Lahiri, J. - (1.) THE question referred to us by the Income-tax Appellate Tribunal, "the Tribunal" for short, under Section 256(1) of the Income-tax Act, 1961, "the Act" for short, as fashioned by the Tribunal reads: " Whether on a proper construction of Section 32(2) of the Income-tax Act, 1961, the Tribunal was justified in holding that the unabsorbed depreciation of the assessee, registered firm, for the preceding assessment years allocated to the partners, if not wholly set off in their respective assessment, should be brought back for computation of the total income of the firm in the subsequent years, as if it were the firm's unabsorbed depreciation? "
(2.) SHORTLY put, the necessary facts, leading up to the present reference by the Tribunal, are: The assessee in question is a registered firm. In the assessment year 1972-73, the ITO completed the assessment of the firm at nil after determining the unabsorbed depreciation for the year at Rs. 21,846. The quantum of depreciation allowance of Rs. 21,846 was the unabsorbed depreciation allowance for the assessment years 1969-70, 1970-71 and 1971-72. In the assessment year 1973-74, the assessee claimed before the ITO that the unabsorbed depreciation amounting to Rs. 21,846 for the years 1969-70, 1970-71 and 1971-72 (hereinafter referred as "the unabsorbed depreciation") should be carried forward in favour of the firm and added to the current year's depreciation and set off against the profits of 1973-74, and the balance should be carried forward to the subsequent assessment year. The ITO, however, determined the total income of the firm at Rs. 5,798 after allowing the depreciation for the current assessment year and turned down the claim of the assessee to carry forward and set off the unabsorbed depreciation and/or to carry forward the balance of the depreciation allowance to the subsequent assessment year. On consideration of the provisions contained in Section 32(2) of the Act, the ITO held that the firm was entitled to set off the depreciation allowance for the current year only. He held that the unabsorbed depreciation remaining after the assessment of the firm could be allocated to the partners and they and they alone could take the benefit of carry-forward and set-off in respect of the allocated unabsorbed depreciation in their hands. On appeal by the assessee, the AAC allowed the appeal and held that unabsorbed depreciation of the previous years in the hands of the partners due to there being no sufficient profit reverted to the firm for set-off in the years following. The revenue took the matter to the Tribunal which upheld the order of the AAC. While upholding the order of the AAC the Tribunal took into consideration the scheme of the Act, the status of a registered firm, distinction between the ordinary business loss and depreciation allowance, construed the provisions contained in Sections 32(2), 72(2) and 73(3) of the Act and held that in the case of ordinary business loss of a firm, the loss which could not be set off by the firm was to be allocated to its partners and treated in their hands as if it belonged to the partners in accordance with the proportion of their shares; however, in so far as the depreciation allowance was concerned, an exception was carved out in Section 32(2) of the Act; if there was any unabsorbed depreciation and full effect of set-off could not be given owing to the profits or gains being less, then the depreciation allowance should be allocated to the partners according to their entitlements. However, it has held that depreciation allowance allocated to the partners if not wholly set off in their respective assessment, the depreciation allowance so left unabsorbed reverts back to the firm in the computation of the total income of the firm in the subsequent year or years as if it were the firm's unabsorbed depreciation. In support of the determination, the Tribunal has drawn force from the decision reported in , (Ballarpur Collieries Co. v. CIT, 1973 92 ITR 219). It considered all the contentions raised on behalf of the revenue. It also considered the rival contentions of the revenue and the rationale of the decisions reported in , (K. T. Wire Products v. Union of India, 1973 92 ITR 459) and, CIT v. Garden Silk Wvg. Factory, 1975 101 ITR 658 and held that when two views were consistent and possible the view that favoured the assessee should be accepted. Mr. G. K. Talukdar, the learned counsel for the revenue, has submitted that once the allocation was made to the partners they were the beneficiaries of unabsorbed depreciation and they and they alone were entitled to carry forward and set it off against their other income in the year or the years following. Once the allocation is made, the learned counsel submits, there remains nothing with the firm which can be carried forward by it on the ground of either there being no income or income being insufficient to absorb depreciation allowance. The learned counsel points to the collocation of the words " if the assessee is a registered firm......in the assessment of the partners full effect cannot be given to any such allowance ", in Section 32(2) of the Act, and submits that the depreciation allowance once allocated to the partners remains and continues to remain in their hands and the question of carrying forward the unabsorbed depreciation in the hands of the partners to the registered firm for the purpose of its assessment does not arise at all. It has been contended that there is no warrant for the proposition that unabsorbed depreciation allowance of a firm, once allocated to the partners can be reverted back to the firm, either in Section 32(2) or in any other provision of the Act. It is contended that any other interpretation would violate the plain and grammatical meaning of Section 32(2) of the Act and would result in distinct disadvantage to the partners who compose the firm. The learned standing counsel in support of his contention relies on K.T. Wire Products, 1973 92 ITR 459 , CIT v. Garden Silk Wvg. Factory, 1975 101 ITR 658 and Raj Narain Agarwala v. CIT, 1970 75 ITR 1 . The precise point for determination is if in the assessment of an assessee which is a registered firm, full effect could not be given to the depreciation allowance owing to their being no profits or gains chargeable or owing to the profits or gains chargeable being less than the allowance and the quantum of depreciation allowance allocated to the partners but effect could not be given to such allowance in the assessment of the partners, can the said unabsorbed depreciation allowance be allowed to be added to the depreciation allowance of the firm in the succeeding years under Section 32(2) of the Act ?
(3.) AS the point referred relates to a true and proper construction of Section 32 of the Act the relevant extracts of the provisions are quoted: "32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed--... (2) Where, in the assessment of the assessee (or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment, of its partners), full effect cannot be given to any allowance under Clause (i) or Clause (ii) or Clause (iv) or Clause (v) of Sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then subject to the provisions of Sub-section (2) of Section 72 and Sub-section (3) of Section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years." Section 32(2) of the Act corresponds to Section 10(2)(vi), prov. (b), of the Indian I.T. Act, 1922, hereinafter referred as " the old Act".;