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PETITIONER: GARDEN SILK WEAVING FACTORY, SURAT

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX,GUJARAT, AHMEDABAD

DATE OF JUDGMENT22/03/1991

BENCH: RANGNATHAN, S. BENCH: RANGNATHAN, S. RAMASWAMY, K.

CITATION:  1991 AIR 1322            1991 SCR  (1) 909  1991 SCC  (2) 684        JT 1991 (5)   160  1991 SCALE  (1)501

ACT:      Income    Tax   Act,   1961-Sections   32(2),    72(2)- "Depreciation"-Meaning  of -Unabsorbed loss  and  unabsorbed depreciation-Difference  of-Carry   forward and set  off  of unabsorbed depreciation--Principle and distinction of.      Income   Tax  Act,  1961-Sections  72(2),  32(2),   35- Unabsorbed depreciation computed in assessment of registered firm-Carry  forward of-Alternatives indicated.      Income    Tax   Act,   1961-Section    32(2)-Unabsorbed depreciation  allocated to  partners  of  registered   firm- Firm  whether  entitled  to  carry forward the  depreciation and set off.      Income      Tax     Act,      1961-Section       32(2)- Construction    and    object of-Assessee-Registered   firm- Steps    to    be    taken    to    carry     forward     of unabsorbed  depreciation  to  successive  assessment  years, indicated.      Income    Tax     Act,     1922-Section     10(2)(vib), proviso   (as   amended in 1953)-Effect and application of.

HEADNOTE:      For    the    assessment   year   of    1968-69,    the assessee    appellant,    a registered  firm,   returned   a total   income   of   Rs.3,94,483   and    a     provisional assessment was made.      Subsequently,  the  Income  Tax  Officer  found    that for   the   said assessment  year,  the  assessee  had  made an   income   of  Rs.  11,82,056  and  deducting   therefrom three    figures   viz.,   (i)   unabsorbed    depreciation: Rs.1,59,181;    (ii)    unabsorbed    development    rebate: Rs.2,79,150;    and    (iii)   unabsorbed   business   loss: Rs.3,49,242,   aggregating   to   Rs.7,87,573   and  arrived at   the   net  income  of  Rs.3,94,483,  which   had   been returned   and  accepted.  The  three   figures   were   the figures   carried   over   from   the previous year for  the assessment year 1967-68.      The     Income     Tax     Officer     allowed      the unabsorbed    development                                                        910 rebate pertaining to the assessment year of  1967-68  to  be carried   for-ward  and  set off  in  computing  the   total

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income   for  the  assessment  year of 1968-69, but he   did not   allow  the  amounts  of  unabsorbed  depreciation  and unabsorbed  business   loss.  He,  therefore,   added   back the   sum of Rs.5,08,423  (the  aggregate  of  the   amounts of   unabsorbed  depreciation and unabsorbed business  loss) to  the  returned  income  for  determining the total income for the assessment year of 1968-69.      The action of the Income Tax Officer was  confirmed  by the  Appellate Assistant Commissioners  (A.A.C.).   However, on   further   appeal,  the  Income-tax  Appellate  Tribunal (A.T.)   upheld  the  income-tax  Officer’s stand  that  the firm  could  not be allowed to carry forward and   set   off the business loss carried from the earlier year but, so  far as   the  unabsorbed depreciation was concerned,  it  upheld the assessee’s contention.      On these two issues a  reference  to  the  High   Court was   made   and the High Court answered  them  against  the assessee.      For the assessment year  1967-68,  the  assessee  filed a  return  on 30.6.67 showing a  loss  of  Rs.7,87,515   but filed  a  revised  return  on 22.3.1972 showing a  loss   of Rs.5,46,351.   On   14.3.73   the   I.T.O.   completed   the assessment determining a loss of Rs.4,85,250.      The  assessee’s  request  that  this  loss  should   be carried  forward  to the  subsequent  assessment  year   was rejected   by   the  I.T.O.  This  was  confirmed   by   the A.A.C.   On   further  appeal,  the  A.T.   confirmed    the order  of the A.A.C., following the High  Court’s   decision for   the   assessment year 1968-69 which had by  then  been announced.      The High Court  answered  the  (question--"Whether,  on the   facts  and circumstances of the case,   the   Tribunal was  justified  in  rejecting the claim for carry forward of business  loss in the hands  of  the  firm  in view  of  the decision reported in 101I.T.R. 658? in the affirmative.      Hence  the  assessee’s  the  appeals -one  appeal   for the    assessment  year  of  1968-69  and  the   other   for the   assessment   year  of  1967-68-under  certificates  of fitness granted by the High Court.      On  behalf  of the assessee it was contended  that  the firm   as  well  as the partners had been  returning  losses all  along with the result that  no part of  the  unabsorbed depreciation  of  the  firm had  been   set   off   in   the partner’s  hands;   that  when  there  was   an   unabsorbed depreciation    computed    in   the   assessment    of    a registered  firm  for  any  year,  for  the                                                        911 purpose  of  carry  forward, it  should  be   retained   and carried  forward  by the firm only.      On  the  other hand, it was submitted for  the  Revenue that   once  the assessment was completed  and   the   total income   or  loss  of  the  firm ascertained, it had  to  be apportioned   amongst   the   partners.   Thereafter   there remained nothing  in  the  assessment  of  the  firm  to  be carried   forward.   Only each of the  partners  can   carry forward   his  share  of  the unabsorbed loss,  which   also included  the  unabsorbed  depreciation,  as there  was   no difference   between   unabsorbed   loss   and    unabsorbed depreciation;  and  that  the  amendment  to   the   proviso to   section 10(2)(vib) in 1953 of depreciation was intended to  negative   the  claim  of carry forward, by   the   firm which   was  earlier  being  accepted  on  the  strength  of the earlier language resulting in a double advantage.      Allowing the appeals, this Court,      HELD:  1.  "Depreciation"  is  one  of  the    notional

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allowances-which  expression means a deduction in respect an outgoing  which  is  not an item of actual expenditure or is one   which   cannot   be  treated  as   an  outgoing  of  a revenue    nature-permitted   by   the   statute    to    be deducted  in the computation of the profits and gains  of  a business. [921H-922B]      2.  Initially, the depreciation allowances has  to   be deducted   from  the profits and gains of the  business   to which   the  assets  earning  the  depreciation relate  but, if it remains  unabsorbed  by  such  profits,  the allowance has to be set off  against  the  other  business  income  of the  assessee and, where that is also insufficient,  against the   other   taxable  income of the  assessee.   The  carry forward  of  any  depreciation  as  unabsorbed cannot  arise until  the  stage of final assessment is reached   and   the total   income  of  the  assessee  otherwise   computed   is insufficient  to  absorb the year’s depreciation  allowance. [928E-G]      3. An unabsorbed depreciation is a part of the  "loss". This  is  so because, in the first place, "depreciation"  is a  normal  outgoing,  though in a sense notional, which  has to  be debited  in  the  computation  of  the profits  of  a business   on  commercial  principles  (quite  apart    from statute)   and  it  is  difficult to  see  why,  when   such deduction  yields  a  negative figure of profits, it  cannot be   a  "loss"   as   generally   understood.    Where   the depreciation   allowance  attributable  to   a    particular business   exceeds the profits otherwise computed  for  that business,   the  deduction  of  the  depreciation  allowance from  such  profits  can  only  result  in  a   "loss"  from that  business  and a business loss has  to   be   set   off against  income                                                        912 from   any   other   business,   by   way   of    intra-head adjustment,    under   s.   70 and  the  income  under   any other   head,  by  way  of   intra-head   adjustment,  under s.  71.   This is  implicit in  the   provision   that   the excessive  depreciation  of  one  business  can  be   "given effect  toll  against  the  profits  and gains  of   another business   in  the  same  year  and  has   been   recognised by  decisions  holding that it  can  be  set   off   against income   from  other  heads. If unabsorbed depreciation   is treated   as  a  genus  totally  different  from  a  "loss", there  is  no  statutory  provision  that  will  permit  its adjustment  against  other  business   income-implicit    in S.    32(2)   itself-and   against all  other   income    of the   assessee.   "Loss"   and   "unabsorbed   depreciation" should not  be  treated  as  antithetical  to,  or  mutually exclusive  of, each  other.  However,   there   is   nothing anomalous   or   absurd   in   the statute providing for   a dissection   of   the  amount  of  loss  for   purposes   of carry   forward   and   providing   for   a    special    or different    treatment    to unabsorbed   depreciation    in this    regard   although   it   is   a   component  element of the genus described as "loss" [931B-C, 926C-E, 93IC-F]      4.      Unabsorbed      losses      and      unabsorbed depreciation   are    to    be carried  forward  to   future years   to  be  set  off   against   future   income.  There is,   however,   one   important   difference.    Unabsorbed losses    can    be carried  forward  only  for   a   period of    eight   years   whereas   unabsorbed depreciation  can be carried forward indefinitely. [923G -H]      5.  There is  also  difference  between  the   two   in the   matter   of  their carry  forward  in  the   case   of assessment   of  a  registered  firm.  In   this  case,  the

