COMMISSIONER OF INCOME TAX U.P, LUCKNOWversusJ.K. HOSIERY FACTORY, KANPUR

                                                                        907
                                                                               A
                          COMMISSIONER OF INCOME TAX U,P,, WCKNOW
                                            v.
                               J,K, HOSIERY FACTORY, KANPUR

                                      MARCH 19, 1986
                                                                               B
                      [R.S. PATHAK AND SABYASACHI MUKHARJI, JJ,]

                Right to carry forward the unabsorbed depreciation and
          to set off by a unregistered firm in one year to the next year
          when it was registered, whether permissible - Income Tax Act,
          1922 sections 10(2)(vi) read with 24(i) and 24(2),
                                                                               c
                M/s. J.K. Hosiery ·Factory, Kanpur the respondent
          assessee firm originally consisted of three Singhania Brothers
          and one J.P. Agarwal as partners. The Singhania brothers
          retired in 1946 and in their place Kamala Town Truat was
          alleged to have become partner. During the assessment year           D
          1949-SO the unregistered fil'll bad been allowed an unabsorbed
          depreciation of Rs. 43,963. The firm claimed a set off thereof
          in the assessment year 1950-Sl when· it was registered. The
          Tribunal refused to all~,.- ·che carry forward and set off but
          the High Court in t~. .ri!~erence answered the question against
          Revenue. Hence
                     ,-/ .
                           the appeal by the Revenue.
                                                                               E
                 .,.-··
-.._---....,,-----rlismissing the appeal, the Court,

                lll!LD : 1.1 Having regard to the 9cheme of the relevant
          provisions and in view of the provisions of sections 10(2)
          (vi) read with section 24(1) and section 24(2) of the 1922
                                                                               F
          Act, the deduction of the unabsorbed depreciation should have
 ...-.,   been allowed, in as 111.1ch in both the years tbe firm continued
          - in one year it was unregistered, in the next year it got
          itself transferred into registered, but its identity was not
          lost. The firm was one. Further the assessee was entitled to
          an interpretation favourable to him. [915 C-D]
                                                                               G
                1.2 Where two interpretations were possible, the court
          should take the interpretation that is favourable to the
          assessee bearing in mind that a tmdng statute is being
          construed. (914 H; 915 A]
                                                                               H
                1.3 The proviso (b) below section 10(2)(vi) of      the 1922

/
        908                 SUPREME COURT REPORTS      [19861 1 s.c.R.

A
        Act dealt with every assessee. It specified that where the
        assessee was a registered firm, then in the assessment of its
        partners, if full effect could not be given to any
        depreciation allowance and where the assessee was an
        unregistered firm where there was no question of its partners
        being assessed, the depreciation which could be carried
B       forward was the unabsorbed depreciation in the assessment of
        the firm itself. There was nothing in the section. which           .~      .
        indicated that unregistered firm could not get the benefit of
        the carry forward. [911 G-H; 912 A-Bl

              1,4 If section 24 is properly read in conjunction with
c       clause (b) of the proviso to sub-section (2) of section 24
        which gives the right to carry forward the loss then the
        effect would be that loss had to be carried forward and
        adjusted first against the profits of the next year. Neither
        of the provisions prohibited that carry forward unabsorbed
        depreciation in case the firm became registered in the
D       subsequent year. The entity is the firm, registration makes
        no difference in that entity. By registration, the firm gets
        certain additional qualification and puts upon itself certain
        additional burden. The scheme of the.-.Ct does not indicate any
        intention to deprive the subsequently regbtered firm of its
        right to carry forward the unabsorbed .;lepreciation.
    E   Depreciation is given to the person who. becomes ent! tled to
        it. The subsequently registered firm is composed of him ali>c·-.    - ~-   -·
        Therefore, in principle, there is no basis for the propositiou
        that he should not be entitled to get the benefit of
        depreciation. [912 B-E]

    F          Indian Iron & Steel Co. Ltd. v. eo-t.seioner of 1 - -
        tax, llengal, 11 I.T,R. 328 P,C, discussed and distinguished.

