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Judgment
Sethuraman, J.—In this reference u/s 256(1) of the I.T. Act, the following question has been referred for the opinion of this court :
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in directing that the unabsorbed depreciation and
development rebate of the assessment years 1968-69 and 1969-70, to the extent not absorbed in the hands of the partners should be given set off
against the income of the assessee-firm in the assessment year 1970-71?
The assessee is a registered firm consisting of 12 partners. This is one of the those unfortunate cases where the facts themselves do not appear
either in the orders of the authorities or in the statement of the case. However, we are making the best out of what is available and we are
proceeding to answer the reference as best as possible.
The assessee submitted a return showing a loss of Rs. 5,96,362. This amount was arrived at after adjusting the losses of the previous years of
Rs. 8,46,649 against the profits of Rs. 2,50,287 in the relevant previous year for the assessment year 1970-71. The ITO considered that as the
assessee was a registered firm, the loss of the firm could not be adjusted against its income and that, therefore, the adjustment of the loss claimed
by the firm should stand disallowed. He took the income of the firm as shown, by the assessee at Rs. 2,50,287 and made certain adjustments
thereto and arrived at a total income of Rs. 2,61,787 rounded off to Rs. 2,61,790 which was distributed among the 12 partners of the firm.
In the appeal filed by the assessee, it was claimed that the ITO was wrong in ignoring the loss of the previous years in arriving at the assessable
income for the assessment year 1970-71. The AAC did not agree with the assessee''s contention and he, therefore, dismissed the assessee''s
appeal on this point. Thereafter, the firm appealed to the Tribunal. The Tribunal pointed out in its order :
We, therefore, hold that though the loss of the earlier years cannot be carried forward by a registered firm and set off against the profits of the
succeeding years, the unabsorbed depreciation and development rebate can be carried forward by the registered firm and set off against its profits
in the subsequent assessment years.
The result was that the appeal was allowed to the extent of the unabsorbed depreciation and development rebate. It is this order of the Tribunal
that has given rise to the present reference. In the course of the order of the Tribunal"", it has been pointed out that full effect to the depreciation
allowance could not be given in the assessment of the partners as they had no business income. The Tribunal posed before itself the question
whether the unabsorbed depreciation and development rebate could be carried forward and set off by the firm itself in the succeeding assessment
years and the question was decided by directing their adjustment.
We have no idea as to what are the amounts of unabsorbed depreciation and unabsorbed development rebate available for set off in the present
case. As far as unabsorbed depreciation is concerned, we have already held in T.C. No. 28 of 1975 in the judgment pronounced on 2-1-1979
[since reported as CIT v. Nagapatinam Import and Export Corporation [1919] 119 ITR 444 that the unabsorbed depreciation along with the
business loss would be apportioned among the partners and adjusted against the other income, if any, in the hands of the partners. If there was
unadjusted depreciation, as a result of the partners'' income not being sufficient to absorb the depreciation allowance, then the amount of
unabsorbed depreciation "" would have to be brought, back into the assessment of the firm as contemplated by Section 32(2) of the Act.
Therefore, the Tribunal was right in directing the unabsorbed depreciation in the present case to be set off against the profits of the assessment year
1970-71 as it is clear from the order of the Tribunal itself that in the hands of the partners, in the earlier years, there was no other income against
which it could have been adjusted.
As far as the development rebate is concerned, the position is somewhat different. In respect of plants installed before January 1, 1958,
development rebate was allowed as deduction in the computation of the profits and gains of the assessee and if the profits were not adequate to
absorb the development rebate allowed in any year then it would be added to the business loss and dealt with as such. The scheme of grant of
development rebate came to be modified subsequently. Under the law in force from January 1, 1958, the development rebate was granted on a
fixed percentage of the actual cost of the new machinery or plant owned by the assessee and wholly used for the purpose of business carried on by
him. As a condition precedent to the grant of this allowance, the assessee has to create the reserve to the extent indicated in Section 33. Where the
assessee qualifies himself for allowance of the development rebate by the creation of the reserve, then as to how the development rebate should be
allowed is dealt with in Sub-section (2) of Section 33, It has provided as follows:
In the case of a ship acquired or machinery or plant installed after the 31st day of December, 1957, where the total income of the assessee
assessable for the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the
immediately succeeding previous year, as the case may be....is nil or is less than the full amount of the development rebate calculated at the rate
applicable thereto under Sub-section (1) or Sub-section (1A), as the case may be,--
(i) the sum to be allowed by way of development rebate for that assessment year under Sub-section (1) or Sub-section (1A) shall be only such
amount as is sufficient to reduce the said total income to nill and
(ii) the amount of the development rebate, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following
assessment year, and the development rebate to be allowed for the following assessment year shall be such amount as is sufficient to reduce the
total income of the assessee assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the development
rebate, if any, still outstanding shall be carried forward to the following assessment year, and so on, so however, that no portion of the
development rebate shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to the
previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be.
The total income contemplated by Section 33(2) has to be computed without making any allowance of development rebate or any deduction
under Chap. VI-A (which provides for certain deductions in computing the total income) or Section 280. The result of this provision is that
depreciation is to be allowed first, and thereafter, the question of allowability of the development rebate would arise. The allowance of
development rebate can only reduce the total income to nil. This provision stands in contrast to what is provided u/s 32(2) in relation to
depreciation. In Section 32(2) the following words "" 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 of depreciation "" show
that implicit in the statutory provision is the contemplation that the loss arrived at as a result of the depreciation allowance being adjusted as against
the profits and gains arising to a firm will have to be apportioned among the partners. It is only after this apportionment that the question would
arise as to whether full depreciation allowance can be absorbed by the partners and any surplus which has not been absorbed by them will have to
be brought back into the assessment of the firm, and dealt with as contemplated by Section 32(2).
Similar language is absent in Section 33(2). Further, Section 33(2) contemplates the reduction of the total income to nil. There is no question of
apportionment of nil income among the partners. Thus, the language of Section 33(2) appears to us to show that the development rebate will have
to be considered only in the hands of the firm alone.
The learned counsel for the revenue submitted that practically there is no difference between allowance of depreciation and development
rebate, that prior to January 1, 1958, the development rebate was treated on a par with depreciation and that there is no reason why development
rebate should be treated differently. It is not for us to speculate as to why Parliament directed allowance of development rebate in the manner
contemplated by Section 33(2), only in such a manner as to reduce the total income to nil. It is not difficult to find out why the development rebate
is treated differently from depreciation, and that is, the development rebate is conditional on the assessee creating the reserve to the extent
contemplated by the provision, and keeping the reserve intact for a period of eight years, the period during which alone development rebate could
be allowed in the hands of the assessee as a deduction. We consider that, on the language of Section 33(2), the Tribunal acted rightly in deducting
the allowance of development rebate being set off against the profits of the firm itself. In the present reference, we are not concerned with the
relative priority in the matter of adjustment of development rebate and other business losses, and, therefore, we do not go into that question.
The question referred to us is answered in the affirmative and in favour of the assessee. The assessee will be entitled to his costs. Counsel''s
fee. Rs. 500.