2004 (4) TMI 62 - HC - Income Tax

Whether, Tribunal is right in law in holding that the assessee is entitled to set off his share of unabsorbed depreciation from the firm in which he was a partner, against his income of the previous year even though the firm was not carrying on any business during that previous year? - we are of the view that a partner of a registered firm is entitled to set off his share of unabsorbed depreciation of the firm in which he was a partner against his income of the previous year even though the firm was not carrying on any business during the previous year.

Issues Involved:
1. Whether the assessee is entitled to set off his share of unabsorbed depreciation from the firm against his income of the previous year even though the firm was not carrying on any business during that previous year.

Detailed Analysis:

1. Entitlement to Set Off Unabsorbed Depreciation:

The primary issue was whether the assessee could set off his share of unabsorbed depreciation from a firm against his income, despite the firm not carrying on any business during the relevant previous year. The Tribunal had allowed the claim based on the Calcutta High Court's decision in CIT v. Shiva Prosad Bagaria [1991] 191 ITR 139, which distinguished between section 32(2) and section 72(1) of the Income-tax Act, 1961.

Arguments by Revenue:

The Revenue contended that sections 32(1) and (2), along with sections 72(2) and 73(1), indicate that unabsorbed depreciation can only be adjusted if the firm continues its business during the relevant period. They argued that the term "previous year" in section 32(2) refers to the firm's previous year, not the partners', and thus, the firm's business must exist for the adjustment to be valid.

Arguments by Assessee:

The assessee's counsel argued that section 32(2) does not impose such a restriction and cited the Calcutta High Court's decision, which differentiated section 32(2) from section 72(1), proviso. They also referenced a similar claim allowed by this court in CIT v. A. M. J. Anthraper [1996] 222 ITR 414. Additionally, they pointed to a circular from the Central Board of Direct Taxes, suggesting that the tax effect in this case was too small to justify the reference.

Court's Analysis:

The court examined the relevant provisions of the Act. Section 32(2) allows for the carry forward of unabsorbed depreciation to be added to the depreciation allowance of the following year. The court noted that section 72 deals with business losses and requires the business to continue for the loss to be carried forward, a condition not present in section 32(2).

Precedents and Judicial Opinions:

The court reviewed various High Court decisions, noting that the majority view is that the business need not be in existence for unabsorbed depreciation to be set off. This view was supported by decisions from the Allahabad, Bombay, Andhra Pradesh, Karnataka, and Calcutta High Courts. The court also considered the contrary view from the Madras High Court, which required the business to be in existence, but found it less persuasive.

Supreme Court Guidance:

The court referred to the Supreme Court's decision in Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512, which indicated that the business need not continue for unabsorbed depreciation to be set off. The Supreme Court emphasized that the statutory provisions should be interpreted in favor of the assessee when two interpretations are possible.

Conclusion:

The court concluded that the assessee is entitled to set off his share of unabsorbed depreciation from the firm against his income, even if the firm was not carrying on any business during the previous year. This interpretation aligns with the majority view of various High Courts and the guidance from the Supreme Court.

Judgment:

The question referred was answered in the affirmative, in favor of the assessee and against the Revenue. The court directed that a copy of the judgment be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

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