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TMI Blog2004 (4) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is entitled to set off his share of unabsorbed depreciation from the firm in which he was a partner, against his income of the previous year even though the firm was not carrying on any business during that previous year?" The brief facts are as follows: The respondent-assessee was a partner in the firm M/s. Anthraper Industries. In the assessment under the Act for the year 1983-84, he was assessed to tax on a total income of Rs. 50,000. The Assessing Officer in doing so did not accept the request for adjusting the share of unabsorbed depreciation of the firm brought forward from the earlier years. The unabsorbed depreciation was to the extent of Rs. 48,576 relating to the assessment years 1973-74, 1974-75 and 1975-76. The partnership firm had closed down its business on May 2, 1974, and it was not carrying on business after the assessment year 1975-76. According to the Assessing Officer, the unabsorbed depreciation can be adjusted against the income of the partners only if the partnership firm is carrying on its business activity during the relevant period. The Commissioner of Income-tax (Appeals) by his order dated May 23, 1990 (annexure B), dismissed the appeal filed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is necessary to refer to the relevant provisions of the Act under which the claim is made. Section 32(1) of Income Tax Reports Income Tax Reports the Act provides for depreciation in respect of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, subject to the provisions of section 34. Sub-section (2) which is relevant for the purpose of this case reads: "(2) Where, in the assessment of the assessee (or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners), full effect cannot be given to any allowance under . . . clause (ii).... of sub-section (1) . . . in any previous year owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, 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 allowance for depreciation for the following previous year and deemed to be part of that all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 1975-76. The question whether the very business carried on by the assessee and with respect to which depreciation is carried forward should be in existence during the previous year in order to claim the benefit of section 32(2) of the Act was considered by several High Courts and the majority of the High Courts took the view that the business with respect to which the depreciation is carried forward need not be in existence during the previous year relevant to the assessment year for which the claim under section 32(2) is made We also note that the Madras High Court in East Asiatic Co. (India) P. Ltd. v. CIT [1986] 161 ITR 135 has taken a contrary view relying on two earlier decisions; one of the Bombay High Court in Sahu Rubbers P. Ltd. v. CIT [1963] 48 ITR 464 and the other of the Madras High Court itself in CIT v. Dutt's Trust [1942] 10 ITR 477 followed in Tube Suppliers Ltd. v. CIT [1985] 152 ITR 694 and Hindustan Chemical Works Ltd. v. CIT [1980] 124 ITR 561(Bom). Here it must be noted that all the decisions which have taken the view that the same business in respect of which depreciation was carried forward need not be in existence in the previous year for claiming the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 64, the decision of the Madras High Court in Butt's Trust's case [1942] 10 ITR 477 referred to therein and also a still earlier decision of the Bombay High Court itself in David Sassoon and Co. Ltd., In re [1940] 8 ITR 7 were considered. The court observed that the said decisions rendered on the construction of the proviso to section 10(2)(vi) of the Indian Income-tax Act, 1922, in regard to the proper meaning given to the provisions of section 32(2) of the Act, do not constitute a binding authority inasmuch as the provisions contained in the Act of 1961 have ceased to be a proviso as was the case under the 1922 Act and the decision in Sahu Rubber's case [1963] 48 ITR 464 (Bom) principally turned on the question whether the statutory provision was required to be considered as an independent substantive provision. The Bombay High Court thereafter independently considered the provisions of the 1961 Act afresh. After referring to the decisions of various High Courts, it was observed thus: "It is true that the approach to be found in the observations at page 470 of the report (48 ITR 464), viz., that if the intention of the Legislature had been to adjust the unabsorbed depreciation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e current year as the question of deducting the depreciation allowance from the present year will arise only if the business, to which the depreciation allowance relates, was carried on. The Division Bench after referring to the provisions of sections 32 and 72 of the Act, observed thus: "Section 32(2) does not impose any other condition regarding continuance of the business or using of the assets. While under section 32(1) in respect of depreciation for the assessment year, it is expressly stated that it is in respect of machinery, etc., used for the purposes of the business or the profession, there is no such requirement under section 32(2). In this connection, it will be useful to refer to section 72 which deals with the carrying forward and set off of business losses. Under the proviso to section 72(1)(i), set off is allowed only on condition that the business or profession for which the loss was originally computed, continued to be carried on by him in the previous year relevant to the assessment year. In contrast to an express requirement regarding the continuance of the business or profession as a condition for set off of loss under section 72(1)(i), proviso, there is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , or made applicable to, the carry forward and set off of depreciation allowance specially provided for in sub-section (2) of section 32 of the Act." In CIT v. Kishanlal and Sons (Udyog) P. Ltd. [1985] 154 ITR 735 before the Calcutta High Court the assessee had been allowed depreciation in the earlier assessment year for the jetty and trolley lines business which remained unabsorbed. In the assessment years concerned the assessee claimed that such unabsorbed depreciation should be allowed to be carried forward and set off against its business income for the said years. This was disallowed on the ground that the assessee did not carry on its earlier business in the relevant years. This was confirmed in appeal by the Appellate Assistant Commissioner. Before the