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PETITIONER: COMMISSIONER OF INCOME TAX U.P., LUCKNOW

       Vs.

RESPONDENT: J.K. HOSIERY FACTORY, KANPUR

DATE OF JUDGMENT19/03/1986

BENCH: MUKHARJI, SABYASACHI (J) BENCH: MUKHARJI, SABYASACHI (J) PATHAK, R.S.

CITATION:  1986 AIR 1665            1986 SCR  (1) 907  1986 SCC  Supl.  104     1986 SCALE  (1)471

ACT:      Right to  carry forward the unabsorbed depreciation and to set  off by  a unregistered  firm in one year to the next year when  it was  registered, whether  permissible - Income Tax Act, 1922 sections 10(2)(vi) read with 24(i) and 24(2).

HEADNOTE:      M/s.  J.K.   Hosiery  Factory,  Kanpur  the  respondent assessee  firm   originally  consisted  of  three  Singhania Brothers and  one J.P.  Agarwal as  partners. The  Singhania brothers retired  in 1946  and in  their place  Kamala  Town Trust  was  alleged  to  have  become  partner.  During  the assessment year  1949-50  the  unregistered  firm  had  been allowed an  unabsorbed depreciation  of Rs. 43.963. The firm claimed a  set off  thereof in  the assessment  year 1950-51 when it  was registered.  The Tribunal  refused to allow the carry forward  and  set  off  but  the  High  Court  in  the reference answered  the question  against Revenue. Hence the appeal by the Revenue.      Dismissing the appeal,the Court, ^      HELD :  1.1 Having regard to the scheme of the relevant provisions and  in view  of the provisions of sections 10(2) (vi) read  with section  24(1) and section 24(2) of the 1922 Act, the  deduction of  the unabsorbed  depreciation  should have been  allowed, in  as much  in both  the years the firm continued -  in one  year it  was unregistered,  in the next year it  got itself  transferred into  registered,  but  its identity was  not  lost.  The  firm  was  one.  Further  the assessee was  entitled to  an interpretation  favourable  to him. [915 C-D]      1.2 Where  two interpretations were possible, the court should take  the interpretation  that is  favourable to  the assessee bearing  in mind  that a  taxing statute  is  being construed. [914 H; 915 A]      1.3 The proviso (b) below section 10(2)(vi) of the 1922 908 Act dealt  with every  assessee. It specified that where the assessee was  a registered  firm, then  in the assessment of its partners,  if full  effect could  not be  given  to  any depreciation  allowance   and  where  the  assessee  was  an unregistered  firm  where  there  was  no  question  of  its

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partners being  assessed, the  depreciation which  could  be carried forward  was  the  unabsorbed  depreciation  in  the assessment of  the firm  itself. There  was nothing  in  the section which indicated that unregistered firm could not get the benefit of the carry forward. [911 G-H; 912 A-B]      1.4 If  section 24 is properly read in conjunction with clause (b)  of the  proviso to sub-section (2) of section 24 which gives  the right  to carry  forward the  loss then the effect would  be that  loss had  to be  carried forward  and adjusted first against the profits of the next year. Neither of the  provisions prohibited  that carry forward unabsorbed depreciation in  case the  firm  became  registered  in  the subsequent year.  The entity is the firm, registration makes no difference in that entity. By registration, the firm gets certain  additional   qualification  and  puts  upon  itself certain additional  burden. The  scheme of  the Act does not indicate  any   intention  to   deprive   the   subsequently registered firm of its right to carry forward the unabsorbed depreciation.  Depreciation  is  given  to  the  person  who becomes entitled  to it. The subsequently registered firm is composed of  him also.  Therefore, in principle, there is no basis for  the proposition that he should not be entitled to get the benefit of depreciation. [912 B-E]      Indian  Iron  &  Steel  Co.  Ltd.  v.  Commissioner  of Incometax,  Bengal,   11  I.T.R.   328  P.C.  discussed  and distinguished.      Ballarpur Collieries co. v. Commissioner of Income Tax, Poona, 92 I.T.R. 219 held inapplicable.      1.5 It  could not  be contended that since a registered firm was  liable to  a separate  tax called  the "firm tax", which is over and above the tax payable by the partners, the registered firm  should be treated like an ordinary assessee for the  purposes of  the assessment  of "firm  tax" and the losses of  the earlier  years computed  in the assessment of the 909 firm should  be carried  forward and  set  off  against  its business profits  of the  subsequent years. Though the "firm tax" was  levied under  the Finance  Act each year, it was a part and parcel of the income tax which was levied under the provisions of  the Income-tax  Act. If  the contentions were accepted it  would lead to an anomalous position inasmuch as there would  be two  assessments in  the case  of registered firms, one  for purposes of levy of "firm tax" and the other for purposes of levy of income tax and the quantum of income in the  two assessments would be different. Such a result is not contemplated under the Income tax Act. Imposition of tax was on  the registered firm as well as on unregistered firm. The manner  of levy  and realisation is different in case of registered firm.  Therefore, under the provisions of section 32(2) for the purpose of setting off unabsorbed depreciation carried forward  from a preceding year, it was not necessary that the  business in  respect  of  which  the  depreciation allowance  was   originally  worked  out  should  remain  in existence in such succeeding year.[914 c-e]      K.T.Wire Products  v. Union  of India & Ors., 92 I.T.R. 459 (All)  and Commissioner of Income tax, Bombay City II v. Estate and Finance Ltd., 111 I.T.R. 119 (BY) referred to.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION : Civil Appeal Nos. 1371- 72 (NT) of 1974.      From the  Judgment and  Order dated 4th August, 1972 of

