Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX U.P., LUCKNOW
Vs.
RESPONDENT:
J.K. HOSIERY FACTORY, KANPUR
DATE OF JUDGMENT19/03/1986
BENCH:
MUKHARJI, SABYASACHI (J)
BENCH:
MUKHARJI, SABYASACHI (J)
PATHAK, R.S.
CITATION:
1986 AIR 1665 1986 SCR (1) 907
1986 SCC Supl. 104 1986 SCALE (1)471
ACT:
Right to carry forward the unabsorbed depreciation and
to set off by a unregistered firm in one year to the next
year when it was registered, whether permissible - Income
Tax Act, 1922 sections 10(2)(vi) read with 24(i) and 24(2).
HEADNOTE:
M/s. J.K. Hosiery Factory, Kanpur the respondent
assessee firm originally consisted of three Singhania
Brothers and one J.P. Agarwal as partners. The Singhania
brothers retired in 1946 and in their place Kamala Town
Trust was alleged to have become partner. During the
assessment year 1949-50 the unregistered firm had been
allowed an unabsorbed depreciation of Rs. 43.963. The firm
claimed a set off thereof in the assessment year 1950-51
when it was registered. The Tribunal refused to allow the
carry forward and set off but the High Court in the
reference answered the question against Revenue. Hence the
appeal by the Revenue.
Dismissing the appeal,the Court,
^
HELD : 1.1 Having regard to the scheme of the relevant
provisions and in view of the provisions of sections 10(2)
(vi) read with section 24(1) and section 24(2) of the 1922
Act, the deduction of the unabsorbed depreciation should
have been allowed, in as much in both the years the firm
continued - in one year it was unregistered, in the next
year it got itself transferred into registered, but its
identity was not lost. The firm was one. Further the
assessee was entitled to an interpretation favourable to
him. [915 C-D]
1.2 Where two interpretations were possible, the court
should take the interpretation that is favourable to the
assessee bearing in mind that a taxing statute is being
construed. [914 H; 915 A]
1.3 The proviso (b) below section 10(2)(vi) of the 1922
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Act dealt with every assessee. It specified that where the
assessee was a registered firm, then in the assessment of
its partners, if full effect could not be given to any
depreciation allowance and where the assessee was an
unregistered firm where there was no question of its
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partners being assessed, the depreciation which could be
carried forward was the unabsorbed depreciation in the
assessment of the firm itself. There was nothing in the
section which indicated that unregistered firm could not get
the benefit of the carry forward. [911 G-H; 912 A-B]
1.4 If section 24 is properly read in conjunction with
clause (b) of the proviso to sub-section (2) of section 24
which gives the right to carry forward the loss then the
effect would be that loss had to be carried forward and
adjusted first against the profits of the next year. Neither
of the provisions prohibited that carry forward unabsorbed
depreciation in case the firm became registered in the
subsequent year. The entity is the firm, registration makes
no difference in that entity. By registration, the firm gets
certain additional qualification and puts upon itself
certain additional burden. The scheme of the Act does not
indicate any intention to deprive the subsequently
registered firm of its right to carry forward the unabsorbed
depreciation. Depreciation is given to the person who
becomes entitled to it. The subsequently registered firm is
composed of him also. Therefore, in principle, there is no
basis for the proposition that he should not be entitled to
get the benefit of depreciation. [912 B-E]
Indian Iron & Steel Co. Ltd. v. Commissioner of
Incometax, Bengal, 11 I.T.R. 328 P.C. discussed and
distinguished.
Ballarpur Collieries co. v. Commissioner of Income Tax,
Poona, 92 I.T.R. 219 held inapplicable.
1.5 It could not be contended that since a registered
firm was liable to a separate tax called the "firm tax",
which is over and above the tax payable by the partners, the
registered firm should be treated like an ordinary assessee
for the purposes of the assessment of "firm tax" and the
losses of the earlier years computed in the assessment of
the
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firm should be carried forward and set off against its
business profits of the subsequent years. Though the "firm
tax" was levied under the Finance Act each year, it was a
part and parcel of the income tax which was levied under the
provisions of the Income-tax Act. If the contentions were
accepted it would lead to an anomalous position inasmuch as
there would be two assessments in the case of registered
firms, one for purposes of levy of "firm tax" and the other
for purposes of levy of income tax and the quantum of income
in the two assessments would be different. Such a result is
not contemplated under the Income tax Act. Imposition of tax
was on the registered firm as well as on unregistered firm.
