Full Judgment Text
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PETITIONER:
BROOKE BOND & COMPANY LTD.(NOW KNOWN ASBROOKE BOND LEIBIG LI
Vs.
RESPONDENT:
C.I.T., WEST BENGAL-II, CALCUTTA
DATE OF JUDGMENT30/09/1986
BENCH:
PATHAK, R.S.
BENCH:
PATHAK, R.S.
MUKHARJI, SABYASACHI (J)
CITATION:
1986 SCR (3) 980 1986 SCC (4) 689
JT 1986 613 1986 SCALE (2)573
ACT:
Indian Income Tax Act, 1922-Sections 6, 24(2) & 33A-
Assessee-Dividend income shown in return under head ’income
from other sources’ - Whether could be computed under head
’income from business’.
HEADNOTE:
The appellant, a sterling company carrying on business
in tea with its Head office in the United Kingdom, invested
in the shares of other tea companies in different parts of
the world, and had a hundred per cent share holding in an
Indian subsidiary.
The appellant was assessed under the Indian Income Tax
Act 1922. For the assessment year 1955-56 the appellant was
assessed on its total world income on the basis of
provisional figures of its business loss including
depreciation, and its income from individuals. As its Indian
income exceeded its income outside India it was assessed as
a resident. Meanwhile the appellant had already been
assessed for the subsequent assessment year 1956-57 in the
status of a ’non-resident’ and its income from dividends was
assessed under the head ’Income from other Sources’. The
loss determined for the assessment year 1955-56 could not be
carried forward and set off against the income for the
assessment year 1956-57, as the latter assessment was made
subsequent to the farmer.
The appellant preferred two revision applications, one
each for the assessment years 1955-56 and 1956-57 under sub-
s. (2) of s. 33A. In the revision application for the
assessment year 1955-56, the appellant claimed that the
quantum of loss determined for that year having been based
on provisional figures should be revised on the basis of
final figures certified by an Inspector of Taxes in the
United Kingdom, that the loss should be ascertained for the
purpose of carrying it forward, and that the loss should be
bifurcated between an unabsorbed deprecia-
981
tion and other loss. In the revision application for the
assessment year 1956-57, the appellant claimed a set off of
the loss determined for the assessment year 1955-56 against
the income of the assessment year 1956-57 on the ground that
the shares held by it in different companies constituted its
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trading assets and the dividend income accruing therefrom
should be regarded as income from accruing therefrom should
be regarded as income from business.
During the pendency of these revision petitions the
assessment for the assessment year 1957-58 was completed as
a non-resident, and the income was determined as receipt by
way of dividends on its share holdings.
In the appeal to the Appellate Assistant Commissioner,
it was claimed that the loss for the assessment year 1955-56
should be carried forward and set off against the income of
the assessment year 1957-58 under sub-s. (2) of s. 24
because both the losses and the income arose from business
carried on by the appellant, but the appeal was dismissed
holding that there would be no loss if the loss for the
assessment year 1955-56 was set off against the income for
the assessment year 1956-57 and that the loss could not be
legally set off directly in the assessment year 1957-58.
In further appeal, the Income-Tax Appellate Tribunal
set aside the order of the Appellate Assistant Commissioner
and directed it to dispose of the appeal afresh after
determining whether the appellant was entitled to set off a
business loss arising outside the taxable territories for
the assessment year 1955-56 against the dividend income
arising in the taxable territories for the assessment year
1957-58. The reference to the High Court was declined by the
Appellate Tribunal.
The revision application pertaining to the assessment
year 1955-56 was allowed subject to the claim being verified
in regard to the figures and calculation of depreciation by
the Income Tax Officer. The revision application pertaining
to the assessment year 1956-57, however, was rejected
holding that the dividends earned by the appellant from the
investments in shares of companies carrying on the tea
business could not be said to be a part of the appellant’s
business because the investments were not incidental to the
appellant’s business activities and were not held as trading
assets, that the companies from which the dividend was
earned were not companies of which the appellant was
managing agent, that a set off cannot be allowed to the
extent of the
982
unabsorbed depreciation brought forward from the assessment
year 1955-56 against the business income derived during the
assessment year 1956-57, and that there was no business
income in the assessment year 1956-57.
