Income-tax---

----Depreciation---Registered firm---Unabsorbed depreciation allocated to partners and not wholly set off in their individual assessments---Allowable in the hands of registered firm in subsequent year---Indian Income Tax Act, 1961, S.32.

Though a firm and its partners are distinct assessees for the purposes of income-tax, the Income Tax Act, 1961, still recognises the principle that a firm is only a compendious name for its partners and the business carried on by the firm is as well a business carried on by each of the partners too. Section 32(2) of the Income Tax Act, 1961, contemplates and envisages that the unabsorbed depreciation should first be adjusted in the assessment of the registered firm against its other business income and against its income under other heads. Depreciation which remains unabsorbed has first to be apportioned to the partners and adjusted against the business and other income of the partners pro tanto. If full effect cannot be given to the depreciation allowance of the firm against the income of the registered firm or its partners in that year and some depreciation remains unadjusted, then the registered firm can carry forward the remaining unadjusted depreciation to the subsequent years.

Garden Silk Weaving Factory v. CIT (1991) 189 ITR 512 (SC) fol.

B.S. Gupta with Sanjay Bansal for the Commissioner.

Nemo for the Assessee.

JUDGMENT

ASHOK BHAN, J.---At the instance of the Revenue, the following question of law has been referred to this Court by the Income-tax Appellate Tribunal Chandigarh Bench, Chandigarh (hereinafter referred to as "the Tribunal'), for its opinion:

"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal erred in allowing carry forward of unabsorbed depreciation amounting to Rs.1,70,631 in the hands of the firm for adjustment and set off against profits in the subsequent years?"

Shortly stated, the facts are:

The assessee is a registered firm. For the assessment year 1980-81, depreciation admissible to the assessee was worked out to Rs.3,30,671. The net income of the assessee before allowing the depreciation was worked out by the Income-tax Officer at Rs.1,60,040. Depreciation to this extent was set off against this income. The balance depreciation of Rs.1,70,631 could not be absorbed for want of profits. Loss of Rs.1,70,631 on account of unabsorbed depreciation was allowed against the income of the two partners for that year. The claim of the assessee was that this loss should not have been apportioned amongst the partners and the same should have been carried forward in the hands of the firm for adjustment and set off against the profits .of the firm in the subsequent years. The claim of the assessee was declined by the Income-tax Officer.

The assessee filed an appeal. before the Commissioner of Income-tax Appeals), which was accepted. In appeal, it was held that the Income-tax Officer had erred 'in law and on facts in apportioning the unabsorbed depreciation amounting to Rs.1,70,631 in the hands of the partners and in refusing to carry forward the same in the hands of the firm for future adjustment against the income of the firm.

The Revenue, aggrieved against the aforesaid finding of the Commissioner of Income-tax (Appeals), filed an appeal before the Tribunal. The Tribunal upheld the view taken by the Commissioner of Income-tax (Appeals). Noticing the difference of opinion between the various High Courts, the Tribunal decided to take the view which was in favour of the assessee.

On a petition filed by the Revenue under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). the Tribunal has referred the question of law, reproduced in the earlier part of the .judgment, to this Court for its opinion.

The assessee-respondent is not present in spite of service.

Counsel for the Revenue has been heard at length.

The point involved is no longer res integral and open to discussion in view of the judgment rendered by their Lordships of the Supreme Court in Garden Silk Weaving Factory v. CIT (1991) 189 ITR 512. In this judgment, it has been held that though a firm and its partners are distinct assessee for the purposes 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 business carried on by each of the partners too. Section 32(2) of the Act contemplates and envisages that the unabsorbed depreciation should first be adjusted in the assessment of the registered firm against its other business income and against its income under other heads. Depreciation which remains unabsorbed has first to be apportioned to the partners and adjusted against the business and other incomes of the partners pro-tanto. If full effect cannot be given to the depreciation allowance of the firm against the income of the registered firm or its partners in that year and some depreciation remains unadjusted then the registered firm will carry forward the remaining unadjusted depreciation to the subsequent years.

In view of the law laid down by their Lordships of the Supreme Court in Garden Silk Weaving Factory's case (1991) 189 ITR 512, the question referred to this Court is answered in 'the affirmative, i.e., in favour of the Revenue and against the assessee and it is held that after adjusting the depreciation against the income of the firm, the balance should have been adjusted against the income of the partners and if some depreciation still remained unadjusted, only then the same could be carried forward by the registered firm to be adjusted against its profits in the subsequent years. No costs.

M.B.A./3254/FCReference answered.