# >.( v. COMMISSIONER OF INCOME TAX, GUJARAT, AHMEDABAD

- **Citation:** [1991] 1 S.C.R. 909
- **Court:** Supreme Court of India
- **Decided:** 1991-03-22
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/v-commissioner-of-income-tax-gujarat-ahmedabad-11123
- **Pages:** 29

## Headnote

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GARDEN SILK WEAVING FACTORY, SURAT
A
>.(
V.
COMMISSIONER OF INCOME TAX,
GUJARAT, AHMEDABAD
MARCH 22, 1991
B
. [S. RANGANATHAN AND K. RAMASWAMY, JJ]
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Income Tax Act, 1961-Sections 32(2), 72(2)-"Depreciation"-
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y·
Meaning of-Unabsorbed loss and unabsorbed depreciation-Difference of-Carry forward and set off of unabsorbed depreciationPrinciple and distinction of.
c
Income Tax Act, 1961-Sections 72(2), 32(2), 35-Unabsorbed
depreciation computed in assessment of registered firm-Carry forward
of-Alternatives indicated.
Income Tax Act, 1961-Section 32(2)-Unabsorbed depreciation
D
allocated to partners of registered firm-Firm whether entitled to carry
forward the depreciation and set off.
Income Tax Act, 1961-Section 32(2)-Construction and object
of-Assessee-Registered firm-Steps to be taken to carry forward of
)... ·unabsorbed depreciation to successive assessment years, indicated.
E
·~
Income Tax Act, 1922-Section 10(2)(vib), proviso (as amended
in 1953)-Effect and application of
For the assessment year of 1968-69, the assessee appellant, a
registered firm, returned a total income of Rs.3,94,483 and a provisional assessment was made.
Subsequently, the Income Tax Officer found that for the said
assessment year, the assessee had made an income of Rs.11,82,056 and
deducting therefrom three figures viz., (i) unabsorbed depreciation:
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Rs.1,59,181; (ii) unabsorbed development rebate: Rs.2,79,150; and (iii)
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unabsorbed business loss: Rs.3,49,242, aggregating to Rs. 7 ,87 ,573 and
\,-arrived at the net income of Rs.3,94,483, which had been returned and
accepted. The three figures were the figures carried over from the
previous year for the assessment year 1967-68.
The Income Tax Officer allowed the unabsorbed development
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909
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SUPREME COURT REPORTS
( 1991] 1 S.C.R.
rebate pertaining to the assessment year of 1967-68 to be carried for-
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ward and set off in computing the total income fOr the assessment year
of 1968-69, but he did not allow the amounts of unabsorbed depreciation and unabsorbed business loss. He, therefore, added back the sum
of Rs.5,08,423 (the aggregate of the amounts of unabs~rbed depreciation and unabsorbed busine~s loss) to the returned income for determinB
ing the total income for the assessment year of 1968-69.
The action of the Income Tax Officer was confirmed by the Appel-
~\
late Assistant Commissioners (A.A.C.). However, on further appeal, the
Income-tax Appellate Tribunal (A. T.) upheld the Income-tax Officer's
stand that the firm could not be allowed to carry forward and set off the
~~
busines~ loss carried from the earlier year but, so far as the unabsorbed
c
depreciation was concerned, it upheld the assessee's contention.
On these two issues a reference to the High Court was made and y
the High Court answered them against the assessee.
D
For the assessment year 1967-68, the assessee filed a return on
.30.6.67 showing a loss of Rs. 7 ,87 ,515 but filed a revised return on
22.3.1972 showing a loss of Rs.5,46,351. On 14.3.73 the I:T.O. completed the assessment determining a loss of Rs.4,85,250.
The assessee's request that this loss should be carried forward to
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the subsequent assessment year was rejected by the I.T.O. This was
confirmed by the A.A.C. On further appeal, the A.T. confirmed the
order of the A.A.C., following the High Court's decision for the assessment year 1968-69 which had by then been announced.
The High Court answered the q,,qestion-"Whether, on the facts
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and circumstances of the case, the Tribunal was justified in rejecting
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the claim for carry forward of business loss in the hands of the firm in
view of the decision reported in 101 I. T .R. 658?" in the affirmative.