A Petition under Art. 226 filed by the appellant
against the disposal of his revision application for the
assessment year 1956-57 was dismissed by a Single Judge, and
the appeal against that order as well as dismissed.
In the appeal to this Court on behalf of the appellant
it was contended: (1) that if this Court clarified that the
Appellate Assistant Commissioner can proceed in the appeal
relating to the assessment year 1957-58 pending before him
without being influenced by the observations of the
Commissioner of Income Tax and the High Court in the case
relating to the assessment year 1956-57 on the aspect of
carry forward of loss under sub-s. (2) of s. 24, the appeal
would not be pursued, and that if such clarification is not
possible then this Court should confine itself to the case
relating to the assessment year 1956-57; (2) that the
Commissioner of Income Tax had conceded in an earlier
proceeding that the dividend income was income from
business; (3) that the loss should be carried forward under
sub-s. (2) of s. 24 from the assessment year 1955-56, to the
assessment year 1956-57 and it is not necessary that the
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business carried on in the assessment year 1956-57 should be
the same as that carried on in the assessment year 1955-56,
and (4) that the claim of the appellant to carry forward of
unabsorbed depreciation under sub-s. (2) of s. 10 should be
allowed.
Partly allowing the Appeal,
^
HELD: 1. The order of the Division Bench and of the
Single Judge as well as the order of the Commissioner of
Income Tax on the revision application for the assessment
year 1956-57 are set aside in regard to the claim of the
appellant to the carry forward of unabsorbed depreciation
and the Commissioner is directed to dispose of the revision
application afresh. As to the rest of the reliefs the appeal
is dismissed. [992C-D]
2. Income-tax is a single charge on the total income of
an assessee. For the purpose of computation the statute
recognises different classes of income which it classifies
under different heads of income. For each head of income the
statute has provided the mode of computing the quantum of
such income. The mode of computation varies with
983
the nature of class of such income, for the deductions
permissible under the law in computing the income under each
head bear a particular relevance to the nature of the
income. [988B-C]
3. The statute operates on the principle that it is the
net income under each head which should be considered as a
component of the total income. The statute permits specified
deductions from the gross receipt in order to compute the
net income. The net income under the different heads is then
pooled together to constitute the total income. The process
of computation at this stage takes in the provisions
relating to the carry forward and setting off of losses and
of unabsorbed depreciation. On the conclusion of the entire
process of assessment what emerges is the figure of taxable
income, the quantum of income which is assessed to tax.
[988C-E]
4. Ordinarily when income pertains to a certain head,
the source of such income is peculiar to that head, but it
is not unusual that commercial considerations may properly
describe the source differently. For instance, a banking
concern may hold securities in the course of its business.
The securities constitute its trading assets and income from
them would in the commercial sense be regarded as business
income. However, for the purposes of computation under the
income-tax, the income from such securities would be
computed not under the head ’Income from Business’ but under
the head ’Interest on Securities’. [988E-G]
5(i) Business income is broken up under different heads
only for the purpose of computation of the total income, and
that by such breakup the income does not cease to be the
income of the business. [988G]
5(ii) Section 6 of the Indian Income Tax Act 1922,
which classified the taxable income under different heads
made such classification only for the purpose of computation
of the net income of the assessee. [989C]
United Commercial Bank Ltd. v. Commissioner of Income
Tax, [1957] 32 I.T.R. 688; Commissioner of Income-Tax,
Bombay City v. Chugandas and Co., [1965] 55 I.T.R. 17;
Commissioner of Income-tax, Andhra Pradesh v. Cocandada
Radhaswami Band Ltd., [1965] 57 I.T.R. 306 and O.RM.M.SP.SV.
Firm v. Commissioner of Income-tax, Madras, [1967] 631
I.T.R. 404, 410 followed.
