Escorts Electronics Ltd. vs Cit
2002 Latest Caselaw 1584 Del

JUDGMENT

D.K. Jain, J.

At the instance of the assessed, the Tribunal, Delhi Bench 'E', has referred the following questions under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), for our opinion :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that unabsorbed depreciation of an earlier year could not be allowed to be set off against the income taxed under section 56 (sic) of the Income Tax Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the allowance of only 10 per cent of the total expenditure incurred by the assessed as expenditure for earning the income that was the subject-matter of tax ?"

2. The assessed-company, initially incorporated as a public limited company under the name and style of 'CGR India Limited', was engaged in the business of manufacturing and assembling X-ray equipments. However, its business activity stopped from 1-1-1981 as the foreign collaborator had withdrawn from the company. The name of the company was thereafter changed to Escorts Electronics Ltd. For the assessment year 1982-83, for which the previous year ended on 31-12-1981, the assessed filed its return declaring a loss of Rs. 11,76,539. While computing total income for the said assessment year, the assessing officer held that since the business of the assessed had ceased to exist, the entire income was to be assessed under the head 'Income from other sources' and not under the head 'Profits and gains of business'. He, accordingly, assessed the receipts on account of sale of drawings and industrial files (Rs. 12,48,000); profit on sale of other assets (Rs. 31,286) and other receipts (Rs. 83,374) under the head 'Income from other sources'. The entire expenditure of Rs. 25,48,083 incurred by the assessed during the previous year was also disallowed and only a sum of Rs. 1,36,266, being 10 per cent of the total aforementioned receipts, was allowed as deduction. The depreciation for the current year and unabsorbed depreciation for earlier years was also disallowed. Thus, the total income for the year was assessed at Rs. 12,26,394.

2. The assessed-company, initially incorporated as a public limited company under the name and style of 'CGR India Limited', was engaged in the business of manufacturing and assembling X-ray equipments. However, its business activity stopped from 1-1-1981 as the foreign collaborator had withdrawn from the company. The name of the company was thereafter changed to Escorts Electronics Ltd. For the assessment year 1982-83, for which the previous year ended on 31-12-1981, the assessed filed its return declaring a loss of Rs. 11,76,539. While computing total income for the said assessment year, the assessing officer held that since the business of the assessed had ceased to exist, the entire income was to be assessed under the head 'Income from other sources' and not under the head 'Profits and gains of business'. He, accordingly, assessed the receipts on account of sale of drawings and industrial files (Rs. 12,48,000); profit on sale of other assets (Rs. 31,286) and other receipts (Rs. 83,374) under the head 'Income from other sources'. The entire expenditure of Rs. 25,48,083 incurred by the assessed during the previous year was also disallowed and only a sum of Rs. 1,36,266, being 10 per cent of the total aforementioned receipts, was allowed as deduction. The depreciation for the current year and unabsorbed depreciation for earlier years was also disallowed. Thus, the total income for the year was assessed at Rs. 12,26,394.

3. Being aggrieved, the assessed preferred an appeal to the Commissioner (Appeals), who affirmed the view of the assessing officer that the income for the year was to be assessed under the head 'Income from other sources'. However, relying on the decision of the Bombay High Court in CIT v. Estate & Finance Ltd. (1978) 111 ITR 119 (Bom), the Commissioner allowed set-off of the carry forward unabsorbed depreciation of earlier years against the income computed under the head 'Income from other sources'. The assessable income was, thus, reduced to nil.

3. Being aggrieved, the assessed preferred an appeal to the Commissioner (Appeals), who affirmed the view of the assessing officer that the income for the year was to be assessed under the head 'Income from other sources'. However, relying on the decision of the Bombay High Court in CIT v. Estate & Finance Ltd. (1978) 111 ITR 119 (Bom), the Commissioner allowed set-off of the carry forward unabsorbed depreciation of earlier years against the income computed under the head 'Income from other sources'. The assessable income was, thus, reduced to nil.

4. The assessed as well as the revenue, being aggrieved with the order of the Commissioner (Appeals), took the matter in further appeals to the Tribunal. The Tribunal dismissed the appeal of the assessed regarding disallowance of the expenses but allowed the appeal filed by the revenue, holding that the depreciation brought forward from earlier years could not be set off against income from other sources.

4. The assessed as well as the revenue, being aggrieved with the order of the Commissioner (Appeals), took the matter in further appeals to the Tribunal. The Tribunal dismissed the appeal of the assessed regarding disallowance of the expenses but allowed the appeal filed by the revenue, holding that the depreciation brought forward from earlier years could not be set off against income from other sources.

