1981 (12) TMI 60 - AT - Income Tax

Summary

Issues:
- Allowance of unabsorbed depreciation in the assessment of a registered firm for set off in the succeeding assessment year.

Analysis:
1. The appeal concerned the allowance of unabsorbed depreciation amounting to Rs. 20,541 in the assessment of a registered firm for the assessment year 1978-79. The firm, constituted of three partners, claimed that the unabsorbed depreciation allocated to the partners but not set off in their individual assessments should be considered for set off in the firm's assessment. The claim was initially rejected by the authorities, leading to the appeal.

2. The contention revolved around whether unabsorbed depreciation allowance not utilized in the partners' assessments could be added to the firm's depreciation allowance for set off in the following year under section 32(2) of the Income Tax Act, 1961. The assessee relied on judgments of the Bombay and Gauhati High Courts supporting their claim, while the Revenue cited a Gujarat High Court judgment in opposition.

3. The Tribunal examined the relevant provisions of the Income Tax Act, particularly section 32(2), which governs the carry forward and set off of depreciation allowance exclusively. The Tribunal emphasized that the unabsorbed depreciation allowance retains its character as depreciation and is not subject to the limitation period applicable to business losses. The judgment highlighted the distinct treatment of depreciation allowance compared to business losses and speculative losses under sections 72 and 73.

4. The Tribunal further analyzed that the partners of a registered firm do not have the right to carry forward unabsorbed depreciation as a loss for set off against their other income. It was concluded that the firm, as an assessee, is entitled to carry forward unabsorbed depreciation, emphasizing the completeness of section 32(2) in dealing with depreciation allowance set off and carry forward.

5. Considering the conflicting judicial views on the issue, the Tribunal applied the principle favoring the subject in tax interpretation, thereby allowing the appeal of the assessee and directing the acceptance of the claim for unabsorbed depreciation amounting to Rs. 20,541.

6. In conclusion, the Tribunal held that where full effect of depreciation allowance has not been given in the partners' assessments, the unabsorbed allowance should be permitted to be set off by the registered firm in the subsequent year, thereby allowing the appeal of the assessee and granting the claim for unabsorbed depreciation.