Full Judgment Text
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PETITIONER:
GARDEN SILK WEAVING FACTORY, SURAT
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX,GUJARAT, AHMEDABAD
DATE OF JUDGMENT22/03/1991
BENCH:
RANGNATHAN, S.
BENCH:
RANGNATHAN, S.
RAMASWAMY, K.
CITATION:
1991 AIR 1322 1991 SCR (1) 909
1991 SCC (2) 684 JT 1991 (5) 160
1991 SCALE (1)501
ACT:
Income Tax Act, 1961-Sections 32(2), 72(2)-
"Depreciation"-Meaning of -Unabsorbed loss and unabsorbed
depreciation-Difference of-Carry forward and set off of
unabsorbed depreciation--Principle and distinction of.
Income Tax Act, 1961-Sections 72(2), 32(2), 35-
Unabsorbed depreciation computed in assessment of registered
firm-Carry forward of-Alternatives indicated.
Income Tax Act, 1961-Section 32(2)-Unabsorbed
depreciation allocated to partners of registered firm-
Firm whether entitled to carry forward the depreciation
and set off.
Income Tax Act, 1961-Section 32(2)-
Construction and object of-Assessee-Registered firm-
Steps to be taken to carry forward of
unabsorbed depreciation to successive assessment years,
indicated.
Income Tax Act, 1922-Section 10(2)(vib),
proviso (as amended in 1953)-Effect and application of.
HEADNOTE:
For the assessment year of 1968-69, the
assessee appellant, a registered firm, returned a
total income of Rs.3,94,483 and a provisional
assessment was made.
Subsequently, the Income Tax Officer found that
for the said assessment year, the assessee had made
an income of Rs. 11,82,056 and deducting therefrom
three figures viz., (i) unabsorbed depreciation:
Rs.1,59,181; (ii) unabsorbed development rebate:
Rs.2,79,150; and (iii) unabsorbed business loss:
Rs.3,49,242, aggregating to Rs.7,87,573 and arrived
at the net income of Rs.3,94,483, which had been
returned and accepted. The three figures were the
figures carried over from the previous year for the
assessment year 1967-68.
The Income Tax Officer allowed the
unabsorbed development
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rebate pertaining to the assessment year of 1967-68 to be
carried for-ward and set off in computing the total
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income for the assessment year of 1968-69, but he did
not allow the amounts of unabsorbed depreciation and
unabsorbed business loss. He, therefore, added back
the sum of Rs.5,08,423 (the aggregate of the amounts
of unabsorbed depreciation and unabsorbed business loss)
to the returned income for determining the total income
for the assessment year of 1968-69.
The action of the Income Tax Officer was confirmed by
the Appellate Assistant Commissioners (A.A.C.). However,
on further appeal, the Income-tax Appellate Tribunal
(A.T.) upheld the income-tax Officer’s stand that the
firm could not be allowed to carry forward and set off
the business loss carried from the earlier year but, so far
as the unabsorbed depreciation was concerned, it upheld
the assessee’s contention.
On these two issues a reference to the High Court
was made and the High Court answered them against the
assessee.
For the assessment year 1967-68, the assessee filed
a return on 30.6.67 showing a loss of Rs.7,87,515 but
filed a revised return on 22.3.1972 showing a loss of
Rs.5,46,351. On 14.3.73 the I.T.O. completed the
assessment determining a loss of Rs.4,85,250.
The assessee’s request that this loss should be
carried forward to the subsequent assessment year was
rejected by the I.T.O. This was confirmed by the
A.A.C. On further appeal, the A.T. confirmed the
order of the A.A.C., following the High Court’s decision
for the assessment year 1968-69 which had by then been
announced.
The High Court answered the (question--"Whether, on
the facts and circumstances of the case, the Tribunal
was justified in rejecting the claim for carry forward of
business loss in the hands of the firm in view of the
decision reported in 101I.T.R. 658? in the affirmative.
Hence the assessee’s the appeals -one appeal for
the assessment year of 1968-69 and the other for
the assessment year of 1967-68-under certificates of
fitness granted by the High Court.
On behalf of the assessee it was contended that the
firm as well as the partners had been returning losses
all along with the result that no part of the unabsorbed
depreciation of the firm had been set off in the
partner’s hands; that when there was an unabsorbed
depreciation computed in the assessment of a
registered firm for any year, for the
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purpose of carry forward, it should be retained and
carried forward by the firm only.
On the other hand, it was submitted for the Revenue
that once the assessment was completed and the total
income or loss of the firm ascertained, it had to be
apportioned amongst the partners. Thereafter there
remained nothing in the assessment of the firm to be
carried forward. Only each of the partners can carry
forward his share of the unabsorbed loss, which also
included the unabsorbed depreciation, as there was no
difference between unabsorbed loss and unabsorbed
depreciation; and that the amendment to the proviso
to section 10(2)(vib) in 1953 of depreciation was intended
to negative the claim of carry forward, by the firm
which was earlier being accepted on the strength of
the earlier language resulting in a double advantage.
Allowing the appeals, this Court,
HELD: 1. "Depreciation" is one of the notional
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allowances-which expression means a deduction in respect an
outgoing which is not an item of actual expenditure or is
one which cannot be treated as an outgoing of a
revenue nature-permitted by the statute to be
deducted in the computation of the profits and gains of a
business. [921H-922B]
2. Initially, the depreciation allowances has to be
deducted from the profits and gains of the business to
which the assets earning the depreciation relate but,
if it remains unabsorbed by such profits, the allowance
has to be set off against the other business income of
the assessee and, where that is also insufficient, against
the other taxable income of the assessee. The carry
forward of any depreciation as unabsorbed cannot arise
until the stage of final assessment is reached and the
total income of the assessee otherwise computed is
insufficient to absorb the year’s depreciation allowance.
[928E-G]
3. An unabsorbed depreciation is a part of the "loss".
This is so because, in the first place, "depreciation" is
a normal outgoing, though in a sense notional, which has
to be debited in the computation of the profits of a
business on commercial principles (quite apart from
statute) and it is difficult to see why, when such
deduction yields a negative figure of profits, it cannot
be a "loss" as generally understood. Where the
depreciation allowance attributable to a particular
business exceeds the profits otherwise computed for that
business, the deduction of the depreciation allowance
from such profits can only result in a "loss" from
that business and a business loss has to be set off
against income
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from any other business, by way of intra-head
adjustment, under s. 70 and the income under any
other head, by way of intra-head adjustment, under
s. 71. This is implicit in the provision that the
excessive depreciation of one business can be "given
effect toll against the profits and gains of another
business in the same year and has been recognised
by decisions holding that it can be set off against
income from other heads. If unabsorbed depreciation is
treated as a genus totally different from a "loss",
there is no statutory provision that will permit its
adjustment against other business income-implicit in
S. 32(2) itself-and against all other income of
the assessee. "Loss" and "unabsorbed depreciation"
should not be treated as antithetical to, or mutually
exclusive of, each other. However, there is nothing
anomalous or absurd in the statute providing for a
dissection of the amount of loss for purposes of
carry forward and providing for a special or
different treatment to unabsorbed depreciation in
this regard although it is a component element
of the genus described as "loss" [931B-C, 926C-E, 93IC-F]
4. Unabsorbed losses and unabsorbed
depreciation are to be carried forward to future
years to be set off against future income. There
is, however, one important difference. Unabsorbed
losses can be carried forward only for a period
of eight years whereas unabsorbed depreciation can
be carried forward indefinitely. [923G -H]
5. There is also difference between the two in
the matter of their carry forward in the case of
assessment of a registered firm. In this case, the
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unabsorbed loss cannot be carried forward by the
firm at all. The statute clearly so provides. So far
as unabsorbed depreciation is concerned, three
alternatives are possible to be urged: (i) It should
be retained (without apportionment) and carried
forward by the firm only. (ii) It should be
apportioned among the partners. Thereafter, it can be
dealt with-even for carry forward purpose only in the
assessment of each of the partners in respect of his
aliquot share thereof. (iii) It should be apportioned
among the partners each of whom may set off his
share thereof against his other income. If, after
this, any amount remains unabsorbed, it will revert
to the firm. The firm will carry it forward, set it
off against its other income in the succeeding year.
