Interpretation of Section 32(2) of the Income-tax Act, 1961 regarding the set off of unabsorbed depreciation from previous assessment years against the firm's income for the current year.

Gokal Chand Mital, J.

1. The assessee-firm was assessed as an unregistered firm for the assessment year 1971-72. Unabsorbed depreciation of over a lakh of rupees remained after the aforesaid assessment. For the assessment year 1972-73, the assessee-firm was registered. When the case relating to the assessment year 1973-74 was taken up, the assessee wanted to set off the unabsorbed depreciation relating to the assessment year 1971-72 from the firms income also but that was declined upto the Tribunal in view of the decisions of the Delhi, Allahabad and Gujarat High Courts. At the instance of the assessee, the following question has been referred for opinion :

"Whether, on the facts and in the circumstances of the case and on a proper construction of Section 32(2) of the Income-tax Act, 1961, the Tribunal is correct in holding that the depreciation allowance for the assessment year 1973-74 of the assessee, a registered firm, would not include the unabsorbed depreciation allowance for the assessment year 1971-72 and, therefore, the assessee is not entitled to the aggregate of the depreciation allowances for the assessment years 1971-72 and 1973-74 to be set off against the income for the assessment year 1973-74 and to carry over the unabsorbed depreciation left after such set off to the year succeeding the assessment year 1973-74 ?"

2. On behalf of the assessee, reliance has been placed on the following decisions to answer the question in its favour.

3. CIT v. J. Patel and Co. [1984] 149 ITR 682 (Delhi) ; CIT v. Nagpur Gas and Domestic Appliances [1984] 147 ITR 440 (Bom) ; CIT v. Singh Transport Co. [1980] 123 ITR 698 (Gauhati) and CIT v. Nagapatinam Import and Export Corporation [1979] 119 ITR 444 (Mad).

4. After going through the judgments, we find that they fully support the assessees view point. As against the above, on behalf of the Revenue, reliance has been placed on the following decisions :

Sankaranarayana Construction Co. v. CIT [1984] 145 ITR 467 (Kar) ; Garden Silk Weaving Factory v. CIT [1983] 144 ITR 613 (Guj) ; K. T. Wire Products v. Union of India [1973] 92 ITR 459 (All) and Raj Narain Agarwala v. CIT [1970] 75 ITR 1 (Delhi).

5. In J. Patel and Co.s case [1984] 149 ITR 682, the Delhi High Court considered its earlier decision in Raj Narain Agarwalas case [1970] 75 ITR 1 (Delhi) and came to the conclusion that the observations in the earlier decision were obiter. After considering the matter, we are of the opinion that the relevant observations in the earlier decisions of the Delhi High Court were obiter. However, the remaining three decisions of the High Courts relied upon by the Revenue do support their view point.

6. In these circumstances, it has to be seen as to which view is the correct one. After going through the provisions contained in Section 32(2) and Sections 72(2) and 75(2) of the Income-tax Act, 1961 (for short "the Act"), and the decisions referred to before us, we are of the view that the decisions relied upon by the assessee lay down the correct law and following the same, we are of the view that the unabsorbed depreciation would be first set off from the income of the firm for the assessment year 1973-74 and so on till it is wholly absorbed.

7. Accordingly, we answer the question in favour of the assessee, that is, in the negative, leaving the parties to bear their own costs.