Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, MADRAS
Vs.
RESPONDENT:
S. S. SIVAN PILLAI AND OTHERS
DATE OF JUDGMENT:
29/04/1970
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
HEGDE, K.S.
GROVER, A.N.
CITATION:
1970 AIR 1667 1971 SCR (1) 434
1970 SCC (2) 180
CITATOR INFO :
D 1976 SC 606 (8,10)
ACT:
Indian Income-tax Act, 1922, s. 15-C(1) & (4)- Share-holders
whether entitled to exemption under sub-s. (4) when company
makes no profit liable to exemption under sub-s. (1)-
Unabsorbed depreciation carried forward under section 10(2)
(vi) and 10(2) (vi-A)- Whether to be set off against profit
for purpose of determining profit under s. 10 Set-off of
depreciation carried forward against profit of succeeding
year whether takes place under s. 10(2) (vi) proviso (b) or
under S. 24(2).
HEADNOTE:
Shri Ganapathy Mills Co. Ltd., Distributed dividend to its
shareholders out of its business profits earned in the years
ending December 31, 1953 and December 31, 1954. The
company, however carried in its accounts a large balance of
unabsorbed depreciation admissible under s. 10(2) (vi) &
10(2) (vi-a) of the Income-tax Act, 1922 and on that account
it had no taxable income in the relevant assessment years
1954-55 and 1955-56. In assessing the income of the
shareholders for the assessment years the Income-tax Officer
rejected the claim for exemption from tax Linder s. 15-C(4)
of the Income-tax Act and brought the dividend to tax. This
order was confirmed by the Income-tax Appellate Tribunal.
The High Court, in a reference, held in favour of the
assessees. With certificate the Revenue appealed. The
question that fell for consideration were : (i) Whether the
High Court’s view that unabsorbed depreciation of previous
years must be ignored in computing the profits under s. 10
and the Implied assumption that unabsorbed depreciation was
carried forward and set-off under s. 22(4) were correct;
(ii) Whether, the claim under s. 15-C(4) could be made even
when there was no taxable profit for which exemption could
be claimed Linder s. 15-C(4).
HELD : (i) Under proviso (b) to s. 10(2) (vi) the unabsorbed
depreciation in an year is to be deemed the depreciation for
the succeeding year into the accounts of which it is carried
forward and the aggregate of depreciation in the year of
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assessment and the unabsorbed depreciation of the previous
year is deemed to be depreciation allowance for the year of
assessment. The opinion of the High Court that in computing
the profits of an industrial ’undertaking under s. 10,
unabsorbed depreciation for the previous years must be
ignored is inconsistent with the plain terms of the proviso.
[438 D-E; 439 D]
The right to claim allowance of unabsorbed depreciation does
not arise out of s. 24(2) of the Act. Under the scheme of
s. 15-C(4) profits and gains of an industrial undertaking
must be determined under and in the manner provided by s. 10
of the Income-tax Act. For that purpose all the allowances
under sub-s. (2) are taken into account and the resultant
amount forms a component of the taxable profits, By proviso
(b) to s. 10 (2) (vi), the unabsorbed depreciation in the
previous year is deemed depreciation for the subsequent
year, and there is no room for making any distinction
between the unabsorbed depreciation for the previous year
and the depreciation for the current year. The right to
appropriate the profits towards the unabsorbed depreciation
in the previous year does not arise under s. 24(2); it
arises by virtue of s. 10(2) (vi) proviso (b). [439 D-F]
435
(ii)The right of the shareholders to obtain benefit of
exemption under 15-C(4) depends upon the company obtaining
the benefit of exemption under sub-s. (1) of s. 157C for the
exemption from payment of tax on the dividend received by
the share-holders is admissible only on that part of the
profits or gains on which the tax is not payable by the com-
pany under sub-s. (1). [439 HI
On this view it must be held that the claim of shareholders
in the present case rightly disallowed by the taxing
authorities. [435 H; 441 D]
[Proviso (b) ’to s. 24(2 held inapplicable, with the
observation that it deals merely with priority and does not
convert what is unabsorbed depreciation of the previous year
which is deemed to be depreciation for the current year into
loss "for the purpose of carry forward".[440 D]
Commissioner of Income-tax, Calcutta v. Jaipuria China Clay
Mines (P) Ltd., 59 I.T.R. 555, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 2321 to
2324 of 1966.
Appeals from the judgment and order dated August 2, 1965 of
the Madras High Court in Tax Cases Nos. 198 to 201 of 1962
(References Nos. 114 to 117 of 1962).
