H.C Goel, J.:— The Income-tax Appellate Tribunal, Delhi Bench ‘A’ has referred the following question of law for the opinion of this Court at the instance of the Commissioner of Income-tax, Delhi-IV, New Delhi: —

“Whether on the facts and in the circumstances of the case the Tribunal was right in holding that benefit of carry forward unabsorbed depreciation was available to the Registered firm for adjustment against the income of the succeeding year?”

The assessee is a registered firm having two partners. For the A.Y 1970-71, it was assessed on a total income of Rs. 80,156/-. This comprised entirely of business income. For the immediately preceding assessment year, its total income had been assessed at a net loss of Rs. 80,100/-, which was duly allocated in equal shares to the two partners, Shri J.R Patel and Smt. Dhai Laxmi Patel. The Income-tax Officer relying on the provisions of Section 75 of the Income-tax Act, 1961 (hereinafter referred to as the Act) did not allow the assessee firm the benefit of the carry forward loss in the A.Y 1970-71. The firm was required to pay tax as a registered firm on its total income of Rs. 80,156/-.

2. The assessee in the appeal taken to the Appellate Assistant Commissioner contended that against its total income for A.Y 1970-71 the following brought forward losses should be allowed to be adjusted: —

Assessment Yerars Loss determined 1968-69 Rs. 1,14,666/-. 1969-70 Rs. 80,100/-. Total: Rs. 1,94,766/-.

This contention, however, did not prevail with the Appellate Assistant Commissioner. He took the view that Section 75 (2) of the Act put a complete ban on the carry forward of losses in the case of a registered firm. He further observed that as Section 76 of the Act placed registered firms and unregistered firms on the game footing in that respect and that except to the limited extent of speculation losses under the Act of 1922 no other losses as buffered by registered firms, could be carried forward and set off against the profits of the subsequent years, even for the limited purposes of determine the tax payable by the registered firms. The appeal of the assessee was accordingly dismissed.

3. The assessee took the matter to the Appellate Tribunal in the second appeal. Before the Tribunal it was conceded on behalf of the assessee that the loss originally determined for the assessment year 1968-69 had since been converted into a positive income and, therefore, there vas no question of adjusting any carried forward loss from that year. As regards the loss computed for the A.Y 1970-71 it was submitted that it had two parts, viz., business loss proper amounting to Rs. 13,844/-and unabsorbed depreciation amounting to Rs. 66,256/-. It was submitted that the ban regarding the carry forward of loss in the hands of a registered firm, as imposed under Section 75 of the Act might apply, only in respect of the loss of Rs. 13,844/- and that the other amount of Rs. 66,256/- must be treated as unabsorbed depreciation which was required, under the provisions of Section 32 (2) of the Act, to be added to the amount on depreciation allowance for the following previous year and deemed to be a part of that allowance.

4. On behalf of the Revenue it was contended that under Section 75 (2) of the Act only the partners of a registered firm were entitled to get the set off of the carry forward loss and not the firm. The Tribunal on a consideration of the rival contentions observed that Section 75 (2) of the Act refers to the loss of a registered firm, before considering the unabsorbed depreciation and that Section 32 (2) covers the case of unabsorbed depreciation. The decision of the Bombay High Court in the case of Ballarpur Collieries Co. v. Commissioner Of Income-Tax, Poona., Poona, [(1973) 92 ITR 219 (1)] was relied upon by the Tribunal. It was observed that the ratio of the decision in that case which was under the provisions of the old act of 1922 was equally applicable to the cases under the new Act of 1961 as the corresponding provisions of Section 32 (2) of the Act of 1961 are pari materia with Section 10 (2) (vi) (b) of the Act of 1922 and the Tribunal accordingly held that the amount of Rs. 66,256/- of the unabsorbed depreciation must be deducted from the assessee firm's total income computed for the A. Y. 1970-71.

