ORDER
M.M. Cherian, A.M.
1. This is an appeal by the assessee, Seshasayee Paper & Boards Ltd., Erode, against the order passed by the CIT(A), Coimbatore, in the income-tax assessment for the asst. yr. 1991-92. The only ground raised by the assessee in this appeal is that the CIT(A) erred in holding that the investment allowance brought forward from the preceding years could not be given preference over unabsorbed depreciation for the purpose of set off against the income of the current year.
2. The assessee is a public limited company engaged in the business of manufacturing paper. For the asst. yr. 1991-92 the assessee filed the return declaring Nil income after adjusting the brought forward investment allowance of Rs. 2,56,41,378 relating to the earlier years. Though the assessee had claimed priority for the brought forward investment allowance over the unabsorbed depreciation relating to the earlier years, the AO held that unabsorbed depreciation was to be given precedence and so he set off the unabsorbed depreciation and carried forward the unabsorbed investment allowance for adjusting in the future years. The adjustment made by the AO giving priority to unabsorbed depreciation over the brought forward investment allowance was approved by the CIT(A). Aggrieved by the order of the CIT(A), the assessee has filed this appeal before the Tribunal.
3. We have heard the assessee’s counsel Sri S.A. Balasubramanian, advocate, and Departmental Representative, Sri V. Suryanarayanan.
4. The dispute in this appeal is regarding the priority for carry forward and adjustment between unabsorbed investment allowance and unabsorbed depreciation. The assessee wanted the unabsorbed investment allowance of Rs. 2,56,41,378 to be adjusted against the income for the asst. yr. 1991-92 before setting off the unabsorbed depreciation brought forward from the earlier years. As a matter of fact, after set off of the unabsorbed investment allowance of Rs. 2,56,41,378, according to the assessee’s computation, the total income was reduced to Nil and so no set off could be made in regard to the unabsorbed depreciation. The assessee’s claim was that by claiming priority for brought forward investment allowance over the unabsorbed depreciation, the latter could be carried forward indefinitely for adjustment against the income of the subsequent years. Sri Balasubramanian the learned counsel pointed out that the assessee could get the benefit of carry forward of unabsorbed investment allowance to be adjusted over a period of eight assessment years only. It was, therefore, necessary that the benefit under Section 32A should not be lost by adjusting the unabsorbed depreciation in preference to the brought forward investment allowance. The learned counsel submitted that as per Section 29 of the Act the profits and gains of business were to be computed in accordance with the provisions contained in Sections 30 to 43A and so all the deductions and allowances referred to in Sections 30 to 43A were to be allowed. According to him, deductions allowable under Sections 30 to 43 were absolute deductions and they were to be given effect without any priority between them. Drawing our attention to Section 72(2), Sri Balasubramanian submitted that carry forward of business loss took precedence over carry forward of unabsorbed depreciation for set off against the income of the current year, the reason for giving precedence to unabsorbed business loss being that the loss could be carried forward for eight years only. Sri Balasubramanian stated that if not adjusted within the period of eight years the assessee would lose the unabsorbed business loss and that was why the legislature intended to give priority to the unabsorbed business loss over the unabsorbed depreciation. He contended that on the same reasoning unabsorbed investment which could be carried forward for eight years only, should be adjusted first against the income from business before setting off the unabsorbed depreciation. It was further stated that the provisions of Section 32A were to be given effect to in the computation of the taxable income and not by way of adjustment after computing the total income. Sri Balasubramanian added that the CIT(A) was not correct in placing reliance on the decision of the Madras High Court in the case of CIT v. Coromandel Steels Ltd. (1981) 130 ITR 856 (Mad) for deciding the matter against the assessee, as that decision was not concerned with set off of brought forward investment allowance. That decision was concerned with the set off of unabsorbed development rebate. Sri Balasubramanian submitted that unabsorbed depreciation relating to earlier years was part of the depreciation allowance and the same could not be thrust on the assessee if the assessee did not want it, for any assessment year. Relying on the decision of the Supreme Court in the case of CIT v. Mother India Refrigeration Industries (P) Ltd. (1985) 155 ITR 711 (SC), he submitted that current depreciation was in noway different from unabsorbed depreciation. According to him, unabsorbed depreciation could never be imposed on the assessee if such adjustment would have the effect of losing the benefit of any other allowance which the assessee would be lawfully entitled to. It was the contention of the learned counsel that the assessee had the option to claim the benefit of set off of brought forward investment allowance in preference to unabsorbed depreciation, if such adjustment would be more beneficial and that, the AO would not be justified in denying the benefit of setting off the unabsorbed investment allowance by adjusting first the unabsorbed depreciation. For the contention that unabsorbed depreciation should not be adjusted first if the assessee did not want such adjustment on a priority, the learned counsel relied on the decision of the Supreme Court in the case of CIT v. Mahendra Mills (2000) 243 ITR 56 (SC). In the present case, the assessee could not be denied the benefit of unabsorbed investment allowance by first setting off the unabsorbed depreciation relating to the earlier years. Arguing on the above lines, the learned counsel for the assessee urged us to reverse the order of the CIT(A) and direct the AO to allow set off of the unabsorbed investment allowance against the income of the current year, before adjusting the brought forward unabsorbed depreciation.
