JUDGMENT R.L. Gulati, J.
1. This is a petition under Article 226 of the Constitution and raises an interesting question relating to the interpretation of sections 32 and 75 of the Income-tax Act, 1961.
2. The petitioner is a partnership firm which is registered under the Income-tax Act. The assessment year involved is 1966-67. The Income-tax Officer by an assessment order dated November 14, 1969, assessed the net. income of the petitioner at Rs. 1,02,881. The petitioner was aggrieved with the assessment order inasmuch as no adjustment was given in respect of development rebate and depreciation allowance and losses of the earlier years were not set off against the income assessed. The petitioner accordingly moved an application under Section 154 for the rectification of the assessment order. The petitioner had suffered losses including the depreciation allowances for the immediately three preceding years as under:
Assessment year Determined profit or losses Depreciation Rs.
Rs.
1961-62 Loss 16,057 17,556 1962-63 Loss 1,24,607 32,904 1963-64 Loss 37,330 30,470
3. The petitioner claimed that the losses aforesaid should have been carried forward and set off against the profits of the year 1966-67. The Income-tax Officer by his order dated March 1, 1970, allowed the adjustment on account of the development rebate, but rejected the claim with regard to the losses on the ground that such losses had already been allocated to the partners and the firm was not entitled to carry forward or set off such losses. The petitioner appealed to the Appellate Assistant Commissioner of Income-tax and contended that even though the losses for the earlier years had been allocated between the partners, yet for purposes of assessment of the firm to "firm tax", the losses of the earlier years should have been carried forward and set off against the business income of the assessment year in question. The Appellate Assistant Commissioner of Income-tax rejected the appeal on the ground that the question raised by the assessee was of a highly debatable nature and could not be decided in proceedings under Section 154 which was restricted to rectification of mistakes apparent on the face of the record. The petitioner then moved the Commissioner of Income-tax under Section 264 with a prayer that the assessment order passed by the Income-tax Officer be revised. The Commissioner has dismissed this application holding that the claim put forward by the petitioner is not tenable under the law. The petitioner has now challenged the order of the Commissioner as also of the Income-tax Officer.
4. The contention put forward on behalf of the petitioner is that the losses of the preceding years should have been carried forward and set off against the total income of the firm for purposes of determination of the "firm tax". It is not disputed that the losses including depreciation of the preceding years have already been allocated between the partners. But it is contended that, in spite of that allocation, the losses have to be carried forward and set off in the computation of the total income of the firm for purposes of levy of "firm tax". If this contention of the petitioner is accepted, it would not be liable to any "firm tax".
5. Now, under the general scheme of the Income-tax Act, losses and profits under different heads have to be aggregated and the net income arrived at, which is liable to tax. If the resultant figure is a loss, it is carried forward and set off against the business profits of the succeeding year. This is the position in respect of all the assessees except registered firms. In the case of registered firms, the net loss including depreciation allowance, if any, is allocated to the partners, who alone are entitled to set off the loss allocated to them in their individual assessments and to carry forward any loss which remains unabsorbed. The firm as such is not entitled to carry forward the losses determined in its assessment."
6. The provisions for carry forward of depreciation and business losses are contained respectively in Sub-section (2) of Section 32 and sections 72 to 75.
Sub-section (1) of Section 32 provides for the deduction of depreciation allowance in the computation of the net income of an assessee from business. Sub-section (2) of Section 32 provides that where full effect cannot be given to any depreciation allowance the unabsorbed depreciation shall be carried forward and added to the depreciation allowance of the following year. But this principle is not applicable to registered firms or to unregistered firms assessed as registered firms. The reason is that such depreciation allowance along with net loss, if any, of the firm is allocated to the partners, who alone are entitled to set if off against their individual income and carry forward the unabsorbed depreciation in subsequent years. Sections 72 to 75 deal with carry forward and set off of business loss. The same principle is followed in respect of business loss also, so that the business loss of one year which cannot be set off against income from other heads is carried forward and set off against the business profits of the succeeding years. This principle, however, does not apply to a registered firm. Provision with regard to it is contained in Section 75 which reads as under:
"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 and 74.