Hence the assessee's the appeals-one appeal for the assessment
year of 1968-69 and the other for the assessment year of 1967-68--
G
under certificates of fitness granted by the High Court.
On behalf of the assessee it was contended that the firm as well as .-J..
the partners had been returning losses all

## Text

_Characters 0–39,967 of 72,004. This is a partial read: ask again with offset=39967 for what follows._

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GARDEN SILK WEAVING FACTORY, SURAT
A
>.(
V.
COMMISSIONER OF INCOME TAX,
GUJARAT, AHMEDABAD
MARCH 22, 1991
B
. [S. RANGANATHAN AND K. RAMASWAMY, JJ]
~
..
Income Tax Act, 1961-Sections 32(2), 72(2)-"Depreciation"-
-
y·
Meaning of-Unabsorbed loss and unabsorbed depreciation-Difference of-Carry forward and set off of unabsorbed depreciationPrinciple and distinction of.
c
Income Tax Act, 1961-Sections 72(2), 32(2), 35-Unabsorbed
depreciation computed in assessment of registered firm-Carry forward
of-Alternatives indicated.
Income Tax Act, 1961-Section 32(2)-Unabsorbed depreciation
D
allocated to partners of registered firm-Firm whether entitled to carry
forward the depreciation and set off.
Income Tax Act, 1961-Section 32(2)-Construction and object
of-Assessee-Registered firm-Steps to be taken to carry forward of
)... ·unabsorbed depreciation to successive assessment years, indicated.
E
·~
Income Tax Act, 1922-Section 10(2)(vib), proviso (as amended
in 1953)-Effect and application of
For the assessment year of 1968-69, the assessee appellant, a
registered firm, returned a total income of Rs.3,94,483 and a provisional assessment was made.
Subsequently, the Income Tax Officer found that for the said
assessment year, the assessee had made an income of Rs.11,82,056 and
deducting therefrom three figures viz., (i) unabsorbed depreciation:
F
Rs.1,59,181; (ii) unabsorbed development rebate: Rs.2,79,150; and (iii)
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unabsorbed business loss: Rs.3,49,242, aggregating to Rs. 7 ,87 ,573 and
\,-arrived at the net income of Rs.3,94,483, which had been returned and
accepted. The three figures were the figures carried over from the
previous year for the assessment year 1967-68.
The Income Tax Officer allowed the unabsorbed development
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909
910
SUPREME COURT REPORTS
( 1991] 1 S.C.R.
rebate pertaining to the assessment year of 1967-68 to be carried for-
:.c
A
ward and set off in computing the total income fOr the assessment year
of 1968-69, but he did not allow the amounts of unabsorbed depreciation and unabsorbed business loss. He, therefore, added back the sum
of Rs.5,08,423 (the aggregate of the amounts of unabs~rbed depreciation and unabsorbed busine~s loss) to the returned income for determinB
ing the total income for the assessment year of 1968-69.
The action of the Income Tax Officer was confirmed by the Appel-
~\
late Assistant Commissioners (A.A.C.). However, on further appeal, the
Income-tax Appellate Tribunal (A. T.) upheld the Income-tax Officer's
stand that the firm could not be allowed to carry forward and set off the
~~
busines~ loss carried from the earlier year but, so far as the unabsorbed
c
depreciation was concerned, it upheld the assessee's contention.
On these two issues a reference to the High Court was made and y
the High Court answered them against the assessee.
D
For the assessment year 1967-68, the assessee filed a return on
.30.6.67 showing a loss of Rs. 7 ,87 ,515 but filed a revised return on
22.3.1972 showing a loss of Rs.5,46,351. On 14.3.73 the I:T.O. completed the assessment determining a loss of Rs.4,85,250.
The assessee's request that this loss should be carried forward to
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the subsequent assessment year was rejected by the I.T.O. This was
confirmed by the A.A.C. On further appeal, the A.T. confirmed the
order of the A.A.C., following the High Court's decision for the assessment year 1968-69 which had by then been announced.
The High Court answered the q,,qestion-"Whether, on the facts
F
and circumstances of the case, the Tribunal was justified in rejecting
~'
the claim for carry forward of business loss in the hands of the firm in
view of the decision reported in 101 I. T .R. 658?" in the affirmative.