5. Per contra, Sri V. Suryanarayanan, the Departmental Representative, supported the order of the CIT(A) and submitted that the matter had already been decided by the Madras High Court in the case of Coromandel Steels Ltd. (supra) and so, the appellate authority was fully justified in confirming the adjustment made by the AO giving priority to unabsorbed depreciation over the brought forward investment allowance. The learned Departmental Representative stated that though the decision of the High Court was concerned with the set off of unabsorbed development rebate, the wording in Section 32A was similar to that in Section 33 relating to development rebate and so, the decision was equally applicable to setting off the brought forward investment allowance in preference to unabsorbed depreciation. Sri Suryanarayanan submitted that Section 32A was inserted by Finance Act, 1976, w.e.f. 1st April, 1976, and that the scope and effect of Section 32A had been elaborated in the Circular No. 202, dt. 5th July, 1976, issued by the CBDT. The learned Departmental Representative filed before us a copy of the above circular and submitted that in the circular the order of priority for various allowances including the brought forward investment allowance was given. He submitted that the decision of the Supreme Court in the case of Mahendra Mills (supra) relied on by the learned counsel for the assessee had no application to the facts of the present case. It was pointed out that the decision in that case was given in respect of asst. yr. 1974-75 when there was the condition that the allowance of depreciation under Section 32(1) would be allowed subject to the provisions of Section 34. It was pointed out that Sub-section (1) of Section 34 providing that the allowance of depreciation would be allowed only if the prescribed particulars had been furnished, was deleted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. 1st April, 1988. In the present case, the dispute is not regarding the allowance of depreciation and whether the allowance could be given if the assessee did not furnish the required particulars. Sri Suryanarayanan further submitted that there was no difference in the wording of Section 32A compared to the provisions of Section 33 relating to the allowance of development rebate and so the decisions given by various judicial authorities in regard to carry forward and set off of development rebate would apply equally to set off of investment allowance.
6. We have given due consideration to the submissions on both sides and gone through the facts of the case. We have also perused the paper books filed before us by both sides. While computing the total income for the asst. yr. 1991-92, the AO adjusted the unabsorbed depreciation relating to the earlier years against the income of the current year, to reduce the same to ‘nil’. The result was that the unabsorbed investment allowance of Rs. 2,56,41,378 could not be set off against the income of the current year and the same was carried forward to the subsequent year. Following the decision of the Madras High Court in the case of CIT v. Coromandel Steels Ltd. (supra) the CIT(A) found that the order passed by the AO giving priority to brought forward unabsorbed depreciation over the brought forward unabsorbed investment allowance was in order. In that case the jurisdictional High Court held that the unabsorbed development rebate under Section 33 would come up for consideration only after the allowance of (a) carried forward business loss, and (b) carried forward depreciation. First comes the deduction of depreciation of the current year. Then as between unabsorbed business loss carried forward and unabsorbed depreciation, business loss has priority over unabsorbed depreciation and has to be allowed. Unabsorbed development rebate comes up for consideration only after those two allowances–that was the decision of the Madras High Court in the case of Coromandel Steels Ltd. (supra)
7. It may be noted that development rebate has been withdrawn from 1st June, 1974, except for a limited period in certain cases. The new allowance called investment allowance broadly based on the lines of the discontinued development rebate was introduced from 1st April, 1976, By Finance Act, 1976. Sub-section (3) of Section 32A, dealing with the deduction allowable for investment allowance reads as under:
“(3) Where the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, or as, the case may be, the immediately succeeding previous year [the total income for this purpose being computed after deduction of the allowance under Section 33 and Section 33A, but without making any deduction under Sub-section (1) of this section or any deduction under Chapter VI-A] is nil or is less than the full amount of the investment allowance,–
(i) the sum to be allowed by way of investment allowance for that assessment year under Sub-section (1) shall be only such amount as is sufficient to reduce the said total income to nil; and
(ii) the amount of the investment allowance, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment year, and the investment allowance to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the investment allowance, if any, still outstanding shall be carried forward to the following assessment year and so on, so, however, that no portion of the investment allowance shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, as the case may be, the immediately succeeding previous year.”
