Garden
Silk Weaving Factory, Surat Vs. Commissioner of Income Tax, Gujarat, Ahmedabad [1991] INSC 81 (22 March 1991)
Rangnathan,
S. Rangnathan, S. Ramaswamy, K.
CITATION:
1991 AIR 1322 1991 SCR (1) 909 1991 SCC (2) 684 JT 1991 (5) 160 1991 SCALE
(1)501
ACT:
Income
Tax Act, 1961-Sections 32(2), 72(2)- "Depreciation"-Meaning of
-Unabsorbed loss and unabsorbed depreciation-Difference of-Carry forward and
set off of unabsorbed depreciation--Principle and distinction of.
Income
Tax Act, 1961-Sections 72(2), 32(2), 35- Unabsorbed depreciation computed in
assessment of registered firm-Carry forward of-Alternatives indicated.
Income
Tax Act, 1961-Section 32(2)-Unabsorbed depreciation allocated to partners of
registered firm- Firm whether entitled to carry forward the depreciation and
set off.
Income
Tax Act, 1961-Section 32(2)- Construction and object of-Assessee-Registered
firm- Steps to be taken to carry forward of unabsorbed depreciation to
successive assessment years, indicated.
Income
Tax Act, 1922-Section 10(2)(vib), proviso (as amended in 1953)-Effect and
application of.
HEAD NOTE:
For
the assessment year of 1968-69, the assessee appellant, a registered firm,
returned a total income of Rs.3,94,483 and a provisional assessment was made.
Subsequently,
the Income Tax Officer found that for the said assessment year, the assessee
had made an income of Rs. 11,82,056 and deducting therefrom three figures viz.,
(i) unabsorbed
depreciation: Rs.1,59,181;
(ii) unabsorbed
development rebate: Rs.2,79,150; and
(iii) unabsorbed
business loss: Rs.3,49,242, aggregating to Rs.7,87,573 and arrived at the net
income of Rs.3,94,483, which had been returned and accepted. The three figures
were the figures carried over from the previous year for the assessment year
1967-68.
The
Income Tax Officer allowed the unabsorbed development 910 rebate pertaining to
the assessment year of 1967-68 to be carried for-ward and set off in computing
the total income for the assessment year of 1968-69, but he did not allow the
amounts of unabsorbed depreciation and unabsorbed business loss. He, therefore,
added back the sum of Rs.5,08,423 (the aggregate of the amounts of unabsorbed
depreciation and unabsorbed business loss) to the returned income for
determining the total income for the assessment year of 1968-69.
The
action of the Income Tax Officer was confirmed by the Appellate Assistant
Commissioners (A.A.C.). However, on further appeal, the Income-tax Appellate
Tribunal (A.T.) upheld the income-tax Officer's stand that the firm could not
be allowed to carry forward and set off the business loss carried from the
earlier year but, so far as the unabsorbed depreciation was concerned, it
upheld the assessee's contention.
On
these two issues a reference to the High Court was made and the High Court
answered them against the assessee.
For
the assessment year 1967-68, the assessee filed a return on 30.6.67 showing a
loss of Rs.7,87,515 but filed a revised return on 22.3.1972 showing a loss of
Rs.5,46,351. On 14.3.73 the I.T.O. completed the assessment determining a loss
of Rs.4,85,250.
The assessee's
request that this loss should be carried forward to the subsequent assessment
year was rejected by the I.T.O. This was confirmed by the A.A.C. On further
appeal, the A.T. confirmed the order of the A.A.C., following the High Court's
decision for the assessment year 1968-69 which had by then been announced.
The
High Court answered the (question--"Whether, on the facts and
circumstances of the case, the Tribunal was justified in rejecting the claim
for carry forward of business loss in the hands of the firm in view of the
decision reported in 101I.T.R. 658? in the affirmative.
Hence
the assessee's the appeals -one appeal for the assessment year of 1968-69 and
the other for the assessment year of 1967-68-under certificates of fitness
granted by the High Court.
On
behalf of the assessee it was contended that the firm as well as the partners
had been returning losses all along with the result that no part of the
unabsorbed depreciation of the firm had been set off in the partner's hands;
that when there was an unabsorbed depreciation computed in the assessment of a
registered firm for any year, for the 911 purpose of carry forward, it should
be retained and carried forward by the firm only.
On the
other hand, it was submitted for the Revenue that once the assessment was
completed and the total income or loss of the firm ascertained, it had to be
apportioned amongst the partners. Thereafter there remained nothing in the
assessment of the firm to be carried forward. Only each of the partners can
carry forward his share of the unabsorbed loss, which also included the
unabsorbed depreciation, as there was no difference between unabsorbed loss and
unabsorbed depreciation; and that the amendment to the proviso to section 10(2)(vib)
in 1953 of depreciation was intended to negative the claim of carry forward, by
the firm which was earlier being accepted on the strength of the earlier
language resulting in a double advantage.
Allowing
the appeals, this Court,
HELD:
1. "Depreciation" is one of the notional allowances-which expression
means a deduction in respect an outgoing which is not an item of actual
expenditure or is one which cannot be treated as an outgoing of a revenue
nature-permitted by the statute to be deducted in the computation of the
profits and gains of a business. [921H-922B]
2.
Initially, the depreciation allowances has to be deducted from the profits and
gains of the business to which the assets earning the depreciation relate but,
if it remains unabsorbed by such profits, the allowance has to be set off
against the other business income of the assessee and, where that is also
insufficient, against the other taxable income of the assessee. The carry
forward of any depreciation as unabsorbed cannot arise until the stage of final
assessment is reached and the total income of the assessee otherwise computed
is insufficient to absorb the year's depreciation allowance.
[928E-G]
3. An unabsorbed depreciation is a part of the "loss".
This
is so because, in the first place, "depreciation" is a normal
outgoing, though in a sense notional, which has to be debited in the
computation of the profits of a business on commercial principles (quite apart
from statute) and it is difficult to see why, when such deduction yields a
negative figure of profits, it cannot be a "loss" as generally
understood. Where the depreciation allowance attributable to a particular
business exceeds the profits otherwise computed for that business, the
deduction of the depreciation allowance from such profits can only result in a
"loss" from that business and a business loss has to be set off
against income 912 from any other business, by way of intra-head adjustment,
under s. 70 and the income under any other head, by way of intra-head
adjustment, under s. 71. This is implicit in the provision that the excessive
depreciation of one business can be "given effect toll against the profits
and gains of another business in the same year and has been recognised by
decisions holding that it can be set off against income from other heads. If
unabsorbed depreciation is treated as a genus totally different from a
"loss", there is no statutory provision that will permit its
adjustment against other business income-implicit in S. 32(2) itself-and against
all other income of the assessee. "Loss" and "unabsorbed
depreciation" should not be treated as antithetical to, or mutually
exclusive of, each other. However, there is nothing anomalous or absurd in the
statute providing for a dissection of the amount of loss for purposes of carry
forward and providing for a special or different treatment to unabsorbed
depreciation in this regard although it is a component element of the genus
described as "loss" [931B-C, 926C-E, 93IC-F]
4.