Hence the assessee's the appeals-one appeal for the assessment
year of 1968-69 and the other for the assessment year of 1967-68--
G
under certificates of fitness granted by the High Court.
On behalf of the assessee it was contended that the firm as well as .-J..
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
partner's hands; that when there was an unabsorbed depreciation comH
puted in the assessment of a registered firm for any year, for the
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GARDEN SILK v. C.l.T.
911
>w( purpose of carry forward, it should be t_etained and carried forward by
the firm only.
·
On the other hand, it was submitted for the Revenue that once the
assessment was_ completed and the total income or loss of the firm
ascertained, it had 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, which also included the unabsorbed depreciation, as
there was no difference between unabsorbed loss and unabsorbed
depreciation; and that the amendment to the proviso to section
10(2)(vib) in 1953 of depreciation 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.
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Allowing the appeals, this Court,
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HELD: 1. "Depreciation" is one of the notional allowancesA
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which expression means a deduction ill respect an outgoing whi~h is not
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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 and gains of a business. [921H-922B]
2. Initially, the depreciation allowances has to be deducted from
the profits and gains of the business to which the assets earning the
depreciation relate but, if it remains unabsorbed by such profits, the
allowance has to be set off against the other business income of the
assessee and, where that is also insufficient, against the other taxable
income of the assessee. The carry forward of any depreciation as unabsorbed cannot arise until the stage of fmal assessment is reahed and the
1 ~ total income of the assessee otherwise computed is i~sufficient to absorb
~the year's depreciation allowance. [928E-G]
3. An unabsorbed depreciation is a part of the "loss". This is so
because, in the first place, "depreciation" is a normal outgoing, though
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in a sense notional, which has to be debited in the computation of the
profits of a business on commercial principles (quite apart from statute)
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·)L- and it is difficult to see why, when such deducation yields a negative
figure of profi~, it cannot be a "loss" as g-:nerail.I understood. 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 and a business loss has to be set off against income
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SUPREME COURT REPORTS
[ 1991] 1 S.C.R.
from any other business, by way of intra-head adjustment, under s. 70 'y
and the income under any other head, by way of inter-head adjustment,
under s. 71. This is implicit in the provision that the excessive depreciation of one business can be "given effect to" against the profits and
gains of another business in the same year and has been recognised by
decisions holding that it can be set off against income from other heads.
If unabsorbed depreciation is treated as a genus totally different from a
"loss", there is no statutory provision that will permit its adjustment
against other business income-implicit in S. 32(2) itself-and against ·"""""'
all other income of the assessee. "Loss" and "unabsorbed depreciation" should not be treated as antithetical to, or mutually exclusive of,
each other. However, there is nothing anomalous or absurd in the . *
statute providing for a dissection of the amount of loss for purposes of
carry forward and providing for a special or different treatment to
unabsorbed depreciation in this regard although it is a component
element of the genus described as "loss" [931B-C, 926C-E, 931C-F]
4. Unabsorbed losses and unabsorbed depreciation are to be
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carried forward to future years to be set off against future income.
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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 indefmitely. [923G-H)
s; There is also difference between the two in the matter of their """'
carry forward in the case of assessment of a registered firm. In this
case, the unabsorbed loss cannot be carried forward by the firm at all.
The statute clearly so provides. So far as unabsorbed depreciation is
concerned, three alternatives are possible to be urged: (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 assessment of each of the partners in respect of his aliquot share thereof. (iii) ~,
It should be apportioned among the partners each of whom may set o~
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 indefmitely until the unabsorbed
depreciation gets absorbed. [924B-E]
6. The third alternative is the correct one: (a) The unabsorbed
depreciation .should be allocated among the partners and, like any other
loss, will be available to the partners to the extent of his share therein
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for set off against his business income or other income in the same
GARDEN SILK v. C.I.T.
