Lahiri, J.:— The question referred to us by the Income-tax Appellate Tribunal, “the Tribunal” for short, under s. 256(1) of the Income-tax Act, 1961, “the Act” for short, as fashioned by the Tribunal reads:

“Whether on a proper construction of section 32(2) of the Income-tax Act, 1961, the Tribunal was justified in holding that the unabsorbed depreciation of the assessee, registered firm, for the preceding assessment years allocated to the partners, if not wholly set off in their respective assessment, should be brought back for computation of the total income of the firm in the subsequent years, as if it were the firm's unabsorbed depreciation?”

2. Shortly put, the necessary facts, leading up to the present reference by the Tribunal, are:

The assessee in question is a registered firm. In the assessment year 1972-73, the ITO completed the assessment of the firm at nil after determining the unabsorbed depreciation for the year at Rs. 21,846. The quantum of depreciation allowance of Rs. 21,846 was the unabsorbed depreciation allowance for the assessment years 1969-70, 1970-71 and 1971-72. In the assessment year 1973-74, the assessee claimed before the ITO that the unabsorbed depreciation amounting to Rs. 21,846 for the years 1969-70, 1970-71 and 1971-72 (hereinafter referred as “the unabsorbed depreciation”) should be carried forward in favour of the firm and added to the current year's depreciation and set off against the profits of 1973-74, and the balance should be carried forward to the subsequent assessment year. The ITO, however, determined the total income of the firm at Rs. 5,798 after allowing the depreciation for the current assessment year and turned down the claim of the assessee to carry forward and set off the unabsorbed depreciation and/or to carry forward the balance of the depreciation allowance to the subsequent assessment year. On consideration of the provisions contained in s. 32(2) of the Act, the ITO held that the firm was entitled to set off the depreciation allowance for the current year only. He held that the unabsorbed depreciation remaining after the assessment of the firm could be allocated to the partners and they and they alone could take the benefit of carry-forward and set-off in respect of the allocated unabsorbed depreciation in their hands. On appeal by the assessee, the AAC allowed the appeal and held that unabsorbed depreciation of the previous years in the hands of the partners due to there being no sufficient profit reverted to the firm for set-off in the years following. The revenue took the matter to the Tribunal which upheld the order of the AAC. While upholding the order of the AAC the Tribunal took into consideration the scheme of the Act, the status of a registered firm, distinction between the ordinary business loss and depreciation allowance, construed the provisions contained in ss. 32(2), 72(2) and 73(3) of the Act and held that in the case of ordinary business loss of a firm, the loss which could not be set off by the firm was to be allocated to its partners and treated in their hands as if it belonged to the partners in accordance with the proportion of their shares; however, in so far as the depreciation allowance was concerned, an exception was carved out in s. 32(2) of the Act; if there was any unabsorbed depreciation and full effect of set-off could not be given owing to the profits or gains being less, then the depreciation allowance should be allocated to the partners according to their entitlements. However, it has held that depreciation allowance allocated to the partners if not wholly set off in their respective assesement, the depreciation allowance so left unabsorbed reverts back to the firm in the computation of the total income of the firm in the subsequent year or years as if it were the firm's unabsorbed depreciation. In support of the determination, the Tribunal has drawn force from the decision reported in [1973] 92 ITR 219 (Ballarpur Collieries Co. v. Commissioner Of Income-Tax, Poona.). It considered all the contentions raised on behalf of the revenue. It also considered the rival contentions of the revenue and the rationale of the decisions reported in [1973] 92 ITR 459 (All) (K.T Wire Products v. Union of India) and [1975] 101 ITR 658 (Guj) CIT v. Garden Silk Wvg. Factory) and held that when two views were consistent and possible the view that favoured the assessee should be accepted.

