COMMISSIONER OF INCOME TAX vs INDIA TEA and TIMBER TRADING CO.

D. N. BARUAH, J. :

After the order passed by the Tribunal, the Revenue requested the Tribunal to refer the following questions under s. 256 of the IT Act, 1961 (for short, "the Act") :

"(1) Whether the Tribunal did not err in law as well as in facts in accepting the assessees claim that in the subsequent years production was resumed when, in fact, the factory did not work in subsequent years also ?

(2) Whether the Tribunal was justified in fact as well as in law in allowing depreciation to the assessee, when the factory did not work during the relevant year ?

(3) Whether the Tribunal did not err in law as well as in facts in holding impliedly that there was passive use of machinery during the year ?"

However, the Tribunal referred only questions Nos. 2 and 3 for opinion of this Court.

The facts for the purpose of answering the said questions may be stated as follows :

The assessee is a firm registered under the Indian Partnership Act. The firm follows the mercantile system of accounting. Its main source of income consists of purchase and sale of sugarcane and lorry hire receipts. The AO, amongst others, found that the assessee in Mikir Hills Khandsari Sugar Mills had shown the net loss of Rs. 1,14,880. He excluded depreciation of Rs. 70,318 and the net loss stood at Rs. 44,562. According to the AO, there was no production of sugar during the year as the closing stock of sugar had been shown at nil. According to the AO, as there was no user of machinery, depreciation should not be allowed on the factory building, plant and machinery and electric fittings. He also observed that use of insignificant amounts of chemicals and packing materials and other expenditure could not mean that the machinery was used. Therefore, he held that the factory building, plant and machinery and electric fittings were not used for business and, therefore, depreciation claimed was not allowed. The assessee preferred an appeal before the AAC. The AAC allowed the appeal granting depreciation. Against the said appellate order, the Revenue took up the matter before the Tribunal. The Tribunal, after considering all aspects of the matter, held that the order passed by the AAC was valid. While dismissing the appeal, the Tribunal held that the user of the assets even for a short period would not deprive the assessee from claiming full depreciation as per rules. Even otherwise, keeping the machinery in readiness could be treated as a passive user of the assets. Hence, the present reference.

We heard Mr. G. K. Joshi, learned standing counsel for the Revenue. None appeared on behalf of the assessee. We requested Dr. A. K. Saraf, learned counsel to assist this Court as amicus curiae and Dr. Saraf agreed to assist the Court as requested.

The contention of Mr. Joshi was that unless the machinery was actually used deductions were not allowable. In this regard, Mr. Joshi drew our attention to s. 32(1) of the Act and contended that the section itself was very clear that for claiming deduction for depreciation of buildings, machinery, plant or furniture owned by the assessee those must be used for the purposes of business or profession. The meaning of the expression "used" appearing in sub-s. (1) of s. 32 of the Act was very relevant for the purpose of granting deduction. It was clear that the expression "used" meant actual use and passive use was not contemplated in this connection. The language of the statute being very clear and unambiguous, no other meaning could be given. In support of his contention, Mr. Joshi relied on the following decisions :

COMMISSIONER OF Income Tax Vs. JIWAJI RAO SUGAR CO. LTD., and Commissioner of Income Tax, Gujarat Vs. Suhrid Geigy Ltd.,

Dr. Saraf, on the other hand, submitted that the expression "used" did not mean actual use only. It also meant passive use. He further submitted that the machinery kept ready for use could also be treated as passive use. In this connection, Dr. Saraf drew our attention to the following decisions :

COMMISSIONER OF INCOME TAX, BOMBAY Vs. VISWANATH BHASKAR SATHE.,

COMMISSIONER OF Income Tax, BIHAR AND ORISSA Vs. DALMIA CEMENT LTD.,

The Liquidators of Pursa Limited Vs. Commissioner of Income Tax, Bihar,

Capital Bus Service (P.) Ltd. Vs. Commissioner of Income Tax, New Delhi,

Commissioner of Income Tax, Tamil Nadu-I Vs. Vayithri Plantations Ltd., ; and

Commissioner of Income Tax Vs. G.N. Agrawal (Individual),

In CIT vs. Viswanath Bhaskar Sathe (supra), the Bombay High Court had occasion to deal with a similar matter regarding allowance of depreciation under s. 10(2)(vi) of the Act in respect of depreciation of building, machinery, etc. In that case machinery was not used. The Bombay High Court in the said case held thus :

"But I think that the word used in this section may be given a wider meaning and embraces passive as well as active user. Machinery which is kept idle may well depreciate, particularly during the monsoon season. It seems to me that the ultimate test is, whether, without the particular user of the machinery relied upon the profits sought to be taxed could have been made; and as I read the agreement in the case, the profits of the assessee during the year under assessment could not have been earned except by his maintaining his factory in good working order, and that involves the user of the factory and the machinery."

The Patna High Court in the case of CIT vs. Dalmia Cement Ltd. (supra) took a similar view and held thus :

"But, I think that the word used in this section [10(2)(vi)] may be given a wider meaning and embraces passive as well as active user. Machinery which is kept idle may well depreciate, particularly during the monsoon season...."

In Liquidators of Pursa Ltd. vs. CIT (supra), no opinion was expressed by the apex Court on the view taken by the various High Courts on the expression "used" appearing in s. 10(2)(vi) of the Indian IT Act, 1922, to give it a wider meaning so as to include active as well as passive user. However, the said view had also not been set aside.

The Delhi High Court in Capital Bus service (P) Ltd. vs. CIT (supra) held that the expression "used for the purpose of the business" appearing in s. 10(2)(iv) and (vi) of the Act of 1922, comprehended cases where the machinery was kept ready by the owner for its use in his business and the failure to use it actively in the business was not on account of its incapacity for being used for that purpose or its non-availability. The language used in r. 8 of the Indian IT Rules, 1922, was not inconsistent with the interpretation. It was further held that so far as the allowance for normal depreciation allowance was concerned, it did not depend upon the actual working of the machinery. It was sufficient if the machinery in question was employed by the assessee for the purposes of the business and for no other business and it was kept by him ready for actual use in the profit-making apparatus the moment a need arose.

In CIT vs. Vayithri Plantations Ltd. (supra), the Madras High Court held that the expression "used" for the purpose of the business could also be applicable in case of machinery kept in readiness for such user.

In CIT vs. G. N. Agrawal (Individual) (supra), the Bombay High Court dealt with a case where the question arose whether the assessee was entitled to deduction for depreciation on the WDV of the trucks which were under repair throughout the relevant accounting years but were used for the purpose of the business earlier and later. The only controversy that was raised was as to whether the trucks could be said to have been not used for the business of the assessee merely by reason of the same being under repair. The Bombay High Court held that the vehicles continued to be in use for the business of the assessee even though the same were under repair.

The decisions cited by Mr. Joshi, namely, CIT vs. Jiwaji Rao Sugar Co. Ltd. (supra) and CIT vs. Suhrid Geigy Ltd. (supra), however, gave a contrary view.

After going through the various decisions we find that the expression "used" should have a wider meaning so as to include not only actual but also passive user. Therefore, we agree with the contention of Dr. Saraf. In the present case, the Tribunal had come to the conclusion after appreciating the fact that the factory was used for some period. In our opinion, the Tribunal was right in holding that view.

In view of the above, we answer the questions Nos. 2 and 3 in the affirmative, in favour of the assessee and against the Revenue.

S. B. ROY, J. :

I agree.