(2) Nothing contained in Sub-section (1) of Section 72, Sub-section (2) of Section 73 or Sub-section (1) of Section 74 shall entitle any assessee, being a registered firm, to have its loss carried forward and set off under the provisions of the aforesaid sections."
7. It is thus clear that, according to the specific provisions contained in Sub-section (2) of Section 32 and Sub-section (2) of Section 75, the unabsorbed depreciation and loss cannot be carried forward by a registered firm for the simple reason that they are allocated between the partners and there remains nothing to carry forward so far as the firm is concerned. This legal position is not disputed. It is, however, urged that since a registered firm is 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 purposes of the assessment of "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 subsequent years. In other words, what is contended is that the prohibition contained in Sub-section (2) of Section 32 and Sub-section (2) of Section 75 should be restricted to that income of the firm which is allocated between the partners and on which the firm does not pay any tax, but such restriction should not be made applicable to the determination of the income of the firm for purposes of levy of "firm tax".
8. Reliance for this proposition is placed upon a decision of the Income-tax Appellate Tribunal, Bombay Bench "A", in P. Co., Bombay v. 8th Income-tax Officer, A-Ward, Section I, Bombay, [1970] 29 Tax. (6) 63 (Bom.). In that case a distinction was sought to be made between a substantive tax which is to be paid by the partners of a registered firm and a subsidiary tax which is to be paid by the registered firm itself. It has been held in that case that the prohibition contained in Sub-section (2) of Section 75 applies only in the case of determination of substantive tax and does not apply in the case of subsidiary tax payable by the firm. We find no cogent reason for classifying the tax into two categories. It is true that the "firm tax" is levied under the Finance Act each year, but it is a part and parcel of the income-tax which is levied under the provisions of the Income-tax Act. If this submission of the learned counsel is accepted, it would lead to an anomalous position inasmuch as there would be two assessments in the case of registered firms, one for purposes of the 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 contemplated under the Income-tax Act.
9. There is another reason why this argument of the learned counsel cannot be accepted. The carry-forward of unabsorbed depreciation and loss is a concession given to an assessee for purposes of determination of his liability to income-tax. If "firm tax" is different from income-tax, the concession to carry forward a loss would not be available. It cannot be disputed that every assessment year is a self-contained period of assessment and the profit and loss of that year alone are to be taken into consideration. The carry forward of losses of earlier years are permitted only because of specific provision in that regard in the Income-tax Act. If that provision is not applicable, the losses of earlier years cannot be taken into consideration. The result is that if the "firm tax" is considered to be a part of the income-tax, then the carry forward of the depreciation and losses is not permissible in the case of a registered firm in view of the prohibition contained in Sub-section (2) of Section 32 and Sub-section (2) of Section 75. If, on the other hand, the "firm tax" is considered to be a tax of a different nature, then also the carry forward of loss and depreciation is not permissible, because there is no provision authorising such a carry forward and set-off.
10. In the judgment of the Income-tax Appellate Tribunal, Bombay, there is a reference to a decision of the Supreme Court in Commissioner of Income-tax v. Kantilal Nathuchand Sami, [1967] 63 I.T.R. 318; [1967] 1 S.C.R. 813 (S.C.). That was a case under Section 24 of the Indian Income-tax Act, 1922, which dealt with set-off and carry-forward of losses. In that case it was held that a registered firm was entitled to carry forward losses in speculation business for set off against profit from speculation business in subsequent years. But that was so because under that provision speculation losses are treated on a different footing from losses in other business. Speculation loss is not taken into consideration in the computation of the income of the firm and as such is not allocated to the partners. The same is the position under the Income-tax Act, 1961. But we are not concerned with that question in the present case.
11. We are, therefore, of opinion that the claim put forward by the petitioner is untenable and the Commissioner was right in rejecting the same.
12. The petition fails and is dismissed with costs.