6. The mere circumstance that the appellant showed the
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dividend income under the head ’Income from other Sources’
in its returns can-
984
not in law decide the nature of the dividend income. It must
be determined from the evidence whether having regard to the
true nature and character of the income it could be
described as income from business, even though it is liable
to fall for computation under another head. [989F-G]
7. In the instant case, the appellant placed material
before the Commissioner of Income-tax showing that it held
shares in companies carrying on the tea business, and that
in India it enjoyed a hundred per cent share holding in the
Indian subsidiary. But in order that the share holdings in
tea companies should be regarded as the business assets of
the appellant there must be material evidence indicating
that the ownership of the share-holdings is necessarily
incidental to the business of tea carried on by the
appellant or that the share holdings are held as business
assets. [989H; 990A-B]
8. From the material placed before the Court, the
Revenue cannot be said to have admitted that the dividend
income received by the appellant from its share holdings in
other companies can be regarded as part of the appellant’s
income from business. [990F-G]
9. The loss cannot be carried forward under sub-s. (2)
of s. 24 from the assessment year 1955-56 to the assessment
year 1956-57 because the shares held by the appellant cannot
be regarded as its trading assets. [991A-B]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2020
(NT) of 1974
From the Judgment and Order dated 14.8.1973 of the
Calcutta High Court in Appeal No. 317 of 1970
T.A. Ramachandran, J. Ramamurthi and D.N. Gupta for the
Appellant.
C.M. Lodha and Ms. A. Subhashini for the Respondent.
The Judgment of the Court was delivered by
PATHAK, J. This appeal by certificate granted by the
High Court of Calcutta is directed against a judgment of the
Division Bench of the High Court confirming on appeal the
dismissal of the appellant’s writ petition.
985
The appellant, Brooke Bond & Company Ltd., now known as
Brooke Bond Leibig Limited, is a sterling company carrying
on business in tea with its Head Office in the United
Kingdom. The appellant has invested in the shares of other
tea companies in different parts of the world, and has a
hundred per cent share holding in an Indian subsidiary,
Brooke Bond (India) Limited.
The appellant is assessed under the Indian Income Tax
Act, and the relevant financial year is the previous year in
relation to the corresponding assessment year. For the
assessment year 1955-56 the appellant was assessed on its
total world income by an assessment order dated July 16,
1957 on the basis of provisional figures of its business
loss including depreciation, and its income from dividends.
On the basis of those provisional figures it was assessed to
a net loss of Rs.31,33,647. As its Indian income exceeded
its income outside India it was assessed as a resident.
Meanwhile, on March 28, 1957 the appellant had already been
assessed for the subsequent assessment year 1956-57 in the
status of a non-resident, and its income of Rs.53,11,958
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from dividends was assessed under the head ’Income from
Other Sources’. It is obvious that the loss determined for
the assessment year 1955-56 could not be carried forward and
set off against the income for the assessment year 1956-57,
as the latter assessment was made subsequent to the former.
On February 12, 1958 the appellant preferred two
revisions applications, one each for the assessment years
1955-56 and 1956-57, before the Commissioner of Income-tax
under sub-s. (2) of s. 33A of the Indian Income Tax Act,
1922. In the revision application for the assessment year
1955-56 the appellant claimed that the quantum of loss
determined for that year having been based on provisional
figures should now be revised on the basis of the final
figures certified by an Inspector of Taxes in the United
Kingdom. The appellant claimed also that the loss should be
ascertained for the purpose of carrying it forward, and
further that the loss should be bifurcated between an
unabsorbed depreciation of Rs.40,27,853 and other loss. In
the revision application for the assessment year 1956-57 the
appellant claimed a set off of the loss determined for the
assessment year 1955-56 against the income of the assessment
year 1956-57 on the ground that the shares held by it in tea
companies constituted its trading assets and the dividend
income accruing therefrom should be regarded as income from
business. It mentioned that it carried on business in tea in
the United Kingdom and the investments were made in the
usual course of
986
its tea business in companies also engaged in the tea
business exclusively. The revision petitions remained
pending for eight years.
Meanwhile the appellant’s assessment for the assessment
year 1957-58 was completed in November 1957 as a non-
resident, determining an income of Rs.51,85,836 received by
way of dividends on its share holdings. An appeal was taken
to the Appellate Assistant Commissioner of Income Tax
claiming that the loss for the assessment year 1955-56
should be carried forward and set off against the income for
the assessment year 1957-58 under sub-s. (2) of s. 24
because both the loss and the income arose from business
carried on by the appellant. By his order dated August 14,
1958 the Appellant Assistant Commissioner dismissed the
appeal holding that there would be no loss if the loss for
the assessment year 1955-56 was set off against the income
for the assessment year 1956-57, and that the loss could not
be legally set off directly in the assessment year 1957-58.
