I have brought forward business losses that will lapse in a few years. Can I set them off before this year's depreciation, so the losses do not run out?
No. The Supreme Court held that current depreciation must be deducted first, before the unabsorbed carried forward business loss of earlier years is set off. The priority given to carried forward losses is over the unabsorbed depreciation that is being carried forward, not over the current year's depreciation. The deeming provision that treats carried forward depreciation as part of the following year's allowance is a legal fiction created for a definite purpose - so that it can be set against income under any head - and cannot be stretched further. The appeals were allowed and the reference answered against the assessee, with costs.
Decided by the Supreme Court (Supreme Court of India - Sabyasachi Mukharji and V.D. Tulzapurkar, JJ (judgment by Tulzapurkar, J)) on 1985-08-14, reported as AIR 1985 SC 1720; (1985) 4 SCC 1; (1985) 155 ITR 711; (1985) 23 Taxman 8. It bears on section 32(2), section 72(2), section 72 of the Income Tax Act 1961, in Assessment & Scrutiny and Deductions & Disallowances matters.
This settles the order of set-off that governs every loss-making company with a depreciation pool, and it matters because the two items behave differently: a business loss can only be set against business income and may be carried forward for a limited number of years, while depreciation can be set against income under any head and carries forward without a time limit. The taxpayer's incentive is therefore to use the perishable item first, and this decision refuses it. The reasoning is a model of how to confine a deeming provision to its purpose, applying Bengal Immunity. The Court approved the Calcutta, Gujarat and Andhra Pradesh decisions on the point and set aside the Allahabad view.
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In the civil appeals the years were 1951-52 and 1952-53. At the end of 1950-51 the assessee had an unabsorbed business loss of Rs 67,534 and unabsorbed depreciation of Rs 1,78,154. Its income before current depreciation was Rs 50,624 and Rs 64,332 for the two years. It asked that the earlier year's loss be set off before the current depreciation. The Income-tax Officer refused: for 1951-52 he set off part of that year's depreciation of Rs 58,140 against the profit and carried the balance forward, and for 1952-53 he set off the full allowance of Rs 44,580 and applied the net income against the carried forward loss. The Appellate Assistant Commissioner accepted the assessee's contention; the Tribunal, following the Calcutta decision in Aluminium Corporation, restored the officer's order; the Allahabad High Court answered the reference for the assessee. In the connected tax reference, for assessment year 1969-70 under the 1961 Act, a revised return claimed set-off of carried forward loss before any allowance of current depreciation. The Tribunal held that carried forward loss had priority over unabsorbed depreciation of earlier years but not over current depreciation, and referred the question directly to the Supreme Court under section 257 because the High Courts were in conflict.
The appeals were allowed, the High Court's decision set aside and the Tribunal's restored, and the reference answered against the assessee: depreciation for the current year must first be deducted before deducting the unabsorbed carried forward business loss. Unabsorbed carried forward losses cannot be given preference over current depreciation in computing income for an assessment year. Proviso (b) to section 10(2)(vi) of the 1922 Act does two things - it carries unabsorbed depreciation forward and it clubs that amount with the following year's depreciation, deeming the aggregate to be that year's allowance - and both are made subject to proviso (b) to section 24(2). What that second proviso gives the carried forward loss is preference over the unabsorbed depreciation which is being carried forward, and no preference over current depreciation is intended. Since the provisions of the 1961 Act are in pari materia, the same conclusion follows there. The decisions of the Calcutta High Court in Aluminium Corporation and Malwa Sugar Mills, of the Gujarat High Court in Gujarat State Warehousing Corporation and of the Andhra Pradesh High Court in Andhra Printers were held correct.
The Court began with why the priority provision exists at all. Without it, the aggregate depreciation - current plus brought forward - would be deducted ahead of business losses carried forward, and because those losses can only be carried for a limited number of years, an assessee could be left with losses he could never set off within the permitted time. The legislature enacted the proviso to prevent that. But the words of the proviso identify exactly what it displaces: where depreciation allowance is also to be carried forward, effect shall first be given to the loss provision. What yields to the loss is therefore the depreciation being carried forward, not the allowance of the current year. The assessee's answer was the deeming provision - carried forward depreciation is deemed part of the current year's allowance, so if the loss takes priority over the one it must take priority over the whole. The Court refused to let the fiction travel that far, applying Bengal Immunity: legal fictions are created for a definite purpose and must be limited to it. The purpose here, as Jaipuria China Clay Mines and the Bombay decision in Ravi Industries show, is to give carried forward depreciation the character of current depreciation so that, unlike a carried forward business loss, it can be set against income under any head. Nothing in that purpose requires the order of set-off to change. The result also leaves undisturbed the ordinary principle of commercial accountancy that the year's depreciation is the first charge on the year's profits, since net profits cannot be arrived at without debiting it.