5. The question for consideration is as to whether when in the case of an assessee which is a registered firm or an un-registered firm assessed as a registered firm, in the assessments of its partners full benefit cannot be given to depreciation allowance in any previous year owing to there being no profit or gains chargeable for that previous year or owing to profit or gains chargeable being less than the allowance or part of the allowance to which effect could not be given, as the case may be, is to be carried forward and set off in the hands of the firm in the following year. Such set off is not allowable in the hands of an assessee firm because the same has to be apportioned between the partners of the firm in the relevant previous year. The question involves interpretation of Sections 32 (2) and 75 of the Act which are reproduced below: —

“32 (2): Where, in the assessment of the assessee (or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners) full effect cannot be given to any allowance under clause (i) or clause (ii) or clause (iv) or clause (v) or clause (vi) of sub-section (1) or under clause (i) of sub-Section (1A) 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.”

“75. (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 (2). Nothing contained in sub-section (1) of section 72, sub-section (2) of section 73, sub-section (1) of section 74 or sub-section (3) of section 74 A shall entitle any assessee, being a registered firm, to have its loss carried forward and set off under the provisions of the aforesaid sections.”

The effect of these provisions was brought out in detail by the Madras High Court in the case of Commissioner of Income-tax, Tamil Nadu-1 v. Nagapatinam Import and Export Corporation, [(1979) 119 ITR 444 (2)] as under: —

“In the case of a registered firm, there is a computation to be made of the income in accordance with the provisions of the Act and the firm pays its own tax. After the income of the firm is arrived at, it is distributed or allocated among the partners in accordance with their respective shares as shown by the instrument of partnership so that the income so allocated is added to the other income, if any, in the partners' hands and assessed to tax accordingly. Where the result of the computation in the hands of the firm is a loss, then s. 75 provides that loss also should be apportioned among the partners.

The point to be considered is whether the allowance for depreciation is to be equated with the loss that had been contemplated for apportionment among the partners. For some purposes of the Act, depreciation forms part of the loss. The income of the firm or the loss in the hands of the firm cannot be computed without making allowance for depreciation in case the assessee is eligible for, and has made such a claim by complying with the relevant provisions of the Act. If there is any other loss, apart from the depreciation, then that loss will get added to the amount of depreciation allowable to the assessee under s. 32 read with the rules. It is the total of this amount which will be allocated among the partners under the provisions of s. 75. The Act thus makes a distinction between the unabsorbed allowance of depreciation and other losses. It has already been seen that s. 72 (2) of the Act provides that where any allowance or part thereof is, under sub-s. (2) of s. 32 or sub-s. (4) of s. 35, to be carried forward effect shall first be given to the provisions of s. 72. In other words, s. 72 (2) contemplates the loss other than the unabsorbed depreciation being given a priority in the matter of set-off, as there is time limit within which such loss can be adjusted. Under s. 72 (3) the loss other than from depreciation is eligible for being carried forward and set off only for a period of eight assessment years immediately succeeding the assessment year for which the loss was first computed; in the case of unabsorbed depreciation allowance, there is no such time limit. The Legislature has, therefore, made a specific provision for priority in setting off the loss otherwise than the unabsorbed depreciation allowance so that the unabsorbed depreciation allowance can be carried forward if necessary without any time limit and set off in the appropriate succeeding years. It is thus clear that there is a separate identity maintained under the statute with reference to the unabsorbed depreciation allowance though at the time of computation it forms part of “loss”. It may be that at the time of allocation among the partners the unabsorbed depreciation is taken along with any other loss that may have been sustained by the registered firm; but this identity of unabsorbed depreciation is required to be maintained in order to enable it to be set off against the future income separately and independently of the other losses. If we approach the construction of s. 32 (2) in the light of the above background, there appears to be no difficulty in construing the reference.”

