Unabsorbed Depreciation as Business Loss is apportionable among partners under the proviso to Section 24.

The question addressed is whether unabsorbed depreciation constitutes a business loss capable of apportionment among firm partners. The analysis treats depreciation allowances under the computing heads as part of 'profits or gains', applies the carry forward/ set off scheme to treat unabsorbed depreciation as a revenue loss, and interprets the proviso preferring ordinary losses as governing set off order only. Outcome: the unabsorbed portion of depreciation is a loss under the head 'business' and, where the firm cannot fully set it off, it may be apportioned among partners under the proviso to Section 24.

---

---

Issues: Whether the unabsorbed portion of depreciation allowance amounting to Rs. 12,505 can be treated as a loss of profits under the head 'business' and apportioned among the partners of a registered firm under proviso 2 to Section 24(1) of the Income-tax Act.

Analysis: The Court considered the statutory scheme comprising Sections 3, 4, 6, 10, 23 and 24 of the Income-tax Act and examined the interaction between clause (vi) of sub-section (2) of Section 10 (depreciation) and the set-off/carry-forward provisions of Section 24. The Court analysed proviso (b) to Section 10(2)(vi) which permits carrying forward of unabsorbed depreciation and the proviso to Section 24(2) which gives precedence to ordinary losses for set-off. Precedents from the Lahore, Madras and Nagpur High Courts were examined, which construed 'profits or gains' and allowed unabsorbed depreciation to be included in computing business loss and thereby available for set-off under Section 24. The Court held that allowances enumerated in Section 10(2), including depreciation, form part of computing profits or losses and that Section 24 permits a registered firm's loss (including that arising from depreciation) which cannot be fully set off by the firm to be apportioned between partners. The proviso giving preference to ordinary losses over depreciation merely governs order of set-off and does not exclude depreciation from being a revenue loss capable of apportionment.

Conclusion: The sum of Rs. 12,505 being the unabsorbed portion of depreciation allowance is a loss of profits under the head 'business' and can be apportioned among the partners of the registered firm under proviso 2 to Section 24(1) of the Income-tax Act; the reference is answered in the affirmative in favour of the assessee.

---