Judgment RANGANATHAN, J. ( 1 ) 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 opinionamong various High courts. In the judgment under appeal, reported ascit v. Garden Silk Wvg. Factory, the Gujarat High court has answeredthe question raised in favour of the revenue and against the assessees. Hence these appeals by the assessee, M/s Garden Silk Weaving Factory, Surat. ( 2 ) THE two appeals relate to the assessment years 1967-68 and 1968-69 for which the relevant previous years were the Saka years 2022 and2023 respectively. The question arises in similar circumstances for boththe years. We shall set out the facts relevant for the assessment year1968-69 as the appeals and reference in respect of that year were disposed of earlier than those pertaining to the assessment year 1967-68. ( 3 ) THE assessee, M/s Garden Silk Weaving Factory, is a registeredfirm. For the assessment year in question, it returned a total income ofrs 3,94,483 and a provisional assessment, under S. 141 of the Act,was made accepting the income returned. Subsequently, the Income Taxofficer found that, for the assessment year in question, the assessee hadmade an income of Rs. 11,82,056. 00 but deducted therefrom three figuresaggregating to Rs. 7,87,573. 00 to arrive at the net income of Rs. 3,94,483. 00,which had been returned and accepted. These three figures were figurescarried over from the previous year of the assessment year 1967-68. They comprised:(i) unabsorbed Depreciation rs. 1,59,181 (ii) unabsorbed Development rs. 2,79,150 rebate (iii) unabsorbed Business loss rs. 3,49,242 total: rs. 7,87,573 The Income Tax Officer (ITO) agreed that, out of the above threeamounts, 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, forreasons which will become clear later, the Income Tax Officer was of theopinion that the sum of Rs. 1,59,181. 00 (which represented that amount ofunabsorbed depreciation relating to the assessment year 1967-68) andthe amount of Rs. 3,49,242. 00 (which represented the unabsorbed losspertaining 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 Rs. 5,08,423. 1,59,181. 00 (which represented that amount ofunabsorbed depreciation relating to the assessment year 1967-68) andthe amount of Rs. 3,49,242. 00 (which represented the unabsorbed losspertaining 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 Rs. 5,08,423. 00 (the aggregate of the above twoamounts) to the returned income for determining the total income forassessment year 1968-69. This action of the Income Tax Officer was confirmed by the Appellate Assistant Commissioner (AAC ). However, onfurther appeal, the Income Tax Appellate tribunal (AT) took a differentview. It upheld the Income Tax Officers stand that the firm could not beallowed to carry forward and set off the business loss carried from theearlier year. But, so far as the unabsorbed depreciation was concerned, itupheld the assessees contention. A reference to the High court followed. The following two questions were referred to the High court ofgujarat 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 registeredfirm is entitled to carry forward unabsorbed depreciation from earlier years and that it will be deemed to be an allowance in the natureof depreciation in the previous year, relevant to assessment year1968-69?2. Whether the claim of the assessee to carry forward and setoff loss of Rs. 3,49,242. 00 against its total income for the assessmentyear 1968-69 has been rightly rejected?" ( 4 ) THE High court, in a very detailed judgment, discussed the issuesthreadbare and answered both the questions against the assessee and infavour of the revenue. Hence the assessees appeal for the assessmentyear 1968-69 under a certificate of fitness granted by the High court. ( 5 ) FOR the assessment year 1967-68, a full paper book containing allthe orders and statement of facts has not been placed before us. However, the petition of appeal gives a few facts which may be sufficientto dispose of the appeal. The relevant facts are these. For this assessmentyear, the assessee filed a return on 30/06/1967 showing a loss ofrs 7,87,515 but filed a revised return on 22/03/1972 showing a lossof Rs. 5,46,351. 00. On March 14, 1973 the ITO completed the assessmentdetermining a loss of Rs. 4,85,250. 00. The relevant facts are these. For this assessmentyear, the assessee filed a return on 30/06/1967 showing a loss ofrs 7,87,515 but filed a revised return on 22/03/1972 showing a lossof Rs. 5,46,351. 00. On March 14, 1973 the ITO completed the assessmentdetermining a loss of Rs. 4,85,250. 00. (It will be noticed that the assessmentorder for 1968-69 gives a different figure and also shows its compositionas partly loss, partly unabsorbed depreciation and partly unabsorbeddevelopment rebate but this is not very material for deciding the principle in issue before us.) The assessees request that this loss should becarried forward to the subsequent assessment year was rejected by theito. This was confirmed by the AAC. On further appeal, the AT confirmed the order of the AAC, following the High courts decision forassessment year 1968-69 which had by then been announced. Thereuponthe following question of law was referred to the High court for its opinion:"whether, on the facts and circumstances of the case, thetribunal was justified in rejecting the claim for carry forward ofbusiness loss in the hands of the firm in view of the decisionreported in COMMISSIONER OF INCOME TAX v. Garden Silk Wvg. Factory?the High court answered the question in the affirmative following itsearlier decision but granted a certificate of fitness for appeal to thiscourt. This is how the second appeal is before us. It will be seen from theabove that, though there are two appeals before us, the questioninvolved in both the appeals is the same. ( 6 ) BEFORE discussing the questions at issue, it may be useful to brieflysummarise the procedure under the statute for determining the totalincome of an assessee in respect of a previous year. All income accruingor arising to the assessee and includible in his total income, is, to beginwith, classified (see S. 