1986 (3) TMI 4 - SC - Income Tax

Whether under the provisions of section 10(2)(vi), proviso (b), of the Income-tax Act, the unabsorbed depreciation of the unregistered firm in 1949-50 can be allowed as a deduction in the assessments of the partners of the registered firm in the assessment year 1950-51 - Held, yes

Summary

Issues:
Reconstitution of firm, interpretation of section 10(2)(vi) proviso (b) of the Income-tax Act, 1922 regarding unabsorbed depreciation deduction for partners of a registered firm, relevance of registration status of the firm, comparison with previous judicial decisions on similar issues.

Analysis:
The case involved a dispute over the reconstitution of a firm and the allowance of unabsorbed depreciation as a deduction for partners of a registered firm. The Tribunal had denied the set-off of unabsorbed depreciation for the assessment year 1950-51, arguing that the firm was unregistered in the previous year. However, the High Court held in favor of the assessee, emphasizing the provisions of section 10(2)(vi) and proviso (b) to section 24(2) of the Income-tax Act, 1922. The High Court's interpretation allowed for the carry forward of unabsorbed depreciation even if the firm transitioned from unregistered to registered status in subsequent years.

The judgment analyzed the relevant sections of the Income-tax Act, particularly focusing on the provisions related to depreciation allowances and the treatment of unabsorbed depreciation for registered and unregistered firms. It underscored that the proviso in question applied to all assesses, specifying the treatment of depreciation allowances for registered and unregistered firms. The court highlighted that the transition from unregistered to registered status did not impact the entity of the firm, and the right to carry forward unabsorbed depreciation should not be lost due to registration.

The judgment referenced previous judicial decisions to support its interpretation. It distinguished cases where different entities were involved and emphasized that in the present case, the same entity continued its business as a registered firm. The court also discussed observations from other High Court cases, highlighting the distinction in treatment of losses and profits for registered and unregistered firms, emphasizing the rights of partners in registered firms to set off losses individually.

Moreover, the judgment referred to a Bombay High Court case where the court favored an interpretation beneficial to the assessee regarding the carry forward and set off of unabsorbed depreciation. Ultimately, the Supreme Court upheld the High Court's decision, ruling in favor of the assessee and dismissing the appeals. The judgment concluded that the registration status of the firm did not affect the right to carry forward unabsorbed depreciation, and the assessee was entitled to the deduction.

In summary, the judgment provided a detailed analysis of the relevant provisions of the Income-tax Act, compared previous judicial decisions on similar issues, and ultimately upheld the allowance of unabsorbed depreciation as a deduction for partners of a registered firm, even if the firm was unregistered in the previous year.