We find ourselves in complete agreement with the aforesaid view. It is worth noting that a registered firm is a separate and distinct entity under the Act. Further, depreciation is allowed in the case of a firm on account of the firm owning the building, plant or machinery on which the same is allowed. Thus the benefit of unabsorbed depreciation for purposes of set off in the following years has to go to the firm itself and not the partners. In fact Section 32 (2) of the Act is a complete Code by itself. According to this provision the unabsorbed depreciation has to be added to the amount of the allowance for depreciation for the following previous years and is to be deemed to be a part of that allowance for those years. It is to be noted that this provision talks of addition of unabsorbed depreciation in the next previous year. The only proper interpretation to be placed on the provision is that it is to be added in the hands of the same assessee i.e, the firm which only can get depreciation allowance on that asset, the partners being different persons than the assessee firm. The other words that ‘the carried forward depreciation has to be a part of depreciation allowance of the following year’ also suggest that the same is to be set off in the following year in the hands of the same assessee i.e, the firm itself and not the partners thereof. Thus the liberal interpretation of Section 32 (2) of the Act also leads to the same conclusion that unabsorbed depreciation in the case of a firm is allowed to be carried forward by the firm and set off against its profits in the following year or years. The same view was taken by the Madras High Court in the Nagapatinam's case (supra), and we reproduce below the relevant portion of that judgment:

“Under that provision if there is any surplus out of the unabsorbed depreciation left in the hands of the partner, then the unabsorbed depreciation so left is to be again transported into the assessment of the firm and treated as depreciation in the succeeding years and so on. This position appears to us to be clear from the words of the statute themselves have to start with the assessment of the registered firm. We reach a stage at which we find that there are no profits or gains available for adjustment as against the depreciation allowance due to the firm, because the profits are inadequate to absorb the whole of it. Full effect cannot be given to such an allowance in the hands of the partners. In such a case, either the whole of the depreciation allowance or part of the allowance to which effect has not been given by adjustment in the hands of the partner will have to be added to the amount of the depreciation in the following years and deemed to be the part of the allowance for the later years. This is the clear result of the language of the provisions.”

6. The contention on behalf of the Revenue is that once depreciation allowance is allocated among the partners in accordance with Sections 182 and 75 of the Act then it ceases to be unabsorbed depreciation allowance any longer so as to come within the scope of Section 32 (2) of the Act, then the same cannot be taken away from the hands of the partners and allowed to be carried forward by the firm so that the same may be set off against the profits in the following years in the hands of the firm. This contention was repelled by the Madras High Court, in the said decision (with which we find ourselves in complete agreement) in the following:

“Section 32 (2) of the Act clearly contemplates two positions, one is that the depreciation allowance should remain unadjusted as against the income of the firm as such and, the second is, it should remain unadjusted in the hands of the partner also. When both the situations are reached, then the balance available is to be considered in the hands of the firm and treated as depreciation allowance to be added for the purpose of computation of the total income in accordance with the provisions of s. 32 read with other sections. Otherwise, s. 32 (2) in so far as it applies to the registered firm should be meaningless. We do not find any warrant for the contention of the revenue that the depreciation allowance, so long as it is allocated among the partners, ceases to be depreciation allowance coming within the scope of s. 32 (2) so that it gets reduced only to the position of a loss. This contention would be contrary to s. 72 (2) as well as s. 73 (3).”

7. As regards the contention that Section 75 of the Act provides that partners of a registered firm are exclusively entitled to carry forward and set off of losses, in our view this provision is applicable only in respect of business losses or losses in speculation business and cannot be applicable to carry forward and set off of depreciation allowance. A perusal of the relevant provisions of the Act and in particular the provisions of Sections 32 (2), 72, 73 and 75 clearly show that the manner of carry forward and set off of depreciation allowance is distinct arid separate and is governed exclusively by Section 32 (2) of the Act. This view finds support from a decision of the Supreme Court in the case of Commissioner of Income-tax V. jaipuria China Clay Mines (P) Ltd., [(1965) 59 ITR 555 (3)]. There Lordships observed (at page 561) as below: —