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. ( 7 ) IN computing the income of the assessee according to this classification, two aspects have to be borne in mind. One is that, even under thesame head, an assessee may have different sources. If so, the income hasfirst to be arrived at in respect of each such source. F. Income from other sources. ( 7 ) IN computing the income of the assessee according to this classification, two aspects have to be borne in mind. One is that, even under thesame head, an assessee may have different sources. If so, the income hasfirst to be arrived at in respect of each such source. Thus, if an assesseecarries on several business, the income of each and every such businesshas to be separately computed by allowing against the gross profits andgains of that business only the deductions relevant and appropriate tothe business. The second is that, for arriving at the figure of incomeassessable under a particular head, the individual figures in respect of allthe sources have to be aggregated. Thus, to take up the head, "profitsand gains of business, profession or vocation", the statute contemplatesthe computation of the profits and gains of each business, profession orvocation carried on by the assessee separately. The result of such computation may be either a profit or a loss. If all the businesses end inprofits, the profits are aggregated to arrive at a resultant figure of profitsfrom "business". On the other hand, if some of the businesses makeprofit and some of them result in a loss, the profits and the losses have tobe added together in order to arrive at the consolidated income underthe head "profits and gains of business". If the total amount of profitsexceeds the total amount of losses, there will be a positive income underthis head, assessable for that particular assessment year. If on the otherhand the losses exceed the profits, they will be "adjusted" against theprofits, so as to reduce the assessable income under the head to nil; inaddition, 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 computationwhich we may call "intra-head adjustments". This was not specificallyprovided for in the Indian Income Tax Act, 1922 (the 1922 Act) but nowfinds specific mention in S. 70 of the 1961 Act. ( 8 ) S. 24 (1) of the 1922 Act and S. 71 of the 1961 Act nextcontemplate a mutual set off of the losses under one head against theincome under some other head subject to some exceptions (like speculation loss, capital loss etc. ( 8 ) S. 24 (1) of the 1922 Act and S. 71 of the 1961 Act nextcontemplate a mutual set off of the losses under one head against theincome under some other head subject to some exceptions (like speculation loss, capital loss etc. which, to avoid unnecessary complications andconfusion, we shall leave out of account ). Thus if, in any particularassessment year, an assessee has incurred a loss under the head "business", this loss can be set off against the income earned by the assesseeduring that previous year under other heads. Thus, for example, if anassessee has got income by way of salary of Rs. 20,000. 00 and income fromhouse property of Rs. 25,000. 00 but has sustained a loss of Rs. 40,000. 00 in business, the Act envisages the set off of the loss of Rs. 40,000. 00 against theincome of Rs. 45,000. 00, resulting in a total income of Rs. 5,000. 00 only. This isthe second stage in the process of assessment which we may describe as"inter-head adjustment" or "set off. ( 9 ) THE Acts [section 24 (2) of 1922 Act and S. 72 of the 1961act] next envisage a third stage in the process of assessment which canbe described as the process of "carry forward and set off". By thisprocess, the assessee is permitted to carry forward a loss he has not beenable to adjust or set off in the first and second stages of assessment. Thisbenefit 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 interhead adjustments can becarried forward to the succeeding assessment years and can be set offagainst any other business income in those years. ( 10 ) A modification to the above scheme had to be enacted in respectof partnerships. Partnership firms are treated as separate assessees forthe purposes of the Income Tax Acts. Under the Acts, firms are classifiedinto two - registered firms and unregistered firms. Unregistered firmsare distinct assessees which are liable to pay tax on their total income. The Acts provided that any unabsorbed loss in the case of such a firmcould be carried forward only by the firm and not by its partners. Under the Acts, firms are classifiedinto two - registered firms and unregistered firms. Unregistered firmsare distinct assessees which are liable to pay tax on their total income. The Acts provided that any unabsorbed loss in the case of such a firmcould be carried forward only by the firm and not by its partners. However, under the 1922 Act, as it stood between 1939 and 1956,registered firms were treated as assessees only to this extent that thetotal 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 ofthe firm was apportioned among its partners and each partner wasassessed on his share of income from the firm. In this scheme, it wasobvious that, as soon as the income or loss of a firm was computed, therewas nothing further to be done in the case of the firm; the income or lossbecame that of the partner for all practical purposes. A partners share ofa business loss of the firm which remained unabsorbed became businessloss in the hands of the partner liable to intra-head adjustments, inter-head adjustments and carry forward as if the loss had been incurred bythe partner himself. The Act, therefore, provided that in the case ofregistered firms the loss which could not be absorbed in the same assessment year by the other income of the firm could be carried forward tothe subsequent year not by the firm itself but only by the partners. Inother words, each partner carried forward to subsequent years his shareof 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 ofunregistered firms assessed as registered the provisions regarding whichare not relevant for our present purposes. Leaving them out of account,the Acts outlined a very simple scheme which stemmed from the basicfact that a registered firm was not liable to pay tax whereas anunregistered firm had to pay tax. Under this scheme the full advantage ofcarry forward of the loss incurred by the firm was enjoyed by the partnersin the case of a registered firm and in the case of an unregistered firm bythe firm itself. ( 11 ) THE simplicity of the above scheme of assessment of registeredand unregistered firms, however, was not allowed to last. Under this scheme the full advantage ofcarry forward of the loss incurred by the firm was enjoyed by the partnersin the case of a registered firm and in the case of an unregistered firm bythe firm itself. ( 11 ) THE simplicity of the above scheme of assessment of registeredand unregistered firms, however, was not allowed to last. In 1956, thelegislature decided that registered firms should also be made to pay a tax. This tax, called "firms tax" was at rates lower than those applicable tounregistered firms and other assessees. Under the new scheme, whichbecame effective from 1/04/1956, the total income of a registered firmis determined and it is liable to income tax thereon. The income of thefirm (less the firms tax) is then apportioned among the partners (subjectto certain adjustments as before ). The share income of each partner isaggregated with the rest of his income to arrive at his total income onwhich he also pays tax. In this new scheme the question arises: "when thenet result of a business carried on by a registered firm a particular year isa loss, who is to carry forward such loss? Is it the firm (as in the case ofunregistered firms) or is it the partners (as, earlier, in the case ofregistered firms) or both?" The answer to this question is furnished bythe statute which, while broadly continuing the scheme of assessment ofregistered firms with the modification indicated above, makes a specificprovision in regard to carry forward of losses. The provisions of Sections75 and 77 in their present form can be usefully extracted here (thoughthey contain references to certain amended provisions which we neednot touch upon):"75. Losses of registered firms.