913
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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. The
question is what is to be done thereafter. [932A-B]
(b) When 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 subsection 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 con-
...- . strue the section as envisaging the following steps where the assessee is a
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registered firm:
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(i) Excessive depreciation should be adjusted in the assessment of
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-the assessee against other business income and against other heads of
income;
(ii) Depreciation, which remains unabsorbed under (i), will be
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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
E
assessment year. [934C-G]
(c) The sub-section, before its 1953 amendment, permitted all
assessees--and this included registered firms as well-to carry forward
their unabsorbed depreciation so that though the registered firm paid
no tax, it could, on the language claim a carry forward of the depreciaF
\"""-- tion 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 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
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~-~arry forward, to the extent it has not been effectively allowed to the
partner, continues to be available. The amendment of 1953, therefore,
does not help the case.of the Revenue. [935F-936A)
(d) The objection to the above course is also based on a mental
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imagery of the firm and its partners as altogether different assessees
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914
SUPREME COURT REPORTS
[ 1991] 1 S.C.R.
and of the impermissibility of "bringing back" to the firm's "file" ·;.;-
what has gone away to the' files of the partners. This approach of viewing the two assessments in water-tight compartments for all purposes is
not correct. In any event, any such theoretical dichotomy cannot prevail
over the provisions of s. 32(2). [934G-935A]
(e) The construction suggested does not result in any double
advantage to the partners. [936D]
(f) It is true that the construction may result in a certain amount~
of imbalance in the quantum of relief available as among different
partners. But similar imbalance is inherent in the application of any of
the three possible alternatives. {936E-F]
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7. The assessee-appellant firm is entitled to carry forward the
unabsorbed depreciation computed for the assessment year 1967-68 and
have it set off in its assessment for the assessment year 1968-69. Th~
unabsorbed loss for the assessment year, 1967-68, however, cannot be Y
carried forward by the firm to be set off in its assessment for the
assessment year 1968-69. [937A-B]
K. T. Wire Products v. Union of India, (1973] 92 ITR 459 (All);
Garden Silk Weaving Factory, (1975] 101ITR658; Garden Silk Weaving Factory, (1983] 144 ITR 613 (Guj.): C./. T. v. Ram Swarup Gupta,
[1973] 92 ITR 495; Raj Narayan Aggarwala v. C.I. T., (1979] 75 ITR 1 ,
(Del.); Shankaranarayana Construction Co. v. C.I. T., [1984] 145 ITR ...(
467 (Karn.); Ballarpur Collieries Co. v. C./. T., [1973] 92 ITR 219;
C.l. T. v. Nagpur Gas & Domestic Appliances, [1984] 147 ITR 440
(Born.); CIT v. Nagapattinam Import and Export Corp., (1979] 119
ITR 444; CIT v. Madras Wire Products, [1979] 119 ITR 454; CIT v.
Madras Wire Products, [1980] 123 ITR 722 (Mad.); CIT v. J. Patel &
Co., [1984] 149 ITR 682 (Del.); CITv. Shrinivas Sugar Co., (1988] 174
ITR 178 (AP); CITv. Singh Transport Co., (1980] 123 ITR 698 (Gau.);
Pearl Wotfen Mills v. CIT, [1989] ITR 368; CIT v. Mahavir Steel Roi-_~
ling Mills, (1989] 179 ITR 377 (P & H) and CITv. R.J. Trivedi & Sons,
·
(1990] 183 ITR 420 (M.P.), referred to.
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C;IT v. Jaipuria China Clay Mines (P.) Ltd., (1966] 59 ITR 555
and Rajap(J.layam Mills Ltd. v. C.l. T., (1978] 115 ITR 777, followed.
CIVIL APPELLATE JURISDICTION: Civil Appeal Nov
1249/75 & 2075/79.
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From the Judgment and Order dated 26.9.1974 and 16.10.1978 of
Gajarat High Court in l.T.R. Nos. 19of1973 and 318of1977.
Harish N. Salve, P.H. Parekh and Sunil Degrafor the Appellant.
Ill
GA~DEN SIL.I\ v. C.I.T. [RANGANATHAN, J.)
915
V. Q(\yri Shaukar, Sr. Adv .. and$. Rajappa for the Respondent.
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.
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The two appeals relate to the assessment years 1967-68 and 196869 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 196768.
