TMI Blog1984 (11) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... ase. The assessee in the present case is a partnership firm between the N. C. D. C. Ltd. and the Madhya Pradesh Government. This partnership carries on what is called the " Korba Project " regarding coal development. For the assessment year 1962-63, the Income-tax Officer completed the assessment in the status of a registered firm and worked out the loss at Rs. 2,98,398. The Income-tax Officer also observed in the assessment order that development rebate was not allowed to the assessee because the net result of business without development rebate was loss. It was also mentioned that the claim for development rebate could be considered in the next year if there is a profit from the business. While computing the assessment for 1963-64, the Income-tax Officer allowed the development rebate pertaining to the assessment year 1962-63 as it had not been allowed in the earlier year and there was adequate profit in the assessment year 1963-64. Later on, the Income-tax Officer rectified these assessment orders under section 154 of the Act is he found that the claim of development rebate for the first year had actually been allowed in the second year and the resultant profit had been allocate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he total income to nil and the amount of development rebate which cannot be allowed in that year, has to be carried forward to the following assessment year and the development rebate to be allowed in the following year has to be such amount as is sufficient to reduce the total income of the assessee for that assessment year to nil and later this claim for development rebate can be carried forward up to eight years. The Tribunal also held that this claim of development rebate has to be carried forward in the hands of the assessee and nobody else. According to the Tribunal, unless development rebate is actually allowed, it does not affect the total income of the assessee and in the case of the firm, unless development rebate is actually allowed, it could not affect the income of the firm and it could not be allocated to the partners. According to the Tribunal, the claim of the assessee merely remains alive to be considered in a year when there are adequate profits and when there is satisfaction of the statutory requirements of reserve. The Tribunal further found that in the assessment year 1962-63, the statutory requirements for allowance of development rebate of Rs. 8,54,916 had no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 be deemed to be part of that allowance, or if there is no such allowance for that previous 3 year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years. Thus, it is evident that for depreciation allowance, no limit has been fixed as to how long it can be allowed and that means that the depreciation allowance can be carried forward for an indefinite period. Similar provisions were made in section 10(2)(vi) of the Indian Incometax Act, 1922 (" the 1922 Act"), read with proviso (b) which lays down as follows : " (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 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be apportioned among the partners. Now, let us look at the provisions of development rebate. Section 33 relates to the development rebate in respect of a new ship or new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of section 34, be allowed a deduction in respect of the previous year in which the ship was acquired or machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, a sum by way of development rebate as specified in the various provisions of this section. Section 33(2) lays down as follows : "In the case of a ship acquired or machinery or plant installed after the 31st day of December, 1957, where the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be (the total income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ship has been acquired or the machinery or plant has been installed before the 1st day of January, 1958 : Provided further that where a ship has been acquired after the 28th day of February, 1966, this clause shall have effect in respect of such ship as if for the words 'seventy-five', the word 'fifty' had been substituted. Explanation.-For the removal of doubts, it is hereby declared that the deduction referred to in section 33 shall not be denied by reason only that the amount debited to the profit and loss account of the relevant previous year and credited to the reserve account aforesaid exceeds the amount of the profit of such previous year (as arrived at without making the debit aforesaid in accordance with the profit and loss account. (b) If any ship, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed, any allowance made under section 33 or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of that ship, machinery or plant shall be deemed to have been wrongly made for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance 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 he 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 has also been held that in proviso (b) to section 10(2)(vi), the Legislature clearly assumes that effect can be given to depreciation allowance in the assessment of a partner and that the only way effect can be given in the assessment of a partner is by setting it off against the income, profits and gains under other heads. Their Lordships of the Supreme Court considered the meaning of the expression in proviso (b) to section 10(2)(vi), " in the assessment of the assessee or if the assessee is a registered firm, in the assessment of the partners, full effect cannot be given to any such allowance in any year Their Lordships also held that taking the case of the partners of a registered firm, the assessment must be their individual assessments, i.e., assessments in which the profits from the firm and other sources are pooled together. Their Lords ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different manner, section 24(2) only deals with losses other than the losses due to