I have a brought-forward business loss and brought-forward unabsorbed depreciation in the same year. Which one does the officer have to use first, and does it matter?
The brought-forward business loss goes first; the unabsorbed depreciation is taken after it. The Supreme Court held the Legislature deliberately gave a preference to the deduction of losses first, because a carried-forward loss can only be used within a limited number of years while unabsorbed depreciation carries forward without that limit — set the depreciation off first and the loss simply expires unused.
Decided by the Supreme Court (K. Subba Rao J, J.C. Shah J and S.M. Sikri J) on 1965-11-01, reported as 1966 AIR 1187; 1966 SCR (2) 449; Civil Appeal No. 307 of 1964. It bears on section 32(2), section 72 of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is money, not bookkeeping. Business loss under s.72(3) dies after eight assessment years; unabsorbed depreciation under s.32(2) does not. Every year in which an officer absorbs the depreciation first is a year in which the oldest slice of business loss moves one step closer to lapsing for good, and the loss is the one that cannot be recovered. The same case is also authority that unabsorbed depreciation, unlike a business loss, can be set off against income falling under other heads — the assessee here set it against dividend income. Both limbs were decided on the 1922 Act, and the second limb has to be read against the present s.32(2) and against s.71(2A), which since AY 2005-06 bars set-off of a business loss against income under the head Salaries.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
For assessment year 1952-53 the Income Tax Officer computed the assessee company's income at Rs. 14,041 before depreciation, deducted the current year's depreciation of Rs. 5,360 leaving Rs. 8,681, and then set off Rs. 8,681 of losses carried forward from earlier years (from 1947-48), reducing the business income to nil. Dividend income was computed at Rs. 2,01,130, and total income was assessed at that figure. The assessee also had unabsorbed depreciation of Rs. 76,857 from earlier years and claimed to set that off against the dividend income. The Revenue argued that depreciation compensates for a capital loss and is a charge on the business only, so that a deficiency of depreciation is not a loss of profits and gains within s.24(1) and cannot be set against non-business income such as dividends. The assessee argued that unabsorbed depreciation is deductible against all sources of income.
The Commissioner's appeal was dismissed with costs. The assessee was entitled to set off the unabsorbed depreciation of Rs. 76,857 against the dividend income and other heads, reducing the total income to Rs. 1,32,955. On the sequence, the Court held that losses other than depreciation are to be set off first, and unabsorbed depreciation carried forward under the proviso to s.10(2)(vi) only thereafter.
The Court read the scheme as deliberately preferring losses. Losses under s.24(2) could be carried forward only for six years, whereas the depreciation allowance carried forward under s.10(2)(vi) was not subject to that limit; if depreciation were absorbed first, an assessee would in certain circumstances be left with losses in his books which he would never be able to set off. The Court reasoned that the Legislature, having this in view, gave a preference to the deduction of losses first, and read s.24(2)(b) accordingly. On the second limb, the carried-forward depreciation allowance is by the statute added to the amount of the allowance for depreciation for the following year, and so takes the character of the current year's allowance, which is why it was available against the dividend income and not confined to business profits.
It seems to us that the Legislature, in view of this, gave a preference to the deduction of losses first.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppThe brought-forward business loss goes first; the unabsorbed depreciation is taken after it. The Supreme Court held the Legislature deliberately gave a preference to the deduction of losses first, because a carried-forward loss can only be used within a limited number of years while unabsorbed depreciation carries forward without that limit — set the depreciation off first and the loss simply expires unused. This was decided by the Supreme Court (K. Subba Rao J, J.C. Shah J and S.M. Sikri J) and bears on section 32(2), section 72 of the Income Tax Act 1961. It is reported as 1966 AIR 1187; 1966 SCR (2) 449; Civil Appeal No. 307 of 1964. This is money, not bookkeeping. Business loss under s.72(3) dies after eight assessment years; unabsorbed depreciation under s.32(2) does not. Every year in which an officer absorbs the depreciation first is a year in which the oldest slice of business loss moves one step closer to lapsing for good, and the loss is the one that cannot be recovered. The same case is also authority that unabsorbed depreciation, unlike a business loss, can be set off against income falling under other heads — the assessee here set it against dividend income. Both limbs were decided on the 1922 Act, and the second limb has to be read against the present s.32(2) and against s.71(2A), which since AY 2005-06 bars set-off of a business loss against income under the head Salaries. If it applies to you, the first step is this: Redo the computation in the statutory order — current year's depreciation, then brought-forward business loss, then brought-forward unabsorbed depreciation — and put the corrected working on record with the ageing of each year's loss shown separately.
For assessment year 1952-53 the Income Tax Officer computed the assessee company's income at Rs. 14,041 before depreciation, deducted the current year's depreciation of Rs. 5,360 leaving Rs. 8,681, and then set off Rs. 8,681 of losses carried forward from earlier years (from 1947-48), reducing the business income to nil. Dividend income was computed at Rs. 2,01,130, and total income was assessed at that figure. The assessee also had unabsorbed depreciation of Rs. 76,857 from earlier years and claimed to set that off against the dividend income. The Revenue argued that depreciation compensates for a capital loss and is a charge on the business only, so that a deficiency of depreciation is not a loss of profits and gains within s.24(1) and cannot be set against non-business income such as dividends. The assessee argued that unabsorbed depreciation is deductible against all sources of income. The matter was decided on 1965-11-01 by the Supreme Court (K. Subba Rao J, J.C. Shah J and S.M. Sikri J). On those facts the Supreme Court held as follows. The Commissioner's appeal was dismissed with costs. The assessee was entitled to set off the unabsorbed depreciation of Rs. 76,857 against the dividend income and other heads, reducing the total income to Rs. 1,32,955. On the sequence, the Court held that losses other than depreciation are to be set off first, and unabsorbed depreciation carried forward under the proviso to s.10(2)(vi) only thereafter.