Unabsorbed losses and unabsorbed depreciation are to be carried forward to
future years to be set off against future income. There is, however, one
important difference. Unabsorbed losses can be carried forward only for a
period of eight years whereas unabsorbed depreciation can be carried forward
indefinitely. [923G -H]
5.
There is also difference between the two in the matter of their carry forward
in the case of assessment of a registered firm. In this case, the unabsorbed
loss cannot be carried forward by the firm at all. The statute clearly so
provides. So far as unabsorbed depreciation is concerned, three alternatives
are possible to be urged: (i) It should be retained (without apportionment) and
carried forward by the firm only. (ii) It should be apportioned among the partners.
Thereafter, it can be dealt with-even for carry forward purpose only in the
assessment of each of the partners in respect of his aliquot share thereof.
(iii) It should be apportioned among the partners each of whom may set off his
share thereof against his other income. If, after this, any amount remains
unabsorbed, it will revert to the firm. The firm will carry it forward, set it
off against its other income in the succeeding year.
This
operation will be repeated every year indefinitely until the unabsorbed
depreciation gets absorbed. [924B-E] 6. The third alternative is the correct
one:
(a)
The unabsorbed depreciation should be allocated among the partners and, like
any other loss, will be available to the partners to the extent of his share
therein for set off against his business income or other income in the same 913
assessment year. In fact S. 32(2), in so far as it talks of depreciation being
given effect to in the partners' assessments recognises that such unabsorbed
depreciation should be allocated among the partners. The question is what is to
be done thereafter. [932A-B] (b) When there is nothing in the sub-section or
the Act specifically providing even for an apportionment of the depreciation
among the partners, it is too contrived a construction to read into the
sub-section several words intended to provide for a number of partners, each
carrying forward his share of the unabsorbed depreciation to successive
assessment years.
It
seems natural and reasonable to construe the section as envisaging the
following steps where the assessee is a registered firm:
(i)
Excessive depreciation should be adjusted in the assessment of the assessee
against other business income and against other heads of income;
(ii)
Depreciation, which remains unabsorbed under (i), will be apportioned to the
partners and the share of each will be adjusted against the business and other
income of each of the partners pro tanto;
(iii)
If full effect cannot be given to the depreciation allowance of the assessee by
the above processes and some depreciation remains unadjusted, the assessee-firm
will carry it forward to the succeeding assessment year. [934C-G] (c) The
sub-section, before its 1953 amendment, permitted all assesses-and this
included registered firms as well-to carry forward their unabsorbed
depreciation so that though the registered firm paid no tax, it could, on the
language claim a carry forward of the depreciation which had been apportioned
among the partners. This resulted in such carry forward being claimed even
where the whole or a part of the unabsorbed depreciation of the firm had been
set off in the assessment of individual partners. The amendment only seeks to
make it clear that such carry forward will not be permitted to the extent it
has been given effect to in the partners' assessments; by necessary
implication, the carry forward, to the extent it has not been effectively
allowed to the partner, continues to be available. The amendment of 1953,
therefore, does not help the case-of the Revenue. [935F-936A] (d) The objection
to the above course is also based on a mental imagery of the firm and its
partners as altogether different assesses 914 and of the impermissibility of
"bringing back" to the firm's "file" what has gone away to
the* files of the partners.
This
approach of viewing the two assessments in water- tight compartments for all
purposes is not correct. In any event, any such theoretical dichotomy cannot
prevail over the provisions of s. 32(2). [934G-935A] (e) The construction
suggested does not result in any double advantage to the partners. [936D] (f) It
is true that the construction may result in a certain amount of imbalance in
the quantum of relief available as among different partners. But similar
imbalance is inherent in the application of any of the three possible
alternatives. [936E-F]
7. The
assessee-appellant firm is entitled to carry forward the unabsorbed
depreciation computed for the assessment year 1967-68 and have it set off in
its assessment for the assessment year 1968-69. The unabsorbed loss for the
assessment year, 1967-68, however, cannot be carried forward by the firm to be
set off in its assessment for the assessment year 1968-69.
[937A-B]
K. T. Wire Products v. Union of India, [1973] 92 ITR 459 (All); Garden Silk
Weaving Factory, [1975] 101 ITR 658; Garden Silk Weaving Factory, [1983] 144
ITR 613 (Guj.): C. I. T. v. Ram Swarup Gupta, [1973] 92 ITR 495; Raj Narayan Aggarwala
v. C.I.T., [1979] 75 ITR I (Del.); Shankaranarayana Construction Co. v. C. I.
T., [1984] 145 ITR 467 (Karn.); Ballarpur Collieries Co. v. C.I.T., [1973] 92
ITR 219; C. 1. T. v. Nagpur Gas & Domestic Appliances, [1984] 147 ITR 440 (Bom.);
CIT v. Nagapattinam Import and Export Corp., [1979] 119 ITR 444; CIT v. Madras
Wire Products, [1979] 119 ITR 454; CIT v. Madras Wire Products, [1980] 123 ITR
722 (Mad.); CIT v. J. Patel & Co., [1984] 149 ITR 682 (Del.); CIT v. Shrinivas
Sugar Co., [1988] 174 ITR 178 (AP); CIT v. Singh Transport Co., [1980] 123 ITR
698 (Gau.); Pearl Wollen Mills v. CIT, [1989] ITR 368; CIT v. Mahavir Steel
Rolling Mills, [1989] 179 ITR 377 (P & H) and CIT v. R. J. Trivedi &
Sons, [1990] 183 ITR 420 (M.P.), referred to.
IT v. Jaipuria
China Clay Mines (P.) Ltd., [1966] 59 ITR 555 and Rajapalayam Mills Ltd. v. C.
I. T., [1978] 115 ITR 777, followed.
CIVIL
APPELLATE JURISDICTION: Civil Appeal Nos. 1249/75 & 2075/79.
From
the Judgment and Order dated ' 26.9.1974 and 16.10.1978 of Gujarat High Court
in I.T.R. Nos. 19 of 1973 and 318 of 1977.
Harish
N. Salve, P.H. Parekh and Sunil Degra for the Appellant.
915 V.
Gauri Shanker, Sr. Adv. and S. Rajappa for the Respondent.
The
Judgment of the Court was delivered by RANGANATHAN, J. These appeals raise a
question of some complexity on the interpretation of the provisions of the
Income-Tax Act, 1961, (The 1961 Act'), in regard to which there is a difference
of opinion among various High Courts. In the judgment under appeal, reported in
(1975) 101 ITR 658, the Gujarat High Court has answered the question raised in favour
of the Revenue and against the assessees. Hence these appeals by the assessee,
M/s. Garden Silk Weaving Factory, Surat.
The
two appeals relate to the assessment years 1967- 68 and 1968-69 for which the
relevant previous years were the Saka years 2022 and 2023 respectively. The
question arises in similar circumstances for both the years. We shall set out
the facts relevant for the assessment year 1968-69 as the appeals and reference
in respect of that year were disposed of earlier than those pertaining to the
assessment year 1967-68.
The assessee,
M/s. Garden Silk Weaving Factory, is a registered firm. For the assessment year
in question, it returned a total income of Rs.3,96,483 and a provisional
assessment, under section 141 of the Act, was made accepting the income
returned. Subsequently, the Income Tax Officer found that, for the assessment
year in question, the assessee had made an income of Rs. 11,82,056 but deducted
there-three figures aggregating to Rs.7,87,573 to arrive at the net income of
Rs.3,94,483 which had been returned and accepted.
