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Issues Involved
1. Set-off of Unabsorbed Depreciation: Whether the unabsorbed depreciation not set off in the partners' respective accounts in the earlier year should be given set-off against the income of the assessee-firm in the subsequent assessment year. Issue-wise Detailed Analysis 1. Set-off of Unabsorbed Depreciation Facts: The assessee, a registered firm, filed a return for the assessment year 1977-78, declaring an income of Rs. 75,010 and claimed a set-off of carried forward depreciation amounting to Rs. 97,175 from the previous year. The Income-tax Officer disallowed this claim. On appeal, the Appellate Commissioner allowed the set-off, which was upheld by the Appellate Tribunal. The Department filed a second appeal, leading to the present references due to conflicting views from different High Courts. Revenue's Argument: The learned counsel for the Revenue argued that the unabsorbed depreciation should be carried forward and set off in the partners' individual assessments only and cannot be brought back for the firm's assessment in the subsequent year as there is no provision in the Act permitting such a bringing back. Assessee's Argument: The learned counsel for the assessee contended that the unabsorbed depreciation, if not fully set off in the partners' assessments, should be brought back for computation of the firm's income in the subsequent years. He argued that there is no bar in section 32 or any other provision of the Act against such a bringing back. Legal Provisions: - Section 32(2) of the Income-tax Act, 1961: This section allows the unabsorbed depreciation to be carried forward and added to the depreciation allowance for the following previous year and deemed to be part of that allowance. - Section 75: Governs the apportionment of losses of a registered firm among its partners and specifies that the firm cannot carry forward the loss. - Sections 70 to 75: Relate to the set-off and carry forward of losses. Court's Analysis: - Historical Context: The court examined the evolution of the relevant provisions from the Indian Income-tax Act, 1922, through the amendments in 1953, to the current Act of 1961. The consistent provision has been to add unabsorbed depreciation to the allowance for the following year. - Interpretation of Section 32(2): The court emphasized that section 32(2) operates independently of section 75. The absence of a reference to section 75 in section 32(2) is deliberate, indicating that the unabsorbed depreciation should be carried forward by the firm. - Judicial Precedents: The court noted conflicting decisions from various High Courts. The Madras, Bombay, and Gauhati High Courts supported the firm's right to carry forward unabsorbed depreciation, while the Gujarat, Madhya Pradesh, and Allahabad High Courts held otherwise. The Delhi High Court, in CIT v. J. Patel & Co., supported the firm's right to carry forward unabsorbed depreciation, interpreting section 32(2) as a self-contained code. - Supreme Court Decision in CIT v. J. K. Hosiery Factory: The court distinguished this case, noting it dealt with an unregistered firm that subsequently got registered, and did not address the issue of carrying forward unabsorbed depreciation by a registered firm. Conclusion: The court held that the unabsorbed depreciation of a registered firm, if not fully set off in the partners' assessments, should be brought back and carried forward in the firm's assessment for the following previous year. This mechanism should continue as per section 32(2) of the Act. The question was answered in the affirmative, in favor of the assessee-registered firm, and against the Revenue. Separate Judgment: The second judge concurred with the first, emphasizing the importance of the question given the division of opinion among High Courts. He reiterated the interpretation of section 32(2) as a special provision that should be applied independently of section 75, ensuring the unabsorbed depreciation can be carried forward by the firm. Final Judgment: The court unanimously held that the unabsorbed depreciation should be carried forward by the firm and set off against the firm's income in subsequent years, thus answering the question in favor of the assessee.
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