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<:ome of Rs.3,94,483 which had been returned and accepted. These
tbree figures were figures carried over from the previous year for the
~ss.essemnt year 1967-68. They comprised of:
(i)
Unabsorbed
Rs.1,59, 181
\~-
Depreciation
(ii)
Unabsorbed
Rs.2,79,150
Development Rebate
(iii) Unabsorbed
Rs.3,49,242
Business loss
')._,-
Total:
Rs.7,87,573
The Income Tax Officer (1.T.O.) agreed that, out of the above three
months, the unabsorbed development rebate pertaining to the assessment year 1967-68 had been rightly carried forward and set off in
computing the total income for the assessment year 1968-69. However,
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916
SUPREME COURT REPORTS
[1991] 1 S.C.R.
A
for reasons which will become clear later, tbe Income Tax Officer wasY
of the opinion that the sum of Rs. l,59;-181 (which represented the
amount of unabsorbed depreciation relating to the assessment year
1967-68) and the amount of Rs.3,49,242 (which represented the unabsorbed loss pertaining to the assessment year 1967-68) could not be
carried forward, as done by the assessee, to the assessment year 1968-69.
B
He, therefore, added back the sum of Rs.5,08,423 (the aggregate of
the above two amounts) to the returned income for determining th_~
total income for assessment year 1968-69. This action of the Income
Tax Officer was confirmed by the Appellate Assistant Commissioner
(A.A.C.). However, on further appeal, the Income-tax Appellate Tribunal (A.T.) took a different view. It upheld the Income-tax Officer's~-_
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stand that the firm could not be allowed to carry forward and set off
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the business loss carried from the earlier year. But, so far as the
·unabsorbed depreciation was concerned, it upheld the assessee's conD
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tention. A reference to the High Court followed. The following two y
questions were referred to the High Court of Gujarat for its decision:
"1. Whether on the facts and in the circumstances of the
case, the Tribunal was right in law in holding that the asses- .
see registered firm is entitled to carry forward unabsorbed
depreciation from earlier years and that it will be deemed
to be an allowance in the nature of depreciation in the
previous year, relevant to assessment year 1968-69?
.....(
2. Whether the claim of the assessee to carry forward and
set off loss of Rs.3,49,242 against its total income for the
assessment year 1968-69 has been rightly rejected?"
The High Court, in a very detailed judgment, discussed the
issues threadbare and answered both the questions against the assessee
and in favour of the Revenue. Hence the assessee's appeal for the
assessment year 1968-69 under a certificate of fitness granted by th~
High Court.
·
·
For the assessment year 1967-68, a full paper book containing all
the orders and statement of facts has not been placed before us. However, the petition of appeal gives a few facts which may be sufficient to
dispose of the appeal. The relevant facts are these. For this assessment
year, . the assessee filed a return on 30/6/67 showing a loss -OU
Rs. 7 ,87 ,515 but filed a revised return on 22/3/72 showing a loss of ·
Rs.5,46,351. On 14-3-73 the l.T.O. completed the assessment determining a loss of Rs.4,85,250. (It will be noticed that the assessment
order for 1968-69 gives a different figure and also shows its composition as partly loss, partly unabsorbed depreciation and partly unab- -
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GARDEN SILK v. C.I.T. [RANGANA1HAN, J.]
917
'),,(' sorbed development r(,'.}bate but this is not very material for deciding
the principle in issue 'before us). The assessee's request that this loss
should be carried foI"Ward to the subsequent assessment year was
rejected by the I.T.O. This was confirmed by the A.A.C. on further
appeal, the A.T. confirmed the order of the A.A.C., following the
High Court's decision for assessment year 1968-69 which had by then
been announced. Thereupon the following question of law was refer-
~_ red to the High Court for its opinion:
"Whether, on the facts and circumstances of the case, the
Tribunal was justified in rejecting the claim for carry forward of business loss in the hands of the firm in view of the
dt?.cision reported in 101 I.T.R. 658?"
The High Court answered the question in the affirmative following its
-....,.,- · earlier decision but granted a certificate of fitness for appeal to this
Court. This is how the second appeal is before us. It will be seen from
the above that, though there are two appeals before us, the question
involved in both the appeals is the same.
Before discussing the question at issue, it may be useful to briefly
summarise the procedure under the statute for determining the total
income of an assessee in respect of a previous year. All income accru-
~ ing or arising to the assessee and includible in his total income, is, to
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begin with, classified (see S. 14) under six different heads:
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A. Salaries.