- (1) Where the assessee is aregistered firm, any loss which cannot be set off against any otherincome of the firm shall be apportioned between the partners of thefirm, and they alone shall be entitled to have the amount of the lossset off and carried forward for set off under S. 70, 71,72,73,74 and 74-A. (2) Nothing contained in Ss. (1) of S. 72, Ss. (2) of S. 73, Ss. (1) or Ss. (3) of S. 74 or Ss. (3) of S. 74-A shall entitle any assessee,being a registered firm, to have its loss carried forward and set offunder the provisions of the aforesaid sections. 76. (1) of S. 72, Ss. (2) of S. 73, Ss. (1) or Ss. (3) of S. 74 or Ss. (3) of S. 74-A shall entitle any assessee,being a registered firm, to have its loss carried forward and set offunder the provisions of the aforesaid sections. 76. Losses of unregistered firms assessed as registered firms.- Inthe case of an unregistered firm assessed under the provisions ofclause (b) of S. 183 in respect of any assessment year, its lossesfor that assessment year shall be dealt with as if it were a registeredfirm. 77. Losses of unregistered firms or their partners.- (1) Wherethe assessee is an unregistered firm which has not been assessed as aregistered firm under the provisions of clause (b) of S. 183, anyloss of the firm shall be set off or carried forward and set off onlyagainst the income of the firm. (2) Where the assessee is a partner of an unregistered firmwhich has not been assessed as a registered firm under the provisions of clause (b) of S. 183 and his share in the income of thefirm is a loss, then, whether the firm has already been assessed ornot- (a) such loss shall not be set off under the provisions ofsection 70, S. 71, Ss. (1) of S. 73 or Section74-A; (b) nothing contained in Ss. (1) of S. 72 orsub-section (2) of S. 73 or Ss. (1) or sub-section (3) of S. 74 or Ss. (3) of S. 74-A shall entitlethe assessee to have such loss carried forward and set offagainst his own income. "in view of this specific provision the High court, following an earlierdecision of the same High court in COMMISSIONER OF INCOME TAX v. Dhanji Shamji Manavdar answered the second question referred to it in the reference relating toassessment year 1968-69 and the only question referred in regard to theassessment year 1967-68 infavour of the revenue and against the assessee. The correctness of this answer has not been challenged before us. ( 12 ) THE first question referred to the High court in respect ofassessment year 1968-69, however, arises in a slightly different way. The correctness of this answer has not been challenged before us. ( 12 ) THE first question referred to the High court in respect ofassessment year 1968-69, however, arises in a slightly different way. Itarises in the context of "depreciation" which is one of the notionalallowances - by which expression we mean a deduction in respect of anoutgoing which is not an item of actual expenditure or is one which cannot be treated as an outgoing of a revenue nature permitted by thestatute to be deducted in the computation of the profits and gains of abusiness. In a sense, where the depreciation allowance exceeds theprofits, otherwise arrived at, in respect of the business, there will be aresultant "loss" in the business; and, indeed, the departments contentionis that there is no difference between an unabsorbed loss andunabsorbed depreciation. It would, however, be useful to refer to thetreatment meted out by the statute in respect of three items of deductions allowed in the computation of the profits of a business which maybe larger than the profits of the business otherwise computed. One is thedevelopment rebate regarding which the statute provides that it has to beset off against the total income of the assessee so as to reduce it to niland that the balance is to be carried forward to succeeding assessmentyears to be accorded a similar treatment. . This is an allowance which cannotbe a constituent element of a figure of loss to be carried forward to lateryears and stands on a totally different footing. The second is theallowance for depreciation under S. 10 (2) (vi) of the 1922 Act. Inrespect of this allowance, S. 10 (2) (vi) provided that if full effect tothe allowance could not be given in the assessment of an assessee for anyassessment year, the unabsorbed allowance could be carried forward andset off against business profits in succeeding assessment years indefinitely. This provision, namely clause (b) Of the proviso to S. 10 (2) (vi) ofthe 1922 Act after an addition in 1953 of the words underlined in theextract below reads thus:"10 (2) (vi ). . . Provided that. . . This provision, namely clause (b) Of the proviso to S. 10 (2) (vi) ofthe 1922 Act after an addition in 1953 of the words underlined in theextract below reads thus:"10 (2) (vi ). . . Provided that. . . (a) * * * (b) where, in the assessment of the assessee or, if the asses-see is a registered firm, in the assessment of its partners, full effectcannot be given to any such allowance in any year not being ayear which ended prior to 1/04/1939, owing to there beingno profits or gains chargeable for that year, or owing to theprofits or gains chargeable being less than the allowance, then,subject to the provisions of clause (b) of the proviso to Ss. (2) of S. 24, the allowance or part of the allowanceto which effect has not been given, as the case may be, shall beadded to the amount of the allowance for depreciation for thefollowing year and deemed to be the part of that allowance, orif there is no such allowance for that year, be deemed to be theallowance for that year, and so on for succeeding years;"this provision has, in substance, there are certain verbal differenceswhich are not material for our purposes been re-enacted as Section32 (2) of the 1961 Act, which now reads thus:"32. (2) Where, in the assessment of the assessee (or, if theassessee is a registered firm or an unregistered firm assessed as aregistered firm, in the assessment of its partners) full effect cannot begiven to any allowance under clause (ii) of Ss. (1) in anyprevious year, owing to there being no profits or gains chargeablefor that previous year, or owing to the profits or gains chargeablebeing less than the allowance, then, subject to the provisions of Ss. (2) of S. 72 and Ss. (3) of S. 73, theallowance or part of the allowance to which effect has not beengiven, as the case may be, shall be added to the amount of theallowance for depreciation for the following previous year anddeemed to be part of that allowance, or if there is no such allowancefor that previous year, be deemed to be the allowance for thatprevious year, and so on for the succeeding previous years. "the third type of allowance of this nature, a carry forward of which iscontemplated, is an allowance in respect of expenditure on capital assetsrelated to a business. "the third type of allowance of this nature, a carry forward of which iscontemplated, is an allowance in respect of expenditure on capital assetsrelated to a business. This, by virtue of clause (f) of