              Ballarpar Collieries co. v. eo-issioner of 1 - Tm<,
        Poona, 92 l.T.R, 219 held inapplicable.
    G         1.5 It could not be contended that since a registered
        firm was liable to a separate tax called the "firm tax", which
        is over and above the tax payable by the partners, the
        registered firm should be treated like an ordinary assessee
        for the purposes of the assessment of "firm tax" and the , '-..
        losses of the earlier years computed in the assessment of the
    H
           C. I. T. v. J. K. HOSIERY [SABYASACHI MUKHARJI, J. ]   909   A


    firm should be carried forward and set off against its
    business profits of the subsequent years. Though the "firm
    tax" was levied under the Finance Act each year, it was a part
    and parcel of the income-tax which was levied under the provi-      B
    sions of the Income-tax Act. If the contentions were accepted
    it would lead to an anomalous position inasllllch as there would
    be two assessments fo the case of registered firms, one for
    purposes of levy of "firm tax" and the other for purposes of
    levy of income-tax and the quantum of income in the two
    assessments would be different. Such a result is not contem-
    plated under the Income-tax Act. Imposition cif tax was on the      c
    registered firm as well as on unregistered firm. The manner of
    levy and realisation is different in case of registered firm.
    Therefore, under the provisions of section 32(2) for the
    purpose of setting off unabsorbed depreciation carried forward
    from a preceding year, it was not necessary that the business
    in respect of which the depreciation allowance was originally       D
    worked out should remain in existence in such succeeding year.
    [914 C-E]

         LT. Vire Products v. Union of India & Ors., 92 I.T.R.
    459 (All) and eo-t.1iilioner of IJM  t.u, Bombay City II v.
    Estate and :Fi~ Ud., 111 I.T.R. 119 (BY) referred to.               E

........ CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1371-72
"   (NT) of 1974.
          From the Judgment and Order dated 4th August, 1972 of
    the Allahabad High Court in I.T. Reference No. 426 of 1963.         F

          s.c. Manchanda and Miss A. Subhashini for the Appellant.
          V.S. Desai and M.M. Kashtriya for the Respondent.

          The Judgment of the Court was delivered by                    G
          SABYASACHI MIJKHAR.JI, J. These appeals by special leave
    are from the judgment and order of the Division Bench of the
    Allahabad High Court dated 4th August, 1972.

          M/ s J. K. Hosiery Factory, Kanpur, the asses see firm        H
    herein, originally consisted of sfr Padampat Singhania, L.
    910                    SUPREME COURT REPORTS        [19B6J 1 s.c.R.

A
    Lakshmipat Singhania and L. Kailashpat Singhania and one J.P.
     Agarwal as partners. In January, 1946, the three Singhania
    'brothers appeared to have retired from the firm and in their
     place the Kamla Town Tru•t was alleged to have become partner.

         The revenue challenged this reconstitution of the firm
B   and according to the revenue, the Singhania brothers never
    retired and the trust never became a partner. Four questions
    were referred by the Tribunal to the High Court under section
    66(1) of the Indian Income-tax Act, 1922 (hereinafter called
    the 'Act'). The question No. 4 is the only question
    canvassed before us and survives for these appeals. The same
C   is as follows:

               "Whether,     under   the   provisions     of    section
               10(2)(vi), proviso (b) of the Income-tax Al:t, the
               unabsorbed depreciation of the unregistered firm in
               1949-50 can be allowed as a deduction in the
D              assessments of the partners of the registered firm
               in the assessment year 1950-51?"

         Question No. 4 is relevant only for the assessment year
    1950-51. For the previous assessment year 1949-50, the firm
    had been allowed an unabsorbed depreciation of Rs. 43 '963.- n:";I
E   firm claimed a set off thereof in the assessment year 1950-51.~
    The Tribunal refused to grant this set off on the view that in
    the year 1949-50, the assessee firm was an unregistered firm
    while it had been registered under the Income-tax Act for the
    year 1950-51, According to the Tribunal, the ·1oss on account
    of depreciation of an unregistered firm could not be carried
F   forward to the succeeding year in case the firm got
    registered. It was so held by the Tribunal.

         The High Court by reference to section 10(2)(vi) and
    proviso (b) to section 24(2) of the Act and on interpretation
    of the provisions and scheme of the sections held that the
G   Tribunal was not right and answered the question in favour of
    the assessee. Til.ese appeals are from that decision.

          In order to appreciate this question,·it is necessary to
    bear in mind the relevant provisions of the Act. At the
    relevant time, sub-section (2) of section 2 was as follows:
H
       C.I.T. v. J.K. HOSIERY [SABYASACHI MUKHARJI, J,]              911
                                                                           A

            "' assessee' means a     person by whom income       tax is
            payable."

     The relevant provisions of section 10 were as follows:
                                                                           B
            "10. (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
            or gains of ani business, profession or vocation
            carried on by him.

