Commissioner of Income Tax U.P.,
Lucknow Vs. J.K. Hosiery Factory, Kanpur [1986] INSC 50 (19 March 1986)
MUKHARJI, SABYASACHI (J) MUKHARJI, SABYASACHI
(J) PATHAK, R.S.
CITATION: 1986 AIR 1665 1986 SCR (1) 907 1986
SCC Supl. 104 1986 SCALE (1)471
ACT:
Right to carry forward the unabsorbed
depreciation and to set off by a unregistered firm in one year to the next year
when it was registered, whether permissible - Income Tax Act, 1922 sections
10(2)(vi) read with 24(i) and 24(2).
HEADNOTE:
M/s. J.K. Hosiery Factory, Kanpur the
respondent assessee firm originally consisted of three Singhania Brothers and
one J.P. Agarwal as partners. The Singhania brothers retired in 1946 and in
their place Kamala Town Trust was alleged to have become partner. During the assessment
year 1949-50 the unregistered firm had been allowed an unabsorbed depreciation
of Rs. 43.963. The firm claimed a set off thereof in the assessment year
1950-51 when it was registered. The Tribunal refused to allow the carry forward
and set off but the High Court in the reference answered the question against
Revenue. Hence the appeal by the Revenue.
Dismissing the appeal,the Court, ^
HELD : 1.1 Having regard to the scheme of the
relevant provisions and in view of the provisions of sections 10(2) (vi) read
with section 24(1) and section 24(2) of the 1922 Act, the deduction of the
unabsorbed depreciation should have been allowed, in as much in both the years
the firm continued - in one year it was unregistered, in the next year it got
itself transferred into registered, but its identity was not lost. The firm was
one. Further the assessee was entitled to an interpretation favourable to him.
[915 C-D]
1.2 Where two interpretations were possible,
the court should take the interpretation that is favourable to the assessee
bearing in mind that a taxing statute is being construed. [914 H; 915 A]
1.3 The proviso (b) below section 10(2)(vi)
of the 1922 908 Act dealt with every assessee. It specified that where the
assessee was a registered firm, then in the assessment of its partners, if full
effect could not be given to any depreciation allowance and where the assessee
was an unregistered firm where there was no question of its partners being
assessed, the depreciation which could be carried forward was the unabsorbed
depreciation in the assessment of the firm itself. There was nothing in the
section which indicated that unregistered firm could not get the benefit of the
carry forward. [911 G-H; 912 A-B]
1.4 If section 24 is properly read in
conjunction with clause (b) of the proviso to sub-section (2) of section 24
which gives the right to carry forward the loss then the effect would be that
loss had to be carried forward and adjusted first against the profits of the
next year. Neither of the provisions prohibited that carry forward unabsorbed
depreciation in case the firm became registered in the subsequent year. The
entity is the firm, registration makes no difference in that entity. By
registration, the firm gets certain additional qualification and puts upon
itself certain additional burden. The scheme of the Act does not indicate any
intention to deprive the subsequently registered firm of its right to carry
forward the unabsorbed depreciation. Depreciation is given to the person who
becomes entitled to it. The subsequently registered firm is composed of him
also. Therefore, in principle, there is no basis for the proposition that he
should not be entitled to get the benefit of depreciation. [912 B-E] Indian
Iron & Steel Co. Ltd. v. Commissioner of Incometax, Bengal, 11 I.T.R. 328
P.C. discussed and distinguished.
Ballarpur Collieries co. v. Commissioner of
Income Tax, Poona, 92 I.T.R. 219 held inapplicable.
1.5 It could not be contended that since a
registered firm was liable to a separate tax called the "firm tax",
which is over and above the tax payable by the partners, the registered firm
should be treated like an ordinary assessee for the purposes of the assessment
of "firm tax" and the losses of the earlier years computed in the
assessment of the 909 firm should be carried forward and set off against its
business profits of the subsequent years. Though the "firm tax" was
levied under the Finance Act each year, it was a part and parcel of the income
tax which was levied under the provisions of the Income-tax Act. If the
contentions were accepted it would lead to an anomalous position inasmuch as
there would be two assessments in the case of registered firms, one for
purposes of levy of "firm tax" and the other for purposes of levy of
income tax and the quantum of income in the two assessments would be different.
Such a result is not contemplated under the Income tax Act. Imposition of tax
was on the registered firm as well as on unregistered firm.
The manner of levy and realisation is
different in case of registered firm. Therefore, under 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.[914 c-e] K.T.Wire Products v.
Union of India & Ors., 92 I.T.R.
459 (All) and Commissioner of Income tax,
Bombay City II v.
Estate and Finance Ltd., 111 I.T.R. 119 (BY)
referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.
1371- 72 (NT) of 1974.
From the Judgment and Order dated 4th August,
1972 of the Allahabad High Court in I.T. Reference No. 426 of 1963.
S.C. Manchanda and Miss A. Subhashini for the
Appellant.
V.S. Desai and M.M. Kashtriya for the
Respondent.