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the Allahabad High Court in I.T. Reference No. 426 of 1963.      S.C.  Manchanda   and  Miss   A.  Subhashini   for  the Appellant.      V.S. Desai and M.M. Kashtriya for the Respondent.      The Judgment of the Court was delivered by      SABYASACHI MUKHARJI,  J. These appeals by special leave are from the judgment and order of the Division Bench of the Allahabad High Court dated 4th August, 1972.      M/s J.K.  Hosiery Factory,  Kanpur, the  assessee  firm herein, originally consisted of Sir Padampat Singhania, L. 910 Lakshmipat Singhania  and L.  Kailashpat Singhania  and  one J.P. Agarwal  as  partners.  In  January,  1946,  the  three Singhania brothers  appeared to  have retired  from the firm and in  their place the Kamla Town Trust was alleged to have become partner.      The revenue  challenged this reconstitution of the firm and according  to the  revenue, the Singhania brothers never retired and the trust never became a partner. Four questions were referred  by the  Tribunal  to  the  High  Court  under section  66(1)   of  the   Indian   Income-tax   Act,   1922 (hereinafter called  the ’Act’).  The question  No. 4 is the only question  canvassed before  us and  survives for  these appeals. The same is as follows:           "Whether,  under   the   provisions   of   section           10(2)(vi), proviso  (b) of the Income-tax Act, the           unabsorbed depreciation  of the  unregistered firm           in 1949-50  can be  allowed as  a deduction in the           assessments of the partners of the registered firm           in the assessment year 1950-51?"      Question No. 4 is relevant only for the assessment year 1950-51. For  the previous assessment year 1949-50, the firm had been  allowed an  unabsorbed depreciation of Rs. 43,963. The firm  claimed a  set off  thereof in the assessment year 1950-51.The Tribunal  refused to  grant this  set off on the view that  in the  year 1949-50,  the assessee  firm was  an unregistered firm  while it  had been  registered under  the Income-tax Act  for  the  year  1950-51.  According  to  the Tribunal,  the   loss  on  account  of  depreciation  of  an unregistered firm  could  not  be  carried  forward  to  the succeeding year  in case  the firm got registered. It was so held by the Tribunal.      The High  Court by  reference to  section 10(2)(vi) and proviso  (b)   to  section   24(2)  of   the  Act   and   on interpretation of  the provisions and scheme of the sections held that  the Tribunal  was  not  right  and  answered  the question in  favour of  the assessee. These appeals are from that decision.      In order  to appreciate  this question, it is necessary to bear  in mind  the relevant provisions of the Act. At the relevant time, sub-section (2) of section 2 was as follows: 911           "’assessee’ means  a person  by whom income tax is           payable."      The relevant provisions of section 10 were as follows:           "10. (1)  The tax  shall be payable by an assessee           under the  head ’profits  and gains  of  business,           profession or  vocation’ in respect of the profits           or gains  of any  business, profession or vocation           carried on by him.           (2) Such  profits or gains shall be computed after           making the following allowances, namely : - .....           (vi) in respect of depreciation ....           Provided  that   -  ......   (b)  where,   in  the           assessment of the assessee or if the assessee is a