8. It can be seen from the above provision that the total income is to be computed first without making any deduction under Sub-section (1) of Section 32A or any deduction under Chapter VI. If there was a paucity of income then the investment allowance admissible would be such as to reduce the total income to nil. If there was balance of investment allowance remaining unadjusted, then it would have to be carried forward and adjusted in the subsequent year in the same manner. Sub-section (4) imposes certain conditions for the grant of investment allowance. The deduction is not to be allowed unless 75 per cent of the investment allowance to be actually allowed is debited to the P&L a/c of the previous year and credited to a revenue account to be utilised for the purpose of acquiring, before the expiry of a period of ten years next following the previous year, a new ship or a new aircraft or a new machinery or plant for the purpose of the business of the undertaking, In order to earn the investment allowance the assessee has to satisfy the condition prescribed by Sub-section (4).
9. It is provided in Clause (ii) of Sub-section (3) of Section 32A that the amount of investment allowance; to the extent to which it has not been allowed under Clause (i) shall be carried forward to the following assessment year, and the allowance to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income for that assessment year to nil. From a reading of Clauses (i) and (ii) it can be seen that unabsorbed investment allowance takes precedence over current investment allowance. But can it be said that unabsorbed investment allowance takes precedence over unabsorbed depreciation also?
10. The learned counsel for the assessee is correct in stating that unabsorbed depreciation of earlier years would become part of the depreciation allowance of the current year. Sri Balasubramanian has referred to the decision of the Supreme Court in CIT v. Mother India Refrigeration Industries (P) Ltd (supra) for the proposition that the brought forward unabsorbed depreciation would partake the same character as the current depreciation. He has extended his argument with the submission that it is open to the assessee not to claim the set off of unabsorbed depreciation in the same manner as current depreciation, if that was found to be more advantageous. It was his contention that unabsorbed depreciation as also current depreciation could not be imposed on an unwilling assessee, who might consider it more beneficial to delay the set off of unabsorbed depreciation till the unabsorbed investment allowance is fully adjusted. He contended that by setting off the unabsorbed depreciation in preference to unabsorbed investment allowance against the income of the current year, the assessee might be losing the unabsorbed investment allowance, as the eight year period might meanwhile expire. The learned counsel has drawn our attention to the following observation of the Supreme Court in the case of CIT v. Mahendra Mills (supra) in the headnotes :
“The provision for claim of depreciation is certainly for the benefit of the assessee. If he does not wish to avail of that benefit for some reason, the benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. Income under the head ‘Profits and gains of business or profession’ is chargeable to income-tax under Section 28 and income under Section 29 is to be computed in accordance with the provisions contained in Sections 30 to 43A. The argument that since Section 32 provides for depreciation it has to be allowed in computing the income of the assessee, cannot in all circumstances be accepted in view of the ban contained in Section 34. If Section 34 is not satisfied and the particulars are not furnished by the assessee, his claim for depreciation under Section 32 cannot be allowed. Section 29 is thus to be read with reference to other provisions of the Act. It is not in itself a complete code.”
11. We do not think that the decision in the case of Mahendra Mills in anyway supports the assessee’s case for priority of unabsorbed investment allowance over unabsorbed depreciation. True, in the above case the apex Court has held that in a case where the assessee has not furnished the particulars as required by Section 34(1) in respect of allowance of depreciation, the allowance cannot be forced upon him: In the present case, the assessee had already furnished the particulars in respect of the allowance of depreciation and the depreciation allowable for various previous years had also been quantified. But as the full effect could not be given to the allowance quantified under Section 32(1), owing to the profits and gains chargeable for those years being less than the allowance or part of the allowance to which effect had not been given, was carried forward and deemed to be part of the allowance for the succeeding years, as provided in Sub-section (2) of Section 32. This is not a case where depreciation could not be granted as the assessee had not furnished the required particulars. Rather, the assessee’s case is that after quantifying the allowance of depreciation for each previous year the assessee could exercise the option not to claim set off of the unabsorbed depreciation against the income of the current year, and postpone such adjustment till the unabsorbed investment allowance is exhausted. We do not think that the decision of the Supreme Court in the case of Mahendra Mills (supra) lends support to that proposition of the learned counsel. That decision is not applicable to the facts of this case.
12. In this context we may refer to the decision in the case of CIT v. Jaipuria China Clay Mines (P) Ltd. (1966) 59 ITR 555 (SC), wherein the Supreme Court held :
“The unabsorbed depreciation allowance is carried forward under proviso (b) to Section 10(2)(vi) and the method of carrying it forward is to add it to the amount of the allowance or depreciation in the following year and deeming it to be part of that allowance; the effect of deeming it to be part of the allowance is that it falls in the following year within Clause (vi) and has to be deducted as allowance.”