The Judgment of the Court was delivered by
SABYASACHI MUKHARJI, J. These appeals by special leave are from the judgment
and order of the Division Bench of the Allahabad High Court dated 4th August,
1972.
M/s J.K. Hosiery Factory, Kanpur, the
assessee firm herein, originally consisted of Sir Padampat Singhania, L.
910 Lakshmipat Singhania and L. Kailashpat
Singhania and one J.P. Agarwal as partners. In January, 1946, the three
Singhania brothers appeared to have retired from the firm and in their place
the Kamla Town Trust was alleged to have become partner.
The revenue challenged this reconstitution of
the firm and according to the revenue, the Singhania brothers never retired and
the trust never became a partner. Four questions were referred by the Tribunal
to the High Court under section 66(1) of the Indian Income-tax Act, 1922
(hereinafter called the 'Act'). The question No. 4 is the only question
canvassed before us and survives for these appeals. The same is as follows:
"Whether, under the provisions of
section 10(2)(vi), proviso (b) of the Income-tax Act, the unabsorbed
depreciation of the unregistered firm in 1949-50 can be allowed as a deduction
in the assessments of the partners of the registered firm in the assessment
year 1950-51?" Question No. 4 is relevant only for the assessment year
1950-51. For the previous assessment year 1949-50, the firm had been allowed an
unabsorbed depreciation of Rs. 43,963.
The firm claimed a set off thereof in the
assessment year 1950-51.The Tribunal refused to grant this set off on the view
that in the year 1949-50, the assessee firm was an unregistered firm while it
had been registered under the Income-tax Act for the year 1950-51. According to
the Tribunal, the loss on account of depreciation of an unregistered firm could
not be carried forward to the succeeding year in case the firm got registered.
It was so held by the Tribunal.
The High Court by reference to section
10(2)(vi) and proviso (b) to section 24(2) of the Act and on interpretation of
the provisions and scheme of the sections held that the Tribunal was not right
and answered the question in favour of the assessee. These appeals are from
that decision.
In order to appreciate this question, it is
necessary to bear in mind the relevant provisions of the Act. At the relevant
time, sub-section (2) of section 2 was as follows:
911 "'assessee' means a person by whom
income tax is payable." The relevant provisions of section 10 were as
follows:
"10. (1) The tax shall be payable by an
assessee under the head 'profits and gains of business, profession or vocation'
in respect of the profits or gains of any business, profession or vocation
carried on by him.
(2) Such profits or gains shall be computed
after making the following allowances, namely : - .....
(vi) in respect of depreciation ....
Provided that - ...... (b) where, in the
assessment of the assessee or if the assessee is a 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 their 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 the next
year, and so on for succeeding years." It is apparent, as the High Court
noted, that the proviso dealt with every assessee. It specified that where the
assessee was a registered firm, then in the assessment of its partners, if full
effect could not be given to any depreciation allowance and where the assessee
was an unregistered firm where there was no question of its partners being
assessed, the depreciation which could be carried forward was the unabsorbed
depreciation in the assessment of the firm itself. The assessee in the first
year being an 912 unregistered firm was entitled to carry forward the
unabsorbed depreciation under this proviso. There was nothing in the section
which indicated that unregistered firm could not get that benefit of the
carry-forward. It must be borne in mind that the firm which suffered
depreciation was unregistered in the accounting year i.e.
1949-50 and it is the very same firm which
got itself registered in the subsequent year. If section 24 is properly read in
conjunction with clause (b) of the proviso to sub- section (2) of section 24
which gives the right to carry forward the loss then the effect would be that
loss had to be carried forward and adjusted first against the profits of the
next year. Neither of the provisions prohibited that carry-forward unabsorbed
depreciation in case the firm became registered in the subsequent year. This
appears, in our opinion, on a plain reading of the different provisions of the
section. The entity is the firm, registration makes no difference to that
entity. By registration, the firm gets certain additional qualifications and
puts upon itself certain additional burden. The assessee in both the cases,
however, is the same. We were referred to the provisions of section 23(5)(b)
and section 24 to section 71 of the Income- tax Act, 1961. We do not think that
on this aspect the scheme of the Act indicates any intention to deprive the
subsequently registered firm of its right to carry forward the unabsorbed
depreciation. Depreciation is given to the person who becomes entitled to it.
The subsequently registered firm is composed of him also. Therefore, in
principle, there is no basis for proposition that he should not be entitled to
get the benefit of depreciation.
Our attention was drawn to certain
observations of the Judicial Committee of the Privy Council in the case of
Indian Iron & Steel Co. Ltd. v. Commissioner of Income-Tax, Bengal, 11
I.T.R. 328. There the Privy Council dealt with entirely different set of
circumstances. By an agreement dated 8th September, 1936, made between the
appellant company and another company named the Bengal Iron Company Ltd., the
former had agreed to acquire and take over the whole of the property and assets
of the latter as existing on the date of transfer.In pursuance of this
agreement the Bengal Company transferred all its property and assets on the 2nd
December, 1936 to the appellant company which continued to carry on the
business of the Bengal Company as part of and in combination with its 913
existing business. The agreement contained a clause assigning 'so far as
capable of being assigned, any claim which the Bengal Company may have in
respect of unabsorbed depreciation allowances'. At the time of the amalgamation
the Bengal Company had to its credit unabsorbed depreciation allowance to the
extent of Rs. 85,45,150 which it could set off against its future profits.
