ivil Appeal Nos
124975  207579
From the Judgment and Order dated  2691974 and 16101978 of Gujarat High Court in ITR Nos 19 of 1973 and 318 of 1977
Harish N Salve PH Parekh and Sunil Degra for the Appellant
915 V Gauri Shanker Sr
and section 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  the Gujarat High Court has answered the question raised in favour of the Revenue and against the assessees
Hence these appeals by the assessee Ms 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 assessment year 1967 68
The assessee Ms Garden Silk Weaving Factory is a registered firm
For the assessment year in question it returned a total income of Rs396483 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 1182056 but deducted there three figures aggregating to Rs787573 to arrive at the net income of Rs394483 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 i Unabsorbed Rs 159181 Depreciation ii Unabsorbed Rs 279150 Development Rebate iii Unabsorbed Rs 349242 Business loss Total  Rs 787573 The Income Tax Officer ITO 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 916 for reasons which will become clear later the Income Tax Officer was of the opinion that the sum of Rs 159181 which represented the amount of unabsorbed depreciation relating to the assessment year 1967 68 and the amount of Rs349242 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
He therefore added back the sum of Rs508423 the aggregate of the above two amounts to the returned income for determining the total income for assessment year 1968 69
This action of the Income Tax Officer was confirmed by the Appellate Assistant Commissioner AAC
However on further appeal the Income tax Appellate Tribunal AT took a different view
It upheld the Income tax Officer s stand that the firm could not be allowed to carry forward and set off the business loss carried from the earlier year
But so far as the unabsorbed depreciation was concerned it upheld the assesses contention
A reference to the High Court followed
The following two 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 assessee 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 Rs349242 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 assesse s appeal for the assessment year 1968 69 under a certificate of fitness granted by the 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 30667 showing a loss of Rs787515 but filed a revised return on 22372 showing a loss of Rs546351
On 14 3 73 the ITO completed the assessment determining a loss of Rs485250
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 917 sorbed development rebate but this is not very material for deciding the principle in issue before us
The assessee s request that this loss should be carried forward to the subsequent assessment year was rejected by the ITO This was confirmed by the AAC on further appeal the AT confirmed the order of the AAC following the High Court s decision for assessment year 1968 69 which had by then been announced
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  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 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 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 918 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 241 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 Rs20000 and income from house property of Rs25000 but has sustained a loss of Rs40000 in business the Act envisages the set off of the loss of Rs40000 against the income of Rs45000 resulting in a total income of Rs5000 only
This is the second stage in the process of assessment which we may describe as inter head adjustment or set off
919 The Acts section 242 of 1922 Act and section 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 assessee is permitted to carry forward a loss he had 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 and inter head adjustments can be carried forward to the succeeding assessment 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 partnership
Partnership firms are treated as separate assesses for the purposes of the Income Tax Acts
Under the Acts firms are classified into two registered firms and unregistered firms
Unregistered firms are distinct assesses 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 it s partners
However under the 1922 Act as it stood between 1939 and 1956 registered firms were treated as assesses 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 intera 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 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 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 stemmed from the basic fact that a registered firm was not liable to pay tax whereas an unregistered firm had to pay 920 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 assesses
Under the new scheme which became effective from 141956 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 losses
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 74 and 74A 2 Nothing contained in sub section 1 of section 72 sub section 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
921 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 assessment year shall be dealt with as if it were a registered firm
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 sub section 1 of section 73 or section 74A b nothing contained in sub section 1 of section 72 or sub section 2 of section 73 or sub section 1 or sub section 3 of section 74 or sub section 3 of section 74A 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 vs Dhanji Shamji Mana vdar 1974  ITR 173 Guj answered the second question referred to it in the reference relating to assessment year 1968 69 and the only referred in regard to the assessment 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 assessment year 1968 69 however arises in a slightly different way
