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TMI Blog1956 (9) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... t the time of the hearing of this reference. The assessee company came into existence primarily for manufacturing textile spinning machinery of the type made by H B American Machine Co., of U.S.A., (hereinafter referred to as the American Company). The assessee company had an arrangement with the American Company. For the purpose of manufacturing machinery, it was necessary to erect suitable factory buildings and instal suitable machinery and plant. The factory building was completed before 31st March, 1950. A major part of the plant and machinery was installed therein also before 31st March, 1950. The erection of the building commenced in 1949 and completed, as stated earlier, before 31st March, 1950. Production started 4 or 5 months after 31st March, 1950. 3. Under the agreement of arrangement with the American Company the assessee company was also selling the machinery manufactured by the American Company. Sales commenced some time in the middle of 1947 and also continued in the year of account ended 31st March, 1950. 4. The assessee company claimed for the assessment year 1950-51 initial depreciation allowance in respect of the factory building under section 10(2)(vi) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, rejected. A copy of the Income-tax Officer's order for the assessment year 1950-51 is annexure A and forms part of the case. 6. The assessee company then appealed to the Appellate Assistant Commissioner, who dismissed the appeal. A copy of the Appellate Assistant Commissioner's order is annexure B and forms part of the case. In the order of the Appellate Assistant Commissioner it is stated, inter alia, as follows: As it is admitted that the building was not put to use during the previous year, I find the objection taken by the Income-tax Officer to be well founded. 7. The assessee company then appealed to the Appellate Tribunal and, inter alia, contended that there was no admission made before the Appellate Assistant Commissioner as stated by the Appellate Assistant Commissioner in his order. An affidavit sworn by Shri Indra Chatterji, one of the engineers of the assessee company, was produced before the Appellate Tribunal. A copy of that affidavit is annexure C and forms part of the case. The so-called admission before the Appellate Assistant Commissioner may, therefore, be ignored. 8. The only contention raised before the Tribunal was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said depreciation against the profits of the sales of textile machinery of H B manufacture effected during the period? 8. Whether the applicant in any event is entitled to initial depreciation in respect of such portions of the said buildings as were actually in active and continuous use for a part of the accounting year against the profits of the said sale? 9. Whether the applicant is not entitled to any initial depreciation allowance even in the following year when production commenced? Question No. 6 was not raised before the Appellate Tribunal at all. It was never argued nor even suggested at the time of the hearing of the appeal that the business of manufacture and the business of sale constituted one and the same business. (Mr. Parpia states that this point was argued, but our notes do not indicate that it was argued. In this connection the reply of the assessee company referred to in paragraph 4 may be seen). A copy of the grounds of appeal before the Appellate Tribunal is annexure E and forms part of the case. Ground No. 11 is as follows: The Appellate Assistant Commissioner and the Income-tax Officer have erred in holding that the appellants were not entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uildings which have been newly erected between 1st April, 1946, and 31st March, 1950. We are talking of the law as it stood in the assessment year 1950-51. 4. In order to get a depreciation allowance, it is necessary that the business should be carried on in the year of account. A further requisite is that the depreciation can only be allowed in respect of buildings, machinery, etc., used for the purposes of the business. It is contended, however, that it is not necessary for the purpose of claiming initial depreciation allowance that the buildings should have been used for the purpose of the business carried on by the assessee company in the year of account. We are unable to accept the contention. The language used in section 10(2)(vi) is definitely against the assessee. The language used is as follows: Such profits or gains shall be computed after making the following allowances, namely:- in respect of depreciation of such buildings, machinery, plant, or furniture being the property of the assessee, a sum equivalent,.......... and where the buildings have been newly erected, or the machinery or plant being new has been installed, after the 31st day of March, 1945, a fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these grounds before us. 9. The result is that the appeal fails and is dismissed. M. R. Parpia with Patkar, for the assessee. G. N. Joshi with the Advocate-General, for the Commissioner. JUDGMENT CHAGLA, C.J.--The assessee company was incorporated on the 15th May, 1946. After incorporation the business that the assessee company did was to sell in India certain textile spinning machinery made by H B American Machine Co., of United States of America. There was also an arrangement with this American Company by which the assessee company was to manufacture these machines in India and sell them and for this purpose the assessee company set up a factory. The building of the factory was completed before the 31st March, 1950, the major portion of the plant and machinery was also installed in this factory, but the actual production of textile machinery was not started till four or five months after the 31st March, 1950. We are concerned with the year of account of the assessee company which ends on the 31st March, 1950, and for that year of account the assessee company claimed initial depreciation within the meaning of section 10(2)(vi) of the Income-tax Act. That deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) in