AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2004 (4) TMI 62
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....icer in doing so did not accept the request for adjusting the share of unabsorbed depreciation of the firm brought forward from the earlier years. The unabsorbed depreciation was to the extent of Rs. 48,576 relating to the assessment years 1973-74, 1974-75 and 1975-76. The partnership firm had closed down its business on May 2, 1974, and it was not carrying on business after the assessment year 1975-76. According to the Assessing Officer, the unabsorbed depreciation can be adjusted against the income of the partners only if the partnership firm is carrying on its business activity during the relevant period. The Commissioner of Income-tax (Appeals) by his order dated May 23, 1990 (annexure B), dismissed the appeal filed by the assessee and confirmed the assessment. However, in further appeal, the Appellate Tribunal allowed the claim of the assessee relying on the decision of the Calcutta High Court in CIT v. Shiva Prosad Bagaria [1991] 191 ITR 139. Hence, the reference. Sri P. K. R. Menon, learned senior Central Government standing counsel (Taxes) appearing for the applicant, submitted that a reading of the provisions of section 32(1) and (2) along with sections 72(2) and 73(1) ....
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....assessee (or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners), full effect cannot be given to any allowance under . . . clause (ii).... of sub-section (1) . . . in any previous year owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, ... be the allowance for that previous year, and so on for the succeeding previous years." Since the above sub-section refers to sub-section (2) of section 72 and subsection (3) of section 73, sub-section (2) of section 72 alone being relevant for the purpose of this case reads as follows: "72.(2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first ....
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....vant to the assessment year for which the claim under section 32(2) is made We also note that the Madras High Court in East Asiatic Co. (India) P. Ltd. v. CIT [1986] 161 ITR 135 has taken a contrary view relying on two earlier decisions; one of the Bombay High Court in Sahu Rubbers P. Ltd. v. CIT [1963] 48 ITR 464 and the other of the Madras High Court itself in CIT v. Dutt's Trust [1942] 10 ITR 477 followed in Tube Suppliers Ltd. v. CIT [1985] 152 ITR 694 and Hindustan Chemical Works Ltd. v. CIT [1980] 124 ITR 561(Bom). Here it must be noted that all the decisions which have taken the view that the same business in respect of which depreciation was carried forward need not be in existence in the previous year for claiming the benefit of section 32(2) of the Act had in one way or the other noted the contrary view but did not adopt the view. In CIT v. Virmani Industries P. Ltd. [1974] 97 ITR 461, the Allahabad High Court considered this question. In that case, the assessee, a private limited company, was carrying on the business of manufacture of soap and oil. The business was stopped in 1955 and the factory was let out in hire. In the previous year relevant to the assessment ....
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....the Act, do not constitute a binding authority inasmuch as the provisions contained in the Act of 1961 have ceased to be a proviso as was the case under the 1922 Act and the decision in Sahu Rubber's case [1963] 48 ITR 464 (Bom) principally turned on the question whether the statutory provision was required to be considered as an independent substantive provision. The Bombay High Court thereafter independently considered the provisions of the 1961 Act afresh. After referring to the decisions of various High Courts, it was observed thus: "It is true that the approach to be found in the observations at page 470 of the report (48 ITR 464), viz., that if the intention of the Legislature had been to adjust the unabsorbed depreciation allowance against the profits and gains chargeable to tax of the following year or years irrespective of whether that business continues or not it would have said so, may not commend itself to us. Indeed, it is possible to hold and observe that if in a later section when the Legislature intended to impose such a requirement or condition on the right of the assessee to claim a similar benefit the Legislature expressly provided for such restrictive conditi....
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....on for the assessment year, it is expressly stated that it is in respect of machinery, etc., used for the purposes of the business or the profession, there is no such requirement under section 32(2). In this connection, it will be useful to refer to section 72 which deals with the carrying forward and set off of business losses. Under the proviso to section 72(1)(i), set off is allowed only on condition that the business or profession for which the loss was originally computed, continued to be carried on by him in the previous year relevant to the assessment year. In contrast to an express requirement regarding the continuance of the business or profession as a condition for set off of loss under section 72(1)(i), proviso, there is no such requirement in regard to unabsorbed depreciation under section 32(2). We, therefore, do not agree with the decision of the Tribunal that as the business was not continued and as the asset for which depreciation is claimed was not used as it was sold previous to the year of account, the unabsorbed depreciation could not be carried forward and set off." Almost all the decisions referred to in paragraph 8 above which existed at that time were ....
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....uch unabsorbed depreciation should be allowed to be carried forward and set off against its business income for the said years. This was disallowed on the ground that the assessee did not carry on its earlier business in the relevant years. This was confirmed in appeal by the Appellate Assistant Commissioner. Before the Tribunal the assessee contended that to claim set off of unabsorbed depreciation it was not necessary that the business in which such depreciation was initially allowed should be carried on in the subsequent years. This was accepted by the Tribunal and allowed the assessee's claim. On a reference at the instance of the Revenue, the High Court after considering the decisions of the Allahabad, Bombay, Andhra Pradesh, Karnataka High Courts and the earlier decision of the Calcutta High Court itself observed thus: Sub-section (2) of section 32 of the Income-tax Act, 1961, provides that once depreciation has been duly allowed in a particular year but could not be given effect to by reason of the chargeable profits or gains being less than the allowance, the same has to be added to the amount of allowance for depreciation for the following previous year or alternatively....
