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Petitioner: GARDEN SILK WEAVING FACTORY VS Respondent: COMMISSIONER OF INCOME-TAX, .(
Court Name: Supreme Court of India Judge(s): S. Ranganathan, K. Ramaswa my Title: GARDEN SILK WEAVING FACTORY vs COMMISSIONER OF INCOME-TAX, .( Case No.: Civil Appeals Nos.1249 of 1975 and 2075 of 1979 Date of Judgment:1991-03-22 Reported As: 1992 PTD 307 Result: Appeals allowed
JUDGMENT
JUDGMENT ' S. 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) 101 ITR 658 (C.I.T. v. Garden Silk Weaving Factory), 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 2023, respectively. The question arises in similar circumstances for both the years. We shall set out the facts relevant for the assessment year 1968- 69 as the appeals and reference in respect of that year were disposed of earlier than those pertaining to the assessm ent 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,3,94,483 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 assessm ent year in question, the assessee had made an income of Rs,11,82,056 but deducted therefrom three figures aggregating to Rs,7,87,573 to arrive at the net income of Rs,3,94,433, which had been returned and accepted. These three figures were figures carried over from the previous year for the assessment year 1967-68. They comprised of: {{TABLE}} Rs. (i) Unabsorbed depreciation 1,59,181
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(ii) Unabsorbed development rebate2,79,150 (iii) Unabsorbed business loss 3,49,242 Total 7,87,573 {{TABLE}} ' The Income-tax Officer agreed that, out of the above three amounts, 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, for reasons which will become clear later, the Income-tax Officer was of the opinion that the sum of Rs,1,59,181 (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 assessm ent year 1967-68) could not be carried forward, as done by the assessee, to the assessm ent year 1968-69. He, therefore, added back the sum of Rs,5,08,423 (the aggregate of the above two amounts) to the returned income for determining the total income for the assessment year 1968-69. This action of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner. However, on further appeal, the Income-tax Appellate Tribunal took a different view. It upheld the Income-tax Officer's stand that the firm could not be allowed to carry forward arid set off the business loss carried from the earlier year. But, so far as the unabsorbed depreciation was concerned, it upheld the assessee's contention. A reference to the High Court followed. The following two questions were referred to the High Court of Gujarat for its decision (see (1975) 101 ITR 658, 659): "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee, a 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 the assessment year 196869? "(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 assessm ent 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 assessm ent year 1968-69 under a certificate of fitness granted by the High Court. ' For the assessm ent 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 June 30, 1967, showing a loss of Rs, 7,87,515 but filed a revised return on March 22 1972, showing a loss of Rs, 5,46,351. On March 14, 1973, the Income-tax Officer completed the assessm ent 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 unabsorbed development rebate but this is not very material for deciding the principles in issue before us). The assessee's request that this loss should be carried forward to the subsequent assessm ent year was rejected by the Income-tax Officer. This was confirmed by the Appellate Assistant Commissioner. On further appeal, the Appellate Tribunal confirmed the order of the Appellate Assistant Commissioner following the High Court's decision for the assessm ent year 1968-69 which had by then been pronounced. Thereupon, the following question of law was referred 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 decision reported in (1975) 101 ITR 658 (C.I.T. v. Garden Silk Weaving Factory)?"
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' 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 questions 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 accruing or arising to the assessee and includible in his total income is, to begin with, classified (see section 14) under six different heads: "A. Salaries. B. Interest on securities:(recently omitted). C. Income from house property. D. Profits and gains of business, profession or vocation. (briefly, "business income"). E. Capital gains. F. Income from other sources." ' In computing the income of the assessee according to this classification, two aspects have to be borne in mind. One is that, even under the same head, an assessee may have different sources. If so, the income has first to be arrived at in respect of each such source. Thus, if an assessee carries on several businesses, the income of each and every 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 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 figure of profits from "business". On the other hand, if some of the businesses make profit and 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 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 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 section 70 of the 1961 Act. 'Section 24(1) of the 1922 Act and section 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 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 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 assessm ent which we may describe as "inter-head adjustment" or "set-off". ' The Acts [section 24(2) of the 1922 Act and section 72 of the 1961 Act] next envisage a third stage in the process of assessm ent which can be described as the process of "carry forward and set off. By
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this process, the assessee is permitted to carry forward a loss he has not been able to adjust or set off in the first and second stages of assessment. This benefit is not available to all kinds of losses but subject to certain conditions and restrictions 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-head and inter-head adjustments can be carried forward to the succeeding assessm ent years and can be set off against any other business income in those years. ' A modification to the above scheme had to be enacted in respect of partnerships. Partnership firms are treated as separate assessees for the purposes of the Income-tax Act. Under the Act, firms are classified 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 partners. However, under the 1922 Act, as it stood between 1939 and 1956, registered firms were treated as assessees only to this extent that the total income (or loss) of the firm in any previous year was computed. However, the firm itself was not liable to any income-tax. The income of the firm was apportioned among 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 unabsorbed became business loss in the hands of the partner liable to intra-head 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 not be asborbed 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 firm 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 which stemmed from the basic fact that a registered firm was not liable to pay tax whereas an unregistered firm had to pay 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 firm, 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 April 1, 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 adjustments 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 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 losses. The provisions of sections 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
