1984 (4) TMI 53 - HC - Income Tax

Summary

Issues Involved:
1. Whether the benefit of carry forward of unabsorbed depreciation is available to a registered firm for adjustment against the income of the succeeding year.

Summary:

Issue 1: Carry Forward of Unabsorbed Depreciation by a Registered Firm

The Income-tax Appellate Tribunal, Delhi Bench referred the question of whether a registered firm can carry forward unabsorbed depreciation for adjustment against the income of the succeeding year. The assessee, a registered firm, was assessed on a total income of Rs. 80,150 for the assessment year 1970-71, while its previous year's total income was a net loss of Rs. 80,100, allocated equally to its two partners. The ITO, relying on s. 75 of the I.T. Act, 1961, did not allow the firm the benefit of the carry forward loss for the assessment year 1970-71. The AAC upheld this decision, stating that s. 75(2) of the Act prohibits the carry forward of losses by a registered firm.

Upon appeal, the Tribunal considered the rival contentions and observed that s. 75(2) refers to the loss of a registered firm before considering unabsorbed depreciation, and s. 32(2) covers unabsorbed depreciation. The Tribunal relied on the Bombay High Court's decision in Ballarpur Collieries Co. v. CIT [1973] 92 ITR 219, which held that unabsorbed depreciation must be deducted from the firm's total income for the following year.

The court examined ss. 32(2) and 75 of the Act. Section 32(2) allows unabsorbed depreciation to be added to the depreciation allowance for the following year and deemed part of that allowance. Section 75(1) states that any loss of a registered firm must be apportioned between the partners, who alone can carry it forward. However, s. 75(2) specifies that registered firms cannot carry forward losses under sections 72, 73, and 74.

The court agreed with the Madras High Court's interpretation in CIT v. Nagapatinam Import and Export Corporation [1975] 119 ITR 444, which distinguished between unabsorbed depreciation and other losses. Unabsorbed depreciation retains its identity and can be carried forward without a time limit, unlike other losses. The court concluded that s. 32(2) is a complete code by itself, allowing unabsorbed depreciation to be carried forward by the firm and set off against its profits in subsequent years.

The court also referred to the Supreme Court's decision in CIT v. Jaipuria China Clay Mines (P.) Ltd. [1965] 59 ITR 555, which supported the view that unabsorbed depreciation is carried forward under s. 32(2) and not under the general provisions for carrying forward losses.

The court rejected the Revenue's contention that once depreciation is allocated among partners, it ceases to be unabsorbed depreciation. The court held that s. 32(2) applies to both the firm and its partners, allowing the firm to carry forward unabsorbed depreciation.

The court also noted that the Gauhati High Court in CIT v. Singh Transport Co. [1980] 123 ITR 698 and the Bombay High Court in Ballarpur Collieries Co. [1973] 92 ITR 219 supported this view.

In conclusion, the court answered the question in the affirmative, holding that the benefit of carry forward of unabsorbed depreciation is available to a registered firm for adjustment against the income of the succeeding year. The parties were left to bear their own costs of the reference.