Similarly, the appellant company had an unabsorbed depreciation allowance of
Rs.
62,00,775. It was held by the Judicial
Committee, affirming the decision of the High Court of Calcutta, (i) that the
appellant company was not entitled to have the depreciation allowance of the
Bengal Company computed on the original cost of such assets to the Bengal
Company for the whole of the previous year but only up to the date of
succession and that after that date it had to be computed on the original cost
to the appellant company; and (ii) that the appellant company was not in law
entitled to carry forward the unabsorbed depreciation allowance of the Bengal
Company. It was further held that the word 'assessee' in section 10(2) must,
when there is a successor to the business charged to tax, be read in certain of
the paragraphs as including both predecessor and successor, but it does not
follow as a consequence that the unabsorbed depreciation of the predecessor
must be added to that of the successor or that even in a case when the only business
concerned is that which is transferred. The business when transferred carries
to the purchaser its unabsorbed depreciation.
Here no such problem arises. Here we have a
situation where the same person previously carrying on business as unregistered
firm is now carrying on business as registered firm.
Our attention was drawn to the observations
of the Division Bench of the Bombay High Court in the case of Ballarpur
Collieries Co. v. Commissioner of Income-Tax, Poona, 92 I.T.R. 219. But the
said observations are not relevant for our present purposes.
Similarly, reliance was placed on the
observations of the Division Bench of the Allahabad High Court in K.T. Wire
Products v. Union of India & Ors., 92 I.T.R. 459. It may be mentioned that
there it was noted that under the general scheme of the Income-tax Act, losses
and profits under different heads had to be aggregated and the net income 914
arrived at which was liable to tax. If the resultant figure was a loss, it was
carried forward and set off against the business profits of the succeeding
year. This is the position in the case of all assessees except registered
firms. In the case of registered firms, the net loss including depreciation
allowance, if any, is allocated to the partners, who alone were entitled to set
off the loss allocated to them in their individual assessments and to carry
forward any loss which remained unabsorbed, as provided in sections 32(2) and
75(2) of the Income-tax Act, 1961. The firm as such was not entitled to carry
forward the losses determined in the assessment. It could not be contended that
since a registered firm was liable to a separate tax called the "firm
tax", which is over and above the tax payable by the partners, the
registered firm should be treated like an ordinary assessee for the purposes of
the assessment of "firm tax" and the losses of the earlier years
computed in the assessment of the firm should be carried forward and set off
against its business profits of the subsequent years. Though the "firm
tax" was levied under the Finance Act each year, it was a part and parcel
of the incometax which was levied under the provisions of the Income-tax Act.
If the contentions were accepted it would lead to an anomalous position
inasmuch as there would be two assessments in the case of registered firms, one
for purposes of levy of "firm tax" and the other for purposes of levy
of income-tax and the quantum of income in the two assessments would be
different. Such a result is not contemplated under the Incometax Act. Imposition
of tax was on the registered firm as well as on unregistered firm. The manner
of levy and realisation is different in case of registered firm.
A case converse to the instant case was
before the Division Bench of the Bombay High Court in the case of Commissioner
of Incometax, Bombay City II v. Estate and Finance Ltd., 111 I.T.R. 119. Where
the Division Bench observed that when enacting the provision regarding carry
forward and set off of unabsorbed depreciation under section 32(2) of the
Income-tax Act, 1961, the legislature could have imposed a condition that
unabsorbed depreciation could be set off against the profits of a subsequent
year only if the business in relation to which depreciation was allowed
continued to exist in such year. The absence of such a restriction had to be
construed in favour of the assessee.
915 Where two interpretations were possible
the court should take the interpretation that is favourable to the assessee
bearing in mind that a taxing statute is being construed.
Therefore, under the provisions of section
32(2) for the purpose of setting off unabsorbed depreciation carried forward
from a proceeding 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. It dealt with some other aspect with which
we are not presently concerned.
Having regard to the scheme of the relevant
provisions and in view of the provisions of section 10(2)(vi) read with section
24(1) and section 24(2) of the 1922 Act, we are of the opinion that the
deduction of the unabsorbed depreciation should have been allowed. It is
necessary to bear in mind that in both the years the firm continued - in one
year it was unregistered, in the next year it got itself transferred into
registered, but its identity was not lost.
The firm was one.
In any event as has been mentioned in case of
doubt, the assessee is entitled to an interpretation which is favourable to
him, though we are of the opinion that in the instant case there is no scope of
any doubt.
Therefore, there was no loss of the right to
carry forward the unabsorbed depreciation.
In the premises the revenue was wrong, the
assessee was right. The High Court rightly answered the question. The appeals,
therefore, fail and are accordingly dismissed with costs.
S.R. Appeals dismissed.
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