            (2) Such profits or gains shall be computed after              c
            making the following allowances, namely

            (vi) in respect of depreciation••••

            Provided that - ..... (b) where, in the assessment
            of the assessee or if the assessee is a registered             D
            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 their being no profits
            or gains chargeable for that year, or owing to the
            profits or gains chargeable being less than the                E
            allowance,     then,   subject    to   the provisions     of
            clause (b) of the proviso to sub-section (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 aoount of the allowance
            for depreciation for the following year and deemed             F
            to be part of that allowance, or if there is no
            such allowance for that year, be deemed to be the
            allowance for the next year, and so on for succeed-
            ing years."

      It is apparent, as the High Court noted, that the                    G
proviso dealt with every assessee. It specified that where the
assessee was a registered firm, then in the assessment of            its
partners,   if   full     effect   could     not   be   given   to   any
depreciation allowance and where the assessee was an
unregistered firm where there was no question of its partners
being assessed, the depreciation which could be carried                    H
forward was the unabsorbed depreciation in the assessment of
the firm itself. The assessee in the first year being an
    912                  SUPREME COURT REPORTS      [1986] 1 s.c.R.

A
    unregistered firm was entitled to carry forward the unabsorbed
    depreciation under this proviso. There was nothing in the
    section which indicated that unregistered firm could not get
    that benefit of the carry-forward. It l!llSt be borne in mind
    that the firm which suffered depreciation was unregistered in
    the accounting year i.e. 1949-50 and it is the very same firm
B   which got itself registered in the subsequent year. If section
    24 is properly read in conjunction with clause (b) of the
    proviso to sub-section (2) of section 24 which gives the right
    to carry forward the loss then the effect would be that loss
    had to be carried forward and adjusted first against the
    prof its of the next year. Neither of the provisions prohibited
c   that carry-forward unabsorbed depreciation in case the firm
    became registered in the subsequent year. This appears, in our
    opinion, on a plain reading of the different provisions of the
    section. The entity is the firm, registration makes no differ-
    ence to that entity, By registration, the firm gets certain
    additional qualifications and puts upon itself certain addi-
D   ~ional burden. The assessee in both the cases, however, is the
    same. We were referred to the provisions of section 23(5)(b)
                                                                      1
    and section 24 to section 71 of the Income-tax Act, 1961, We
    do not think that on this aspect the scheme of the Act indi-
    cates any intention to deprive the subsequently registered
    firm of its right to carry forward the unabsorbed deprecia-
E   tion. Depreciation is given to the person who becomes entitled
    to it. The subsequently registered firm is composed of him
    also. Therefore, in principle, there is no basis for proposi-
    tion that he should not be entitled to get the benefit of
    depreciation.

F         Our attention was drawn to certain observations of the
    Judicial Committee of the Privy Council in the case of Indian
    Iron & Steel Co. Ltd. v. Conlll.ssioner of Income-Tax, Bengal,
    11 I.T.R. 328, There the Privy Council dealt with entirely
    different set of circumstances. By an agreement dated 8th
    September, 1936, made between the appellant company and
G   another company named the Bengal Iron Company Ltd., the former
    had agreed to acquire and take over the whole of the property
    and assets of ~he latter as existing on the date of transfer.
    In pursuance of this agreement the Bengal Company transferred
    all its property and assets on the 2nd December, 1936 to the
    appellant company which continued to carry on the business of
H   the Bengal Company as part of and in combination with its
           C.I,T. v. J,K, HOSIERY [SABYASACHI MUKHARJI, J,]     913

                                                                       A


f   existing business. The agreement contained a clause assigning
    'so far as capable of being assigned, any claim which the
    Bengal Company may have in respect of unabsorbed depreciation
    allowances'. At the time of the amalgamation the Bengal
    Company had to its credit unabsorbed depreciation allowance to
    the extent of Rs, 85,45,150 which it could set off against its     B
    future profits. Similarly, the appellant company had an un-
    absorbed depreciation allowance of Rs, 62,00,775. It was held
    by the Judicial Committee; affirming the decision of the High
    Court of Calcutta, (i) that the appellant company was not
    entitled to have the depreciation allowance of the Bengal
    Company computed on the original cost of such assets to the
    Bengal Company for the whole of the previous year but only up      c
    to the date of succession and that after that date it had to
    be computed on the original cost to the appellant company; and
    (ii) that the appellant company was not in law entitled to
    carry forward the unabsorbed depreciation allowance of the
    Bengal Company. It was further held that the word 'assessee'
    in section 10(2) nust, when there is a successor to the busi-      D
    ness charged to tax, be read in certain of the paragraphs as
    including both predecessor and successor, but it does not
    follow as a consequence that the unabsorbed depreciation of
    the predecessor must be added to that of the successor or that
    even in a case when the only business concerned is that which
    is transferred. 'nle business when transferred carries to the      E
    purchaser its unabsorbed depreciation.