The appellant appealed to the Income-tax Appellate Tribunal
and on July 1, 1966 the Appellate Tribunal set aside the
order of the Appellate Assistant Commissioner and directed
the Appellate Assistant Commissioner to dispose of the
appeal afresh after determining whether the appellant was
entitled to set off a business loss arising outside the
taxable territories for the assessment year 1955-56 against
the dividend income arising in the taxable territories for
the assessment year 1957-58. The Commissioner of Income Tax
applied for a reference to the High Court but the Appellate
Tribunal rejected the application on December 1, 1966.
On December 5, 1966 the Commissioner of Income Tax
disposed of the revision applications filed by the
appellant. The revision application pertaining to the
assessment year 1955-56 was allowed subject to the claim
being verified in regard to the figures and calculation of
depreciation by the Income Tax Officer. The revision
application pertaining to the assessment year 1956-57,
however, was rejected with the observation that the dividend
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earned by the appellant from investments in shares of
companies carrying on the tea business could not be said to
be a part of the appellant’s business because the
investments were not incidental to the appellant’s business
activities and were not held as trading assets. It was also
stated that the companies from which the dividend was earned
were not companies of which the appellant was managing agent
so as to require the making of such investments for the
purposes of its business as managing agents. The
Commissioner also rejected the contention of the appellant
that a set off should be allowed to the extent of the
unabsorbed depreciation brought forward
987
from the assessment year 1955-56 against the business income
derived during the assessment year 1956-57. The Commissioner
observed that there was no business income in the assessment
year 1956-57.
Thereafter the appellant filed a writ petition in the
High Court of Calcutta against the disposal of his revision
application for the assessment year 1956-57, but on
September 22, 1969 the learned Single Judge dismissed the
writ petition. An appeal filed by the appellant was
dismissed by the Division Bench of the High Court on August
14, 1973.
The Division Bench adverted to the finding of the
Commissioner of Income Tax in the appellant’s revision
application relating to the assessment year 1956-57 that the
material placed before him did not show that the dividend
earned by the appellant from its investment in the shares of
different companies could be regarded as part of the
appellant’s business income. He had found that the
investments in shares were not incidental to the appellant’s
business activities and they were not held as trading
assets. The Division Bench held that no error of law in the
Commissioner’s order had been established and consequently
there was no case for interference with the rejection of the
appellant’s claim for carrying forward the losses arising
from its business in the assessment year 1955-56 against the
dividend income for the assessment year 1956-57. On the
other contention raised by the appellant, the claim to carry
forward the depreciation allowance pertaining to the
business activities of the assessment year 1955-56 for
deduction in the assessment proceedings of the assessment
year 1956-57 the Division Bench appeared to be in favour of
the appellant, but it declined to express any final opinion
on the point. The judgment of the Division Bench is under
appeal before us.
At the outset learned counsel for the appellant stated
before us that he would not press this appeal if we clarify
that the Appellate Assistant Commissioner can proceed in the
appeal relating to the assessment year 1957-58 pending
before him without being influenced by the observations of
the Commissioner of Income Tax and the High Court in the
case relating to the assessment year 1956-57 on the aspect
of carry forward of loss under sub-s. (2) of s. 24, and that
if such clarification is not possible then we should, in
this appeal, confine ourselves to the case relating to the
assessment year 1956-57.
There was considerable debate on the question whether
the
988
dividend income received by the appellant from its share
holdings in different companies engaged in the tea business
could be regarded as business income.
It is a cardinal principle of the law relating to
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income-tax that income-tax is a single charge on the total
income of an assessee. For the purpose of computation the
statute recognises different classes of income which it
classifies under different heads of income. For each head of
income the statute has provided the mode of computing the
quantum of such income. The mode of computation varies with
the nature of the class of such income, for the deductions
permissible under the law in computing the income under each
head bear a particular relevance to the nature of the
income. The statute operates on the principle that it is the
net income under each head which should be considered as a
component of the total income. The statute permits specified
deductions from the gross receipt in order to compute the
net income. The net income under the different heads is then
pooled together to constitute the total income. The process
of computation at this stage takes in the provisions
relating to the carry forward and setting off of losses and
of unabsorbed depreciation. On the conclusion of the entire
process of assessment what emerges is the figure of taxable
income, the quantum of income which is assessed to tax.
