TMI Blog1988 (7) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, by the assessee, the Appellate Commissioner permitted the setting off of the unabsorbed depreciation of the previous year. Aggrieved by that, the Department filed second appeal before the Appellate Tribunal. The Appellate Tribunal observed that the unabsorbed depreciation of the registered firm for the preceding assessment year allocated to the partners, if not wholly set-off in their respective assessments, should be brought back for computation of the total income of the firm in the subsequent years as if it were the firm's unabsorbed depreciation, and thus upheld the order of the Appellate Assistant Commissioner. As there are conflicting views on the question expressed by different High Courts, the present references are made. Learned counsel for the Revenue submitted that the assessee being the partnership firm, if full effect could not be given to the unabsorbed depreciation of the previous year owing to there being no profits or gains chargeable for the previous year, or owing to the profits or gains chargeable being less than the allowance, then, the said unabsorbed depreciation will be made over to the partners' accounts for being given effect to in their assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the deduction in respect of depreciation as contemplated by section 32(2) of the Act. In order to appreciate the rival contentions, it is necessary to set out here the relevant provisions of the Income-tax Act as in force from time to time before the 1953 amendment, after the 1953 amendment and after the 1961 Act came into force. Deductions permissible to an assessee for purposes of computation of profits and gains of business, profession or vocation were contained in section 10 of the Indian Income-tax Act, 1922. Section 10(2)(vi)(b) was the relevant provision which permitted the benefit of carry-forward and set-off of unabsorbed depreciation. Before the amendment was incorporated in the said clause in 1953, it read as under: "(b) where, full effect cannot be given to any such allowance in any year not being a year which ended prior to the 1st 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the succeeding previous years." (stress is ours). It is, thus, seen that right from 1922 to 1961, the provision contemplated addition of the unabsorbed depreciation of the previous year to the allowance for depreciation for the succeeding years. As regards the importance or implication of this contemplated addition, we shall make reference a little later. It needs to be pointed out here that before the amendment made in 1953, the benefit of carrying forward and setting off of depreciation allowance was permissible in case of firms as well as partners. However, by the amendment made in 1953, a firm was prevented from claiming benefit again of depreciation allowance which is fully effected in the assessment of its partners. As noted supra, section 32(2) of the 1961 Act provides for carrying forward of the unabsorbed depreciation of the previous year to the succeeding previous years for purposes of computation of the income of the firm. This provision, however, is subject to section 72(2) and 73(3) of the Act. It is to be borne in mind that there is a material omission of reference to section 75 of the Act in section 32(2), more so, in the face of specific reference therein to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission by engrafting on it or introducing in it, under the guise of interpretation, by analogy or implication, something which it thinks to be a general principle of justice and equity. To do so, would be entrenching upon the preserves of the Legislature, the primary function of a court of law being jus dicere and not jus dare." In this view of the matter, as submitted by learned counsel for the assessee, since reference to section 75 is conspicuous by its absence in section 32(2), though sections 72(2) and 73(3) have been mentioned, the normal provisions relating to carry forward and set-off the unabsorbed depreciation have to operate in the instant matters. According to sub-section (2) of section 32, that part of the depreciation allowance of the firm which is not fully effected in its partners' assessments is to be added to the amount of allowance for depreciation claimed by a firm for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years. We do not find any reason to deprive the firm of the legal benefit to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment, the reason that gave rise to the instant references is the difference of opinion expressed on the present question by the Madras, Bombay and Gauhati High Courts in one way and the Gujarat, Madhya Pradesh and Allahabad High Courts in a contrary way. In CIT v. Madras Wire Products [1980] 123 ITR 722 (Mad), as in the present one, the question was whether the unabsorbed depreciation of the registered firm for the previous year should be set-off against its income for the following previous year to the extent that it was not adjusted in the assessment of its partners for the previous year. The Madras High Court answered the question in the affirmative and in favour of the registered firm. In this, the Madras High Court followed its earlier decisions in CIT v. Nagapatinam Import and Export Corporation [1979] 119 ITR 444 and in CIT v. Madras Wire Products [1979] 119 ITR 454. It is to be noted that to the same effect is the decision of the Nagpur Bench of the Bombay High Court in Ballarpur Collieries Co. v. CIT [1973] 