This operation will be repeated every year
indefinitely until the unabsorbed depreciation gets
absorbed. [924B-E]
6. The third alternative is the correct one:
(a) The unabsorbed depreciation should be allocated
among the partners and, like any other loss, will be
available to the partners to the extent of his share
therein for set off against his business income or
other income in the same
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assessment year. In fact S. 32(2), in so far as it talks
of depreciation being given effect to in the partners’
assessments recognises that such unabsorbed depreciation
should be allocated among the partners. The question
is what is to be done thereafter. [932A-B]
(b) When there is nothing in the sub-section or the
Act specifically providing even for an apportionment
of the depreciation among the partners, it is too
contrived a construction to read into the sub-section
several words intended to provide for a number of
partners, each carrying forward his share of the
unabsorbed depreciation to successive assessment years.
It seems natural and reasonable to construe the
section as envisaging the following steps where the assessee
is a registered firm:
(i) Excessive depreciation should be adjusted in the
assessment of the assessee against other business income
and against other heads of income;
(ii) Depreciation, which remains unabsorbed under
(i), will be apportioned to the partners and the
share of each will be adjusted against the business and
other income of each of the partners pro tanto;
(iii) If full effect cannot be given to the
depreciation allowance of the assessee by the above
processes and some depreciation remains unadjusted,
the assessee-firm will carry it forward to the
succeeding assessment year. [934C-G]
(c) The sub-section, before its 1953 amendment,
permitted all assesses-and this included registered
firms as well-to carry forward their unabsorbed
depreciation so that though the registered firm paid
no tax, it could, on the language claim a carry forward of
the depreciation which had been apportioned among the
partners. This resulted in such carry forward being
claimed even where the whole or a part of the
unabsorbed depreciation of the firm had been set off in
the assessment of individual partners. The amendment only
seeks to make it clear that such carry forward will not
be permitted to the extent it has been given effect to
in the partners’ assessments; by necessary
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implication, the carry forward, to the extent it has not
been effectively allowed to the partner, continues to
be available. The amendment of 1953, therefore, does
not help the case-of the Revenue. [935F-936A]
(d) The objection to the above course is also based
on a mental imagery of the firm and its partners as
altogether different assesses
914
and of the impermissibility of "bringing back" to the firm’s
"file" what has gone away to the* files of the partners.
This approach of viewing the two assessments in water-
tight compartments for all purposes is not correct. In
any event, any such theoretical dichotomy cannot prevail
over the provisions of s. 32(2). [934G-935A]
(e) The construction suggested does not result in
any double advantage to the partners. [936D]
(f) It is true that the construction may result in a
certain amount of imbalance in the quantum of relief
available as among different partners. But similar
imbalance is inherent in the application of any of the
three possible alternatives. [936E-F]
7. The assessee-appellant firm is entitled to carry
forward the unabsorbed depreciation computed for the
assessment year 1967-68 and have it set off in its
assessment for the assessment year 1968-69. The
unabsorbed loss for the assessment year, 1967-68,
however, cannot be carried forward by the firm to be set
off in its assessment for the assessment year 1968-69.
[937A-B]
K. T. Wire Products v. Union of India, [1973] 92 ITR
459 (All); Garden Silk Weaving Factory, [1975] 101 ITR
658; Garden Silk Weaving Factory, [1983] 144 ITR 613
(Guj.): C. I. T. v. Ram Swarup Gupta, [1973] 92 ITR
495; Raj Narayan Aggarwala v. C.I.T., [1979] 75 ITR
I (Del.); Shankaranarayana Construction Co. v. C. I. T.,
[1984] 145 ITR 467 (Karn.); Ballarpur Collieries Co. v.
C.I.T., [1973] 92 ITR 219; C. 1. T. v. Nagpur Gas &
Domestic Appliances, [1984] 147 ITR 440 (Bom.); CIT
v. Nagapattinam Import and Export Corp., [1979]
119 ITR 444; CIT v. Madras Wire Products, [1979] 119
ITR 454; CIT v. Madras Wire Products, [1980] 123 ITR
722 (Mad.); CIT v. J. Patel & Co., [1984] 149 ITR 682
(Del.); CIT v. Shrinivas Sugar Co., [1988] 174 ITR 178
(AP); CIT v. Singh Transport Co., [1980] 123 ITR 698
(Gau.); Pearl Wollen Mills v. CIT, [1989] ITR 368; CIT v.
Mahavir Steel Rolling Mills, [1989] 179 ITR 377 (P & H)
and CIT v. R. J. Trivedi & Sons, [1990] 183 ITR 420
(M.P.), referred to.
IT v. Jaipuria China Clay Mines (P.) Ltd., [1966]
59 ITR 555 and Rajapalayam Mills Ltd. v. C. I. T., [1978]
115 ITR 777, followed.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1249/75
& 2075/79.
From the Judgment and Order dated ’ 26.9.1974 and
16.10.1978 of Gujarat High Court in I.T.R. Nos. 19 of 1973
and 318 of 1977.
Harish N. Salve, P.H. Parekh and Sunil Degra for
the Appellant.
915
V. Gauri Shanker, Sr. Adv. and S. Rajappa for the
Respondent.
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The Judgment of the Court was delivered by
RANGANATHAN, J. These appeals raise a question
of some complexity on the interpretation of the
provisions of the Income-Tax Act, 1961, (The 1961 Act’),
in regard to which there is a difference of opinion
among various High Courts. In the judgment under
appeal, reported in (1975) 101 ITR 658, the Gujarat
High Court has answered the question raised in favour of
the Revenue and against the assessees. Hence these
appeals by the assessee, M/s. Garden Silk Weaving
Factory, Surat.
The two appeals relate to the assessment years 1967-
68 and 1968-69 for which the relevant previous years were
the Saka years 2022 and 2023 respectively. The
question arises in similar circumstances for both the
years. We shall set out the facts relevant for the
assessment year 1968-69 as the appeals and reference
in respect of that year were disposed of earlier than
those pertaining to the assessment year 1967-68.
The assessee, M/s. Garden Silk Weaving Factory, is
a registered firm. For the assessment year in question, it
returned a total income of Rs.3,96,483 and a provisional
assessment, under section 141 of the Act, was made
accepting the income returned. Subsequently, the
Income Tax Officer found that, for the assessment year
in question, the assessee had made an income of Rs.
11,82,056 but deducted there-three figures aggregating
to Rs.7,87,573 to arrive at the net income of
Rs.3,94,483 which had been returned and accepted.