the proviso to Section10 (2) (xiv) of the 1922 Act, re- enacted in S. 35 (4) of the 1961act, is treated on the same lines as the depreciation allowance dealt within Section 10 (2) (vi) and S. 32 (2 ). We shall, however, leave this outof account in our future discussion as it is not material for the purposesof the present case and as, in any event, whatever is decided in regard tounabsorbed depreciation would apply equally in respect of suchallowance as well. ( 13 ) FROM the above discussion, it will be seen that unabsorbed lossesind unabsorbed depreciation are to be carried forward to future years tobe set off against future income. There is, however, one important difference. Unabsorbed losses can be carried forward only for a period ofeight years whereas unabsorbed depreciation can be carried forwardundefinitely. A rule of priority of set off-as between these two therefore becomes necessary and this is provided by S. 72 (2) of the 1961act which deals with carry forward of losses the counterpart of theproviso to S. 24 (2) of the 1922 Act which reads thus:"72. (2) Where any allowance or part thereof is, under Ss. (2) of S. 32 or Ss. (4) of S. 35, to becarried forward, effect shall first be given to the provisions of thissection. " ( 14 ) THIS is the historical context and statutory language on the basisof which the issue before us has to be resolved. The issue is: when thereis an unabsorbed depreciation computed in the assessment of aregistered firm for any year, how is it to be treated for purposes of carryforward? Three alternatives are possible: (i) It should be retained (without apportionment) and carried forward by the firm only. (ii) Itshould be apportioned among the partners. Thereafter,, it can be dealtwith even for carry forward purposes only in the assessments ofeach of the partners in respect of his aliquot share thereof, (iii) It shouldbe apportioned among the partners each of whom may set off his sharethereof against his other income. If, after this, any amount remainsunabsorbed, it will revert to the firm. The firm will carry it forward, set itoff against its other income in the succeeding year. If, after this, any amount remainsunabsorbed, it will revert to the firm. The firm will carry it forward, set itoff against its other income in the succeeding year. This operation will berepeated every year indefinitely until the unabsorbed depreciation getsabsorbed. The three alternatives will yield widely different results andhence the present controversy. ( 15 ) ON the above issue there has been a strong cleavage of opinionbetween the various High courts. The view that unabsorbed depreciation once allocated to the partners cannot be taken back to the firmsassessment for being carried forward by the firm and that the partnersalone are entitled to carry forward the unabsorbed depreciation for beingset off against their income, has been taken in the following cases: (a)K. T. Wire Products v. Union of India; (b) COMMISSIONER OF INCOME TAX v. Garden Silk Weavingfactory and Garden Silk Weaving Factory v. Commissioner of Income Tax, (c) COMMISSIONER OF INCOME TAX v. Ramswarup Gupta and Raj Narain Agarwala v. CIT, (d) Sankaranarayanaconstruction Co. v. Commissioner of Income Tax. The view that the unabsorbed depreciation,after being carried forward by the partners and set off against theirincome, reverts back to the registered firm for being carried forward andset off against its income and that any depreciation still remainingunabsorbed will again go to the partners and that if it still remainedunabsorbed would revert back to the firm and so on, has been acceptedin: (a) Ballarpur Collieries Co. v. COMMISSIONER OF INCOME TAX and COMMISSIONER OF INCOME TAX v. Nagpur Gas and Domesticappliances, (b) COMMISSIONER OF INCOME TAX v. Nagapatinam Import and Export Corp. , COMMISSIONER OF INCOME TAX v. Madras Wire Products and COMMISSIONER OF INCOME TAX v. Madras Wire Products, (c) COMMISSIONER OF INCOME TAX v. Singh Transport Co. ; (d) COMMISSIONER OF INCOME TAX v. J. Patel and Co. ; (e) COMMISSIONER OF INCOME TAX v. Srinivasasugar Factory, (f) Pearl Woollen Mills v. CIT and CIT v. Mahavir Steelrolling Mills (g) COMMISSIONER OF INCOME TAX v. R. J. Trivedi and Sons. ( 16 ) SHRI Harish Salve, learned counsel for the assessee, canvassedthe latter of the above views but with a slight modification. He submittedthat, 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 unabsorbeddepreciation of the firm had been set off in the partners hands. He submittedthat, 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 unabsorbeddepreciation 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 thethree alternatives set out earlier and that he need not, for the purposesof this case, seek to support the third alternative, upheld in some of thedecisions, which may create an impression in the mind that the assesseewas deriving a double benefit by having the unabsorbed depreciation setoff in the hands of both the firm and the partners. On the other hand, Drgaurishankar, for the revenue, strongly advocated the second alternative. According to him, once the assessment is completed, and the totalincome or loss of the firm ascertained, it has to be apportioned amongstthe partners. Thereafter, there remained nothing in the assessment ofthe firm to be carried forward. Only each of the partners can carry forward his share of the unabsorbed loss (and this, according to him, willinclude also the unabsorbed depreciation) for set off in his future assessments. ( 17 ) THE answer to the problem before us has to be discovered in thelanguage of S. 32 (2) supplemented by that of other S. whichdeal 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 S. 32 (2) to which Sri Salve drew attention in the course of his reply. Hepointed out that S. 32 (2) permits the carry forward of the depreciation allowance "where full effect cannot be given to it" owing to therebeing no profits or gains chargeable for that previous year, or owing tothe profits or gains chargeable being less than the allowance. Layingemphasis on the words "profits or gains", he contended that the carryforward of deprecation allowance is at a stage much anterior to that ofthe determination of the total income of the assessee. On this construction, if an assessee A carries on two businesses, in one of which there isan unabsorbed depreciation of Rs. 15,000. 00 and the profits and gains of theother business is only Rs. 10,000. 00, the net unabsorbed depreciation ofrs 5,000. 00 has to be carried forward irrespective of the other income of theassessee in that year, to the succeeding year. 15,000. 00 and the profits and gains of theother business is only Rs. 10,000. 00, the net unabsorbed depreciation ofrs 5,000. 00 has to be carried forward irrespective of the other income of theassessee in that year, to the succeeding year. This contention, however,cannot be accepted. Though the section, somewhat infelicitiously, usesthe expression "profits and gains" as it occurs in the statute in the fasciculus of S. dealing with the computation of business income, thequestion of the carry forward of unabsorbed depreciation has alwaysbeen understood and interpreted as arising only after the intra-head andinter-head adjustments, referred to earlier, have been carried out. Thus,in the illustration given above, if A has a property income of Rs. 6,000. 