It arises the context of depreciation which is one of the notional 922 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 assessment years to be accorded a similar treatment
See Ss
102vib of the 1922 Act and 332 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 S102vi of the 1922 Act
In respect of this allowance section 1012vi provided that if full effect to the allowance could not be given in the assessment of an assessee for any assessment 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 102vi of the 1922 Act after an addition in 1953 of the words underlined in the extract below reads thus  102vi  
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 given to any such allowance in any year not being a year which ended prior to the I 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 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 amount of the allowance for depreciation for the following year and 923 deemed to be the allowance for that year and so on for succeeding years
 This provision has in substance there are certain verbal differences which are not material for our purposes been re enacted as section 322 of the 1961 Act which now reads thus B 322 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 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
 The third type of allowance of this nature a 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 102xiv of the 1922 Act re enacted in section 354 of the 1961 Act is treated on the same lines as the depreciation allowance dealt with in section 102vi and section 322
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 722 of the 1961 Act which deals with carry forward of losses the counterpart of 924 the proviso to section 242 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 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 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 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 being set off against their income has been taken in the following cases a K T Wire Products vs Union of India b Garden Silk Weaving Factory and Garden Silk Weaving Factory c CIT vs Ram Swarup Gupta and Raj Narayan Aggarwala vs CIT  d Shankaranarayana Construction Co vs CIT 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 partners and that if it still remained unabsorbed would revert back to the firm and so on has been accepted in a Ballarpur Collieries Co vs CIT 219 and CIT vs Nagpur Gas  Domestic Appliances  b CIT vs Nagapattinam Import and Export Corp  CIT vs Madras Wire Products and CIT vs Madras Wire Products  c CIT vs Singh Transport Co  d CIT vs J Patel  Co  e CIT vs Shrinivasa Sugar Co f Pearl Woollen Mills vs CIT and CIT vs Mahavir Steel Rolling Mills5  H and g CIT vs R J Trivedi  Sons Shri Harish Salve learned counsel for the assessee canvassed the latter of the above views but with a slight modification
He submitted that in the present case the firm as well as 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 partners  hands
He therefore submitted that it was sufficient for him to urge the first of the three alternatives set out earlier and that he need not for the purposes of this case seek to support the third alternative upheld in some of the decisions which may create an impression in the mind that the assessee was deriving a double benefit by having the unabsorbed depreciation set off in the hands of both the firm and the partners
On the other hand Dr Gaurishankar for the Revenue strongly advocated the second alternative
According to him once the assessment is completed and the total income or loss of the firm ascertained it has 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 and this according to him will include also the unabsorbed depreciation for set off in his future assessments
The answer to the problem before us has to be discovered in the language of section 322 supplemented by that of other sections which deal with the mode of assessment of a firm and its partners
Before turning to these provisions it will be necessary to clear up one aspect of section 322 to which Sri Salve drew attention in the course of his reply
He pointed out that section 322 permits the carry forward of the depreciation allowance where full effect cannot be given to it 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
Laying emphasis on the words profits or gains he contended that the carry forward of depreciation allowance is at a stage much anterior to that of the determination of the total income of the assessee
On this construction if an assessee A carries on two businesses in one of which there is 926 an unabsorbed depreciation of Rs 15000 and the profits and gains of the other business is only Rs 10000 the net unabsorbed depreciation of Rs5000 has to be carried forward irrespective of the other income of the assessee in that year to the succeeding year
This contention however cannot be accepted
Though the section somewhat infelicitiously uses the expression profits and gains as it occurs in the statute in the fasciculus of sections dealing with the computation of business income the question of the carry forward of unabsorbed depreciation has always been understood and interpreted as arising only after the intra head and intra head adjustments referred to earlier have been carried out
Thus in the illustration given above if A has a property income of Rs6000 the unabsorbed depreciation of Rs5000 will be set off against the property income and there will be no unabsorbed depreciation left for being carried forward to the subsequent assessment year