These three figures were figures carried over from the
previous year for the assessment year 1967-68. They
comprised of:
(i) Unabsorbed Rs. 1,59,181
Depreciation
(ii) Unabsorbed Rs. 2,79,150
Development Rebate
(iii) Unabsorbed Rs. 3,49,242
Business loss
Total : Rs. 7,87,573
The Income Tax Officer (I.T.O.) agreed that, out of the
above three months, the unabsorbed development rebate
pertaining to the assessment year 1967-68
had been rightly carried forward and set off in
computing the total income for the assessment year
1968-69. However,
916
for reasons which will become clear later, the Income
Tax Officer was of the opinion that the sum of Rs.
1,59,181 (which represented the amount of unabsorbed
depreciation relating to the assessment year 1967-68)
and the amount of Rs.3,49,242 (which represented the
unabsorbed loss pertaining to the assessment year 1967-
68) could not be carried forward, as done by the
assessee, to the assessment year 1968-69. He, therefore,
added back the sum of Rs.5,08,423 (the aggregate of
the above two amounts) to the returned income for
determining the total income for assessment year 1968-
69. This action of the Income Tax Officer was
confirmed by the Appellate Assistant Commissioner
(A.A.C.). However, on further appeal, the Income-tax
Appellate Tribunal (A.T.) took a different view. It
upheld the Income-tax Officer’s stand that the firm could
not be allowed to carry forward and set off the
business loss carried from the earlier year. But, so
far as the unabsorbed depreciation was concerned, it
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upheld the assesses contention. A reference to the
High, Court followed. The following two questions were
referred to the High Court of Gujarat for its decision:
1. Whether on the facts and in the
circumstances of the case, the Tribunal was
right in law in holding that the assessee
registered firm is entitled to carry forward
unabsorbed depreciation from earlier years and
that it will be deemed to be an allowance
in the nature of depreciation in the
previous year, relevant to assessment year 1968-
69?
2. Whether the claim of the assessee to carry
forward and set off loss of Rs.3,49,242 against
its total income for the assessment year 1968-
69 has been rightly rejected?"
The High Court, in a very detailed judgment,
discussed the issues threadbare and answered both the
questions against the assessee and in favour of the
Revenue. Hence the assesse’s appeal for the
assessment year 1968-69 under a certificate of fitness
granted by the High Court.
For the assessment year 1967-68, a full paper book
containing all the orders and statement of facts has not
been placed before us. However, the petition of appeal
gives a few facts which may be sufficient to dispose of
the appeal. The relevant facts are these. For this
assessment year, the assessee filed a return on
30/6/67 showing a loss of Rs.7,87,515 but filed a
revised return on 22/3/72 showing a loss of
Rs.5,46,351. On 14-3-73 the I.T.O. completed the
assessment determining a loss of Rs.4,85,250. (It will
be noticed that the assessment order for 1968-69 gives a
different figure and also shows its composition as
partly loss, partly unabsorbed depreciation and partly
unab-
917
sorbed development rebate but this is not very material
for deciding the principle in issue before us). The
assessee’s request that this loss should be carried
forward to the subsequent assessment year was
rejected by the I.T.O. This was confirmed by the
A.A.C. on further appeal, the A.T. confirmed the
order of the A.A.C., following the High Court’s
decision for assessment year 1968-69 which had by
then been announced. Thereupon the following question
of law was referred to the High Court for its opinion:
"Whether, on the facts and circumstances of
the case, the Tribunal was justified in
rejecting the claim for carry forward of
business loss in the hands of the firm in view of
the decision reported in 101 I.T.R. 658? "
The High Court answered the question in the affirmative
following its earlier decision but granted a certificate
of fitness for appeal to this Court. This is how the
second appeal is before us. It will be seen from the
above that, though there are two appeals before us,
the question involved in both the appeals is the same.
Before discussing the question at issue, it may be
useful to briefly summarise the procedure under the
statute for determining the total income of an assessee
in respect of a previous year. All income accruing or
arising to the assessee and includible in his total income,
is, to begin with, classified (see S. 14) under six
different heads:
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A. Salaries.
B. Interest on Securities: (recently omitted)
C. Income from Property.
D. Profits and gains of business, profession or
vocation. (briefly, "business income")
E. Capital gains
F. Income from other sources.
In computing the income of the assessee according to
this classification, two aspects have to be borne in mind.
One is that, even under the same head, an assessee may have
different sources. If so, the
918
income has first to be arrived at in respect of each
such source. Thus, if an assessee carries on several
businesses, the income of each and every such,
business has to be separately computed by allowing
against the gross profits and gains of that business
only the deductions relevant and appropriate to that
business. The second is that, for arriving at the
figure of income assessable under a particular head,
the individual figures in respect of all the sources
have to be aggregated. Thus, to take up the head,
"profits and gains of business, profession or
vocation", the statute contemplates the computation of
the profits and gains of each business, profession or
vocation carried on by the assessee separately. The
result of such computation may be either a profit or
a loss. If all the businesses end in profits, the profits
are aggregated to arrive at a resultant figure of
profits from "business". On the other hand, if some of
the businesses make profit and some of them result in
a loss, the profits and the losses have to be added
together in order to arrive at the consolidated income
under the head "profits and gains of business." If the
total amount of profits exceeds the total amount of
losses, there will be a positive income under this
head, assessable for that particular assessment year. If
on the other hand the losses exceed the profits, they
will be "adjusted" against the profits, so as to reduce
the assessable income under the head to nil; in
addition, the losses of one or more businesses will
remain "unabsorbed". There will thus be one resultant
figure of profit or loss under each head. This is
one aspect of the matter. This is the first stage of
computation which we may call "intra-head adjustments".
This was not specifically provided for in the Indian
Income-tax Act, 1922 (the 1922 Act) but now finds
specific mention in S. 70 of the 1961 Act.
S. 24(1) of the 1922 Act and S. 71 of the 1961
Act next contemplate a mutual set off of the losses
under one head against the income under some other
head subject to some exceptions (like speculation
loss, capital loss etc. which, to avoid unnecessary
complications and confusion, we shall leave out of
account). Thus if, in any particular assessment year,
an assessee has incurred a loss under the head
"business", this loss can be set off against the income
earned by the assessee during that previous year under
other heads. Thus, for example, if an assessee has got
income by way of salary of Rs.20,000 and income
from house property of Rs.25,000 but has sustained a
loss of Rs.40,000 in business, the Act envisages the set
off of the loss of Rs.40,000 against the income of
Rs.45,000 resulting in a total income of Rs.5,000
only. This is the second stage in the process of
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assessment which we may describe as "inter-head
adjustment" or "set off".
919
The Acts [S. 24(2) of 1922 Act and S. 72 of the
1961 Act] next envisage a third stage in the process
of assessment which can’ be described as the
process of "carry forward and set off". By this
process, the assessee is permitted to carry forward a loss
he had not been able to adjust or set off in the first
and second stages of assessment. This benefit is not
available to all kinds of losses but, subject to certain
conditions and restrictions on which we need not dilate,
it is available to business losses. A business
loss of one assessment year which remains
"unabsorbed" by the processes of intra-and
inter-head ;adjustments can be carried forward to the
succeeding assessment years ,and can be set off against
any other business income in those years.
