ORDER
Per Shri K. R. Dixit, Judicial Member – In both these appeals there is only one ground that “the learned CIT (A) has erred in view and on facts in holding that depreciation on building, plant & machinery and electric installations be allowed as per IT Rules even though it was not put to use.”
2. During the relevant accounting year the assessees factory remained closed and plant and machinery were not actually used.
The CIT (A) following the decision in the case of CIT v. Vayithri Plantations Ltd. [1981] 128 ITR 675 (Mad.) has allowed the assessees claim.
3. The learned DR relied upon the decision in the case of CIT v. Suhrid Geigy Ltd. [1982] 133 ITR 884 (Guj.).
4. The assessees Advocate pointed out that commercial production was started in December, 1974 and went on till 6th August, 1975 when it was closed and it was again started in 1978. He also argued that it was enough that the machinery kept ready, relying upon the decision in the case of Capital Bus Service (P.) Ltd. v. CIT [1980] 123 ITR 404 (Delhi.). The Gujarat High Court in the aforesaid decision in the case of Suhrid Geigy Ltd. (supra) has held as follows :
“Depreciation is inseparable from the actual user for business and depreciation allowance is permissible only on that account. It is not an allowance for natural wear and tear by reason of the aging process. Every building starts aging from the day it is constructed,……. The emphasis is on the user of the building in the business of the assessee. There must be actual, effective and real user in the commercial sense and the user must be so linked with the business that it can be said that there is an immediate nexus between the user and the business, that is, the real business of the assessee.”
In that case the Court was concerned with the assessees claim of depreciation on a building in which certain machinery was housed. The High Court held that the depreciation could not be granted on the building from the point of time when machinery was merely installed in that building. Since the assessees business was to produce dyestuff the depreciation could not be allowed is very clear and we are bound by it. Therefore the assessee cannot be allowed depreciation for these years when the building, plant and machinery and electric installations were not used.
5. In the result the appeals are allowed.
Per Shri R. M. Mehta, Accountant Member – I have gone through the order passed by my learned brother, but regret that I am not in agreement with the views expressed therein.
2. The nature of dispute and the facts have already been set out in the order of my learned brother and therefore I do not propose to repeat the same. The assessee in this case went into commercial production in December 1974 and continued the same up to 6th August 1975. It was thereafter closed for some time and again restarted in May 1978. According to the assessee, he has not discontinued the business, but there is only a temporary lull in the business on account of glut in the steel market and labour problem in the factory. It is only because of these problems that he has been forced to discontinue production. The assessees case is that he is entitled to depreciation as there was a “passive” use of the assets. According to him, although the assets have not been actually put in use, but they were ready for use and could be utilised in production as and when it commenced. As far as the assessees contentions regarding the glut in the market and labour problem in the factory are concerned, it is observed that there is a finding recorded by the CIT (Appeals) in his order.
3. The assessee in the course of hearing before the CIT (Appeals) as well as before the Tribunal pressed into service the various decisions in support of his contentions, viz.
(1) Vayithri Plantations Ltd.s case (supra) (2) Whittle Anderson Ltd. v. CIT [1971] 79 ITR 613 (Bom.) (3) CIT v. Viswanath Bhaskar Sathe [1937] 5 ITR 621 (Bom.) (4) Capital Bus Service (P.) Ltd.s case (supra)
The contention of the assessee on the basis of these decisions was that he was entitled to depreciation inasmuch as the word “used” was to be understood in a wider sense so as to embrace passive as well as active use.
4. The learned D. R., on the other hand, relied on the decision reported in CIT v. Jiwaji Rao Sugar Co. Ltd. [1969] 71 ITR 319 (MP) as well as the decision of the Honble Gujarat High Court in the case of Suhrid Geigy Ltd. (supra). It would be relevant to point out that the decision of the Honble Gujarat High Court cited (supra) is distinguishable on facts inasmuch as it was dealing with a situation where the assessee had not commenced production but and only installed machinery in the factory building The question posed before the Honble High Court was the determination of the date on which the building came to be “used” in the business of the assessee. It may also he relevant to point out that the provision for depreciation as prevailing at that time was that no depreciation was to be allowed on an asset which had been used for less than 30 days in the relevant accounting year. The matter was decided in favour of the Revenue as the Honble Court opined that the building had not been used for more than one month in the relevant accounting year and so was not entitled to depreciation. In view of the facts which have emerged above, the aforesaid decision would not be applicable to the case of the present assessee.
