assessee in its books of account such treatment has resulted in the misrepresentation of facts by hiding the two-fold effects, one of crediting the income and the other of debiting the expenditure. It is worthwhile to mention here the following three principles laid down by D.R. Scot, way back in 1941 while describing the accounting rules and regulations :
(i) Justiceequitable treatment should be accorded to all interests involved in the financial situation covered by the accounts;
(ii) Truthaccounts must not be made a means of misrepresentation;
(iii) Fairnessaccounting rules, procedure, etc. should not serve a special purposes.
Moreover, in 'Accounting Postulate C-5' developed by Moris Moonity in respect of disclosure, it has been laid down that accounting reports should disclose that which is necessary to make them not misleading.
20. The following illustration based on hypothetical figures will further clarify the reflection of proper accounting treatment (A) vis-a-vis the assessee's version, (B) in respect of textile cess in the final accounts :
A. Proper Accounting treatment
(a) Textile Cess Collection A/c (Ledger)
To P&L; a/c
100
By customers/cash
100
(Textile cess collected during the year transferred to credit of P&L; a/c)
(Textile cess charged in the sales bills during the year)
100
100
(b) Textile Cess Paid A/c (Ledger)
To Cash/Bank/Adj.
90
By P&L; a/c
100
(Textile cess paid or adjusted during the year)
(Textile cess for the year transferred to the debit of profit & loss account)
To Textile cess payable a/c
10
(Balance textile cess outstanding for the year provided for)
100
100
(c) Textile Cess Payable A/c (Ledger)
To Balance c/f
10
By textile cess paid a/c
10
(Carried to the liability side of balance sheet)
(Balance textile cess outstanding for the year provided for)
10
10
(d) Profit and Loss A/c
To trading expenses
700
By sale
1,000
To other expenses
150
By textile cess collected
100
To textile cess paid
100
To net profit
150
1,100
1,100
B. Accounting treatment given by the assessee
(a) Textile Cess A/c (Ledger)
To Cash/Bank/Adj.
90
By customers/cash
100
(Textile cess paid or adjusted during the year)
(Textile cess charged in the sales bills during the year)
To Balance c/f
(Outstanding balance carried to the liability side of balance sheet)
10
100
100
(b) Profit and Loss A/c
To trading expenses
700
By sales
1,000
To other expenses
150
To net profit
150
1,000
1,000
From the above it is evident that instead of maintaining three separate ledger accounts for collection, payment and provision of textile cess, the assessee has posted all the transactions in respect of textile cess to only one account maintained for this purpose which has resulted into squaring off of the debit and credit effects in respect of expenditure and income. Consequently, these items of income and expenditure are not transferred/carried to the profit & loss account and there is no reflection to textile cess at all in the profit & loss account.
20A. It is also evident that the different accounting treatment given by the assessee in respect of textile cess appears to have no effect on the net income (profit or loss) as both the debit and credit effects representing revenue and expenditure are equal and compensating. However, there is an inherent error arising out of such accounting treatment which has resulted into misleading reflection in the final accounts. The profit & loss account is described as an accounting report which summarises the revenue items, the expenses items and the difference between them is net income. One group of items thus listed in the profit & loss account being revenues is defined as the income that accrues to the concern by the sale of the goods/services or by supply of its resources to others. Alternatively, the revenues mean the value that a firm receives from its customers and the sales revenues further signify the total invoice price of the goods/services rendered by the concern to its customers. In the Accounting Standard-9 (AS-9) issued by the Institute of Chartered Accountants of India, the revenue is defined as the gross inflow of cash, receivable or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services and from the use by others of enterprise resources. Clarifying further, it has been mentioned that the revenue is measured by the charges made to the customers or clients for goods supplied and services rendered to them.
21. In the case of Chowringhee Sales Bureau (supra) the Hon'ble Supreme Court has also expressed similar views and observed that the whole amount forming part of the sale consideration paid by the purchaser to the seller should be included in the turnover. It has been, therefore, held by their Lordships that the tax forming part of the turnover is a trading receipt and even if it is not so shown in the books of the assessee, the assessing authority would not be prevented from treating the same as trading receipt.
22. In the present case before us, the assessee has credited the textile cess collection and debited the payments thereof to a separate account maintained for textile cess which has its hidden and inherent effects of revenue being credited and corresponding expenditure being debited. This being so, the contention of the learned counsel of the assessee that the assessee has not claimed the textile cess as deduction appears to be devoid of any merits and accordingly deserves to be rejected. For this view, we also derive support from the decision of Hon'ble Calcutta High Court in the case of CIT v. Associated Pigments Ltd. (1993) 71 Taxman 244 (Cal).
