TMI Blog1991 (3) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... e these appeals by the assessee, M/s. Garden Silk Weaving Factory, Surat. The two appeals relate to the assessment years 1967-68 and 1968-69 for which the relevant previous years were the Saka years 2022 and 2023, respectively. The question arises in similar circumstances for both the years. We shall set out the facts relevant for the assessment year 1968-69 as the appeals and reference in respect of that year were disposed of earlier than those pertaining to the assessment year 1967-68. The assessee, M/s. Garden Silk Weaving Factory, is a registered firm. For the assessment year in question, it returned a total income of Rs. 3,94,483 and a provisional assessment, under section 141 of the Act, was made accepting the income returned. Subsequently, the Income-tax Officer found that, for the assessment year in question, the assessee had made an income of Rs. 11,82,056 but deducted therefrom three figures aggregating to Rs. 7,87,573 to arrive at the net income of Rs. 3,94,433, which had been returned and accepted. These three figures were figures carried over from the previous year for the assessment year 1967-68. They comprised of : Rs. (i) Unabsorbed d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted by the High Court. For the assessment year 1967-68, a full paper book containing all the orders and statement of facts has not been placed before us. However, the petition of appeal gives a few facts which may be sufficient to dispose of the appeal. The relevant facts are these. For this assessment year, the assessee filed a return on June 30, 1967, showing a loss of Rs. 7,87,515 but filed revised return on March 22, 1972, showing a loss of Rs. 5,46,351. On March 14, 1973, the Income-tax Officer completed the assessment determining a loss of Rs. 4,85,250. (It will be noticed that the assessment order for 1968-69 gives a different figure and also shows its composition as partly loss, partly unabsorbed depreciation and partly unabsorbed development rebate but this is not very material for deciding the principles in issue before us). The assessee's request that this loss should be carried forward to the subsequent assessment year was rejected by the Income-tax Officer. This was confirmed by the Appellate Assistant Commissioner. On further appeal, the Appellate Tribunal confirmed the order of the Appellate Assistant Commissioner following the High Court's decision for the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of profits from "business". On the other hand, if some of the businesses make profit and some of them result in a loss, the profits and the losses have to be added together in order to arrive at the consolidated income under the head "Profits and gains of business". If the total amount of profits exceeds the total amount of losses, there will be a positive income under this head, assessable for that particular assessment year. If, on the other hand, the losses exceed the profits, they will be "adjusted" against the profits, so as to reduce the assessable income under the head to nil ; in addition, the losses of one or more businesses will remain "unabsorbed". There will thus be one resultant figure of profit or loss under each head. This is one aspect of the matter. This is the first stage of computation which we may call "intra-head adjustments". This was not specifically provided for in the Indian Income-tax Act, 1922 (the 1922 Act) but now finds specific mention in section 70 of the 1961 Act. Section 24(1) of the 1922 Act and section 71 of the 1961 Act next contemplate a mutual set off of the losses under one head against the income under some other head subject to some ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed on his share of income from the firm. In this scheme, it was obvious that, as soon as the income or loss of firm was computed, there was nothing further to be done in the case of the firm ; the income or loss became that of the partner for all practical purposes. A partner's share of a business loss of the firm which remained unabsorbed became business loss in the hands of the partner liable to intra-head adjustments, inter-head adjustments and carry forward as if the loss had been incurred by the partner himself. The Act, therefore, provided that, in the case of registered firms, the loss which could not be absorbed in the same assessment year by the other income of the firm could be carried forward to the subsequent year not by the firm itself but only by the partners. In other words, each partner carried forward to subsequent years his share of the business loss of the firm and set it off against his business income, whether from the firm or otherwise. There is a third category of unregistered firms assessed as registered, the provisions regarding which are not relevant for our present purposes. Leaving them out of account, the Acts outlined a very simple scheme which s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s carried forward and set off under the provisions of the aforesaid sections. 