Court rules unabsorbed depreciation for registered firm carried forward, not allocated to partners

The High Court of GAUHATI ruled in favor of the assessee, holding that unabsorbed depreciation of a registered firm should be carried forward by the firm itself for setting off against future profits, rather than being allocated to partners. The court emphasized that excessive depreciation should be adjusted against other business income and other heads of income, with any remaining unabsorbed depreciation carried forward by the firm to the succeeding assessment year. The judgment will be transmitted to the Appellate Tribunal without costs.

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Issues: Interpretation of provisions of sub-section (2) of section 32 of the Income-tax Act, 1961 regarding unabsorbed depreciation of a registered firm.

The judgment delivered by the High Court of GAUHATI addressed a reference under section 256(1) of the Income-tax Act, 1961, concerning the treatment of unabsorbed depreciation of a registered firm. The case involved the question of whether the unabsorbed depreciation, which could not be fully set off in the assessments of partners for a particular year, should be brought back in the subsequent assessment of the firm for setting off against the business income. The assessment for the year 1980-81 was made on the assessee as a registered firm under section 143(3) of the Income-tax Act, based on the loss as per the profit and loss account. The Income-tax Officer allocated unabsorbed depreciation and investment allowance among the partners, which was contested by the assessee before the Commissioner of Income-tax (Appeals) and subsequently before the Appellate Tribunal.

The Appellate Tribunal, considering conflicting decisions, allowed the claim of the assessee. The court heard arguments from both parties and referred to a Supreme Court decision in Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512 (SC) for guidance. The Supreme Court's interpretation emphasized that unabsorbed depreciation in the hands of the firm should be carried forward by the firm itself for setting off against future profits, rather than being allocated to partners. The court, in line with the Supreme Court's ruling, concluded that excessive depreciation should be adjusted against other business income and other heads of income, with any remaining unabsorbed depreciation carried forward by the firm to the succeeding assessment year.

Based on the facts and the Supreme Court's decision, the High Court of GAUHATI ruled in favor of the assessee, stating that the unabsorbed depreciation should be brought back in the subsequent assessment of the firm for setting off against the business income. The judgment will be transmitted to the Appellate Tribunal, and no costs were directed.

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