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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 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 Appellate Assistant Commissioner of Income-tax, Akola Range, Akola. Before the Appellate Assistant Commissioner the contention raised was that the aggregate losses of the earlier two years should be set off against the income of Rs. 5,24,035 before tax was levied on the registered firm. This contention was rejected by the Appellate Assi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ; 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 : " 24. Set off of loss in computing aggregate income.- (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year : ..... Provided further that ... where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation 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 being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 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 before unabsorbed depreciation is to be set off, the losses contemplated by sub-section (2) of section 24 must be set off first. Now, what is argued on behalf of the revenue is that when clause (b) of the proviso to clause (vi) of sub-section (2) of section 10 refers to the assessment of the partners in a case where the assessee is a registered firm, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tionment 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, imposition of tax on the firm after including the share of the income of certain partners in the income of the firm, even though the firm is registered. The proceedings for assessment of the firm are not completed until all these steps have been taken by the Income-tax Officer, and each one of those steps must be held to be a step in the proceedings for assessment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 therefore be dealt with in the same manner as the carried-forward loss under section 24(2), so far as its availability for set off is concerned. The Division Bench observed : " It appears to us from the language used in the proviso (b) to section 24(2) that depreciation allowance is treated differently from the carried-forward losses and is not regarded as being of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear. " 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 following year, or becomes current depreciation for the following year where no such current depreciation exists. The only difference which it has from the current depreciation for the following year is as provided under proviso (b) to section 24(2), namely, that its application will be postponed to the prior absorption of the carried-forward losses of the previous ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 assessment of the partners is relevant only for the purpose of ascertaining whether full effect has been given to the depreciation allowance contemplated by section 10(2)(vi). In our view, in the case of a registered firm if full effect has not been given to the depreciation allowance in the assessment of the partners the unabsorbed depreciation allowance has to be given e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 set off the loss is created by section 24 of the Act. In the case of a partnership there is an express provision that where the assessee is a registered firm, any loss which cannot be set off against other income, profits and gains of the firm is to be apportioned between the partners of the firm and they alone are entitled to have the amount of the loss set off under that se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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