This is because 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 this however is subject to a limitation that will be discussed later and a business loss has to be set off against income from any other business by way of intera head adjustment under section 70 and the income under any other head by way of inter head adjustment under section 71
This principle indeed emerges even from the language of section 322 in so far as it implicitly recognises that the excessive depreciation of one business can be given effect to against the profits and gains of another business in the same year
This indeed is a well settled proposition and it should be sufficient to cite two decisions of this Court which make this clear In CIT vs Jaipuria China Clay Mines P Ltd 1966591TR555 this Court observed Mr Shastri learned counsel for the revenue urges that depreciation although a permissible allowance under section 102 of the Act serves to compensate an assessee for the capital loss suffered by him by way of depreciation of his assets
He says that if it had not been expressly allowed as allowance it would have been treated as capital expenditure and would have been excluded
He further says that depreciation is a charge on the profits of a business
Bearing these two factors in mind he urges that the expression loss of profits and gains in section 241 does not include any deficiency resulting from depreciation and therefore an assessee is not entitled to ask the department to include the depreciation in the amount which can be set 927 off against income profits and gains under Other heads such as income from property or dividends
Mr Rajagopala Shastri for the assessee relies on the history of the legislation and a number of authorities to support the judgment of the High Court
Apart from authority looking at the Act as it stood on April 1 1952 it is clear that the underlying idea of the Act is to assess the total income of an assessee
Prima facie it would be unfair to compute the total income of an assessee carrying on business without pooling the income from business with the income or loss under other heads
The second consideration which is relevant is that the Act draws no express distinction between the various allowances mentioned in section 102
They all have to be deducted from the gross profits and gains of a business
According to commercial principles depreciation would be shown in the accounts and the Profit and Loss account would reflect the depreciation accounted for in the accounts
If the profits are not large enough to wipe off depreciation the profits and loss account would show a loss
Therefore apart from proviso b to section 102vi neither the Act nor commercial principles draw any distinction between the various allowances mentioned in section 102 the only distinction is that while the other allowances may be outgoings depreciation is not an actual outgoing and expressly disproved the observations of the Madras High Court in CIT vs Nagi Reddy 19641 that the deduction for depreciation should be limited to the amount of the profits and cannot result in working out a loss
The following observations in the more recent decision in Rajapalayam Mills Ltd vs CIT  SC place the position beyond doubt It is clear on a plain reading of the language of provision b to cl
vi that it comes into operation only where full effect cannot be given to the depreciation allowance for the assessment year in question owing to there being no profits or gains chargeable for that year or profits or gains chargeable being less than the depreciation allowance
Now it is well settled as a result of the decision of this court in CIT vs Jaipuria China Clay Mines P Ltd  that the words no profits or gains chargeable for that year are not confined to profits and gains derived 928 from the business whose income is being computed under section 10 but they refer to the totality of the profits or gains computed under the various heads and chargeable to tax
It is therefore clear that effect must be given to depreciation allowance first against the profits or gains of the particular business whose income is being computed under section 10 and if the profits of that business are not sufficient to absorb the depreciation allowance the allowance to the extent to which it is not absorbed would be set off against the profits of any other business and if a part of the depreciation allowance still remains unabsorbed it would be liable to be set off against the profits or gains chargeable under any other head and it is only if some part of the depreciation allowance still remains unabsorbed that it can be carried forward to the next assessment year
Obviously therefore there would be no scope for the applicability of provision b to cl
vi if the total income of the assessee chargeable to tax is sufficient to absorb the depreciation allowance for then there would not be any unabsorbed depreciation allowance to be carried forward to the following assessment year
But where any part of the depreciation allowance remains unabsorbed after being set off against the total income chargeable to tax it can be carried forward under provision b to cl
vi to the following year and set off against that year s income and so on for succeeding years
 The resultant position therefore is that initially the depreciation allowance 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 final assessment is reached and the total income of the assessee otherwise computed is insufficient to absorb the year s depreciation allowance
Sri Salve s argument that the stage of carry forward of depreciation arises at a stage anterior to the completion of the assessment and determination of the total income cannot therefore be accepted
