1. In this reference made under s. 256(1) of the I.T. Act, 1961 ('Act' called shortly), the following question has been referred for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the unabsorbed depreciation allowance of Rs. 39,543 for the assessment year 1973-74 cannot be allowed to be adjusted while computing the income of the assesses firm in the assessment year 1973-74 ?'
2. The answer to this question turns on the scope of s. 32(2) of the Act which has given rise to acute conflict of judicial opinion.
3. The facts behind the legal formulation are as follows :
Unabsorbed depreciation of Rs. 1,14,779 in the assessment of the assessee, a registered firm, was left to be adjusted against the individual income of the partners under s. 32(2) for the assessment 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.
4. 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 assesses 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.
5. The assessee's further appeal to the Tribunal was also dismissed. Before the Tribunal the assesses firm placed strong reliance on the decision of the Bombay High Court in Ballarpur Collieries Co. v. CIT : 92ITR219(Bom) and the Department relied upon the decisions of the Gujarat High Court in CIT v. Garden Silk Wvg. Factory : 101ITR658(Guj) , the decision of the Allahabad High Court in K.T. Wire Products v. Union of India : 92ITR459(All) and the decision of the Delhi High Court in Raj Narain Agarwala v. CIT : 75ITR1(Delhi) . The Tribunal preferred the view taken by the Gujarat, Allahabad and Delhi High Courts as against the view taken by the Bombay High Court and confirmed the disallowance.
6. Being aggrieved by the order of the Tribunal the assessee sought for a reference under s. 256(1) of the Act.
7. As a preliminary to the consideration of the question, it would be necessary to advert to special provisions in the Act applicable to firms. Section 182 provides for assessment of registered firms. First, the income-tax payable by the firm itself shall be determined; and, second, the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly. Section 182(2) states that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of ss. 70 to 75.
8. The Act draws a distinction between the depreciation loss and other losses in the matter of set off and carry forward. Section 72 deals with the carrying forward and setting off business losses of non-speculative nature. The Act, however, stipulates that before the unabsorbed loss can be set off, it must be shown that the business or profession for which the loss was originally computed continued to be carried on by the assessee in the previous year relevant for the said following assessment year. The continuity of business is essential and if the continuity breaks at any point, the loss in the business incurred in an earlier year and carried forward lapses altogether. It cannot be revived even if the discontinued business is resumed at a later date at any time within the period of eight years or thereafter. It appears to us that the position would not be different where a concern closed its manufacturing process but continued to maintain an office for realisation of the outstanding the continuity of the business is broken and the outstanding loss lapses. One exception, however, is provided in respect of this rule of continuity under the proviso to s. 72(1)(ii), added by the Finance (No. 2) Act, 1967.
9. In the case of registered firms, the computation of income must be made as per the provisions of the Act and the firm must pay its own tax. After the income of the firm is arrived at, it is allocated among 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 year as provided by s. 72(3) of the Act.
10. 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 some what 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 any previous year owing to there being no 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 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.'
11. This section deals exclusively with the unabsorbed depreciation left at the end of an assessment. If the assessee is a registered firm or an unregistered firm treated as a registered firm, the unabsorbed depreciation remaining at the end of an assessment is allocated between the individual partners in their profit-sharing ratios, and the partners are entitled to set off their portion of the unabsorbed depreciation against their other incomes, if any, includible in their individual total income. If there is still some unabsorbed depreciation left in the hands of the partners, then that shall be carried forward. Thus far, there is no doubt of dispute.
12. The next question to be considered is as to who has the right to carry forward that unabsorbed depreciation left in the hands of the partners, whether the firm or its partners. The view in favour of the firm has the support of the decisions of the High Courts of Bombay, Madras and Gauhati. The view in favour of the partners has the support of the decisions of the High Courts of Gujarat, Allahabad and Delhi. Mr. Bhat for the assessee passionately pleads for acceptance of the former view while Mr. Srinivasan for the Revenue vehemently contends for the latter view.
