TMI Blog1979 (12) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the assessment of the firm at nil after determining the unabsorbed depreciation for the year at Rs. 21,846. The quantum of depreciation allowance of Rs. 21,846 was the unabsorbed depreciation allowance for the assessment years 1969-70, 1970-71 and 1971-72. In the assessment year 1973-74, the assessee claimed before the ITO that the unabsorbed depreciation amounting to Rs. 21,846 for the years 1969-70, 1970-71 and 1971-72 (hereinafter referred as " the unabsorbed depreciation ") should be carried forward in favour of the firm and added to the current year's depreciation and set off against the profits of 1973-74, and the balance should be carried forward to the subsequent assessment year. The ITO, however, determined the total income of the firm at Rs. 5,798 after allowing the depreciation for the current assessment year and turned down the claim of the assessee to carry forward and set off the unabsorbed depreciation and/or to carry forward the balance of the depreciation allowance to the subsequent assessment year. On consideration of the provisions contained in s. 32(2) of the Act, the ITO held that the firm was entitled to set off the depreciation allowance for the current ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned counsel for the revenue, has submitted that once the allocation was made to the partners they were the beneficiaries of unabsorbed depreciation and they and they alone were entitled to carry forward and set it off against their other income in the year or the years following. Once the allocation is made, the learned counsel submits, there remains nothing with the firm which can be carried forward by it on the ground of either there being no income or income being insufficient to absorb depreciation allowance. The learned counsel points to the collocation of the words " if the assessee is a registered firm ...... in the assessment of the partners full effect cannot be given to any such allowance ", in s. 32(2) of the Act, and submits that the depreciation allowance once allocated to the partners remains and continues to remain in their hands and the question of carrying forward the unabsorbed depreciation in the hands of the partners to the registered firm for the purpose of its assessment does not arise at all. It has been contended that there is no warrant for the proposition that unabsorbed depreciation allowance of a firm, once allocated to the partners can be reverted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year, and so on for the succeeding previous years." (Emphasis supplied) Section 32(2) of the Act corresponds to s. 10(2)(vi), prov. (b), of the Indian I.T. Act, 1922, hereinafter referred as " the old Act ". Section 32(1) makes depreciation allowable in respect of, (a) buildings, (b) machinery, (c) furniture, or (d) plant. The prime requisites for claiming depreciation allowance : (a) the depreciable asset must be owned by the assessee, and (b) the asset must be used for the purpose of the assessee's business or profession, subject to the provisions of s. 34 of the Act. The section, inter alia, provides for the basis or grounds for allowing depreciation allowance and also provides the manner of calculation of the allowance. Section 32(2) lays down the manner in which depreciation allowance may be set off and carried forward. Unabsorded depreciation allowance can be carried forward and the method is to add it to the amount of the depreciation allowance in the following year deeming it to be a part of that allowance. It is apparent that the effect of the deeming provision is that the unabsorbed depreciation allowance retains its colour or character as depreciation allowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et-off as it is applicable in the case of business loss and losses in speculation business, vide ss. 72(3) and 73(4) of the Act. Sections 72(2) and 73(3) provide for inter se priority of set-off between ordinary business loss or losses in speculation business and unabsorbed depreciation allowance. The provisions of s. 32(2) containing the expression " subject to the provisions of sections 72(2) and 73(3) " obviously manifest that the rest of the provisions contained in ss. 72 and 74 in so far as the manner of carry forward and set off are not applicable in respect of the two classes of unabsorbed depreciation allowances. On perusal of the relevant provisions of the Act and in particular the provisions of ss. 32(2), 72, 73 and 75 we are convinced that the manner of carry forward and set off of depreciation allowance is distinct and separate and covered exclusively by s. 32(2). In support we would refer to a decision of the Supreme Court, wherein their Lordships were called upon to interpret the provisions of s. 10(2)(vi) of the old Act corresponding to s. 32(2) of the Act and s. 24(2) of the old Act corresponding to ss. 72 and 73 of the Act, in CIT v. Jaipuria China Clay Mines (P.