These
three figures were figures carried over from the previous year for the
assessment year 1967-68. They comprised of:
(i)
Unabsorbed Rs. 1,59,181 Depreciation (ii) Unabsorbed Rs. 2,79,150 Development
Rebate (iii) Unabsorbed Rs. 3,49,242 Business loss Total : Rs. 7,87,573 The
Income Tax Officer (I.T.O.) agreed that, out of the above three months, the
unabsorbed development rebate pertaining to the assessment year 1967-68 had
been rightly carried forward and set off in computing the total income for the
assessment year 1968-69. However, 916 for reasons which will become clear
later, the Income Tax Officer was of the opinion that the sum of Rs. 1,59,181
(which represented the amount of unabsorbed depreciation relating to the
assessment year 1967-68) and the amount of Rs.3,49,242 (which represented the
unabsorbed loss pertaining to the assessment year 1967- 68) could not be
carried forward, as done by the assessee, to the assessment year 1968-69. He,
therefore, added back the sum of Rs.5,08,423 (the aggregate of the above two
amounts) to the returned income for determining the total income for assessment
year 1968- 69. This action of the Income Tax Officer was confirmed by the
Appellate Assistant Commissioner (A.A.C.). However, on further appeal, the
Income-tax Appellate Tribunal (A.T.) took a different view. It upheld the
Income-tax Officer's stand that the firm could not be allowed to carry forward
and set off the business loss carried from the earlier year. But, so far as the
unabsorbed depreciation was concerned, it upheld the assesses contention. A
reference to the High, Court followed. The following two questions were
referred to the High Court of Gujarat for its decision:
1.
Whether on the facts and in the circumstances of the case, the Tribunal was
right in law in holding that the assessee registered firm is entitled to carry
forward unabsorbed depreciation from earlier years and that it will be deemed
to be an allowance in the nature of depreciation in the previous year, relevant
to assessment year 1968- 69?
2.
Whether the claim of the assessee to carry forward and set off loss of
Rs.3,49,242 against its total income for the assessment year 1968- 69 has been
rightly rejected?" The High Court, in a very detailed judgment, discussed
the issues threadbare and answered both the questions against the assessee and
in favour of the Revenue.
Hence
the assesse's appeal for the assessment year 1968-69 under a certificate of
fitness granted by the High Court.
For
the assessment year 1967-68, a full paper book containing all the orders and
statement of facts has not been placed before us. However, the petition of
appeal gives a few facts which may be sufficient to dispose of the appeal. The
relevant facts are these. For this assessment year, the assessee filed a return
on 30/6/67 showing a loss of Rs.7,87,515 but filed a revised return on 22/3/72
showing a loss of Rs.5,46,351. On 14-3-73 the I.T.O. completed the assessment
determining a loss of Rs.4,85,250. (It will be noticed that the assessment
order for 1968-69 gives a different figure and also shows its composition as
partly loss, partly unabsorbed depreciation and partly unab- 917 sorbed
development rebate but this is not very material for deciding the principle in
issue before us). The assessee's request that this loss should be carried
forward to the subsequent assessment year was rejected by the I.T.O. This was
confirmed by the A.A.C. on further appeal, the A.T. confirmed the order of the
A.A.C., following the High Court's decision for assessment year 1968-69 which
had by then been announced. Thereupon the following question of law was
referred to the High Court for its opinion:
"Whether,
on the facts and circumstances of the case, the Tribunal was justified in
rejecting the claim for carry forward of business loss in the hands of the firm
in view of the decision reported in 101 I.T.R. 658? " The High Court
answered the question in the affirmative following its earlier decision but
granted a certificate of fitness for appeal to this Court. This is how the
second appeal is before us. It will be seen from the above that, though there
are two appeals before us, the question involved in both the appeals is the
same.
Before
discussing the question at issue, it may be useful to briefly summarise the procedure
under the statute for determining the total income of an assessee in respect of
a previous year. All income accruing or arising to the assessee and includible
in his total income, is, to begin with, classified (see S. 14) under six
different heads:
A.
Salaries.
B.
Interest on Securities: (recently omitted) C. Income from Property.
D.
Profits and gains of business, profession or vocation. (briefly, "business
income")
E.
Capital gains
F.
Income from other sources.
In
computing the income of the assessee according to this classification, two
aspects have to be borne in mind.
One is
that, even under the same head, an assessee may have different sources. If so,
the 918 income has first to be arrived at in respect of each such source. Thus,
if an assessee carries on several businesses, the income of each and every
such, business has to be separately computed by allowing against the gross
profits and gains of that business only the deductions relevant and appropriate
to that business. The second is that, for arriving at the figure of income
assessable under a particular head, the individual figures in respect of all
the sources have to be aggregated. Thus, to take up the head, "profits and
gains of business, profession or vocation", the statute contemplates the
computation of the profits and gains of each business, profession or vocation
carried on by the assessee separately. The result of such computation may be
either a profit or a loss. If all the businesses end in profits, the profits
are aggregated to arrive at a resultant figure of profits from
"business". On the other hand, if some of the businesses make profit
and some of them result in a loss, the profits and the losses have to be added
together in order to arrive at the consolidated income under the head
"profits and gains of business." If the total amount of profits
exceeds the total amount of losses, there will be a positive income under this
head, assessable for that particular assessment year. If on the other hand the
losses exceed the profits, they will be "adjusted" against the
profits, so as to reduce the assessable income under the head to nil; in
addition, the losses of one or more businesses will remain
"unabsorbed". There will thus be one resultant figure of profit or
loss under each head. This is one aspect of the matter. This is the first stage
of computation which we may call "intra-head adjustments".
This
was not specifically provided for in the Indian Income-tax Act, 1922 (the 1922
Act) but now finds specific mention in S. 70 of the 1961 Act.
S.
24(1) of the 1922 Act and S. 71 of the 1961 Act next contemplate a mutual set
off of the losses under one head against the income under some other head
subject to some exceptions (like speculation loss, capital loss etc. which, to
avoid unnecessary complications and confusion, we shall leave out of account).
Thus if, in any particular assessment year, an assessee has incurred a loss
under the head "business", this loss can be set off against the
income earned by the assessee during that previous year under other heads.
Thus, for example, if an assessee has got income by way of salary of Rs.20,000
and income from house property of Rs.25,000 but has sustained a loss of
Rs.40,000 in business, the Act envisages the set off of the loss of Rs.40,000
against the income of Rs.45,000 resulting in a total income of Rs.5,000 only.
This is the second stage in the process of assessment which we may describe as
"inter-head adjustment" or "set off".
919
The Acts [S. 24(2) of 1922 Act and S. 72 of the 1961 Act] next envisage a third
stage in the process of assessment which can' be described as the process of
"carry forward and set off". By this process, the assessee is
permitted to carry forward a loss he had not been able to adjust or set off in
the first and second stages of assessment. This benefit is not available to all
kinds of losses but, subject to certain conditions and restrictions on which we
need not dilate, it is available to business losses. A business loss of one
assessment year which remains "unabsorbed" by the processes of
intra-and inter-head ;adjustments can be carried forward to the succeeding
assessment years ,and can be set off against any other business income in those
years.