5. On assessed's moving an application under section 256(1), the aforenoted questions, as corrected, have been referred.

5. On assessed's moving an application under section 256(1), the aforenoted questions, as corrected, have been referred.

6. We have heard Mr. Santosh K. Aggarwal, the learned counsel for the assessed and Mr. R.D. Jolly, senior standing counsel for the revenue. Since, in our opinion, the issue, subject-matter of the first question, stands answered by the Supreme Court in CIT v. Virmani Industries (P) Ltd. (1995) 216 ITR 607 (SC), we deem it unnecessary to dwell on the question in greater detail. In Virmani Industries (P) Ltd.'s case (supra) the assessed was engaged in the manufacture of soap and oil during the previous year relevant to the assessment year 1956-57. The business was stopped in that year, where after the factory was let out on hire. Ten years later, i.e., in the previous year relating to the year 1965-66, the assessed started the business of manufacture of steel pipes. For the purpose of this business, a part of the old machinery used in the manufacture of soap and oil was utilised. In the assessment proceedings relating to the assessment year 1965-66, the assessed claimed that unabsorbed depreciation, to the extent it pertained to the old machinery utilised in the new business, should be brought forward and set off against the profits of the new business. The claim was rejected by the Income Tax Officer and by the Appellate Assistant Commissioner. The Tribunal, however, upheld the assessed's claim. The view of the Tribunal was affirmed by the High Court. Upholding the decision of the High Court, the Apex Court held that if after setting off the unabsorbed depreciation allowance relating to the assessment year 1956-57 against the income for the following assessment years, any depreciation allowance still remained unabsorbed, it could be set off against the income for the accounting period relevant to the assessment year 1965-66. For coming to the said conclusion, the Supreme Court relied on its earlier two decisions in CIT v. Jaipuria China Clay Mines (P) Ltd. (1966) 59 ITR 555 and Rajapalayam Mills Ltd. v. CIT (1978) 115 ITR 777, wherein it was observed that the unabsorbed depreciation was not only to be set off against other heads of income in the relevant previous year but where it is carried forward, it 'stands exactly on the same footing as the current depreciation'. Thus, reiterating the view expressed in the afore-noted decisions, in Virmani Industries (P) Ltd.'s case (supra), the Apex Court has held that though on the first impression the expression 'profits or gains chargeable' appears to refer only to profits or gains of business or profession chargeable under section 28 but in view of the said decisions, the said expression is not so confined and it refers to income from all the heads of income specified in section 14 of the Act, which includes 'Income from other sources'.

6. We have heard Mr. Santosh K. Aggarwal, the learned counsel for the assessed and Mr. R.D. Jolly, senior standing counsel for the revenue. Since, in our opinion, the issue, subject-matter of the first question, stands answered by the Supreme Court in CIT v. Virmani Industries (P) Ltd. (1995) 216 ITR 607 (SC), we deem it unnecessary to dwell on the question in greater detail. In Virmani Industries (P) Ltd.'s case (supra) the assessed was engaged in the manufacture of soap and oil during the previous year relevant to the assessment year 1956-57. The business was stopped in that year, where after the factory was let out on hire. Ten years later, i.e., in the previous year relating to the year 1965-66, the assessed started the business of manufacture of steel pipes. For the purpose of this business, a part of the old machinery used in the manufacture of soap and oil was utilised. In the assessment proceedings relating to the assessment year 1965-66, the assessed claimed that unabsorbed depreciation, to the extent it pertained to the old machinery utilised in the new business, should be brought forward and set off against the profits of the new business. The claim was rejected by the Income Tax Officer and by the Appellate Assistant Commissioner. The Tribunal, however, upheld the assessed's claim. The view of the Tribunal was affirmed by the High Court. Upholding the decision of the High Court, the Apex Court held that if after setting off the unabsorbed depreciation allowance relating to the assessment year 1956-57 against the income for the following assessment years, any depreciation allowance still remained unabsorbed, it could be set off against the income for the accounting period relevant to the assessment year 1965-66. For coming to the said conclusion, the Supreme Court relied on its earlier two decisions in CIT v. Jaipuria China Clay Mines (P) Ltd. (1966) 59 ITR 555 and Rajapalayam Mills Ltd. v. CIT (1978) 115 ITR 777, wherein it was observed that the unabsorbed depreciation was not only to be set off against other heads of income in the relevant previous year but where it is carried forward, it 'stands exactly on the same footing as the current depreciation'. Thus, reiterating the view expressed in the afore-noted decisions, in Virmani Industries (P) Ltd.'s case (supra), the Apex Court has held that though on the first impression the expression 'profits or gains chargeable' appears to refer only to profits or gains of business or profession chargeable under section 28 but in view of the said decisions, the said expression is not so confined and it refers to income from all the heads of income specified in section 14 of the Act, which includes 'Income from other sources'.

7. In view of the said authoritative pronouncement, we are of the opinion that the Tribunal was not right in holding that the unabsorbed depreciation carried forward from earlier years could not be allowed against the income assessed under section 56 of the Act under the head 'Income from other sources'. Consequently, the first question is answered in the negative, i.e., in favor of the assessed and against the revenue.

7. In view of the said authoritative pronouncement, we are of the opinion that the Tribunal was not right in holding that the unabsorbed depreciation carried forward from earlier years could not be allowed against the income assessed under section 56 of the Act under the head 'Income from other sources'. Consequently, the first question is answered in the negative, i.e., in favor of the assessed and against the revenue.

8. As regards the second question, Mr. Aggarwal, the learned counsel for the assessed, submits that the assessed, at whose instance, the reference has been made, is not interested in getting an answer from this court on the question. Accordingly, the second question is returned unanswered.

8. As regards the second question, Mr. Aggarwal, the learned counsel for the assessed, submits that the assessed, at whose instance, the reference has been made, is not interested in getting an answer from this court on the question. Accordingly, the second question is returned unanswered.

The reference stands disposed of in the above terms with no order as to costs.