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not claim the benefit of such unabsorbed depreciation allowance. In short, the argument is when s. 32(2) refers to the assessment of the partners in a case where the assessee is a registered firm, the assessment of the partners is a part of the assessment of the firm, hence the provisions regarding the carry forward of unabsorbed depreciation must be given effect to in the assessment of the partners. It is difficult to accept the proposition that the assessment of the partners is apart of the assessment of the firm as an assessee. Under ss. 182 and 183 of the Act, the ITO deals with the assessment of a registered firm. He is required to determine the income-tax payable by the firm itself and thereafter the total income of each partner of the firm including a share of the firm's income, profits and gains of the previous years are required to be assessed and the sum payable by the partners, on the basis of such assessment, is determined. We would quote the extract of the observations made by the Supreme Court in S. Sankappa v. ITO [1968] 68 ITR 760, 766, 767: " In the case of a registered firm, the Income-tax Officer, after computing the income, has to determine the tax pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be held to be a step in the proceedings for assessment of the firm." It is true that the law laid down by the Supreme Court is in respect of the relevant provisions of the old Act. We are only to consider s. 158 of the new Act in place of s. 23(6) and s. 247 of the new Act in place of s. 30(1) and ss. 182 and 183 of the new Act in place of s. 23(5) of the old Act. It may be culled from the decision that, (a) proceedings for the assessment of a firm continue till the income of the firm is apportioned between its partners, in appropriate cases, till the imposition of the tax on the firm after including the share of the income of the partners ; (b) proceedings for assessment are independent and separate proceedings. Therefore, the expression " the assessment of the partners in case where the assessee is a registered firm " has to be read only for the purpose of finding out whether full effect cannot be given to the allowance permissible under s. 32. In CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555, the Supreme Court has clearly explained the true meaning of the expressions in the assessment of the assessee or if the assessee is a registered firm, in the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the firm for the purpose of the assessee's business or profession. As such, a person other than the firm is required to establish that the owner of the depreciable asset ought not to get the benefit of unabsorbed depreciation allowance. This appears to be in consonance with common sense, justice and equity. We do not find any such right of the partners to which they are entitled under s. 75(1) of the Act. In the result, it appears to us that a registered firm is entitled to carry forward depreciation allowance, the effect of which has not been given. On a perusal of the provisions of ss. 72 and 73 it becomes clear to us that depreciation allowance has been treated differently by the Legislature from business losses and losses in speculative business. The provisions of ss. 72(2) and 73(3) provide that when there are carried forward business losses or losses in speculative business and also depreciation allowance to be carried forward, priority shall be given to the carried forward losses and losses in speculative business and not to the depreciation allowance. Fixation of the priority itself distinguishes the colour and character of depreciation allowance. We have noted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se partners who have gained profits in the assessment year may not draw the benefit. It does not appear to be unjust or inequitable inasmuch as the deserving partners would derive the benefit of the provision. Be that as it may, when we find that it is the only possible construction of the provisions contained in s. 32(2) of the Act the contention of the revenue does not hold good. We respectfully differ from the opinion expressed in [1973] 92 ITR 459 (All) (K. T. Wires Products v. Union of India) and [1975] 101 ITR 658 (Guj) (CIT v. Go Silk Wvg. Factory). Suffice it to say that the problem was not looked at and solution sought for in the manner dealt with by us. We express the same view regarding Raj Narain Agarwala v. CIT [1970] 75 ITR 1 (Delhi). but would like to add that the observation touching the, question relevant for our determination was an obiter dictum of the High Court. The views expressed in the decisions do not appeal to us. In the result, we answer the question in the affirmative and in favour of the assessee. There will be no order as to costs. Let a copy of the judgment be sent to the Appellate Tribunal who shall render such orders as are necessary to dispos ..... X X X X Extracts X X X X X X X X Extracts X X X X
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