1986 (3) TMI 4 - SC - Income Tax

Unabsorbed depreciation from unregistered year can be carried forward and set off under section 10(2)(vi) proviso (b) and section 24

Commissioner of Income-Tax, Uttar Pradesh Versus JK Hosiery Factory

SC held that unabsorbed depreciation incurred by a firm while unregistered in 1949-50 could be carried forward and set off against the registered firm's ... Reconstitution of firm - Interpretation of section 10(2)(vi) proviso (b) - set-off of unabsorbed depreciation - Whether under the provisions of section 10(2)(vi), proviso (b), the unabsorbed depreciation of the unregistered firm in 1949-50 can be allowed as a deduction in the assessments of the partners of the registered firm in the assessment year 1950-51 - Held That:- The assessee in the first year being an unregistered firm was entitled to carry forward the unabsorbed depreciation under this proviso. There was nothing in the section which indicated that an unregistered firm could not get that benefit of the carry forward. It must be borne in mind that the firm which suffered depreciation was unregistered in the accounting year, i.e., 1949-50, and it is the very same firm which got itself registered in the subsequent year. If section 24 is properly read in conjunction with clause (b) of the proviso to sub-section (2) of section 24 which gives the right to carry forward the loss, then the effect would be that the loss had to be carried forward and adjusted first against the profits of the next year. Neither of the provisions prohibited the carry forward of unabsorbed depreciation in case the firm became registered in the subsequent year. This appears, in our opinion, on a plain reading of the different provisions of the section. The entity being the firm, registration makes no difference to that entity. By registration, the firm gets certain additional qualifications and puts upon itself certain additional burden. The assessee in both the cases, however, is the same. We were referred to the provisions of section 23(5)(b) and section 24 of the 1922 Act and section 71 of the Income-tax Act, 1961. We do not think that on this aspect, the scheme of the Act indicates any intention to deprive the subsequently registered firm of its right to carry forward the unabsorbed depreciation. Depreciation is given to the person who becomes entitled to it. Tile subsequently registered firm is composed of him also. Therefore, in principle, there is no basis for the proposition that he should not be entitled to get the benefit of depreciation. A case converse to the instant case was before the Division Bench of the Bombay High Court in the case of CIT v. Estate and Finance Ltd.[1976 (11) TMI 28 - BOMBAY HIGH COURT], where the Division Bench observed that when enacting the provision regarding carry forward and set off of unabsorbed depreciation under section 32(2) of the Income-tax Act, 1961, the Legislature could have imposed a condition that unabsorbed depreciation could be set off against the profits of a subsequent year only if the business in relation to which depreciation was allowed continued to exist in such year. The absence of such a restriction had to be construed in favour of the assessee. Where two interpretations were possible, the court should take the interpretation that is favourable to the assessee bearing in mind that a taxing statute is being construed. Therefore, under the provisions of section 32(2), for the purpose of setting off unabsorbed depreciation carried forward from a preceding year, it was not necessary that the business in respect of which the depreciation allowance was originally worked out should remain in existence in such succeeding year. It dealt with some other aspect with which we are not presently concerned. Having regard to the scheme of the relevant provisions and in view of the provisions of section 10(2)(vi) read with section 24(1) and section 24(2) of the 1922 Act, we are of the opinion that the deduction of the unabsorbed depreciation should have been allowed. It is necessary to bear in mind that in both the years the firm continued in one year it was ' unregistered ', in the next year it got itself transferred as ' registered but its identity was not lost. The firm was one. Therefore, there was no loss of the right to carry forward the unabsorbed depreciation. Appeals dismissed. Issues:Reconstitution of firm, interpretation of section 10(2)(vi) proviso (b) of the Income-tax Act, 1922 regarding unabsorbed depreciation deduction for partners of a registered firm, relevance of registration status of the firm, comparison with previous judicial decisions on similar issues.Analysis:The case involved a dispute over the reconstitution of a firm and the allowance of unabsorbed depreciation as a deduction for partners of a registered firm. The Tribunal had denied the set-off of unabsorbed depreciation for the assessment year 1950-51, arguing that the firm was unregistered in the previous year. However, the High Court held in favor of the assessee, emphasizing the provisions of section 10(2)(vi) and proviso (b) to section 24(2) of the Income-tax Act, 1922. The High Court's interpretation allowed for the carry forward of unabsorbed depreciation even if the firm transitioned from unregistered to registered status in subsequent years.The judgment analyzed the relevant sections of the Income-tax Act, particularly focusing on the provisions related to depreciation allowances and the treatment of unabsorbed depreciation for registered and unregistered firms. It underscored that the proviso in question applied to all assesses, specifying the treatment of depreciation allowances for registered and unregistered firms. The court highlighted that the transition from unregistered to registered status did not impact the entity of the firm, and the right to carry forward unabsorbed depreciation should not be lost due to registration.The judgment referenced previous judicial decisions to support its interpretation. It distinguished cases where different entities were involved and emphasized that in the present case, the same entity continued its business as a registered firm. The court also discussed observations from other High Court cases, highlighting the distinction in treatment of losses and profits for registered and unregistered firms, emphasizing the rights of partners in registered firms to set off losses individually.Moreover, the judgment referred to a Bombay High Court case where the court favored an interpretation beneficial to the assessee regarding the carry forward and set off of unabsorbed depreciation. Ultimately, the Supreme Court upheld the High Court's decision, ruling in favor of the assessee and dismissing the appeals. The judgment concluded that the registration status of the firm did not affect the right to carry forward unabsorbed depreciation, and the assessee was entitled to the deduction.In summary, the judgment provided a detailed analysis of the relevant provisions of the Income-tax Act, compared previous judicial decisions on similar issues, and ultimately upheld the allowance of unabsorbed depreciation as a deduction for partners of a registered firm, even if the firm was unregistered in the previous year.