1991 (3) TMI 1 - SC - Income Tax

Section 32(2) allows firm and partners to share unabsorbed depreciation carry forward, but business loss restricted

SC held that under section 32(2), unabsorbed depreciation of a firm, including a firm assessed as a registered firm, must first be set off against the ... Carry forward and set off - unabsorbed depreciation - losses of registered firms - apportionment among partners - intra-head and inter-head adjustment - priority of set off - interpretation of section 32(2)Unabsorbed depreciation - interpretation of section 32(2) - apportionment among partners - carry forward and set off - Whether unabsorbed depreciation of a registered firm may be carried forward by the firm for set off in subsequent years after apportionment to partners and attempts to set off in partners' hands have failed - HELD THAT: - The Court held that unabsorbed depreciation is a component of business loss but is subject to a special statutory regime under section 32(2) permitting carry forward indefinitely. Depreciation must first be given effect to by intra head and inter head adjustments; if unabsorbed it is apportioned to partners as part of their share in the firm's loss and may be set off in their assessments. If, after such apportionment and attempts to set off in partners' assessments, any depreciation remains unabsorbed, section 32(2) envisages that the residual unabsorbed depreciation reverts to the firm and may be carried forward by the firm and added to subsequent years' depreciation. The Court construed the parenthetical words in section 32(2) conjunctively and read the subsection as providing an inbuilt mechanism for the firm to carry forward what remains unabsorbed after being given effect to in both the firm's and partners' assessments. The legislative scheme and the absence of a statutory prohibition on firm carry forward of depreciation (as distinct from the specific prohibitions applicable to losses) support this construction. Policy objections about uneven benefit among partners or perceived double advantage were rejected as inherent or addressed by the statutory scheme.Unabsorbed depreciation computed in assessment year 1967-68 could be carried forward and set off by the registered firm in assessment year 1968-69 to the extent it remained unabsorbed after apportionment to and set off in the partners' hands.Losses of registered firms - carry forward and set off - intra-head and inter-head adjustment - Whether unabsorbed business loss of the registered firm for 1967-68 could be carried forward by the firm to be set off in 1968-69 - HELD THAT: - The Court accepted the High Court's conclusion, grounded in the statutory scheme (sections dealing with losses of registered firms), that unabsorbed business loss of a registered firm cannot be carried forward by the firm itself but must be apportioned among the partners who alone are entitled to carry forward and set off such business loss under the relevant provisions. The Court treated this aspect as distinct from the special treatment accorded to unabsorbed depreciation and affirmed that the statutory prohibition on firm carry forward of loss applies.The unabsorbed business loss of assessment year 1967-68 could not be carried forward by the firm for set off in assessment year 1968-69 and was rightly disallowed to be carried forward by the firm.Final Conclusion: Appeals allowed in part: the firm is entitled to carry forward and set off the unabsorbed depreciation of 1967-68 in its 1968-69 assessment to the extent it remained unabsorbed after apportionment and partners' set off; the unabsorbed business loss of 1967-68 cannot be carried forward by the firm and was correctly disallowed. Issues Involved:1. Carry forward and set off of unabsorbed depreciation by a registered firm.2. Carry forward and set off of unabsorbed business loss by a registered firm.Detailed Analysis:1. Carry Forward and Set Off of Unabsorbed Depreciation by a Registered Firm:The primary issue revolves around whether a registered firm can carry forward unabsorbed depreciation and set it off in subsequent years. The relevant statutory provisions are section 32(2) of the Income-tax Act, 1961, and its predecessor under the 1922 Act.The court examined the historical context and statutory language, noting that unabsorbed depreciation can be carried forward indefinitely, unlike business losses which are limited to eight years. The court considered three possible interpretations:1. The firm retains and carries forward the unabsorbed depreciation.2. The unabsorbed depreciation is apportioned among the partners, who then carry it forward.3. The unabsorbed depreciation is apportioned among the partners for set off against their income, and any remaining unabsorbed depreciation reverts to the firm for carry forward.The court favored the third interpretation, emphasizing that section 32(2) contemplates the situation where unabsorbed depreciation is too large to be absorbed by the firm and its partners. The court concluded that the firm should carry forward the unabsorbed depreciation if it remains after being apportioned among the partners and set off against their income.The court rejected the argument that there is no statutory provision for recalling unabsorbed depreciation to the firm's assessment file, stating that section 32(2) itself contains an inbuilt mechanism for this. The court also dismissed the notion that treating unabsorbed depreciation as part of 'loss' would create anomalies, noting that the statute provides for a special treatment of unabsorbed depreciation for carry forward purposes.The court concluded that the assessee-firm is entitled to carry forward the unabsorbed depreciation of the assessment year 1967-68 and set it off in its assessment for 1968-69.2. Carry Forward and Set Off of Unabsorbed Business Loss by a Registered Firm:The second issue concerns whether a registered firm can carry forward unabsorbed business loss to subsequent years. The relevant statutory provisions are sections 75 and 77 of the Income-tax Act, 1961.Section 75(2) explicitly states that a registered firm cannot carry forward its business loss. Instead, the loss is apportioned among the partners, who then carry it forward and set it off against their income in accordance with sections 70 to 75.The court noted that the Gujarat High Court had previously answered this question against the assessee, following its earlier decision in CIT v. Dhanji Shamji [1974] 97 ITR 173 (Guj). The court upheld this view, stating that the unabsorbed business loss of the assessment year 1967-68 cannot be carried forward by the firm to be set off in its assessment for the assessment year 1968-69.Conclusion:The appeals are allowed in part. The assessee-firm is entitled to carry forward the unabsorbed depreciation of the assessment year 1967-68 and set it off in its assessment for 1968-69. However, the firm cannot carry forward the unabsorbed business loss of the assessment year 1967-68 for set off in the assessment year 1968-69. The assessments are directed to be modified accordingly. No order regarding costs.