TMI Blog1982 (8) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal. The Tribunal concurred with the view of the AAC and rejected the assessee's appeal. The assessee thereafter sought and obtained a reference to this court under s. 256(1) of the Act on the following question of law : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to set off against the business income of the assessee for the assessment year 1971-72, the unabsorbed depreciation determined in the assessment of the firm, of which the assessee was a partner for assessment years 1967-68 and 1968-69, and carried forward ". It is seen from the order of the Tribunal that in the firm's assessment for the year 1967-68, the assessee's share of loss has been determined at Rs. 36,333 and for the year 1968-69, her share of loss has been determined at Rs. 44,519. Up to the assessment year 1968-69, the firm has been treated as a registered firm and the allocation of loss has been made to the partners on that basis. However, from the assessment year 1969-70, the assessment has been made on the firm as an unregistered firm and in the year 1969-70, the assessment has resulted in a net loss of Rs. 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm was carrying on before its dissolution and, therefore, the assessee is entitled to claim set off. Having regard to the assessee's claim that she has been continuing the transport business after the dissolution of the firm, the AAC directed the ITO to verify the actual share of loss from the firm remaining unabsorbed in. 1971-72 and set it off against the income from the same business, that is, lorry transport, in conformity with the provisions of s. 72 of the Act. However, his direction did not cover the unabsorbed depreciation. Before us the learned counsel for the assessee contends that a similar direction should have been given by the AAC for unabsorbed depreciation as well. According to the learned counsel for the assessee, the provisions of s. 32(2) are clear that in the case of a registered firm, if full effect could not be given to any allowance for depreciation, allowance has to be given in the assessment of the partners. In support of the said contention, he relied on the decision of the Gujarat High Court in CIT v. Garden Silk Weaving Factory [1975] 101 ITR 658, the decision of the Allahabad High Court in CIT v. Virmani Industries (P) Ltd. [1974] 97 ITR 461 (Al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of this section. (3) No loss (other than the loss referred to in the proviso to subsection (1) of this section) shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed ". A reading of s. 32(2) would indicate that if full effect for depreciation provided under s. 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. Thus, the allowance for depreciation is allowed to be carried forward for set off against future years' profits. It is because of this that the unabsorbed depreciation allowance was carried forward in the assessments of the firm and in the partners' assessment full effect of the proportionate carried forward unabsorbed depreciation will have to be given. Therefore, as per s. 32(2) read with s. 72(2), the unabsorbed depreciation which has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resulting on account of unabsorbed depreciation is allocated to the shares of the partners, the firm itself cannot claim a right to carry forward the unabsorbed depreciation so as to have it deducted from its income before the taxable income of the firm is determined. On the other hand, the assessee contended that the right to carry forward unabsorbed depreciation by s. 32(2) which says that depreciation which remained unabsorbed has to be taken into account before the income of the firm in question is computed. The court rejected the contention of the Revenue and held that even though for certain purposes of set off, losses occasioned on account of unabsorbed depreciation is dealt with under s. 24 of the Act, it does not lose its character or nature as unabsorbed depreciation and is carried forward not by virtue of the provisions of s. 32(2) but by virtue of the express provisions of s. 10(2)(vi), proviso (b), of the Act of 1922. The Allahabad High Court in K. T. Wire Products v. Union of India [1973] 92 ITR 459, has, however, taken a different view. It has held that in the case of a registered firm, the net loss including the depreciation allowance, if any, is allocated to the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of s. 32(2) makes it clear that, in the case of a registered firm, either the whole 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 year and deemed to be part of the allowance for the later year and can be considered for set off or adjustment in the hands of the firm. The reasoning of the Bench in that case is that in the first instance, the unabsorbed depreciation of the firm will be allocated among the partners to be adjusted in the hands of the partners and whatever remained unabsorbed in the hands of the partners will have to be transported into the assessment of the firm for purposes of assessment in its hands and the partner will not be able to get it adjusted in his own assessment thereafter, and that the object of the relevant provisions of the Act is to see that there is adjustment towards unabsorbed losses only once either in the hands of the partner or in the hands of the firm. In the said decision, the learned Judges have referred to the scheme of the Act and stated (p. 447): " For some purposes of the Act, depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e." This decision, though rendered on a different point, supports the case of the assessee that once the unabsorbed depreciation is allocated to the partners for adjustment, the partner can carry it forward and set it off against his other income in the subsequent years. The same view has been taken by the same Bench in CIT v. Madras Wire Products [1979] 119 ITR 454. We are of the view that the decision relied on by the Revenue does not throw any light on the question to be decided here. On the other hand, those decisions proceed on the basis that the unabsorbed depreciation of the firm has to be allocated to the partners for adjustment in the first instance and if it could not be adjusted in full, the unabsorbed portion shall be added in the account of the allowance for depreciation and carried forward and set off in the partner's hands. It is no doubt true, as pointed out by this court in CIT v. Nagapattinam Import and Export Corporation [1979] 119 ITR 444, the unabsorbed depreciation allowance can be adjusted only once either in, the hands of the partners or in the hands of the firm but not in both. In this case the firm has been dissolved and has ceased to exist after 1970. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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