13. In Ballarpur Collieries Co. v. CIT : 92ITR219(Bom) , the Bombay High Court while examining the scope of the proviso to s. 10(2) of the Indian I.T. Act, 1922, which is analogous to s. 32(2) of the Act, observed (P.230) :
'Under the proviso (b) to section 10(2)(vi) the unabsorbed depreciation allowance has to be added to the allowance for depreciation for the following year. The depreciation allowance in the following year as contemplated by this proviso is available only to the firm as an assessee whose 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 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 fact, however, cannot affect the construction which is the only construction possible we find of the terms of clause (b) of the proviso to section 10(2)(vi)'
14. In CIT v. Nagapatinam Import and Export Corporation : 119ITR444(Mad) , the Madras High Court observed (at pp. 448 and 449) :
'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 given to such an allowance in the hands of the partners. In such a case, either the whole of the depreciation allowance or part of the allowance for which effect has not been given by adjustment in the hands of the partner will have to be added to the amount of the depreciation in the following years and deemed to be the part of the allowance for the later years. This is the clear result in the language of the provision.
The learned counsel for the Revenue submitted that when once the depreciation allowance has been allocated among the partners in accordance with the provisions of s. 182 and s. 75, then it ceases any longer to be an unabsorbed allowance so as to come within the scope of s. 32(2). This argument appears to us to be untenable. Section 32(2) of the Act clearly contemplates two positions, one is that the depreciation allowance should remain unadjusted as against the income of the firm as such and the second is, it should remain unadjusted in the hands of the partner also. When both the situations are reached, then the balance available is to be considered in the hands of the firm and treated as depreciation allowance to be added for the purpose of computation of the total income in accordance with provisions of s. 32 read with other sections. Otherwise, s. 32(2) in so far as it applied to the registered firm would be meaningless. We do not find any warrant for the contention of the Revenue that the depreciation allowance, so long as it is allocated among the partners, ceases to be depreciation allowance coming within the scope of s. 32(2) so that it gets reduced only to the position of a loss. This contention would be contrary to s. 72(2) as well as s. 73(3).'
15. In CIT v. Singh Transport Co. , the Gauhati High Court has observed that the provision of 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 assess 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.'
16. 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 for 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 allowance in the hands of the partners.
Let us look at the question whether the unabsorbed depreciation or part thereof to which effect has not been given is to be carried forward as a loss by the partners and they alone can set it off against their other income or such unabsorbed depreciation may be allowed to be set off by the firm itself in a succeeding year from another angle. As alluded, the depreciation is ordinarily the entitlement of the assessee who holds the depreciable asset. The depreciable asset is owned by the firm and used by the firm for the purpose of the assessee's business or profession. As such, a person other then the firm is required to establish that the owner of the depreciable asset ought not to get the benefit of unabsorbed depreciation allowance. This appears to be in consonance with common sense, justice and equity. We do not find any such right of the partners to which they are entitled under s. 75(1) of the Act.'
17. With respect, we are unable to agree with the conclusion in the above cases. Section 32(2) deals with the unabsorbed depreciation allowance of the firms and other assessees. It does not provide for assessment of firms. The income of the firm has to be computed in the manner provided by ss. 182 and 183 of the Act and not under s. 32(2). It, however, specifically provides for the assessment of partners in regard to unabsorbed depreciation allowance. Generally the benefit of the unabsorbed depreciation allowance would be available to the assessee who is the owner of the depreciable assets. But, section 32(2) makes an exception to this rule so far as the partners of a firm are concerned.
18. Let us look at the language of s. 32(2) so far as it pertains to partners of a firm. By deleting the words relating to other assessees, the beginning of the sub/section may be recast as follows :
'Where, in the assessment of the partners of a registered firm or an unregistered firm assessed as a registered firm, full effect cannot be given to any allowance in any previous years....'