00 theunabsorbed depreciation of Rs. 5,000. 00 will be set off against the propertyincome and there will be no unabsorbed depreciation left for beingcarried forward to the subsequent assessment year. This is because,where the depreciation allowance attributable to a particular businessexceeds the profits otherwise computed for that business, the deductionof the depreciation allowance from such profits can only result in a "loss"from that business this, however, is subject to a limitation that will bediscussed later and a business loss has to be set off against incomefrom any other business, by way of intra-head adjustment, under Section70 and the income under any other head, by way of inter-head adjustment, under S. 71. This principle indeed emerges even from thelanguage of S. 32 (2) insofar as it implicitly recognises that theexcessive depreciation of one business can be "given effect to" againstthe profits and gains of another business in the same year. This, indeed, isa well settled proposition, and it should be sufficient to cite two decisionsof this court which make this clear. In COMMISSIONER OF INCOME TAX v. Jaipuria China Clay Mines (P) Ltd. , this court observed:"mr Shastri, learned counsel for the revenue, urges thatdepreciation, although a permissible allowance under S. 10 (2)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 ithad not been expressly allowed as allowance, it would have beentreated as capital expenditure and would have been excluded. Hefurther says that depreciation is a charge on the profits of a business. He says that if ithad not been expressly allowed as allowance, it would have beentreated as capital expenditure and would have been excluded. Hefurther says that depreciation is a charge on the profits of a business. Bearing these two factors in mind, he urges that the expression "lossof profits and gains" in S. 24 (1) does not include any deficiencyresulting from depreciation and, therefore, an assessee is notentitled to ask the department to include the depreciation in theamount which can be set off against income, profits and gains underother heads such as income from property or dividends. Mrrajagopala Sastri for the assessee relies on the history of the legislation and a number of authorities to support the judgment of thehigh court. Apart from authority, looking at the Act as it stood on 1/04/1952, it is clear that the underlying idea of the Act is to assess thetotal income of an assessee. Prima facie, it would be unfair to compute the total income of an assessee carrying on business withoutpooling the income from business with the income or loss underother heads. The second consideration which is relevant is that theact draws no express distinction between the various allowancesmentioned in S. 10 (2 ). They all have to be deducted from thegross profits and gains of a business. According to commercial principles, depreciation would be shown in the accounts and the profitand loss account would reflect the depreciation accounted for in theaccounts. If the profits are not large enough to wipe off depreciation, the profit and loss account would show a loss. Therefore, apartfrom proviso (b) to S. 10 (2) (vi), neither the Act nor commercial principles draw any distinction between the various allowancesmentioned in S. 10 (2); the only distinction is that while theother allowances may be outgoings, depreciation is not an actualoutgoing. "and expressly disapproved the observations of the Madras High court incit v. B. Nagi Reddy that the deduction for depreciation should belimited to the amount of the profits and cannot result in working out aloss. "and expressly disapproved the observations of the Madras High court incit v. B. Nagi Reddy that the deduction for depreciation should belimited to the amount of the profits and cannot result in working out aloss. The following observations in the more recent decision inrajapalayam Mills Ltd. v. COMMISSIONER OF INCOME TAX place the position beyond doubt:"it is clear on a plain reading of the language of proviso (b) toclause (vi) that it comes into operation only where full effect cannotbe given to the depreciation allowance for the assessment year inquestion owing to there being no profits or gains chargeable for thatyear or profits or gains chargeable being less than the depreciationallowance. Now, it is well settled, as a result of the decision of thiscourt in COMMISSIONER OF INCOME TAX v. Jaipuria China Clay Mines (P) Ltd. , that the wordsno profits or gains chargeable for that year are not confined toprofits and gains derived from the business whose income is beingcomputed under S. 10, but they refer to the totality of theprofits or gains computed under the various heads and chargeable totax. It is, therefore, clear that effect must be given to depreciationallowance first against the profits or gains of the particular businesswhose income is being computed under S. 10 and if the profitsof that business are not sufficient to absorb the depreciationallowance, the allowance to the extent to which it is not absorbedwould be set off against the profits of any other business and if apart of the depreciation allowance still remains unabsorbed, it wouldbe liable to be set off against the profits or gains chargeable underany other head and it is only if some part of the depreciationallowance still remains unabsorbed that it can be carried forward tothe next assessment year. Obviously therefore, there would be noscope for the applicability of proviso (b) to clause (vi), if the totalincome of the assessee chargeable to tax is sufficient to absorb thedepreciation allowance, for then there would not be any unabsorbeddepreciation allowance to be carried forward to the following assessment year. But, where any part of the depreciation allowanceremains unabsorbed after being set off against the total incomechargeable to tax, it can be carried forward under proviso (b) toclause (vi) to the following year and set off against that yearsincome and so on for succeeding years. But, where any part of the depreciation allowanceremains unabsorbed after being set off against the total incomechargeable to tax, it can be carried forward under proviso (b) toclause (vi) to the following year and set off against that yearsincome and so on for succeeding years. "the resultant position, therefore, is that initially, the depreciationallowance has to be deducted from the profits and gains of the businessto which the assets earning the depreciation relate but, if it remainsunabsorbed by such profits, the allowance has to be set off against theother business income of the assessee and, where that is also insufficient,against the other taxable income of the assessee. The carry forward ofany depreciation as unabsorbed cannot arise until the stage of finalassessment is reached and the total income of the assessee otherwisecomputed is insufficient to absorb the years depreciation allowance. Srisalves argument that the stage of carry forward of depreciation arises ata stage anterior to the completion of the assessment and determinationof the total income cannot, therefore, be accepted. ( 18 ) SRI Salve, then, contended that there is no statutory provisionwhich enables the apportionment of the firms unabsorbed depreciationamong the partners and that, therefore, the unabsorbed depreciation hasto be carried forward by the firm itself and none else. In our opinion, thiscontention also is not well founded. S. 182, to the extent relevantfor our present purposes, reads:"182. Assessment of registered firms. (1) Notwithstanding anything contained in S. 143 and 144 and subject to the provisions of Ss. (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 firmshall 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 againsthis other income or carried forward and set off in accordance withthe provisions of S. 