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TMI Blog1991 (3) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 depreciation 1,59,181 (ii) Unabsorbed development rebate 2,79,150 (iii) Unabsorbed business loss 3,49,242 Total 7,87,573 The Income-tax Officer agreed that, out of the above three amounts, the unabsorbed development rebate pertaining to the assessment year 1967-68 had been rightly carried forward and set off in computing the total income for the assessment year 1968-69. However, for reasons which will become clear later, the Income-tax Officer was of the opinion tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment 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 assessment year 1968-69 which had by then been pronounced. Thereupon, the following question of law was referred to the High Court for its opinion : "Whether, on the facts and circumstances of the case, the Tribunal was justified in rejecting the claim for carry forward of business loss in the hands of the firm in view of the decision reported in [1975] 101 ITR 658 (CIT v. Garden Silk Wvg. Factory) ?" The High Court answered the question in the affirmative following its earlier decision but granted a certificate of fitness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exceptions (like speculation loss, capital loss, etc., which, to avoid unnecessary complications and confusion, we shall leave out of account). Thus if, in any particular assessment year, an assessee has incurred a loss under the head "Business", this loss can be set off against the income earned by the assessee during that previous year under other heads. Thus, for example, if an assessee has got income by way of salary of Rs. 20,000 and income from house property of Rs. 25,000 but has sustained a loss of Rs. 40,000 in business, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, 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 stemmed from the basic fact that a registered firm was not liable to pay tax whereas an unregistered firm had to pay tax. Under this scheme, the full advantage of carry forward of the loss incurred by the firm was enjoyed by the partners in the case of a registered firm and in the case of an unregistered firm by the firm itself. The simplicity of the above scheme of assessment of registered and unregistered firms, however, was not allowed to last. In 1956, the Legislature decided that registered firms should also be made to pay a tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 section 74 or sub-section (3) of section 74A shall entitle the assessee to have such loss carried forward and set off against his own income." In view of this specific provision, the High Court, following an earlier decision of the same High Court in CIT v. Dhanji Shamji [1974] 97 ITR 173 (Guj), answered the second question referred to it in the reference relating to the assessment year 1968-69 and the only question referred to it in regard to the assessment year 1967-68 in favour of the Revenue and against the assessee. The correctness of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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-there are certain verbal differences which are not material for our purposes-been re-enacted as section 32 (2) of the 1961 Act, which now reads thus: "32(2). Where, in the assessment of the 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 chargeabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward 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 will yield widely different results and hence the present controversy. On the above issue there has been a strong cleavage of opinion among various High Courts. The view that unabsorbed depreciation, once allocated to the partners, cannot be taken back to the firm's assessment for being carried forward by the firm and that the partners alone are entitled to carry forward the unabsorbed depreciation for being set off against their income, has been taken in the following cases : (a) K. T. Wire Products v. Union of India [1973] 92 ITR 459 (All), (b) CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pointed out that section 32(2) permits the carry forward of the depreciation allowance "where full effect cannot be given to it" owing to there being no profits or gains chargeable for that previous year, or owing to the profits and gains chargeable being less than the allowance. Laying emphasis on the words "profits or gains", he contended that the carry forward of depreciation allowance is at a stage much anterior to that of the determination of the total income of the assessee. On this construction, if an assessee, A, carries on two businesses in one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Apart from authority, looking at the Act as it stood on April 1, 1952, it is clear that the underlying idea of the Act is to assess the total income of an assessee. Prima facie, it would be unfair to compute the total income of an assessee carrying on business without pooling the income from business with the income or loss under other heads. The second consideration which is relevant is that the Act draws no express distinction between the various allowances mentioned in section 10(2). They all have to be deducted from the gross profits and gains of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 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 so on for succeeding years." The resultant position, therefore, is that initially, the depreciation allowance has to be deducted from the profits and gains of the business to which the assets earning the depreciation relate but, if it remains unabsorbed by such profits, the allowance has to be set off against the other business income of the assessee and, where that is also insufficient, against the other taxable income of the assessee. The carry forward of any depreciation as unabsorbed cannot arise until the stage of final assessment is reached and the tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit 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 remuneration paid to the partner by the firm in respect of the previous year shall be added to that amount, and the result shall be treated as the partner's share in the income of the firm ; (c) where the amount apportioned to the partner under clause (a) is a loss, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of the previous year shall be adjusted against that amount, and the result shall be treated as the partner's share in the income of the firm. (2) The share of a partner in the income or loss of the firm, as compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nomalous 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 under two headings : (a) an unabsorbed depreciation of Rs. 5,000, and (b) a business loss of Rs. 15,000. The amount of Rs. 20,000 will be carried forward to the subsequent year but the carry forward of Rs. 5,000 will be according to the provisions of section 32(2) and the carry forward under section 72 will have, perforce, to be restricted to the other amount of Rs. 15,000. The language of section 72(2) itself contains an indication that, where unabsorbed depreciation is a component of the figure of loss carried forward, the amount of loss proper should be set off first and the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 depreciation to successive assessment years. It seems natural and reasonable to construe the section as envisaging the following steps where the assessee is a registered firm (i) Excessive depreciation should be adjusted in the assessment of the assessee against other business income and against other heads of income ; (ii) Depreciation which remains unabsorbed under (i) will be apportioned to the partners and the share of each will be adjusted against the business and other income of each of the partners pro tanto ; (iii) If full effect cannot be given to the depreciation allowance of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gistered 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 the partners' assessments ; by necessary implication, the carry forward, to the extent it has not been effectively allowed to the partner, continues to be available. The amendment of 1953, therefore, not only does not help the case of the Revenue, it actually lends support to the construction we are inclined to place on the proviso. It is possible that our conclusion may give scope for two grounds of criticism : (i) that the partners derive a double advantage of setting off the unabsorbed depreciation to reduce the taxable income of the firm as well as the partners ; and (ii) that this will dis ..... 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