Shri Salve then contended that there is no statutory provision which enables the apportionment of the firm s unabsorbed depreciation among the partners and that therefore the unabsorbed deprecia 929 tion has to be carried forward by the firm itself and none else
In our opinion this contention also is not well founded
section 182 to the extent relevant for our present purposes reads section 182
 Assessment of registered firms Not withstanding anything contained in section 143 and 144 and subject to the provisions of sub section 3 in the case of a registered firm after assessing the total income of the firm i the income tax payable by the firm shall be determined and ii the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly
2 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 sections 70 to 75
3 When any of the partners of a registered firm is a non resident the tax on his share in the income of the firm shall be assessed on the firm at the rate or rates which would be applicable if it were assessed on him personally and the tax so assessed shall be paid by the firm
4 A registered firm may retain out of share of each partner in the income of the firm a sum not exceeding thirty percent thereof until such time as the tax which may be levied on the partner in respect of that share is paid by him and where the tax so levied cannot be recovered from the partner whether wholly or in part the firm shall be liable to pay the tax to the extent of the amount retained or could have been so retained
 How this share is to be computed is set out in section 67 which may be set out here section 671 Method of computing a partner s share in the income of the firm In computing the total income of an assessee who is a partner of a firm whether the net result of the computation of total income of the firm is a profit or a 930 loss his share whether a net profit or a net loss shall be computed as follows a any interest salary commission or other remuneration paid to any partner in respect of the previous year and where the firm is a registered firm or an unregistered firm assessed as a registered firm under clause b of section 183 the income tax if any payable by it in respect of the total income of the previous year shall be deducted from the total income of the firm and the balance ascertained and apportioned among the partners b where the amount apportioned to the partner under clause a is a profit any salary interest commission or other remuneration paid to the partner by the firm in respect of the previous year shall be added to that amount and the result shall be treated as the partner s share in the income of the firm c where the amount apportioned to the partner under clause a is a loss any salary interest commission or other remuneration paid to the partner by the firm in respect of the previous year shall be adjusted against that amount and the result shall be treated as the partner s share in the income of the firm
2 The share of a partner in the income or loss of the firm as computed under sub section 1 shall for the purposes of assessment be apportioned under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head of income
3 Any interest paid by a partner on capital borrowed by him for the purposes of investment in the firm shall in computing his income chargeable under the head Profits and gains of business or profession in respect of his share in the income of the firm be deducted from the share
4 If the share of a partner in the income of a registered firm or an unregistered firm assessed as a registered firm under clause b of section 183 as computed under this section is a loss such loss may be set off or carried forward and set off in accordance with the provisions of this Chapter
931 Explanation In this section paid has the same meaning as is assigned to it in clause 2 of section 23 1
Sri Salve contends that these provisions talk only of loss and that to take this expression as including unabsorbed depreciation as well will obliterate the distinction in the treatment meted out to these as separate items by section 322 and section 722 and 3
We think this argument is misconceived
An unabsorbed depreciation is indeed a part of the loss
This is so because in the first place depreciation is a normal outgoing though 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 and it is difficult to see why when such deduction yields a negative figure of profits it cannot be a loss as generally understood
Jaipuria definitely says so as pointed out earlier
Again as pointed out earlier if it is treated as a genus totally different from a loss there isno statutory provision that will permit its adjustment against other business income implicit in section 32 2 itself and against all other income of the assessee as held by the above decisions
We therefore do not see why loss and unabsorbed depreciation should be treated as antithetical to or mutually exclusive of each other
Nor are we persuaded that any mix up or anomaly will result as suggested by counsel if we treat the expressions as synonymous except to the extent specifically treated differently by the statute
In our view 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
To illustrate suppose an assesseehas a profit of Rs5000 in one business before deduction of depreciation of say Rs 10000 and a loss of Rs 15000 in another business it will be quite correct to say that he has a business loss of Rs20000 in that assessment year
But for purposes of carry forward this has to be considered under to headings a an unabsorbed depreciation of Rs5000 and b a business loss of Rs 15000
The amount of Rs20000 will be carried forward to the subsequent year but the carry forward of Rs5000 will be according to the provisions of section 322 and the carry forward under section 72 will have perforce to be restricted to the other amount of Rs 15000