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 beassessed on the firm at the rate or rates which would be applicable ifit were assessed on him personally, and the tax so assessed shall bepaid by the firm. (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 beassessed on the firm at the rate or rates which would be applicable ifit were assessed on him personally, and the tax so assessed shall bepaid by the firm. (4) A registered firm may retain out of the share of each partner in the income of the firm a sum not exceeding thirty per centthereof until such time as the tax which may be levied on the partnerin respect of that share is paid by him; and where the tax so leviedcannot be recovered from the partner, whether wholly or in part, thefirm shall be liable to pay the tax, to the extent of the amountretained or could have been so retained. "how this share is to be computed is set out in S. 67 which may beset out here:"67. Method of computing a partners share in the income of thefirm. (1) In computing the total income of an assessee who is apartner of a firm, whether the net result of the computation of totalincome of the firm is a profit or a loss, his share (whether a netprofit or a net loss) shall be computed as follows: (a) any interest, salary, commission or other remunerationpaid to any partner in respect of the previous year, [and, wherethe firm is a registered firm or an unregistered firm assessed asa registered firm under clause (b) of S. 183], the incometax, if any, payable by it in respect of the total income of theprevious year, shall be deducted from the total income of thefirm and the balance ascertained and apportioned among the partners; (b) where the amount apportioned to the partner underclause (a) is a profit, any salary, interest, commission or otherremuneration paid to the partner by the firm in respect of theprevious year shall be added to that amount, and the result shallbe treated as the partners share in the income of the firm; (c) where the amount apportioned to the partner underclause (a) is a loss, any salary, interest, commission or otherremuneration paid to the partner by the firm in respect of theprevious year shall be adjusted against that amount, and theresult shall be. treated as the partners share in the income ofthe firm. treated as the partners share in the income ofthe firm. (2) The share of a partner in the income or loss of the firm, ascomputed under Ss. (1) shall, for the purposes of assessment, be apportioned under the various heads of income in thesame manner in which the income or loss of the firm has beendetermined under each head of income. (3) Any interest paid by a partner on capital borrowed by himfor the purposes of investment in the firm shall, in computing hisincome chargeable under the head "profits and gains of business orprofession" in respect of his share in the income of the firm, bededucted from the share. (4) If the share of a partner in the income of registered firm or (an unregistered firm assessed as a registered firm under) clause (b)of S. 183, as computed under this section, is a loss, such lossmay be set off, or carried forward and set off, in accordance with theprovisions of this Chapter. Explanation: In this section, paid has the same meaning as isassigned to it in clause (2) of S. 23. "sri Salve contends that these provisions talk only of "loss" and that totake this expression as including "unabsorbed depreciation" as well willobliterate the distinction in the treatment meted out to these as separateitems by S. 32 (2) and S. 72 (2) and (3 ). We think this argument is misconceived. An unabsorbed depreciation is indeed a part ofthe "loss". This is so because, in the first place, "depreciation" is anormal outgoing though in a sense notional, which has to be debited inthe 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 generallyunderstood. Jaipuria definitely says so as pointed out earlier. Again, aspointed out earlier, if it is treated as a genus totally different from a"loss", there is no statutory provision that will permit its adjustmentagainst other business income implicit in S. 32 (2) itself andagainst 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. We therefore do not see why "loss" and "unabsorbed depreciation"should be treated as antithetical to, or mutually exclusive of, each other. ( 19 ) NOR are we persuaded that any mix up or anomaly will result assuggested by counsel if we treat the expressions as synonymous except tothe extent specifically treated differently by the statute. In our view,there is nothing anomalous or absurd in the statute providing for adissection of the amount of loss for purposes of carry forward andproviding for a special or different treatment to unabsorbed depreciationin this regard although it is a component element of the genus describedas "loss". To illustrate, suppose an assessee has a "profit" of Rs. 5,000. 00 inone business before deduction of depreciation of, say, Rs. 10,000. 00 and aloss of Rs. 15,000. 00 in another business, it will be quite correct to say thathe has a business loss of Rs. 20,000. 00 in that assessment year. But for purposes of carry forward this has to be considered under two headings: (a)an unabsorbed depreciation of Rs. 5,000. 00 and (b) a business loss ofrs 15,000. 00. The amount of Rs. 20,000. 00 will be carried forward to the subsequent year but the carry forward of Rs. 5,000. 00 will be according to theprovisions of S. 32 (2) and the carry forward under S. 72 willhave, perforce, to be restricted to the other amount of Rs. 15,000. 