B. Interest on Securities: (recently omitted)
C. Income from Property.
D. Profits and gains of business, profession or vocation.
(briefly, "business income")
E. Capital gains
F. Income {rom other sources.
In computing the income of the assessee according to this classification, two asepcts have to be borne iQ. mind. One is that, even under
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the same head, an :;.ssessee may have differ~nt sources. If so, the
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SUPREME COURT REPORTS
[1991] 1 S.C,R,
A income luis finit to be arrived !lt in re!ipect of each such 5ource, Thus, if
an assessee carries on several businesses, the income of each and ~ivl!ry
such business has to be separately computed by allowing against the
gross profits and gains of that business only the deductions relevant
and appropriate to that business. The second is that, for arriving at the
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figure of income assessable under a particular head, the individual
figures in respect of all the sources have to be aggregated. Thus, to
take up the head, "profits and gains of business, profession or vocation", the statute contemplates the computation of the profits and
gains of each business, profession or vocation carried on by the assessee separately. The result of such computation may be either a profit
or a loss. If all the businesses end in profits, the profits are aggregated to
arrive at a resultant figμre of profits from "business". On the other
hand, if some of the businesses make. profit a'nd some of them result in a
loss, the profits and the losses have to be added together in order to
arrive at the consolidated income under the head "profits and gains of
business." If the total amount Of profits exceeds the total amount of
D losses, there will be a positive income under this head, assessable for
that particular assessment year. If on the other hand the losses exceed
the profits, they will be "adjusted" against the profits, so as to reduce
the assessable income under the head to nil; in addition, the losses of
one or more businesses will remain "unabsorbed". There will thus be
one resultant figure of profit or loss under each head. This is one
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aspect of the matter. This is the first stage of computation which we
may call "intra-head adjustments". This was not specifically provided
for in the Indian Income-tax Act, 1922 (the 1922 Act) but now finds
specific mention in S. 70 of the 1961 Act.
S. 24(1) of the 1922 Act and S. 71 of the 1961 Act next contemplate a mutual set off of the losses under one head against the income
under some other head subject to some exceptions (like speculation
-...;.____ --....
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loss, capital loss etc. which, to avoid unnecessary complications and
~,'
confusion, we shall leave out of account). Thus if, in any particular
assessment year, an assessee has incurred a loss under the head "business", this loss can be set off against the income earned by the assessee
during that previous year under other heads. Thus, for example, if an
assessee has got income by way of salary of Rs.20,000 and income from
H
house property of Rs.25,000 but has sustained a loss of Rs.40,000 in
business, the Act envisages the set off of the loss of Rs.40,000 against ~
the income of Rs.45,000 resulting in a total income of Rs.5,000 only.
This is the second stage in the, process of assessment which we may
describe as "inter-head adjustment" or "set off".
GARDEN SiLK V. C.I.T. [RANGANATHAN, J.)
919
".Iii'
The Acts [S. 24(2) of 1922 Act and S. 72 of the 1961 Act] next
envisage a third stage in the process of assessment which can be
described as the process of "carry forward and set off". By this process, the a:ssessee is permitted to carry forward a loss he had not been
able to adjust or set off ih the first and second stages of asses.sment.
This benefit is not available to all kinds of losses but, subject to certain
\.
conditions and testrictions on which we need not dilate, it is available
to business losses. A business loss of one assessment year which
;... remains "unabsorbed" by the processes of intra-and inter-head
adjustments can be carried forward to the succeeding assessment years
and can be set off against any other business income in th0se years.
A
_.,_ -
A modification to the above scheme had to be enacted in respect c
-
of partnership. Partnership firms are treated as separate assessees for
the purposes of the Income Tax Acts. Under the Acts, firms are clas·
sified into two-registered firms and unregistered firms. Unregistered
firms are distinct assessees which are liable to pay tax on their total ·
income. The Acts provided that any unabsorbed loss in the case of
such a firm could be carried forward only by the firm and not by its D
partners. However, under the 1922 Act, as it stood between 1939 and
1956, registered firrns were treated as assessees only to this extent that
the total income (or loss) of the firm in any previous year was com·
puted. However, the firm itself wai; hot liable to any incom~ tax. The
~ income of the firm was apportioned arnong its partners and each partner was assessed on his share of income from the firm. In this scheme,
it was obvious that, as soon as the income or loss of a firm was computed, there was nothing further to be done in the case of the firm; the
income or loss became that of the partner for all practical purposes. A
partner's share of a business loss of the firm which remained unab·
sorbed became business loss in the hands of the partner liable to intrahead adjustments, inter-head adjustments and carry forward as if the
loss had been incurred by the partner himself. The Act, therefore,
provided that in the case of registered firms the loss which could not be
absorbed in the same assessment year by the other income of the firm
could be carried forward to the subsequent year not by the firm itself
but only by the partners. In other words, each partner carried forward
to subsequent years his share of the business loss of the firtn and set it
off against his business income, whether from the firm or otherwise.