A
modification to the above scheme had to be enacted in respect of partnership.
Partnership firms are treated as separate assesses for the purposes of the
Income Tax Acts. Under the Acts, firms are classified into -two-registered
firms and unregistered firms. Unregistered firms are distinct assesses which
are liable to pay tax on their total income. The Acts provided that any
unabsorbed loss in the case of such a firm could be carried forward only by the
firm and not by it's partners. However, under the 1922 Act, as it stood between
1939 and 1956,-registered firms were treated as assesses only to this extent
that the total income (or loss) of the firm in any previous year was computed.
However, the firm itself was not liable to any income tax. The income of the
firm was apportioned among its partners and each partner was assessed on his
share of income from the firm. In this scheme, it was obvious that, as soon as
the income or loss of a firm was computed, there was nothing further to be done
in the case of the firm; the income or loss became that of the partner for all
practical purposes. A partner's share of a business loss of the firm which
remained unabsorbed became business loss in the hands of the partner liable to intera-head
adjustments, inter-head adjustments and carry forward as if the loss had been
incurred by the partner himself. The Act, therefore, provided that in the case
of registered firms the loss which could not be absorbed in the same assessment
year by the other income of the firm could be carried forward to the subsequent
year not by the firm itself but only by the partners. In other words, each
partner carried forward to subsequent years his share of the business loss of
the firm and set it off against his business income, whether from the firm or
otherwise. There is a third category of unregistered firms assessed as
registered the provisions regarding which are not relevant for our present
purposes. Leaving them out of account, the Acts outlined a very simple scheme
stemmed from the basic fact that a registered firm was not liable to pay tax
whereas an unregistered firm had to pay 920 tax. Under this scheme the full
advantage of carry forward of the loss incurred by the firm was enjoyed by the
partners in the case of a registered firm and in the case of an unregistered
firm by the firm itself.
The simplicity
of the above scheme of assessment of registered and unregistered firms,
however, was not allowed to last. In 1956, the legislature decided that
registered firms should also be made to pay a tax.
This
tax, called "firm's tax" was at rates lower than those applicable to
unregistered firms and other assesses. Under the new scheme, which became
effective from 1.4.1956, the total income of a registered firm is determined
and it is liable to income-tax thereon.
The
income of the firm (less the firm's tax) is then apportioned among the partners
(subject to certain adjustment as before). The share income of each partner is
aggregated with the rest of his income to arrive at his total income on which
he also pays tax. In this new scheme the question arises: "when the net
result of a business carried on by a registered firm in a particular year is a
loss, who is to carry forward such loss? Is it the firm (as in the case of
unregistered firms) or is it is the partners (as, earlier, in the case of
registered firms) or both?" The answer to this question is furnished by
the statute which, while broadly continuing the scheme of assessment of
registered firms with the modification indicated above, makes a specific
provision in regard to carry forward of losses. The provisions of Ss. 75 and 77
in their present form can be usefully extracted here (though they contain
references to certain amended provisions which we need not touch upon):
75.
Losses of registered firms:
(1)
Where the assessee is a registered firm, any loss which cannot be set off
against any other income of the firm shall be apportioned between the partners
of the firm, and they alone shall be entitled to have the amount of the loss
set off and carried forward for set off under sections 70, 71, 72, 73, 74 and
74A.
(2)
Nothing contained in sub-section (1) of section 72, sub-section (2) of section
73, sub- section (1) or sub-section (3) of section 74 or sub-section (3) of
section 74A shall entitle any assessee, being a registered firm, to have its
loss carried forward and set off under the provisions of the aforesaid section.
921
76.
Losses of unregistered firms assessed as registered firms:
In the
case of an unregistered firm assessed under the provisions of clause (b) of
section 183 in respect of any assessment year, its losses for that assessment
year shall be dealt with as if it were a registered firm.
77.
Losses of unregistered firms or their partners:
1)
Where the assessee is an unregistered firm which has not been assessed as a
registered firm under the provisions of clause (b) of section 183, any loss of
the firm shall be set off or carried forward and set off only against the
income of the firm.
(2)
Where the assessee is a partner of an unregistered firm which has not been
assessed as a registered firm under the provisions of clause (b) of section 183
and his share in the income of the firm is a loss, then, whether the firm has
already been assessed or not- (a) such loss shall not be set off under the
provisions of section 70, section 71, sub- section (1) of section 73 or section
74A;
(b) nothing
contained in sub-section (1) of section 72 or sub-section (2) of section 73 or
sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section
74A shall entitle the assessee to have such loss carried forward and set off
against his own income.
In
view of this specific provision the High Court, following an earlier decision
of the same High Court in C. I. T. v. Dhanji Shamji Mana vdar,[ 1974 ] I.T.R.
173 (Guj.) answered the second question referred to it in the reference
relating to assessment year 1968-69 and the only referred in regard to the
assessment year 1967-68 in favour of the Revenue and against the assessee. The
correctness of this answer has not been challenged before us.
The
first question referred to the High Court in respect of assessment year 1968
69, however, arises in a slightly different way. It arises the context of
"depreciation" which is one of the notional 922 allowances-by which
expression we mean a deduction in respect of an outgoing which is not an item
of actual expenditure or is one, which cannot be treated as an outgoing of a
revenue nature-permitted by the statute to be deducted in the computation of
the profits and gains, of a business. In a sense, where the depreciation
allowance exceeds the profits, otherwise arrived at, in respect of the
business, there will be a resultant "loss" in the business; and,
indeed, the Department's contention is that there is no difference between an
unabsorbed loss and unabsorbed depreciation. It would, however, be useful to
refer to the treatment meted out by the statute in respect of three items of
deductions allowed in the computation of the profits of a business, which may
be larger than the profits of the business otherwise computed. One is the
development rebate regarding which the statute provides that it has to be set
off against the total income of the assessee so as to reduce it to nil and that
the balance is, to be carried forward to succeeding assessment years to be accorded
a similar treatment. [See Ss. 10(2)(vib) of the 1922 Act and 33(2) of the 1961
Act]. This is an allowance which cannot be a constituent element of a figure of
loss to be carried forward to later years and stands on a totally different
footing. The second is the allowance for depreciation under S10(2)(vi) of the
1922 Act. In respect of this allowance, S. 10(12)(vi) provided that if full
effect to the allowance could not be given in the assessment of an assessee for
any assessment year, the unabsorbed allowance could be carried forward and set
off against business profits in succeeding assessment years indefinitely. This
provision, namely clause (b) of the proviso to S. 10(2)(vi) of the 1922 Act-
after- an addition in 1953 of the words underlined in the extract below-reads
thus,:
"
10(2)(vi) ........
Provided
that .....
(a)
.............
