2004 (4) TMI 62 - HC - Income Tax

Assessee can set off unabsorbed depreciation from inactive firm against income

The court held that the assessee could set off his share of unabsorbed depreciation from a firm against his income, even if the firm was not conducting ... Set off of unabsorbed depreciation - deeming provision in section 32(2) - continuance of business as condition for carry forward - carry forward and set off of business losses - construction of taxing statute favourable to the assesseeSet off of unabsorbed depreciation - deeming provision in section 32(2) - continuance of business as condition for carry forward - Whether a partner of a registered firm can set off his share of the firm's unabsorbed depreciation against his income for the previous year even though the firm was not carrying on business during that previous year - HELD THAT: - The court examined section 32(2) read with the proviso to section 72(1) and the authorities taking divergent views. The deeming provision in section 32(2) treats unabsorbed depreciation as an allowance in the succeeding year and, when given its full effect, does not import an express requirement that the same business or the firm must continue to be in existence in the relevant previous year. The court placed reliance on the majority view of High Courts (including Allahabad, Bombay (later), Andhra Pradesh, Karnataka, Gujarat, Calcutta) and on the Supreme Court's observations in Garden Silk Weaving Factory that the later portion of section 32(2) does not envisage that the business carried on in subsequent years should be the same or that the assets should be the same. Distinguishing the contrary approach of the Madras High Court, the court held that the condition of continuance is applicable to carry forward of business losses under section 72(1) proviso but is not incorporated into the independent deeming fiction created by section 32(2). Further, where two interpretations are possible in a taxing statute, the interpretation favourable to the assessee must be adopted. Applying these principles to the facts (unabsorbed depreciation allocated to the partner from assessment years 1973-74 to 1975-76 and the claim in assessment year 1983-84), the court concluded that the lack of continuance of the registered firm during the relevant previous year does not bar the partner from setting off his share of unabsorbed depreciation against his income.A partner of a registered firm is entitled to set off his share of the firm's unabsorbed depreciation against his income for the previous year even though the firm was not carrying on business during that previous year; question answered in the affirmative for the assessee.Final Conclusion: The reference is answered in favour of the assessee: the partner may set off his share of the firm's unabsorbed depreciation against his income for the relevant previous year despite the firm having ceased to carry on business. Issues Involved:1. Whether the assessee is entitled to set off his share of unabsorbed depreciation from the firm against his income of the previous year even though the firm was not carrying on any business during that previous year.Detailed Analysis:1. Entitlement to Set Off Unabsorbed Depreciation:The primary issue was whether the assessee could set off his share of unabsorbed depreciation from a firm against his income, despite the firm not carrying on any business during the relevant previous year. The Tribunal had allowed the claim based on the Calcutta High Court's decision in CIT v. Shiva Prosad Bagaria [1991] 191 ITR 139, which distinguished between section 32(2) and section 72(1) of the Income-tax Act, 1961.Arguments by Revenue:The Revenue contended that sections 32(1) and (2), along with sections 72(2) and 73(1), indicate that unabsorbed depreciation can only be adjusted if the firm continues its business during the relevant period. They argued that the term 'previous year' in section 32(2) refers to the firm's previous year, not the partners', and thus, the firm's business must exist for the adjustment to be valid.Arguments by Assessee:The assessee's counsel argued that section 32(2) does not impose such a restriction and cited the Calcutta High Court's decision, which differentiated section 32(2) from section 72(1), proviso. They also referenced a similar claim allowed by this court in CIT v. A. M. J. Anthraper [1996] 222 ITR 414. Additionally, they pointed to a circular from the Central Board of Direct Taxes, suggesting that the tax effect in this case was too small to justify the reference.Court's Analysis:The court examined the relevant provisions of the Act. Section 32(2) allows for the carry forward of unabsorbed depreciation to be added to the depreciation allowance of the following year. The court noted that section 72 deals with business losses and requires the business to continue for the loss to be carried forward, a condition not present in section 32(2).Precedents and Judicial Opinions:The court reviewed various High Court decisions, noting that the majority view is that the business need not be in existence for unabsorbed depreciation to be set off. This view was supported by decisions from the Allahabad, Bombay, Andhra Pradesh, Karnataka, and Calcutta High Courts. The court also considered the contrary view from the Madras High Court, which required the business to be in existence, but found it less persuasive.Supreme Court Guidance:The court referred to the Supreme Court's decision in Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512, which indicated that the business need not continue for unabsorbed depreciation to be set off. The Supreme Court emphasized that the statutory provisions should be interpreted in favor of the assessee when two interpretations are possible.Conclusion:The court concluded that the assessee is entitled to set off his share of unabsorbed depreciation from the firm against his income, even if the firm was not carrying on any business during the previous year. This interpretation aligns with the majority view of various High Courts and the guidance from the Supreme Court.Judgment:The question referred was answered in the affirmative, in favor of the assessee and against the Revenue. The court directed that a copy of the judgment be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.