Registered firm set-off rules: unabsorbed depreciation can return to firm assessment, while development rebate stays within firm-level computation.

Unabsorbed depreciation of a registered firm may, after apportionment to partners under section 32(2) of the Income-tax Act, 1961, be brought back into the firm's subsequent assessment if the partners cannot absorb it for want of sufficient income; the firm is therefore entitled to the set-off. Unabsorbed development rebate stands on a different footing under section 33(2): the provision contains no partner-wise apportionment and operates within the firm's own assessment, subject to creation and maintenance of the statutory reserve. On that statutory scheme, the rebate is adjusted against the firm's total income. The reference was answered in favour of the assessee on both questions.

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Issues: (i) whether unabsorbed depreciation of earlier assessment years could be brought back into the assessment of the registered firm and set off against its profits for the relevant assessment year; (ii) whether unabsorbed development rebate could similarly be carried forward and set off in the hands of the firm.

Issue (i): whether unabsorbed depreciation of earlier assessment years could be brought back into the assessment of the registered firm and set off against its profits for the relevant assessment year

Analysis: Under section 32(2) of the Income-tax Act, 1961, where full effect cannot be given to depreciation in the assessment of a registered firm, the allowance is first to be apportioned among the partners. If the partners cannot absorb the depreciation for want of sufficient income, the unabsorbed balance is to be brought back into the firm's assessment in the subsequent year. The statutory scheme therefore permits the firm to claim the surplus unabsorbed depreciation in its own assessment.

Conclusion: The unabsorbed depreciation was rightly allowed to be set off against the firm's profits and the answer is in favour of the assessee.

Issue (ii): whether unabsorbed development rebate could similarly be carried forward and set off in the hands of the firm

Analysis: Section 33(2) of the Income-tax Act, 1961 differs materially from section 32(2). It contemplates that development rebate is to reduce the total income to nil, and it contains no language providing for apportionment among partners. The allowance is conditioned on the creation and maintenance of the statutory reserve, and the structure of the provision indicates that the rebate is to be worked out only in the assessment of the firm itself.

Conclusion: The development rebate was correctly directed to be adjusted in the firm's assessment and the answer is in favour of the assessee.

Final Conclusion: The reference was answered in favour of the assessee on both the depreciation and development rebate questions, and the firm was held entitled to the claimed set-off in accordance with the statutory scheme.

Ratio Decidendi: Under section 32(2), unabsorbed depreciation of a registered firm may be brought back into the firm's assessment after any inability of the partners to absorb it, whereas section 33(2) confines development rebate to the firm's own assessment and permits it to reduce total income to nil without partner-wise apportionment.

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