(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 I 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 case may be, shall be added to the. amount of the allowance for
depreciation for the following year and 923 deemed to be the allowance for that
year, and so on for succeeding years." This provision has, in substance,-there
are certain verbal differences which are not material for our purposes-been
re-enacted as S. 32(2) of the 1961 Act, which now reads thus:
B
"32(2) Where, in the assessment of the assessee (or, if the assessee is a
registered firm or an unregistered firm assessed as a registered firm, in the
assessment of its partners) full effect cannot be given to any allowance under
clause (ii) of sub-section ( 1) in any previous year, owing to there being no
profits or gains chargeable for that previous year, or owing to the profits or
gains chargeable being less than the allowance, then, subject to the provisions
of sub-section (2) of section 72 and sub-section (3) of section 73, 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 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." The
third type of allowance of this nature, a carry forward of which is
contemplated, is an allowance in respect of expenditure on capital assets
related to a business. This, by virtue of clause (f) of the proviso to S. 10(2)(xiv)
of the 1922 Act, re-enacted in S. 35(4) of the 1961 Act, is treated on the same
lines as the depreciation allowance dealt with in S. 10(2)(vi) and S.
32(2).
We shall, however, leave this out of account in our future discussion as it is
not material for the purposes of the present case and as, in any event,
whatever is decided in regard to unabsorbed depreciation would apply equally in
respect of such allowance as well.
From
the above discussion, it will be seen that unabsorbed losses and unabsorbed
depreciation are to be carried forward to future years to be set off against
future income. There is, however, one important difference. Unabsorbed losses
can be carried forward only for a period of eight years whereas unabsorbed
depreciation can be carried forward indefinitely. A rule of priority of set
off-as between these two- therefore becomes necessary and this is provided by
S. 72(2) of the 1961 Act which deals with carry forward of losses-the
counterpart of 924 the proviso to S. 24(2) of the 1922 Act-which reads thus:
"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." This is the historical context
and statutory language on the basis of which the issue before us has to be
resolved. The issue is: when there is an unabsorbed depreciation computed in
the assessment of a registered firm for any year, how is it to be treated for
purposes of carry forward? Three alternatives are possible: (i) It should be
retained (without apportionment) and carried forward by the firm only. (ii) It
should be apportioned among the partners.
Thereafter,
it can be dealt with-even for carry forward purposes-only in the assessments of
each of the partners in respect of his aliquot share thereof.
(iii)
It should be apportioned among the partners each of whom may set off his share
thereof against his other income. If, after this, any amount remains
unabsorbed, it will revert to the firm. The firm will carry it forward. set it
off against its other income in the succeeding year. This operation will be
repeated every year indefinitely until the unabsorbed depreciation gets
absorbed. The three alternatives will yield widely different results and hence
the present controversy.
On the
above issue there has been a strong cleavage of opinion between the various
High Courts.
The
view that unabsorbed depreciation once allocated to the partners cannot be
taken back to the firm's assessment for being carried forward by the firm and
that the partners alone are entitled to carry forward the unabsorbed
depreciation for being set off against their income, has been taken in the
following cases:
(a) K.
T. Wire Products v. Union of India, [1973] 92 ITR 459 (All)
(b)
Garden Silk Weaving Factory, [1975] 101 ITR 658 and Garden Silk Weaving
Factory, [1983] 144 ITR 613 (Guj.):
(c)
CIT v. Ram Swarup Gupta, [1973] 92 ITR 495 and Raj Narayan Aggarwala v. CIT,
[1979] 75 ITR 1 (Del.);
(d) Shankaranarayana
Construction Co. v. CIT, [1984] 145 ITR 467 (Karn.).
The
view that the unabsorbed depreciation, after being carried forward by the
partners and set off against their income, reverts back to the registered firm
for being carried forward and set off against its income and that any
depreciation still remaining unabsorbed will again go to the partners and that
if it still remained unabsorbed would revert back to the firm and so on, has
been accepted in:
(a) Ballarpur
Collieries Co. v. CIT, [1973] 92 ITR 925 219 and CIT v. Nagpur Gas & Domestic Appliances,
[1984] 147 ITR 440 (Bom.);
(b)
CIT v. Nagapattinam Import and Export Corp., [1979] 119 ITR 444; CIT v. Madras Wire Products, [1979] 119 ITR 454
and CIT v. Madras Wire Products, [1980] 123 ITR 722
(Mad);
(c)
CIT v. Singh Transport Co., [1980] 123 ITR 698 (Gau);
(d)
CIT v. J. Patel & Co., [1984] 149 ITR 682 (Del.);
(e)
CIT v. Shrinivasa Sugar (Co., [1988] 174 ITR 178 (A.P.):
(f)
Pearl Woollen Mills v. CIT, [1989] 179 ITR 368 and CIT v. Mahavir Steel Rolling
Mills,5, [1989] 179 ITR 377 (P& H); and
(g)
CIT v. R. J. Trivedi & Sons, [1990] 183 ITR 420 (M.P.) Shri Harish Salve,
learned counsel for the assessee, canvassed the latter of the above views but
with a slight modification. He submitted that, in the present case, the firm as
well as the partners had been returning losses all along with the result that
no part of the unabsorbed depreciation of the firm had been set off in the
partners' hands. He, therefore, submitted that it was sufficient for him to
urge the first of the three alternatives set out earlier and that he need not,
for the purposes of this case, seek to support the third alternative, upheld in
some of the decisions, which may create an impression in the mind that the assessee
was deriving a double benefit by having the unabsorbed depreciation set off in
the hands of both the firm and the partners.
On the
other hand, Dr. Gaurishankar, for the Revenue, strongly advocated the second
alternative. According to him, once the assessment is completed, and the total
income or loss of the firm ascertained, it has to be apportioned amongst the
partners. Thereafter, there remained nothing in the assessment of the firm to
be carried forward. Only each of the partners can carry forward his share of
the unabsorbed loss (and this, according to him, will include also the
unabsorbed depreciation) for set off in his future assessments.
The
answer to the problem before us has to be discovered in the language of S.
32(2) supplemented by that of other sections which deal with the mode of
assessment of a firm and its partners. Before turning to these provisions, it
will be necessary to clear up one aspect of S. 32(2) to which Sri Salve drew
attention in the course of his reply. He pointed out that S. 32(2) permits the
carry forward of the depreciation allowance "where full effect cannot be
given to it" owing to there being no profits or gains chargeable for that
previous year, or owing to the profits or gains chargeable being less than the
allowance. Laying emphasis on the words "profits or gains", he
contended that the carry forward of depreciation allowance is at a stage much
anterior to that of the determination of the total income of the assessee. On
this construction, if an assessee A carries on two businesses, in one of which
there is 926 an unabsorbed depreciation of Rs. 15,000 and the profits and gains
of the other business is only Rs. 10,000, the net unabsorbed depreciation of
Rs.5,000 has to be carried forward irrespective of the other income of the assessee
in that year, to the succeeding year. This contention, however, cannot be
accepted. Though the section, somewhat infelicitiously, uses the expression
"profits and gains" as it occurs in the statute in the fasciculus of
sections dealing with the computation of business income, the question of the
carry forward of unabsorbed depreciation has always been understood and
interpreted as arising only after the intra-head and intra-head adjustments,
referred to earlier, have been carried out. Thus, in the illustration given
above, if A has a property income of Rs.6,000 the unabsorbed depreciation of
Rs.5,000 will be set off against the property income and there will be no
unabsorbed depreciation left for being carried forward to the subsequent
assessment year. This is because, where the depreciation allowance attributable
to a particular business exceeds the profits otherwise computed for that
business, the deduction of the depreciation allowance from such profits can
only result in a "loss" from that business-this, however, is subject
to a limitation that will be discussed later-and a business loss has to be set
off against income from any other business, by way-of intera-head adjustment,
under S. 70 and the income under any other head, by way of inter- head
adjustment, under S. 71. This principle indeed emerges even from the language
of S. 32(2) in so far as it implicitly recognises that the excessive depreciation
of one business can be "given effect to" against the profits and
gains of another business in the same year.
