JUDGMENT
1. The Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, at the instance of the assessee has referred the following question of law for the opinion of this court under Section 256(1) of the Income-tax Act, 1961 (for short "the Act") :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the unabsorbed development rebate for earlier years cannot be given precedence over the unabsorbed depreciation in computing the business income of the assessee ?"
2. The dispute pertains to the assessment year 1975-76, where the assessee claimed that unabsorbed development rebate in respect of earlier years and carried forward to the extent of Rs. 4,52,99,772 (allowed during the assessment year 1968-69) should have been first set off, before calculating and setting off of the carried forward amount of unabsorbed depreciation. The unabsorbed depreciation carried forward in terms of assessment order dated May 12, 1977, relating to the assessment year 1974-75 was to the extent of Rs. 4,79,14,914. The Income-tax Officer, however, did not accept this claim and allowed the unabsorbed depreciation of the earlier years to the extent of Rs. 96,63,527 as a result of which, the taxable income for the year in question was reduced to nil.
3. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals) and objected to the action of the Income-tax Officer, on the grounds, inter alia, that unabsorbed development rebate should have been given precedence over unabsorbed depreciation of earlier years in computing the business income. This contention was advanced on the ground that, whereas the depreciation could be carried forward indefinitely, the development rebate on the other hand could be carried forward only up to eight years and therefore, in equity, the development rebate should be given precedence. The appellate authority, however did not accept the contention of the assessee taking the view that the principles of carry forward have to be strictly construed according to the provisions of the Act. The provisions of carry forward and setting off of business losses are contained in Section 72(1) and the Legislature in its wisdom had thought fit as per provisions of Sub-section (2) of Section 72, that only an allowance under Sub-section (2) of Section 32 or Sub-section (4) of Section 35 are to be allowed before the set off of carry forward loss. Further, it is nowhere provided that the development rebate is to get precedence over unabsorbed depreciation brought forward.
4. The assessee appealed further to the Income-tax Appellate Tribunal which upheld the appellate order, relying upon a decision of the Karnataka High Court in Mysore Paper Mills Ltd. v. CIT [1979] 117 ITR 132. Feeling still dissatisfied, the assessee applied for a reference under Section 256(1) of the Act and in granting the application, the question set out above has been referred to this court for its opinion.
5. We have heard learned counsel for the parties. Learned counsel for the assessee reiterated the argument that was put forward before the Commissioner of Income-tax (Appeals) and thereafter before the Income-tax Appellate Tribunal. It was contended that carry forward of unabsorbed depreciation is for an unlimited period while the carry forward of unabsorbed development rebate is restricted only to a period of eight years and, for this consideration alone the relevant provisions of the Act dealing with carry forward be construed in the manner that the benefits permissible under the Act are given full effect and an assessee is not put to any disadvantage in availing of the benefits.
6. The question that falls for consideration is the order of priority in adjustment between carried forward accumulated depreciation of earlier years and the carried forward unabsorbed development rebate against the profits and gains of the business of the subsequent year.
7. At the outset we may observe that the controversy that has come up for consideration before us, is by now almost settled. It had been the subject-matter of decision before different High Courts. Analysing the legal implications of Sections 32(1), 32(2), 33(1)(a), 33(2) read with Section 72(1} and 72(2) of the Act, the unanimous opinion is that brought forward unabsorbed depreciation losses will have precedence over the brought forward unabsorbed development rebate in the matter of setting off against the income of subsequent years.
8. In Mysore Paper Mills Ltd. [1979] 117 ITR 132 (Kar), the competition for adjustment was between carried forward depreciation and carried forward development rebate as in the case before us. It was held that Section 32(2) of the Act, by a legal fiction treats the unabsorbed depreciation allowance of the previous year as forming part of the current year's depreciation allowance and it directs the authorities functioning under the Act to deal with it as such subject only to Section 72(2) and 72(3) of the Act. It was pointed out that, but for Section 32(2) being made subject to Sub-section (2) of Section 72, by reason of the legal fiction enacted in Section 32(2), the entire unabsorbed depreciation allowance would have to be treated as the current year's depreciation and deducted even before the carried forward loss is deducted. The unasborbed depreciation of an earlier year carried forward must be taken as part of the current year's depreciation allowance and should be set off to the extent possible against the income of the current year. The court held that Section 33 which provides for development rebate, is intended to give an incentive to businessmen to invest in new machinery or in modernising plant and equipment. It does not deal with any trading loss as it is ordinarily understood. The development rebate is allowed to an assessee, subject to the conditions stipulated under Section 34 of the Act and unabsorbed development rebate under Section 33(2){ii) of the Act cannot be carried forward beyond eight years. Hence, the unabsorbed development rebate cannot be treated as part of the business loss which is allowed to be carried forward under Section 72(1) of the Act and given priority over the unabsorbed depreciation allowance of the previous years.
9. The decision in Mysore Paper Mills Ltd. [1979] 117 ITR 132 (Kar), was referred to with approval by the Madras High Court in CIT v. Coromandel Steels Ltd. [1981] 130 ITR 856 and it was held (headnote) :
"The competition in the matter of allowance between unabsorbed business loss and unabsorbed depreciation was resolved in favour of unabsorbed business loss by Parliament itself. There is, however, no provision made with reference to unabsorbed development rebate, as it stands in a class by itself. In these circumstances, the unabsorbed development rebate of earlier years would come up for consideration only after the allowance of (a) carried forward business loss, and fb) 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 these two allowances."
10. The Kerala High Court in Calicut Modern Spinning and Weaving Mills Ltd. v. CIT [1985] 153 ITR 810 upon consideration of the decisions cited earlier and that of the Gujarat High Court in CIT v. Gujarat State Warehousing Corporation [1976] 104 ITR 1 has held (headnote) :
"It is only after setting off unabsorbed business loss and also unabsorbed depreciation that the question of unabsorbed development rebate can arise."
11. Against the decision of the Kerala High Court a special leave petition was dismissed by the Supreme Court in Calicut Modern Spinning and Weaving Mills Ltd, v. CIT [1988] 169 ITR (St.) 11. Reference may also be made to the decisions of the Patna High Court in Bihar State Industrial Development Corporation Ltd. v. CIT [1987] 165 ITR 671 and to that of the Orissa High Court in Utkal Machinery Ltd. v. CIT [1987] 167 ITR 119, where a similar view has been taken.
12. We respectfully agree with the view expressed in the decisions referred hereinabove and hold that, in the event of a contest between unabsorbed depreciation and unabsorbed carried forward development rebate for set off against the profits and gains of the subsequent years, the priority must be given to the depreciation of the earlier years carried forward over the carried forward development rebate of earlier years. The contention that such an interpretation would result in inequitable results because the development rebate cannot be carried forward beyond eight years, has no merit. Similar contention has already been rejected by different High Courts in the cases cited above, by saying that where there is no ambiguity in the provisions of the statute, it is not possible to apply any consideration based on the provision being so applied as to be more advantageous to the assessee or to give the asses-see a kind of choice in the matter of adjustment. It has been pointed out that the result of this may be that, over a period of eight years, the depreciation may be continued to be carried forward and development rebate may never get a chance of being actually allowed, since the right to the rebate lapses after eight years. For these very reasons, the contention of learned counsel for the assessee based on equitable considerations cannot be accepted and is raveled,
13. For the reasons given above, we answer the question referred to this court in the affirmative, favour of the Revenue and against the assessee.