The manner of levy and realisation is different in case of
registered firm. Therefore, under the provisions of section
32(2) for the purpose of setting off unabsorbed depreciation
carried forward from a preceding year, it was not necessary
that the business in respect of which the depreciation
allowance was originally worked out should remain in
existence in such succeeding year.[914 c-e]
K.T.Wire Products v. Union of India & Ors., 92 I.T.R.
459 (All) and Commissioner of Income tax, Bombay City II v.
Estate and Finance Ltd., 111 I.T.R. 119 (BY) referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1371-
72 (NT) of 1974.
From the Judgment and Order dated 4th August, 1972 of
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the Allahabad High Court in I.T. Reference No. 426 of 1963.
S.C. Manchanda and Miss A. Subhashini for the
Appellant.
V.S. Desai and M.M. Kashtriya for the Respondent.
The Judgment of the Court was delivered by
SABYASACHI MUKHARJI, J. These appeals by special leave
are from the judgment and order of the Division Bench of the
Allahabad High Court dated 4th August, 1972.
M/s J.K. Hosiery Factory, Kanpur, the assessee firm
herein, originally consisted of Sir Padampat Singhania, L.
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Lakshmipat Singhania and L. Kailashpat Singhania and one
J.P. Agarwal as partners. In January, 1946, the three
Singhania brothers appeared to have retired from the firm
and in their place the Kamla Town Trust was alleged to have
become partner.
The revenue challenged this reconstitution of the firm
and according to the revenue, the Singhania brothers never
retired and the trust never became a partner. Four questions
were referred by the Tribunal to the High Court under
section 66(1) of the Indian Income-tax Act, 1922
(hereinafter called the ’Act’). The question No. 4 is the
only question canvassed before us and survives for these
appeals. The same is as follows:
"Whether, under the provisions of section
10(2)(vi), proviso (b) of the Income-tax Act, the
unabsorbed depreciation of the unregistered firm
in 1949-50 can be allowed as a deduction in the
assessments of the partners of the registered firm
in the assessment year 1950-51?"
Question No. 4 is relevant only for the assessment year
1950-51. For the previous assessment year 1949-50, the firm
had been allowed an unabsorbed depreciation of Rs. 43,963.
The firm claimed a set off thereof in the assessment year
1950-51.The Tribunal refused to grant this set off on the
view that in the year 1949-50, the assessee firm was an
unregistered firm while it had been registered under the
Income-tax Act for the year 1950-51. According to the
Tribunal, the loss on account of depreciation of an
unregistered firm could not be carried forward to the
succeeding year in case the firm got registered. It was so
held by the Tribunal.
The High Court by reference to section 10(2)(vi) and
proviso (b) to section 24(2) of the Act and on
interpretation of the provisions and scheme of the sections
held that the Tribunal was not right and answered the
question in favour of the assessee. These appeals are from
that decision.
In order to appreciate this question, it is necessary
to bear in mind the relevant provisions of the Act. At the
relevant time, sub-section (2) of section 2 was as follows:
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"’assessee’ means a person by whom income tax is
payable."
The relevant provisions of section 10 were as follows:
"10. (1) The tax shall be payable by an assessee
under the head ’profits and gains of business,
profession or vocation’ in respect of the profits
or gains of any business, profession or vocation
carried on by him.
(2) Such profits or gains shall be computed after
making the following allowances, namely : - .....
(vi) in respect of depreciation ....