This,
indeed, is a well settled proposition, and it should be sufficient to cite two
decisions of this Court which make this clear, In C.I.T. v. Jaipuria China Clay
Mines (P) Ltd., [1966]591,T.R.555 this Court observed:
"Mr.
Shastri, learned counsel for the revenue, urges that depreciation, although a
permissible allowance under section 10(2) of the Act, serves to compensate an assessee
for the capital loss suffered by him by way of depreciation of his assets. He
says that if it had not been expressly allowed as allowance, it would have been
treated as capital expenditure and would have been excluded. He further says
that depreciation is a charge on the profits of a business.
Bearing
these two factors in mind, he urges that the expression "loss of profits
and gains" in section 24(1 does not include any deficiency resulting from
depreciation and, therefore, an assessee is not entitled to ask the department
to include the depreciation in the amount which can be set 927 off against
income, profits and gains under Other heads such as income from property or
dividends. Mr. Rajagopala Shastri for the assessee relies on the history of the
legislation and a number of authorities to support the judgment of the High
Court.
Apart
from authority, looking at the Act as it stood on April 1, 1952, it is clear
that the underlying idea of the Act is to assess the total income of an assessee.
Prima facie, it would be unfair to compute the total income of an assessee
carrying on business without pooling the income from business with the income
or loss under other heads. The second consideration which is relevant is that
the Act draws no express distinction between the various allowances mentioned
in section 10(2). They all have to be deducted from the gross profits and gains
of a business.
According
to commercial principles, depreciation would be shown in the accounts and the
Profit and Loss account would reflect the depreciation accounted for in the
accounts. If the profits are not large enough to wipe off depreciation, the
profits and loss account would show a loss.
Therefore,
apart from proviso (b) to section 10(2)(vi), neither the Act nor commercial
principles draw any distinction between the various allowances mentioned in
section 10(2); the only distinction is that while the other allowances may be
outgoings, depreciation is not an actual outgoing." and expressly
disproved the observations of the Madras High Court in C.I.T. v. Nagi Reddy,
[19641 51 I.T.R. 178 that the deduction for depreciation should be limited to
the amount of the profits and cannot result in working out a loss. The
following observations in the more recent decision in Rajapalayam Mills Ltd. v.
C.I.T., [1978] 115 I.T.R. 777, S.C. place the position beyond doubt:
It is
clear on a plain reading of the language of provision (b) to cl. (vi) that it
comes into operation only where full effect cannot be given to the depreciation
allowance for the assessment year in question owing to there being no profits
or gains chargeable for that year or profits or gains chargeable being less
than the depreciation allowance. Now, it is well settled, as a result of the
decision of this court in CIT v. Jaipuria China Clay Mines (P) Ltd., [1966] 59
ITR 555 (SC), that the words "no profits or gains chargeable for that
year" are not confined to profits and gains derived 928 from the business
whose income is being computed under s. 10, but they refer to the totality of
the profits or gains computed under the various heads and chargeable to tax. It
is, therefore, clear that effect must be given to depreciation allowance first
against the profits or gains of the particular business whose income is being
computed under s. 10 and if the profits of that business are not sufficient to
absorb the depreciation allowance, the allowance to the extent to which it is
not absorbed would be set off against the profits of any other business and if
a part of the depreciation allowance still remains unabsorbed, it would be
liable to be set off against the profits or gains chargeable under any other
head and it is only if some part of the depreciation allowance still remains
unabsorbed that it can be carried forward to the next assessment year.
Obviously, therefore, there would be no scope for the applicability of
provision (b) to cl. (vi), if the total income of the assessee chargeable to
tax is sufficient to absorb the depreciation allowance, for then there would
not be any unabsorbed depreciation allowance to be carried forward to the
following assessment year.
But
where any part of the depreciation allowance remains unabsorbed after being set
off against the total income chargeable to tax, it can be carried forward under
provision (b) to cl. (vi) to the following year and set off against that year's
income and so on for succeeding years." The resultant position, therefore,
is that initially, the depreciation allowance has to be deducted from the
profits and gains of the business to which the assets earning the depreciation
relate but, if it remains unabsorbed by such profits, the allowance has to be
set off against the other business income of the assessee and, where that is
also insufficient, against the other taxable income of the assessee. The carry
forward of any depreciation as unabsorbed cannot arise until the stage of final
assessment is reached and the total income of the assessee otherwise computed
is insufficient to absorb the year's depreciation allowance. Sri Salve's
argument that the stage of carry forward of depreciation arises at a stage
anterior to the completion of the assessment and determination of the total
income cannot, therefore, be accepted.
Shri
Salve, then, contended that there is no statutory provision which enables the
apportionment of the firm's unabsorbed depreciation among the partners and
that, therefore, the unabsorbed deprecia- 929 tion has to be carried forward by
the firm itself and none else. In our opinion, this contention also is not
well- founded. S. 182, to the extent relevant for our present purposes, reads-
"S. 182. (])-Assessment of registered firms- Not withstanding anything
contained in section 143 and 144 and subject to the provisions of sub-section
(3), in the case of a registered firm, after assessing the total income of the
firm,- (i) the income-tax payable by the firm shall be determined, and (ii) the
share of each partner in the income of the firm shall be included in his total
income and assessed to tax accordingly.
(2) If
such share of any partner is a loss it shall be set off against his other
income or carried forward and set off in accordance with the provisions of
sections 70 to 75.
(3)
When any of the partners of a registered firm is a non resident, the tax on his
share in the income of the firm shall be assessed on the firm at the rate or
rates which would be applicable if it were assessed on him personally, and the
tax so assessed shall be paid by the firm.
(4) A
registered firm may retain out of share of each partner in the income of the
firm a sum not exceeding thirty percent thereof until such time as the tax
which may be levied on the partner in respect of that share is paid by him; and
where the tax so levied cannot be recovered from the partner, whether wholly or
in part, the firm shall be liable to pay the tax, to the extent of the amount
retained or could have been so retained." How this share is to be computed
is set out in S. 67 which may be set out here:
S.
67(1)-Method of computing a partner's share in the income of the firm-In
computing the total income of an assessee who is a partner of a firm, whether
the net result of the computation of total income of the firm is a profit or a
930 loss, his share (whether a net profit or a net loss) shall be computed as
follows:
(a)
any interest, salary, commission or other remuneration paid to any partner in
respect of the previous year, and, where the firm is a registered firm or an
unregistered firm assessed as a registered firm under clause (b) of section
[183], the income-tax, if any, payable by it in respect of the total income of
the previous year, shall be deducted from the total income of the firm and the
balance ascertained and apportioned among the partners;
(b)
where the amount apportioned to the partner under, clause (a) is a profit, any
salary, interest, commission or other remuneration paid to the partner by the
firm in respect of the previous year shall be added to that amount, and the
result shall be treated as the partner's share in the income of the firm;
(c) where
the amount apportioned to the partner under clause (a) is a loss, any salary,
interest, commission or other remuneration paid to the partner by the firm in
respect of the previous year shall be adjusted against that amount, and the
result shall be treated as the partner's share in the income of the firm.
