GARDEN SILK WEAVING FACTORY, SURAT v. COMMISSIONER OF INCOME TAX, GUJARAT, AHMEDABAD

Citation: [1991] 1 S.C.R. 909

Court: Supreme Court of India

Bench: S. RANGANATHAN, K. RAMASWAMY

Case summary

Judgment text

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) 101ITR658, 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 2(}23. respectively. The question arises in similar circumstances for both the years. We shall set out the facts relevant for the assessment year 'f 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- {tom three figures aggregating to Rs. 7,87,573 to arrive at the net io essed as registered . ft 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.

ofunregistered 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 ass,essee 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, whether the firm has already been assessed or not- (a) such lp,ss 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 subsection (3) of section 74 or sub-secti_on (3) of section 74A shall entitle the assessee to have sucK loss carried forward and set off against his own income.

1 ~fn view of this specific provision the High Court, following an earlier decision of the same High Court in C. /. T. v. Dhanji Shamji Manavdar, [1974) 97 I. T. R. 173 (Guj. ) answered the second question referred to it in the reference relating to assessment year 1968-69 and -the only question 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 m the context of "depreciation" which is one of the notional y ·allowances-by which expression we mean a deduction in respect of aft ). rt 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 aftd gains of a business.

In a sense, where the depreciation allowance exce·eds the ·. profits, otherwise arrived at, in respect of the business, thete will be a resultant "loss" in the business; and, indeed, the Department's tort~ tention is that there is no difference between an unabsorbed los'S ai:id 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 whi~h may be larger than the profits of the business otherwise computed. One i! l ...... _______ the development rebate regarding which the statute provides that it ... has to be set off against the total income of the assessee so as lo teduce r it to nil and that the balance is to be carried forward to succeeding assessment years to be accorded a similar treatment. fSee Ss. 10(2)(vib) of the 1922 Act and 33(2) of the 1961 Act].

This is an Y allowance which cannot be a constituent element of a figure of loss to b. be carried forward to later years and stands on a totally diffetent footing. The second is the allowance for depreciation under S. 10(2)(vi) of the 1922 Act. In respect of this allowattce, S. 10(2}(vi) provided that if full effect to the allowance could not be given in the as• sessment of an assessee for any assessment year, the unabsorbed liiiowance could be carried forward and set off against business profits in. ( succeeding assessment years indefinitely. This provision, natrtely clause (b) of the proviso to S. I0(2)(vi) of the 1922 Act-after an addition ifi 1953 of the words underlined in the extract below-reads thus: "10(2)(vi) ....... . Provided that .... . (a) . (b) where, in the assessment of the assessee or, ifthe assessee is a regiStered firm, in the assessment ofits partners, full effect cannot be give.

n to any such allowance in any year not being a year which ended prior to the 1 April, 1939, owing 0 to there being 110 profits or gains chargeable for that year, ot owing to the profits o~ gains chargea? ~e being less thar2(" the allowance, then, sub1ect to the prov1s1ons of clause (b) of the proviso to sub-section (2) of section 24, the allowartce or part of the allowance to which effect has not been givett1as the t:ase may be, shall be added to the amount of the allowattt:e for tleprechttitm tot the folh::Jwittg yeat attd GARDEN SILK v. C. l. T. [RANGANATHAN, J. ] 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 reenacted as S. 32(2) of the 1961 Act, which now reads thus: "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 0) of section 73, the allowance or part of the allowailce to which effect has not been given, as the case may be, stiall 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 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 twotherefore becomes necessary and this is provided by S. 72(2) of the 1961 Act which deals with carry forward of losses-the counterpart of [1991] 1 S. C. R. 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 y 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 ofIndia, [1973] 92 ITR 459 (All) ~· (b) Garden Silk Weaving Factory, [1975] 101ITR658 and Garden Silk Weaving Factory, [1983] 144 ITR 613 (Guj. ): (c) C/Tv. 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 partner\') 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 GARDEN SILK v. C. I. T. [RANGANATHAN, J. ] 925 'JI{ 219 and CIT v. Nagpur Gas & Domestic Appliances, [1984] 147 ITR 440 (Born. ); (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) CJTv. 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, [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 submit- ·-". ted 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, ·y 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 ~he 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 construetion, if an assessee A carries on two businesses, in one of which there is 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 -B in the fasciculus of sections dealing with the computatfon 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 inter-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 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, how- .

