1. In this reference made under s. 256(1) of the I.T. Act, 1961 ("Act" called shortly), the following question has been referred for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the unabsorbed depreciation allowance of Rs. 39,543 for the assessment year 1973-74 cannot be allowed to be adjusted while computing the income of the assesses firm in the assessment year 1973-74 ?"

2. The answer to this question turns on the scope of s. 32(2) of the Act which has given rise to acute conflict of judicial opinion.

3. The facts behind the legal formulation are as follows :

Unabsorbed depreciation of Rs. 1,14,779 in the assessment of the assessee, a registered firm, was left to be adjusted against the individual income of the partners under s. 32(2) for the assessment year 1972-73. After setting it off against the individual income of its partners for the same assessment year, a sum of Rs. 39,543 still remained being unabsorbed.

4. It was claimed on behalf of the firm in its assessment for the assessment year 1973-74 that the said balance of unabsorbed depreciation should be set off against its income assessable for the year 1973-74. On the ITO rejecting this claim, the assesses firm preferred an appeal before the AAC and contended that the ITO erred in not adding the said balance of unabsorbed depreciation of the assessment year 1972-73 remaining after adjusting against the income of the partners to the depreciation of the firm for the assessment year 1973-74. The AAC rejected the assessee's contention.

5. The assessee's further appeal to the Tribunal was also dismissed. Before the Tribunal the assesses firm placed strong reliance on the decision of the Bombay High Court in Ballarpur Collieries Co. Vs. Commissioner of Income Tax, Poona, (1973) 92 ITR 219 Bom and the Department relied upon the decisions of the Gujarat High Court in Commissioner of Income Tax, Gujarat Vs. Garden Silk Wvg. Factory, (1975) 101 ITR 658 Guj , the decision of the Allahabad High Court in K.T. Wire Products Vs. Union of India (UOI) and Others, (1973) 92 ITR 459 All and the decision of the Delhi High Court in Raj Narain Agarwala Vs. The Income Tax Commissioner, Delhi, ILR (1969) Delhi 936. The Tribunal preferred the view taken by the Gujarat, Allahabad and Delhi High Courts as against the view taken by the Bombay High Court and confirmed the disallowance.

6. Being aggrieved by the order of the Tribunal the assessee sought for a reference under s. 256(1) of the Act.

7. As a preliminary to the consideration of the question, it would be necessary to advert to special provisions in the Act applicable to firms. Section 182 provides for assessment of registered firms. First, the Income Tax payable by the firm itself shall be determined; and, second, the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly. Section 182(2) states that 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 ss. 70 to 75.

8. The Act draws a distinction between the depreciation loss and other losses in the matter of set off and carry forward. Section 72 deals with the carrying forward and setting off business losses of non-speculative nature. The Act, however, stipulates that before the unabsorbed loss can be set off, it must be shown that the business or profession for which the loss was originally computed continued to be carried on by the assessee in the previous year relevant for the said following assessment year. The continuity of business is essential and if the continuity breaks at any point, the loss in the business incurred in an earlier year and carried forward lapses altogether. It cannot be revived even if the discontinued business is resumed at a later date at any time within the period of eight years or thereafter. It appears to