The language of section 722 itself contains an indication that where unabsorbed depreciation is a component of the figure of loss carried forward the amount of loss proper should be set off first and the unabsorbed depreciation later
But for the special treatment ac 932 corded by section 322 and section 72 for purposes of carry forward there is no difference between an item of unabsorbed depreciation and an item of loss
We are therefore of opinion that the unabsorbed depreciation will be allocated among the partners and like any other loss will be available to the partner for set off against his business income or other income in the same assessment year
In fact section 322 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
So the first of the three alternatives referred to by us earlier is in our opinion out
We now come to the crucial question as to what is to be done when the amount of unabsorbed depreciation does not get absorbed by the other income of the firm and further the aliquot shares of the partners therein do not also get absorbed in the partners  assessments against their other income
There can be two answers to this 1 that the partners in whose hands the unabsorbed depreciation has been allocated should carry forward the depreciation to succeeding years or 2 that the amount of depreciation so remaining unabsorbed should be carried forward by the firm for set off in future assessments
We have given our most careful consideration to this matter particularly in view of the controversy of judicial decisions prevailing thereon and we have come to the conclusion that the second of these alternatives is what is truly envisaged by the statute
The most formidable obstacle put forward to this course is that once the unabsorbed depreciation gets divided and allocated to the partners there is no statutory provision for recalling to the firm s file the amount remaining unabsorbed
We think this criticism really proceeds on an unduly narrow construction placed on the provisions of section 322
In our opinion section 322 itself contains an inbuilt mechanism for doing this
It is plain on the language of this sub section that the benefit of the carry forward is to be given to the assessee
Where the assessee is other than a registered firm or an unregistered firm assessed as a registered firm this is indeed very plain
In the case of this category of assessee the difficulty arises because of the words in parenthesis
But a moment s thought will make it clear that the word or in the sub section is really used as a conjunctive
It cannot be an alternative for there can be no doubt that even in the case of such an assessee the 933 unabsorbed depreciation for reasons already set out has to be adjusted against its other income
The assessment of the firm cannot be complete without such a set off
Thus where a firm assessed as a registered firm has only unabsorbed depreciation of say Rs8000 in the business carried on by it but a property income of Rs12000 its total income for the year has to be Rs4000 it cannot be assessed on an income of Rs 12000 with the depreciation of Rs8000 apportioned to its partners
We have already pointed out that the partner s share in the unabsorbed depreciation is part of his share in the loss of the firm and by virtue of section 673 will be treated as business loss which is capable of adjustment against his business and other income
This is the position envisaged by section 322 when it talks of effect being given to the unabsorbed depreciation in the assessment of the partners
This can refer only to cases where the depreciation cannot be given effect to in the firm s assessment
It is therefore clear that section 322 contemplates the situation where the unabsorbed depreciation in the hands of the firm is too large to get absorbed first in the hands of the firm and then after apportionment in the hands of the partners
What remains thereafter has obviously to be carried forward by the firm which is the assessee referred to in the sub section
Perhaps the meaning of the provision will become clearer if its relevant words are rearranged as follows Where full effect cannot be given to any depreciation in any previous year in the assessment of the assessee whatever category it belongs to and if the assessee is a registered firm or an unregistered firm assessed as a registered firm in the assessment of its partners 
  the allowance shall be added   
As in the case of all other assesses the carry forward will be available to the registered firm which is the assessee that is referred to in the sub section
This construction is also strengthened by the last part of the sub section
When it talks of the depreciation allowance carried forward being added to the allowance for depreciation for the following previous year it obviously refers to the depreciation allowance due to the assessee that is the firm in the subsequent previous year
In the normal run of cases it will thus either get added to the subsequent year s depreciation in respect of the same assets and get set off against the income from the same business or some other business of the same assessee or failing that against other income of such assessee
What 934 the sub section clearly provides for is that the aggregate of the depreciation available to an assessee over the years will be taken into consideration for set off against its income over a period of years
No doubt the latter portion of section 322 does not envisage that the business carried on by the assessee in the subsequent years should be the same or that the assets to the depreciation in respect of which the unabsorbed depreciation is to be added should be the same or indeed that any depreciation at all should be allowable to the assessee in the subsequent year