The Court read the scheme as deliberately preferring losses. Losses under s.24(2) could be carried forward only for six years, whereas the depreciation allowance carried forward under s.10(2)(vi) was not subject to that limit; if depreciation were absorbed first, an assessee would in certain circumstances be left with losses in his books which he would never be able to set off. The Court reasoned that the Legislature, having this in view, gave a preference to the deduction of losses first, and read s.24(2)(b) accordingly. On the second limb, the carried-forward depreciation allowance is by the statute added to the amount of the allowance for depreciation for the following year, and so takes the character of the current year's allowance, which is why it was available against the dividend income and not confined to business profits. In the words reproduced by the source cited on this page: "It seems to us that the Legislature, in view of this, gave a preference to the deduction of losses first."
It was decided by the Supreme Court on 1965-11-01 and is reported as 1966 AIR 1187; 1966 SCR (2) 449; Civil Appeal No. 307 of 1964. 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, 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 taxpayer. The Commissioner's appeal was dismissed with costs. The assessee was entitled to set off the unabsorbed depreciation of Rs. 76,857 against the dividend income and other heads, reducing the total income to Rs. 1,32,955. On the sequence, the Court held that losses other than depreciation are to be set off first, and unabsorbed depreciation carried forward under the proviso to s.10(2)(vi) only thereafter. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 32(2), section 72 of the Income Tax Act 1961, and was decided by K. Subba Rao J, J.C. Shah J and S.M. Sikri 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. Anchor it on s.72(2), which says in terms that where an allowance under s.32(2) is to be carried forward, effect shall first be given to the provisions of s.72. Quantify the prejudice in the reply: show the exact amount of business loss that will lapse under s.72(3) if the officer's order of set-off stands, so the point is not treated as academic. Where the year's other income is not business income, remember that the unabsorbed depreciation limb of this case lets you reach it, but check the current s.32(2) and s.71(2A) before extending it to salary income. Keep a year-wise carry-forward schedule with the assessment year of origin against each figure; the argument only works if the eight-year clock is visible on the face of the record.
Still good law. A citator search returns 118 later decisions citing this judgment, and it has twice been applied by the Supreme Court itself. In Garden Silk Weaving Factory v CIT (22 March 1991) the Court said it is well settled as a result of the decision in Jaipuria China Clay Mines that the words 'no profits or gains chargeable for that year' are not confined in the way contended for; and in CIT v Mahendra Mills (15 March 2000) the Court took from it that the taxable profits of a business cannot be ascertained without debiting the current year's depreciation. It was also applied by the Gauhati High Court in CIT v Singh Transport Co. (14 December 1979) and by the Calcutta High Court in Universal Cargo Carriers Inc. v CIT (4 December 1985). The sequence it lays down is now written into section 72(2) of the 1961 Act. A second search by case name coupled with the word overruled returned two decisions, neither adverse; nothing overruling or doubting it was found. 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.
Decided on s.10(2)(vi) and s.24(2) of the Indian Income-tax Act, 1922, where the carry-forward period for losses was six years; the corresponding period under s.72(3) of the 1961 Act is eight assessment years. The retrieval layer offered a second sentence, 'Where set off is to be given for different kinds of losses other than those due to depreciation such losses must be set off first and then the loss due to depreciation', as a quotation from this judgment; that sentence is in the judgment, but it is not the Supreme Court's own: it appears inside quotation marks as a passage the Court reproduces from the East Punjab High Court in Laxmichand Jaipuria Spinning and Weaving Mills, In re. It is therefore not reproduced here as this Court's words. The figures recorded on the copy read are: total income before depreciation Rs. 14,041, current depreciation Rs. 5,360, carried-forward loss absorbed Rs. 8,681, dividend income Rs. 2,01,130, unabsorbed depreciation of earlier years Rs. 76,857. 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 Commissioner's appeal was dismissed with costs. The assessee was entitled to set off the unabsorbed depreciation of Rs. 76,857 against the dividend income and other heads, reducing the total income to Rs. 1,32,955. On the sequence, the Court held that losses other than depreciation are to be set off first, and unabsorbed depreciation carried forward under the proviso to s.10(2)(vi) only thereafter.
TaxSphere, “CIT v Jaipuria China Clay Mines (P) Ltd”, https://taxnotice.vittsphere.com/caselaw/case/jaipuria-china-clay-mines-order-of-set-off-loss-before-depreciation/ (validity last checked 2026-09-07)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
The officer has disallowed a receipt on the ground that it is not 'derived from' our undertaking. Does the exact wording of the deduction section decide the point?
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?
The officer has invoked s.79 after a change in our shareholding and struck out everything brought forward, including unabsorbed depreciation. Does s.79 reach unabsorbed depreciation?
The return was filed late, so the officer has refused to carry forward everything — including unabsorbed depreciation. Is depreciation really caught by the late return bar?