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unabsorbed   loss   cannot  be  carried   forward   by   the firm  at  all. The  statute  clearly  so  provides.  So  far as     unabsorbed    depreciation    is   concerned,   three alternatives  are  possible  to  be  urged:  (i)  It  should be  retained    (without    apportionment)    and    carried forward    by     the    firm only.  (ii)   It   should   be apportioned  among  the  partners.   Thereafter,   it can be dealt  with-even  for  carry forward purpose  only  in   the assessment  of  each of the partners in   respect   of   his aliquot  share  thereof.  (iii) It  should  be   apportioned among   the  partners  each  of  whom  may   set    off  his share   thereof   against  his  other  income.   If,   after this,   any   amount remains  unabsorbed,  it  will   revert to   the  firm.  The  firm will  carry   it forward, set  it off  against  its  other  income  in  the  succeeding  year. This   operation    will    be    repeated    every     year indefinitely   until    the   unabsorbed  depreciation  gets absorbed. [924B-E]      6.   The   third  alternative  is  the   correct   one: (a)    The   unabsorbed depreciation  should  be   allocated among  the  partners  and,  like  any   other loss, will  be available to the  partners  to  the  extent  of  his   share therein  for  set  off  against  his  business   income   or other  income   in   the   same                                                        913 assessment year.  In fact S. 32(2), in so far as  it   talks of   depreciation  being given effect to in  the   partners’ assessments  recognises  that  such unabsorbed  depreciation should  be  allocated  among  the  partners.   The  question is what is to be done thereafter. [932A-B]      (b) When there is nothing in  the  sub-section  or  the Act   specifically  providing  even  for  an   apportionment of   the   depreciation   among  the  partners,  it  is  too contrived a  construction  to  read  into  the   sub-section several   words  intended  to  provide  for  a   number   of partners,  each   carrying   forward  his   share   of   the unabsorbed   depreciation   to successive assessment  years. It   seems   natural   and   reasonable   to   construe  the section as envisaging the following steps where the assessee is a registered firm:       (i) Excessive depreciation should be adjusted  in  the assessment  of the assessee against other  business   income and  against  other  heads  of income;      (ii)  Depreciation,  which  remains  unabsorbed   under (i),   will   be  apportioned to  the   partners   and   the share  of  each  will  be  adjusted against the business and other income of each of the partners pro tanto;      (iii)   If   full  effect  cannot  be  given   to   the depreciation  allowance   of the  assessee  by   the   above processes   and  some   depreciation    remains  unadjusted, the  assessee-firm   will   carry   it   forward   to    the succeeding assessment year. [934C-G]      (c)  The sub-section,   before  its   1953   amendment, permitted    all  assesses-and  this   included   registered firms    as   well-to   carry   forward   their   unabsorbed depreciation  so  that  though  the  registered  firm   paid no tax, it could, on the language claim a carry  forward  of the   depreciation which had  been  apportioned  among   the partners.   This   resulted   in such  carry  forward  being claimed  even  where  the   whole   or   a   part   of   the unabsorbed depreciation of the firm had  been  set  off   in the  assessment of individual partners.  The amendment  only seeks  to  make  it  clear  that such carry forward will not be  permitted to the extent  it  has  been  given effect  to in     the    partners’    assessments;     by     necessary

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implication,   the  carry forward, to the extent it has  not been   effectively  allowed  to  the partner,  continues  to be   available.  The  amendment  of  1953,  therefore,  does not help the case-of the Revenue. [935F-936A]      (d) The objection to the above  course  is  also  based on   a   mental imagery of the firm and  its   partners   as altogether  different  assesses                                                        914 and of the impermissibility of "bringing back" to the firm’s "file"  what  has gone away to the* files of  the  partners. This  approach   of  viewing the two assessments  in  water- tight  compartments for  all  purposes  is not correct.   In any  event, any such theoretical dichotomy  cannot   prevail over the provisions of s. 32(2). [934G-935A]      (e) The  construction  suggested  does  not  result  in any  double advantage to the partners. [936D]      (f)  It is true that the construction may result  in  a certain   amount of imbalance in  the  quantum   of   relief available   as   among   different  partners.   But  similar imbalance  is  inherent in the application of  any   of  the three possible alternatives. [936E-F]      7. The assessee-appellant firm is  entitled  to   carry forward   the  unabsorbed depreciation  computed   for   the assessment   year   1967-68   and have it  set  off  in  its assessment   for  the   assessment   year    1968-69.    The unabsorbed   loss  for  the   assessment   year,    1967-68, however,  cannot  be carried forward by the firm to be   set off  in  its  assessment  for  the assessment year  1968-69. [937A-B]      K. T. Wire Products v. Union of India, [1973]  92   ITR 459  (All); Garden Silk Weaving  Factory,  [1975]  101   ITR 658;   Garden   Silk  Weaving Factory, [1983]  144  ITR  613 (Guj.):  C.  I. T.  v.  Ram  Swarup  Gupta,  [1973]  92  ITR 495;   Raj  Narayan  Aggarwala  v.  C.I.T.,  [1979] 75   ITR I  (Del.);  Shankaranarayana Construction Co. v. C.  I.  T., [1984]  145  ITR 467 (Karn.); Ballarpur Collieries  Co.   v. C.I.T.,   [1973]  92  ITR  219; C. 1. T. v. Nagpur   Gas   & Domestic   Appliances,  [1984]  147  ITR  440  (Bom.);   CIT v.   Nagapattinam  Import   and   Export    Corp.,    [1979] 119  ITR 444; CIT  v.  Madras  Wire  Products,  [1979]   119 ITR   454;   CIT  v. Madras Wire Products, [1980]  123   ITR 722  (Mad.);  CIT  v.  J.  Patel  & Co., [1984] 149 ITR  682 (Del.);  CIT  v. Shrinivas Sugar Co., [1988]   174  ITR  178 (AP);  CIT  v. Singh  Transport Co., [1980]  123   ITR   698 (Gau.); Pearl Wollen Mills v. CIT, [1989] ITR 368;  CIT   v. Mahavir   Steel  Rolling Mills, [1989] 179 ITR 377 (P  &  H) and  CIT  v.  R. J. Trivedi  &  Sons,  [1990]  183  ITR  420 (M.P.), referred to.      IT  v. Jaipuria China Clay  Mines  (P.)  Ltd.,   [1966] 59  ITR  555 and Rajapalayam Mills Ltd. v. C. I. T.,  [1978] 115 ITR 777, followed.

JUDGMENT:      CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1249/75 & 2075/79.      From  the Judgment and Order  dated  ’  26.9.1974   and 16.10.1978  of Gujarat High Court in I.T.R. Nos. 19 of  1973 and 318 of 1977.      Harish  N.  Salve, P.H. Parekh and  Sunil   Degra   for the  Appellant.                                                        915      V.  Gauri  Shanker, Sr.  Adv. and S.  Rajappa  for  the Respondent.

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    The Judgment of the Court was delivered by      RANGANATHAN,   J.  These  appeals  raise  a    question of    some  complexity  on  the   interpretation   of    the provisions  of  the  Income-Tax Act, 1961, (The 1961  Act’), in  regard  to  which there is  a   difference   of  opinion among   various   High  Courts.  In   the   judgment   under appeal,  reported  in (1975) 101  ITR   658,   the   Gujarat High  Court  has  answered the question raised in favour  of the  Revenue   and  against  the   assessees.  Hence   these appeals  by  the  assessee,   M/s.   Garden   Silk   Weaving Factory, Surat.      The two appeals relate to the  assessment  years  1967- 68  and  1968-69 for which the relevant previous years  were the   Saka   years   2022   and   2023  respectively.    The question  arises  in  similar circumstances  for   both  the years.   We  shall  set  out the  facts  relevant  for   the assessment   year 1968-69  as  the  appeals  and   reference in   respect  of  that  year  were disposed of earlier  than those pertaining  to  the  assessment  year  1967-68.      The assessee, M/s.  Garden Silk  Weaving  Factory,   is a  registered firm. For the assessment year in question,  it returned a total  income  of Rs.3,96,483 and  a  provisional assessment,   under  section  141  of  the Act,   was   made accepting   the   income   returned.    Subsequently,    the Income Tax Officer  found  that,  for  the  assessment  year in   question,  the assessee had made an   income   of   Rs. 11,82,056   but  deducted  there-three  figures  aggregating to   Rs.7,87,573   to   arrive   at   the   net  income   of Rs.3,94,483   which  had  been  returned    and    accepted. These  three  figures  were figures carried  over  from  the previous   year   for  the assessment  year  1967-68.   They comprised of:        (i)  Unabsorbed                     Rs.  1,59,181             Depreciation        (ii) Unabsorbed                     Rs.  2,79,150             Development Rebate        (iii) Unabsorbed                    Rs.  3,49,242             Business  loss             Total :                         Rs. 7,87,573 The Income Tax Officer (I.T.O.)  agreed  that,  out  of  the above   three months, the  unabsorbed   development   rebate pertaining     to     the     assessment    year     1967-68 had   been   rightly  carried  forward  and   set   off   in computing  the   total  income  for  the   assessment   year 1968-69.  However,                                                        916 for  reasons  which will become clear  later,   the   Income Tax   Officer   was of the opinion that the   sum   of   Rs. 1,59,181   (which  represented  the amount   of   unabsorbed depreciation  relating  to  the   assessment   year 1967-68) and  the  amount  of  Rs.3,49,242  (which  represented   the unabsorbed loss pertaining  to  the  assessment  year  1967- 68)   could   not   be  carried  forward,  as  done  by  the assessee,  to the assessment  year  1968-69. He,  therefore, added  back  the  sum  of  Rs.5,08,423  (the  aggregate   of the   above  two  amounts)  to  the  returned   income   for determining   the total income for  assessment  year   1968- 69.   This   action   of   the   Income  Tax   Officer   was confirmed   by   the  Appellate    Assistant    Commissioner (A.A.C.).   However,  on  further  appeal,  the   Income-tax Appellate   Tribunal  (A.T.)  took  a  different  view.   It upheld  the  Income-tax  Officer’s stand that the firm could not  be  allowed   to  carry  forward   and   set   off  the business  loss carried from  the  earlier  year.   But,   so far   as  the unabsorbed  depreciation  was  concerned,   it