A modification to the above scheme had to be
enacted in respect of partnership. Partnership firms are
treated as separate assesses for the purposes of the
Income Tax Acts. Under the Acts, firms are
classified into -two-registered firms and unregistered
firms. Unregistered firms are distinct assesses which are
liable to pay tax on their total income. The Acts
provided that any unabsorbed loss in the case of
such a firm could be carried forward only by the firm
and not by it’s partners. However, under the 1922
Act, as it stood between 1939 and 1956,-registered
firms were treated as assesses only to this extent that
the total income (or loss) of the firm in any previous
year was computed. However, the firm itself was not
liable to any income tax. The income of the firm was
apportioned among its partners and each partner was
assessed on his share of income from the firm. In
this scheme, it was obvious that, as soon as the income
or loss of a firm was computed, there was nothing
further to be done in the case of the firm; the
income or loss became that of the partner for all
practical purposes. A partner’s share of a business
loss of the firm which remained unabsorbed became
business loss in the hands of the partner liable to
intera-head adjustments, inter-head adjustments and
carry forward as if the loss had been incurred by
the partner himself. The Act, therefore, provided that
in the case of registered firms the loss which could not
be absorbed in the same assessment year by the other
income of the firm could be carried forward to the
subsequent year not by the firm itself but only by the
partners. In other words, each partner carried forward
to subsequent years his share of the business loss of the
firm and set it off against his business income,
whether from the firm or otherwise. There is a third
category of unregistered firms assessed as registered
the provisions regarding which are not relevant for
our present purposes. Leaving them out of account,
the Acts outlined a very simple scheme stemmed from the
basic fact that a registered firm was not liable to pay
tax whereas an unregistered firm had to pay
920
tax. Under this scheme the full advantage of carry
forward of the loss incurred by the firm was enjoyed
by the partners in the case of a registered firm and
in the case of an unregistered firm by the firm
itself.
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The simplicity of the above scheme of assessment
of registered and unregistered firms, however, was not
allowed to last. In 1956, the legislature decided that
registered firms should also be made to pay a tax.
This tax, called "firm’s tax" was at rates lower than
those applicable to unregistered firms and other
assesses. Under the new scheme, which became effective
from 1.4.1956, the total income of a registered firm
is determined and it is liable to income-tax thereon.
The income of the firm (less the firm’s tax) is then
apportioned among the partners (subject to certain
adjustment as before). The share income of each
partner is aggregated with the rest of his income to
arrive at his total income on which he also pays
tax. In this new scheme the question arises: "when
the net result of a business carried on by a
registered firm in a particular year is a loss, who is to
carry forward such loss? Is it the firm (as in the case of
unregistered firms) or is it is the partners (as, earlier,
in the case of registered firms) or both?" The answer
to this question is furnished by the statute which,
while broadly continuing the scheme of assessment of
registered firms with the modification indicated
above, makes a specific provision in regard to carry
forward of losses. The provisions of Ss. 75 and 77 in
their present form can be usefully extracted here
(though they contain references to certain amended
provisions which we need not touch upon):
75. Losses of registered firms:
(1) Where the assessee is a registered firm,
any loss which cannot be set off against any
other income of the firm shall be apportioned
between the partners of the firm, and they
alone shall be entitled to have the amount of the
loss set off and carried forward for set off
under sections 70, 71, 72, 73, 74 and 74A.
(2) Nothing contained in sub-section (1) of
section 72, sub-section (2) of section 73, sub-
section (1) or sub-section (3) of section 74
or sub-section (3) of section 74A shall
entitle any assessee, being a registered firm, to
have its loss carried forward and set off
under the provisions of the aforesaid
section.
921
76. Losses of unregistered firms assessed
as registered firms:
In the case of an unregistered firm assessed
under the provisions of clause (b) of section
183 in respect of any assessment year, its
losses for that assessment year shall be dealt
with as if it were a registered firm.
77. Losses of unregistered firms or their
partners:
1) Where the assessee is an unregistered firm
which has not been assessed as a registered
firm under the provisions of clause (b) of
section 183, any loss of the firm shall be set
off or carried forward and set off only against
the income of the firm.
(2) Where the assessee is a partner of an
unregistered firm which has not been assessed
as a registered firm under the provisions of
clause (b) of section 183 and his share in
the income of the firm is a loss, then,
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whether the firm has already been assessed or
not-
(a) such loss shall not be set off under the
provisions of section 70, section 71, sub-
section (1) of section 73 or section 74A;
(b) nothing contained in sub-section (1) of
section 72 or sub-section (2) of section 73
or sub-section (1) or sub-section (3) of
section 74 or sub-section (3) of section 74A
shall entitle the assessee to have such loss
carried forward and set off against his own
income.
In view of this specific provision the High Court,
following an earlier decision of the same High Court in C.
I. T. v. Dhanji Shamji Mana vdar,[ 1974 ] I.T.R. 173
(Guj.) answered the second question referred to it in
the reference relating to assessment year 1968-69 and
the only referred in regard to the assessment year
1967-68 in favour of the Revenue and against the
assessee. The correctness of this answer has not been
challenged before us.
The first question referred to the High Court in respect
of assessment year 1968 69, however, arises in a slightly
different way. It arises the context of "depreciation"
which is one of the notional
922
allowances-by which expression we mean a
deduction in respect of an outgoing which is not
an item of actual expenditure or is one, which
cannot be treated as an outgoing of a revenue
nature-permitted by the statute to be deducted in
the computation of the profits and gains, of a
business. In a sense, where the depreciation
allowance exceeds the profits, otherwise arrived at, in
respect of the business, there will be a resultant
"loss" in the business; and, indeed, the
Department’s contention is that there is no
difference between an unabsorbed loss and unabsorbed
depreciation. It would, however, be useful to
refer to the treatment meted out by the statute in
respect of three items of deductions allowed in the
computation of the profits of a business, which may
be larger than the profits of the business otherwise
computed. One is the development rebate regarding
which the statute provides that it has to be set
off against the total income of the assessee so as to reduce
it to nil and that the balance is, to be carried forward to
succeeding assessment years to be accorded a
similar treatment. [See Ss. 10(2)(vib) of the 1922
Act and 33(2) of the 1961 Act]. This is an
allowance which cannot be a constituent element of a
figure of loss to be carried forward to later years
and stands on a totally different footing. The
second is the allowance for depreciation
under S10(2)(vi) of the 1922 Act. In respect of this
allowance, S. 10(12)(vi) provided that if full effect to
the allowance could not be given in the assessment of
an assessee for any assessment year, the unabsorbed
allowance could be carried forward and set off
against business profits in succeeding assessment
years indefinitely. This provision, namely clause
(b) of the proviso to S. 10(2)(vi) of the 1922 Act-
after- an addition in 1953 of the words underlined in the
extract below-reads thus,:
" 10(2)(vi) ........
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Provided that .....
(a) .............
(b) where, in the assessment of the assessee
or, if the assessee is a 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 I April, 1939, owing to there 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
923
deemed to be the allowance for that year, and
so on for succeeding years."
This provision has, in substance,-there are certain
verbal differences which are not material for our
purposes-been re-enacted as S. 32(2) of the 1961 Act,
which now reads thus:
B
"32(2) Where, in the assessment of the assessee
(or, if the assessee is a registered firm or an
unregistered firm assessed as a registered firm,
in the assessment of its partners) full effect
cannot be given to any allowance under clause
(ii) of sub-section ( 1) in any previous year,
owing to there being no profits or gains
chargeable for that previous year, or owing
to the profits or gains chargeable being less
than the allowance, then, subject to the
provisions of sub-section (2) of section 72 and
sub-section (3) of section 73, 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 previous .year
and deemed to be part of that allowance, or if
there is no such allowance for that previous
year, be deemed to be the allowance for that
previous year, and so on for the succeeding
previous years."