B.Sen, G. C. Sharma, R. N. Sachthey and B. D. Sharma, for
the appellant (in all the appeals).
Gobind Das and Lily Thomas, for the respondents (in all the,
appeals).
The Judgment of the Court was delivered by
Shah, J. Sri Ganapathy Mills Co. Ltd. distributed divident
to its shareholders out of the business profits earned by it
in the years ending December 31, 1953 and December 31, 1954.
The Company however carried in its accounts a large balance
of unabsorbed depreciation admissible under s. 10(2) (vi)
and S. 10 (2) (vi-a) of the, Income-tax Act, and on that
account it had no taxable income in the relevant assessment
years 1954-55 and 1955-56.
In assessing the income, of the shareholders for the,
assessment years 1955-56 and 1956-57 the Income-tax Officer
rejected their claim for exemption from tax under S. 15-C(4)
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of the Incometax Act, 1922, and brought-the dividend income
to tax. This. order was confirmed by the Income-tax
Appellate Tribunal.
The Tribunal referred the following question to the High
Court of Madras for opinion :
"Whether on the facts and in the circumstances of the case,
the assessees are entitled to the benefit of
436
S.15-C(4) in respect of the dividend income received from
Sri Ganapathy Mills Co. Ltd., Tinnevelly ?"
The High Court answered the question in the affirmative.
The ,Commissioner of Income-tax has appealed to this Court
with a ,certificate under S. 66A(2) of the Income-tax Act.
In the year ending December 31, 1953, the Company had
,earned in its business transactions a profit of Rs. 87,184,
but it ,had no taxable profits, for the depreciation for the
current and the previous years amounted to Rs. 2,83,343
which was an admissible allowance in the computation of
income under s. 10 of the Income-tax Act. Since full effect
could not be given to the allowance, the Company was
entitled to add to the depreciation for the following year
the unabsorbed depreciation of Rs. 1,96,159 under s.
10(2)(vi) proviso (b). In the year ending December 31,
1954, the Company earned a profit of Rs. 4,36,821 ,and the
depreciation admissible for the year was Rs. 2,41,809.
Taking into account the unabsorbed depreciation of the
previous _year in computing the taxable income, it was found
that the Company had suffered a loss of Rs., 1,147.
Accordingly the Company had no taxable profits in either of
the two years and so tax was ,levied from the Company. But
the Company had still distributed dividend out of profits
earned by it and the taxing authorities levied tax on the
dividend received by the shareholders.
The answer to the question referred to the Tribunal depend-,
upon the true interpretation of s. 15-C of the Indian
Income-tax Act, 1922. Section 15-C of the Income-tax Act.
insofar as it is ,relevant, provides
" (1) Save as otherwise hereinafter provided,
the tax shall not be payable by an assessee on
so much of the profits or gains derived from
any industrial undertaking to which this
section applies as do not exceed ,six per cent
per annum on the capital employed in the
undertaking, computed in accordance with Such
rules as may be made in this behalf by the
Central Board of Revenue.
(2) . . . . . .
(3) The profits or gains of an industrial
under,taking to which this section applies
shall be computed in accordance with the
provisions of section 10.
(4) The tax shall not be payable by a share-
holder in respect of so much of any dividend
paid or deemed to be paid to him by an
industrial undertaking
4 3 7
as is attributable to that part of the profits
or gains on which the tax is not payable under
this section.
. . . . . . ."
The Company was an industrial undertaking to which s. 15-C
applied. It had in the two relevant years derived from the
industrial undertaking no profits or gains within the
meaning of sub-s. (1) read with sub-s. (3) of s. 15-C. The
profits or gains derived the industrial undertaking within
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the meaning of sub-s. (1) of s. 15-C are not business
profits : they are taxable profits computed in accordance
with the provisions of s. 10 of the Income-tax Act. Under
s. 15-C(1) no tax is payable by the industrial undertaking
on its taxable profits equal to six per cent per annum of
the capital employed. Sub-section (4) of s. 15-C exempts
the shareholders of an industrial, undertaking to which s.
15-C applies, from liability to pay tax in respect of the
dividend paid or deemed to be paid as is attributable to
that part of the profits or gains on which the tax is not
payable under s. 15-C (1).