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upheld   the   assesses  contention.  A reference   to   the High,  Court  followed.  The  following  two questions  were referred to the High Court  of  Gujarat  for  its  decision:           1.   Whether   on  the   facts    and    in    the           circumstances   of   the case,  the  Tribunal  was           right  in  law  in  holding  that   the   assessee           registered  firm is  entitled  to  carry   forward           unabsorbed  depreciation from earlier  years   and           that   it  will  be  deemed to be   an   allowance           in    the   nature   of   depreciation   in    the           previous  year, relevant to assessment year  1968-           69?           2. Whether the claim  of  the  assessee  to  carry           forward   and set off loss of Rs.3,49,242  against           its total  income  for  the assessment year  1968-           69 has been rightly rejected?"      The  High   Court,  in  a   very   detailed   judgment, discussed  the  issues threadbare and  answered   both   the questions  against  the  assessee  and  in  favour  of   the Revenue.    Hence    the   assesse’s   appeal    for     the assessment year 1968-69  under  a  certificate  of   fitness granted  by  the High    Court.      For  the assessment year 1967-68, a  full  paper   book containing  all the orders and statement of facts  has   not been   placed  before  us.  However, the petition of  appeal gives a few facts which  may  be  sufficient  to dispose  of the  appeal.   The relevant facts  are   these.   For   this assessment  year,   the   assessee   filed   a   return   on 30/6/67   showing   a   loss   of Rs.7,87,515 but  filed   a revised    return   on   22/3/72   showing   a    loss    of Rs.5,46,351.   On   14-3-73  the   I.T.O.   completed    the assessment   determining a loss of  Rs.4,85,250.  (It   will be  noticed  that  the  assessment order for 1968-69 gives a different   figure  and  also  shows  its   composition   as partly  loss,  partly  unabsorbed  depreciation  and  partly unab-                                                        917 sorbed development rebate but  this  is  not  very  material for   deciding  the  principle in  issue  before  us).   The assessee’s   request  that  this  loss should   be   carried forward   to   the   subsequent    assessment    year    was rejected  by  the   I.T.O.  This  was   confirmed   by   the A.A.C.   on   further  appeal,  the   A.T.   confirmed   the order   of   the   A.A.C.,   following   the  High   Court’s decision   for   assessment  year  1968-69  which   had   by then  been  announced.  Thereupon  the  following   question of  law  was  referred to the High Court for its opinion:           "Whether,  on  the facts  and   circumstances   of           the    case,   the  Tribunal  was   justified   in           rejecting  the  claim   for   carry   forward   of           business loss in the hands of the firm in view  of           the decision reported in 101 I.T.R. 658? " The High Court answered the  question  in  the   affirmative following  its earlier decision but granted   a  certificate of  fitness  for appeal to  this  Court.  This  is  how  the second  appeal is before us.  It  will  be  seen  from   the above  that,  though there  are  two  appeals   before   us, the  question  involved in both the appeals is the same.      Before  discussing  the question at issue,  it  may  be useful   to   briefly summarise the  procedure   under   the statute  for  determining  the  total income of an  assessee in  respect of a  previous  year.  All  income  accruing  or arising to the assessee and includible in his total income, is,   to  begin  with,  classified (see  S.  14)  under  six different heads:

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    A. Salaries.      B. Interest on Securities: (recently omitted)      C. Income from Property.      D.  Profits  and  gains  of  business,  profession   or      vocation. (briefly, "business income")      E. Capital gains      F. Income from other sources.      In  computing the income of the assessee  according  to this  classification, two aspects have to be borne in  mind. One is that, even under the same head, an assessee may  have different sources.  If so, the                                                        918 income has first to be  arrived  at  in  respect  of   each such  source.  Thus,   if an assessee  carries  on   several businesses,   the   income   of   each   and   every   such, business  has  to  be  separately   computed   by   allowing against  the  gross profits  and  gains  of  that   business only   the   deductions  relevant and  appropriate  to  that business.   The  second  is that,  for   arriving   at   the figure  of  income  assessable  under  a  particular   head, the    individual figures in respect of  all   the   sources have   to   be  aggregated.  Thus,  to take  up  the   head, "profits    and   gains   of   business,    profession    or vocation",  the  statute  contemplates  the  computation  of the    profits   and gains of each business, profession   or vocation   carried  on  by  the  assessee  separately.   The result  of  such  computation  may  be  either  a  profit or a  loss.  If all the businesses end in profits, the  profits are  aggregated  to  arrive  at  a   resultant   figure   of profits  from  "business".  On  the  other hand, if some  of the  businesses make profit and  some  of  them  result   in a  loss,  the profits and the losses  have   to   be   added together   in  order  to arrive at the consolidated   income under  the  head  "profits  and  gains  of business." If the total  amount  of  profits  exceeds  the  total  amount   of losses,  there  will  be a  positive   income   under   this head,  assessable  for that particular assessment year.   If on  the  other  hand  the  losses  exceed the profits,  they will be "adjusted" against the  profits,  so  as  to  reduce the   assessable  income  under  the  head   to   nil;    in addition,   the  losses  of one  or  more  businesses   will remain  "unabsorbed".  There  will  thus   be one  resultant figure   of  profit  or  loss  under  each  head.  This   is one  aspect of the matter.  This  is  the  first  stage   of computation  which  we may  call  "intra-head  adjustments". This  was  not   specifically   provided for in  the  Indian Income-tax   Act,  1922  (the  1922  Act)  but   now   finds specific mention in S. 70 of the 1961 Act.      S.  24(1) of the 1922 Act  and  S.  71  of   the   1961 Act   next   contemplate a mutual set off  of   the   losses under   one  head  against  the  income under   some   other head   subject  to  some   exceptions   (like    speculation loss,   capital  loss  etc.  which,  to  avoid   unnecessary complications   and  confusion,  we shall   leave   out   of account).   Thus  if,  in  any  particular assessment  year, an  assessee   has   incurred  a   loss   under   the   head "business",  this  loss can be set off against  the   income earned  by  the  assessee during that previous  year   under other  heads.  Thus,  for  example,  if  an assessee has got income   by   way  of  salary  of   Rs.20,000   and   income from  house property  of  Rs.25,000  but  has  sustained   a loss  of  Rs.40,000  in business, the Act envisages the  set off   of   the  loss  of  Rs.40,000  against the  income  of Rs.45,000   resulting   in  a  total  income   of   Rs.5,000 only.  This   is  the  second  stage  in  the   process   of

