1972 (4) TMI 25 - HC - Income Tax

1. Whether the assessee is entitled to deduct the business loss of Rs. 1,38,756 for 1957-58, in computing its total income for 1958-59, for the purpose of levying the tax on registered firms? 2. Whether the assessee is entitled to deduct the unabsorbed depreciation of Rs. 1,12,283 and Rs. 2,15,911 from the profits of the year to arrive at the total income for the material year ?

Issues Involved:
1. Deductibility of business loss for the assessment year 1957-58 in computing total income for 1958-59.
2. Deductibility of unabsorbed depreciation from previous years in computing total income for the assessment year 1958-59.

Issue-wise Detailed Analysis:

1. Deductibility of Business Loss for the Assessment Year 1957-58:
The first issue concerns whether the assessee can deduct the business loss of Rs. 1,38,756 for the assessment year 1957-58 when computing its total income for 1958-59 for the purpose of levying tax on registered firms. The Tribunal found that the firm was not entitled to have the business loss of Rs. 1,38,756 for the year 1957-58 deducted before it was assessed to tax under section 23(5) of the Act. The court examined the relevant provisions of the Indian Income-tax Act, 1922, particularly sections 23(5) and 24.

Section 23(5) outlines the assessment process for a firm, stating that the total income of the firm should be assessed and apportioned among the partners. Section 24(1) allows for the set-off of losses against income, profits, or gains under any other head in that year. However, the second proviso to section 24(1) specifies that in the case of a registered firm, any loss that cannot be set off against other income, profits, and gains of the firm shall be apportioned between the partners, and they alone shall be entitled to have the amount of the loss set off.

The court concluded that the firm could not claim the benefit of setting off a business loss already allocated to its partners, as the right to set off the loss of the previous year was intended to be given only to the partners and not to the firm. This position is further reiterated by proviso (c) to section 24(2), which prohibits a registered firm from claiming a set-off for losses apportioned between the partners. Therefore, the first question was answered in the negative, affirming the Tribunal's decision.

2. Deductibility of Unabsorbed Depreciation from Previous Years:
The second issue pertains to whether the assessee can deduct the unabsorbed depreciation of Rs. 1,12,283 and Rs. 2,15,911 from the profits of the year to arrive at the total income for the material year. The Tribunal allowed the unabsorbed depreciation to be set off against the income for the year 1958-59, subject to verification that the depreciation for 1956-57 and 1957-58 had not been absorbed by the other income of the partners.

The court examined the provisions of section 10(2)(vi) and proviso (b) of the Act, which allow for the carry-forward of unabsorbed depreciation. It was noted that unabsorbed depreciation retains its character and is carried forward by virtue of section 10(2)(vi), proviso (b), rather than section 24(2). The court referenced previous judgments, including Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd., which clarified that section 24(2) deals only with business losses and not with the carry-forward of depreciation.

The court held that unabsorbed depreciation should be added to the allowance for depreciation for the following year and deemed to be part of that allowance. This provision applies to the firm as an assessee, and the assessment of the partners is relevant only for ascertaining whether full effect has been given to the depreciation allowance. The court concluded that if full effect has not been given to the depreciation allowance in the assessment of the partners, the unabsorbed depreciation allowance must be given effect to in the succeeding year before determining the firm's income.

Therefore, the second question was answered in the affirmative, supporting the Tribunal's decision to allow the set-off of unabsorbed depreciation against the firm's income for the assessment year 1958-59.

Summary of Judgments:
- First Question: The court answered in the negative, affirming that the assessee is not entitled to deduct the business loss of Rs. 1,38,756 for 1957-58 in computing its total income for 1958-59.
- Second Question: The court answered in the affirmative, allowing the assessee to deduct the unabsorbed depreciation of Rs. 1,12,283 and Rs. 2,15,911 from the profits of the year to arrive at the total income for the material year.

In conclusion, the court upheld the Tribunal's decisions on both counts, providing a detailed interpretation of the relevant provisions of the Indian Income-tax Act, 1922.

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