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         registered  firm,   in  the   assessment  of   its           partners, full  effect cannot be given to any such           allowance in any year not being a year which ended           prior to  the 1st  day of  April, 1939,  owing  to           their being  no profits  or gains  chargeable  for           that year,  or  owing  to  the  profits  or  gains           chargeable being  less than  the allowance,  then,           subject to  the provisions  of clause  (b) of  the           proviso to  sub-section (2)  of  section  24,  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 year and deemed to           be part  of that allowance, or if there is no such           allowance for  that year,  be  deemed  to  be  the           allowance  for  the  next  year,  and  so  on  for           succeeding years."      It is  apparent, as  the High  Court  noted,  that  the proviso dealt  with every  assessee. It specified that where the assessee  was a  registered firm, then in the assessment of its  partners, if  full effect  could not be given to any depreciation  allowance   and  where  the  assessee  was  an unregistered  firm  where  there  was  no  question  of  its partners being  assessed, the  depreciation which  could  be carried forward  was  the  unabsorbed  depreciation  in  the assessment of  the firm  itself. The  assessee in  the first year being an 912 unregistered  firm   was  entitled   to  carry  forward  the unabsorbed  depreciation   under  this  proviso.  There  was nothing in  the section  which indicated  that  unregistered firm could  not get  that benefit  of the  carry-forward. It must  be   borne  in  mind  that  the  firm  which  suffered depreciation was  unregistered in  the accounting  year i.e. 1949-50 and  it is  the very  same  firm  which  got  itself registered in the subsequent year. If section 24 is properly read in  conjunction with  clause (b) of the proviso to sub- section (2)  of section  24 which  gives the  right to carry forward the  loss then  the effect would be that loss had to be carried forward and adjusted first against the profits of the next  year. Neither  of the  provisions prohibited  that carry-forward  unabsorbed  depreciation  in  case  the  firm became registered  in the  subsequent year. This appears, in our opinion,  on a plain reading of the different provisions of the  section. The  entity is the firm, registration makes no difference to that entity. By registration, the firm gets certain  additional  qualifications  and  puts  upon  itself certain additional  burden. The  assessee in both the cases, however, is  the same. We were referred to the provisions of section 23(5)(b) and section 24 to section 71 of the Income- tax Act,  1961. We  do not  think that  on this  aspect  the scheme of  the Act  indicates any  intention to  deprive the subsequently registered  firm of  its right to carry forward the unabsorbed  depreciation. Depreciation  is given  to the person  who   becomes  entitled   to  it.  The  subsequently registered firm  is composed  of  him  also.  Therefore,  in principle, there  is no basis for proposition that he should not be entitled to get the benefit of depreciation.      Our attention  was drawn to certain observations of the Judicial Committee  of the  Privy Council  in  the  case  of Indian Iron  & Steel Co. Ltd. v. Commissioner of Income-Tax, Bengal, 11  I.T.R. 328.  There the  Privy Council dealt with entirely different  set of  circumstances. By  an  agreement dated  8th  September,  1936,  made  between  the  appellant company and  another company  named the  Bengal Iron Company

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Ltd., the  former had  agreed to  acquire and  take over the whole of  the property  and assets of the latter as existing on the  date of  transfer.In pursuance of this agreement the Bengal Company  transferred all  its property  and assets on the 2nd  December,  1936  to  the  appellant  company  which continued to  carry on the business of the Bengal Company as part of and in combination with its 913 existing  business.   The  agreement   contained  a   clause assigning ’so  far as  capable of  being assigned, any claim which the  Bengal Company  may have in respect of unabsorbed depreciation allowances’.  At the  time of  the amalgamation the Bengal Company had to its credit unabsorbed depreciation allowance to  the extent of Rs. 85,45,150 which it could set off against  its future  profits. Similarly,  the  appellant company had  an unabsorbed  depreciation  allowance  of  Rs. 62,00,775. It  was held by the Judicial Committee, affirming the decision  of the  High Court  of Calcutta,  (i) that the appellant company  was not entitled to have the depreciation allowance of  the Bengal  Company computed  on the  original cost of  such assets  to the Bengal Company for the whole of the previous  year but only up to the date of succession and that after  that date  it had to be computed on the original cost to  the appellant  company; and (ii) that the appellant company was  not  in  law  entitled  to  carry  forward  the unabsorbed depreciation  allowance of the Bengal Company. It was further  held that  the word ’assessee’ in section 10(2) must, when  there is  a successor to the business charged to tax, be  read in certain of the paragraphs as including both predecessor and  successor, but  it does  not  follow  as  a consequence  that   the  unabsorbed   depreciation  of   the predecessor must  be added  to that of the successor or that even in  a case  when the  only business  concerned is  that which is  transferred. The business when transferred carries to the purchaser its unabsorbed depreciation.      Here no  such problem  arises. Here we have a situation where the  same person  previously carrying  on business  as unregistered firm  is now carrying on business as registered firm.      Our attention  was drawn  to the  observations  of  the Division Bench  of the  Bombay High  Court in  the  case  of Ballarpur Collieries  Co.  v.  Commissioner  of  Income-Tax, Poona, 92  I.T.R. 219.  But the  said observations  are  not relevant for our present purposes.      Similarly, reliance  was placed  on the observations of the Division  Bench of the Allahabad High Court in K.T. Wire Products v.  Union of India & Ors., 92 I.T.R. 459. It may be mentioned that  there it  was noted  that under  the general scheme of  the Income-tax  Act,  losses  and  profits  under different heads had to be aggregated and the net income 914 arrived at  which was liable to tax. If the resultant figure was a  loss, it  was carried forward and set off against the business  profits  of  the  succeeding  year.  This  is  the position in  the case  of all  assessees  except  registered firms. In  the  case  of  registered  firms,  the  net  loss including depreciation  allowance, if  any, is  allocated to the partners,  who alone  were entitled  to set off the loss allocated to  them in  their individual  assessments and  to carry  forward   any  loss  which  remained  unabsorbed,  as provided in  sections 32(2) and 75(2) of the Income-tax Act, 1961. The firm as such was not entitled to carry forward the losses  determined  in  the  assessment.  It  could  not  be contended that  since a  registered firm  was  liable  to  a separate tax  called the "firm tax", which is over and above