Provided that - ...... (b) where, in the
assessment of the assessee or if the assessee is a
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registered firm, in the assessment of its
partners, full effect cannot be given to any such
allowance in any year not being a year which ended
prior to the 1st day of April, 1939, owing to
their being no profits or gains chargeable for
that year, or owing to the profits or gains
chargeable being less than the allowance, then,
subject to the provisions of clause (b) of the
proviso to sub-section (2) of section 24, the
allowance or part of the allowance to which effect
has not been given, as the case may be, shall be
added to the amount of the allowance for
depreciation for the following year and deemed to
be part of that allowance, or if there is no such
allowance for that year, be deemed to be the
allowance for the next year, and so on for
succeeding years."
It is apparent, as the High Court noted, that the
proviso dealt with every assessee. It specified that where
the assessee was a registered firm, then in the assessment
of its partners, if full effect could not be given to any
depreciation allowance and where the assessee was an
unregistered firm where there was no question of its
partners being assessed, the depreciation which could be
carried forward was the unabsorbed depreciation in the
assessment of the firm itself. The assessee in the first
year being an
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unregistered firm was entitled to carry forward the
unabsorbed depreciation under this proviso. There was
nothing in the section which indicated that unregistered
firm could not get that benefit of the carry-forward. It
must be borne in mind that the firm which suffered
depreciation was unregistered in the accounting year i.e.
1949-50 and it is the very same firm which got itself
registered in the subsequent year. If section 24 is properly
read in conjunction with clause (b) of the proviso to sub-
section (2) of section 24 which gives the right to carry
forward the loss then the effect would be that loss had to
be carried forward and adjusted first against the profits of
the next year. Neither of the provisions prohibited that
carry-forward unabsorbed depreciation in case the firm
became registered in the subsequent year. This appears, in
our opinion, on a plain reading of the different provisions
of the section. The entity is the firm, registration makes
no difference to that entity. By registration, the firm gets
certain additional qualifications and puts upon itself
certain additional burden. The assessee in both the cases,
however, is the same. We were referred to the provisions of
section 23(5)(b) and section 24 to section 71 of the Income-
tax Act, 1961. We do not think that on this aspect the
scheme of the Act indicates any intention to deprive the
subsequently registered firm of its right to carry forward
the unabsorbed depreciation. Depreciation is given to the
person who becomes entitled to it. The subsequently
registered firm is composed of him also. Therefore, in
principle, there is no basis for proposition that he should
not be entitled to get the benefit of depreciation.
Our attention was drawn to certain observations of the
Judicial Committee of the Privy Council in the case of
Indian Iron & Steel Co. Ltd. v. Commissioner of Income-Tax,
Bengal, 11 I.T.R. 328. There the Privy Council dealt with
entirely different set of circumstances. By an agreement
dated 8th September, 1936, made between the appellant
company and another company named the Bengal Iron Company
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Ltd., the former had agreed to acquire and take over the
whole of the property and assets of the latter as existing
on the date of transfer.In pursuance of this agreement the
Bengal Company transferred all its property and assets on
the 2nd December, 1936 to the appellant company which
continued to carry on the business of the Bengal Company as
part of and in combination with its
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existing business. The agreement contained a clause
assigning ’so far as capable of being assigned, any claim
which the Bengal Company may have in respect of unabsorbed
depreciation allowances’. At the time of the amalgamation
the Bengal Company had to its credit unabsorbed depreciation
allowance to the extent of Rs. 85,45,150 which it could set
off against its future profits. Similarly, the appellant
company had an unabsorbed depreciation allowance of Rs.
62,00,775. It was held by the Judicial Committee, affirming
the decision of the High Court of Calcutta, (i) that the
appellant company was not entitled to have the depreciation
allowance of the Bengal Company computed on the original
cost of such assets to the Bengal Company for the whole of
the previous year but only up to the date of succession and
that after that date it had to be computed on the original
cost to the appellant company; and (ii) that the appellant
company was not in law entitled to carry forward the
unabsorbed depreciation allowance of the Bengal Company. It
was further held that the word ’assessee’ in section 10(2)
must, when there is a successor to the business charged to
tax, be read in certain of the paragraphs as including both
predecessor and successor, but it does not follow as a
consequence that the unabsorbed depreciation of the
predecessor must be added to that of the successor or that
even in a case when the only business concerned is that
which is transferred. The business when transferred carries
to the purchaser its unabsorbed depreciation.
