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TMI Blog1983 (8) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1972-73. After setting it off against the individual income of its partners for the same assessment year, a sum of Rs. 39,543 still remained being unabsorbed. It was claimed on behalf of the firm in its assessment for the assessment year 1973-74 that the said balance of unabsorbed depreciation should be set off against its income assessable for the year 1973-74. On the ITO rejecting this claim, the assessee-firm preferred an appeal before the AAC and contended that the ITO erred in not adding the said balance of unabsorbed depreciation of the assessment year 1972-73 remaining after adjusting against the income of the partners to the depreciation of the firm for the assessment year 1973-74. The AAC rejected the assessee's contention. The assessee's further appeal to the Tribunal was also dismissed. Before the Tribunal the assessee-firm placed strong reliance on the decision of the Bombay High Court in Ballarpur Collieries Co. v. CIT [1973] 92 ITR 219 and the Department relied upon the decisions of the Gujarat High Court in CIT v. Garden Silk Wvg. Factory [1975] 101 ITR 658, the decision of the Allahabad High Court in K. T. Wire Products v. Union of India [1973] 92 ITR 459 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the partners proportionate to their respective shares entitled to by the instrument of partnership. The income so allocated is added to the other income, if any, in the partners hands and assessed to tax accordingly. Where the result of the computation in the hands of the firm is a loss, then s. 75 states that that loss also should be appropriated among the partners and they alone shall be entitled to have the amount of the loss set off and carried forward for set off under ss. 70 to 74A. Such loss can be carried forward for a maximum number of eight years as provided by s. 72(3) of the Act. It is against this background that one then comes to s. 32(2). It applies to registered firms or unregistered firms treated as registered firms and also to every other assessee. The language of the sub-section is somewhat long winding and it reads : "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) or clause (iv) or clause (v) or clause (vi) or under clause (i) of sub-section (1A) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose 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 effect to in the succeeding year to which it is carried forward before the income of the firm is determined, except that if there are any carried-forward business losses they have to be given effect to first before the carried-forward depreciation allowance is given effect to in view of the provisions of clause (b) of the proviso to section 24(2). It was urged that the construction which we have placed on clause (b) of the proviso to section 10(2)(vi) is likely to work inequitably as between partners in given circumstances. This fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 32(2) is an independent provision and a complete code providing for the manner of set-off and carry forward of depreciation allowance to partners and other assessees. It was then observed (p. 706) : "The expression 'the assessment of the partners in case where the assessee is a registered firm has to be read only for the purpose of finding out whether full effect cannot be given to the allowance permissible under s. 32. " It has been further observed at page 707 : " Effect can be given to depreciation allowance in the assessment of the partners entitling them to claim set-off. The expression has not been used to mean that the aforesaid entitlement of partners ensured them an absolute right to carry forward the unabsorbed depreciation allowance from year to year in the manner prescribed under s. 75 of the Act. The expression provides for entitlement of the partners of a registered firm to depreciation allowance, full effect of which could not be given in the assessment of the assessee. It does not provide for eternal retention of the allowance in the assessment of the partners or to continue to set it off from year to year when effect has not been given to such depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was observed : " If one looks at the language of proviso (b) to section 10(2)(vi), the first question that arises is : What is the meaning of the expression I in the assessment of the assessee or if the assessee is a registered firm, in the assessment of the partners, full effect cannot be given to any such allowance in any year?' It would be noted that the words used are I in the assessment of the assessee or the assessment of the partners'. Taking the case of the partners of a registered firm, the assessment must be their individual assessments, i.e., assessments in which the profits from the firm and other sources are pooled together. The Legislature is clearly assuming that effect can be given to depreciation allowance in the assessment of a partner; the only way effect can be given in the assessment of a partner is by setting it off against income, profits and gains under other heads." (Under lining is ours). It would be, therefore, clear that the Legislature had intended that the only way by which effect can be given to unabsorbed depreciation allowance is in the assessment of a partner by setting it off against his income under other heads. When such is the intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a firm are alone entitled to carry forward the unabsorbed depreciation allowance. Any other interpretation, in our opinion, would be contrary to the express provisions of s. 32(2) and also would work inequitably as between the partners who have got different income under other heads. Our view finds support from the decision of the Gujarat High Court in CIT v. Garden Silk Weaving Factory [1975] 101 ITR 658, wherein it was observed at page 665: "Where do we get in sub-section (2) that unabsorbed depreciation allowance is to be taken back and added to current depreciation allowance of a firm for the next previous year unless one draws an inference by implication that it is only the firm to which depreciation allowance is available. Is there any warrant for this inference which Mr. Shah wanted to draw ? On the contrary, the fiction incorporated in the said subsection that unabsorbed depreciation would be current depreciation allowance for the next year provides the solution to the conundrum posed on behalf of the assessee's learned advocate relying heavily on the aforesaid decision of the Bombay High Court. The interpretation which has been sought to be placed on behalf of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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