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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, 74 and 74-A. (2) Nothing contained in subsection (1) of section 72, subsection (2) of section 73, subsection (1) or subsection (3) of section 74 or subsection (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 sections. 76. Losses of unregistered firms assessed 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 assessm ent year shall be dealt with as if it were a registered firm. 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 off or carried forward and set off only against the income of the firm. (2) Where the assessee 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 loss shall not be set off under the provisions of section 70, section 71, subsection (1) of section 73 or section 74A; (b) nothing contained in subsection (1) of section 72 or subsection (2) of section 73 or subsection (1) or subsection (3) of section 74 or subsection (3) of section 74-A shall entitle the assessee to have such loss carried forward and set off against his own income." In view of this specific provision, the High Court, following an earlier decision of the same High Court in C.I.T. v. Dhanji Shamji (1974) 97 ITR 173 (Guj.), answered the second question referred to it in the reference relating to the assessm ent year 1968-69 and the only question referred to it in regard to the assessm ent 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 the assessment year 1968-69, however, arises in a slightly different way. It arises in the context of "depreciation" which is one of the notional allowances---by which expression we mean a deduction in respect of an 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 and gains of a business. In a sense, where the depreciation allowance exceeds the profits otherwise arrived at, in respect of the business, there will be a resultant "loss" in the business; and, indeed, the Department's contention is that there is no difference between an unabsorbed loss and 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 which may be larger than the profits of the business otherwise computed. One is the development rebate regarding which the statute provides that it has to be set off against the total income of the assessee so as to reduce it to nil and that the balance is to be carried forward to succeeding assessm ent years to be accorded a similar treatment. [See sections 10(2)(vib) of the 1922 Act and 33(2) of the 1961 Act]. This is an allowance which cannot be a constituent element of a figure of loss to be carried forward to later years and stands on a totally different footing. The second is the allowance for depreciation under section 10(2)(vi) of the 1922 Act. In respect of this allowance, section 10(2)(vi) provided that if full effect to the allowance could not be given in the assessment of an assessee for any assessm ent year, the unabsorbed allowance could be carried forward and set off against business profits in succeeding assessment years indefinitely. This provision, namely, clause (b) of the proviso to section 10(2) (vi) of the 1922 Act---after an addition in 1953 of the words underlined in the extract below---reads thus:
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"10(2)(vi).. Provided that... (b) where, in the assessm ent of the assessee or, if the assessee is a registered firm, in the assessm ent 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 clause (b) of the proviso to subsection (2) of section 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" ' This provision has, in substance---there are certain verbal differences ' which are not material for our purposes---been re-enacted as section 32(2) of the 1961 Act, which now reads thus: "32.--(2) Where, in the assessm ent 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 subsection (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 subsection (2) of section 72 and subsection (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." ' The third type of allowance of this nature, 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 section 10(2)(xiv) of the 1922 Act, re-enacted in section 35(4) of the 1961 Act, is treated on the same lines as the depredation allowance dealt with in section 10(2)(vi) and section 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 two---therefore becomes necessary and this is provided by section 72(2) of the 1961 Act which deals with carry forward of losses---the counterpart of the proviso to section 24(2) of the 1922 Act---which reads thus: "Where any allowance or part thereof is, under subsection (2) of section 32 or subsection (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 assessm ent 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 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
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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 among various High Courts. The view that unabsorbed depreciation, once allocated to the partners, cannot be taken back to the firm's assessm ent 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 of India (1973) 92 ITR 459 (All.), (b) C.I.T. v. Garden Silk Weaving Factory (1975) 101 ITR 658 (Guj.) and Garden Silk Weaving Factory v. C.I.T. (1983) 144 ITR 613 (Guj.); (c) C.I.T. v. Ram Swarup Gupta (1973) 92 ITR 495 (Delhi) and Raj Narain Agarwala v. C.I.T. (1970) 75 ITR 1 (Delhi); (d) Sankaranarayana Construction Co. v. C.I.T. (1984) 145 ITR 467 (Ker). The view that the unabsorbed depreciation, after being carried forward by the partners and set off against their income, reverts 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 partners and that if it still remained unabsorbed, would revert to the firm and so on, has been accepted in: (a) Ballarpur Collieries Co. v. C.I.T. (1973) 92 ITR 219 (Bom.) and C.I.T. v. Nagpur Gas and Domestic Appliances (1984) 147 ITR 440 (Born.); (b)…
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