Current depreciation must be deducted first before deducting the unabsorbed carried forward business losses of the earlier years in giving set off while computing the total income of any particular year.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that current depreciation must be deducted first, before the unabsorbed carried forward business loss of earlier years is set off. The priority given to carried forward losses is over the unabsorbed depreciation that is being carried forward, not over the current year's depreciation. The deeming provision that treats carried forward depreciation as part of the following year's allowance is a legal fiction created for a definite purpose - so that it can be set against income under any head - and cannot be stretched further. The appeals were allowed and the reference answered against the assessee, with costs. This was decided by the Supreme Court (Supreme Court of India - Sabyasachi Mukharji and V.D. Tulzapurkar, JJ (judgment by Tulzapurkar, J)) and bears on section 32(2), section 72(2), section 72 of the Income Tax Act 1961. It is reported as AIR 1985 SC 1720; (1985) 4 SCC 1; (1985) 155 ITR 711; (1985) 23 Taxman 8. This settles the order of set-off that governs every loss-making company with a depreciation pool, and it matters because the two items behave differently: a business loss can only be set against business income and may be carried forward for a limited number of years, while depreciation can be set against income under any head and carries forward without a time limit. The taxpayer's incentive is therefore to use the perishable item first, and this decision refuses it. The reasoning is a model of how to confine a deeming provision to its purpose, applying Bengal Immunity. The Court approved the Calcutta, Gujarat and Andhra Pradesh decisions on the point and set aside the Allahabad view. If it applies to you, the first step is this: Compute in the order the Court fixed: current depreciation first, then brought forward business loss, then unabsorbed depreciation of earlier years.
In the civil appeals the years were 1951-52 and 1952-53. At the end of 1950-51 the assessee had an unabsorbed business loss of Rs 67,534 and unabsorbed depreciation of Rs 1,78,154. Its income before current depreciation was Rs 50,624 and Rs 64,332 for the two years. It asked that the earlier year's loss be set off before the current depreciation. The Income-tax Officer refused: for 1951-52 he set off part of that year's depreciation of Rs 58,140 against the profit and carried the balance forward, and for 1952-53 he set off the full allowance of Rs 44,580 and applied the net income against the carried forward loss. The Appellate Assistant Commissioner accepted the assessee's contention; the Tribunal, following the Calcutta decision in Aluminium Corporation, restored the officer's order; the Allahabad High Court answered the reference for the assessee. In the connected tax reference, for assessment year 1969-70 under the 1961 Act, a revised return claimed set-off of carried forward loss before any allowance of current depreciation. The Tribunal held that carried forward loss had priority over unabsorbed depreciation of earlier years but not over current depreciation, and referred the question directly to the Supreme Court under section 257 because the High Courts were in conflict. The matter was decided on 1985-08-14 by the Supreme Court (Supreme Court of India - Sabyasachi Mukharji and V.D. Tulzapurkar, JJ (judgment by Tulzapurkar, J)). On those facts the Supreme Court held as follows. The appeals were allowed, the High Court's decision set aside and the Tribunal's restored, and the reference answered against the assessee: depreciation for the current year must first be deducted before deducting the unabsorbed carried forward business loss. Unabsorbed carried forward losses cannot be given preference over current depreciation in computing income for an assessment year. Proviso (b) to section 10(2)(vi) of the 1922 Act does two things - it carries unabsorbed depreciation forward and it clubs that amount with the following year's depreciation, deeming the aggregate to be that year's allowance - and both are made subject to proviso (b) to section 24(2). What that second proviso gives the carried forward loss is preference over the unabsorbed depreciation which is being carried forward, and no preference over current depreciation is intended. Since the provisions of the 1961 Act are in pari materia, the same conclusion follows there. The decisions of the Calcutta High Court in Aluminium Corporation and Malwa Sugar Mills, of the Gujarat High Court in Gujarat State Warehousing Corporation and of the Andhra Pradesh High Court in Andhra Printers were held correct.
The Court began with why the priority provision exists at all. Without it, the aggregate depreciation - current plus brought forward - would be deducted ahead of business losses carried forward, and because those losses can only be carried for a limited number of years, an assessee could be left with losses he could never set off within the permitted time. The legislature enacted the proviso to prevent that. But the words of the proviso identify exactly what it displaces: where depreciation allowance is also to be carried forward, effect shall first be given to the loss provision. What yields to the loss is therefore the depreciation being carried forward, not the allowance of the current year. The assessee's answer was the deeming provision - carried forward depreciation is deemed part of the current year's allowance, so if the loss takes priority over the one it must take priority over the whole. The Court refused to let the fiction travel that far, applying Bengal Immunity: legal fictions are created for a definite purpose and must be limited to it. The purpose here, as Jaipuria China Clay Mines and the Bombay decision in Ravi Industries show, is to give carried forward depreciation the character of current depreciation so that, unlike a carried forward business loss, it can be set against income under any head. Nothing in that purpose requires the order of set-off to change. The result also leaves undisturbed the ordinary principle of commercial accountancy that the year's depreciation is the first charge on the year's profits, since net profits cannot be arrived at without debiting it. In the words reproduced by the source cited on this page: "Current depreciation must be deducted first before deducting the unabsorbed carried forward business losses of the earlier years in giving set off while computing the total income of any particular year."