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....give the benefit of the unabsorbed depreciation in the following previous year or in the succeeding previous years and when that is the purpose of the legal fiction, all the facts necessary for the purpose of earning depreciation under section 32(1) of the Act must be secured and, therefore, for the following previous year the ownership of machinery, user of machinery and user of machinery for the purpose of business and existence of business also will be required to be assumed for giving effect to the legal fiction. These facts are to be assumed only for the purpose of giving effect to the legal fiction and in doing so, there is no question of construing the legal fiction beyond the purpose for which it is created and/or beyond the language of the section by which it is created. On the contrary, if such facts are not assumed, the very purpose of introducing the legal fiction will be defeated and the court will not endure that the purpose for which the legal fiction of deemed allowance introduced for the sake of doing justice to the assessees who could not take advantage of the total amount of depreciation in the current year be defeated by calling upon them to prove the necessary ....
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.... also depreciate in value and until the assessee sells all the assets, the assessee cannot recover the cost of such asset in the form of depreciation allowance. The condition is that the asset originally purchased on which depreciation was allowed must be in existence to be eligible for depreciation. But, in case of loss which may arise in the course of carrying on the business, unless the business is in existence, this loss cannot be allowed. It has nothing to do with any asset of the business." The High Court concluded the matter thus: "Having regard to the views expressed by this court in CIT v. Kishanlal and Sons (Udyog) P. Ltd. [1985] 154 ITR 735; the Gujarat High Court in Deepak Textile Industries Ltd. [1987] 168 ITR 773 and the Bombay High Court in Estate and Finance Ltd. [1978] 111 ITR 119, we are of the opinion that the decision of the Madras High Court in East Asiatic Co. (India) P. Ltd. [1986] 161 ITR 135 and the decision of the Bombay High Court in Hindusthan Chemical Works Ltd. [1980] 124 ITR 561 do not correctly lay down the correct principles. We, therefore, following the principles laid down by this court in Kishanlal and Sons (Udyog) Pvt. Ltd. [1985] 154 ITR ....
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....sorbed depreciation allowance on the same footing as a similar allowance for the relevant previous year. That is the limited purpose of the words which are used in the concluding portion of section 32(2). The deeming fiction can be carried undoubtedly to its logical conclusion but the effect of the deeming fiction will come to an end the moment it is treated as an allowance for the relevant previous year. The fiction cannot be carried further and it is an established proposition that a statutory fiction cannot be given effect to beyond the purpose for which it is intended. The purpose for which the fiction in section 32(2) is intended is merely for the purpose of treating such unabsorbed depreciation as an allowance for the purpose of deductibility under section 32(1). This fiction does not have the effect of dispensing with the substantive condition in sub-section (1) prescribed as a condition for deducibility, namely, that the buildings, machinery, plant and furniture in respect of the allowance are used for the purposes of the business or profession." The Madras High Court followed the decision of the Bombay High Court in Sahu Rubbers P. Ltd.'s case [1963] 48 ITR 464 in prefe....
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.... partners-in whose hands the unabsorbed depreciation has been allocated-should carry forward the depreciation to succeeding years; or (2) that the amount of depreciation so remaining unabsorbed should be carried forward by the firm for set off in future assessments. The Supreme Court then observed that the second of these alternatives is what is truly envisaged by the statute. Regarding the possible criticism that the partners derive a double advantage of setting off of the unabsorbed depreciation it is stated that though a firm and its partners are distinct assessees for the purpose 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) of the Act-and the loss of a registered firm is treated as the losses of its partners too-and that 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 income of the firm and partners. To the extent effect is given to such unabsorbed depreciation to one or more of the....
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.... of the Act) observed that the said words are not confined to the profits and gains derived from the business by a person whose income is being computed under section 10. A Division Bench of this court in CIT v. A. M. J. Anthraper [1996] 222 ITR 414, to which one of us (Sivarajan J.) was a party, considered the case of another partner of the very same firm, M/s. Anthraper Industries, for the assessment years 1978-79, 1979-80 and 1980-81. The assessee-partner's claim for carried forward and consequential set off of the unabsorbed depreciation was rejected by the officer on the ground that business loss cannot be carried forward and set off against the income under other head. In appeal, the first appellate authority decided that the carrying forward and set off of un-absorbed depreciation can be allowed at the assessee's hands against the income arising under the other heads to the extent of his share. The Tribunal, in appeal filed by the Revenue, confirmed the order of the first appellate authority. The Tribunal also noted that the consistent stand of the Department throughout is that the unabsorbed depreciation on allocation to the partners can be carried forward only by the pa....