Ordinarily when income pertains to a certain head, the
source of such income is peculiar to that head, but it is
not unusual that commercial considerations may properly
describe the source differently. For instance, a banking
concern may hold securities in the course of its business.
The securities constitute its trading assets and income from
them would in the commercial sense be regarded as business
income. However, for the purposes of computation under the
income-tax law the income from such securities would be
computed not under the head ’Income from Business’ but under
the head ’Interest on Securities’. In United Commercial Bank
Ltd., v. Commissioner of Income tax, [1957] 32 I.T.R. 688,
this Court pointed out that business income was broken up
under different heads only for the purpose of computation of
the total income, and that by such break-up the income did
not cease to be the income of the business. The principle
was followed by this Court in Commissioner of Income-tax,
Bombay City v. Chugandas and Co., [1965] 55 I.T.R. 17 and it
was reiterated that business income was broken up under
different heads under the Income Tax Act only for the
purpose of computation of the total income, and that by
breaking up the income did not cease to be the income of the
business. It was said:
989
"The heads described in section 6 and further
elaborated for the purpose of computation of
income in sections 7 to 10 and 12, 12A, 12AA and
12B are intended merely to indicate the classes of
income: the heads do not exhaustively delimit
sources from which income arises,"
The point was elaborated by the Court in Commissioner
of Income-tax, Andhra Pradesh v. Cocanada Radhaswami Bank
Ltd., [1965] 57 I.T.R. 306, where the Court was called upon
to consider whether the securities owned by the assessee
formed part of the trading assets of his business, and
income therefrom could be described as income from business,
and the Court reaffirmed that s. 6 of the Indian Income Tax
Act 1922, which classified the taxable income under
different heads made such classification only for the
purpose of computation of the net income of the assessee and
"though for the purpose of computation of the
income, interest on securities is separately
classified, income by way of interest from
securities does not cease to be part of the income
from business if the securities are part of the
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trading assets. Whether a particular income is
part of the income from a business falls to be
decided not on the basis of the provisions of
section 6 but on commercial principles
................ If it was the income of the
business, section 24(2) of the Act was immediately
attracted. If the income from the securities was
the income from its business, the loss could, in
terms of that section, be set off against that
income."
Accordingly, the mere circumstance that the appellant
showed the dividend income under the head ’Income from Other
Sources’ in its returns cannot in law decide the nature of
the dividend income. It must be determined from the evidence
whether having regard to the true nature and character of
the income it could be described as income from business,
even though it is liable to fall for computation under
another head. The principle was again applied in O.RM.M. SP.
SV. Firm v. Commissioner of Income-tax, Madras [1967] 63
I.T.R. 404, 410. The position on the law is clear. But is
the appellant in the present case entitled to the relief
claimed by it?
The appellant placed material before the Commissioner
of Income-tax showing that it held shares in companies
carrying on the tea business
990
and that in India it enjoyed a hundred per cent share
holding in the Indian subsidiary. But in order that the
share holdings in tea commpanies should be regarded as the
business assets of the appellant there must be material
evidence indicating that the ownership of the shareholdings
is necessarily incidental to the business of tea carried on
by the appellant or that the share holdings are held as
business assets. The Commissioner of Income Tax was unable
to draw any conclusion in favour of the appellant in this
regard, and the appellant failed to convince the High Court
also. We have given our careful consideration to the matter
and except for the Indian subsidiary there is nothing to
show that the investments of the appellant in the other tea
companies were intended to bring, or in fact brought about,
some advantage or benefit to the business carried on by the
appellant. The mere fact that the share holdings related to
the tea companies is not sufficient by itself to support the
submission that they were acquired to safeguard the
appellant’s interest in the tea business carried on by it.
The matter is pending in appeal relating to the assessment
year 1957-58 before the Appellate Assistant Commissioner and
it will be open to the appellant to place further material
before the Appellate Assistant Commissioner to enable him to
come to an adequate and satisfactory decision. The appellant
may have a sufficient case specially in regard to the share
holding possessed by it in its Indian subsidiary, but we
refrain from expressing any opinion on the point and we
leave it to the appellant to satisfy the Appellate Assistant
Commissioner that the appellants share holdings in the
Indian subsidiary and the other tea-companies enures to the
benefit of the business carried on by it.