We find it also useful to refer to the following observation of the apex Court in the case of CIT v. Mother India Refrigeration Industries (P) Ltd. (supra) at p. 718–
“In other words the normal accountancy principle has to be applied in arriving at the net income from business for that year by debiting the current year’s depreciation. The question is whether any deviation from this normal rule of accountancy is contemplated by proviso (b) to Section 10(2)(vi) r/w. proviso (b) to Section 24(2) of the 1922 Act or by Section 32 (2) r/w Section 72(2) of the 1961 Act, and it is here that the aspect of proper construction of these provisions arises. Dealing with the provisions of the 1922 Act first, it will be clear that proviso (b) to Section 10(2)(vi) is in two parts and provides for two things; the first part provides for carry forward of unabsorbed depreciation and its second part provides for clubbing the said carried forward depreciation with the current year’s depreciation and deeming the aggregate to be the current year’s depreciation. However, carrying forward of the unabsorbed depreciation and the deeming provision in proviso (b) are not absolute but are subject to the proviso (b) to Section 24(2). Had proviso (b) to Section 24(2) not been enacted by the legislature the result would have been that the aggregate depreciation would have been deducted first out of the profits and gains in preference to unabsorbed business losses which might have been, carried forward under Section 24(2) but as such losses can be carried forward only for limited number of years, the assessee would in certain circumstances have in his books losses which he might not be able to set off even within the time limit during which the set off is permitted. In order to prevent such a situation the legislature enacted the proviso (b) to Section 24(2).”
13. As noticed by the Supreme Court, had proviso (b) to Section 24(2) [i.e., Section 72(2) of the 1961 Act] not been enacted by the legislature, the result would have been that the aggregate depreciation would have been deducted first out of the profits and gains. It is important to note that there is no provision similar to Section 72(2) in regard to investment allowance being given priority over unabsorbed depreciation. That means in the absence of any provision giving priority to investment allowance, the aggregate depreciation allowance, i.e., the current depreciation together with the unabsorbed depreciation relating to earlier years, would have to be deducted first from the profits and gains of the business to arrive at the total income. As can be seen from Sub-section (3) of Section 32A, it is from the total income [total income for this purpose being computed after deduction of the allowances under Sections 33 and 33A, but without making any deduction under Sub-section (1) of Section 32A or any deduction under Chapter VI-A] that the deduction is allowed towards investment allowance. There can be no doubt that the total income referred to above is the total income as computed in the manner laid down in the Act [vide Section 2(45)]. The order of priority in the computation of total income is as under:
(i) Current depreciation [Section 32(1)]
(ii) Carried forward losses of earlier years [Section 72(2)3. (iii) Unabsorbed depreciation of earlier years [Section 32(2)].
14. It is from the total income computed in the above manner [but after the deduction under Sections 33 and 33A, but without the deduction under Section 32A(1) and under Chapter VI-A] that, the unabsorbed investment allowance is adjusted, as provided in Clause (ii) of Section 32A(3). The learned Departmental Representative has brought to our notice the Circular No. 202 issued by the CBDT on 5th July, 1976, dealing with the scope and effect of Section 32A inserted w.e.f. 1st April, 1976. In that circular the combined effect of the provisions of Sections 32, 32A, 33, 33A and 72 is given and the order in which the allowances and the business losses are to be deducted. In that circular the order of priority is shown as under :
(i) Current depreciation [Section 32(1)].
(ii) Carried forward losses of earlier years [Section 72(1)].
(iii) Unabsorbed depreciation of earlier years [Section 32(2)).
(iv) Unabsorbed development rebate of earlier years [Section 33(2)(ii)].
(v) Current development rebate [Section 33(2)(i)].
(vi) Unabsorbed development allowance of earlier years [Section 33A(2)(ii)].
(vii) Current development allowance [Section 33A(2)(i)].
(viii) Unabsorbed investment allowance of earlier years [Section 32A(3)(ii)].
(ix) Current investment allowance [Section 32A(3)(i)].
Of course, the circular of the Board is not binding on the Tribunal. We find force in the contention of the learned Departmental Representative that the wording of Section 33 relating to development rebate is similar to the wording of Section 32A and so the decision of the Madras High Court in the case of CIT v. Coromandel Steels Ltd. (supra) is equally applicable to the set off of unabsorbed investment allowance, in view of the similarity in the wording in the sections.
15. The learned counsel Sri Balasubramanian submitted that by adjusting the unabsorbed depreciation before unabsorbed investment allowance, the assessee would be losing the benefit of unabsorbed investment allowance as the same could be carried forward for a limited period only, In this connection we may refer to the observation of the Madras High Court in the case of CIT v. Coromandel Steels Ltd. (supra) appearing on p. 862–
“The matter has to be considered only in the light of the statutory provisions and not in the light of the reasoning based on equitable considerations, on the accident of the relative age of the unabsorbed depreciation, loss or development rebate in any particular case.”
16. In the light of the judicial decisions discussed above, we find no infirmity in the order of the CIT(A), upholding the priority given to unabsorbed depreciation over unabsorbed investment allowance for adjustment against the profits and gains of the current year.
17. This appeal by the assessee is, therefore, dismissed.