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 ... Depreciation - Scientific Research - Entitlement 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:- In our opinion, section 32(2) itself contains an inbuilt mechanism for doing this. It is plain, on the language of this sub-section, that the benefit of the carry forward is to be given to the assessee. Where the assessee is other than a registered firm or an unregistered firm assessed as a registered firm, this is indeed very plain. In the case of this category of assessee, difficulty arises because of the words in parenthesis. But a moment's thought will make it clear that the word 'or' in the sub-section is really used as a conjunctive. It cannot be an alternative, for there can be no doubt that even in the case of such an assessee, the unabsorbed depreciation, for reasons already set out, has to be adjusted against its other income. The assessment of the firm cannot be complete without such a set-off. Thus, where a firm assessed as a registered firm has only unabsorbed depreciation of say Rs. 8,000 in the business carried on by it and a property income of Rs. 12,000, its total income for the year has to be Rs. 4,000 ; it cannot be assessed on an income of Rs. 12,000 with the depreciation of Rs. 8,000 apportioned to its partners. We have already pointed out that the partner's share in the unabsorbed depreciation is part of his share in the loss of the firm and, by virtue of section 67(3), will be treated as business loss which is capable of adjustment against his business and other income. This is the position envisaged by section 32(2) when it talks of effect being given to the unabsorbed depreciation in the assessment of the partners. This can refer only to cases where the depreciation cannot be given effect to in the firm's assessment. It is, therefore, clear that section 32(2) contemplates the situation where the unabsorbed depreciation in the hands of the firm is too large to get absorbed, first, in the hands of the firm and then, after apportionment, in the hands of the partners. What remains thereafter has obviously to be carried forward by the firm which is the assessee referred to in the subsection. Unabsorbed depreciation is allocated to the partners and they alone can carry forward and set it off, it will have this consequence that the partners who have other high income will derive the benefit of set off qua their shares but no benefit can be got by partners whose total income is not enough to offset their share of the depreciation and the unabsorbed depreciation will not get absorbed even though the firm may have sufficiently large income in subsequent years. In other words, whichever procedure is adopted, the relief available to the partners will not be uniform. This is a consequence flowing from the variations in the income sources of various partners and cannot be avoided under any scheme of carry forward and set off. We, therefore, do not think that this consideration should weigh against our reaching the conclusion which naturally flows from the language of the sub-section. It is now settled law, that though a firm and its partners are distinct assessees for purposes of income-tax, the Act still recognises the principle that a firm is only a compendious name for its partners and that the business carried on by the firm is as well a business carried on by each of the partners too-vide section 67(2) and (4)-and the loss of a registered firm is treated as the losses of its partners too. The procedure envisaged by it will only enable a firm and the partners to set off the aggregate of the unabsorbed depreciation of the firm against the aggregate income of the firm and partners. To the extent effect is given to such unabsorbed depreciation to one or more of the partners, the firm cannot again get the benefit and vice versa. There is, therefore, really no double advantage. Thus, we are of opinion that the assessee appellant-firm is entitled to the carry forward of the unabsorbed depreciation computed for the assessment year 1967-68 and have it set off in its assessment for 1968-69. The unabsorbed business loss of assessment year 1967-68, however, cannot be carried forward by the firm to be set off in its assessment for assessment year 1968-69. Appeals allowed in part. 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.