Law:

Section:

section 32(2) of the income-tax act, 1961-depreciation-carry forward and set off of depreciation allowance-whether Unabsorbed development rebate could be treated as part of business loss and allowed to be carried forward and adjusted even before the unabsorbed depreciation could be set off-held, no Facts For the assessment year 1971-72, the ITO computed the net income of the assessee at Rs. 66,46,360 and thereafter set off the depreciation allowance of Rs. 26,16,626 brought forward from 1966-67, and Rs. 40,29,734 from 1967-68 bringing the taxable income to nil. After deduction of some capital gain, the ITO determined the depreciation allowance of 1967- 68 to be carried forward at Rs. 26,20,889. As the income became nil, the ITO did not allow any set off of the development rebate brought forward from 1966-67. In appeal, the assessee claimed that the unabsorbed development rebate brought forward from 1966-67 should have been first adjusted before the depreciation allowance could be adjusted. The AAC accepted the assessee's contention but the Tribunal restored the ITO's order. On reference, the assessee conceded that the current year's depreciation had to be deducted first before setting off development rebate brought forward under section 32(2) but contended that such development rebate should be treated as a part of the business loss and pursuant to section 72(2), it should get precedence over unabsorbed depreciation allowance brought forward. Held By a legal fiction, section 32(2) treats the brought forward depreciation allowance as part of the current year's allowance and entitles it to set off, subject only to the provisions of sections 72(2) and 73(3), i.e., set off of business and speculation loss. Development rebate is not a business loss but an incentive for modernizing machinery, plant and equipment and as such, it cannot get priority over the unabsorbed depreciation allowance of the previous years for the purpose of set off. Case review CIT v. Gujarat State Warehousing Corp. [1976] 104 ITR 1 (Guj.) followed. Cases referred to CIT v. Gujarat State Warehousing Corporation [1976] 104 ITR 1 (Guj.) and CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR…

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