The third type of allowance of this nature, a carry
forward of which is contemplated, is an allowance in
respect of expenditure on capital assets related to a
business. This, by virtue of clause (f) of the proviso to
S. 10(2)(xiv) of the 1922 Act, re-enacted in S. 35(4) of
the 1961 Act, is treated on the same lines as the
depreciation allowance dealt with in S. 10(2)(vi) and S.
32(2). We shall, however, leave this out of account in
our future discussion as it is not material for the
purposes of the present case and as, in any event,
whatever is decided in regard to unabsorbed
depreciation would apply equally in respect of such
allowance as well.
From the above discussion, it will be seen that
unabsorbed losses and unabsorbed depreciation are to be
carried forward to future years to be set off against
future income. There is, however, one important
difference. Unabsorbed losses can be carried forward
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only for a period of eight years whereas unabsorbed
depreciation can be carried forward indefinitely. A
rule of priority of set off-as between these two-
therefore becomes necessary and this is provided by S.
72(2) of the 1961 Act which deals with carry forward of
losses-the counterpart of
924
the proviso to S. 24(2) of the 1922 Act-which reads thus:
"Where any allowance or part thereof is, under
sub-section (2) of section 32 or sub-section (4) of
section 35, to be carried forward, effect shall first be
given to the provisions of this section."
This is the historical context and statutory language
on the basis of which the issue before us has to be
resolved. The issue is: when there is an unabsorbed
depreciation computed in the assessment of a
registered firm for any year, how is it to be treated
for purposes of carry forward? Three alternatives are
possible: (i) It should be retained (without
apportionment) and carried forward by the firm
only. (ii) It should be apportioned among the partners.
Thereafter, it can be dealt with-even for carry
forward purposes-only in the assessments of each of
the partners in respect of his aliquot share thereof.
(iii) It should be apportioned among the partners
each of whom may set off his share thereof against his
other income. If, after this, any amount remains
unabsorbed, it will revert to the firm. The firm will
carry it forward. set it off against its other income
in the succeeding year. This operation will be
repeated every year indefinitely until the unabsorbed
depreciation gets absorbed. The three alternatives will
yield widely different results and hence the present
controversy.
On the above issue there has been a strong
cleavage of opinion between the various High Courts.
The view that unabsorbed depreciation once allocated to
the partners cannot be taken back to the firm’s
assessment for being carried forward by the firm and
that the partners alone are entitled to carry forward
the unabsorbed depreciation for being set off against
their income, has been taken in the following cases:
(a) K. T. Wire Products v. Union of India, [1973] 92 ITR
459 (All) (b) Garden Silk Weaving Factory, [1975] 101
ITR 658 and Garden Silk Weaving Factory, [1983] 144
ITR 613 (Guj.): (c) CIT v. Ram Swarup Gupta, [1973]
92 ITR 495 and Raj Narayan Aggarwala v. CIT, [1979] 75 ITR
1 (Del.); (d) Shankaranarayana Construction Co. v.
CIT, [1984] 145 ITR 467 (Karn.). The view that the
unabsorbed depreciation, after being carried forward by
the partners and set off against their income, reverts
back to the registered firm for being carried forward
and set off against its income and that any
depreciation still remaining unabsorbed will again go to
the partners and that if it still remained unabsorbed
would revert back to the firm and so on, has been
accepted in: (a) Ballarpur Collieries Co. v. CIT, [1973] 92
ITR
925
219 and CIT v. Nagpur Gas & Domestic Appliances,
[1984] 147 ITR 440 (Bom.); (b) CIT v. Nagapattinam Import
and Export Corp., [1979] 119 ITR 444; CIT v. Madras
Wire Products, [1979] 119 ITR 454 and CIT v. Madras
Wire Products, [1980] 123 ITR 722 (Mad); (c) CIT v.
Singh Transport Co., [1980] 123 ITR 698 (Gau); (d) CIT
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v. J. Patel & Co., [1984] 149 ITR 682 (Del.); (e)
CIT v. Shrinivasa Sugar (Co., [1988] 174 ITR 178 (A.P.):
(f) Pearl Woollen Mills v. CIT, [1989] 179 ITR 368 and
CIT v. Mahavir Steel Rolling Mills,5, [1989] 179 ITR
377 (P& H); and (g) CIT v. R. J. Trivedi & Sons, [1990] 183
ITR 420 (M.P.)
Shri Harish Salve, learned counsel for the
assessee, canvassed the latter of the above views but with
a slight modification. He submitted that, in the present
case, the firm as well as the partners had been
returning losses all along with the result that no part of
the unabsorbed depreciation of the firm had been set off
in the partners’ hands. He, therefore, submitted that it
was sufficient for him to urge the first of the three
alternatives set out earlier and that he need not,
for the purposes of this case, seek to support the third
alternative, upheld in some of the decisions, which may
create an impression in the mind that the assessee
was deriving a double benefit by having the
unabsorbed depreciation set off in the hands of both the
firm and the partners. On the other hand, Dr.
Gaurishankar, for the Revenue, strongly advocated
the second alternative. According to him, once the
assessment is completed, and the total income or loss of
the firm ascertained, it has to be apportioned
amongst the partners. Thereafter, there remained
nothing in the assessment of the firm to be carried
forward. Only each of the partners can carry forward his
share of the unabsorbed loss (and this, according to
him, will include also the unabsorbed depreciation)
for set off in his future assessments.
The answer to the problem before us has to be
discovered in the language of S. 32(2) supplemented by
that of other sections which deal with the mode of
assessment of a firm and its partners. Before turning
to these provisions, it will be necessary to clear up
one aspect of S. 32(2) to which Sri Salve drew attention
in the course of his reply. He pointed out that S. 32(2)
permits the carry forward of the depreciation
allowance "where full effect cannot be given to it"
owing to there being no profits or gains chargeable for
that previous year, or owing to the profits or gains
chargeable being less than the allowance. Laying
emphasis on the words "profits or gains", he contended
that the carry forward of depreciation allowance is at a
stage much anterior to that of the determination of the
total income of the assessee. On this construction, if
an assessee A carries on two businesses, in one of which
there is
926
an unabsorbed depreciation of Rs. 15,000 and the profits and
gains of the other business is only Rs. 10,000, the net
unabsorbed depreciation of Rs.5,000 has to be carried
forward irrespective of the other income of the assessee in
that year, to the succeeding year. This contention,
however, cannot be accepted. Though the section,
somewhat infelicitiously, uses the expression "profits and
gains" as it occurs in the statute in the fasciculus of
sections dealing with the computation of business
income, the question of the carry forward of
unabsorbed depreciation has always been understood and
interpreted as arising only after the intra-head and
intra-head adjustments, referred to earlier, have been
carried out. Thus, in the illustration given above, if A
has a property income of Rs.6,000 the unabsorbed
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depreciation of Rs.5,000 will be set off against the
property income and there will be no unabsorbed
depreciation left for being carried forward to the
subsequent assessment year. This is because, where the
depreciation allowance attributable to a particular
business exceeds the profits otherwise computed for
that business, the deduction of the depreciation
allowance from such profits can only result in a "loss"
from that business-this, however, is subject to a
limitation that will be discussed later-and a business
loss has to be set off against income from any other
business, by way-of intera-head adjustment, under S. 70
and the income under any other head, by way of inter-
head adjustment, under S. 71. This principle indeed
emerges even from the language of S. 32(2) in so far
as it implicitly recognises that the excessive depreciation
of one business can be "given effect to" against the
profits and gains of another business in the same year.
