COMMISSIONER OF INCOME-TAX VS A.M.J. ANTHRAPER (LATE).
1998 P T D 2316
[222 I T R 414]
[Kerala High Court (India))
Before V. V. Kamat and G. Sivarajan, JJ
COMMISSIONER OF INCOME-TAX
versus
A.M.J. ANTHRAPER (LATE). through Legal Heirs
Income-tax References Nos.80 to 82 of 1991, decided on 05/03/1996.
Income-tax--
----Depreciation---Firm---Unabsorbed depreciation---Carry forward and set off--- Unabsorbed depreciation allocated to partners can be carried forward and set-off against income of firm---Indian Income Tax Act, 1961, S.32.
Depreciation in the case of a registered firm allocated and remaining. unabsorbed in the hands of the partners will revert to the firm to be adjusted against the firm's income for the following year and the balance, if any, remaining unabsorbed in the hands of the firm will be brought back to the partner's file to be absorbed against his other income so that this process of reversion is repeated year after year till the entire unabsorbed depreciation is wiped out. .
Garden Silk Weaving Factory v. CIT (1991) 189 ITR 512 (SC) fol.
P.K.R. Menon and N.R.K. Nair for the Commissioner.
P. Balachandran for the Assessee.
JUDGMENT
V.V. KAMAT, J.---These three references relate to the assessment years 1978-79, 1979-80 and 1980-81. We are required to answer the following modified question by the Tribunal itself:
"Whether, on the facts and in the circumstances of the case, the unabsorbed depreciation in the hands of the partners will revert to the firm to be adjusted against the firm's income and the balance, if any, remaining unabsorbed in the hands of the firm will be brought back to the partner's file to be absorbed against his other income so that this processing of reversion is repeated year after year till the, entire unabsorbed depreciation is wiped out?"
The question is of the unabsorbed depreciation remaining in the hands of the firm to be brought back to the partner's file for absorption against his other incomes. A short resume of facts would not be without purpose. The deceased assessee was a partner in the firm, Messrs. Anthraper Industries. The firm suffered losses continuously for the assessment years 1973-74, 1974-75, 1975-76 and 1976-77. The completion of assessment for the years 1978-79, 1979-80 and 1980-81 required consideration of the unabsorbed depreciation for the years of losses referred to above. The Income-tax Officer did not allow this carrying forward and consequential set off. The reason was that the carried forward business loss cannot be set-off against the income from other heads.
The question with regard to this unabsorbed depreciation was taken up in appeal before the Commissioner of Income-tax (Appeals). The Appellate authority accepting the general principle that the business loss cannot be set-off against the income from other heads, by a process of reasoning held that at least unabsorbed depreciation included in the carried forward loss should be allowed to be set-off against the income from other sources. As a consequence, the appellate authority directed this carrying forward and setting-off of unabsorbed depreciation at the assessee's hands against the income arising under the other heads to the extent of his share.
In reaching this conclusion, the appellate authority considered the text of section 32(2) of the Income Tax Act, 1961. Although in the original order the text was not correctly reproduced, by way of errata the correct text of section 32(2) was brought on record and is as follows:
"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 (iia) or clause (iv) or clause (v) or clause (vi) of subsection (1) or under clause (i) of subsection (1-A) 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 subsection (2) of section 72 and subsection (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 allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years. "
The appellate authority, although considered decisions of various High Courts, fixed its approach and reasoning on the text of the section to observe that the unabsorbed depreciation would assume the character of current depreciation and would be available for set-off, subject to the provisions of section 72(2) and section 73(3) which deal with priority to be granted to different types of allowances and reliefs carried forward, the available income of the assessee in the process of assessment of partners. The appellate authority considered the main issue as the facility of carrying forward and adjustment of unabsorbed depreciation as really required to be granted to the registered firm in whose hands such allowance was determined, or has to be allowed to the partners of such registered firm to whom such depreciation and unabsorbed losses would stand allocated under section 67(2) of the Act.
In the process of reasoning the appellate authority considered the provisions of section 75 of the Act dealing with the position of losses of a registered firm, providing that any loss which cannot be set-off against any income of the firm would be required to be apportioned between the partners of the firm and by reason thereof the partners would be entitled to have the amount of loss set-off and carried forward for the purpose of set-off under the provisions of sections 70, 71, 72, 73, 74, and 74-A.