92 ITR 219. The Gauhati High Court also in CIT v. Singh Transport Co. [1980] 123 ITR 698 held that the unabsorbed depreciation of a registered firm for the prece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear within clause (vi) and has to be deducted as allowance. If the Legislature had not enacted proviso (b) to section 24(2), the result would have been that depreciation allowance would have been deducted first out of the profits and gains in preference to any losses which might have been carried forward under section 24, but as the losses can be carried forward only for six years under section 24(2), the assessee would, in certain circumstances, have in his books losses which he would not be able to set-off. It seems to us that the Legislature, in view of this, gave a preference to the deduction of losses first. But it is wrong to assume that section 24(2) also deals with the carrying forward of depreciation. This carry forward having been provided in section 10(2)(vi) and in a different manner, section 24(2) only deals with losses other than the losses due to depreciation." It is worth noting that section 75 of the Act of 1961 embodies the provisions of the second proviso, latter half, to section 24(1) and earlier part of proviso (e) to section 24(2) of the Act of 1922. There has been no change of law in the Act of 1961, as against the Act of 1922, so far as the carry forward a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset, the partners being persons different from the assessee-firm. The words that the carried forward depreciation has to be 'deemed to be part of' depreciation allowance of the following year also suggest that the same is to be set-off in the following year in the hands of the same assessee, i.e., the firm itself and not the partners thereof. Thus, the literal interpretation of section 32(2) also leads to the conclusion that unabsorbed depreciation in the case of a firm is allowed to be carried forward by the firm and set-off against its profits in the following year or years. Section 75 is applicable only in respect of business losses or losses in speculation business and cannot be applicable to the carry forward and setoff of depreciation allowance. A perusal of the relevant provisions of the Act and in particular the provisions of sections 32(2), 72, 73 and 75 clearly show that the manner of carry forward and set-off of depreciation allowance is distinct and separate and is governed exclusively by section 32(2) of the Act." At this stage, learned standing counsel for the Revenue sought to urge that a later decision of the Supreme Court in CIT v. J. K. Hosiery Factory [198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt question. We are not convinced that the scope and authority of this decision shall have to be expanded so as to accede to the submission of learned counsel that the benefit of carry forward and set-off is not available to a registered firm. In this behalf, we are fortified in our view by the decisions of the Supreme Court in Prakash Amichand Shah v. State of Gujarat, AIR 1986 SC 468 and Madhav Rao Jivaji Rao Scindia v. Union of India, AIR 1971 SC 530, laying down the principles as regards the binding nature of precedents. It is interesting to notice that in this very decision, the Supreme Court, while referring to certain observations of the Bombay High Court in CIT v. Estate and Finance Ltd. [1978] 111 ITR 119, went to the extent of holding that 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 inasmuch as the Legislature had not imposed any such condition. It is lastly urged by learned counsel for the Revenue that the business loss of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o far as the unabsorbed depreciation is concerned, it is on a different footing. Under section 32(2), unabsorbed depreciation is to be added to the amount of depreciation allowance of the firm for the subsequent year and deemed to be part of the depreciation of the subsequent year. It can be carried forward indefinitely. Further, section 75(2) bars only the carrying forward of the losses of the registered firm once they are apportioned among the partners again to the firm back, whereas, there is no such bar as regards the depreciation allowance since section 32(2) is not subjected to the operation of section 75, though it is specifically subjected to the operation of sections 72(2) and 73(3). One more distinction to be noticed is that while the business loss inherently takes within it the feature of outgoings, the depreciation allowance is not an actual outgoing. In this view of the matter, we cannot accede to the contention of learned counsel for the Revenue that the business losses as also the depreciation allowance merit the same and identical treatment as regards their absorption. In view of the foregoing reasons, we hold that in cases where, in the assessment of the register ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following: For the previous assessment year, full effect could not be given in the assessment of the assessee to the depreciation allowance which it was entitled to under section 32(1). Accordingly, it was allocated to the partners in their individual assessments in proportion to their shares. Still, the depreciation could not be fully absorbed and, therefore, for the assessment year concerned herein, the firm sought to carry forward and add the same to the depreciation allowance permissible during this assessment year. This the Income-tax Officer did not allow on the plea that since the unabsorbed