Here no such problem arises. Here we have a situation
where the same person previously carrying on business as
unregistered firm is now carrying on business as registered
firm.
Our attention was drawn to the observations of the
Division Bench of the Bombay High Court in the case of
Ballarpur Collieries Co. v. Commissioner of Income-Tax,
Poona, 92 I.T.R. 219. But the said observations are not
relevant for our present purposes.
Similarly, reliance was placed on the observations of
the Division Bench of the Allahabad High Court in K.T. Wire
Products v. Union of India & Ors., 92 I.T.R. 459. It may be
mentioned that there it was noted that under the general
scheme of the Income-tax Act, losses and profits under
different heads had to be aggregated and the net income
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arrived at which was liable to tax. If the resultant figure
was a loss, it was carried forward and set off against the
business profits of the succeeding year. This is the
position in the case of all assessees except registered
firms. In the case of registered firms, the net loss
including depreciation allowance, if any, is allocated to
the partners, who alone were entitled to set off the loss
allocated to them in their individual assessments and to
carry forward any loss which remained unabsorbed, as
provided in sections 32(2) and 75(2) of the Income-tax Act,
1961. The firm as such was not entitled to carry forward the
losses determined in the assessment. It could not be
contended that since a registered firm was liable to a
separate tax called the "firm tax", which is over and above
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the tax payable by the partners, the registered firm should
be treated like an ordinary assessee for the purposes of the
assessment of "firm tax" and the losses of the earlier years
computed in the assessment of the firm should be carried
forward and set off against its business profits of the
subsequent years. Though the "firm tax" was levied under the
Finance Act each year, it was a part and parcel of the
incometax which was levied under the provisions of the
Income-tax Act. If the contentions were accepted it would
lead to an anomalous position inasmuch as there would be two
assessments in the case of registered firms, one for
purposes of levy of "firm tax" and the other for purposes of
levy of income-tax and the quantum of income in the two
assessments would be different. Such a result is not
contemplated under the Incometax Act. Imposition of tax was
on the registered firm as well as on unregistered firm. The
manner of levy and realisation is different in case of
registered firm.
A case converse to the instant case was before the
Division Bench of the Bombay High Court in the case of
Commissioner of Incometax, Bombay City II v. Estate and
Finance Ltd., 111 I.T.R. 119. Where the Division Bench
observed that when enacting the provision regarding carry
forward and set off of unabsorbed depreciation under section
32(2) of the Income-tax Act, 1961, the legislature could
have imposed a condition that unabsorbed depreciation could
be set off against the profits of a subsequent year only if
the business in relation to which depreciation was allowed
continued to exist in such year. The absence of such a
restriction had to be construed in favour of the assessee.
915
Where two interpretations were possible the court should
take the interpretation that is favourable to the assessee
bearing in mind that a taxing statute is being construed.
Therefore, under the provisions of section 32(2) for the
purpose of setting off unabsorbed depreciation carried
forward from a proceeding year, it was not necessary that
the business in respect of which the depreciation allowance
was originally worked out should remain in existence in such
succeeding year. It dealt with some other aspect with which
we are not presently concerned.
Having regard to the scheme of the relevant provisions
and in view of the provisions of section 10(2)(vi) read with
section 24(1) and section 24(2) of the 1922 Act, we are of
the opinion that the deduction of the unabsorbed
depreciation should have been allowed. It is necessary to
bear in mind that in both the years the firm continued - in
one year it was unregistered, in the next year it got itself
transferred into registered, but its identity was not lost.
The firm was one.
In any event as has been mentioned in case of doubt,
the assessee is entitled to an interpretation which is
favourable to him, though we are of the opinion that in the
instant case there is no scope of any doubt.
Therefore, there was no loss of the right to carry
forward the unabsorbed depreciation.
In the premises the revenue was wrong, the assessee was
right. The High Court rightly answered the question. The
appeals, therefore, fail and are accordingly dismissed with
costs.
S.R. Appeals dismissed.
916