(2)
The share of a partner in the income or loss of the firm, as computed under
sub-section (1) shall, for the purposes of assessment, be apportioned under the
various heads of income in the same manner in which the income or loss of the
firm has been determined under each head of income.
(3)
Any interest paid by a partner on capital borrowed by him for the purposes of
investment in the firm shall, in computing his income chargeable under the head
"Profits and gains of business or profession" in respect of his share
in the income of the firm, be deducted from the share.
(4) If
the share of a partner in the income of a registered firm or [an unregistered
firm assessed as a registered firm under clause (b) of section 183, as computed
under this section, is a loss, such loss may be set off, or carried forward and
set off, in accordance with the provisions of this Chapter.
931
Explanation: In this section, "paid" has the same meaning as is
assigned to it in clause (2) of section 23. 1.
"Sri
Salve contends that these provisions talk only of "loss" and that to
take this expression as including "unabsorbed depreciation" as well
will obliterate the distinction in the treatment meted out to these as separate
items by S. 32(2) and S. 72(2) and (3). We think this argument is misconceived.
An unabsorbed depreciation is indeed a part of the "loss". This is so
because, in the first place, "depreciation" is a normal outgoing
though in a sense notional, which has to be debited in the computation of the
profits of a business on commercial principles (quite apart from statute) and
it is difficult to see why, when such deduction yields a negative figure of
profits, it cannot be a "loss" as generally understood. Jaipuria definitely
says so as pointed out earlier. Again, as pointed out earlier, if it is treated
as a genus totally different from a "loss", there is"no
statutory provision that will permit its adjustment against other business
income-implicit in S. 32('2) itself- and against all other income of the assessee
as held by the above decisions. We therefore do not see why "loss"
and "unabsorbed depreciation should be treated as antithetical to, or
mutually exclusive of, each other.
Nor
are we persuaded that any mix-up or anomaly will result as, suggested by
counsel if we treat the expressions as synonymous except to the extent
specifically treated differently by the statute. In our view, there is nothing
anomalous or absurd in the statute providing for a dissection of the amount of
loss for purposes of carry forward and providing for a special or different
treatment to unabsorbed depreciation in this regard although it is a component
element of the genus described as "loss". To illustrate, suppose an assessee,has
a "profit" of Rs.5,000 in one business before deduction of
depreciation of, say, Rs. 10,000 and a loss of Rs. 15,000 in another business,
it will be quite correct to say that he has a business loss of Rs.20,000 in
that assessment year. But for purposes of carry forward this has to be
considered under to headings: (a) an unabsorbed depreciation of Rs.5,000 and
(b) a business loss of Rs. 15,000. The amount of Rs.20,000 will be carried
forward to the subsequent year but the carry forward of Rs.5,000 will be
according to the provisions of S. 32(2) and the carry forward under S. 72 will
have, perforce, to be restricted to the other amount of Rs, 15,000. The
language of S. 72(2) itself contains an indication that, where unabsorbed
depreciation is a component of the figure of loss carried forward, the amount
of loss proper should be set off first and the unabsorbed depreciation later.
But for the special treatment ac- 932 corded by S. 32(2) and S. 72 for purposes
of carry forward, there is no difference between an item of "unabsorbed
depreciation" and an item of "loss". We are, therefore, of
opinion that the unabsorbed depreciation will be allocated among the partners
and, like any other loss, will be available to the partner for set off against
his business income or other income in the same assessment year. In fact S.
32(2), in so far as it talks of depreciation being given effect to in the
partners' assessments recognises that such unabsorbed depreciation should be
allocated among the partners.
So the
first of the three alternatives referred to by us earlier is, in our opinion,
out.
We now
come to the crucial question as to what is to be done when the amount of
unabsorbed depreciation does not get absorbed by the other income of the firm
and, further, the aliquot shares of the partners therein do not also get
absorbed in the partners' assessments against their other income. There can be
two answers to this:
(1) that
the partners-in whose hands the unabsorbed depreciation has been
allocated-should carry forward the depreciation to succeeding years; or (2)
that the amount of depreciation so remaining unabsorbed should be carried
forward by the firm for set off in future assessments.
We
have given our most careful consideration to this matter, particularly in view
of the controversy of judicial decisions prevailing thereon, and we have come
to the conclusion that the second of these alternatives is what is truly
envisaged by the statute. The most formidable obstacle put forward to this
course is that, once the unabsorbed depreciation gets divided and allocated to
the partners, there is no statutory provision for recalling, to the firm's
"file", the amount remaining unabsorbed. We think this, criticism
really proceeds on an unduly narrow construction placed on the provisions of S.
32(2). In our opinion, S. 32(2) itself contains an inbuilt mechanism for doing
this. It is plain, on the language of this sub-section, that the benefit of the
carry forward is to be given to the assessee. Where the assessee is other than
a registered firm or an unregistered firm assessed as a registered firm, this
is indeed very plain. In the case of this category of assessee, the difficulty
arises because of the words in parenthesis. But a moment's thought will make it
clear that the word "or" in the sub-section is really used as a
conjunctive. It cannot be an alternative, for there can be no doubt that even
in the case of such an assessee the 933 unabsorbed depreciation, for reasons
already set out, has to be adjusted against its other income. The assessment of
the firm cannot be complete without such a set off. Thus, where a firm assessed
as a registered firm, has only unabsorbed depreciation of say, Rs.8,000, in the
business carried on by it but a property income of Rs.12,000 its total income
for the year has to be Rs.4,000; it cannot be assessed on an income of Rs.
12,000 with the depreciation of Rs.8,000 apportioned to its partners. We have
already pointed out that the partner's share in the unabsorbed depreciation is
part of his share in the loss of the firm and, by virtue of S. 67(3), will be
treated as business loss which is capable of adjustment against his business
and other income. This is the position envisaged by S. 32(2) when it talks of
effect being given to the unabsorbed depreciation in the assessment of the
partners. This can refer only to cases where the depreciation cannot be given
effect to in the firm's assessment. It is, therefore, clear that S. 32(2)
contemplates the situation where the unabsorbed depreciation in the hands of
the firm is too large to get absorbed, first, in the hands of the firm and
then, after apportionment, in the hands of the partners. What remains
thereafter has obviously to be carried forward by the firm which is the assessee
referred to in the sub-section. Perhaps the meaning of the provision will
become clearer if its relevant words are rearranged as follows:
"Where
full effect cannot be given to any (depreciation) in any previous year in the
assessment of the assessee (whatever category it belongs to) and, if the assessee
is a registered firm or an unregistered firm assessed as a registered firm, in
the assessment of its partners . ....... the allowance shall be added . . . . .
".
As in
the case of all other assesses, the carry forward will be available to the
registered firm which is the assessee that is referred to in the sub-section.
