Commissioner of Income Tax vs Union Flour Mills

D.N. Baruah, J.—The following question has been referred u/s 256(1) of the Income Tax Act, 1961, for the opinion of this court :

"Whether, on the facts and in the circumstances of the case and on a correct interpretation of the provisions of Sub-section (2) of Section 32 of the Income Tax Act, 1961, the Tribunal was justified in holding that the unabsorbed depreciation of a registered firm which could not be set-off fully in the assessments of partners for the same assessment year should be brought back in the subsequent assessment of the registered firm for the purpose of setting off the same against the business income of the firm for that subsequent assessment year ?"

For the assessment year 1980-81, assessment was made on the assessee as a registered firm u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The computation was done on the basis of the loss as per the profit and loss account. The Income Tax Officer allowed unabsorbed depreciation to be allocated u/s 158 at a sum of Rs. 2,58,758. The unabsorbed investment allowance to the extent of Rs. 4,75,926 was allocated amongst the partners by the Assessing Officer. The assessee thereafter took the matter to the Commissioner of Income Tax (Appeals) to the effect that the Assessing Officer erred in allocating the unabsorbed depreciation to the partners instead of carrying it forward for the purpose of setting off against the future profits of the firm. The Commissioner of Income Tax (Appeals) turned down the contention of the assessee. Therefore, the assessee took up the matter before the Appellate Tribunal. The Appellate Tribunal found that there were two possible judicial views on the same point of law in view of the conflicting decisions and allowed the claim of the assessee.

We have heard Mr. S.L. Jain, learned counsel appearing on behalf of the assessee, and Mr. D.K. Talukdar, learned standing counsel appearing on behalf of the Department. Mr. Jain has placed before us a decision in M/s. Garden Silk Weaving Factory, Surat Vs. The Commissioner of Income Tax, Gujarat, Ahmedabad, In the said decision, the Supreme Court observed that (at page 531) :

"It is, therefore, clear that Section 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. . . . 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. "

The Supreme Court further observed (at page 532) :

"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."

Going through the question referred and the facts and circumstances of the case, we find that this is covered by the aforesaid decision of the apex court. Accordingly, we answer the question in the affirmative, that is, in favour of the assessee and against the Department.

A copy of the judgment under the signature of the Registrar and the seal of the High Court will be transmitted to the Appellate Tribunal. There will be no direction as to costs.