1996 (3) TMI 105 - HC - Income Tax

Summary

Issues:
Interpretation of unabsorbed depreciation in the hands of a partner and its treatment in relation to the firm's income.

Analysis:

The judgment addressed the issue of unabsorbed depreciation in the hands of a partner reverting to the firm for adjustment against the firm's income and then back to the partner's file for absorption against other incomes. The deceased assessee was a partner in a firm that suffered losses for several years. The Income-tax Officer initially disallowed carrying forward and set-off of the losses, citing that business losses cannot be set-off against income from other heads.

The Commissioner of Income-tax (Appeals) allowed the set-off of unabsorbed depreciation against income from other sources, based on the provisions of section 32(2) of the Income-tax Act, 1961. The appellate authority considered the priority given to different types of allowances and reliefs carried forward, emphasizing the need to grant the facility of carrying forward and adjusting unabsorbed depreciation to the registered firm or its partners under section 67(2).

The Tribunal confirmed the appellate authority's decision, stating that unabsorbed depreciation allocated to partners can be carried forward by the partner. The judgment referred to the Supreme Court decision in Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512, which clarified the treatment of excessive depreciation against business and other incomes.

The Supreme Court's decision indicated that unabsorbed depreciation should be adjusted against the firm's incomes first, followed by apportionment between partners for adjustment against their incomes. The judgment highlighted that the provision of section 32(2) allows for the carry forward of unabsorbed depreciation after adjustments against business and other incomes have been made.

In conclusion, the Tribunal was justified in rejecting the Revenue's appeal, and the question was answered in favor of the assessee, affirming the treatment of unabsorbed depreciation as outlined in the judgment.

This comprehensive analysis of the judgment provides insights into the interpretation and application of provisions related to unabsorbed depreciation in the context of partnership firms and individual partners, ensuring clarity on the treatment of such depreciation for tax purposes.