76. Losses of unregistered firms assessed as registered firms. -In the case of an unregistered firm assessed under the provisions of clause (b) of section 183 in respect of any assessment year, its losses for that assessment year shall be dealt with as if it were a registered firm. 77. Losses of unregistered firms or their partners. - (1) Where the assessee is an unregistered firm which has not been assessed as a registered firm under the provisions of clause (b) of section 183, any loss of the firm shall be set off or carried forward and set off only against the income of the firm. (2) Where the assessee is a partner of an unregistered firm which has not been assessed as a registered firm under the provisions of clause (b) of section 183 and his share in the income of the firm is a loss, then, whether the firm has already been assessed or not (a) such loss shall not be set off under the provisions of section 70, section 71, sub-section (1) of section 73 or section 74A (b) nothing contained in sub-section (1) of section 72 or subsection (2) of section 73 or sub-section (1) or sub-section (3) of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance could be carried forward and set off against business profits in succeeding assessment years indefinitely. This provision, namely, clause (b) of the proviso to section 10(2)(vi) of the 1922 Act-after an addition in 1953 of the words underlined in the extract below -reads thus : "10(2)(vi) ... Provided that ... (b) where, in the assessment of the assessee or, if the assessee is registered firm, in the assessment of its partners, full effect cannot be given to any such allowance in any year not being a year which ended prior to the lst day of April, 1939, owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24, 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 year and deemed to be part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeeding years ; and" This provision has, in substance- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section." This is the historical context and statutory language on the basis of which the issue before us has to be resolved. The issue is : when there is an unabsorbed depreciation computed in the assessment of a registered firm for any year, how is it to be treated for purposes of carry forward ? Three alternatives are possible : (1) It should be retained (without apportionment) and carried forward by the firm only. (ii) It should be apportioned among the partners. Thereafter, it can be dealt with even for carry forward purposes-only in the assessments of each of the partners in respect of his aliquot share thereof. (iii) It should be apportioned among the partners each of whom may set off his share thereof against his other income. If, after this, any amount remains unabsorbed, it will revert to the firm. The firm will carry it forward, set it off against its other income in the succeeding year. This operation will be repeated every year indefinitely until the unabsorbed depreciation gets absorbed. The three alternatives w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that he need not, for the purposes of this case, seek to support the third alternative, upheld in some of the decisions, which may create an impression in the mind that the assessee was deriving a double benefit by having the unabsorbed depreciation set off in the hands of both the firm and the partners. On the other hand, Dr. Gauri Shankar, for the Revenue, strongly advocated the second alternative. According to him, once the assessment is completed and the total income or loss of the firm ascertained, it has to be apportioned amongst the partners. Thereafter, there remained nothing in the assessment of the firm to be carried forward. Only, each of the partners can carry forward his share of the unabsorbed loss (and this, according to him, will include also the unabsorbed depreciation) for set off in his future assessments. The answer to the problem before us has to be discovered in the language of section 32(2) supplemented by that of other sections which deal with the mode of assessment of a firm and its partners. Before turning to these provisions, it will be necessary to clear up one aspect of section 32(2) to which Sri Salve drew attention in the course of his reply. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition, and it should be sufficient to cite two decisions of this court which make this clear. In CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555, 558, 559, this court observed : "Mr. Shastri, learned counsel for the Revenue, urges that depreciation, although a permissible allowance under section 10(2) of the Act, serves to compensate an assessee for the capital loss suffered by him by way of depreciation of his assets. He says that if it had not been expressly allowed as allowance, it would have been treated as capital expenditure and would have been excluded. He further says that depreciation is a charge on the profits of a business. Bearing these two factors in mind, he urges that the expression 'loss of profits and gains' in section 24(1) does not include any deficiency resulting from depreciation and, therefore, an assessee is not entitled to ask the Department to include the depreciation in the amount which can be set off against income, profits and gains under other heads such as income from property or dividends. Mr. Rajagopala Sastri for the assessee relies on the history of the legislation and a number of authorities to support the judgment of the High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the profits or gains of the particular business whose income is being computed under section 10 and if the profits of that business are not sufficient to absorb the depreciation allowance, the allowance to the extent to which it is not absorbed would be set off against the profits of any other business and if part of the depreciation allowance still remains unabsorbed, it would be liable to be set off against the profits or gains chargeable under any other head and it is only if some part of the depreciation allowance still remains unabsorbed that it can be carried forward to the next assessment year. Obviously, therefore, there would be no scope for the applicability of proviso (b) to clause (vi), if the total income of the assessee chargeable to tax