This
construction is also strengthened by the last part of the sub-section. When it
talks of the depreciation allowance carried forward being added to the
allowance for depreciation for the following previous year it obviously refers
to the depreciation allowance due to the assessee (that is, the firm) in the
subsequent previous year. In the normal run of cases, it will thus either get
added to the subsequent year's depreciation in respect of the same assets and
get set off against the income from the same business or some other business of
the same assessee or, failing that, against other income of such assessee. What
934 the sub-section clearly provides for is that the aggregate of the
depreciation available to an assessee over the years will be taken into
consideration for set off against its income over a period of years. No doubt,
the latter portion of S. 32(2) does not envisage that the business carried on
by the assessee in the subsequent years should be the same or that the assets
to the depreciation in respect of which the unabsorbed depreciation is to be
added should be the same or, indeed, that any depreciation at all should be
allowable to the assessee in the subsequent year. It is no doubt true that the
words of the sub-section are so widely couched that they can, with a certain
amount of difficulty, be rendered capable of application to the situation of
each partner carrying forward his share of the unabsorbed depreciation for set
off, even where he has no business or business income, against his other
income. But we think that it is too strained a construction of the sub-section.
When, as pointed out by Sri Salve, there is nothing in the sub- section or the
Act specifically providing even for an apportionment of the depreciation among
the partners, it is too contrived a construction to read into the sub- section
several words intended to provide for a number of partners, each carrying
forward his share of the unabsorbed depreciation to successive assessment
years. It seems natural and reasonable to construe the section as envisaging
the following steps where the assessee is a registered firm:
(i)
Excessive depreciation should be adjusted in the assessment of the assessee
against other business income and against other heads of income;
(ii)
Depreciation, which remains unabsorbed under (i), will be apportioned to the
partners and the share of each will be adjusted against the business and other
income of each of the partners pro tanto;
(iii)
If full effect cannot be given to the depreciation allowance of the assessee by
the above processes and some depreciation remains unadjusted, the assessee-firm
will carry it forward to the succeeding assessment year.
The
objection to this course is based on a mental imagery of the firm and its
partners as altogether different assesses and of the impermissibility of
"bringing back" to the firm's "file" what has gone away to
the files of the partners. We think this approach of viewing the two
assessments in water-tight compartments is not correct. The Act itself contains
several provisions [e.g. Ss. 67(2) & (3)] which indicate 935 that this is
not so. The observations of this Court in Sankappa v. I. T. O., [1968] 68
I.T.R. 760 at pp. 766-7 also bring out the regions of inter-dependence of these
two assessments. In any event, any such theoretical dichotomy cannot prevail
over the provisions of s. 32(2).
There
is also one further reason why this view should find acceptance. As we have
pointed out earlier, unabsorbed depreciation is only a species of business
loss. But for purposes of carry forward the statute has drawn a distinction
between them. In doing so, it specifically out-lines the procedure for carry
forward and set off of losses in the case of a registered firm but is silent in
regard to unabsorbed depreciation. There is no statutory prohibition against
the carry forward of unabsorbed depreciation by the registered firm as there is
against carry forward of loss. The need felt to enact a specific prohibition in
respect of losses and the absence of a like provision in respect of
depreciation are significant pointers in support of the above construction.
An
argument has been put forward by Dr. Gaurishankar on the basis of the amendment
to the proviso to s. 10(2)(vib) in 1953 to submit that it was intended to
negative the claim of carry forward by the firm which was earlier being
accepted on the strength of the earlier language resulting in a double
advantage.
Attention
has been drawn to the objects and reasons of the amendment, set out thus at p.
57 in (1952) 21 I.T.R. (Statutes):
"The
(amendment) is intended to make it clear that where unabsorbed depreciation has
been effectively allowed in the assessment of a partner of a registered firm,
it would not be carried forward in the case of the firm." (emphasis added)
It is true that the clause, before its amendment, permitted all assesses-and
this included registered firms as well-to carry forward their unabsorbed
depreciation and that though the registered firm paid no tax, it could, on the
language claim a carry forward of the depreciation which had been apportioned
among the partners. This resulted in such carry forward being claimed even
where the whole or a part of the unabsorbed depreciation of the firm had been
set off in the assessment of individual partners. The amendment, vide the words
emphasised in the extract above, only seeks to make it clear that such carry
forward will not be permitted to the extent it has been given effect to in the
partners' assessments; by necessary implication the carry forward, to the
extent it has not been effectively allowed to the partner, continues 936 to be
available. The amendment of 1953, therefore, not only does not help the case of
the Revenue, it actually lands support to the construction we are inclined to
place on the proviso.
It is
possible that our conclusion may give scope for two grounds of criticism: (i)
that the partners derive a double advantage of setting off the unabsorbed
depreciation to reduce the taxable income of the firm as well as the partners;
and (ii) that this will distort the relief available to various partners
depending upon the variations in income as between the several partners as well
as over a period of years. We do not think that the first criticism is a valid
one. For it is now settled law, that though a firm and its partners are
distinct assesses for purposes of income-tax, the Act still recognises the
principle that a firm is only a compendious name for its partners and that the
business carried on by the firm is also a business carried on by each of the
partners too-vide S. 67(2) and (4)-and the loss of a registered firm is treated
as the losses of its partners too. The procedure envisaged by it will only
enable a firm and the partners to set off the aggregate of the unabsorbed
depreciation of the firm against the aggregate income of the firm and partners.
To the
extent effect is given to such unabsorbed depreciation to one or more of the
partners the firm cannot again get the benefit and vice versa. There is,
therefore, really no double advantage.
There
is some point in the second criticism. But, then, a certain amount of imbalance
among the partners is inherent in the application of any one of the three
possible alternatives. If, as suggested by Sri Salve, only the firm and not the
partners can carry forward the unabsorbed depreciation, there will be an
injustice to the partners who may have other income against which it could be
set off. On the other hand, if the unabsorbed depreciation is allocated to the
partners and they alone can carry forward and set it off, it will have this
consequence that the partners who have other high income will derive the
benefit of set off qua their shares but no benefit can be got by partners whose
total income is not enough to offset their share of the depreciation and the
unabsorbed depreciation will not get absorbed even though the firm may have
sufficiently large income in subsequent years. In other words, whichever
procedure is adopted, the relief available to the partners will not be uniform.
This is a consequence flowing from the variations in the income sources of
various partners and cannot be avoided under any scheme of carry forward and
set off. We, therefore, do not think that this consideration should weigh
against our reaching the conclusion which naturally flows from the language of
the sub-section.
937
For the reasons discussed above, we are of the opinion that the assessee-appellant-firm
is entitled to a carry forward of the unabsorbed depreciation computed for the
assessment year 1967-68 and have it set off in its assessment for the
assessment year 1968-69. The unabsorbed loss computed for the assessment year
1967-68, however, cannot be carried forward by the firm to be set off in its
assessment for the assessment year 1968-69. So far as the assessment year 1967-
68 is concerned, the High Court was right in holding that unabsorbed business
loss of one year cannot be carried forward and set off by the firm in a subsequent
year; but, if there was any unabsorbed depreciation computed for the assessment
year 1966-67, it could have been allowed to be brought forward and set off in
the assessment for the assessment year 1967-68 in the manner discussed in the
judgment.
In the
result, appeals for both the assessment years are allowed to the extent
indicated and the assessments directed to be modified appropriately. We,
however, make no order regarding costs.
V. P.
R. Appeals allowed.
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