Exemption under s. 15-C(1) from payment of income-tax is not
related to the business profits: it is related to the
taxable profits. The language of sub-s. (3) is clear : the
profits or gains of an industrial undertaking have to be
determined under s. 10 of ,the Act. Even if the undertaking
has earned profits out of its commercial activity, if it has
no taxable profits it cannot claim exemption from payment of
tax under sub-s. (1) of s. 15-C; and it’ the undertaking
cannot claim the benefit under sub-s. (1) the shareholders
will not get the benefit of sub-s. (4), for there is no
dividend paid which is attributable to that part of the
profits or gains on which the tax was not payable by the
undertaking.
The Company had no taxable profit in the year of accounts it
did not accordingly qualify for exemption from payment of
tax under sub-s. (1) and since there was- no such taxable
profit, the dividend received by the shareholders could not
be said to be attributable to that part of the profits or
gains on which the tax was not payable under sub-s. (1). On
the plain terms of s. 15-C the shareholders cannot obtain
the benefit of exemption from payment of tax.
We are unable to agree with the High Court that in deter-
mining the profits of the Company the unabsorbed
depreciation of the previous years will not be taken into
account. Section 10 of the Income-tax Act, insofar as it is
relevant, provides :
"(1) The tax shall be payable by an assessee
under the head "Profits and gains of business,
profession or vocation" in respect’ of the
profits or gains of any business, profession
or vocation carried on by him.
L12SupCI 70-14
438
(2) Such profits or gains shall be computed
after
making the following allowances, namely:-
. . . . . . ."
Clause (vi) deals with depreciation allowance in respect of
buildings, machinery, plant or furniture being the property
of the assessee, at a sum equivalent to such percentage on
the original cost thereof as may be prescribed. Under cl.
(vi-a) in respect of buildings newly erected, or of
machinery or plant being new which had been installed after
March 31, 1948, a further sum which is deductible in
determining the written down value equal to the amount
admissible under cl. (vi) is allowable. If the depreciation
under cls. (vi) and (vi-a) cannot be given full effect in
any year owing to there being no profits or gains chargeable
for that year, or owing to the profits or gains chargeable
being less than the allowance, then subject to the
provisions of cl. (b) of the proviso to sub-s. (2) of S. 24,
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
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year and deemed to be part of that allowance. It tion of an
year is to be deemed depreciation for the succeeding year
into the account of which it is carried forward, and the
aggregate of the depreciation for the year of assessment and
the unabsorbed depreciation of the previous year is deemed
to be depreciation allowance for the year of assessment.
The High Court, however, said that in computing the profits
of the year of an industrial undertaking for determining
whether the benefit of exemption under s. 15-C(1) is
admissible, the unabsorbed depreciation cannot be taken into
account. The High Court observed:
"In effect, it computing the profits or gains
for the purpose of section 15-C(1) and (4) the
only allowances that could be made in respect
of current year’s additional or extra
depreciation under section 10(2) (vi-a). The
set off of losses under section 24(2) and
allowances in respect of unabsorbed
depreciation both under section 10(2) (vi) and
10(2) (vi-a) would not enter into the
computation under section 15-C(3).
It is true that when the net result of
assessment on the company is taken there is
’nil, profit and there might be no occasion at
all for the application of section 15-C. But,
in our view, it does not follow from it that
on that ground the benefit of that section can
be denied to the shareholders if on a
computation of the profits and gains of the
industrial undertaking under
43 9
section 15-C(3), the company had made profits
out of which dividends had been paid to its
shareholders. Where the company has ’nil,’
profits under its final assessment, the non-
application of section 15-C is not due the
fact that it made no profits and it was not
entitled to the benefit of section 15-C(1).
But, in view of the overall result of the
assessment, there is no need for the company
to claim exception under that provision, as
there is no tax liability at all. Viewed from
this angle, we consider that the shareholders
are entitled to take the position of the
profits or gains of the company as computed
under sub-section (3) of section 15-C and
subject to the limits provided by that sub-
section, and claim the benefit under section
15-C(4)."