          Here no such problem arises. Here we have a situation
    where the same person previously carrying on business as
    unregistered fim is now carrying on business as .registered
    fim.                                                               F

          Our attention was drawn to the observations of the
    Division Bench of the Bombay High Court in the case of
    Ballarpur Collieries Co. v. Coalllissioner of Income-Tax, Poona,
    92 I.T.R. 219. But the said observations are not relevant for
    our present purposes.                                              G

          Similarly, reliance was placed on the observations of
    the Division Bench of the Allahabad High Court in ·LT. WI.re
    Products v. Union of India & Ors., 92 1.T.R. 459. It may be
    mentioned that there it was noted that under the general
    scheme of the Income-tax Act, losses and profits under             H
    different heads had to be aggregated and the net income
    914                  SUPREME COURT REPORTS     [1986] 1 s.c.R.
A
    arrived at which was liable to tax. If the resultant figure
    was a loss, it was carried forward and set off against the
    business profits of the succeeding year. This is the position
    in the case of all assessees except registered firms. In the
    case of registered fir1119, the net loss including depreciation
    allowance, if any, is allocated to the partners, who alone
B   were entitled to set off the loss allocated to them in their
    individual assessments and to carry forward any loss which
    remained unabsorbed, as provided in sections 32(2) and 75(2}
    of the Income-tax Act, 1961. The firm as such was not entitled
    to carry forward the losses determined in the assessment. It
    could not be contended that since a registered firm was liable
c   to a separate tax called the "firm tax", which is over and
    above the tax payable by the partners, the registered firm
    should be treated like an ordinary assessee for the purposes
    of the assessment of 11 firm tax" and the losses of the earlier
    years computed in the assessment of the firm should be carried
    forward and set off against its business profits of the
D   subsequent years. Though the "firm tax" was levied under the
    Finance Act each year, it was a part and parcel of the income-
    tax which was levied under the provisions of the Income-tax
    Act. If the contentions were accepted it would lead to an
    anomalous position inasm.ich as there would be two assessments
    in the case of registered firms, one for purposes of levy of
E   "firm tax" and the other for purposes of levy of income-tax
    and the quantum of income in the two assessments would be
    different. Such a result is not contemplated under the Income-
    tax Act. Imposition of tax was on the registered firm as well
    as on unregistered firm. The manner of levy and realisation is
    different in case of registered firm.
F
          A case converse to the instant case was before the
    Di vision Bench of the Bombay High Court in the case of
    Collllissioner of Income-tax, Bombay City II 'v. !!state and
    Finance Ltd., 111 I.T.R. 119. Where the Division Bench
    observed that . when enacting the provision regarding carry
G   forward and set off of unabsorbed depreciation under section
    32(2} of the Income-tax Act, 1961, the legislature could have
    imposed a condition that unabsorbed depreciation could be set
    off against the profits of a subsequent year only if the
    business in relation to which depreciation was allowed
    continued to exist in such year. The absence of such a
H   restriction had to be construed in favour of the assessee•
             C.I,T. v. J,K, HOSIERY [SABYASACHI MUKHARJI, J,]    915

r                                                                      A
    Where two interpretations were possible the court should take
    the interpretation that is favourable to the assessee bearing
    in mind that a taxing statute is being construed. Therefore,
    under the provisions of section 32 (2) for the purpose of
    setting off unabsorbed depreciation carried forward from a         B
    proceeding year, it was not necessary that the business in
    respect of which the depreciation allowance was originally
    worked out should remain in existence in such succeeding year.
    It dealt with some other aspect with which we are not present-
    ly concerned.

           Having regard to the scheme of the relevant provisions      c
    and in view .of the provisions of section 10(2)(vi) read with
    sect.ion 24(1) and section 24(2) of the 1922 Act, we are of the
    opinion that the deduction of the unabsorbed depreciation
    should have been allowed. It is necessary to bear in mind that
    in both the years the firm continued - in one year it was·
    unregistered, in the next year it got itself transferred into
                                                                       D
    registered, but its identity was not lost. The firm was one.

          In any event as has been mentioned in case of doubt, the
    assessee is entitled to an interpretation which is favourable
    to him, though we are of the opinion that in the instant case
    there is no scope of any doubt.
                                                                       E
          Therefore, there was no loss of the right to carry
    forward the unabsorbed depreciation.

          In the premises the revenue was wrong, the assessee was
    right. The High Court rightly answered the question. The
                                                                       F
    appeals, therefore, fail and are accordingly dismissed with
    costs.



    S.R.                                          Appeals dismissed.