23. The learned counsel for the assessee has also contended that the decision of Hon'ble Supreme Court in the case of Chowringhee Sales Bureau (supra) relates to sales-tax and hence is not applicable to the present case involving textile cess. However, it is held by the Hon'ble Apex Court in the said case that anything and everything which forms part of the sales consideration payable by the purchaser to the seller is includible in the turnover and are accordingly regarded as trading receipts, thus making it abundantly clear that the ratio decidendi of the Hon'ble Apex Court is not just confined to sales-tax.
24. The learned counsel for the assessee has also contended that the textile cess is charged on the sales value inclusive of sales-tax and in effect no sales-tax is charged on the textile cess. In our opinion, such a practice does not change the nature of textile cess as trading receipts for the reasons given hereinabove. The learned counsel for the assessee has also tried to make a comparison between the textile cess and charity and further reliance is placed on the decisions of Hon'ble Allahabad High Court in the case of CIT v. Tarachand Surajmal : [1996]217ITR315(All) , the decision of Hon'ble Rajasthan High Court in the case of Hari Industries v. CIT and the decision of the Hon'ble Supreme Court in the case of Bijli Cotton Mills : [1979]116ITR60(SC) to derive support to the contention that the textile cess does not fall within the ambit of section 43B. After going through these decisions cited by the learned counsel for the assessee, it is observed that in these cases before the Hon'ble Jurisdictional High Court (supra) and Hon'ble Supreme Court : [1979]116ITR60(SC) (supra), the issue of Dharmada/charity was involved and accordingly it was held that the same cannot be considered as trading receipt for the reason that it does not form part of sale consideration. Elaborating further, their Lordships observed that the dharmada/charity is paid by the purchaser to the seller on the occasion of purchase and not certainly as part of consideration for purchase. The ratio of these decisions, therefore, cannot be applied to the present case involving textile cess which forms part of the turnover as discussed hereinabove.
25. It is also observed that the decision of Hon'ble Allahabad High Court : [1996]217ITR315(All) (supra) relates to assessment year 1966-67 involving the issue of market fees payable to Krishi Mandi Committee and it was held by the Hon'ble, Allahabad High Court that such market fees cannot be regarded as tax or duty attracting provisions of section 43B. It is pertinent to note here that clause (a) of section 43B at the relevant time referred only to tax or duty. However, the same was substituted by the Finance Act, 1988, with effect from 1-4-1989, to read as under :
'(a) any tax, duty, cess or fees payable under a statute by whatever name called'.
With the result of the above amendment the scope of section 43B stands widened to also cover the cess and fees payable under a statute by whatever name called and as such has apparently nullified the aforesaid decision of the Hon'ble Allahabad High Court. It is relevant here to refer to the decision of Hon'ble Calcutta High Court in the case of CIT v. Orient Paper Industries Ltd. : [1995]214ITR473(Cal) wherein it has been held that the amendment made in clause (a) of section 43B with effect from 1-4-1989, is clarificatory in nature and, therefore, has retrospective operations. In the present case involving assessment year 1991-92 it is observed that the textile cess is levied and collected under a separate statute called Textile Committee Act, 1963, which is a Parliamentary Act and as such come under the purview of section 43B after the amendment made by the Finance Act, 1988.
26. As such considering all the facts of the case, the legal position emanating from the various judicial pronouncements and in view of the reasons given hereinabove, we are of the considered view that the textile cess is a trading receipt and irrespective of accounting treatment, the corresponding payment/debits in respect of the same have the inherent effect of forming part of the assessee's expenditure. This being so, it clearly falls within the ambit of section 43B especially after the amendment in clause (a) of the said section with effect from 1-4-1989. We, therefore, do not find any infirmity in the order of the learned Commissioner (Appeals) confirming the disallowance in respect of unpaid textile cess under section 43B and accordingly decline to interfere.
27. Ground No. 5 relates to the computation of deduction under section 80HH. At the time of hearing, the learned representatives of both the sides agreed that this issue is squarely covered by the decision of Hon'ble Rajasthan High Court in the case of CIT v. Loonker Tools (I) Ltd. .
28. We have considered the rival submissions and perused the relevant records including the decision of Hon'ble Jurisdictional High Court in the case of CIT v. Loonker Tools India Ltd. (supra) wherein it has been held that deduction under section 80HH is allowable on profits and gains derived from an industrial undertaking which is included in gross total income of the assessee and not on commercial profit. As such considering the facts of the case, and following the said decision of the Hon'ble Jurisdictional High Court, we dismiss this ground raised by the assessee.
29. In the result the assessee's appeal is dismissed.