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TMI Blog1972 (4) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... the year to arrive at the total income for the material year ? " These questions arise on the following facts : The assessee, M/s. Ballarpur Collieries Company, Nagpur, is a registered firm carrying on business of coal mining. In the assessment year 1956-57, the assessee's income was Rs. 9,236 before adjustment of depreciation. The depreciation allowable for that year was Rs. 1,21,519. After setting off the depreciation to the extent of profits there was unabsorbed depreciation of Rs. 1,12,283. In the following year, namely, the assessment year 1957-58, there was a business loss of Rs. 1,38,756. This was before making allowance for the depreciation of Rs. 2,15,911 for that year. In the assessment year 1958-59, after making allowance for the depreciation and the development rebate allowable for that year, the total income of the assessee-firm was determined by the Income-tax Officer at Rs. 5,24,035. This income was asssessed by the Income-tax Officer under section 23(3) of the Act and these profits were allocated among the partners in accordance with their shares. The assessee-firm was not satisfied with this order of the Income-tax Officer and it filed an appeal before the App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s : " Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (1), sub-section (3) or sub-section (4), as the case may be,- (a) in the case of a registered firm, (i) the income-tax payable by the firm itself shall be determined ; and (ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined : Provided that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of section 24 : ..... (6) Whenever the Income-tax Officer makes a determination in accordance with the provisions of sub-section (5), he shall notify to the firm by an order in writing the amount of the total income on which the determination has been based and the apportionment thereof between the several partners. " The relevant provisions of section 24 which provide for a set-off of a loss in computing aggregate income are as follows : " 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partner in an unregistered firm which has not been assessed under the provisions of clause (b) of sub-section (5) of section 23, to have carried forward and set off against his own income any loss sustained by the firm ;...... " Sub-section (1) and the relevant part of sub-section (2) of section 10 which deals with carrying forward of unabsorbed depreciation are as follows : " 10. Business.-(1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely :-- ...... (vi) In respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent, ....... Provided that- (a) the prescribed particulars have been duly furnished ; (b) where, in the assessment of the assessee or if the assessee is a registered firm, in the assessment of its partners, full effect cannot be given to any such allowance in any year not being a year which ended prior to the 1st day of April, 1939, owing to there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat year or on account of the profits or gains chargeable being less than the allowance, full effect cannot be given to any such allowance. In such a case, the proviso contemplates that the allowance or part of the allowance to which effect has not been given, as the case may be, is to be added to the amount of the allowance of depreciation for the following year and it is deemed to be a part of that allowance, or if there is no such allowance for that year, it is to be deemed to be the allowance for that year and so on for succeeding years. This is made subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24 which provides that where depreciation allowance is under clause (b) of the proviso to clause (vi) of sub-section (2) of section 10, also to be carried forward, effect shall first be given to the provisions of sub-section (2) of section 24. Now, it is clear from the provisions of sub-section (2) of section 24 that no loss is permitted to be carried forward for more than eight years. There is no limitation for carrying forward depreciation allowance and clause (b) of the proviso to sub-section (2) of section 24, therefore, fixes a priority that b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he notice of that apportionment has to be given under section 23(6) by him to the firm. This apportionment is clearly treated as a part of the proceeding for assessment of the firm and that is why the notice is to be given to the firm. The second proviso to section 30(1) also clarifies this position by laying down that the right of appeal in respect of the apportionment is to be exercised by the partners by filing appeals against the order of assessment of the firm and not against orders made in the course of subsequent proceedings for the individual assessments of the partners themselves. The second proviso to section 23(5)(a) also brings out this position. In certain cases, after the apportionment of the income of the registered firm, the share of a particular partner, who is not resident in the taxable territories, is to be assessed to tax also as if it is the income of the registered firm. All these provisions clearly show that proceedings for assessment of a firm consist of computation of the income of the firm, determination of tax payable by the firm, apportionment of the income of the firm between its partners in the case of a registered firm and, in appropriate cases, impo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s what is to happen when full effect to the depreciation allowance cannot be given in the assessment of the partners. Is it to be carried forward as a loss by the partners and they alone can set it off against their other income or whether it can be carried forward as unabsorbed depreciation as such and should be allowed to be set off by the firm in the succeeding year ? It appears to us that though where full effect cannot be given to an allowance while computing the income of the firm a loss will result and this loss is liable to be apportioned between the partners, such loss on account of unabsorbed depreciation, though allocated to the partners, still retains the character of unabsorbed depreciation. This loss is carried forward by virtue of the special provision in section 10(2)(vi), proviso (b), and not by virtue of the general provisions in section 24(2) of the Act. We may usefully refer to a decision of a Division Bench of this court in Commissioner of Income-tax v. Ravi Industries Ltd. The contention for the revenue in that case was that unabsorbed depreciation was a business loss and carried-forward unabsorbed depreciation was a carried-forward business loss and must ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng set off against the profits under any other head, but that would not have the effect of making the carried-forward part of the unabsorbed depreciation into the following year a carried-forward loss when the provision of the statute clearly and unequivocally states that it will be carried forward as an allowance and treated as a part of the allowance for the next year. " Later, in the same judgment, the Division Bench further observed: " It is no doubt true that the excess of the current year's depreciation over the profits and gains of the income coming under the head 'business' is available for being set off as loss of profits and gains against the income from other heads of business. But that does not mean that the allowance by way of depreciation, therefore, loses all its character and attributes as an allowance when it is carried forward to the following year not being wholly absorbed during the current year. In view of the provision of section 10(2)(vi), proviso (b), when taken over to the following year, it still retains its character as depreciation allowance and gets added to the current depreciation of the following year when such current depreciation exists for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off under that section. The losses could be carried forward by the partners only by virtue of section 24(2), and since section 24(2) deals only with business losses and does not deal with carrying forward unabsorbed depreciation which is expressly dealt with by section 10(2)(vi), proviso (b), unabsorbed depreciation could not be carried forward by the partners under section 24(2). In our view, since section 24(2) deals only with business losses the loss referred to in proviso (c) to that sub-section cannot be said to include losses on account of unabsorbed depreciation which is taken care of by section 10(2)(vi), proviso (b). Under proviso (b) to section 10(2)(vi) the unabsorbed depreciation allowance has to be added to the allowance for depreciation for the following year. The depreciation allowance in the following year as contemplated by this proviso is available only to the firm as an assessee whose income is to be computed as required by section 23(5)(a)(i) of the Act. Deduction of depreciation allowance is not permissible for computing the income of the partners in their capacity as such. Proviso (b) to section 10(2)(vi), therefore, in our view, clearly contemplates that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled to those benefits. It is difficult for us to accept the classification of a substantive tax and a subsidiary tax which is sought to be made on behalf of the assessee for which there is no basis in the Act. It is no doubt true that prior to the enactment of the Finance Act of 1956, income-tax was not payable by the firm itself and what was required to be determined was the total income of each partner of the firm including therein his share of its income, profits and gains of the previous year, and it was this income which was assessed and the sum payable by him on the basis of such assessment had to be determined. The position after the enactment of the Finance Act of 1956 was that income-tax became payable by the firm itself, though the rate is a reduced one, and in the relevant year tax was payable by the firm because its income was more than Rs. 40,000. The manner in which income is to be determined for the purposes of the several provisions of the Income-tax Act is provided by the statute itself. While computing the taxable income in the case of an assessee, there is no general right to set off any business loss, the only right being as provided in the Act. The right to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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