Patna H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the claim of unabsorbed development rebate and depreciation of the unregistered firm can be allowed as a deduction for the subsequent year of the registered firm under the provisions of s. 77 of the IT Act ?

UDAY SINHA, J.:

This is a reference under s. 256(1) of the IT Act, 1961 (hereinafter referred to as ” the ” Act). The question referred to us for our opinion is : “Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the claim of unabsorbed development rebate and depreciation of the unregistered firm can be allowed as a deduction for the subsequent year of the registered firm under the provisions of s. 77 of the IT Act ?”

The assessment year is 1972-73.

The facts in brief are that the assessee is a partnership firm. During the year 1971-72 (assessment year), it was assessed as an unregistered firm with only two partners, Sakaldeep Narayan Choudhary and Pradip Narayan Choudhary. Part of the unabsorbed development rebate and depreciation was set off during that assessment year. Even after set off, a sum of Rs. 43,293 remained as unabsorbed development rebate and depreciation to be carried forward and set off in later years. Then came the assessment year in question. In that year, i.e., 1972-73, an application for registration was filed by the firm. The application was allowed. In the assessment proceeding, the assessee claimed set off of the aforesaid sum of Rs. 43,293 by carrying forward the earlier years unabsorbed development rebate and depreciation. The ITO rejected the claim of the assessee. The assessee appealed against the order of assessment, but only in regard to the quantum of assessment. Subsequently, the assessee filed an application under s. 154 of the Act for rectification of the assessment. The assessee claimed that there was an error apparent on the face of the record which needed to be corrected. The stand of the assessee was that inasmuch as the assessee was entitled to the set off of development rebate and depreciation allowance which had not been allowed to it, there was an error apparent on the face of the record. The ITO rejected the claim holding that an unregistered firm or an association of persons are two different entities. The assessee, being aggrieved by the rejection of its application under s. 154 of the Act, appealed to the Tribunal against the rejection of the assessee’s claim for rectification of the assessment order. The appeal in respect of the rectification matter was heard by the Tribunal along with the appeal of the assessee in regard to the quantum assessment. They were both disposed of by a common order.

In this reference, we are concerned only with the matter arising out of the rejection of the prayer for rectification. It goes without saying that if the assessee was entitled to the set off of development rebate and depreciation allowance of the previous year in the assessment year in question, there would be a case for rectification. If, however, law does not permit carrying forward of unabsorbed development rebate and depreciation allowance of the an unregistered firm, when in subsequent year it became a registered firm (sic). The Tribunal, following the decision of the Allahabad High Court in J. K. Hosiery Factory vs. CIT (1973) 92 ITR 16 (All), held that the assessee was entitled to carry forward the unabsorbed development rebate and unabsorbed depreciation allowance of the unregistered firm and having it set off in the subsequent year treated as a registered firm. The appeal of the assessee to that extent was allowed and rectification was ordered by the Tribunal. The Revenue, being aggrieved by the order of the Tribunal, has got this matter referred to us for our opinion in terms of s. 256(1) of the Act.

From the facts stated above, the core question which falls for consideration before us is whether an unregistered partnership firm is entitled to carry forward its losses and set them off in the succeeding year when the firm is assessed as a registered firm. There is no doubt that prior to the enactment of the present IT Act, 1961, the view enunciated on behalf of the assessee was the law. In the case of J. K. Hosiery Factory (supra), a Division Bench of the Allahabad High Court held that the assessee being of the same unit, the registration of the firm did not make any difference for the purposes of assessment and, therefore, the firm was entitled to have its unabsorbed depreciation allowance set off in the subsequent year when it became a registered firm. The view taken by the Allahabad High Court was agitated by the CIT before the Supreme Court as well and the Supreme Court in CIT vs. J. K. Hosiery Factory (supra) held that the firm that suffered the depreciation was unregistered and it was the very same firm which got itself registered in the subsequent year. The entity of the firm on registration made no difference to that entity. In the view of the Supreme Court, the Indian IT Act, 1922, did not indicate any intention to deprive the firm subsequently registered of its right to carry forward the unabsorbed depreciation. The authoritative pronouncement of the Supreme Court is not open to challenge. Learned senior standing counsel for the Revenue, however, contended that the case of CIT vs. J. K. Hosiery Factory (supra) before the Supreme Court related to the law under the Indian IT Act, 1922. According to him, the law has changed under the IT Act, 1961, which rules the present case and, therefore, the matter requires a fresh look.

Learned senior standing counsel, however, failed to bring to our notice any change in law after the decision of the Supreme Court in CIT vs. J. K. Hosiery Factory (supra). It is true that that was a case under the Indian IT Act, 1922, in relation to the asst. yr. 1949-50, but the law even then was as it is in the asst. yr. 1971-72. Learned senior standing counsel was at pains to explain to us the process of assessment of a firm and that of partners of a firm. He stated that the benefit due to a firm would be made available only to a firm and that due to partners only to the partners. In that connection, learned senior standing counsel placed heavy reliance upon the provisions of ss. 75(2) and 77(2) r/w ss. 182 and 183 of the Act. The provisions in the accounting year 1971-72 being the same as that covered by the decision of the Supreme Court in CIT vs. J. K. Hosiery Factory (supra), it is not permissible for this Court to take a view different from that of the Supreme Court. The present case is fully covered by the decision of the Supreme Court indicated earlier. It must, therefore, be held that the firm was entitled to claim deduction in respect of unabsorbed development rebate and depreciation.

For the reasons stated above, I am of the view that the Tribunal was correct in law in holding that the claim of unabsorbed development rebate and depreciation of the unregistered firm could be allowed as a deduction for the subsequent year of the registered firm under the provisions of s. 77 of the IT Act. The question thus referred to us is answered in favour of the assessee and against the Revenue. Since no one has appeared on behalf of the assessee, the reference is disposed of in the terms mentioned above but without costs.

B.N. AGRAWAL, J.:

I agree.

[Citation : 170 ITR 484]