It is no doubt true that the words of the sub section are so widely couched that they can with a certain amount of difficulty be rendered capable of application to the situation of each partner carrying forward his share of the unabsorbed depreciation for set off even where he has no business or business income against his other income
But we think that it is too strained a construction of the sub section
When as pointed out by Sri Salve 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 sub section 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 construe the section as envisaging the following steps where the assessee is a registered firm i Excessive depreciation should be adjusted in the assessment of the assessee against other business income and against other heads of income ii Depreciation which remains unabsorbed under i will be 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 assessment year
The objection to this course is based on a mental imagery of the firm and its partners as altogether different assesses and of the impermissibility of bringing back to the firm s file what has gone away to the files of the partners
We think this approach of viewing the two assessments in water tight compartments is not correct
The Act itself contains several provisions eg Ss 672  3 which indicate 935 that this is not so
The observations of this Court in Sankappa vs I T O at pp
766 7 also bring out the regions of inter dependence of these two assessments
In any event any such theoretical dichotomy cannot prevail over the provisions of section 322
There is also one further reason why this view should find acceptance
As we have pointed out earlier unabsorbed depreciation is only a species of business loss
But for purposes of carry forward the statute has drawn a distinction between them
In doing so it specifically out lines the procedure for carry forward and set off of losses in the case of a registered firm but is silent in regard to unabsorbed depreciation
There is no statutory prohibition against the carry forward of unabsorbed depreciation by the registered firm as there is against carry forward of loss
The need felt to enact a specific prohibition in respect of losses and the absence of a like provision in respect of depreciation are significant pointers in support of the above construction
An argument has been put forward by Dr Gaurishankar on the basis of the amendment to the proviso to section 102vib in 1953 to submit that it 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
Attention has been drawn to the objects and reasons of the amendment set out thus at p 57 in 1952 21 ITR Statutes The amendment is intended to make it clear that where unabsorbed depreciation has been effectively allowed in the assessment of a partner of a registered firm it would not be carried forward in the case of the firm emphasis added It is true that the clause before its amendment permitted all assesses and this included registered firms as well to carry forward their unabsorbed depreciation and that though the registered firm paid no tax it could on the language claim a carry forward of the depreciation 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 vide the words emphasised in the extract above 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 carry forward to the extent it has not been effectively allowed to the partner continues 936 to be available
The amendment of 1953 therefore not only does not help the case of the Revenue it actually lands support to the construction we are inclined to place on the proviso
It is possible that our conclusion may give scope for two grounds of criticism i that the partners derive a double advantage of setting off the unabsorbed depreciation to reduce the taxable income of the firm as well as the partners and ii that this will distort the relief available to various partners depending upon the variations in income as between the several partners as well as over a period of years
We do not think that the first criticism is a valid one
For it is now settled law that though a firm and its partners are distinct assesses for purposes of income tax the Act still recognises the principle that a firm is only a compendious name for its partners and that the business carried on by the firm is also a business carried on by each of the partners too vide section 672 and 4 and the loss of a registered firm is treated as the losses of its partners too
The procedure envisaged by it will only enable a firm and the partners to set off the aggregate of the unabsorbed depreciation of the firm against the aggregate income of the firm and partners
To the extent effect is given to such unabsorbed depreciation to one or more of the partners the firm cannot again get the benefit and vice versa
There is therefore really no double advantage
There is some point in the second criticism
But then a certain amount of imbalance among the partners is inherent in the application of any one of the three possible alternatives
If as suggested by Sri Salve only the firm and not the partners can carry forward the unabsorbed depreciation there will be an injustice to the partners who may have other income against which it could be set off
On the other hand if the unabsorbed depreciation is allocated to the partners and they alone can carry forward and set it off it will have this consequence that the partners who have other high income will derive the benefit of set off qua their shares but no benefit can be got by partners whose total income is not enough to offset their share of the depreciation and the unabsorbed depreciation will not get absorbed even though the firm may have sufficiently large income in subsequent years