3. Mr. G.K Talukdar, the learned counsel for the revenue, has submitted that once the allocation was made to the partners they were the beneficiaries of unabsorbed depreciation and they and they alone were entitled to carry forward and set it off against their other income in the year or the years following. Once the allocation is made, the learned counsel submits, there remains nothing with the firm which can be carried forward by it on the ground of either there being no income or income being insufficient to absorb depreciation allowance. The learned counsel points to the collocation of the words “if the assessee is a registered firm……in the assessment of the partners full effect cannot be given to any such allowance”, in s. 32(2) of the Act, and submits that the depreciation allowance once allocated to the partners remains and continues to remain in their hands and the question of carrying forward the unabsorbed depreciation in the hands of the partners to the registered firm for the purpose of its assessment does not arise at all. It has been contended that there is no warrant for the proposition that unabsorbed depreciation allowance of a firm, once allocated to the partners can be reverted back to the firm, either in s. 32(2) or in any other provision of the Act. It is contended that any other interpretation would violate the plain and grammatical meaning of s. 32(2) of the Act and would result in distinct disadvantage to the partners who compose the firm. The learned standing counsel in support of his contention relies on K.T Wire Products, [1973] 92 ITR 459 (All), CIT v. Garden Silk Wvg. Factory, [1975] 101 ITR 658 (Guj) and Shri Raj Narain Agarwala…Petitioner v. The Income Tax Commissioner, Delhi…, [1970] 75 ITR 1 (Delhi). The precise point for determination is if in the assessment of an assessee which is a registered firm, full effect could not be given to the depreciation allowance owing to their being no profits or gains chargeable or owing to the profits or gains chargeable being less than the allowance and the quantum of depreciation allowance allocated to the partners but effect could not be given to such allowance in the assessment of the partners, can the said unabsorbed depreciation allowance be allowed to be added to the depreciation allowance of the firm in the succeeding years under s. 32(2) of the Act?

4. As the point referred relates to a true and proper construction of s. 32 of the Act the relevant extracts of the provisions are quoted:

“32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed—…

(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) 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.”

(Emphasis* supplied)

5. Section 32(2) of the Act corresponds to s. 10(2)(vi), prov. (b), of the Indian. I.T Act, 1922, hereinafter referred as “the old Act”. Section 32(1) makes depreciation allowable in respect of, (a) buildings, (b) machinery, (c) furniture, or (d) plant. The prime requisites for claiming depreciation allowance: (a) the depreciable asset must be owned by the assessee, and (b) the asset must be used for the purpose of the assessee's business or profession, subject to the provisions of s. 34 of the Act. The section, inter alia, provides for the basis or grounds for allowing depreciation allowance and also provides the manner of calculation of the allowance. Section 32(2) lays down the manner in which depreciation allowance may be set off and carried forward. Unabsorded depreciation allowance can be carried forward and the method is to add it to the amount of the depreciation allowance in the following year deeming it to be a part of that allowance. It is apparent that the effect of the deeming provision is that the unabsorbed depreciation allowance retains its colour or character as depreciation allowance in the following year and has to be deducted as “allowance” and not as “business loss”. It also appears that the section is subject to the provisions of ss. 72(2) and 73(3). It appears prima facie that had it (depreciation allowance) not been subject to the provisions of ss. 72(2) and 73(3) depreciation allowance would have been deducted first out of the profits or gains in preference to any losses, be that business loss or loss in speculation business.