This, indeed, is a well settled proposition, and it
should be sufficient to cite two decisions of this
Court which make this clear, In C.I.T. v. Jaipuria
China Clay Mines (P) Ltd., [1966]591,T.R.555 this Court
observed:
"Mr. Shastri, learned counsel for the
revenue, urges that depreciation, although a
permissible allowance under section 10(2) of
the Act, serves to compensate an assessee
for the capital loss suffered by him by way
of depreciation of his assets. He says that if
it had not been expressly allowed as
allowance, it would have been treated as
capital expenditure and would have been
excluded. He further says that depreciation is
a charge on the profits of a business.
Bearing these two factors in mind, he urges
that the expression "loss of profits and gains"
in section 24(1 does not include any
deficiency resulting from depreciation and,
therefore, an assessee is not entitled to ask
the department to include the depreciation in
the amount which can be set
927
off against income, profits and gains under
Other heads such as income from property or
dividends. Mr. Rajagopala Shastri for the
assessee relies on the history of the legislation
and a number of authorities to support the
judgment of the High Court.
Apart from authority, looking at the Act
as it stood on April 1, 1952, it is clear that
the underlying idea of the Act is to assess
the total income of an assessee. Prima facie,
it would be unfair to compute the total income
of an assessee carrying on business without
pooling the income from business with the
income or loss under other heads. The
second consideration which is relevant is that
the Act draws no express distinction
between the various allowances mentioned in
section 10(2). They all have to be deducted
from the gross profits and gains of a business.
According to commercial principles,
depreciation would be shown in the accounts
and the Profit and Loss account would
reflect the depreciation accounted for in the
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accounts. If the profits are not large
enough to wipe off depreciation, the profits
and loss account would show a loss.
Therefore, apart from proviso (b) to section
10(2)(vi), neither the Act nor commercial
principles draw any distinction between the
various allowances mentioned in section 10(2);
the only distinction is that while the other
allowances may be outgoings, depreciation is
not an actual outgoing."
and expressly disproved the observations of the
Madras High Court in C.I.T. v. Nagi Reddy, [19641
51 I.T.R. 178 that the deduction for depreciation
should be limited to the amount of the profits and
cannot result in working out a loss. The following
observations in the more recent decision in Rajapalayam
Mills Ltd. v. C.I.T., [1978] 115 I.T.R. 777, S.C. place
the position beyond doubt:
It is clear on a plain reading of the language
of provision (b) to cl. (vi) that it comes into operation
only where full effect cannot be given to the
depreciation allowance for the assessment year in
question owing to there being no profits or gains
chargeable for that year or profits or gains chargeable
being less than the depreciation allowance. Now, it is
well settled, as a result of the decision of this court in
CIT v. Jaipuria China Clay Mines (P) Ltd., [1966] 59
ITR 555 (SC), that the words "no profits or gains
chargeable for that year" are not confined to profits
and gains derived
928
from the business whose income is being computed
under s. 10, but they refer to the totality of the
profits or gains computed under the various heads and
chargeable to tax. It is, therefore, clear that
effect must be given to depreciation allowance first
against the profits or gains of the particular
business whose income is being computed under s. 10
and if the profits of that business are not
sufficient to absorb the depreciation allowance, the
allowance to the extent to which it is not
absorbed would be set off against the profits of any
other business and if a part of the depreciation
allowance still remains unabsorbed, it would be
liable to be set off against the profits or gains
chargeable under any other head and it is only if
some part of the depreciation allowance still remains
unabsorbed that it can be carried forward to the
next assessment year. Obviously, therefore, there
would be no scope for the applicability of
provision (b) to cl. (vi), if the total income of the
assessee chargeable to tax is sufficient to absorb the
depreciation allowance, for then there would not be
any unabsorbed depreciation allowance to be
carried forward to the following assessment year.
But where any part of the depreciation
allowance remains unabsorbed after being set off
against the total income chargeable to tax, it can
be carried forward under provision (b) to cl. (vi)
to the following year and set off against that
year’s income and so on for succeeding years."
The resultant position, therefore, is that
initially, the depreciation allowance has to be
deducted from the profits and gains of the business
to which the assets earning the depreciation relate
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but, if it remains unabsorbed by such profits, the
allowance has to be set off against the other
business income of the assessee and, where that is
also insufficient, against the other taxable
income of the assessee. The carry forward of any
depreciation as unabsorbed cannot arise until the
stage of final assessment is reached and the total
income of the assessee otherwise computed is
insufficient to absorb the year’s depreciation
allowance. Sri Salve’s argument that the stage
of carry forward of depreciation arises at a stage
anterior to the completion of the assessment and
determination of the total income cannot,
therefore, be accepted.
Shri Salve, then, contended that there is no
statutory provision which enables the apportionment of
the firm’s unabsorbed depreciation among the partners and
that, therefore, the unabsorbed deprecia-
929
tion has to be carried forward by the firm itself and none
else. In our opinion, this contention also is not well-
founded. S. 182, to the extent relevant for our present
purposes, reads-
"S. 182. (])-Assessment of registered firms-
Not withstanding anything contained in section
143 and 144 and subject to the provisions of
sub-section (3), in the case of a registered
firm, after assessing the total income of
the firm,-
(i) the income-tax payable by the firm shall be
determined, and
(ii) the share of each partner in the income of
the firm shall be included in his total
income and assessed to tax accordingly.
(2) If such share of any partner is a loss it
shall be set off against his other income or
carried forward and set off in accordance
with the provisions of sections 70 to 75.
(3) When any of the partners of a registered firm
is a non resident, the tax on his share in the
income of the firm shall be assessed on the firm
at the rate or rates which would be applicable
if it were assessed on him personally, and the
tax so assessed shall be paid by the firm.
(4) A registered firm may retain out of share of
each partner in the income of the firm a sum not
exceeding thirty percent thereof until such time
as the tax which may be levied on the partner
in respect of that share is paid by him; and
where the tax so levied cannot be recovered
from the partner, whether wholly or in part, the
firm shall be liable to pay the tax, to the
extent of the amount retained or could have
been so retained."
How this share is to be computed is set out in S.
67 which may be set out here:
S. 67(1)-Method of computing a partner’s share
in the income of the firm-In computing the
total income of an assessee who is a partner
of a firm, whether the net result of the
computation of total income of the firm is a
profit or a
930
loss, his share (whether a net profit or a net
loss) shall be computed as follows:
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(a) any interest, salary, commission or other
remuneration paid to any partner in respect of
the previous year, and, where the firm is a
registered firm or an unregistered firm
assessed as a registered firm under clause (b)
of section [183], the income-tax, if any, payable
by it in respect of the total income of the
previous year, shall be deducted from the
total income of the firm and the balance
ascertained and apportioned among the partners;
(b) where the amount apportioned to the partner
under, clause (a) is a profit, any salary,
interest, commission or other remuneration
paid to the partner by the firm in respect
of the previous year shall be added to that
amount, and the result shall be treated as the
partner’s share in the income of the firm;
(c) where the amount apportioned to the
partner under clause (a) is a loss, any
salary, interest, commission or other
remuneration paid to the partner by the
firm in respect of the previous year shall be
adjusted against that amount, and the result
shall be treated as the partner’s share in
the income of the firm.