Tribunal the assessee contended that to claim set off of unabsorbed depreciation it was not necessary that the business in which such depreciation was initially allowed should be carried on in the subsequent years. This was accepted by the Tribunal and allowed the assessee's claim. On a reference at the instance of the Revenue, the High Court after considering the decisions of the Allahabad, Bombay, Andhra Pradesh, Karnataka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed on the ground that the assessee had sold the business of textile mills and had ceased to carry on the said business in the assessment year concerned. The Tribunal accepted the contention of the assessee and allowed the claim. On a reference, the High Court with reference to the relevant provisions observed thus: "On reading section 32(2) of the Act, it is clear that the purpose of the Legislature in introducing the legal fiction is to give the benefit of the unabsorbed depreciation in the following previous year or in the succeeding previous years and when that is the purpose of the legal fiction, all the facts necessary for the purpose of earning depreciation under section 32(1) of the Act must be secured and, therefore, for the following previous year the ownership of machinery, user of machinery and user of machinery for the purpose of business and existence of business also will be required to be assumed for giving effect to the legal fiction. These facts are to be assumed only for the purpose of giving effect to the legal fiction and in doing so, there is no question of construing the legal fiction beyond the purpose for which it is created and/or beyond the language ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is absent in section 32. Section 32(2) does not require in terms that, for allowing the setting off of unabsorbed depreciation, the business must be in existence. The reason is clear. Depreciation in one case is allowed for the machinery or plant which the assessee purchased and which was used for the business. Even if the business is not carried on, there will be wear and tear of the machinery and plant and it will, in the normal course, also depreciate in value and until the assessee sells all the assets, the assessee cannot recover the cost of such asset in the form of depreciation allowance. The condition is that the asset originally purchased on which depreciation was allowed must be in existence to be eligible for depreciation. But, in case of loss which may arise in the course of carrying on the business, unless the business is in existence, this loss cannot be allowed. It has nothing to do with any asset of the business." The High Court concluded the matter thus: "Having regard to the views expressed by this court in CIT v. Kishanlal and Sons (Udyog) P. Ltd. [1985] 154 ITR 735; the Gujarat High Court in Deepak Textile Industries Ltd. [1987] 168 ITR 773 and the Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court, in Dutt's Trust's case [1942] 10 ITR 477 and in Tube Suppliers Ltd.'s case [1985] 152 ITR 694. The High Court observed as follows: "The observations quoted above clearly indicate that when carried forward unabsorbed depreciation is treated as an allowance under section 32(2), it will become a deductible allowance only under section 32(1). The only effect of the provisions of section 32(2) is to treat the carried forward unabsorbed depreciation allowance on the same footing as a similar allowance for the relevant previous year. That is the limited purpose of the words which are used in the concluding portion of section 32(2). The deeming fiction can be carried undoubtedly to its logical conclusion but the effect of the deeming fiction will come to an end the moment it is treated as an allowance for the relevant previous year. The fiction cannot be carried further and it is an established proposition that a statutory fiction cannot be given effect to beyond the purpose for which it is intended. The purpose for which the fiction in section 32(2) is intended is merely for the purpose of treating such unabsorbed depreciation as an allowance for the purpose of deductibility ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbay, Madras, Gauhati, Delhi, Andhra Pradesh, Punjab and Haryana and Madhya Pradesh High Courts. The Supreme Court then considered the question as to what is to be done when the amount of unabsorbed depreciation does not get absorbed by the other income of the firm and further, the aliquot shares of the partners therein do not also get absorbed by their other income. The Supreme Court observed that there are two answers: (1) that the partners-in whose hands the unabsorbed depreciation has been allocated-should carry forward the depreciation to succeeding years; or (2) that the amount of depreciation so remaining unabsorbed should be carried forward by the firm for set off in future assessments. The Supreme Court then observed that the second of these alternatives is what is truly envisaged by the statute. Regarding the possible criticism that the partners derive a double advantage of setting off of the unabsorbed depreciation it is stated that though a firm and its partners are distinct assessees for the purpose of income-tax, the Act still recognises the principle that a firm is only a compendious name for its partners and that the business carried on by the firm is as well a bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, since a partnership firm is nothing but a compendious name for its partners and the business carried on by the firm is as well carried on by the partners. The decision of the Supreme Court in CIT v. Jaipuria China Clay Mines P. Ltd. [1966] 59 ITR 555 also supports the same where the Supreme Court adverting to the words "no profits or gains chargeable for that year" occurring in section 10 of the 1922 Act (same as in section 32(2) of the Act) observed that the said words are not confined to the profits and gains derived from the business by a person whose income is being computed under section 10. A Division Bench of this court in CIT v. A. M. J. Anthraper [1996] 222 ITR 414, to which one of us (Sivarajan J.) was a party, considered the case of another partner of the very same firm, M/s. Anthraper Industries, for the assessment years 1978-79, 1979-80 and 1980-81. The assessee-partner's claim for carried forward and consequential set off of the unabsorbed depreciation was rejected by the officer on the ground that business loss cannot be carried forward and set off against the income under other head. In appeal, the first appellate authority decided that the carrying forward and ..... 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