5. We also observe, on the other hand, that the decisions cited by the learned counsel of the assessee support his arguments. The decision in the case of Viswanath Bhaskar Sathe (supra) is a decision of the Bombay High Court delivered on 23-3-1937 and is binding inasmuch as Honble Gujarat High Court was formed only on 1-5-1960. The following observations in the case of Whittle Anderson Ltd. (supra) reproduced from the head note would also support the case of the assessee :-
“(ii) the word used in that section should be understood in a wide sense so as to embrace passive as well as active user; when machinery is kept ready for use at any moment in a particular factory under an express agreement from which taxable profits are earned, the machinery can be said to be used for the purposes of the business which earned the profits although it was not actually worked;”
In the decision in the case of Vayithri Plantations Ltd. (supra), the following observations are not-worthy :-
“The result of these cases is to establish that the machinery could be used for the purposes of the business so long as it is kept ready for such user. Any forced idleness of the machinery cannot disentitles the assessee from getting the benefit of the allowance. In the present case, from the directors report, which have already been extracted and the contents of which are not at all in dispute, it is clear that the assessee was prevented from using the machinery because of there frequent labour unrest. In these circumstances, we consider that, in the present case, the assessee would be eligible for the allowance as the machinery was kept ready for use and in that sense had been used for the purposes of that business, as contemplated under the provision.”
The decision in the case of Capital Bus Service (P.) Ltd. (supra) also helps the assessee. A portion of the head note is reproduced as under :
“The allowance for normal depreciation does not depend upon the actual working of the machinery : it is sufficient if the machinery in question is employed by the assessee for the purposes of the business and for no other business and it is kept by him ready for actual use.”
It is also observed that the Honble Delhi High Court has discussed the various cases on the subject starting from Bhikaji Venkatesh v. CIT [1937] 5 ITR 626 (Nag.) and has also discussed the decision of the Honble Supreme Court in the case of Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265. We may also mention that the ITO has relied on the aforesaid decision to deny the claim of depreciation to the assessee. The learned CIT (Appeals) has, however, rightly observed in his order that the Honble Supreme Court in the aforesaid decision was not deciding the question whether “passive” use of the plant and machinery could be regarded as “user”.
6. I, therefore, following the ratio laid down by the various decisions cited by the learned counsel of the assessee, do hold that the assessee is entitled to the claim in respect of depreciation in both the years under appeal.
7. I also observe that in the assessment year 1977-78, the assessee claimed the aforesaid depreciation for the first time before the CIT (Appeals) by means of an additional ground. It is not known whether he has complied with the various conditions envisaged u/s. 34 of the Income-tax Act. The ITO is accordingly directed to allow depreciation subject to fulfilling of various conditions laid down in section 34 of the Income-tax Act, 1961.
8. As a result, the appeals of the Revenue are dismissed.
REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961.
Difference of opinion has arisen amongst the members, who constituted the Bench. The following point of difference is referred to the Honble President of the Income-tax Appellate Tribunal, under section 255(4) of the IT Act, 1961.
“Whether, on the facts and in law the assessee is entitled to the depreciation on the building, plant, machinery and electrical installations ?”
THIRD MEMBER ORDER.
Per Shri Y. Upadhyaya, Vice President – The following question has been assigned to the Third Member by the Honble President u/s 255(4) of the IT Act, 1961 :
“Whether, on the facts and in law the assessee is entitled to the depreciation on the building, plant, machinery and electrical installations ?”