The opinion of the High Court that in computing the profits
of an industrial undertaking under s. 10, unabsorbed
depreciation for the previous years must be ignored, is
inconsistent with the plain terms of s. 10(2)(vi) proviso
(b). Again the assumption that the right to claim allowance
of unabsorbed depreciation arises out of s. 24(2) of the Act
is in our judgment erroneous. Under the scheme of s. 15-C
the profits or gains of an industrial undertaking must be
determined under and in the manner provided by s. 10 of the
Income-tax Act. For that purpose all the allowances under
sub-s. (2) must be taken into account, and the resultant
amount forms a component of the taxable profit. If by
proviso (b) to s. 10 (2) (vi) the unabsorbed depreciation of
the previous year is deemed depreciation for the subsequent
year, there is no room for making any distinction between
the unabsorbed depreciation for the previous year and the
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depreciation for the current year. The right to appropriate
the profits towards the unabsorbed depreciation of the
previous year does not arise under s. 24 ( 1); it arises by
virtue of s. 10 (2) (vi) proviso (b)
We are also unable. to agree with the High Court that if an
industrial undertaking has distributed dividend, the
shareholders will be entitled to exemption from payment of
tax on that dividend, even if the Company is not entitled to
claim exemption from liability to pay tax under sub-s. (1)
of s. 15-C. The right of the shareholders to obtain the
benefit of exemption under s. 5-C(4) depends upon the
Company obtaining the benefit of exemption under sub-s. (1)
of s. 15-C, for the exemption from payment of tax on the
dividend received by the shareholders is admissible only in
that part of the profits or gains on which the tax is
not payable by the Company under sub-s. (1).
440
Section 24(2) proviso (b) on which reliance was placed has,
in our judgment, no application. That proviso enacts
"Provided that-
(b) where depreciation allowance is, under
clause (b) of the proviso to, clause (vi) of
sub-section (2) of section 10, also to be
carried forward,effect shall first be given to
the provisions of this sub-section."
Sub-section (2) of S. 24 deals with "the carry-forward of
losses" and proviso (b) to S. 24(2) sets out the sequence in
which the losses carried forward and the depreciation
allowance which remains unabsorbed in the previous year are
to be allowed. Whether any practical effect may be given to
the terms of proviso (b) to s. 24(2), in the view which this
Court has taken in Commissioner of Income-tax, Calcutta v.
Jaipuria China Clay Mines (P) Ltd.(1) is a matter on which
we need express no opinion. If on its plain terms, proviso
(b) to s. 24(2) deals merely with priority and does not
convert what is unabsorbed depreciation of the previous year
which is deemed to be depreciation for the current year’,-
into loss for the purpose of carry-forward," sub-s. (2) of
s. 24 proviso (b) presents no difficulty in the present
case.
This Court in Jaipuria China Clay Mines’ case(1) held that
unabsorbed depreciation of past years cannot be kept out of
accounts in determining the net income of an assessee for a
particular year; it has to be set off against the profits
from other heads. In that case the assessee had for the
year 1952-53 a total business income of Rs. 14,000 odd and
the depreciation amounted to Rs. 5,360. The assessee
company had a large dividend incomes. The tax-payer claimed
that the unabsorbed depreciation of the previous year should
be deducted from the dividend income and the total income
liable to tax be reduced. The Income-tax Officer rejected
the claim. This Court observed that the Income-tax Act
draws no distinction between the various allowances
mentioned in s. 10(2); they all have to be deducted from the
gross profits and gains of a business. Accordingly the’
unabsorbed depreciation of the past years must be added to
the depreciation of the current year, and the aggregate of
the unabsorbed depreciation and the current year’s
depreciation must be deducted from the total income of the
year relevant to the assessment year in question. If the
profits do not wipe out the depreciation, the profit and
loss account would show a loss. The Court further observed
that "carry-forward of depreciation is provided for" in s.
10(2) (vi), and s. 24(2) only deals with losses other than
the losses
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(1) 59 I.T.R. 555.
441
due to depreciation. That decision clearly establishes that
depreciation in respect of a business has in the first
instance to be set off as an allowance against the profits
from the business, profession or vocation. If the
depreciation exceeds the profits and there is no other income
from any other head, the depreciation may be carried forward
to the next year. If, there is a profit from some other
head, then the unabsorbed depreciation of a particular year
under the head "Profits and gains of the business,
profession or vocation" will be set off against such other
income.
In the case in hand, the Company had no other source of
income. The depreciation allowance admissible in the
assessment years exceeded-the business profits. The Company
had no taxable profit in the two years in question. The
Company could not claim exemption from payment of tax
provided in s. 15-C (1); and no dividend having been
distributed out of the taxable profits there was no dividend
attributable to that part of the profits which were exempt
from tax in the ’hands of the shareholders. The answer to
the question submitted by the Tribunal is recorded in the
negative.
The appeals must therefore be allowed. Having regard to the
Circumstances of the case, the Parties will bear their own
costs in this Court and in the High Court.
Appeals allowed. ’G. C.
442