(1.) THE following two questions have been referred by the Tribunal, Bombay Bench "B", to this Court under S. 66(1) of the Indian INCOME TAX ACT, 1922 (hereinafter referred to as "the Act") :
"1. Whether the assessee is entitled to deduct the business loss of Rs. 1,38,756 for 1957 -58, in computing its total income for 1958 -59, for the purpose of levying the tax on registered firms ? 2. Whether the assessee is entitled to deduct the unabsorbed depreciation of Rs. 1,12,283 and Rs. 2,15,911 from the profits of the year to arrive at the total income for the material year ?" These questions arise on the following facts :
(2.) THE assessee, M/s Ballarpur Collieries Co. Nagpur, is a registered firm carrying on business of coal mining. In the asst. year 1956 -57, the assessee's income was Rs. 9,236 before adjustment of
depreciation. The depreciation allowable for that year was Rs. 1,21,519. After setting off the
depreciation to the extent of profits there was unabsorbed depreciation of Rs. 1,12,283. In the
following year, namely, the asst. year 1957 -58, there was a business loss of Rs. 1,38,756. This was
before making allowance for the depreciation of Rs. 2,15,911 for that year. In the asst. year 1958 -
59, after making allowance for the depreciation and the development rebate allowable for that year, the total income of the assessee -firm was determined by the ITO at Rs. 5,24,035. This
income was assessed by the ITO under S. 23(3) of the Act and these profits were allocated among
the partners in accordance with their shares. The assessee -firm was not satisfied with this order of
the ITO and it filed an appeal before the AAC, Akola Range, Akola. Before the AAC the contention
raised was that the aggregate losses of the earlier two years should be set off against the income
of Rs. 5,24,035 before tax was levied on the registered firm. This contention was rejected by the
AAC and he substantially maintained the assessment order passed by the ITO except that a
deduction of Rs. 600 paid as salary to an employee was allowed.
When the matter was taken to the Tribunal, two contentions were raised. The first contention was that the unabsorbed depreciation of Rs. 1,12,283 in respect of the asst. year 1956 -57 and of Rs.
2,15,911 in respect of the asst. year 1957 -58 should be deducted from the income of Rs. 5,24,035 to arrive at the income of the firm for the material year. The second contention was that after the
income of the firm was determined as above, the business loss of Rs. 1,38,756 for the asst. yr.
1957 -58 should also be deducted before levying the tax on the registered firm. On the first contention the Tribunal held that the unabsorbed depreciation in the partner's hands was available
for set off by the firm itself in the following year in view of the provisions of proviso (b) to S. 10(2)
(vi) of the Act. Before the Tribunal it appears that it was contended for the assessee that the
depreciation for 1956 -57 and 1957 -58 had not been absorbed by the other income of the partners.
Subject to the verification of this fact, the Tribunal found that the unabsorbed depreciation for the
years 1956 -57 and 1957 -58, could be set off by the firm against the income for the years 1958 -59.
On the second contention the Tribunal found that the firm was not entitled to have the business
loss of Rs. 1,38,756 for the year 1957 -58 deducted before it was assessed to tax under S. 23(5) of
the Act. The first question reproduced above was referred to this Court at the instance of the
assessee and the second question was referred at the instance of the Revenue.
(3.) WE shall first take up the second question. In order to appreciate the contentions raised on behalf of the Revenue, it is necessary to reproduce some relevant provisions of the Act. Sub - ss.
(5) and (6) of S. 23 of the Act which provides for the assessment of a firm are as follows :
"Notwithstanding anything contained in the foregoing sub - sections, when the assessee is a firm and the total income of the firm has been assessed under sub -s. (1), sub -s. (3) or sub -s. (4), as the case may be, - (a) in the case of a registered firm, (i) the income -tax payable by the firm itself shall be determined ; and (ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined : Provided that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of S. 24 : . . . . . (6) Whenever the ITO makes a determination in accordance with the provisions of sub -s. (5), he shall notify to the firm by an order in writing the amount of the total income on which the determination has been based and the apportionment thereof between the several partners." The relevant provisions of S. 24 which provide for a set -off of a loss in computing aggregate income are as follows : "24. Set -off of loss in computing aggregate income. -(1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in S. 6, he shall be entitled to have the amount of the loss set -off against his income, profits or gains under any other head in that year : . . . . . Provided further that . . . where the assessee is a registered firm, any loss which cannot be set -off against other income, profits and gains 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 under this section . . . . . (2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be wholly set -off under sub -s. (1), so much of the loss as is not so set -off or the whole loss where the assessee had no other head of income shall be carried forward to the following year, and (i) where the loss was sustained by him in a business consisting of speculative transactions, it shall be set -off only against the profits and gains, if any, of any business in speculative transactions carried on by him in that year ; (ii) where the loss was sustained by him in any other business, profession or vocation, it shall be set off against the profits and gains, if any, of any business, profession or vocation carried on by him in that year : Provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year ; and (iii) if the loss in either case cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year and so on, but no loss shall be so carried forward for more than eight years : . . . . . Provided that . . . . . (b) where depreciation allowance is, under cl. (b) of the proviso to cl. (vi) of sub -s. (2) of S. 10, also to be carried forward, effect shall first be given to the provisions of this sub -section ; (c) nothing herein contained shall entitle any assessee, being a registered firm, to have carried forward and set off any loss which has been apportioned between the partners, under the proviso to sub -s. (1), or entitle any assessee, being a partner in an unregistered firm which has not been assessed under the provisions of cl. (b) of sub -s. (5) of S. 23, to have carried forward and set -off against his own income any loss sustained by the firm ; . . . . ." Sub -s. (1) and the relevant part of sub -s. (2) of S. 10 which deals with carrying forward of unabsorbed depreciation are as follows : "10. Business. -(1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances,namely : .... (vi) In respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent, . . . . . Provided that - (a) the prescribed particulars have been duly furnished ; (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 given to any such allowance in any year not being a year which ended prior to the 1st day of April, 1939, owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of cl. (b) of the proviso to sub -s. (2) of S. 24, 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 year and deemed to be part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeeding years ; and . . . . ." ;