2. The assessee is a limited company and was running a mini steel plant. The previous year for the assessment years 1977-78 and 1978-79 is 30th September, 1975 and 30th September, 1977 respectively. The mini steel plant started its commercial production in December 1974 and the plant was running till 6-8- 1975. There was a glut thereafter in the steel market and further the assessee had labour problem. Consequently the plant could not run between the period from 7-8-1975 till April, 1978. The plant was restarted in May, 1978. The assessee in 1977-78 did not claim depreciation before the ITO. However, an additional ground was taken before the CIT (A) and it was indicated that due to glut in the steel market and labour problem the assessee was having the passive use of its building, plant, machinery and electric installations and the assessee should be allowed depreciation. The assessee placed reliance in Vayithri Plantations Ltd.s case (supra). The CIT (A) accepted the claim of the assessee for the assessment years 1977-78 and 1978-79. The department challenged the finding of the CIT (A) and placed reliance in Suhrid Geigy Ltd.s case (supra). The learned Judicial Member was of the view that the facts of the assessees case are covered by the decision of the Gujarat High court in Suhrid Geigy Ltd.s case (supra) and, therefore, he came to the conclusion that as there was no actual user of the building, plant, machinery and electric installations the assessee was not entitled for depreciation. The learned Accountant Member, on the other hand, came to the conclusion that there was a lull and, therefore, the assessee was having the passive use of the building, plant, machinery etc. and accordingly he, relying on the decisions in Vayithri Plantations Ltd.s case (supra), Whittle Anderson Ltd.s case (supra), Viswanath Bhaskar Sathes case (supra), Capital Bus Service (P.) Ltd.s case (supra) and Liquidators of Pursa Ltd.s case (supra) came to the conclusion that the assessee was entitled for depreciation.
3. The departmental representative indicated the facts and first disputed that it is not known whether the mini plant started in May 1978. He further disputed that the mini plant was closed due to glut in the market but not due to the labour problem. For this purpose the departmental representative referred to the auditors note and the Directors report in the published accounts. He further stated that the matter has been concluded by the Honble Gujarat High Court in Suhrid Geigy Ltd.s case (supra) and, therefore, the assessee was not entitled for depreciation. He indicated that it is clear the the assessee was not having the active use of the building, plant, machinery etc. and, therefore, the question of passive use does not arise. He further referred to section 28 and 32 and rule 5 of IT Rules to show that depreciation cannot be allowed unless the building, plant, machinery etc. were not used during the previous years even for a day or month and, therefore, the assessee could have not got depreciation. The D. R. indicated that even the assessee was of the same view because it did not claim depreciation in the return and further the auditors gave their note that the depreciation had not been claimed as the factory was closed. The D. R
further, relying on the decisions in Hyderabad Construction Co. Ltd. v. CIT [1981] 129 ITR 81 (AP), Liquidators of Pursa Ltd.s case (supra), Western States Trading Co. (P.) Ltd. v. CIT [1971] 80 ITR 21 (SC), Central Provinces Manganese Ore Co. Ltd. v. CIT [1937] 5 ITR 734 (Nag.), CWT v. K. S. N. Bhatt [1984] 145 ITR 1 (SC) and CWT v. Vadilal Lallubhai [1984] 145 ITR 7 (SC) urged that depreciation was not available to the assessee. He distinguished the case in Vayithri Plantations Ltd.s case (supra).
4. The assessees counsel, on the other hand, indicated the facts and urged that it is not correct that the factory was closed only due to the glut in the steel market but it was closed also due to labour problem. The assessees counsel in this connection referred to the finding given by the CIT (A) and stated that the said finding has not been challenged with any material. he also challenged the statement of the D. R. that the factory reopened in May, 1978. In this connection he referred to the order of the Honble Accountant Member. He also filed the assessment order for the assessment year 1979-80 in which depreciation was calculated by the ITO but the same was allowed to be carried forward because there was no taxable income for the assessment year 1979-80. The counsel discussed the case in Suhrid Geigy Ltd.s case (supra) and urged that the decision of the said case is not applicable on the facts of the present case. He indicated that new business in the above case was not set up and the depreciation was claimed only on the building which was meant for housing the plant and machinery and under the said circumstances the depreciation was denied by the Honble High court. He further indicated that in the present case the plant was doing commercial production from December 1974 to 6-8-1975 and it was closed only due to the glut in the steel market and labour problem. The assessee was always having the passive use and this fact is clarified by the assessment order passed by the ITO for the assessment year 1979-80 when the depreciation has been allowed to be carried forward. The counsel further supported the finding by the order of the Accountant Member and relied on Viswanath Bhaskar Sathes case (supra), Whittle Anderson Ltd.s case (supra), CIT v. Elecon Engg. Co. Ltd. [1974] 96 ITR 672 (Guj.) and Capital Bus Service (P.) Ltd.s case (supra). The assessees counsel alternatively indicated that if two views are possible, the view favourable to the assessee may be taken. He relied on CED v. R. Kanakasabai [1973] 89 ITR 251 (SC).
