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TMI Blog1984 (4) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... on the provisions of s. 75 of the I.T. Act, 1961 (hereinafter referred to as " the Act "), did not allow the assessee-firm the benefit of the carry forward loss in the assessment year 1970-71. The firm was required to pay tax as a registered firm on its total income of Rs. 80, 190. The assessee in the appeal taken to the AAC contended that against its total income for assessment year 1970-71, the following brought forward losses should be allowed to be adjusted : --------------------------------------------------------------------------------------------------------------------------------------------------- Assessment years Loss determined --------------------------------------------------------------------------------------------------------------------------------------------------- Rs. 1968-69 1,14,666 1969-70 80,100 ---------------- Total : 1,94,766 ----------------- This contention, however, did not prevail with the AAC. He took the view that s. 75(2) of the Act put a complete ban on the carry forward of losses in the case of a registered firm. He further observed that as s. 76 of the Act placed registered firms and unregistered firms on the same f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm's total income computed for the assessment year 1970-71. The question for consideration is as to whether where in the case of an assessee which is a registered firm or an unregistered firm assessed as registered firm, in the assessments of its partners full effect cannot be given to depreciation allowance 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, the allowance or part of the allowance to which effect could not be given, as the case may be, is to be carried forward and set off in the hands of the firm in the following year or such set off is not allowable in the hands of an assessee-firm because the same has to be apportioned between the partners of the firm in the relevant previous year. The question involves the interpretation of ss. 32(2) and 75 of the Act, which are reproduced below: " 32. (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 (i) or clause (ii) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm or the loss in the hands of the firm cannot be computed without making allowance for depreciation in case the assessee is eligible for, and has made such a claim by complying with the relevant provisions of the Act. If there is any other loss apart from the depreciation, then that loss will get added to the amount of depreciation allowable to the assessee under s. 32 read with the rules. It is the total of this amount which will be allocated among the partners under the provisions of s. 75. However, the Act thus makes distinction between the unabsorbed allowance of depreciation and other losses. It has already been seen that s. 72(2) of the Act provides that where any allowance or part thereof is, under sub-s. (2) of s. 32 or sub-s. (4) of s. 35, to be carried forward; effect shall first be given to the provisions of s. 72. In other words, s. 72(2) contemplates the loss other than the unabsorbed depreciation being given a priority in the matter of set-off, as there is a time-limit within which such loss can be adjusted. Under s. 72(3) the loss other than from depreciation is eligible for being carried forward and set-off only for a period of eight assessment years immediately s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same is to be set off in the following year in the hands of the same assessee, i.e., the firm itself and not the partners thereof. Thus the literal interpretation of s. 32(2) of the Act also leads to the same conclusion that unabsorbed depreciation in the case of a firm is allowed to be carried forward by the firm and set off against its profits in the following year or years. The same view was taken by the Madras High Court in Nagapatinam's case [1979] 119 ITR 444, and we reproduce below the relevant portion of that judgment (p. 448) : " Under that provision if there is any surplus out of the unabsorbed depreciation left in the hands of the partner, then the unabsorbed depreciation so left is to be again transported into the assessment of the firm and treated as depreciation in the succeeding years and so on. This position appears to us to be clear from the words of the statute themselves. We have to start with the assessment of the registered firm. We reach a stage at which we find that there are no profits or gains available for adjustment as against the depreciation allowance due to the firm, because the profits are inadequate to absorb the whole of it. Full effect cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant provisions of the Act and in particular the provisions of ss. 32(2), 72, 73 and 75 clearly show that the manner of carry forward and set off of depreciation allowance is distinct and separate and is governed exclusively by s 32(2) of the Act. This view finds support from a decision of the Supreme Court in the case of CIT v. Jaipuria China Clay Mines (P.) Ltd. [1965] 59 ITR 555. Their Lordships observed (at page 561) as below: "The unabsorbed depreciation allowance is carried forward under proviso (b) to section 10(2)(vi) and the method of carrying it forward is to add it to the amount of the allowance or depreciation in the following year and deeming it to be part of that allowance ; the effect of deeming it to be part of that allowance is that it a s in the allowing year within clause (vi) and has to be deducted as allowance. If the legislature had not enacted proviso (b) to section 24(2), the result would have been that depreciation allowance would have been deducted first out of the profits and gains in preference to any losses which might have been carried forward under section 24, but as the losses can be carried forward only for six years under section 24(2), the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1922 and that under the proviso (b) to s. 10(2)(vi), the unabsorbed depreciation allowance had to be added to the allowance for depreciation for the following year. It was further held that the deduction of depreciation allowance is not permissible for computing the income of the partners in their capacity as such. What was contemplated was that as a firm was treated as an independent assessee after the Finance Act, 1956, it must independently be given the benefit of s. 24(1) and (2) and it must be allowed to carry forward the past losses in spite of the fact that these losses had already been allocated to its partners. The provisions of s. 32(2) of the Act are pari materia with the provisions of s. 10(2)(vi), proviso (b) of the Act of 1922. Thus this decision of the Bombay High Court is equally applicable to the cases under the new Act of 1961. A number of cases were cited by Mr. Wadhera in support of his contention that unabsorbed depreciation like business loss, cannot be carried forward by a registered firm for the simple reason that once it is allocated among the partners, there remains nothing to carry forward so far as the firm is concerned. Reference was made to the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e apportioned between the partners of the firm and such partners alone are entitled to have the amount of loss set off under section 24. In the case of a registered firm, if full effect cannot be given to any depreciation allowance in any past year, then the carried forward unabsorbed depreciation becomes depreciation of the current year in the hands of the partners. If one of such partners is carrying on no other business, such partner can necessarily set off the unabsorbed depreciation against income under other heads. In the language of section 10(2)(vi), proviso (b), is implicit the intention of the legislature that effect can be given to depreciation allowance in the assessment of a partner. In such a case, set-off is permitted under section 24(1) and recourse to section 24(2) is unnecessary." It is stated in the subsequent portion of the judgment that that matter was not before the court and, therefore, it need not finally decide the abovesaid question. It is thus clear that the aforesaid observations were in the nature of obiter only. The cases CIT v. Dhanji Shamji [1974] 97 ITR 173 (Guj) and M. D. Devassia and Co. v. CIT [1979] 118 ITR 212 (SC), relate to cases of carry ..... X X X X Extracts X X X X X X X X Extracts X X X X
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