(2) The share of a partner in the income or loss
of the firm, as computed under sub-section (1)
shall, for the purposes of assessment, be
apportioned under the various heads of income
in the same manner in which the income or
loss of the firm has been determined under each
head of income.
(3) Any interest paid by a partner on capital
borrowed by him for the purposes of investment
in the firm shall, in computing his income
chargeable under the head "Profits and gains
of business or profession" in respect of his
share in the income of the firm, be deducted from
the share.
(4) If the share of a partner in the income of
a registered firm or [an unregistered firm
assessed as a registered firm under clause (b)
of section 183, as computed under this
section, is a loss, such loss may be set off, or
carried forward and set off, in accordance with
the provisions of this Chapter.
931
Explanation: In this section, "paid" has the
same meaning as is assigned to it in clause (2)
of section 23. 1.
"Sri Salve contends that these provisions talk only of
"loss" and that to take this expression as including
"unabsorbed depreciation" as well will obliterate the
distinction in the treatment meted out to these as
separate items by S. 32(2) and S. 72(2) and (3). We
think this argument is misconceived. An unabsorbed
depreciation is indeed a part of the "loss". This is
so because, in the first place, "depreciation" is a
normal outgoing though in a sense notional, which has
to be debited in the computation of the profits of a
business on commercial principles (quite apart from
statute) and it is difficult to see why, when such
deduction yields a negative figure of profits, it cannot
be a "loss" as generally understood. Jaipuria definitely
says so as pointed out earlier. Again, as pointed out
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earlier, if it is treated as a genus totally different
from a "loss", there is"no statutory provision that
will permit its adjustment against other business
income-implicit in S. 32(’2) itself- and against all
other income of the assessee as held by the above
decisions. We therefore do not see why "loss"
and "unabsorbed depreciation should be treated as
antithetical to, or mutually exclusive of, each other.
Nor are we persuaded that any mix-up or anomaly
will result as, suggested by counsel if we treat the
expressions as synonymous except to the extent
specifically treated differently by the statute. In our
view, there is nothing anomalous or absurd in the
statute providing for a dissection of the amount of
loss for purposes of carry forward and providing for
a special or different treatment to unabsorbed
depreciation in this regard although it is a
component element of the genus described as "loss". To
illustrate, suppose an assessee,has a "profit" of
Rs.5,000 in one business before deduction of
depreciation of, say, Rs. 10,000 and a loss of Rs.
15,000 in another business, it will be quite correct to
say that he has a business loss of Rs.20,000 in that
assessment year. But for purposes of carry forward this
has to be considered under to headings: (a) an
unabsorbed depreciation of Rs.5,000 and (b) a business
loss of Rs. 15,000. The amount of Rs.20,000 will be
carried forward to the subsequent year but the carry
forward of Rs.5,000 will be according to the provisions
of S. 32(2) and the carry forward under S. 72 will
have, perforce, to be restricted to the other amount
of Rs, 15,000. The language of S. 72(2) itself contains
an indication that, where unabsorbed depreciation is a
component of the figure of loss carried forward, the
amount of loss proper should be set off first and
the unabsorbed depreciation later. But for the
special treatment ac-
932
corded by S. 32(2) and S. 72 for purposes of carry
forward, there is no difference between an item of
"unabsorbed depreciation" and an item of "loss". We
are, therefore, of opinion that the unabsorbed
depreciation will be allocated among the partners and, like
any other loss, will be available to the partner for set
off against his business income or other income in the
same assessment year. In fact S. 32(2), in so far as it
talks of depreciation being given effect to in the
partners’ assessments recognises that such unabsorbed
depreciation should be allocated among the partners.
So the first of the three alternatives referred to by us
earlier is, in our opinion, out.
We now come to the crucial question as to what
is to be done when the amount of unabsorbed
depreciation does not get absorbed by the other income
of the firm and, further, the aliquot shares of the
partners therein do not also get absorbed in the
partners’ assessments against their other income. There
can be two answers to this:
(1) that the partners-in whose hands the
unabsorbed depreciation has been allocated-should
carry forward the depreciation to succeeding years; or
(2) that the amount of depreciation so
remaining unabsorbed should be carried forward by the
firm for set off in future assessments.
We have given our most careful
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consideration to this matter, particularly in
view of the controversy of judicial decisions
prevailing thereon, and we have come to the
conclusion that the second of these
alternatives is what is truly envisaged by the
statute. The most formidable obstacle put
forward to this course is that, once the
unabsorbed depreciation gets divided and
allocated to the partners, there is no
statutory provision for recalling, to the firm’s
"file", the amount remaining unabsorbed. We
think this, criticism really proceeds on an
unduly narrow construction placed on the
provisions of S. 32(2). In our opinion, S.
32(2) itself contains an inbuilt mechanism
for doing this. It is plain, on the language of
this sub-section, that the benefit of the carry
forward is to be given to the assessee. Where
the assessee is other than a registered firm
or an unregistered firm assessed as a
registered firm, this is indeed very plain. In
the case of this category of assessee, the
difficulty arises because of the words in
parenthesis. But a moment’s thought will make it
clear that the word "or" in the sub-section
is really used as a conjunctive. It cannot be an
alternative, for there can be no doubt that even
in the case of such an assessee the
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unabsorbed depreciation, for reasons already set out,
has to be adjusted against its other income. The
assessment of the firm cannot be complete without such a
set off. Thus, where a firm assessed as a registered
firm, has only unabsorbed depreciation of say,
Rs.8,000, in the business carried on by it but a
property income of Rs.12,000 its total income for the
year has to be Rs.4,000; it cannot be assessed on an
income of Rs. 12,000 with the depreciation of Rs.8,000
apportioned to its partners. We have already pointed out
that the partner’s share in the unabsorbed depreciation
is part of his share in the loss of the firm and, by
virtue of S. 67(3), will be treated as business loss
which is capable of adjustment against his business and
other income. This is the position envisaged by S. 32(2)
when it talks of effect being given to the unabsorbed
depreciation in the assessment of the partners. This
can refer only to cases where the depreciation cannot be
given effect to in the firm’s assessment. It is,
therefore, clear that S. 32(2) contemplates the
situation where the unabsorbed depreciation in the
hands of the firm is too large to get absorbed, first, in
the hands of the firm and then, after apportionment, in
the hands of the partners. What remains thereafter has
obviously to be carried forward by the firm which is
the assessee referred to in the sub-section. Perhaps
the meaning of the provision will become clearer if its
relevant words are rearranged as follows:
"Where full effect cannot be given to any
(depreciation) in any previous year in the
assessment of the assessee (whatever category
it belongs to) and, if the assessee is a
registered firm or an unregistered firm
assessed as a registered firm, in the
assessment of its partners . ....... the
allowance shall be added . . . . . ".
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As in the case of all other assesses, the carry forward will
be available to the registered firm which is the assessee
that is referred to in the sub-section.
