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 firm's own income and, to the extent not absorbed, can be apportioned to partners and further carried forward. The expression "or" in section 32(2) was construed conjunctively to permit such dual-level adjustment without resulting in double benefit. The firm, as assessee, was therefore entitled to carry forward its unabsorbed depreciation for AY 1967-68 and set it off in AY 1968-69. However, the unabsorbed business loss of AY 1967-68 could not be carried forward by the firm. Appeals were allowed in part.

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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.

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