An attempt was made by learned counsel for the
appellant to show that the Commissioner of Income Tax had
conceded in an earlier proceeding that the dividend income
was income from business. Our attention has been invited to
a recital in the order of the Appellate Tribunal relating to
the assessment year 1957-58 and to what has been stated by
the Commissioner in his reference application against that
order. We are not satisfied from the material placed before
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us that the Revenue can be said to have admitted that the
dividend income received by the appellant from its share
holdings in other companies can be regarded as part of the
appellant’s income from business.
Consequently we are unable to sustain the appellant’s
challenge to the view expressed by the Division Bench of the
High Court in regard to the appellant’s claim that the
dividend income must be regarded as income from business.
991
The next point raised by the appellant is that the loss
should be carried forward under sub-s. (2) of s. 24 from the
assessment year 1955-56 to the assessment year 1956-57 and
it is not necessary that the business carried on in the
assessment year 1956-57 should be the same as that carried
on in the assessment year 1955-56. This point must also fail
because it proceeds on the assumption that the shares held
by the appellant can be regarded as its trading assets.
The final contention of the appellant relates to the
carry forward of unabsorbed depreciation under sub-s. (2) of
s. 10. The Division Bench appeared to be of the tentative
view that the appellant was entitled to the carry forward
claimed by it, but it did not express any final opinion as
it had decided to decline relief to the appellant on the
ground that the assessment for the assessment year 1956-57
had already been closed by the Revenue when the assessment
for the assessment year 1955-56 was being made and the grant
of relief would have its consequence on the assessment for
the assessment year 1957-58, in respect of which an appeal
was pending. The writ petition was directed against the
order of the Commissioner of Income Tax made upon the
revision application filed by the appellant in respect of
the assessment year 1956-57, and the High Court could have
directed the Commissioner to grant appropriate relief for
the assessment year 1956-57. The Commissioner was not
concerned with the proceeding relating to the assessment
year 1957-58. That was a matter pending in appeal before the
Appellate Assistant Commissioner. The point could have been
considered by the Commissioner in the revision application
for the assessment year 1956-57. Merely because relief given
by the Commissioner in that regard in the proceeding for the
assessment year 1956-57 could have its consequence upon the
proceeding for the assessment year 1957-58 then pending in
appeal before the Assistant Appellate Commissioner, could
not bring the case within proviso (b) to sub-s. (1) of s.
33A of the Indian Income Tax Act. It may be that the same
point was the subject of the appeal, but the point agitated
before the Commissioner was with reference to the assessment
year 1957-58. It could not debar the Commissioner from
considering the same point in relation to the assessment
year 1956-57. We need express no opinion at this stage on
the view tentatively expressed by the Division Bench of the
High Court that the appellant’s claim to the carry forward
of unabsorbed depreciation from the assessment year 1955-56
to the assessment year 1956-57 is vaild or not. As we have
noted, the view taken by the High Court was tentative only
and not its final opinion. Indeed, no submission was made on
behalf of the Revenue before us on the point.
992
We shall concern ourselves merely with the correctness of
the Division Bench refusing to grant relief after it reached
the tentative finding that there was merit in the
appellant’s claim to the carry forward of unabsorbed
depreciation. In our opinion, the order of the Commissioner
disposing of the revision application for the assessment
year 1956-57 should have been set aside by the Division
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Bench and the Commissioner should have been directed to
consider the claim on its merits. We make that direction
now. At the same time, we make it clear that it will be open
to the Revenue to contend on the merits that the appellant
is not entitled to the carry forward of unabsorbed
depreciation.
The appeal is allowed in so far only that the order of
the Division Bench and of the learned Single Judge as well
as the order of the Commissioner of Income Tax on the
revision application for the assessment year 1956-57 are set
aside in regard to the claim of the appellant to the carry
forward of unabsorbed depreciation, and the Commissioner is
directed to dispose of the revision application in respect
of that claim afresh. As to the rest of the reliefs the
appeal is dismissed. In the circumstances there is no order
as to costs.
A.P.J. Appeal allowed in part.
993