depreciation has been allocated to the partners and given effect to, in their individual assessments, during the previous assessment year, it is not open to the firm to bring it back to its assessment during this assessment year and claim it as unabsorbed depreciation. His view was that once allocated to the individual assessments of the partners, it should be given effect to in their assessments only, and cannot be brought back to the firm's assessment. The question is whether the assessee-firm is entitled to do so, as claimed by it. It would be appropriate to notice the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a registered firm, full effect cannot be given to any allowance under the specified sub-clauses in subsections (1) and (lA) of section 32 in the assessment of the assessee and in the assessment of its partners, for the reason that there are no profits or gains chargeable for that previous year, or for the reason that profits or gains chargeable are less than the allowance, then, subject to the provisions of section 72(2) and section 73(3), the allowance or part of the allowance to which effect has not been given, shall be added to the amount of allowance for depreciation for the following previous year, and deemed to be part of that allowance. It is further provided that if there is no such allowance for that following previous year, the carried forward allowance shall be deemed to be the allowance for that previous year, and so on for the succeeding previous years. I have split up sub-section (2) into, two clauses for the sake of felicity and to avoid confusion ; otherwise, the rule contained in sub-section (2) is the same. Only its application differs where the assessee is a registered firm or an unregistered firm assessed as registered firm. In other words, in the case of a reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of section 71, so much of the loss as has not been so set off, subject to the other provisions of Chapter VI, shall be carried forward to the following assessment year and set off against the profits and gains of that following assessment year, provided that the business or profession for which the loss was incurred continues to be carried on in the previous year relevant to the following assessment year. It provides for carrying forward the loss year after year, up to a period of eight assessment years. Sub-section (2) of section 72 ought to be noticed, since it is one of the provisions referred to in sub-section (2) of section 32. The application of the rule contained in section 32(2) is made subject to section 72(2) and section 73 (3). Sub-section (2) of section 72 says : "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 be given to the provisions of this section". (emphasis added) Section 73 deals with losses in speculation business and provides that any loss suffered in a speculation business shall not be set off except against profits and gains, if any, of another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er giving effect to all the allowances permissible in law, in the case of business income, including the depreciation allowance provided by section 32(1) ; in the case of a registered firm or an unregistered firm which is assessed as a registered firm, if the loss suffered by it cannot be set off against the other income of the firm, it shall have to be apportioned between the partners of the firm, and the partners of the firm alone are entitled to have the amount of loss set off and carried forward for set off, in accordance with sections 70 to 74A ; indeed: sub-section (2) expressly declares that nothing contained in sections 72(1), 73(2), 74(l) or 74A(3) shall entitle any assessee, being a registered firm, to have its loss carried forward and set off under the provisions of the aforesaid sections, which means that a registered firm cannot carry forward its loss for set off to the following previous year; the carrying forward has to be done only by the partners in their individual assessments ; a registered firm is entitled to set off the losses suffered by it against its other income during that particular assessment year alone ; but there is no question of its carrying forward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary. So far as the carrying forward of unabsorbed depreciation of the kind mentioned in sub-section (2) of section 32 is concerned, the rule contained in section 75 has no application This, in my view, represents the correct understanding of the relevant provisions, and I have arrived at this conclusion by reading the relevant provisions harmoniously, giving effect to each of them. For the above reasons, I agree with the decisions in Ballarpur Collieries Co. v. CIT [1973] 92 ITR 219 (Bom) ; CIT v. Nagapatinam Import Export Corporation [1979] 119 ITR 444 (Mad) CIT v. Madras Wire Products [1979] 119 ITR 454 (Mad) ; CIT v. Madras Wire Products [1980] 123 ITR 722 (Mad) ; CIT v. Singh Transport Company [1980] 123 ITR 698 (Gau) and CIT v. J. Patel Company [1984] 149 ITR 682 (Delhi). For the same reasons, I am in respectful disagreement with the decisions of the Gujarat High Court in CIT v. Garden Silk Weaving Factory [1975] 101 ITR 658 and Garden Silk Weaving Factory v. CIT [1983] 144 ITR 613 ; of the Madhya Pradesh High Court in Kalani Udyog v. ITO [1979] 117 ITR 431, of the Allahabad High Court in K. T. Wire Products v. Union of India [1973] 92 ITR 459 and of the Karnataka High C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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