depreciation. Thus, from this decision, it is evident that the depreciation losses and the business losses have to be carried forward and calculated in the case of the firm and then they have to be allocated in the hands of the partners in view of the special provision of proviso (b) to section 10(2)(vi) of the 1922 Act and section 32(2) of the 1961 Act. Of course, there is an observation in this decision that the 1922 Act draws no express distinction between the allowances mentioned in section 10(2) and they all have to be deducted from gross profits and gains of a business, but it cannot be doubted that their Lordships of the Supreme Court were considering only the case of depreciation and not the case of development rebate. Each case has to be decided on its own facts and in that case their Lordships were considering the depreciation allowance. It cannot be doubted that there are other allowances under section 10(2), but their Lordships were not considerating section 10(2)(vi)(b) where there was a special provision for allowance of development rebate only on the condition that an amount equal to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1967-68, the assessee's share of loss was determined at Rs. 36,333 and for the year 1968-69, her share of loss was determined at Rs. 44,519. Up to the assessment year 1968-69, the firm was treated as a registered firm and the allocation of loss was made to the partners on that basis and, in those circumstances, it was held that a reading of section 32(2) would indicate that if full effect for depreciation provided under section 32(1) cannot be given owing to there being no profits or no profits chargeable for the previous year or profits being less than the allowance, then 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 allowance for depreciation for the following year and deemed to be part of that allowance and, thus, the allowance for depreciation is allowed to be carried forward for set off against future years' profits. It was also held in this decision that it is because of this that the unabsorbed depreciation allowance was carried forward in the assessment of the firm and in the partners' assessments full effect of the proportionate carried forward unabsorbed depreciation will have to be given. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d its partners. In the case of Sankaranarayana Construction Co. v. CIT [1984] 145 ITR 467, the Karnataka High Court has observed that section 32(2) deals with unabsorbed depreciation allowance of firms and other assessees. It does not provide for the assessment of firms. It has also been held that the income of a firm has to be computed in the manner provided by sections 182 and 183 of the Act and not under section 32(2). It has also been held that it, however, specifically provides for the assessment of partners in regard to unabsorbed depreciation allowance and generally the benefit of the unabsorbed depreciation allowance would be available to the assessee who is the owner of the depreciable assets, but section 32(2) makes an exception to this rule so far Ls the partners of a firm are concerned. It has also been observed that the language of section 32(2), so far as it pertains to the partners of a firm, viz., Where, in the assessment of the partners of a registered firm or an unregistered firm assessed as a registered firm, full effect cannot be given to any allowance in any previous year ", clearly indicate that the assessments must be individual assessments of the partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the depreciation allowance or any part thereof for which effect had not been given by adjustment in the hands of the partners, will have to be added to the amount of the depreciation in the following years and be deemed to be part of the allowance for the latter year and can be considered for set off or adjustment in the hands of the firm. It has been pointed out in this decision that after the income of the firm is arrived at, it is distributed or allocated among the partners in accordance with their respective shares as shown by the instrument of the partnership so that the income so allocated is added to the other income, if any, in the partners' hands and assessed to tax accordingly and where the result of the computation in the hands of the firm is a loss, then section 75 provides that the loss also should be apportioned among the partners. It has also been held in this decision that depreciation forms part of the loss and that the income of the firm or the loss in the hands of the firm cannot be Computed without making allowance for depreciation in case the assessee is eligible for it and has made such claim by complying with the relevant provisions of the Act and if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of the firm in the subsequent assessment year. In this decision, development rebate was also considered and it was observed that as far as the development rebate is concerned, the position is somewhat different and that in respect of the plants installed before January 1, 1958, the development rebate was allowed as deduction in the computation of the profits and gains of the assessee and if the profits were not adequate to absorb the development rebate allowed in any year, then it would be added to the business loss and dealt with as such. It has also been pointed out that the scheme of grant of development rebate came to be modified subsequently and that under the law in force from January 1, 1958, the development rebate was granted on a fixed percentage of the actual cost of the new machinery or plant owned by the assessee and wholly used for the purpose of business carried on by him and as a condition precedent to the grant of this allowance, the assessee has to create the reserve to the extent indicated in section 33 and where the assessee qualifies himself for allowance of the development rebate by the creation of the reserve, then as to how the development rebate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dment) Act, 1960, is not retrospective in effect and does not