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the tax  payable by the partners, the registered firm should be treated like an ordinary assessee for the purposes of the assessment of "firm tax" and the losses of the earlier years computed in  the assessment  of the  firm should  be carried forward and  set off  against its  business profits  of  the subsequent years. Though the "firm tax" was levied under the Finance Act  each year,  it was  a part  and parcel  of  the incometax which  was levied  under  the  provisions  of  the Income-tax Act.  If the  contentions were  accepted it would lead to an anomalous position inasmuch as there would be two assessments  in  the  case  of  registered  firms,  one  for purposes of levy of "firm tax" and the other for purposes of levy of  income-tax and  the quantum  of income  in the  two assessments  would  be  different.  Such  a  result  is  not contemplated under  the Incometax Act. Imposition of tax was on the  registered firm as well as on unregistered firm. The manner of  levy and  realisation is  different  in  case  of registered firm.      A case  converse to  the instant  case was  before  the Division Bench  of the  Bombay High  Court in  the  case  of Commissioner of  Incometax, Bombay  City II  v.  Estate  and Finance Ltd.,  111 I.T.R.  119.  Where  the  Division  Bench observed that  when enacting  the provision  regarding carry forward and set off of unabsorbed depreciation under section 32(2) of  the Income-tax  Act, 1961,  the legislature  could have imposed  a condition that unabsorbed depreciation could be set  off against the profits of a subsequent year only if the business  in relation  to which depreciation was allowed continued to  exist in  such year.  The absence  of  such  a restriction had to be construed in favour of the assessee. 915 Where two  interpretations were  possible the  court  should take the  interpretation that  is favourable to the assessee bearing in  mind that  a taxing  statute is being construed. Therefore, under  the provisions  of section  32(2) for  the purpose  of  setting  off  unabsorbed  depreciation  carried forward from  a proceeding  year, it  was not necessary that the business  in respect of which the depreciation allowance was originally worked out should remain in existence in such succeeding year.  It dealt with some other aspect with which we are not presently concerned.      Having regard  to the scheme of the relevant provisions and in view of the provisions of section 10(2)(vi) read with section 24(1)  and section  24(2) of the 1922 Act, we are of the  opinion   that  the   deduction   of   the   unabsorbed depreciation should  have been  allowed. It  is necessary to bear in  mind that in both the years the firm continued - in one year it was unregistered, in the next year it got itself transferred into  registered, but its identity was not lost. The firm was one.      In any  event as  has been  mentioned in case of doubt, the assessee  is entitled  to  an  interpretation  which  is favourable to  him, though we are of the opinion that in the instant case there is no scope of any doubt.      Therefore, there  was no  loss of  the right  to  carry forward the unabsorbed depreciation.      In the premises the revenue was wrong, the assessee was right. The  High Court  rightly answered  the question.  The appeals, therefore,  fail and are accordingly dismissed with costs. S.R.                                 Appeals dismissed. 916