ORDER
T.V.K. Natarajachandran, Accountant Member
1. This is an appeal by the assessee which is directed against the order of the CIT(A), wherein he has held that the unabsorbed depreciation could not be set off against the long term capital gains made for the year under consideration and thus rejected the claim of set off made by the assessee. The assessee has raised grounds to urge that the CIT(A) erred in his decision and that he ought to have held that the unabsorbed depreciation carried forward should be set off against long-term capital gains.
2. The assessee is a private limited company and the assessment year involved is 1987-88. The return was filed on 7-8-1987 admitting net income of Rs. 43,976. The assessment was completed determining the business income of Rs. 36,958. The carried forward loss of earlier years were set off against business profits of this year to arrive at nil income. Further, the long term capital gains of Rs. 8,976 were taxed by the ITO and the unabsorbed depreciation relating to earlier years were allowed to be carried forward for the purpose of set off.
3. On appeal, the assessee relied on the judgment of the Supreme Court in the case of CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 and claimed that unabsorbed depreciation relating to earlier years should be set off against long term capital gains determined for the same year. The CIT(A) was of the opinion that in view of the provisions of the Income-tax Act, 1961 only the carried forward business loss will have priority over the unabsorbed depreciation of earlier years and this has been rightly done by reducing the business profits to nil. Quoting the observations of the Supreme Court in the case of Jaipuria China Clay Mines (P.) Ltd. (supra) he concluded that unabsorbed depreciation could not be equated with unabsorbed business loss, and, therefore, it could not be set off against the long term capital gains made. At the time of the hearing, the learned counsel for the assessee relied on the facts in the decision of the Supreme Court in the case of Jaipuria China Clay Mines (P.) Ltd. (supra) in support of the assessee’s case. According to him, the facts of the assessee’s case are exactly similar with the facts of the case in Jaipuria China Clay Mines (P.) Ltd. (supra) and urged that the CIT(A) has erred in his decision and, therefore, the claim of the assessee should be allowed. The learned Departmental Representative, on the other hand, supported the order of the CIT(A).
4. After the consideration, I am of the opinion that there is force in the contentions of the learned counsel for the assessee that the claim made by the assessee is valid in accordance with the judgment of the Supreme Court in the case of Jaipuria China Clay Mines (P.) Ltd. (supra). In that case the total income of the assessee was Rs. 14,041 for the assessment year 1952-53. After deducting the current depreciation the net profit was determined at Rs. 8,681 against which the unabsorbed loss of earlier years were set off. The ITO determined the dividend income separately at Rs. 2,01,130 and levied tax on it. The assessee claimed that unabsorbed depreciation of Rs. 76,857 should be deducted from the dividend income. But this claim was rejected by the Assessing Officer. Ultimately the Supreme Court held that the unabsorbed depreciation should be set off against dividend income taxed in that year. The Supreme Court ruled that though normally the unabsorbed depreciation is to be treated as part and parcel of the current year’s depreciation but in view of the limited period available for set off for carried forward business loss priority is given to it under proviso (b) to Section 24(2) [equivalent to Section 72(2) of the Income-tax Act, 1961]. The judgment is, therefore, a clear elucidation of the provisions of law contained in the Income-tax Act, 1961. In view of the legal fiction of deeming the unabsorbed depreciation as part of current year’s depreciation for the purpose of determining the business profits, and inasmuch as the priority for unabsorbed depreciation has been given the unabsorbed depreciation is liable to be set off against the long term capital gains made by the assessee for the year under consideration. In a similar situation the Supreme Court allowed the set off of unabsorbed depreciation against dividend income in that case even though unabsorbed loss of business was set off against profits of that year to bring the profits to nil. Since the decision of the Supreme Court in the case of Jaipur is China Clay Mines (P.) Ltd. (supra) applies squarely to the facts of the assessee’s case, there is force in the contention of the learned counsel for the assessee and the claim of the assessee has to be accepted. Therefore, the CIT(A) was not justified in rejecting the claim of the assessee. Consequently, I set aside the order of the CIT(A) and direct the ITO to set off the unabsorbed depreciation against the long-term capital gains made for this year. The appeal is allowed.