6. It is patent that for the determination of profits under the head “Income from business” all allowances permissible under s. 32 must be deducted. Profits and gains of business, profession or vocation are required to be computed after deducting all allowances permissible under s. 32(2) for the purpose of determining the tax payable by an assessee. There may be cases where on account of there being no profits or gains chargeable for the year or profits or gains chargeable being less than the depreciation allowance full effect may not be given to such depreciation allowance. On some occasions no effect may at all be given to depreciation allowance or partial effect may not be given for the reasons alluded. In such cases depreciation allowance or part thereof, in respect of which effect could not be given, is required to be added to the amount of allowance of depreciation for the following previous year and the same shall be deemed to be a part of that allowance for that year and so on for the succeeding years. It is worthwhile mentioning that s. 32(2) postulates that losses which had been carried forward from past years should first be set off against business profits under s. 72; if any balance of profit still remains the unabsorbed depreciation allowance of the past years carried forward under s. 32(2) should be set off against such balance of profits. Similarly, in respect of allowance on account of depreciation on scientific reserach the provisions of s. 72(2) shall apply instead of the provisions contained in s. 73 dealing with set-off and carry forward provisions applicable to losses in speculative business. We also notice that even in respect of unabsorbed expenditure for promoting family planning has a special method to carry forward and set-off—vide ss. 36(1)(ix) and 72(2) of the Act. There cannot be any dispute that the unabsorbed allowance is not subject to the limitation of 8 years for set-off as it is applicable in the case of business loss and losses in speculation business, vide ss. 72(3) and 73(4) of the Act. Sections 72(2) and 73(3) provide for inter se priority of set-off between ordinary business loss or losses in speculation business and unabsorbed depreciation allowance. The provisions of s. 32(2) containing the expression “subject to the provisions of sections 72(2) and 73(3)” obviously manifest that the rest of the provisions contained in ss. 72 and 74 in so far as the manner of carry forward and set off are not applicable in respect of the two classes of unabsorbed depreciation allowances. On perusal of the relevant provisions of the Act and in particular the provisions of ss. 32(2), 72, 73 and 75 we are convinced that the manner of carry forward and set off of depreciation allowance is distinct and separate and covered exclusively by s. 32(2). In support we would refer to a decision of the Supreme Court, wherein their Lordships were called upon to interpret the provisions of s. 10(2)(vi) of the old Act corresponding to s. 32(2) of the Act and s. 24(2) of the old Act corresponding to ss. 72 and 73 of the Act, in CIT v. Jaipuria China Clay Mines [P.) Ltd., [1965] 59 ITR 555 (SC). Their Lordships observed (at p. 561):

“The unabsorbed depreciation allowance is carried forward under proviso (b) to 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 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 the 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)

7. 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.

8. It has been contended by the revenue that the section refers to unabsorbed depreciation allowance of a registered firm in the assessment of its partners and contended that once depreciation allowance was apportioned between the partners the registered firm could not claim the benefit of such unabsorbed depreciation allowance. In short, the argument is when s. 32(2) refers to the assessment of the partners in a case where the assessee is a registered firm, the assessment of the partners is a part of the assessment of the firm, hence the provisions regarding the carry forward of unabsorbed depreciation must be given effect to in the assessment of the partners.

9. It is difficult to accept the proposition that the assessment of the partners is a part of the assessment of the firm as an assessee. Under ss. 182 and 183 of the Act, the ITO deals with the assessment of a registered firm. He is required to determine the income-tax payable by the firm itself and thereafter the total income of each partner of the firm including a share of the firm's income, profits and gains of the previous years are required to be assessed and the sum payable by the partners, on the basis of such assessment, is determined. We would quote the extract of the observations made by the Supreme Court in S. Sankappa v. ITO, [1968] 68 ITR 760, 766, 767:

“In the case of a registered firm, the Income-tax Officer, after computing the income, has to determine the tax payable by the firm itself, and provision is made that, thereafter, the share in the income of the firm of each partner is to be included in his total income for purposes of his individual assessment to tax. It is true that the Income-tax Officer assessing the firm may not be the same officer who may be dealing with the individual assessment of the partners and, in any case, even if he be the same officer, the proceeding for assessment of the partners has to be treated as a separate proceeding; but it is also clear that the proceedings for assessment of th??? firm under this section do not come to an end merely on computation of the income of the firm and determination of the tax payable by the firm on that income. The Income-tax Officer, who deals with the assessment of the firm, has also to apportion the income of the firm, in the case of a registered firm, between its partners and the notice of that apportionment has to be given under section 23(6) by him to the firm. This apportionment is clearly treated as a part of the proceeding for assessment of the firm and that is why the notice is to be given to the firm. The second proviso to section 30(1) also clarifies this position by laying down that the right of appeal in respect of the apportionment is to be exercised by the partners by filing appeals against the order of assessment of the firm and not against orders made in the course of subsequent proceedings for the individual assessments of the partners themselves. The second proviso to section 23(5)(a) also brings out this position. In certain cases, after the apportionment of the income of the registered firm, the share of a particular partner, who is not resident in the taxable territories, is to be assessed to tax also as if it is the income of the registered firm. All these provisions clearly show that proceedings for assessment of a firm consist of computation of the income of the firm, determination of tax payable by the firm, apportionment of the income of the firm between its partners in the case of a registered firm and, in appropriate cases, imposition of tax on the firm after including the share of the income of certain partners in the income of the firm, even though the firm is registered. The proceedings for assessment of the firm are not completed until all these steps have been taken by the Income-tax Officer, and each one of those steps must be held to be a step in the proceedings for assessment of the firm.”

10. It is true that the law laid down by the Supreme Court is in respect of the relevant provisions of the old Act. We are only to consider s. 158 of the new Act in place of s. 23(6) and s. 247 of the new Act in place of s. 30(1) and ss. 182 and 183 of the new Act in place of s. 23(5) of the old Act. It may be culled from the decision that, (a) proceedings for the assessment of a firm continue till the income of the firm is apportioned between its partners, in appropriate cases, till the imposition of the tax on the firm after including the share of the income of the partners; (b) proceedings for assessment are independent and separate proceedings. Therefore, the expression “the assessment of the partners in case where the assessee is a registered firm” has to be read only for the purpose of finding out whether full effect cannot be given to the allowance permissible under s. 32.

11. In CIT v. Jaipuria China Clay Mines (P.) Ltd., [1966] 59 ITR 555. the Supreme Court has clearly explained the true meaning of the expressions “in the assessment of the assessee or if the assessee is a registered firm, in the assessment of the partners, full effect cannot be given to any such allowance……” Their Lordships observed as under (p. 559):

“What is the meaning of the expression ‘in the assessment of the assessee or if the assessee is a registered firm, in the assessment of the partners, full effect cannot be given to any such allowance in any year?’ It would be noted that the words used are ‘in the assessment of the assessee or the assessment of the partners’. Taking the case of the partners of a registered firm, the assessment must be their individual assessments, i.e, assessment in which the profits from the firm and other sources are pooled together. The legislature is clearly assuming that effect can be given to depreciation allowance in the assessment of a partner; the only way effect can be given in the assessment of a partner is by setting it off against income, profits and gains under other heads.”

12. Therefore, their Lordships have clarified the cloud or mist as to the meaning of the expression. It has been held by their Lordships that by virtue of the expression the partners of registered firms are entitled to claim set-off. Effect can be given to depreciation allowance in the assessment of the partners entitling them to claim set-off. The expression has not been used to mean that the aforesaid entitlement of partners ensured them an absolute right to carry forward the unabsorbed depreciation allowance from year to year in the manner prescribed under s. 75 of the Act. The expression provides for entitlement of the partners of a registered firm to depreciation allowance, full effect of which could not be given in the assessment of the assessee. It does not provide for eternal retention of the allowance in the assessment of the partners or to continue to set it off from year to year when effect has not been given to such depreciation allowance in the hands of the partners.

13. Let us look at the question whether the unabsorbed depreciation or part thereof to which effect has not been given is to be carried forward as a loss by the partners and they alone can set it off against their other income or such unabsorbed depreciation may be allowed to be set off by the firm itself in a succeeding year from another angle. As alluded, the depreciation is ordinarily entitlement of the assessee who holds the depreciable asset. The depreciable asset is owned by the firm and used by the firm for the purpose of the assessee's business or profession. As such, a person other than the firm is required to establish that the owner of the depreciable asset ought not to get the benefit of unabsorbed depreciation allowance. This appears to be in consonance with common sense, justice and equity. We do not find any such right of the partners to which they are entitled under s. 75(1) of the Act.