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assessment    which    we   may  describe   as   "inter-head adjustment" or "set off".                                                        919      The  Acts [S. 24(2) of 1922  Act  and  S.  72  of   the 1961  Act]  next envisage  a  third  stage  in  the  process of   assessment   which   can’    be   described   as    the process  of   "carry   forward  and  set   off".   By   this process,  the assessee is permitted to carry forward a  loss he   had  not  been able  to adjust or set off in the  first and   second   stages  of  assessment. This benefit  is  not available  to all kinds of losses but, subject  to   certain conditions  and restrictions on which we need  not   dilate, it   is   available     to  business  losses.   A   business loss    of    one    assessment     year     which   remains "unabsorbed"     by    the    processes     of     intra-and inter-head  ;adjustments can be  carried  forward   to   the succeeding   assessment  years ,and can be set  off  against any other business income in those years.      A  modification  to  the  above  scheme   had   to   be enacted  in  respect of partnership.  Partnership firms  are treated   as   separate  assesses  for the purposes  of  the Income    Tax    Acts.   Under   the   Acts,    firms    are classified  into  -two-registered  firms  and   unregistered firms.   Unregistered firms are distinct assesses which  are liable  to  pay  tax  on  their  total  income.   The   Acts provided   that   any  unabsorbed  loss  in  the   case   of such  a  firm could be carried forward only  by   the   firm and   not  by  it’s   partners.  However,  under  the   1922 Act,   as   it  stood  between  1939   and  1956,-registered firms  were treated as assesses only to  this  extent   that the total income (or loss) of  the  firm  in  any   previous year   was   computed.  However, the firm itself   was   not liable  to  any  income  tax.  The income of the  firm   was apportioned   among  its  partners  and  each   partner  was assessed  on  his share  of  income  from   the   firm.   In this    scheme, it was obvious that, as soon as the   income or   loss   of  a  firm  was  computed,  there  was  nothing further  to  be  done  in  the  case  of   the   firm;   the income  or  loss  became  that  of  the  partner   for   all practical   purposes.  A partner’s  share  of   a   business loss   of   the  firm  which  remained    unabsorbed  became business  loss  in the hands of  the   partner   liable   to intera-head   adjustments,   inter-head   adjustments    and carry   forward  as  if  the loss  had  been   incurred   by the  partner  himself.  The  Act,   therefore, provided that in the case of registered firms the loss  which  could   not be absorbed in  the  same  assessment  year  by  the   other income  of   the  firm  could  be  carried  forward  to  the subsequent  year  not  by  the  firm  itself but only by the partners.  In other  words,  each  partner  carried  forward to  subsequent years his share of the business loss  of  the firm   and   set   it off against   his   business   income, whether   from  the  firm  or  otherwise. There is  a  third category  of  unregistered  firms  assessed  as   registered the  provisions  regarding  which  are  not  relevant    for our    present purposes.  Leaving  them  out   of   account, the  Acts outlined a very simple scheme stemmed  from    the basic  fact  that a registered firm was not liable  to   pay tax  whereas an unregistered firm had to pay                                                        920 tax.   Under  this scheme the  full   advantage   of   carry forward  of  the  loss incurred  by  the  firm  was  enjoyed by  the  partners  in  the  case  of  a registered firm  and in   the   case  of  an  unregistered  firm  by   the   firm itself.

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    The  simplicity  of  the  above  scheme  of  assessment of    registered and unregistered firms, however,  was   not allowed  to  last.  In  1956,  the legislature decided  that registered   firms  should  also  be  made  to  pay  a  tax. This  tax, called "firm’s tax" was  at  rates   lower   than those   applicable  to   unregistered   firms   and    other assesses.   Under  the  new  scheme, which became  effective from  1.4.1956,  the  total  income  of  a  registered  firm is determined  and  it  is  liable  to  income-tax  thereon. The   income  of the firm (less the firm’s  tax)   is   then apportioned   among   the  partners  (subject   to   certain adjustment   as   before).  The  share   income   of    each partner  is  aggregated  with the rest of  his   income   to arrive   at   his  total income  on  which  he   also   pays tax.   In  this  new  scheme  the   question  arises:  "when the  net   result   of   a  business   carried   on   by   a registered  firm in a particular year is a loss, who  is  to carry forward such loss? Is  it the firm (as in the case  of unregistered firms) or is it is the partners  (as,  earlier, in the case of  registered  firms)  or  both?"  The   answer to   this question  is  furnished  by  the  statute   which, while  broadly   continuing the  scheme  of  assessment   of registered   firms    with    the    modification  indicated above, makes  a  specific  provision  in  regard  to   carry forward of losses.  The provisions  of  Ss.  75  and  77  in their   present   form  can be   usefully   extracted   here (though   they   contain  references   to   certain  amended provisions which we need not touch upon):           75. Losses of registered firms:           (1)  Where the assessee is  a   registered   firm,           any   loss   which cannot be set off  against  any           other  income  of  the  firm  shall be apportioned           between  the  partners  of  the  firm,  and   they           alone shall be entitled to have the amount of  the           loss   set   off and carried forward for  set  off           under sections 70,  71,  72,  73, 74 and 74A.           (2)  Nothing  contained in  sub-section   (1)   of           section  72,  sub-section (2) of section 73,  sub-           section   (1)  or  sub-section  (3) of section  74           or   sub-section  (3)  of   section   74A    shall           entitle any assessee, being a registered firm,  to           have   its  loss  carried  forward  and  set   off           under    the    provisions    of    the  aforesaid           section.                                                        921           76.   Losses  of  unregistered   firms    assessed           as   registered  firms:           In  the case of an  unregistered   firm   assessed           under   the  provisions of clause (b)  of  section           183  in  respect  of  any   assessment  year,  its           losses for that assessment  year  shall  be  dealt           with as if it were a registered firm.           77.   Losses  of  unregistered  firms   or   their           partners:           1)  Where  the assessee is  an  unregistered  firm           which  has  not been assessed  as   a   registered           firm   under   the  provisions of  clause  (b)  of           section  183, any loss of the firm shall  be   set           off  or carried forward and set off only   against           the  income  of the firm.           (2)  Where  the assessee is  a   partner   of   an           unregistered   firm which has not  been   assessed           as  a  registered  firm  under  the provisions  of           clause  (b)  of section 183  and  his   share   in           the  income  of  the  firm  is   a   loss,   then,

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         whether   the  firm  has already been assessed  or           not-           (a)  such loss shall not  be  set  off  under  the           provisions   of  section 70,  section   71,   sub-           section  (1)  of  section  73  or section 74A;           (b)  nothing  contained  in  sub-section  (1)   of           section  72  or sub-section  (2)  of  section   73           or   sub-section   (1)   or   sub-section  (3)  of           section 74  or  sub-section  (3)  of  section  74A           shall entitle the assessee  to  have  such    loss           carried   forward  and  set off  against  his  own           income. In  view  of  this specific  provision   the   High   Court, following  an  earlier decision of the same High Court in C. I.  T.  v.  Dhanji  Shamji  Mana  vdar,[ 1974 ]  I.T.R.  173 (Guj.)  answered  the  second  question  referred  to it  in the reference  relating  to  assessment  year  1968-69   and the    only  referred  in regard to  the   assessment   year 1967-68   in   favour   of the  Revenue  and   against   the assessee.   The  correctness  of  this  answer has not  been challenged before us. The  first question referred to the High Court  in   respect of   assessment year 1968 69, however, arises in a  slightly different   way.  It  arises the context  of  "depreciation" which is one of the notional                                                        922 allowances-by    which    expression      we     mean      a deduction  in   respect   of   an outgoing  which   is   not an   item   of  actual  expenditure  or  is    one,    which cannot  be  treated   as   an   outgoing   of   a    revenue nature-permitted    by  the  statute  to  be   deducted   in the   computation   of   the   profits   and   gains,  of  a business.    In    a   sense,   where    the    depreciation allowance  exceeds   the profits, otherwise arrived  at,  in respect   of   the  business, there  will  be   a  resultant "loss"     in    the    business;    and,    indeed,     the Department’s   contention    is   that    there    is     no difference    between   an   unabsorbed loss and  unabsorbed depreciation.   It   would,   however,    be    useful    to refer   to   the treatment  meted  out  by  the  statute  in respect   of   three  items  of  deductions allowed  in  the computation  of  the  profits  of  a  business,  which   may be larger  than  the  profits  of  the   business  otherwise computed.   One   is the   development   rebate    regarding which   the   statute   provides   that    it has to be  set off against the total income of the assessee so as to reduce it to nil and that the balance is, to be carried forward  to succeeding assessment    years    to    be    accorded     a similar     treatment.     [See Ss. 10(2)(vib) of  the  1922 Act   and   33(2)   of   the   1961   Act].   This   is   an allowance which cannot  be  a  constituent  element   of   a figure   of   loss to be carried  forward  to  later   years and   stands   on   a   totally   different footing.     The second    is     the     allowance     for      depreciation under S10(2)(vi) of  the  1922  Act.  In  respect  of   this allowance,  S.   10(12)(vi) provided that if full effect  to the  allowance  could  not  be  given  in  the assessment of an  assessee  for  any  assessment  year,   the   unabsorbed allowance   could   be   carried   forward   and   set   off against    business    profits   in   succeeding  assessment years   indefinitely.   This   provision,   namely    clause (b) of the  proviso  to  S.  10(2)(vi)  of  the  1922   Act- after-  an  addition  in 1953 of the words underlined in the extract below-reads thus,:           " 10(2)(vi) ........