respect of depreciation. Therefore, the scheme of section 10(1) and (2) is clear. To start with there must be a business which is being carried on for the purpose of earning profits and those profits are being assessed to tax. It is in respect of that business that the assessee claims various allowances under section 10(2) and one of the allowances is depreciation, whether normal or initial. Therefore, in order that the assessee can be entitled to depreciation under section 10(2)(vi) he must carry on a business which should yield profits and in respect of which allowance can be claimed. It is not necessary that the business should in fact yield profits. The carrying on of a business may result in loss; but the particular activity carried on by the assessee must be such as must be calculated to yield profits. The test is not the actual making of the profits; the test is whether the nature of the activity is such as possibly to yield profits to the assessee. In this case, although the factory building was erected in the year of account, the question that we have to ask ourselves is whether the factory was used in connection with a business which was carried on within the mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation is a permissible allowance if the building is erected in the year of account and what is emphasised by him is that the Legislature wanted to give an impetus to businessmen and industrialists to start new factories and to put up new machinery and therefore this initial depreciation was given, and what is said is that the test and the main test laid down by the Legislature is that a new building should be erected in the year of account, and if such a building is erected, then the assessee should not be deprived of this depreciation. Now, it is fallacious to suggest that the only condition laid down by the Legislature is that the building should be erected in the year of account. The further condition laid down by the Legislature is that the building must have been used for the purpose of the business in the year of account. Therefore, the three conditions that are necessary before an assessee becomes entitled to initial depreciation allowance are: (1) A business must be carried on by the assessee, (2) for the purpose of this business a building must be erected in the year of account, and (3) the building must be used for the purposes of the business. It is only when all these t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in connection with the other clauses of section 10(2). That, in our opinion, is a contention impossible to accept. If the words carried on by him in section 10(1) are the governing words which apply to all allowances claimable under section 10(2), then we cannot possibly give one meaning to that expression when we are dealing with one allowance and a different meaning to it when we are dealing with another allowance. Therefore, if a business is not carried on for the purpose of one of the several allowances mentioned in section 10(2), it is equally not carried on for the purpose of the allowance mentioned in clause (vi). With regard to the meaning of the expression carrying on there cannot be much doubt because the Supreme Court, in Liquidators of Pursa Ltd. v. Commissioner of Income-tax [1954] 25 I.T.R. 265, has considered the scheme of section 10(2)(iv) and section 10(2)(v), (vi) and (vii), and at page 272 the learned Judges point out: The words 'used for the purposes of the business' obviously mean used for the purpose of enabling the owner to carry on the business and earn profits in the business. In other words, the machinery or plant must be used for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar be regarded as carrying on of the business by the company and not a realisation of its assets with a view to winding up, the machinery or plant not being used during the accounting year at all and in any event not having had any connection with the carrying on of that limited business during the accounting year, section 10(2)(vii) can have no application to the sale of any such machinery or plant. Therefore, in the case before us, the factory or the building in respect of which the assessee company is claiming depreciation must have a connection with the limited business which the assessee company was doing in the year of account, viz., the selling of textile machinery. It was not doing the more comprehensive business which it contemplated, viz., the manufacture and sale of textile machinery. Therefore, for the purpose of deciding whether the assessee company is entitled to this allowance we have not to consider a business which the assessee company contemplated carrying on or a business with regard to which preparation had been made and which was proposed to be carried on later on, but we have only to consider that limited business which was actually carried on in the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Mr. Justice Madhavan Nair says at page 355: It is not necessary to discuss the various illustrative cases brought to our notice as the decision whether the business was being carried on must depend in each case on its own facts and not on any general theory of law. Therefore, we must decide the case before us on the facts which have been established, and on the facts established we agree with the Tribunal that the factory was not used for the purpose of the business which in fact was not carried on in the year of account. The result, therefore, is that the question submitted to us must be answered in the negative. Before we part with this reference, we must draw the attention of the Taxing Authorities to the obvious injustice which the assessee company has suffered by reason of what we must consider to be a lacuna in the law. If the intention of the Legislature was to give an impetus to an assessee who sets up new buildings and instals new machinery, then there is no reason why this particular assessee should not get the benefit of initial depreciation. There is no reason on principle why this assessee should have got the benefit of initial depreciation if it had ..... X X X X Extracts X X X X X X X X Extracts X X X X
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