mean that if the development rebate had been granted before the date on which the Act came into force, viz., April 1, 1960, and remained unabsorbed against the profits of the previous years, the balance of such unabsorbed development rebate must be treated as extinguished on the date when the Act came into force and that such development rebate remains an integral part of loss and can be adjusted against subsequent profits and can be carried forward for the assessment year 1960-61 and subsequent years. It has also been held in this decision that when once development rebate is granted, it constitutes an allowance which has to be deducted from the gross profits of the business, and in the absence of any special provision like that contained in the proviso to section 10(2)(vi) relating to the depreciation allowance, if the unabsorbed development rebate has been included in loss from business and carried forward, the Department cannot claim in a subsequent year that only such portion of the total loss carried forward which represented the business loss could be adjusted against the profits, and that the remaining portion no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chinery if there is no profit in that year and it is sufficient if the reserve is created when there is profit and, therefore, development rebate can be actually allowed. It has been held in the case of Addl. CIT v. Vishnu Industrial Enterprises [1980] 122 ITR 919 (All), that there is no express provision that the development rebate reserve must be created in the year in which rebate is to be determined and that the reserve may be created only when profits are earned. It has also been held in this decision that section 33(2) shows that the allowability of the development rebate is not confined to the first year and it can be carried forward and allowed against the income accruing in the succeeding seven years and that the provision contemplates a carry forward of the rebate in a case where the assessee's income is nil and there is no reason why rebate cannot be carried forward in the case of a loss. Section 34(3)(a) clearly lays down that the deduction under section 33 shall not be allowed unless the reserve is created. It has also been held in this decision that before an assessee claims deduction, he should create a reserve by debiting the profit and loss account and crediting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dryer as per bill dated August 14, 1961. The actual cost came to Rs. 1,03,095. The accounting period of the assessee is the calendar year and in the assessment year 1962-63, though the total income of the assessee was calculated at Rs. 4,706 and he had shown net profit as per the profit and loss account at Rs. 5,065, the assessee calculated the development rebate allowable for Rs.1,03,095 at Rs. 25,774 and the statutory reserve required was 75 per cent. which came to Rs. 19,330 and, therefore, in the assessment year 1962-63, the assessee did not create the necessary reserve for the development rebate. In the assessment year 1963-64, the assessee created development rebate reserve to the extent of Rs. 20,000. The assessee thus claimed rebate at least to the extent of Rs. 20,000 minus Rs. 4,706, i.e., the assessee claimed development rebate in the assessment year 1963-64 to the extent of Rs. 15,913 and in those circumstances it was held that the assessee was not entitled to the development rebate in the assessment year 1963-64. It has been held in the case of CIT v. Orissa Flour Mills (P.) Ltd. [1976] 104 ITR 682 (Orissa) that while section 33 lays down that the development rebate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made wholly or partly to an assessee in any assessment year under section 33 and subsequently at any time before the expiry of eight years referred to in sub-section (3) of section 34, the assessee utilised the amount credited to the reserve account under clause (a) of that sub-section for distribution by way of dividends or profits or for any other purpose which is not a purpose of the business of the undertaking, the development rebate originally allowed shall be deemed to have been wrongly allowed and the Income-tax Officer may recompute the total income of the assessee for the relevant previous year and make the necessary amendment and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the previous year in which the money was so utilised. Thus, it is evident that if development rebate reserve is created by firm and the development rebate is allocated to the partners as a loss and remains in the hands of the partners to be carried forward as loss in the following year and subsequently the development rebate reserve is utilised for purposes other than business p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also submitted that the unabsorbed development rebate in the case of a firm is not to be allocated in the hands of the partners but it is to be carried forward in the case of the same assessee-firm. The Income-tax Officer took the view that the power of rectification under section 154 is limited to the rectification of a mistake which is apparent from the record and that for rectification of a mistake, the Income-tax Officer is competent to examine all the materials available from the record and to decide whether there is, in fact, an error which is obvious and patent. He also took the view that it is a well-settled principle of law by a number of judicial pronouncements that an error apparent from the record is not only confined to an error of fact but may include an error of law. It was argued on behalf of the assessee that there was distinction between the language of section 32(2) and the language of section 33(2) but the Income-tax Officer did not accept this and held that the unabsorbed development rebate which has been carried forward in the assessment year 1962-63 is allocated in the hands of the partners and nothing is carried forward in the case of the assessee-firm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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