“The unabsorbed depreciation allowance is carried forward under proviso (b) of Section 10 (2) (vi) and the method of carrying it forward is to add it to the amount of the allowance or depreciation in the following year and deeming in it to be part of that allowance; the effect of deeming it to be part of that allowance is that it falls in the following year within clause (vi) and has to be deducted as allowance. If the legislature had not enacted proviso (b) to section 24 (2), the result would have been that depreciation allowance would have been deducted first out of the profits and gains in preference to any losses which might have been carried forward under section 24, but as the losses can be carried forward only for six years under section 24 (2), the assessee would in certain circumstances have in his books losses which he would not be able to set off. It seems to us that he Legislature, in view of this, gave a reference to the deduction of losses first. But it is wrong to assume that section 24 (2) also deals with the carry forward of depreciation. This carry forward having been provided in section 10 (2) (vi) and in a different manner, section 24 (2) only deals with losses other than the losses due to depreciation.” (Emphasis supplied).

It is worth noting that Section 75 of the Act of 1961 embodies the provisions of second proviso later half to Section 24(1) and earlier part of proviso (c) to section 24 (2) of the Act of 1922. There has been no change of law in the Act of 1961 as against the Act of 1922 so far as the carry forward and set off of depreciation allowance in the case of a registered firm is concerned and the only change that has been brought out is with regard to carry forward and set off of speculation loss of registered firms.

8. The Gauhati High Court in the case of Commissioner of Income-tax. Shillong v. Singh Transport Co., [(1980) 123 ITR 698 (4)] also took the same view. The Court held as below: —

“In the result, we have no hesitation in arriving at the conclusion that s. 32 (2) of the Act governs exclusively as to the manner of carry forward and set off in respect of depreciation allowance. In this view of the matter, the rigour of limitation as to the time up to which unabsorbed depreciation allowance can be set off is not applicable in case of such depreciation allowance. Further s. 32 (2) being the provision providing the manner of carry forward and set off of such allowances, the provisions of s. 75 are inapplicable. section 75 which provides that the partners of a registered firm are exclusively entitled to carry forward and set off losses are only applicable in respect of business losses or losses in speculation business and cannot be applicable to carry forward and set off of depreciation allowance.”

9. The Bombay High Court in the case of Ballarpur Collieries Co., (supra) dealt with the question of the carry forward loss and unabsorbed depreciation in the case of a firm under the provisions of the Act of 1922. It was held that depreciation loss is carried forward by virtue of the special provision in s. 10 (2) (vi) proviso (b) and not by virtue of the general provisions of S. 24 (2) of the Act of 1922 and that under the proviso (b) to Section 10 (2) (vi) the unabsorbed depreciation allowance had to be added to the allowance for depreciation for the following year. It was further held that the deduction of depreciation allowance is not permissible for computing the income of the partners in their capacity as such. What was contemplated was that as the firm was treated as an independent assessee after the Finance Act, 1956, it must independently be given the benefit of Section 24 (1) and (2) and it must be allowed to carry forward the past losses in spite of the fact that those losses had already been allocated to its partners. The provisions of section 32 (2) of the Act are pari materia with the provisions of Section 10 (2) (vi), proviso (b) of the Act of 1922. Thus this decision of the Bombay High Court is equally applicable to the cases under the new Act of 1961.

