1974 (9) TMI 37 - HC - Income Tax

Carry-forward of unabsorbed depreciation by registered firm treated as partners' benefit, not firm's allowance; revenue upheld

Whether a registered firm is entitled to carry forward unabsorbed depreciation: HC construed section 32(2) and the 1952 amendment to the proviso to ... Unabsorbed depreciation allowance - Carry forward of unabsorbed depreciation by a registered firm - Distributable Surplus - Assessed Income - mischief of double benefit - Commercial Profit - Whether, the Tribunal was right in law in holding that the assessee, a registered firm, is entitled to carry forward unabsorbed depreciation from earlier years and that it will be deemed to be an allowance in the nature of depreciation in the previous year relevant to the assessment year 1968-69 ? - HELD THAT:- We find the Statement of Objects and Reasons for the Indian Income-tax (Amendment) Bill, 1952, which by clause 8 proposed to introduce two amendments in sections 10(2)(vi)(a) and (b), and the second of which sought to substitute in the proviso to clause (b) for the words, ' where full ' the words ' where, in the assessment of the assessee or, if the assessee is a registered firm, in the assessment of its partners, full '. The result of the amendment, in our opinion, is to prevent the benefit being claimed twice over, and, as stated above, if once the depreciation allowance is allocated amongst the partners, there remains nothing in the hands of the firm which would be required to be carried forward. In our opinion, the interpretation which has been canvassed by Mr. Shah would necessarily result, if the mischief of double benefit is to be discouraged, that the partners would be deprived of the benefit to carry forward unabsorbed depreciation allowance in their assessment proceedings, though it has been already allocated once to the partners. On a plain reading of section 32(2) it appears to us that the benefit of carry-forward and set-off of unabsorbed depreciation allowance is to be worked out in the case of individual assessment of partners when the assessee is a registered firm. Mr. Shah, therefore, urged that there is no ruling on this point except the one, of the Bombay High Court in Ballarpur Collieries Company's case [1972 (4) TMI 25 - BOMBAY HIGH COURT] and, therefore, on the principle of the comity of judicial decisions, though we may not be completely agreeing with the view taken by the Bombay High Court, we must accept it in the interest of the assessees of these two adjoining States, namely, Maharashtra and Gujarat, which are separated by a common border only, as otherwise it would work to the prejudice of the assessees in these States. We would have been inclined to accept the submission of Mr. Shah provided there are no other views in the field. On the plain reading of the section, the legislative intent appears to be clearly otherwise and in view of the scheme of the Act, namely, that in case where the assessee is a registered firm it is the partners who are entitled to have the benefit of carry-forward and set-off, we do not think that this is a case of another reasonably possible view, which must induce us to prefer one which is favourable to the assessee. In this connection, our attention has been drawn on behalf of the revenue to the Commentary on Income-tax by Kanga and Palkhivala, sixth edition, volume I. In the commentary on sub-section (2) of section 32 (clause (b) of proviso to section 10(2)(vi) of the 1922 Act) at page 356, the learned authors have in the first paragraph set out the principles that is contained in the relevant proviso and thereafter they have expressed their view as to how these principles are to be applied in case where the assessee is a registered firm. In that view of the matter, therefore, we answer question No. 1 in the negative and against the assessee. The second question is answered in the affirmative and in favour of the revenue Issues Involved:1. Carry forward of unabsorbed depreciation by a registered firm.2. Rejection of carry forward and set off of business loss by the assessee.Comprehensive Issue-wise Analysis:1. Carry Forward of Unabsorbed Depreciation by a Registered Firm:The primary issue was whether a registered firm is entitled to carry forward unabsorbed depreciation from previous years and set it off against its business income for the assessment year 1968-69. The Tribunal had allowed the carry forward of unabsorbed depreciation but rejected the carry forward and set-off of business loss.The relevant provisions under scrutiny were Section 32(2) of the Income-tax Act, 1961, and its predecessor provisions in the 1922 Act. The Tribunal's interpretation was based on the absence of a reference to Section 75 in Section 32(2), leading it to conclude that the normal provisions for carrying forward unabsorbed depreciation should apply.The court examined the legislative amendments and the intent behind the amendments made in 1953, which added specific language to Section 10(2)(vi)(b) of the 1922 Act, and subsequently Section 32(2) of the 1961 Act. The court noted that the amendment aimed to prevent double benefit of depreciation allowance by ensuring that if depreciation is fully allowed in the assessment of partners, it cannot be carried forward by the firm.The court disagreed with the Tribunal's interpretation and the assessee's argument that unabsorbed depreciation should revert to the firm if not fully allowed in the partners' assessments. The court emphasized that once depreciation is allocated to partners, it cannot be carried back to the firm. The court also referred to the decisions of the Allahabad High Court and the Delhi High Court, which supported this interpretation.The court concluded that the benefit of carry forward and set-off of unabsorbed depreciation should be worked out in the individual assessment of partners when the assessee is a registered firm. Therefore, the court answered the first question in the negative, against the assessee.2. Rejection of Carry Forward and Set Off of Business Loss:The second issue concerned whether the assessee's claim to carry forward and set off a business loss of Rs. 3,49,242 against its total income for the assessment year 1968-69 was rightly rejected. The assessee conceded this issue during the hearing, acknowledging that it was concluded by the decision in Commissioner of Income-tax v. Dhanji Shamji.The court noted that the Tribunal had correctly rejected the carry forward and set-off of business loss based on Section 72(2) of the Income-tax Act, 1961. Consequently, the court answered the second question in the affirmative, in favor of the revenue.Conclusion:1. The court held that a registered firm is not entitled to carry forward unabsorbed depreciation if it is not fully allowed in the partners' assessments. The first question was answered in the negative and against the assessee.2. The court affirmed that the assessee's claim to carry forward and set off business loss was rightly rejected. The second question was answered in the affirmative and in favor of the revenue.The assessee was ordered to pay the costs of the reference to the revenue.