00. Thelanguage of S. 72 (2) itself contains an indication that, whereunabsorbed depreciation is a component of the figure of loss carried forward, the amount of loss proper should be set off first and theunabsorbed depreciation later. But for the special treatment accorded bysection 32 (2) and S. 72 for purposes of carry forward, there is nodifference between an item of "unabsorbed depreciation" and an item of"loss". We are, therefore, of opinion that the unabsorbed depreciationwill be allocated among the partners and, like any other loss, will beavailable to the partner for set off against his business income or otherincome in the same assessment year. In fact S. 32 (2), insofar as ittalks of depreciation being given effect to in the partners assessmentsrecognises that such unabsorbed depreciation should be allocated amongthe partners. So the first of the three alternatives referred to by us earlieris, in our opinion, out. In fact S. 32 (2), insofar as ittalks of depreciation being given effect to in the partners assessmentsrecognises that such unabsorbed depreciation should be allocated amongthe partners. So the first of the three alternatives referred to by us earlieris, in our opinion, out. ( 20 ) WE now come to the crucial question as to what is to be donewhen the amount of unabsorbed depreciation does not get absorbed bythe other income of the firm and, further, the aliquot shares of the partners therein do not also get absorbed in the partners assessments againsttheir other income. There can be two answers to this: (1) that the partners in whose hands the unabsorbeddepreciation has been allocated should carry forward thedepreciation to succeeding years; or (2) that the amount of depreciation so remaining unabsorbedshould be carried forward by the firm for set off in future assessments. ( 21 ) WE have given our most careful consideration to this matter,particularly in view of the controversy of judicial decisions prevailingthereon, and we have come to the conclusion that the second of thesealternatives is what is truly envisaged by the statute. The most formidableobstacle put forward to this course is that, once the unabsorbeddepreciation gets divided and allocated to the partners, there is nostatutory provision for recalling, to the firms "file", the amount remaining unabsorbed. We think this criticism really proceeds on an unduly narrow construction placed on the provisions of S. 32 (2 ). In ouropinion, S. 32 (2) itself contains an inbuilt mechanism for doing this. It is plain, on the language of this sub-section, that the benefit of thecarry forward is to be given to the assessee. Where the assessee is otherthan a registered firm or an unregistered firm assessed as a registeredfirm, this is indeed very plain. In the case of this category of assessee, thedifficulty arises because of the words in parenthesis. But a momentsthought will make it clear that the word "or" in the Ss. is reallyused as a conjunctive. It cannot be an alternative, for there can be nodoubt that even in the case of such an assessee the unabsorbed depreciation, for reasons already set out, has to be adjusted against its otherincome. The assessment of the firm cannot be complete without such aset off. Thus, where a firm assessed as a registered firm, has onlyunabsorbed depreciation of say, Rs. 8,000. The assessment of the firm cannot be complete without such aset off. Thus, where a firm assessed as a registered firm, has onlyunabsorbed depreciation of say, Rs. 8,000. 00, in the business carried on by itbut a property income of Rs 12,000. 00 its total income for the year has to bers 4000; it cannot be assessed on an income of Rs 12,000. 00 with thedepreciation of Rs 8,000. 00 apportioned to its partners. We have alreadypointed out that the partners share in the unabsorbed depreciation ispart of his share in the loss of the firm and, by virtue of S. 67 (3),will be treated as business loss which is capable of adjustment against hisbusiness and other income. This is the position envisaged by Section32 (2) when it talks of effect being given to the unabsorbed depreciationin the assessment of the partners. This can refer only to cases where thedepreciation cannot be given effect to in the firms assessment. It is,therefore, clear that S. 32 (2) contemplates the situation where theunabsorbed depreciation in the hands of the firm is too large to getabsorbed, first, in the hands of the firm and then, after apportionment, inthe hands of the partners. What remains thereafter has obviously to becarried forward by the firm which is the assessee referred to in the sub-section. Perhaps the meaning of the provision will become clearer if itsrelevant words are rearranged as follows:"where full effect cannot be given to any (depreciation) in anyprevious year in the assessment of the assessee (whatever category itbelongs to) and, if the assessee is a registered firm or anunregistered firm assessed as a registered firm, in the assessment ofits partners,. . . the allowance shall be added. . . ". As in the case of all other assessees, the carry forward will be available tothe registered firm which is the assessee that is referred to in the sub-section. ( 22 ) THIS construction is also strengthened by the last part of the sub-section. When it talks of the depreciation allowance carried forwardbeing added to the allowance for depreciation for the following previousyear it obviously refers to the depreciation allowance due to the assessee (that is, the firm) in the subsequent previous year. ( 22 ) THIS construction is also strengthened by the last part of the sub-section. When it talks of the depreciation allowance carried forwardbeing added to the allowance for depreciation for the following previousyear it obviously refers to the depreciation allowance due to the assessee (that is, the firm) in the subsequent previous year. In the normal run ofcases, it will thus either get added to the subsequent years depreciationin respect of the same assets and get set off against the income from thesame business or some other business of the same assessee or, failingthat, against other income of such assessee. What the Ss. clearlyprovides for is that the aggregate of the depreciation available to anassessee over the years will be taken into consideration for set off againstits income over a period of years. No doubt, the latter portion of Section32 (2) does not envisage that the business carried on by the assessee inthe subsequent years should be the same or that the assets to thedepreciation in respect of which the unabsorbed depreciation is to beadded should be the same or, indeed, that any depreciation at all shouldbe allowable to the assessee in the subsequent year. It is no doubt truethat the words of the Ss. are so widely couched that they can,with a certain amount of difficulty, be rendered capable of application tothe situation of each partner carrying forward his share of theunabsorbed depreciation for set off, even where he has no business orbusiness income, against his other income. But we think that it is toostrained a construction of the sub-section. When, as pointed out by Srisalve, there is nothing in the Ss. or the Act specifically providingeven for an apportionment of the depreciation among the partners, it istoo contrived a construction to read into the Ss. several wordsintended to provide for a number of partners, each carrying forward hisshare of the unabsorbed depreciation to successive assessment years. When, as pointed out by Srisalve, there is nothing in the Ss. or the Act specifically providingeven for an apportionment of the depreciation among the partners, it istoo contrived a construction to read into the Ss. several wordsintended to provide for a number of partners, each carrying forward hisshare of the unabsorbed depreciation to successive assessment