It was decided by the Supreme Court on 1985-08-14 and is reported as AIR 1985 SC 1720; (1985) 4 SCC 1; (1985) 155 ITR 711; (1985) 23 Taxman 8. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 32(2), section 72(2), section 72, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were allowed, the High Court's decision set aside and the Tribunal's restored, and the reference answered against the assessee: depreciation for the current year must first be deducted before deducting the unabsorbed carried forward business loss. Unabsorbed carried forward losses cannot be given preference over current depreciation in computing income for an assessment year. Proviso (b) to section 10(2)(vi) of the 1922 Act does two things - it carries unabsorbed depreciation forward and it clubs that amount with the following year's depreciation, deeming the aggregate to be that year's allowance - and both are made subject to proviso (b) to section 24(2). What that second proviso gives the carried forward loss is preference over the unabsorbed depreciation which is being carried forward, and no preference over current depreciation is intended. Since the provisions of the 1961 Act are in pari materia, the same conclusion follows there. The decisions of the Calcutta High Court in Aluminium Corporation and Malwa Sugar Mills, of the Gujarat High Court in Gujarat State Warehousing Corporation and of the Andhra Pradesh High Court in Andhra Printers were held correct. It arises in Assessment & Scrutiny and Deductions & Disallowances matters, on section 32(2), section 72(2), section 72 of the Income Tax Act 1961, and was decided by Supreme Court of India - Sabyasachi Mukharji and V.D. Tulzapurkar, JJ (judgment by Tulzapurkar, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Watch the expiry of carried forward business losses, because this order of set-off is what causes them to lapse, and plan the year's income accordingly rather than arguing about priority. Remember what the fiction does give you: unabsorbed depreciation brought forward keeps the character of depreciation and can be set against income under any head, which a carried forward business loss cannot. Do not build a claim on general observations in a judgment decided on a different point; the High Court did that here with Jaipuria China Clay Mines and was set aside.
Still good law. A citator search returns 220 later decisions citing this judgment. The Rajasthan High Court applied it in Shri Rajasthan Syntex Ltd v Dy. CIT (30 November 2000), holding that the brought forward business loss and the unabsorbed depreciation get priority over the unabsorbed investment allowance, and the Jodhpur Tribunal decided the companion matter the same way on the same date. The Madras Tribunal applied it in Seshasayee Paper and Boards Ltd v DCIT (20 December 2000), holding that the aggregate depreciation would have been deducted first out of the profits and gains, and the Chennai Tribunal upheld an order founded on it in DCIT v Airplaza Retail Holdings Pvt Ltd (9 July 2019). The Calcutta High Court considered it in CIT v Shiva Prasad Bagaria (19 December 1990). A second search by case name coupled with the word overruled returned 15 decisions; the overruling referred to there concerns a different and unrelated Mother India Refrigeration decision of the Allahabad High Court on excise duty, overruled in Frick India Ltd v Union of India, not this income tax judgment. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The reasoning is set out on the 1922 Act, with the conclusion carried across on the footing that sections 32 and 72 of the 1961 Act are in pari materia; a reader should read the current text of section 32(2) and section 72(2), which have been amended since 1985. The batch line listed section 71, which the judgment does not discuss. The harvested text is a poor transcription in places, giving the citation of Andhra Printers as both 117 ITR 555 and 147 ITR 555 and dropping words in the summary of the Revenue's argument. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed, the High Court's decision set aside and the Tribunal's restored, and the reference answered against the assessee: depreciation for the current year must first be deducted before deducting the unabsorbed carried forward business loss. Unabsorbed carried forward losses cannot be given preference over current depreciation in computing income for an assessment year. Proviso (b) to section 10(2)(vi) of the 1922 Act does two things - it carries unabsorbed depreciation forward and it clubs that amount with the following year's depreciation, deeming the aggregate to be that year's allowance - and both are made subject to proviso (b) to section 24(2). What that second proviso gives the carried forward loss is preference over the unabsorbed depreciation which is being carried forward, and no preference over current depreciation is intended. Since the provisions of the 1961 Act are in pari materia, the same conclusion follows there. The decisions of the Calcutta High Court in Aluminium Corporation and Malwa Sugar Mills, of the Gujarat High Court in Gujarat State Warehousing Corporation and of the Andhra Pradesh High Court in Andhra Printers were held correct.
TaxSphere, “CIT v Mother India Refrigeration Industries (P) Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-mother-india-refrigeration-industries-p-ltd/ (validity last checked 2026-08-29)
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