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         Provided that    .....           (a)  .............           (b)  where, in the assessment  of   the   assessee           or,   if  the  assessee is a 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  I  April,  1939,  owing to there   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                                                        923           deemed to be the  allowance  for  that  year,  and           so  on  for succeeding years." This  provision  has,  in   substance,-there   are   certain verbal    differences  which  are  not  material  for    our purposes-been   re-enacted  as  S.  32(2)  of the 1961  Act, which now reads thus:               B           "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           (ii)   of sub-section ( 1) 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  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." The  third  type  of  allowance of  this  nature,  a   carry forward  of  which  is contemplated,  is  an  allowance   in respect   of  expenditure  on   capital assets related to  a business.  This, by virtue of clause (f) of  the  proviso to S.  10(2)(xiv)  of the 1922 Act, re-enacted in S.  35(4)  of the   1961   Act,  is  treated on  the  same  lines  as  the depreciation  allowance  dealt  with  in S. 10(2)(vi) and S. 32(2).  We shall, however,  leave  this  out  of  account in our  future  discussion  as it is not   material   for   the purposes   of   the present case and as,   in   any   event, whatever    is    decided    in    regard    to   unabsorbed depreciation   would  apply  equally  in  respect  of   such allowance as well.      From  the  above discussion, it  will  be   seen   that unabsorbed   losses and unabsorbed depreciation are  to   be carried   forward  to  future  years to be set  off  against future   income.   There   is,   however,   one    important difference.   Unabsorbed  losses can  be   carried   forward

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only   for   a  period of eight years   whereas   unabsorbed depreciation   can   be  carried  forward  indefinitely.   A rule   of  priority  of  set  off-as  between  these    two- therefore becomes necessary and  this  is  provided  by   S. 72(2)    of  the 1961 Act which deals with carry forward  of losses-the counterpart of                                                        924 the proviso to S. 24(2) of the 1922 Act-which reads thus:      "Where  any  allowance  or  part  thereof   is,   under sub-section  (2)  of  section 32 or   sub-section   (4)   of section  35,  to  be carried forward, effect shall first  be given to  the  provisions of this section."      This is the historical context and statutory   language on   the  basis of which the issue before  us  has   to   be resolved.   The  issue  is:  when there is   an   unabsorbed depreciation    computed    in   the   assessment    of    a registered  firm for any year, how is  it  to   be   treated for  purposes  of carry  forward?  Three  alternatives   are possible:    (i)    It    should    be  retained    (without apportionment)   and   carried   forward   by    the    firm only. (ii) It should be  apportioned  among  the   partners. Thereafter,   it  can  be  dealt   with-even    for    carry forward    purposes-only   in   the assessments of each   of the  partners  in  respect  of  his  aliquot  share thereof. (iii)   It   should  be  apportioned  among   the   partners each   of whom may set off his share thereof   against   his other    income.   If,   after  this,  any  amount   remains unabsorbed,  it  will  revert  to  the  firm.  The firm will carry  it forward. set it off  against  its   other   income in   the  succeeding   year.   This   operation   will    be repeated   every  year  indefinitely until  the   unabsorbed depreciation  gets  absorbed.  The  three  alternatives will yield  widely  different  results  and  hence  the   present controversy.      On  the  above  issue   there   has   been   a   strong cleavage   of  opinion between  the  various  High   Courts. The  view  that  unabsorbed  depreciation once allocated  to the  partners  cannot   be  taken   back   to   the   firm’s assessment  for  being carried forward by   the   firm   and that  the  partners alone  are  entitled  to  carry  forward the   unabsorbed  depreciation  for being set  off   against their  income,  has  been  taken  in  the  following  cases: (a)  K. T. Wire Products v. Union of  India, [1973]  92  ITR 459   (All)  (b) Garden Silk Weaving Factory,   [1975]   101 ITR   658   and  Garden  Silk Weaving Factory,  [1983]   144 ITR   613  (Guj.):  (c)  CIT  v.  Ram  Swarup Gupta,  [1973] 92 ITR 495 and Raj Narayan Aggarwala v. CIT, [1979] 75   ITR 1  (Del.);  (d)   Shankaranarayana   Construction   Co.   v. CIT,  [1984] 145  ITR  467  (Karn.).  The  view   that   the unabsorbed   depreciation, after being carried  forward   by the  partners  and  set  off  against their income,  reverts back  to  the  registered  firm  for  being  carried forward and   set   off  against  its   income    and    that    any depreciation   still remaining unabsorbed will again  go  to the partners  and  that  if  it  still remained   unabsorbed would  revert  back  to  the  firm  and  so  on,   has  been accepted in: (a) Ballarpur Collieries Co. v. CIT, [1973]  92 ITR                                                        925 219  and   CIT  v.  Nagpur  Gas   &   Domestic   Appliances, [1984]  147 ITR 440 (Bom.); (b) CIT v.  Nagapattinam  Import and   Export  Corp.,  [1979] 119 ITR 444;  CIT   v.   Madras Wire   Products,  [1979]  119  ITR  454  and CIT  v.  Madras Wire  Products,  [1980]  123  ITR  722  (Mad);  (c)  CIT  v. Singh  Transport Co., [1980] 123 ITR  698  (Gau);  (d)   CIT

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v.   J.  Patel  & Co.,  [1984]  149  ITR  682  (Del.);   (e) CIT  v.  Shrinivasa  Sugar  (Co., [1988] 174 ITR 178 (A.P.): (f) Pearl Woollen  Mills  v.  CIT,  [1989]  179  ITR 368 and CIT  v. Mahavir Steel  Rolling  Mills,5,  [1989]   179   ITR 377  (P& H); and (g) CIT v. R. J. Trivedi & Sons, [1990] 183 ITR 420 (M.P.)      Shri   Harish   Salve,   learned   counsel   for    the assessee,  canvassed the latter of the above views but  with a  slight  modification.  He submitted that, in the  present case,  the  firm  as  well  as   the   partners   had   been returning  losses all along with the result that no part  of the  unabsorbed depreciation of the firm had  been  set  off in  the  partners’  hands.  He, therefore, submitted that it was  sufficient for him  to  urge  the  first  of the  three alternatives  set  out  earlier  and  that  he   need   not, for  the purposes of this case, seek to  support  the  third alternative,   upheld  in some of the decisions,  which  may create   an  impression  in  the  mind  that  the   assessee was    deriving   a   double   benefit   by    having    the unabsorbed  depreciation set off in the hands of  both   the firm   and   the   partners.   On  the   other   hand,   Dr. Gaurishankar,   for  the   Revenue,    strongly    advocated the  second  alternative.  According  to   him,   once   the assessment   is completed, and the total income or loss   of the   firm   ascertained,   it   has  to   be    apportioned amongst   the   partners.   Thereafter,    there    remained nothing  in  the assessment of the  firm   to   be   carried forward.   Only  each of the partners can carry forward  his share   of  the  unabsorbed  loss  (and this,  according  to him,   will  include  also  the   unabsorbed   depreciation) for set off in his future assessments.      The  answer  to the problem  before  us   has   to   be discovered   in  the language of S. 32(2)  supplemented   by that   of   other  sections  which  deal with  the  mode  of assessment of  a  firm  and  its  partners.  Before  turning to these provisions,  it  will  be  necessary  to  clear  up one   aspect  of S. 32(2) to which Sri Salve drew  attention in the course  of  his  reply.  He pointed out that S. 32(2) permits    the   carry   forward   of    the    depreciation allowance  "where  full  effect  cannot  be  given  to   it" 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.   Laying emphasis on the words  "profits  or  gains",  he   contended that   the  carry forward of depreciation allowance is at  a stage  much  anterior  to  that  of the determination of the total income of  the  assessee.  On  this  construction,  if an  assessee  A carries on two businesses, in one  of  which there  is                                                        926 an unabsorbed depreciation of Rs. 15,000 and the profits and gains   of  the other business is only Rs. 10,000,  the  net unabsorbed   depreciation  of  Rs.5,000 has  to  be  carried forward irrespective of the other  income of the assessee in that  year,  to  the  succeeding  year.   This   contention, however,  cannot   be   accepted.   Though   the    section, somewhat  infelicitiously, uses the expression "profits  and gains"  as  it occurs in the  statute in the  fasciculus  of sections  dealing   with   the   computation   of   business income,   the   question   of   the   carry    forward    of unabsorbed   depreciation  has always been  understood   and interpreted   as  arising  only  after  the  intra-head  and intra-head  adjustments,  referred  to  earlier,  have  been carried  out.  Thus, in the illustration given above, if   A has   a   property  income  of   Rs.6,000   the   unabsorbed