This construction is also strengthened by the
last part of the sub-section. When it talks of the
depreciation allowance carried forward being added to
the allowance for depreciation for the following
previous year it obviously refers to the depreciation
allowance due to the assessee (that is, the firm) in the
subsequent previous year. In the normal run of cases, it
will thus either get added to the subsequent year’s
depreciation in respect of the same assets and get set off
against the income from the same business or some other
business of the same assessee or, failing that, against
other income of such assessee. What
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the sub-section clearly provides for is that the aggregate
of the depreciation available to an assessee over the years
will be taken into consideration for set off against its
income over a period of years. No doubt, the latter
portion of S. 32(2) does not envisage that the business
carried on by the assessee in the subsequent years should
be the same or that the assets to the depreciation in
respect of which the unabsorbed depreciation is to be
added should be the same or, indeed, that any
depreciation at all should be allowable to the assessee
in the subsequent year. It is no doubt true that the
words of the sub-section are so widely couched that they
can, with a certain amount of difficulty, be rendered
capable of application to the situation of each partner
carrying forward his share of the unabsorbed depreciation
for set off, even where he has no business or business
income, against his other income. But we think that it is
too strained a construction of the sub-section. When, as
pointed out by Sri Salve, there is nothing in the sub-
section or the Act specifically providing even for an
apportionment of the depreciation among the partners, it
is too contrived a construction to read into the sub-
section several words intended to provide for a
number of partners, each carrying forward his share of
the unabsorbed depreciation to successive assessment
years. It seems natural and reasonable to construe the
section as envisaging the following steps where the
assessee is a registered firm:
(i) Excessive depreciation should be adjusted in
the assessment of the assessee against other
business income and against other heads of
income;
(ii) Depreciation, which remains unabsorbed
under (i), will be apportioned to the
partners and the share of each will be
adjusted against the business and other income
of each of the partners pro tanto;
(iii) If full effect cannot be given to the
depreciation allowance of the assessee by the
above processes and some depreciation remains
unadjusted, the assessee-firm will carry it
forward to the succeeding assessment year.
The objection to this course is based on a mental
imagery of the firm and its partners as altogether
different assesses and of the impermissibility of
"bringing back" to the firm’s "file" what has gone away
to the files of the partners. We think this approach of
viewing the two assessments in water-tight compartments
is not correct. The Act itself contains several
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provisions [e.g. Ss. 67(2) & (3)] which indicate
935
that this is not so. The observations of this Court
in Sankappa v. I. T. O., [1968] 68 I.T.R. 760 at pp.
766-7 also bring out the regions of inter-dependence of
these two assessments. In any event, any such
theoretical dichotomy cannot prevail over the provisions of
s. 32(2).
There is also one further reason why this view
should find acceptance. As we have pointed out earlier,
unabsorbed depreciation is only a species of business
loss. But for purposes of carry forward the statute has
drawn a distinction between them. In doing so, it
specifically out-lines the procedure for carry forward and
set off of losses in the case of a registered firm but is
silent in regard to unabsorbed depreciation. There is
no statutory prohibition against the carry forward of
unabsorbed depreciation by the registered firm as there is
against carry forward of loss. The need felt to enact a
specific prohibition in respect of losses and the absence
of a like provision in respect of depreciation are
significant pointers in support of the above construction.
An argument has been put forward by Dr.
Gaurishankar on the basis of the amendment to the
proviso to s. 10(2)(vib) in 1953 to submit that it was
intended to negative the claim of carry forward by the
firm which was earlier being accepted on the strength of
the earlier language resulting in a double advantage.
Attention has been drawn to the objects and reasons of
the amendment, set out thus at p. 57 in (1952) 21
I.T.R. (Statutes):
"The (amendment) is intended to make it clear
that where unabsorbed depreciation has been
effectively allowed in the assessment of a
partner of a registered firm, it would not be
carried forward in the case of the firm."
(emphasis added)
It is true that the clause, before its amendment,
permitted all assesses-and this included registered
firms as well-to carry forward their unabsorbed
depreciation and that though the registered firm paid
no tax, it could, on the language claim a carry forward of
the depreciation which had been apportioned among the
partners. This resulted in such carry forward being
claimed even where the whole or a part of the
unabsorbed depreciation of the firm had been set off in
the assessment of individual partners. The amendment,
vide the words emphasised in the extract above, only
seeks to make it clear that such carry forward will not
be permitted to the extent it has been given effect to
in the partners’ assessments; by necessary implication
the carry forward, to the extent it has not been
effectively allowed to the partner, continues
936
to be available. The amendment of 1953, therefore, not
only does not help the case of the Revenue, it actually
lands support to the construction we are inclined to
place on the proviso.
It is possible that our conclusion may give scope for two
grounds of criticism: (i) that the partners derive a double
advantage of setting off the unabsorbed depreciation to
reduce the taxable income of the firm as well as the
partners; and (ii) that this will distort the relief
available to various partners depending upon the
variations in income as between the several partners as
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well as over a period of years. We do not think that
the first criticism is a valid one. For it is now settled
law, that though a firm and its partners are distinct
assesses for purposes of income-tax, the Act still
recognises the principle that a firm is only a
compendious name for its partners and that the business
carried on by the firm is also a business carried on by
each of the partners too-vide S. 67(2) and (4)-and the
loss of a registered firm is treated as the losses of
its partners too. The procedure envisaged by it will
only enable a firm and the partners to set off the
aggregate of the unabsorbed depreciation of the firm
against the aggregate income of the firm and partners.
To the extent effect is given to such unabsorbed
depreciation to one or more of the partners the firm
cannot again get the benefit and vice versa. There
is, therefore, really no double advantage.
There is some point in the second criticism. But,
then, a certain amount of imbalance among the partners
is inherent in the application of any one of the three
possible alternatives. If, as suggested by Sri Salve,
only the firm and not the partners can carry forward
the unabsorbed depreciation, there will be an injustice to
the partners who may have other income against which it
could be set off. On the other hand, if the unabsorbed
depreciation is allocated to the partners and they
alone can carry forward and set it off, it will have this
consequence that the partners who have other high income
will derive the benefit of set off qua their shares but
no benefit can be got by partners whose total income is
not enough to offset their share of the depreciation and
the unabsorbed depreciation will not get absorbed even
though the firm may have sufficiently large income in
subsequent years. In other words, whichever procedure
is adopted, the relief available to the partners will
not be uniform. This is a consequence flowing from
the variations in the income sources of various
partners and cannot be avoided under any scheme of carry
forward and set off. We, therefore, do not think that
this consideration should weigh against our reaching
the conclusion which naturally flows from the
language of the sub-section.
937
For the reasons discussed above, we are of the opinion that
the assessee-appellant-firm is entitled to a carry forward
of the unabsorbed depreciation computed for the assessment
year 1967-68 and have it set off in its assessment for the
assessment year 1968-69. The unabsorbed loss computed for
the assessment year 1967-68, however, cannot be carried
forward by the firm to be set off in its assessment for the
assessment year 1968-69. So far as the assessment year 1967-
68 is concerned, the High Court was right in holding that
unabsorbed business loss of one year cannot be carried
forward and set off by the firm in a subsequent year; but,
if there was any unabsorbed depreciation computed for the
assessment year 1966-67, it could have been allowed to be
brought forward and set off in the assessment for the
assessment year 1967-68 in the manner discussed in the
judgment.
In the result, appeals for both the assessment years
are allowed to the extent indicated and the assessments
directed to be modified appropriately. We, however, make
no order regarding costs.
V. P. R. Appeals allowed.
938
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