19. These words clearly indicate that the assessments must be the individual assessments of partners and effect can be given to depreciation allowance in their assessments by setting it off against income. This is not open to doubt after the judgment of the Supreme Court in CIT v. Jaipuria China Clay Mines (P.)Ltd. : 59ITR555(SC) , wherein 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 '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 'in the assessment of the assessee or the assessment of the partners'. Taking the case of the partners of the 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).
20. 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 of the Legislature, we cannot assume that the partners have no right to carry forward the unabsorbed depreciation when full effect could not be given in the previous year. In a point of judicial interpretation, where the words of a statute are not ambiguous, there should not be an under-current of doubt in the mind of a judge to give effect to the legislative intent. The judicial interpretation should be close to the legislative intent. When a partner receives unabsorbed depreciation allowance from the firm with a right to have it set off against his other income we fail to understand how that depreciation allowance left unabsorbed in the hands of that partner could be brought back to the account of the firm in the next year in the absence of any express provision of that effect. The partner is entitled to receive the unabsorbed depreciation allowance from the firm as of right.He is entitled to have his individual assessment like any other assessee and also entitled to have his individual assessment like any other assessee and also entitled to have the unabsorbed depreciation allowance carried forward if there is no law to the contrary. Section 32(2) is a complete code providing for unabsorbed depreciation allowance and it does not contain any provision for recycling such unabsorbed depreciation allowance back to the firm.
21. There is one other aspect which has not received due consideration in the judgments of the High Court of Bombay, Madras and Gauhati. In the latter part of s. 32(2) there are two legal fictions. first fiction is to deem the unabsorbed depreciation of the earlier year as the depreciation for the current year and to add the same to the depreciation allowance allowable for the current year. The second fiction is to deem the unabsorbed depreciation of the earlier year as the current depreciation in case where there is no depreciation allowance to be allowed for the current year. The second fiction is appropriately applicable to partners of a registered firm. The first fiction is inappropriate to partners and is applicable only to other assessees. The introduction of the second fiction has become necessary since partners of a registered firm may not be owners of any depreciable asset and may not be entitled to any depreciation allowance during the current year and in such a situation a fiction has been introduced to deem the unabsorbed depreciation allowance for the current year. It seems to us, therefore, that the partners 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 provision of s. 32(2) and also would work inequitably as between the partners who have got different income under other heads.
22. Our view finds support form the decision of the Gujarat High Court in CIT v. Garden Silk Weaving Factory : 101ITR658(Guj) , 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 years 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 sub-section that unabsorbed depreciation would be current depreciation said decision of the Bombay High Court. The interpretation which has been sought to be placed on behalf of the assessee would secure the benefit for the firm for purposes of firm tax, and second time for the purposes of individual assessment of the partners' tax.'
23. In K.T. Wire Products v. Union of India : 92ITR459(All) , a Division Bench of the Allahabad High Court has also taken the same line of reasoning. It was observed therein that the unabsorbed depreciation cannot be carried forward by a registered firm for the simple reason that it is allocated between partners, and there remains nothing to carry forward so far as the firm is concerned.
24. In Raj Narain Agarwala v. CIT : 75ITR1(Delhi) , a Division Bench of the Delhi High Court has also made some observations in the nature of obiter that in the case of a registered firm if full effect is not given effect to the depreciation allowance in any past year, then the carried forward unabsorbed depreciation becomes depreciation of the current year in the hands of the partners, and if one of such partners is carrying on no other business such partner can necessarily set off unabsorbed depreciation against income under other heads.
25. In the light of what is discussed above and from a plain reading of s. 32(2) of the Act, the Tribunal, in our judgment, was right in holding that the unabsorbed deprecation allowance of Rs. 39,543 for the assessment year 1972-73 cannot be allowed to be adjusted while computing the income of the assesses firm for the year 1973-74.
26. We accordingly answer the question in the affirmative and against the assessee.
27. The parties will pay and bear their own cost.