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depreciation   of   Rs.5,000  will  be set off  against  the property   income   and   there  will   be   no   unabsorbed depreciation  left  for  being  carried   forward   to   the subsequent   assessment year.  This is because,  where   the depreciation   allowance   attributable  to  a    particular business   exceeds   the  profits  otherwise   computed  for that  business,   the   deduction   of   the    depreciation allowance   from such profits can only result in  a   "loss" from   that   business-this,   however,  is  subject  to   a limitation  that  will  be  discussed  later-and  a business loss  has  to be set off against income   from   any   other business, by way-of  intera-head  adjustment,  under  S.  70 and  the  income   under any other head, by way  of   inter- head   adjustment,  under  S.  71.   This  principle  indeed emerges  even from the language of S. 32(2) in so        far as it implicitly recognises that the excessive  depreciation of   one   business  can be "given effect  to"  against  the profits  and  gains  of  another business in the same  year. This,  indeed,  is  a  well  settled   proposition,  and  it should  be  sufficient  to cite  two   decisions   of   this Court   which  make this  clear,  In  C.I.T.   v.   Jaipuria China  Clay  Mines  (P)  Ltd., [1966]591,T.R.555 this  Court observed:           "Mr.    Shastri,   learned   counsel    for    the           revenue,   urges that  depreciation,  although   a           permissible    allowance   under section 10(2)  of           the   Act,  serves  to  compensate   an   assessee           for  the capital loss suffered  by  him   by   way           of   depreciation of his assets.  He says that  if           it    had   not   been   expressly    allowed   as           allowance,   it   would  have  been   treated   as           capital  expenditure   and   would    have    been           excluded.   He   further says that depreciation is           a  charge  on  the   profits   of   a    business.           Bearing  these two  factors  in  mind,  he   urges           that  the expression "loss of profits  and  gains"           in    section    24(1   does   not   include   any           deficiency   resulting  from   depreciation   and,           therefore,  an assessee is not  entitled  to   ask           the   department to include the  depreciation   in           the  amount  which  can  be  set                                                        927           off  against  income,  profits  and  gains   under           Other   heads such  as  income  from  property  or           dividends.    Mr.    Rajagopala  Shastri  for  the           assessee relies on the history of the  legislation           and  a  number  of  authorities  to  support   the           judgment of the High Court.                Apart from  authority,  looking  at  the  Act           as   it  stood on April 1, 1952, it is clear  that           the   underlying  idea  of  the Act is  to  assess           the  total income of an  assessee.  Prima   facie,           it would be unfair to compute  the  total   income           of  an  assessee  carrying  on  business   without           pooling   the  income   from business   with   the           income   or   loss   under   other   heads.    The           second  consideration which is relevant  is   that           the    Act   draws  no     express     distinction           between   the   various   allowances mentioned  in           section  10(2). They  all  have  to  be   deducted           from the gross profits and gains  of  a  business.           According      to     commercial       principles,           depreciation  would  be  shown  in   the  accounts           and   the   Profit   and   Loss   account    would           reflect  the depreciation accounted  for  in   the

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         accounts.   If   the   profits   are   not   large           enough  to  wipe  off  depreciation,  the  profits           and   loss    account   would   show    a    loss.           Therefore,   apart  from proviso (b)  to   section           10(2)(vi),   neither   the  Act   nor   commercial           principles   draw  any  distinction  between   the           various allowances mentioned  in  section   10(2);           the   only  distinction is that while  the   other           allowances   may  be  outgoings,  depreciation  is           not an actual outgoing." and   expressly   disproved   the   observations   of    the Madras   High  Court   in C.I.T.  v.  Nagi   Reddy,   [19641 51   I.T.R.  178  that   the   deduction   for  depreciation should   be  limited  to  the amount  of  the  profits   and cannot  result  in  working  out  a  loss.   The   following observations  in   the  more recent decision in  Rajapalayam Mills Ltd. v. C.I.T.,  [1978]    115  I.T.R. 777, S.C. place the position beyond doubt:           It is clear on a plain reading  of  the   language of  provision (b) to cl. (vi) that it comes  into  operation only    where    full  effect  cannot  be   given   to   the depreciation    allowance   for   the  assessment  year   in question   owing   to  there  being  no   profits  or  gains chargeable for that year or  profits  or  gains   chargeable being less than  the  depreciation  allowance.  Now,  it  is well settled, as a result of the decision of this  court  in CIT  v. Jaipuria China Clay  Mines  (P)  Ltd.,   [1966]   59 ITR   555 (SC),  that  the  words  "no  profits   or   gains chargeable  for that  year"  are  not  confined  to  profits and  gains  derived                                                        928 from  the  business  whose   income   is   being    computed under s. 10,  but  they refer  to  the   totality   of   the profits  or  gains computed  under  the  various  heads  and chargeable   to    tax.    It  is,  therefore,  clear   that effect   must  be  given  to  depreciation  allowance  first against   the   profits   or   gains   of   the   particular business  whose  income  is  being  computed  under  s.   10 and     if  the  profits  of   that   business    are    not sufficient  to  absorb  the depreciation   allowance,    the allowance    to    the    extent     to  which  it  is   not absorbed  would  be  set  off  against  the  profits of  any other  business  and  if  a   part   of   the   depreciation allowance   still   remains   unabsorbed,   it   would    be liable   to   be set  off  against  the  profits  or   gains chargeable   under   any other  head  and  it  is  only   if some  part  of  the  depreciation allowance  still   remains unabsorbed  that   it   can   be   carried forward  to   the next    assessment   year.   Obviously,    therefore,  there would    be   no   scope   for   the    applicability     of provision  (b) to  cl. (vi), if the total  income   of   the assessee  chargeable to tax is  sufficient  to  absorb   the depreciation   allowance,  for then  there  would   not   be any     unabsorbed     depreciation    allowance    to    be carried   forward   to   the   following   assessment  year. But     where     any    part    of     the     depreciation allowance  remains   unabsorbed  after   being    set    off against   the   total income  chargeable  to  tax,  it   can be   carried   forward   under provision (b)  to  cl.   (vi) to   the   following   year  and   set   off  against   that year’s  income  and  so  on  for  succeeding   years."      The   resultant   position,    therefore,    is    that initially,    the    depreciation  allowance   has   to   be deducted  from  the  profits  and  gains  of  the   business to   which  the  assets  earning  the  depreciation   relate

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but,   if   it   remains unabsorbed  by  such  profits,  the allowance   has   to   be  set   off   against    the  other business  income  of  the  assessee  and,  where  that    is also     insufficient,   against   the     other     taxable income   of   the   assessee.   The   carry forward  of  any depreciation   as  unabsorbed  cannot   arise   until    the stage of  final  assessment  is  reached  and   the    total income    of    the    assessee  otherwise    computed    is insufficient    to    absorb   the    year’s    depreciation allowance.   Sri   Salve’s   argument   that    the    stage of   carry   forward   of depreciation  arises  at  a  stage anterior   to  the  completion  of  the    assessment    and determination     of     the    total     income     cannot, therefore, be accepted.      Shri  Salve,   then,  contended  that   there   is   no statutory   provision which enables  the  apportionment   of the  firm’s unabsorbed depreciation among the partners   and that, therefore, the unabsorbed deprecia-                                                        929 tion has to be carried forward by the firm itself and   none else.   In  our  opinion, this contention also is not  well- founded.  S. 182,  to  the  extent relevant for our  present purposes, reads-           "S.  182.  (])-Assessment  of  registered   firms-           Not   withstanding anything contained  in  section           143  and  144  and  subject to the  provisions  of           sub-section  (3),  in  the  case  of  a registered           firm,   after  assessing  the  total   income   of           the firm,-           (i) the income-tax payable by the  firm  shall  be           determined, and           (ii)  the share of each partner in the  income  of           the  firm   shall  be  included   in   his   total           income  and   assessed   to   tax accordingly.           (2)  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 sections 70 to 75.           (3) When any of the partners of a registered  firm           is  a  non  resident, the tax on his share in  the           income of the firm  shall be assessed on the  firm           at the rate or  rates  which  would  be applicable           if  it were assessed on him personally,  and   the           tax so assessed shall be paid by the firm.           (4) A registered firm may retain out of  share  of           each  partner in the income of the firm a sum  not           exceeding  thirty  percent thereof until such time           as the tax  which  may  be  levied on the  partner           in  respect of that share is  paid  by  him;   and           where  the  tax so levied  cannot   be   recovered           from  the  partner, whether wholly or in part, the           firm   shall  be  liable  to pay the tax,  to  the           extent  of  the  amount  retained  or  could  have           been so retained."           How this share is to be computed is set out in  S.           67  which  may  be  set  out here:           S. 67(1)-Method of computing  a  partner’s   share           in  the  income  of  the  firm-In  computing   the           total  income   of   an assessee who is a  partner           of  a  firm,   whether  the  net   result  of  the           computation  of  total  income of the  firm  is  a           profit or a                                                        930           loss,  his  share (whether a net profit or  a  net           loss) shall  be computed as follows:

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         (a) any interest,  salary,  commission  or   other           remuneration  paid to any partner in  respect   of           the   previous   year,  and, where the firm  is  a           registered   firm  or   an    unregistered    firm           assessed as a registered  firm  under  clause  (b)           of section [183], the income-tax, if any,  payable           by  it  in respect  of  the total  income  of  the           previous   year,   shall  be  deducted   from  the           total  income   of  the  firm  and   the   balance           ascertained and apportioned among the partners;           (b) where the amount apportioned to  the   partner           under,  clause  (a)  is  a  profit,  any   salary,           interest,   commission   or  other    remuneration           paid  to  the  partner  by  the  firm   in respect           of  the  previous year shall be  added   to   that           amount,  and  the result shall be treated  as  the           partner’s share  in  the income of the firm;           (c)   where   the  amount   apportioned   to   the           partner    under  clause  (a)  is  a   loss,   any           salary,     interest,    commission    or    other           remuneration   paid   to  the   partner   by   the           firm    in respect of the previous year shall   be           adjusted   against  that amount, and  the   result           shall   be  treated  as  the  partner’s  share  in           the income of the firm.           (2)  The share of a partner in the income or  loss           of the  firm, as computed under  sub-section   (1)           shall,   for   the  purposes  of  assessment,   be           apportioned  under  the  various  heads  of income           in  the  same manner  in  which  the   income   or           loss   of the firm has been determined under  each           head of income.           (3) Any interest paid by  a  partner  on   capital           borrowed  by him for the purposes  of   investment           in   the  firm  shall,  in computing  his   income           chargeable  under  the  head   "Profits and  gains           of  business  or profession" in respect   of   his           share in the income of the firm, be deducted  from           the share.           (4)  If the share of a partner in the  income   of           a   registered  firm  or  [an  unregistered   firm           assessed  as  a  registered  firm under clause (b)           of   section   183,   as   computed   under   this           section,  is a loss, such loss may be set off,  or           carried   forward and set off, in accordance  with           the  provisions  of  this Chapter.                                                        931           Explanation:  In  this  section,  "paid"  has  the           same   meaning as is assigned to it in clause  (2)           of  section 23. 1.  "Sri  Salve contends that these provisions talk   only   of "loss"  and  that  to take  this  expression  as   including "unabsorbed   depreciation"   as   well will obliterate  the distinction   in  the  treatment  meted  out  to  these   as separate  items by S.  32(2)  and  S.  72(2)  and  (3).   We think   this   argument  is  misconceived.   An   unabsorbed depreciation   is  indeed  a  part  of the "loss".  This  is so  because,  in  the  first  place,  "depreciation"  is   a normal  outgoing though in a  sense  notional,   which   has to  be  debited  in the computation  of  the  profits  of  a business   on   commercial   principles  (quite  apart  from statute)  and  it  is  difficult  to  see  why,  when   such deduction yields a negative figure of  profits,  it   cannot be  a  "loss"  as generally understood.  Jaipuria definitely says   so  as  pointed  out  earlier. Again, as pointed  out

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earlier,  if  it is treated as a genus   totally   different from   a  "loss",  there  is"no  statutory  provision   that will   permit    its adjustment   against   other   business income-implicit  in  S.  32(’2)    itself- and  against  all other  income  of  the  assessee  as  held  by  the    above decisions.   We   therefore   do   not   see   why    "loss" and     "unabsorbed  depreciation  should  be  treated    as antithetical  to,  or  mutually  exclusive of, each other.      Nor are  we  persuaded  that  any  mix-up  or   anomaly will   result  as, suggested by counsel  if  we  treat   the expressions    as    synonymous   except   to   the   extent specifically  treated differently by the statute.   In   our view,  there   is  nothing  anomalous  or  absurd   in   the statute   providing  for  a dissection  of  the  amount   of loss  for  purposes  of  carry  forward   and providing  for a    special   or   different   treatment   to    unabsorbed depreciation   in   this   regard   although   it    is    a component  element  of  the  genus described as "loss".   To illustrate,  suppose   an   assessee,has   a   "profit"   of Rs.5,000    in    one   business   before    deduction    of depreciation    of,    say,  Rs. 10,000 and a  loss  of  Rs. 15,000 in another  business,  it  will  be  quite correct to say  that he has a  business  loss  of  Rs.20,000  in   that assessment year.  But for purposes  of  carry  forward  this has   to   be   considered  under  to   headings:   (a)   an unabsorbed  depreciation  of  Rs.5,000  and  (b) a  business loss  of Rs.  15,000.  The  amount  of  Rs.20,000  will   be carried  forward to the  subsequent  year  but   the   carry forward   of  Rs.5,000  will be according to the  provisions of  S.  32(2)  and  the  carry  forward  under S.  72   will have,  perforce,  to  be  restricted  to  the  other  amount of Rs, 15,000.  The language of S.  72(2)  itself   contains an  indication  that, where  unabsorbed  depreciation  is  a component  of  the  figure   of   loss carried forward,  the amount  of  loss  proper  should  be  set  off   first   and the    unabsorbed   depreciation   later.   But   for    the special  treatment   ac-                                                        932 corded  by  S.  32(2)  and S.  72  for  purposes  of   carry forward,   there  is  no difference  between  an   item   of "unabsorbed   depreciation"   and  an  item of  "loss".   We are,   therefore,   of   opinion   that    the    unabsorbed depreciation will be allocated among the partners and,  like any  other  loss,  will be available to the partner for  set off  against  his  business  income  or other income in  the same assessment year.  In fact S. 32(2),  in  so  far  as it talks  of  depreciation  being given  effect   to   in   the partners’   assessments  recognises  that  such   unabsorbed depreciation   should   be   allocated among  the  partners. So the first of the  three  alternatives  referred to by  us earlier is, in our opinion, out.      We  now come to  the  crucial  question  as   to   what is    to   be   done  when  the   amount    of    unabsorbed depreciation  does  not  get  absorbed  by the other  income of the  firm  and,  further,  the  aliquot  shares  of   the partners  therein  do  not  also   get   absorbed   in   the partners’   assessments against their other  income.   There can be two answers to this:      (1)    that   the   partners-in   whose    hands    the unabsorbed     depreciation   has   been    allocated-should carry  forward   the   depreciation to succeeding years; or      (2)    that    the   amount   of    depreciation     so remaining   unabsorbed should  be  carried  forward  by  the firm  for  set  off  in  future assessments.            We     have     given    our     most     careful

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         consideration  to  this   matter, particularly  in           view  of the controversy  of  judicial   decisions           prevailing  thereon,  and we have  come   to   the           conclusion    that    the    second    of    these           alternatives  is  what is truly envisaged  by  the           statute.   The   most   formidable  obstacle   put           forward  to   this  course  is  that,   once   the           unabsorbed   depreciation   gets   divided     and           allocated   to   the   partners,   there   is   no           statutory provision for recalling, to the   firm’s           "file",   the  amount  remaining  unabsorbed.   We           think  this,  criticism  really  proceeds  on   an           unduly  narrow   construction   placed   on    the           provisions   of   S.  32(2).  In our  opinion,  S.           32(2)   itself  contains  an   inbuilt   mechanism           for  doing this.  It is plain, on the language  of           this  sub-section, that the benefit  of the  carry           forward  is to be given to the   assessee.   Where           the  assessee  is other than  a  registered   firm           or   an   unregistered   firm   assessed   as    a           registered  firm, this is indeed very  plain.   In           the  case  of  this  category   of  assessee,  the           difficulty  arises  because  of  the   words    in           parenthesis.  But a moment’s thought will make  it           clear  that  the  word  "or"  in  the  sub-section           is really used as a conjunctive.  It cannot be  an           alternative,  for there can be no doubt that  even           in  the  case  of  such  an  assessee  the                                                        933 unabsorbed  depreciation,  for  reasons  already  set   out, has    to    be  adjusted against its  other   income.   The assessment  of  the  firm  cannot be complete without such a set  off.  Thus,  where  a  firm  assessed  as  a registered firm,   has   only   unabsorbed   depreciation    of    say, Rs.8,000,   in  the  business  carried on  by   it   but   a property   income  of  Rs.12,000  its total income  for  the year  has to be  Rs.4,000;  it  cannot  be  assessed  on  an income of Rs.  12,000  with  the  depreciation  of  Rs.8,000 apportioned   to its partners.  We have already pointed  out that  the  partner’s  share  in the unabsorbed  depreciation is  part  of his share in the  loss  of  the  firm  and,  by virtue  of S. 67(3), will  be  treated  as   business   loss which  is capable of adjustment  against  his  business  and other  income.  This  is the position envisaged by S.  32(2) when  it talks of effect  being  given  to  the   unabsorbed depreciation  in  the  assessment  of  the  partners.   This can  refer only to cases where the depreciation  cannot   be given   effect   to  in  the  firm’s  assessment.   It   is, therefore,   clear   that   S.   32(2)    contemplates   the situation  where   the  unabsorbed   depreciation   in   the hands   of the firm is too large to get absorbed, first,  in the  hands  of the firm  and then, after  apportionment,  in the  hands  of  the  partners.  What  remains thereafter has obviously  to  be carried forward by  the  firm   which   is the   assessee referred  to  in  the  sub-section.   Perhaps the  meaning  of  the provision will become clearer  if  its relevant  words  are  rearranged  as follows:           "Where  full  effect cannot  be   given   to   any           (depreciation)   in  any previous  year   in   the           assessment  of  the  assessee  (whatever  category           it  belongs  to)  and,  if  the  assessee  is    a           registered   firm   or   an   unregistered    firm           assessed     as    a  registered  firm,   in   the           assessment  of  its partners    .     .......  the           allowance shall be added . . . . . ".