14. In the result, it appears to us that a registered firm is entitled to carr??? forward depreciation allowance, the effect of which has not been given. On a perusal of the provisions of ss. 72 and 73 it becomes clear to us that depreciation allowance has been treated differently by the Legislature from business losses and losses in speculative business. The provisions of ss. 72(2) and 73(3) provide that when there???re carried forward business losses or losses in speculative business and also depreciation allowance to be carried forward, priority shall be given to the carried forward losses and losses in speculative business and not to the depreciation allowance. Fixation of the priority itself distinguishes the colour and character of depreciation allowance. We have noted that the rigour of limitation is not applicable in the case of an unabsorbed depreciation allowance. We have also noted that the provision of s. 32(2) is an independent provision providing the manner of set off and carry forward of depreciation allowance. Therefore, unabsorbed depreciation allowance never loses its nature or character as depreciation allowance. Unabsorbed depreciation allowance goes to the partners by virtue of the provisions of s. 32(2) itself. In our opinion, s. 32(2) of the Act is a complete code dealing with set-off and carry forward of depreciation allowance. This view finds support from the observations made by their Lordships in Jaipuria China Clay Mines (P.) Ltd., [1966] 59 ITR 555 (SC) and S. Sankappa, [1968] 68 ITR 760 (SC). We are of the opinion that depreciation allowance never loses its character, nature or colour as unabsorbed depreciation allowance and is always required to be set off and carried forward not by force of s. 72 and/or s. 73 but by virtue of the provisions of s. 32(2) itself. Applicability of ss. 72(2) and 73(3) is exclusively for the purpose of giving priority inter se between losses and depreciation allowance. In this view of the matter, we are of the opinion that depreciation allowance in the following year is available only to the firm as an assessee whose income is to be computed as enjoined under ss. 182 and 183 of the Act. No deduction of depreciation allowance is permissible for computing the income of the partners in their capacity as such. Section 32(2), in our opinion, contemplates that the assessment of the partner is relevant only for the purpose of ascertaining whether full effect has not been given to the depreciation allowance.

15. In the result, we hold that where full effect has not been given to the depreciation allowance in the assessment of the partners the unabsorbed allowance should be allowed to be set off by the registered firm in the succeeding year.

16. It has been contended on behalf of the revenue that the construction put forward by the assessee is likely to work inequitably as between the partners. We have already referred that in reality the entitlement of depreciation allowance ought to have gone exclusively to the owner of depreciable assets; however, the partners have been given the right to claim set-off and the question of injustice or inequity between the partners cannot arise. Only those partners who have gained profits in the assessment year may not draw the benefit. It does not appear to be unjust or inequitable inasmuch as the deserving partners would derive the benefit of the provision. Be that as it may, when we find that it is the only possible construction of the provisions contained in s. 32(2) of the Act the contention of the revenue does not hold good.

17. We respectfully differ from the opinion expressed in [1973] 92 ITR 459 (All) (K.T Wire Products v. Union of India) and [1975] 101 ITR 658 (Guj) (CIT v. Garden Silk Wvg. Factory). Suffice it to say that the problem was not looked at and solution sought for in the manner dealt with by us. We express the same view regarding Shri Raj Narain Agarwala…Petitioner v. The Income Tax Commissioner, Delhi…, [1970] 75 ITR 1 (Delhi), but would like to add that the observation touching the question relevant for our determination was an obiter dictum of the High Court. The views expressed in the decisions do not appeal to us. In the result, we answer the question in the affirmative and in favour of the assessee. There will be no order as to costs.

18. Let a copy of the judgment be sent to the Appellate Tribunal who shall render such orders as are necessary to dispose of the case conformably to the judgment.