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Issues: Whether a partner of a firm is entitled, in her individual assessment, to set off the share of unabsorbed depreciation carried forward from the firm's earlier assessment years against her business and other income.
Analysis: Section 32(2) of the Income-tax Act, 1961 treats unabsorbed depreciation as part of the depreciation allowance of the following year and permits its carry forward. Read with section 72(2), the provision requires effect to be given to the carried forward allowance in the relevant assessment. The carried forward unabsorbed depreciation retains its distinct character and can be adjusted only once, either in the hands of the firm or in the hands of the partners. Where the firm has ceased to exist, there is no scope for further adjustment in the firm's hands, and the partner's individual assessment may absorb the amount as current depreciation against aggregate income.
Conclusion: The assessee was entitled to set off her share of the unabsorbed depreciation of the dissolved firm in her individual assessment. The question was answered in the negative and in favour of the assessee.
Ratio Decidendi: Unabsorbed depreciation carried forward under section 32(2) of the Income-tax Act, 1961 may be given effect to in the partner's individual assessment, and where the firm is no longer capable of adjustment, the allowance can be set off against the partner's aggregate income subject to the statutory scheme giving priority to business-loss carry forward rules.
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