Income-tax---

----Loss---Carry forward of loss ---Assessee-company in liquidation-- Discontinuance of business---Accrual of interest income---Interest income assessed as income from other sources---Unabsorbed depreciation of earlier years was liable to be set off against income from other sources.

The assessee-company was in liquidation. During the winding up proceedings, it had income by way of interest accruals. As the company had discontinued its business it was liable to be assessed under the head "Income from other sources". The company also had unabsorbed depreciation of the earlier years carried for the purpose of being set off against profits and gains of the subsequent years. The Income-tax Officer disallowed the claim of the assessee on the ground that the assessee had no profits or gains chargeable under the head "Income from business" but had taxable income from other sources. The Tribunal held that the assessee was not entitled to set off of depreciation against income from other sources because it had ceased to carry on business. On a reference:

Held, that, the Tribunal was not right in holding that the set off of unabsorbed depreciation carried forward from earlier years could not be allowed against the income from other sources unless, the assessee had income falling under section 28 of the Income Tax Act, 1961.

CIT v. Jaipuria China Clay Mines (P.) Ltd. (1966) 59 ITR 555 (SC); Rajapalayam Mills Ltd. v. CIT (1978) 115 ITR 777 (SC) and CIT v. Virmani Industries (Private) Limited (1995) 216 ITR 607 (SC) fol.

Official Liquidator for the Assessee.

Manish R. Bhatt for the Commissioner.

JUDGMENT

These two references in respect of the same assessee raise identical issues covering the period for the assessment years 1977-78 to 1980-81. The assessee-company was in liquidation. During the winding up proceedings, it. had income by way of interest accruals. As the company had discontinued its business it was liable to be assessed under the head "Income from other sources". The company also had unabsorbed depreciation of the earlier years carried forward for the purpose of being set off against profits and gains of subsequent years. The Income-tax Officer has disallowed the claim of the assessee on the ground that since the assessee had no profits or gains chargeable under the head "Income from business" but had his taxable income from other sources, the carry forward unabsorbed depreciation was not liable to be set off. The Tribunal holding that the assessee was not entitled to set off of depreciation because it has ceased to carry on business ultimately affirmed that order.

At the instance of the company (in liquidation) in Income-tax Reference Nr-.251 of 1984 for the assessment period 1978-79 to 1980-81 the following question of law has been referred to this Court for its opinion:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that set off of unabsorbed depreciation allowance carried forward from earlier years could not be allowed against the income from other sources unless the assessee had income falling under section 28 of the Income Tax Act, 1961?"

In Income-tax Reference No.252 of 1984 relating to the assessment year 1977-78 the following question of law has been referred at the instance of the Commissioner of Income-tax:

"Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that set off of unabsorbed depreciation allowance carried forward from earlier years could not be allowed against the income from other sources unless the assessee had income falling under section 28 of the Income Tax Act, 1961?"

At the time of hearing learned counsel for the Revenue candidly stated that the issue is to be resolved in favour of the assessee in view of the decision of the Supreme Court in CIT v. Virmani Industries (Pvt.) Ltd. (1995) 216 ITR 607, wherein the Court has held considering the meaning of expression "profits or gains chargeable" within the meaning of section 32(2) with reference to sections 72(2) and, 73(3) (page 615):

"On the first impression, the said expression appears to refer only to profits or gains of business or profession chargeable under section 28. But this Court has repeatedly held that the said expression is not so confined and that it refers to income under all the heads of income specified in section 14.

The Court reiterated the view expressed in Rajapalayam Mills Limited v. CIT (1978) 115 ITR 777 (SC) and CIT v. Jalpuria China Clay Mines (P.) Ltd. (1966) 59 ITR 555 (SC) (page 785):

"Now, it is well settled, as a result of the decision of this Court in CIT v. Jaipuria China Clay Mines (P.) Ltd. (1966) 59 ITR 555 (SC), that the words 'no profits or gains chargeable for-that year' are not confined to profits and gains derived from the business whose income is being computed under section 10, but they refer to the totality of the profits or gains computed under the various heads and chargeable to tax."

As to the necessity of carrying on the business activity in the succeeding year as a condition for the carried forward only the unabsorbed depreciation to be set off against the income of such subsequent years, the Court negative the same and held (page 618 of 216 ITR):

"Yet another question which has to be answered before we can answer the question concerned in this appeal is whether it is necessary that in the following year the assessee must carry on business, i.e., some or other business, to avail of the benefit of the said subsection? Two views are possible in this behalf, viz., (1) since the subsection speaks of unabsorbed depreciation being carried forward to the next year and 'added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance' the subsection necessarily contemplates existence of a business in the following year, land (2) inasmuch as the subsection not only speaks of adding the unabsorbed depreciation to the depreciation allowance allowed in the following year but also says that in the absence of such allowance, the carried forward depreciation allowance shall be the allowance for that year, it means that in the following year the assessee need not carry on any business or profession for availing of the benefit of sub section (2) of section 32. We are inclined to adopt the second of the above two views having regard to the decisions of this Court in Jaipuria China Clay Mines (P.) Ltd. s case (1966) 59 ITR 555 and Rajapalayam Mills Ltd.'s case (1978) 115 ITR 777. We have extracted the relevant observations from both the judgments hereinabove, which say that the unabsorbed depreciation allowance has not only to be set off against other heads of income in the relevant previous year but where it is carried forward, it 'stands on exactly the same footing as the current depreciation'.

In view of the aforesaid, we answer the question referred to us in negative, that is to- say, in favour of the assessee and against 'the Revenue by holding that the Tribunal was not right in holding that the set off of unabsorbed depreciation carried forward from earlier years could not be allowed against the income from other sources unless the assessee had income falling under section 28 of the Income-tax Act.

There shall be no order as to costs.

M.B.A./90/FC Reference answered.