Chandurkar, J.:— The assessment years in respect of which this reference has been made are 1959-60, 1960-61, 1961-62 and 1962-63. The assessee-company was originally carrying on business in the manufacture of certain chemicals, particularly bichromates and its by-products. The business of the company had commenced from 14th October, 1946, but the company stopped manufacturing chemicals in the year 1955 due to acute financial stringency. The assets of the company were mortgaged to the Industrial Finance Corporation of India (hereinafter referred to as the “finance corporation”), but the finance corporation refused to provide any further funds to the assessee from the middle of 1955. With the consent of the finance corporation, the premises of the company were leased out to Colgate Palmolive (India) Ltd. in 1957 and 1958, though the assessee retained a portion of the premises for its own use and it kept its plant and machinery after it was dismantled from the premises which were let out to Colgate Palmolive (India) Ltd. and Indo-Chem Pvt. Ltd. The assessee got a loan from Bombay Hospital Trust on mortgage of land and buildings and the liabilities of the Finance Corporation were discharged and the assessee took possession of its assets. There were some negotiations between foreign companies and the assessee, but it was not till 31st Augnst, 1967, that the assessee was able to establish a plant in Bhilai in Madhya Pradesh where a part of the machinery was shifted. The then prevalent state of affairs, particularly the financial position of the company, are reflected in the directors' reports made from time to time. The directors' reports from 1953-54 to 1966-67 are annexed to the statement of the case as annex. “A”. The company had run into loss year after year and in the directors' report dated 11th May, 1955, the loss shown was Rs. 1,54,486-14-6, the main reason for the loss being given as depression in the bichromate industry and keen competition as a result of overproduction of bichromates in the country. The figure of loss increased to Rs. 2,34,382 in the year ending 31st August, 1955, the main reason for the loss given being that, during the year, the company had to close down the factory in December, 1954, on account of financial difficulties. It was stated in the report that the company tried its level best to secure further loans from the Finance Corporation as well as from private parties but could not succeed and hence could not restart production. It was also stated that efforts were being made to lease out or sell off the entire land and buildings, though the company had not so far been successful and was still negotiating with prominent firms for the purpose. The statement of accounts for the year ending 31st August, 1956, showed a loss of Rs. 49,516 and it was stated that the company had succeeded in leasing out buildings at an annual rental of Rs. 1,50,000 partly to M/s. Colgate Palmolive (India) Pvt. Ltd. and partly to Indo-Chem Pvt. Ltd. in December, 1957. The report also states that the rents were being recovered by the Finance Corporation and the company proposed to restart the business very soon on securing a site in Greater Bombay. For the year ending 31st August, 1957, the directors' report stated that the factory premises were leased out after carrying out the necessary repairs and modifications to the buildings. It was also stated:
“The plants and machinery have been dismantled and the company intends to restart production elsewhere after securing the site and making the necessary financial arrangements.”
2. The directors' report for the year ending 31st August, 1958, refers to additions and alterations and repairs to buildings not being completed and its inability, therefore, to give possession of all buildings to the lessees except for the main building. There is no reference in this report to any decision of the directors to restart the business. The report for the year ending 31st August, 1959, states that the depreciation on fixed assets of the company was not charged to the profit and loss account as the factory was closed and the fixed assets were not used. The report for the year ending 31st August, 1960, states;
“As the company's manufacturing activities were closed since 1955, the plants and machinery were dismantled to enable the company to lease out the buildings ……….”
3. A hope was held out in this report that the company would be able to restart the industry as negotiations were being held with foreign firms for collaboration. The report for the year ending 31st August, 1961, which is the relevant report for the purposes of the last assessment year in this reference, stated that the Bombay Hospital Trust had paid Rs. 5 lakhs to pay off the debts of the Finance Corporation and would further pay Rs. 2,50,000 towards development of the Mahim property. It further stated: “The company has now decided to go ahead with the expansion of the Mahim property to enhance the rental income of the property.” The company had also applied for the necessary licence for expansion of its capacity and the directors were negotiating for a suitable site. In the assessment years 1959-60 to 1962-63, the ITO disallowed the claim of the assessee for certain expenditure and depreciation and for allowance of unabsorbed depreciation for the earlier years on the ground that the assessee did not carry on any business in the years of account.
4. The AAC upheld the decision' of the ITO that the deductions could not be given effect to and unabsorbed depreciation carried forward could not be set off in the absence of any income assessable under s. 10 for the material years.