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As in the case of all other assesses, the carry forward will be   available to the registered firm which is the  assessee that  is  referred  to  in  the sub-section.      This  construction   is  also   strengthened   by   the last   part  of  the sub-section.  When it  talks   of   the depreciation   allowance  carried  forward being  added   to the   allowance   for   depreciation   for   the   following previous  year  it obviously refers  to   the   depreciation allowance   due  to the assessee (that is, the firm) in  the subsequent  previous  year.  In  the normal run of cases, it will   thus  either  get  added  to  the  subsequent  year’s depreciation in respect of the same assets and get  set  off against the income from the same  business  or  some   other business   of  the  same assessee or, failing that,  against other  income  of  such  assessee.  What                                                        934 the  sub-section clearly provides for is that the  aggregate of the  depreciation available to an assessee over the years will  be  taken  into  consideration for set off against its income  over  a  period of years.   No   doubt,  the  latter portion  of S. 32(2) does not envisage  that  the   business carried on by the assessee in the subsequent  years   should be   the   same  or that the assets to the  depreciation  in respect   of  which  the  unabsorbed depreciation is  to  be added   should   be   the  same   or,   indeed,   that   any depreciation  at all should be allowable  to  the   assessee in   the   subsequent year.  It is no doubt  true  that  the words of the  sub-section  are  so widely couched that  they can, with  a  certain  amount  of  difficulty,  be  rendered capable  of  application to the situation of  each   partner carrying  forward his share of the  unabsorbed  depreciation for   set  off,  even where he has no business  or  business income, against  his  other  income. But we think that it is too  strained a construction of  the  sub-section. When,  as pointed  out by Sri Salve, there is nothing  in   the   sub- section  or the Act specifically  providing  even   for   an apportionment   of  the depreciation among the partners,  it is  too contrived  a  construction  to read into  the   sub- section   several   words   intended  to   provide   for   a number  of  partners, each carrying forward his   share   of the   unabsorbed  depreciation  to   successive   assessment years.   It  seems  natural  and reasonable to construe  the section   as   envisaging  the  following  steps  where  the assessee is a registered firm:           (i) Excessive depreciation should be  adjusted  in           the   assessment  of the  assessee  against  other           business   income   and  against  other  heads  of           income;           (ii)   Depreciation,  which  remains    unabsorbed           under   (i),   will   be   apportioned   to    the           partners   and   the  share  of   each   will   be           adjusted  against the business and  other   income           of  each  of  the partners pro tanto;           (iii)  If  full  effect cannot  be  given  to  the           depreciation   allowance of the assessee  by   the           above  processes  and  some  depreciation  remains           unadjusted,   the  assessee-firm  will  carry   it           forward to  the succeeding assessment year.           The objection to this course is based on a  mental imagery   of   the  firm and its  partners   as   altogether different   assesses   and   of   the  impermissibility   of "bringing  back" to the firm’s "file"  what  has  gone  away to  the  files of the partners.  We think this  approach  of viewing   the two assessments in  water-tight   compartments is    not   correct.   The   Act  itself  contains   several

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provisions [e.g. Ss. 67(2) &  (3)]  which  indicate                                                        935 that  this is not  so.  The  observations  of   this   Court in   Sankappa   v.  I. T. O., [1968]  68 I.T.R. 760  at  pp. 766-7  also bring out the regions  of  inter-dependence   of these   two   assessments.   In   any   event,   any    such theoretical dichotomy cannot prevail over the provisions  of s. 32(2).      There  is  also  one further reason   why   this   view should  find  acceptance.  As we have pointed out   earlier, unabsorbed   depreciation   is  only a species  of  business loss.   But for purposes of carry forward  the  statute  has drawn  a  distinction  between  them.   In  doing   so,   it specifically  out-lines the procedure for carry forward  and set  off of losses in the case  of a registered firm but  is silent   in  regard  to  unabsorbed  depreciation. There  is no statutory  prohibition  against  the  carry  forward   of unabsorbed depreciation by the registered firm as there   is against   carry forward of loss.  The need felt to  enact  a specific prohibition  in  respect of losses and the  absence of  a  like  provision in   respect   of   depreciation  are significant pointers in support of the above construction.      An    argument   has   been   put   forward   by    Dr. Gaurishankar   on    the basis of the   amendment   to   the proviso  to  s.  10(2)(vib)  in  1953  to submit that it was intended to negative  the  claim  of  carry  forward  by the firm  which was earlier being accepted on the  strength   of the   earlier  language resulting in  a  double   advantage. Attention   has  been  drawn  to the objects and reasons  of the   amendment,  set  out  thus  at  p.  57  in  (1952)  21 I.T.R. (Statutes):           "The (amendment) is  intended  to  make  it  clear           that   where  unabsorbed  depreciation  has   been           effectively   allowed   in  the  assessment  of  a           partner  of a registered firm, it would   not   be           carried forward in the case of the firm."                                         (emphasis added) It   is  true  that  the  clause,  before   its   amendment, permitted    all  assesses-and  this  included    registered firms    as   well-to   carry   forward   their   unabsorbed depreciation  and that  though  the  registered  firm   paid no tax, it could, on the language claim a carry forward   of the   depreciation which had been  apportioned   among   the partners.   This   resulted   in such  carry  forward  being claimed  even  where  the  whole   or   a   part   of    the unabsorbed  depreciation of the firm had been  set  off   in the   assessment of individual  partners.   The   amendment, vide   the   words  emphasised  in the extract  above,  only seeks to make it  clear  that  such  carry  forward will not be  permitted to the extent it has been  given   effect   to in   the partners’ assessments; by   necessary   implication the   carry   forward,   to  the  extent  it  has  not  been effectively allowed to the partner, continues                                                        936 to be available.  The amendment  of  1953,  therefore,   not only   does  not help the case of the Revenue,  it  actually lands  support   to  the  construction we  are  inclined  to place on the proviso. It is possible that our conclusion may give  scope  for  two grounds of criticism: (i) that the partners derive a  double advantage  of  setting off the unabsorbed  depreciation   to reduce   the  taxable  income  of  the firm as well  as  the partners;  and  (ii) that  this will  distort   the   relief available   to  various  partners   depending    upon    the variations   in  income as between the several  partners  as

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well  as  over  a  period  of  years.  We do not think  that the  first criticism is a valid one.  For it is now  settled law, that though a  firm  and  its  partners  are   distinct assesses   for  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 also  a  business  carried  on  by each   of   the partners too-vide S. 67(2) and  (4)-and  the loss   of  a  registered  firm  is treated as the losses  of its  partners  too.  The procedure  envisaged  by   it  will only  enable  a  firm  and  the  partners  to  set  off  the aggregate   of  the unabsorbed depreciation  of   the   firm against   the  aggregate  income  of the firm and  partners. To  the  extent  effect  is   given   to   such   unabsorbed depreciation  to  one or more of the   partners   the   firm cannot   again  get the  benefit  and  vice   versa.   There is,  therefore,  really  no  double advantage.      There  is  some point in the second   criticism.   But, then,   a  certain amount of imbalance among  the   partners is   inherent  in  the  application of any one of the  three possible  alternatives.  If,  as  suggested  by  Sri  Salve, only  the  firm and not the  partners  can   carry   forward the  unabsorbed depreciation, there will be an injustice  to the   partners  who  may have other income against which  it could  be set off.  On  the  other  hand, if the  unabsorbed depreciation   is  allocated  to  the  partners   and   they alone  can carry forward and set it off, it will  have  this consequence   that the partners who have other  high  income will  derive  the  benefit  of  set off qua their shares but no benefit can be  got  by  partners  whose  total income is not enough to offset their share  of  the  depreciation  and the unabsorbed  depreciation  will  not  get  absorbed  even though  the  firm may  have  sufficiently  large  income  in subsequent  years.   In   other words,  whichever  procedure is  adopted,  the  relief  available  to  the partners  will not  be  uniform.  This  is  a  consequence   flowing   from the  variations  in   the   income   sources   of    various partners  and  cannot  be avoided under any scheme of  carry forward   and  set  off.  We,  therefore, do not think  that this  consideration  should  weigh  against   our   reaching the    conclusion   which   naturally   flows    from    the language   of   the   sub-section.                                                        937 For the reasons discussed above, we are of the opinion  that the  assessee-appellant-firm is entitled to a carry  forward of  the unabsorbed depreciation computed for the  assessment year 1967-68 and have it   set off in its assessment for the assessment  year 1968-69. The unabsorbed loss  computed  for the  assessment  year 1967-68, however,  cannot  be  carried forward by the firm to be set off in its assessment for  the assessment year 1968-69. So far as the assessment year 1967- 68 is   concerned, the High Court was right in holding  that unabsorbed  business  loss  of one year  cannot  be  carried forward and set off by the firm   in a subsequent year; but, if there was any unabsorbed depreciation   computed for  the assessment year 1966-67, it could have been allowed   to  be brought  forward  and  set off in  the  assessment  for  the assessment    year  1967-68 in the manner discussed  in  the judgment.      In  the result, appeals for both the  assessment  years are  allowed   to the extent indicated and  the  assessments directed  to be modified   appropriately. We, however,  make no order regarding costs. V. P. R.                                    Appeals allowed.                                                        938

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