Unabsorbed depreciation carry-forward was held adjustable against a registered firm's income and balance carried forward.

Section 32(2) of the Income-tax Act, read with sections 72(2) and 75(2), was construed to permit unabsorbed depreciation from an earlier year to be first adjusted against the income of a registered firm and, if any balance remained, to be carried forward until fully absorbed. The line of authority favouring continued carry forward of unabsorbed depreciation was preferred over conflicting High Court views. The question was answered in favour of the assessee and against the Revenue, so the assessee was entitled to set off the depreciation against the relevant assessment year's income and carry forward the balance.

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Issues: Whether, on a proper construction of section 32(2) of the Income-tax Act, 1961, the unabsorbed depreciation relating to an earlier assessment year could be carried forward and set off against the income of a registered firm for the relevant assessment year.

Analysis: The relevant provisions of section 32(2), read with sections 72(2) and 75(2) of the Income-tax Act, 1961, were considered in the light of conflicting High Court decisions. The Court preferred the line of authority holding that unabsorbed depreciation is to be first adjusted against the firm's income and continued to be carried forward until fully absorbed.

Conclusion: The question was answered in favour of the assessee and against the Revenue. The assessee was entitled to set off the unabsorbed depreciation against the income for the assessment year concerned and to carry forward any balance.

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