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of <h1>High Court of Madras Rules on Set Off of Unabsorbed Depreciation & Development Rebate for Registered Firm</h1> The High Court of Madras ruled in response to an Income Tax Act reference concerning the set off of unabsorbed depreciation and development rebate for a ... Carry Forward And Set Off, Unabsorbed Depreciation, Unabsorbed Development Rebate ISSUES PRESENTED AND CONSIDERED 1. Whether unabsorbed depreciation of earlier assessment years, to the extent not absorbed in the hands of partners of a registered firm, may be carried forward and set off against the income of the firm in a subsequent assessment year. 2. Whether unabsorbed development rebate (under s. 33(2) as enacted from 1-1-1958), to the extent not absorbed in the hands of partners because their incomes were nil or insufficient, may be carried forward and set off against the income of the registered firm in a subsequent assessment year. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Carry-forward and set-off of unabsorbed depreciation by a registered firm Legal framework: Section 32(2) provides for treatment where 'full effect cannot be given to any allowance of depreciation' in the assessment of the assessee (and, where the assessee is a registered firm, in the assessment of its partners), indicating apportionment of depreciation-related loss to partners and consequent treatment of any unabsorbed balance. Precedent Treatment: The court refers to its prior decision holding that unabsorbed depreciation together with business loss is apportioned among partners and adjusted against partners' other income; any residue unadjusted in partners' hands must be brought back into assessment of the firm under s. 32(2). Interpretation and reasoning: The language of s. 32(2) implicitly contemplates apportionment of depreciation allowance and business loss among partners; where partners' incomes are insufficient to absorb their share of depreciation, the unabsorbed portion is to be returned to the firm's assessment and dealt with under s. 32(2). The Tribunal's finding that partners had no other income to absorb depreciation supports carrying unabsorbed depreciation back to the firm for set-off against the firm's profits in a later year. Ratio vs. Obiter: Ratio - unabsorbed depreciation apportioned to partners and unabsorbed remainder is to be brought back into the firm's assessment under s. 32(2) for possible set-off against subsequent firm profits. The prior decision relied upon is treated as binding precedent for this proposition. Conclusion: Unabsorbed depreciation, where partners had no other income to absorb their shares, may be carried forward and set off against the income of the registered firm in a subsequent assessment year; the Tribunal's direction to that effect was correct. Issue 2 - Carry-forward and set-off of unabsorbed development rebate under s. 33(2) Legal framework: Section 33(2) (as operative from 1-1-1958) allows development rebate on a fixed percentage of cost of new machinery/plant subject to creation of a specified reserve; where total income for the relevant assessment year (or immediately succeeding year) is nil or less than the full rebate, the rebate is allowed only to the extent that it reduces total income to nil and the balance is carried forward to the following assessment year, with a maximum carry-forward period of eight assessment years. 'Total income' for this purpose is to be computed without taking into account any development rebate or deductions under Chapter VI-A or s. 280-O; depreciation is to be allowed first. Precedent Treatment: The statute itself governs treatment; no prior decision is invoked to alter the statutory scheme for development rebate in registered firms. Interpretation and reasoning: The text of s. 33(2) differs materially from s. 32(2). Unlike s. 32(2), s. 33(2) contains no language contemplating apportionment of rebate-related loss among partners ('where, in the assessment of the assessee (or ... its partners) ...'). Instead, s. 33(2) expressly contemplates reduction of the firm's total income to nil by the rebate and carrying forward any unallowed balance for up to eight years. Since total income contemplated by s. 33(2) is to be computed without the rebate, and because nil cannot be apportioned among partners, the statutory scheme indicates that development rebate is to be considered and carried forward in the hands of the firm alone. The conditional nature of development rebate (requirement to create and maintain a reserve for the specified period) further supports differential statutory treatment from depreciation. Ratio vs. Obiter: Ratio - development rebate under s. 33(2) is to be applied in the hands of the firm; absent language for apportionment to partners, unabsorbed development rebate is to be carried forward and set off by the firm itself, subject to the eight-year limit and the statutory computation rules. The court expressly distinguishes s. 33(2) from s. 32(2) as decisive. Conclusion: Unabsorbed development rebate (under the post-1957 statutory scheme) is to be dealt with in the hands of the firm; the Tribunal was correct to permit the firm to carry forward and set off the unabsorbed development rebate against the firm's profits in a subsequent assessment year. Cross-references and interaction between issues When both unabsorbed depreciation and unabsorbed development rebate arise, they are governed by different statutory schemes: s. 32(2) (depreciation) contemplates apportionment to partners and return of any unabsorbed balance to the firm, whereas s. 33(2) (development rebate) contemplates firm-level carry-forward and set-off only. The court did not decide relative priority between development rebate and other business losses when both are present. Final determination The Tribunal's directions to permit set-off of unabsorbed depreciation (to the extent not absorbed by partners) and unabsorbed development rebate (under s. 33(2)) against the firm's income in the subsequent assessment year were upheld; the question referred under s. 256(1) is answered in the affirmative in favor of the assessee (i.e., the firm).
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