5. The assessee-company then took a second appeal to the Income-tax Appellate Tribunal in respect of each year and all the appeals were disposed of by the Tribunal by a common order. Before the Tribunal the contention of the assessee was that there was only a lull in the business due to financial difficulties and that the company had kept its machinery with it for use in its business when suitable opportunity arose and that finally the company was able to set up a plant at Bhilai for the manufacture of the same product, namely, bichromate. Therefore, according to the assessee,. the machinery and plant and a part of the building were also used for the purpose of the business and it was, therefore, entitled to claim depreciation and development rebate, for claiming which, according to the assessee, there need not necessarily be active user of the assets and that even passive user was enough. The Tribunal declined to accept the contention of the assessee that there was a mere lull in the business and it took the view that there was a complete breakdown of the business of the assessee and the assessee held on to the assets only, so that it would use it in some other way, preferably by starting another business to which they could be put. The Tribunal also found that the whole apparatus of production had to be dismantled because most of the buildings including the factory building had to be let out and there were no prospects of the assessee being able to utilise them for its own business. It was found that the machinery which had remained was shifted to Bhilai and with the part of the new machinery purchased, a new plant was being set up at Bhilai. The Tribunal further took the view that the properties which had been leased out had ceased to be assets of the business and that the income from the properties leased out was properly chargeable only under the head “Income from property” and it had to be computed in accordance with the provisions of s. 9 of the Indian I.T Act, 1922, and s. 22 of the I.T Act, 1961. The Tribunal clearly mentioned that no contentions were raised regarding specific deductions to be given while computing income under the head “Property”. With regard to the question as to whether the assessee — was entitled to deduction of any expenses and depreciation notwithstanding the fact that it did not carry on any business in the years of account, the Tribunal held that the expenditure incurred by the assessee was referable to the assessee's holding on to these assets and the fact that no income was actually earned for some time from those assets was of no consequence or relevance in considering the assessee's claim for deduction of expenditure incurred while holding these assets. The Tribunal, therefore, held that the assessee's claim for deduction of expenditure should be considered by the ITO on merits and he should disallow only such part of the expenditure which is not referable to the holding of the assets. With regard to unabsorbed depreciation the Tribunal also held that just as depreciation could not be allowed, unabsorbed depreciation carried forward could also not be set off against any income of the material years. It took the view that the unabsorbed depreciation in the present case was determined under the head “Business” which had come to a complete stop in the middle of 1955 and to all intents and purposes the unabsorbed depreciation lapsed and it could not be transferred to another head, namely, “Income from other sources” in the subsequent year. The Tribunal thus partly allowed the appeals of the assessee.
6. Arising out of this order of the Tribunal, the following questions, out of which the first three are raised at the instance of the assessee and the fourth question at the instance of the revenue, have been referred to this court:
“(1) Whether, on the facts and circumstances of the case, the assessee was entitled to the allowance of depreciation and also for the set-off of unasorbed depreciation carried forward, on the footing that it was carrying on business?
(2) Whether, on the facts and in the circumstances of the case, the income from the letting out of the properties was assessable as income from property or as income under business or other sources?
(3) If the answer to question No. 1 is in the negative, whether the assessee is still not entitled to deduction of depreciation and set off of unabsorbed depreciation carried forward from the income of the material year?
“(4) Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction of that portion of the expenses shown in annexure ‘D’ which could be held to be referable to the holding of the assets?”
7. The crucial question which falls for determination for the purposes of the first three questions and which has been argued by Mr. Mehta appearing on behalf of the assessee is whether the finding recorded by the Tribunal that the assessee had ceased to carry on its business in the years in question was erroneous. According to the learned counsel, all that could be said on the facts in the instant case was that there was a lull in the business and the company having ultimately decided to carry on its business of manufacture of bichromates at Bhilai and having throughout stuck to the machinery, the company could not be held to have stopped its production and, therefore, stopped its business. It is urged that the directors' report clearly referred to the fact that attempts were being made to revive the factory and that merely because of financial stringency the factory had to be closed and production had to be stopped, it could not be held that the assessee had stopped its business altogether. Some reliance was placed on behalf of the assessee by the learned counsel on the orders of the Tribunal in respect of the assessment years 1963-64 to 1969-70 in respect of the very same assessee in which the Tribunal had recorded a finding that the company never gave up its intention to carry on business of manufacturing chemicals and there was only a temporary lull in the business activity during certain years. Indeed, the sheet-anchor of the argument of the learned counsel for the assessee was that in respect of the further assessment years 1963-64 to 1969-70, the Tribunal has taken a different view from the one taken in the order out of which this reference has arisen and further that even the reference applications made on behalf of the revenue on the basis of challenging the findings recorded by the Tribunal have been, rejected.
8. Now, it will not be permissible for us to go into the correctness of the findings recorded by the Tribunal in the subsequent orders in respect of the assessment years 1963-64 to 1969-70. The learned counsel for the assessee was, however, no doubt entitled to adopt the argument which had succeeded before the Tribunal in respect of the subsequent years, which he has done. But we must decide the questions referred to us on the material which is on record in this reference.