is sufficient to absorb the depreciation allowance, for then there would not be any unabsorbed depreciation allowance to be carried forward to the following assessment year. But where any part of the depreciation allowance remains unabsorbed after being set off against the total income chargeable to tax, it can be carried forward under proviso (b) to clause (vi) to the following year and set off against that year's income and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id by him ; and where the tax so levied cannot be recovered from the partner, whether wholly or in part, the firm shall be liable to pay the tax, to the extent of the amount retained or could have been so retained. " How this share is to be computed is set out in section 67 which may be set out here : "67(1). Method of computing a partner's share in the income of the firm. - In computing the total income of an assessee who is a partner of a firm, whether the net result of the computation of total income of the firm is a profit or a loss, his share (whether a net profit or a net loss) shall be computed as follows : (a) any interest, salary, commission or other remuneration paid to any partner in respect of the previous year, and, where the firm is a registered firm or an unregistered firm assessed as a registered firm under clause (b) of section 183, the Income-tax, if any, payable by it in respect of the total income of the previous year, shall be deducted from the total income of the firm and the balance ascertained and apportioned among the partners (b) where the amount apportioned to the partner under clause (a) is a profit, any salary, interest, commission or other remu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m "loss", there is no statutory provision that will permit its adjustment against other business income-implicit in section 32(2) itself-and against all other income of the assessee as held by the above decisions. We, therefore, do not see why "loss" and "unabsorbed depreciation" should be treated as antithetical to, or mutually exclusive of, each other. Nor are we persuaded that any mix-up or anomaly will result as suggested by counsel if we treat the expressions as synonymous except to the extent specifically treated differently by the statute. In our view, there is nothing anomalous or absurd in the statute providing for a dissection of the amount of loss for purposes of carry forward and providing for a special or different treatment to unabsorbed depreciation in this regard although it is a component element of the genus described as "loss". To illustrate, suppose an assessee has a "profit" of Rs. 5,000 in one business before deduction of depreciation of, say, Rs. 10,000 and a loss of Rs. 15,000 in another business, it will be quite correct to say that he has a business loss of Rs. 20,000 in that assessment year. But, for purposes of carry forward, this has to be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recalling, to the firm's "file", the amount remaining unabsorbed. We think this criticism really proceeds on an unduly narrow construction placed on the provisions of section 32(2). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for set off against its income over period of years. No doubt, the latter portion of section 32(2) does not envisage that the business carried on by the assessee in the subsequent years should be the same or that the assets to the depreciation in respect of which the unabsorbed depreciation is to be added should be the same or, indeed, that any depreciation at all should be allowable to the assessee in the subsequent year. It is no doubt true that the words of the subsection are so widely couched that they can, with a certain amount of difficulty, be rendered capable of application to the situation of each partner carrying forward his share of the unabsorbed depreciation for set off, even where he has no business or business income, against his other income. But we think that it is too strained a construction of the sub-section. When, as pointed out by Sri Salve, there is nothing in the sub-section or the Act specifically providing even for an apportionment of the depreciation among the partners, it is too contrived a construction to read into the sub-section several words intended to provide for a number of partners, each carrying forward his share of the unabsorbed depreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim of carry forward by the firm which was earlier being accepted on the strength of the earlier language resulting in a double advantage. Attention has been drawn to the objects and reasons of the amendment, set out thus at p. 57 in [1952] 21 ITR (Statutes) : "The (amendment) is intended to make it clear that where unabsorbed depreciation has been effectively allowed in the assessment of partner of a registered firm, it would not be carried forward in the case of the firm." (emphasis added) It is true that the clause, before its amendment, permitted all assessees-and this included registered firms as well-to carry forward their unabsorbed depreciation and that though the registered firm paid no tax, it could, on the language, claim carry forward of the depreciation which had been apportioned among the partners. This resulted in such carry forward being claimed even where the whole or a part of the unabsorbed depreciation of the firm had been set off in the assessment of individual partners. The amendment, vide the words emphasised in the extract above, only seeks to make it clear that such carry forward will not be permitted to the extent it has been given effect to in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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