years. Itseems natural and reasonable to construe the S. as envisaging thefollowing steps where the assessee is a registered firm: (i) Excessive depreciation should be adjusted in the assessmentof the assessee against other business income and against otherheads of income; (ii) Depreciation, which remains unabsorbed under (i), will beapportioned to the partners and the share of each will be adjustedagainst the business and other income of each of the partners pro tanto; (iii) If full effect cannot be given to the depreciation allowanceof the assessee by the above processes and some depreciationremains unadjusted, the assessee-firm will carry it forward to thesucceeding assessment year. ( 23 ) THE objection to this course is based on a mental imagery of thefirm and its partners as altogether different assessees and of theimpermissibility of "bringing back" to the firms "file" what has goneaway to the files of the partners. We think this approach of viewing thetwo assessments in watertight compartments is not correct. The Act itselfcontains several provisions [e. g. S. 67 (2) and (3)] which indicatethat this is not so. The observations of this court in S. Sankappa v. ITOalso bring out the regions of interdependence of these two assessments. In any event, any such theoretical dichotomy cannot prevail over theprovisions of S. 32 (2 ). ( 24 ) THERE is also one further reason why this view should find acceptance. As we have pointed out earlier, unabsorbed depreciation is only aspecies of business loss. But for purposes of carry forward the statute hasdrawn a distinction between them. In doing so, it specifically outlines theprocedure for carry forward and set off of losses in the case of aregistered firm but is silent in regard to unabsorbed depreciation. Thereis no statutry prohibition against the carry forward of unabsorbeddepreciation by the registered firm as there is against carry forward ofloss. The need felt to enact a specific prohibition in respect of losses andthe absence of a like provision in respect of depreciation are significantpointers in support of the above construction. Thereis no statutry prohibition against the carry forward of unabsorbeddepreciation by the registered firm as there is against carry forward ofloss. The need felt to enact a specific prohibition in respect of losses andthe absence of a like provision in respect of depreciation are significantpointers in support of the above construction. ( 25 ) AN argument has been put forward by Dr Gaurishankar on thebasis of the amendment to the proviso (b) to S. 10 (2) (vi) in 1953 tosubmit that it was intended to negative the claim of carry forward by thefirm which was earlier being accepted on the strength of the earlierlanguage resulting in a double advantage. Attention has been drawn tothe objects and reasons of the amendment, set out thus at page 57 in (1952) 21 ITR (Statutes):"the (amendment) is intended to make it clear that whereunabsorbed 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 assessees -and this included registered firms as well to carry forward theirunabsorbed depreciation and that though the registered firm paid no tax,it could, on the language claim a carry forward of the depreciation whichhad been apportioned among the partners. This resulted in such carryforward being claimed even where the whole or a part of the unabsorbeddepreciation of the firm had been set off in the assessment of individualpartners. The amendment, vide the words emphasised in the extractabove, only seeks to make it clear that such carry forward will not bepermitted to the extent it has been given effect to in the partners assessments; by necessary implication the carry forward, to the extent it has notbeen effectively allowed to the partner, continues to be available. Theamendment of 1953, therefore, not only does not help the case of therevenue, it actually lends support to the construction we are inclined toplace on the proviso. Theamendment of 1953, therefore, not only does not help the case of therevenue, it actually lends support to the construction we are inclined toplace on the proviso. ( 26 ) IT is possible that our conclusion may give scope for two groundsof criticism: (i) that the partners derive a double advantage of setting offthe unabsorbed depreciation to reduce the taxable income of the firm aswell as the partners; and (ii) that this will distort the relief available tovarious partners depending upon the variations in income as between theseveral partners as well as over a period of years. We do not think thatthe first critism is a valid one. For it is now settled law, that though afirm and its partners are distinct assessees for purposes of income tax, theact still recognises the principle that a firm is only a compendious namefor its partners and that the business carried on by the firm is also a business carried on by each of the partners too vide S. 67 (2) and (4)and the loss of a registered firm is treated as the losses of its partnerstoo. The procedure envisaged by it will only enable a firm and the partners to set off the aggregate of the unabsorbed depreciation of the firmagainst the aggregate income of the firm and partners. To the extenteffect is given to such unabsorbed depreciation to one or more of thepartners the firm cannot again get the benefit and vice versa. There is,therefore, really no double advantage. ( 27 ) THERE is some point in the second criticism. But, then, a certainamount of imbalance among the partners is inherent in the application ofany one of the three possible alternatives. If, as suggested by Sri Salve,only the firm and not the partners can carry forward the unabsorbeddepreciation, there will be an injustice to the partners who may haveother income against which it could be set off. On the other hand, if theunabsorbed depreciation is allocated to the partners and they alone cancarry 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 quatheir shares but no benefit can be got by partners whose total income isnot enough to offset their share of the depreciation and the unabsorbeddepreciation will not get absorbed even though the firm may have sufficiently large income in subsequent years. In other words, whicheverprocedure is adopted, the relief available to the partners will not beuniform. This is a consequence flowing from the variations in the incomesources of various partners and cannot be avoided under any scheme ofcarry forward and set off. We, therefore, do not think that this consideration should weigh against our reaching the conclusion which naturallyflows from the language of the sub-section. ( 28 ) FOR the reasons discussed above, we are of opinion that theassessee-appellant firm is entitled to a carry forward of the unabsorbeddepreciation computed for the assessment year 1966-67 (sic 1967-68) andhave it set off in its assessment for 1968-69. The unabsorbed loss of 1967-68, however, cannot be carried forward by the firm to be set off in itsassessment for 1968-69. ( 29 ) THE appeals are allowed to the extent indicated above and theassessments directed to be modified appropriately. We, however, make no order regarding costs.