Court allows firm to carry forward unabsorbed depreciation for partners

The court held that unabsorbed depreciation allocated to partners reverts back to the firm for computation in subsequent years if not wholly set off by partners. The court favored the interpretation benefiting the assessee, allowing the registered firm to carry forward and set off unabsorbed depreciation in succeeding years. The court emphasized that the firm, not the partners, should carry forward the depreciation allowance exclusively under section 32(2) of the Income-tax Act, 1961. The decision was in favor of the assessee, with no costs awarded.

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Issues Involved:
1. Proper construction of section 32(2) of the Income-tax Act, 1961.
2. Entitlement to carry forward and set off unabsorbed depreciation by a registered firm.

Summary:

Issue 1: Proper construction of section 32(2) of the Income-tax Act, 1961
The primary question referred to the court was whether, on a proper construction of section 32(2) of the Income-tax Act, 1961, the Tribunal was justified in holding that the unabsorbed depreciation of a registered firm for preceding assessment years, allocated to the partners, should revert back to the firm for computation of total income in subsequent years if not wholly set off in the partners' respective assessments.

Issue 2: Entitlement to carry forward and set off unabsorbed depreciation by a registered firm
The court examined the facts where the assessee, a registered firm, had unabsorbed depreciation of Rs. 21,846 for the assessment years 1969-70, 1970-71, and 1971-72. The ITO allowed only the current year's depreciation and denied the carry forward of unabsorbed depreciation. The AAC reversed this decision, allowing the firm to carry forward the unabsorbed depreciation. The Tribunal upheld the AAC's decision, interpreting sections 32(2), 72(2), and 73(3) of the Act, and distinguishing between ordinary business loss and depreciation allowance.

The Tribunal held that unabsorbed depreciation allocated to partners, if not wholly set off, reverts back to the firm for computation in subsequent years. This view was supported by the decision in Ballarpur Collieries Co. v. CIT [1973] 92 ITR 219 (Bom). The Tribunal favored the interpretation that benefits the assessee when two views are possible.

The revenue contended that once depreciation is allocated to partners, it remains with them, and the firm cannot carry it forward. However, the court found that section 32(2) of the Act governs the carry forward and set off of depreciation allowance exclusively, and the provisions of sections 72 and 73 do not apply to depreciation allowance.

The court concluded that unabsorbed depreciation allowance retains its character and is to be set off and carried forward by the firm, not by the partners. The assessment of partners is relevant only to ascertain if full effect has been given to the depreciation allowance. The court disagreed with the views in K. T. Wire Products v. Union of India [1973] 92 ITR 459 (All) and CIT v. Garden Silk Wvg. Factory [1975] 101 ITR 658 (Guj), finding them unconvincing.

Conclusion:
The court answered the question in the affirmative, favoring the assessee, and held that unabsorbed depreciation should be allowed to be set off by the registered firm in succeeding years. There was no order as to costs, and a copy of the judgment was to be sent to the Appellate Tribunal for necessary orders.

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