5. The D. R. replying to the argument of the assessees counsel urged that it is incorrect that there was any passive use of the plant. The plant was not used at all. He further referred to the order of the ITO and indicated that the ITO passed the order on 23-9-1980. Till date it was not known whether the factory has started and, therefore, the assessee was not entitled for depreciation.
6. The question referred to the Third Member u/s 255(4) had been quoted above. The short point for decision is whether on the facts and circumstances of the case the assessee was entitled for depreciation on the building, plant, machinery and electric installations. The assessee was running the mini steel plant. The mini steel plant started its commercial production in December, 1974, and it was in operation up to 6-8-1975. The steel market was not favourable to the assessee and further there was a labour problem. Consequently the plant was closed from 7-8-1975 to April, 1978. It was restarted in May, 1978. The D. R. has challenged two things; firstly the plant did not close due to the labour problem and secondly it is not correct that the plant was restarted in May 1978. Both facts were examined and it was found that CIT (A) has given a finding that the plant was closed also due to labour problem and a finding has been given by the Accountant Member that the plant reopened in May 1978. No contradictory materials were available so that the said findings can be reversed. Therefore, on these facts the question whether the assessee was entitled for depreciation is to be answered. The department has supported its stand by relying on Suhrid Geigy Ltd.s case (supra) and the Judicial Members finding is also based upon the said decision. It has correctly been distinguished by the assessees counsel. The plant was not set up. The building was ready. Plant and machinery were not installed in the said building itself. On these facts the depreciation was claimed on the building and the Honble High court denied the claim of the assessee. The assessee in the present case started its commercial production in December 1974. The plant was under operation up to 6-8-1975. Thereafter it was closed and it was reopened in May, 1978. The assessee has filed the assessment order for the assessment year 1979-80 from which it is clear that the depreciation claimed by the assessee at Rs. 4,02,072 was added back by the ITO for computing the net loss at Rs. 7,43,112 but the depreciation available to the assessee as per annexure was allowed to be carried forward to Rs. 10,59,103. This indicated that the plant which was closed during the assessment years 1977-78 and 1978-79 was restarted in the assessment year 1979-80. The departmental representative, in the course of the argument, stated that the facts after the close of the previous year should not be taken into consideration. This cannot be correct. The case of the assessee is that there was a temporary lull when the business activities of the assessee were suspended and the same were restarted when the position was favourable to it. Under the circumstances, the position even after the previous year will have to be taken into consideration in order to judge whether there was a temporary suspension of the business or the assessee had its intention to close the business for ever. It is clear from the activities of the assessee that the business was temporarily suspended due to unfavourable steel market and labour problem. After two years when the labour problem was over and the steel market was little favourable to the assessee the factory was reopened. Therefore, it is clear that the active use of the plant and machinery, though was not during the years, the passive use was and it cannot to be said that the plant was closed and, therefore, the plant and machinery etc. were not entitled for depreciation. Several decisions had been cited from both the sides. After considering the arguments and those decisions it is clear from the facts that there was only a temporary suspension of the business and, therefore, the assessee was entitled for depreciation for the passive use of its building, plant, machinery and electric installations. Under the said circumstances, the question referred to the Third Member is answered as below :-
“In the facts and in law the assessee was entitled to the depreciation on the building, plant, machinery and electric installations.”
The matter is referred back to th Division Bench for passing the order after considering the majority decision.