9. In our view, the reports made by the directors from time to time to the general body of shareholders are much too eloquent to need any detailed scrutiny in order to reach the conclusion that the assessee had in fact stopped its business of manufacturing chemicals. The picture which appears on these reports is one of utter helplessness and financial stringency resulting not only in losses but in the anxiety on the part of the directors to search out new avenues of income, taking into account the assets possessed by the company. The company was literally driven on account of paucity of income to lease out its property to Colgate Palmolive (India) Ltd. and Indo-Chem Pvt. Ltd. Indeed, it appears that in order to give possession of the factory premises to Colgate Palmolive (India) Ltd., even the machinery had to be dismantled and it was only after the machinery had been dismantled and removed that the premises were taken possession of by the lessee, Colgate Palmolive (India) Ltd. It is apparent, therefore, that the entire factory was required to be dismantled. The factory as such had ceased to exist and all that remained of the factory in the hands of the assessee was dismantled components of the factory, machinery, the value of which also could not be ascertained by the directors, as is clear from one of the reports of the directors. The decision of the directors as contained in the reports indicates that their energies were now diverted to develop their Mahim property for which purpose a loan of Rs. 2,50,000 was taken from the Bombay Hospital Trust. The company had, therefore, now clearly decided in favour of a new avenue of income and the buildings were to be treated as an independent source of income and they were so developed that they could be leased out at profitable rents. The directors' report dated 2nd February, 1962, is also speaking. It states that the company had decided to go ahead with the expansion of the Mahim property to enhance the rental income of the property. Even as late as in 1962, the company had no other source of income except rental income and there was a studied attempt on the part of the company to see that it increased its rental income after investing moneys in developing the Mahim property. The earlier reports which we have reproduced indicate that the directors were trying to find out purchasers of the assets of the company. The company was, therefore, in such financial stringency that the plant and machinery and the buildings were all intended to be sold. A mere reference in some of the reports that there is a possibility of the company restarting production, on which heavy reliance was placed by Mr. Mehta, hardly indicated any possibility in the proximate future of the company going back to its original business of manufacture of chemicals. Even this ray of hope shed by the directors disappeared in a few years after 1958. It is, therefore, difficult to appreciate the argument that we must read into the situation in which the company had found itself a lull in the business. This was really a case where the company had completely gone out of its production, it had stopped production, it had decided to discontinue its business and either sell away the plant and machinery and buildings or, in the absence of proper purchasers being found, had decided to develop its real property, so that it could become a useful source of income. There is a marked distinction between “lull in business” and “going out of business”. A temporary discontinuance of business may in certain circumstances give rise to an inference that a business is going through a lean period of transition and it could be revived if proper circumstances arise. But where in a case like this the company had decided to dispose of its property the plant and machinery had been dismantled and taken away from the factory premises, there was not even the slightest chance of the company restarting production, there was no finance available, and even the licences had ceased to be effective, it is difficult to hold that there was a lull in business which was of a temporary nature. In our view, the inference drawn by the Tribunal that the company had completely stopped its business and had gone out of business and that the only source of income for the company was income from property was eminently justified by the facts which have appeared in this case. We must, therefore, confirm the finding that in the years in question, the company had not carried on any business so as to enable it to claim either depreciation or deductions claimed by it or a right to set off unabsorbed depreciation carried forward. Question No. 1 must, therefore, be answered in the negative.
10. So far as the second question is concerned, it is clear that the intention of the company was clearly to treat the letting out of the buildings as a separate and new business altogether. The properties were used for the purposes of earning income by letting them out and the income earned by the company on account of rents could be treated only at income from property and not as income from business or other sources.
11. Question No. 3 will also have to be answered in the negative having regard to the fact that we have held that the company had ceased to carry on business in the years in question.
12. So far as question No. 4 is concerned, the controversy before the Tribunal was whether the assessee was entitled to claim expenses which were shown in annex. “D” which is annexed to the statement of the case, even though the assessee had not carried on any business and not earned any income from such business. Annexure “D” is a statement of expenses claimed by the company and partly allowed by the ITO. The nature of the expenses claimed relate to items such as office salaries, machinery dismantling charges, rents, rates, taxes and insurance, postage, telegrams, telephones and other items set out therein. The Tribunal has taken the view that even though no income was actually earned for some time from the assets which were in the possession of the company, that fact was not relevant for considering the assessee's claim for deduction of expenditure incurred for holding these assets. The Tribunal has expressed the view—and, in our view, correctly—that the expenditure incurred by the assessee, which to a considerable extent was referable to the assessee's holding on to the assets, was allowable in so far as they could be referred to the holding of the assets. The view taken by the Tribunal is based on the decision of this court in Ormerods (India) Private Ltd. v. Commissioner Of Income-Tax, Bombay City, [1959] 36 ITR 329 (Bom). This decision has now been approved by the Supreme Court in CIT v. Rajendra Prasad Moody, [1978] 115 ITR 519. In that view of the matter, question No. 4 must be answered in the affirmative and in favour of the assessee. Accordingly, we answer the questions referred to us as follows:
Question No. 1: In the negative and against the assessee.
Question No. 2: Income from letting out of property was assessable as income from property.
Question No. 3: In the negative and against the assessee.
Question No. 4: In the affirmative and in favour of the assessee.
13. Since the assessee has substantially failed in its contentions, the assessee shall pay the costs of this reference.