o ever, 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 intra-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 dear, In C. /. T. v. Jaipuria China Clay Mines (P) Ltd. , [1966] 59 I. 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 busi- _ _,,( ness. Bearing these two factors iri 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 GARDEN SILK v. C. l. T. [RANGANATHAN, J. ] 927 off against income, profits and gains under other heads such as income from property or dividends. Mr. Rajagopala Sastri 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 ·B 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 t~e 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 accounts. If the profits are not large enough to wipe off depreciation, the profits and Joss 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, [1964] 51 I. T. R. 178 that the deduction for depreciation should be liinited to the amount of the profits and cannot result in working out a Joss. The following observations in the more recent decision in Rajapalayam Mills Ltd. v. C. /. 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 Jess 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 de.

rived 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 in -' computed as follows: (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 unregisterted 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 ofthe 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. · GARDEN SILK v. C. l. T. {RANGANATHAN, J,) 931 Explanation: In this section, "paid'; fo'1. s lhe ~anie rneaniilg ·~ as is assigned to'it in clause (2) of section 23. J" ' Sri Salve contends that these provisions talk only of "loss'' and that to take this expression as ificluding "unabsorbed depreciation" as well will obliterate the distinction in the treatmeht 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 bf ~- the "lbss", This is so because, in the first place, "depreciation'' is norrnal outgoing though in a sense notional, which has to be debited in the computa~ion of the profits of a business on commercial pti11cipl~s (quite apart ·from statute) and it is difficult to see why, when such _.. deduction yields' a negative figure of profits, it cannot be a "Joss" as I generally ·understood. Jaipuria defirfitely says so as pointed out earlier. · - Again, as pointed out earlier, if it is treated as a genus totally diffetetit from a "loss';, there is no statutory pro. vision that will permit its 1 adjustment against other busifiess 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 "Joss" and "unabsorbed depreciation should be treated as antithetical to, or mutually exclusive of, each other.

I 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 specificalJy treated differently by the statute. In our vie~, E. there is nothing anomalous or absurd in the statute providing for a dissection- of the amount of loss . fot purposes of carry forward and providing for a, speeial or different treatment to unabsorbed deprecfa:tion in this. regard although it is a component element of the genμs described as "loss','. To illusttate, suppose an assessee has a "profit" of Rs. 5,000 in one business before deduction of depreciatiofi 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 assess- ' ment year. But for purposes of carry forward this has to be considered under to headings: (a) an unabsorbed depredation of Rs. 5,000and (b) a business' Joss 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 ofS. 72(2) itself contains an indication th~t, where unabsorbed depreciation is a component of the figure ofloss carried forward, the amount of loss proper should be set off first atjd the unabsorbed depreciation later~ But for the special treatment ac- 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, theref~re, 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 depreci~tion 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 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 re- ~ maining 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 paranthesis. But moment's thought will make it clear that the word "or" in the sub· sectitm 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 GAFDEN SILK v. C. I. T. [RANGANATHAN, J. ] 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 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 (what- · ever category it belongs to) and, if the assessee is registered firm or an unregistered firm assessed as registered firm, in the assessment of its partners, the allowance shall be added ..... ". As in the case of all other assessees, 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 r 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 inc0me of such assessee. What the sub-section clearly provides for is that the aggregate of the depreciation available to an assessee over the years will be taken into consi~ deration 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 subse-, quent 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~ection. 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 const:i:ue 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 o. ther income of each of the p 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 assessees 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 provisions [e. g. Ss. 67(2) & (3)] which indicate GARDEN SILK v. C. I. T. [RANGANATIIAN, J.

] 935 ~ that this is not so. The observations of this Court in Sankappa v. , I. T. O. , [1968] 68 l. 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 accep- . tance. 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 outlines the procedurefor 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 losl)es 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 o,n 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 l. T. R. (Statutes): 'E "The (amendment) is intended to make it clear that where unabsorbed depreciation has been effectivily 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) \4, It · is true that the clause, before its amendment, permitted all assessees-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 S'UPREME COURT REPORTS (1991] 1 S. C. R. ~ to be available.

The amendment of 1953, therefore, not only does not help the case of the Revenue, it actually lands support to the construe~ tion 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 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 assessees 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 unab~orbed 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 unab- sorbed 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 A 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 subsection. GARDEN SILK v. C. I. T. [RANGANATHAN, J.

] 937 I 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 compute~ for the assessment year 1967-68 and have it, set off in its assessment for the assessment year 1968-69. The unab-' sorbed 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 isl 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 depreciation1 computed for the assessment year 1966-67, it could have been allowed to be brought fon\rard 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. i -