In other words whichever procedure is adopted the relief available to the partners will not be uniform
This is a consequence flowing from the variations in the income sources of various partners and cannot be avoided under any scheme of carry forward and set off
We therefore do not think that this consideration should weigh against our reaching the conclusion which naturally flows from the language of the sub section
937 For the reasons discussed above we are of the opinion that the assessee appellant firm is entitled to a carry forward of the unabsorbed depreciation computed for the assessment year 1967 68 and have it set off in its assessment for the assessment year 1968 69
The unabsorbed loss computed for the assessment year 1967 68 however cannot be carried forward by the firm to be set off in its assessment for the assessment year 1968 69
So far as the assessment year 1967 68 is concerned the High Court was right in holding that unabsorbed business loss of one year cannot be carried forward and set off by the firm in a subsequent year but if there was any unabsorbed depreciation computed for the assessment year 1966 67 it could have been allowed to be brought forward and set off in the assessment for the assessment year 1967 68 in the manner discussed in the judgment
In the result appeals for both the assessment years are allowed to the extent indicated and the assessments directed to be modified appropriately
We however make no order regarding costs
V P R Appeals allowed


Summary:
In a suit filed by plaintiff respondent no1 before the High Court defendant appellants filed a joint application under section 34 of the for staying proceedings of the suit and referring the matter to arbitration
In view of some formal defects in the said application the High Court on 2521966 without mentioning the defects ordered
Application withdrawn with liberty to make a fresh application
on 2131966 the appellants submitted two separate applications for staying the suit in so far as it related to them or in the alternative for stay of the entire suit
The plaintiff respondent resisted the applications as not being in terms of the order dated 2521966
Upholding the objection Learned Single Judge refused to stay the suit
On appeal the Division bench of the High Court held that the liberty was granted to make a fresh application  and as such under the provisions or Order XXIII CPC the appellants had no right to move two separate applications to stay the suit
In appeal by special leave to this Court it was contended that provisions or Order XXIII CPC were not applicable to applications filed under section 34 of the  and that the High Court committed an error in taking a technical view that as liberty was given to withdraw the application in order to make a fresh application the appellants were not entitled to make separate stay applications
Respondent No 1 supported the impugned judgment
Allowing the appeals this Court 810 HELD 1
In view of section 41 of the  subject to provisions of the Act Code of Civil Procedure 1908 apply to all proceedings before the Court No provision in the takes away the provisions of Order XIII CPC from being applied to applications filed under section 34 of the in a suit
814F 816B Hakam Singh vs MS Gammon India Ltd  relied on
Nawab Usman Ali Khan vs Sagarmal   held inapplicable
Munshi Ram vs Banwari Lal 1962 Supp 2 SCR 477 Hansraj Gupta vs Officlal Liquidator Dehradun Musoorie Electric Tramway Co 1932 LR 60 IA 13 Union of India vs Mohinder Singh  Co AIR 1971 JK 10 Union of India vs Rup Kishore 1957 All 504 Executive Engineer vs Thingom Iboyaima Singh AIR 1970 Bom 250 Ram bharosey vs Peary Lal AIR 1957 All 265 Shrinath Bros vs Century Spinning  Wvg
Co AIR 1968 Bom 443 India Minerals Co vs Northern India Lime Making Association  Ganeshmal vs Keshoram Cotton Mills AIR 1952 Cal
10 Governor General in Council vs Associated Live Stock Farm India Ltd AIr  Soorajmull Nagarmull vs Sagar Mal AIR 1978 Cal 239 Ramchand vs Governor General in Council AIR 9147 Sind
147 and Scotish Union of National Insurance Co vs Saraswati Sajnani Air 1960 Cal 22 referred to 2
In the instant case apart from section 41 of the providing for application of Code of Civil Procedure and there being no provision taking away provisions of order XXIII CPC from being applied to the applications for stay filed under section 34 of the  the proceeding started on a plaint filed by the plaintiff and in such a suit if any application was filed under the  the same ought to be governed by the provisions of the Code of Civil Procedure
816A c 31 The High Court was not right in dismissing the applications on the ground that two applications were not maintainable as the same were not covered within its order dated 2521966
820E F 32 The term a fresh application  in the order dated 2521966 used in singular had no more significance than the fact that as both the 811 appellants had submitted one joint application liberty was given to make a fresh application The main purpose of moving the applications under section 34 of the was to stay the suit proceeding
The intention and purpose of moving two such separate applications was also the same
The explanation given by the appellants was that they were given a legal advice to move two separate applications as there were two different agreements between appellants No 1 and 2 and the respondent No 1 There being no element of mala fide in the two applications having been submitted within 30 days of the order dated 2521966 the same were maintainable 
820A c