10. A number of cases were cited by Mr. Wadhera in support of his contention that unabsorbed depreciation like business loss cannot be carried forward by a registered firm for the simple reason that once it is allocated between the partners there remains nothing to carry forward so far as the firm is concerned. Reference has been made to the decision of the Allahabad High Court in the case of K.T Wire Products v. Union of India & Others. [(1973) 92 I.T.R 459] (5). This was a case of writ petition under Article 226 of the Constitution of India. The Allahabad High Court held, after referring to the provisions of sections 32 (2) and 75 of the Act, that according to those provisions the unabsorbed depreciation and loss could not be carried forward by a registered firm for the simple reason that they are allocated between the partners and there remains nothing to carry forward so far as the firm is concerned. The further sentence following these observations is that this legal position was not disputed. It is thus clear that in the case before the Allahabad High Court the question of the distinct character of the allowance of unabsorbed depreciation as compared to the other business loss was not argued and the case went on the assumption that the unabsorbed depreciation and business loss stood at one and the same footing, so far as the question of carry forward and set off was concerned. The Allahabad High Court had thus no occasion to consider the question if the provisions of sections 32 (2) and 75 applied o the case of unabsorbed depreciation allowance.

11. The next case on which strong reliance has been placed by Mr. Wadhera is the decision of the Gujarat High Court in Commissioner of Income-tax, Gujarat v. Garden Silk Wvg. Factory [(1975) 101 ITR 658] (6). It appears that full regard was not given to the language of Section 32 (2) in this decision as there is no discussion in this decision as to how the language of the later part of Section 32 (2) fits in the interpretation as given by the Allahabad High Court to Section 32 (2) in arriving at its conclusion that in the case of an assessee which is a registered firm, where full effect cannot be given to depreciation allowance in the assessment of individual partners, the registered firm is not entitled to carry forward the unabsorbed depreciation allowance to the next year and set it off against its business income. In Garden Silk Weaving Factory v. Commisserion Of Income Tax, Gujarat, [(1983) 144 ITR (613)] (7), the Gujarat High Court simply followed its earlier decision in the case of Garden Silk Wvg, Factory, (supra).

12. In Raj Narain Agarwala v. Commissioner of Income-tax, Delhi [(1970) 75 ITR (1)] (8), the following observations were made:

“In the case of a registered firm any loss, which cannot be set off against any income, profits or gains of a firm, is to be apportioned between the partners of the firm and such partners alone are entitled to have the amount of loss set off under section 24. In the case of a registered firm if full effect cannot be given to any depreciation allowance in any past year then the carried forward unabsorbed depreciation becomes depreciation of the current year in the hands of the partners. If one of such partners is carrying on no other business, such partner can necessarily set off the unabsorbed depreciation against income under other heads. In the language of section 10 (2) (vi), proviso (b), is implicit the intention of the legislature that effect can be given to a depreciation allowance in the assessment of a partner. In such a case set off is permitted under section 24 (1) and recourse to section 24 (2) is unnecessary.”

It is stated in the subsequent portion of the judgment that that matter was not before the Court and, therefore, it need not finally decide the abovesaid question. It is thus clear that the aforesaid observations were in the nature of obiter only.

13. The cases Commissioner of Income-tax, Gujarat III v. Dhanji Shamji (1974) 97 I.T.R (173) (9) and M.O Devassia and Co. v. Commissioner of Income-tax, Kerala, (1979) 118 ITR (212) (10) relate to cases of carry forward of speculation loss. The case of carry forward and set off of speculation loss admittedly stand on a different footing than the case of carry forward of depreciation allowance. Kalani Udyog v. Income-tax Officer, M-Ward, Indore, (1979) 117 ITR (431) (11), is a decision of the Madhya Pradesh High Court which relates to a case of carry forward and set off of unabsorbed loss in the case of a registered firm. We have already pointed out above the distinction between the case of a carry forward and set off of unabsorbed depreciation allowance and that of a business loss. The question as to whether these too stand on the same footing or different footing was not in question before the Madhya Pradesh High Court which only interpreted Section 75 of the Act with regard to the case of carry forward and set off of business loss in the case of a registered firm.

14. As per our above discussion, we answer the question referred to us in the affirmative i.e, in favour of the assessee and against the Revenue. The parties are, however, left to bear their own costs of the Reference.

Question answered in the affirmative.