There is a third category of unregistered firms assessed as registered
the provisions regarding which are not relevant for our present
purposes. Leaving them out of account, the Acts outlined a very
simple scheme whieh stenuned from the basic fact that a registered
firm was not liable to pay tax whereas an unregistered firm had to pay
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920
SUPREME COURT REPORTS
(1991] 1 S.C.R.
tax. Under this scheme the full advantage of carry forward of the loss ';.<
incurred by the firm was enjoyed by the partners in the case of a
registered firm and in the case of an unregistered firm by the firm
itself.
The simplicity of the above scheme of assessment of registered
and unregistered firms, however, was not allowed to last. In 1956, the
legislature decided that registered firms should also be made to pay a
tax. This tax, called "firm's tax" was at rates lower than those applicable to unregistered firms and other assessees. Under the new scheme,
which became effective from 1.4.1956, the total income of a registered
firm is determined and it is liable to income-tax thereon. The income
of the firm (less the firm's tax) is then apportioned among the partners
(subject to certain adjustment as before). The share income of each
partner is aggregated with the rest of his income to arrive at his total
income on which he also pays tax. In this new scheme the question
arises: "when the net result of a business carried on by a registered
firm in a particular year is a loss, who is to carry forward such loss? Is it
the firm (as in the case of unregistered firms) or is it is the partners (as,
earlier, in the case of registered firms) or both?" The answer to this
question is furnished by the statute which, while broadly continuing
the scheme of assessment of registered firms with the modification
indicated above, makes a specific provision in regard to carry forward
~.
of los!';eS. The provisions of Ss. 75 and 77 in their present form can
be usefully extracted here (though they contain references to certain
amended provisions which we need not touch upon):
75. Losses of registered firms:
(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,
74and 74A.
(2) Nothing contained in sub-section ( 1) of section 72, subsection (2) of section 73, sub-section ( 1) or sub-section (3) .__.(
of section 74 or sub-section (3) of section 74A shall entitle
any assessee, being a registered firm, to have its loss carried forward and set off under the provisions of the
aforesaid section.
,...
G~RDEN SILK v. C.l.T. [RANGANATHAN, J.]
921
76. Losses of unregistered firms as:>essed as registered
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
.ft
with as if it were a registered firm.
B
77. Losses. of unregistered 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
C
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
D
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;
E
(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.
F
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 G
, the Revenue and against the assessee. The correctness of this answer
)..has not been challenged before us.
y
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
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922
SUPREME COURT REPORTS
{l99ll 1 S.C.R.
A ·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
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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
it to nil and that the balance is to be carried forward to succeeding
assessment years to be accorded a similar treatment. fSee
. ....._ ______
c
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:
0
H
"10(2)(vi) ....... .
Provided that .... .
(a) ............ .
(b) where, in the assessment of the assessee or, if the assessee is a regiStered firm, in the assessment of its 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
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
givett1 as the t:ase may be, shall be added to the amount of
the allowattt:e for tleprechttitm tot the folh::Jwittg yeat attd
...r
GARDEN SILK v. C.l.T. [RANGANATHAN, J.]
923
~
deemed to be the allowance for that year, and so on for
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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:
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).-
"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 c
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
D
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
E
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
F
\~ 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 G
\_ 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 H
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924
SUPREME COURT REPORTS
[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
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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
thereof. (iii) It should be apportioned among the partners each of
whom may set off his share thereof against his other income. If, after
D
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.
E
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
F
being set off against their income, has been taken in the following
y
cases: (a) K. T. Wire Products v. Union of India, [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,
G
[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
H
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
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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.