The language of the section was found really clear to convey that in cases of registered firms incurring business losses which cannot be absorbed by or adjusted against their incomes under other heads, prima facie including depreciation allowances also, in regard to the unabsorbed losses requiring primarily to be apportioned among the firm's partners who alone shall be entitled to have such unabsorbed amounts set-off and carried forward for set off against future profits.
The process of reasoning took into consideration the various decisions in the aid of the reasoning. It is unnecessary to refer to these decisions now at this stage in view of the question having been declared and settled by the Supreme Court in Garden Silk Weaving Factory v. CIT (1991) 189 ITR 512.
The Revenue's appeal to the Tribunal confirmed the earlier order with an observation that it is as per the provisions of the Act and as a result thereof there is no mistake in regard thereto. In the process it is observed by the Tribunal that the Department's contention has been consistent throughout that the unabsorbed depreciation on allocation to the partners can be carried forward only by the partner. It must be stated that although the Tribunal has included alongwith "unabsorbed depreciation", the situation of "losses" also, in view of the question of losses not being in any way concerned with these references, we make it clear that we considered the question of unabsorbed depreciation alone in this judgment although the above decision of the Supreme Court in Garden Silk Weaving Factory v. CIT (1991) 189 ITR 512 covers the situation of losses also. The Tribunal observed that this position is neatly provided by the statute itself.
With regard to the question under consideration it is declared by the decision of the Supreme Court in Garden Silk Weaving Factory v. CIT (1991) 189 ITR 512 that excessive depreciation should be adjusted in the assessment of the registered firm against its other business income and against its income under other heads. It is thereafter with regard to the depreciation remaining unabsorbed after the process under the earlier aspect, it would be apportioned between the partners and the share of each will be adjusted against the business and other incomes of each of the partners pro tanto. It is thereafter having fulfilled the two stages referred to hereinbefore, in a situation where full effect cannot be given to the depreciation allowance of the firm even after following the first two stages and on finding that some depreciation remained unadjusted, the registered firm will carry forward the remaining unadjusted depreciation to the succeeding assessment year.
On an examination of the provisions of section 32(2), it is observed that his carrying forward of unabsorbed depreciation has always been understood and interpreted as arising only after the adjustments against other business income and income under other heads have been carried out. It is because the depreciation attributable to a particular business exceeds the profits otherwise computed for that business and the deduction of the depreciation allowances from such profits can only result in a loss from that business. It is further observed that the business loss has to be set off against income from any other business by way of intra-head adjustment under section 70 and the income under any other head by way of inter-head adjustment also under section 71. This is the principle emerging from the plain language of section 32(2), recognizing implicitly that the 'excessive depreciation of one business can be given, effect to against the profits and gains of other business in the same year. It is observed that unabsorbed depreciation is indeed a part of the loss, because depreciation is a normal outgoing which has to be debited in the computation of profits of a business on commercial principles. In the process, it is observed that the provision (section 32(2) of the Act) contains an inbuilt mechanism for recalling to the firm's file the balance that remains out of the unabsorbed depreciation of the firm divided and allocated to the partners. It is observed that the language of the provision makes it plain that the benefit of the carry forward is to be given to an assessee and in a situation where the assessee is other than a registered firm or an unregistered firm assessed as a registered firm, this is very plain in the process. The provision contemplates a situation where unabsorbed depreciation in the hands of the firm is too large to get absorbed, in the process referred to above and still remaining to be dealt with. This situation requires obviously the process of carrying forward. It is observed in the process that the procedure would only enable a firm and the partners to set off the aggregate of the unabsorbed depreciation of the firm against the income of the firm and the partners.
These observations of the Supreme Court would rule the answer to the question, even apart from the situation that on a plain reading of the provisions of the Act, the Tribunal would have to be justified in rejecting the application for reference.
The result is that the question is answered affirmatively, in favour of the assessee and against the Revenue.
A copy of this judgment shall be caused to be sent under the seal of the Court and the signature of the Registrar to the Income-tax Appellate Tribunal, Cochin Bench. Order accordingly.
M.B.A./1557/FCReference answered.