The Judgment of the Court was delivered by

Ratnam, J.:— The assessee is a private limited company. During the accounting years relevant to the assessment years 1971-72 and 1972-73, the assessee manufactured gears and used them in carrying on its business of production and sale of cranes and winches, consisting mostly and essentially of the gears manufactured by it. In the course of the assessment proceedings, the assessee claimed relief under section 80-I of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), admissible to a priority industry, higher development rebate and depreciation on the motor cars stated to have been used exclusively for business purposes. The Income-tax Officer took the view that as cranes and winches are not included in Schedule VI, relief under section 80-I of the Act cannot be given. The Income-tax Officer also negatived the claim of the assessee for higher development rebate on the ground that the machinery installed by the assessee for the purpose of engaging itself in the business of manufacture and sale of cranes and winches would not fall under Schedule V. Regarding the claim of the assessee for depreciation on the cars, the Income-tax Officer found that the cars had been used by the directors for non-business purposes also and disallowed one-fifth of the depreciation claimed by the assessee. On appeal by the assessee before the Appellate Assistant Commissioner, the assessee furnished statements disclosing the proportionate cost of the gears manufactured by it in the total cost of production of cranes and winches of different varieties. Taking this into account, the Appellate Assistant Commissioner opined that had the assessee chosen to restrict its manufacturing activity to gears only, relief under section 80-I of the Act would have been available to it, as gears are one of the items enumerated in Schedule VI, but the fact that the assessee chose to manufacture its own gears and utilise the same in the cranes and winches could not deprive the assessee of the benefit of the provisions of section 80-I of the Act. In that view, after holding that the assessee would be entitled to relief under section 80-I, in respect of the profits and gains attributable to the manufacture of the gears, the assessee was directed to furnish the requisite particulars before the Income-tax Officer to work out the profits and gains attributable to the gears and the Income-tax Officer was also directed to satisfy himself about the correctness of the statement and grant relief under section 80-I of the Act on the proportionate amount. Dealing with the claim of the assessee for higher development rebate, the Appellate Assistant Commissioner held that the exclusive use of plant and machinery by the assessee for the manufacture of gears would enable it to claim the benefit of higher development rebate, but that if there had been no exclusive use of the plant and machinery for the sole manufacture of gears, its claim for higher development rebate would not be admissible. With reference to this claim also, the assessee was directed to make available before the Income-tax Officer the relevant particulars and the Income-tax Officer was also directed to satisfy himself about the admissibility of development rebate at a higher rate and grant appropriate relief to the assessee. Considering the claim for depreciation in respect of the cars of the assessee, the Appellate Assistant Commissioner, agreeing with the Income-tax Officer, held that the cars had been used not only for business purposes, but also for the personal use of the directors and, in that view, the disallowance of depreciation by the Income-tax Officer was restricted to one-sixth, as against one-fifth disallowed by the Income-tax Officer. Aggrieved by this, the assessee as well as the Revenue preferred appeals before the Tribunal and the Tribunal upheld the conclusions of the Appellate Assistant Commissioner regarding the claim of the assessee for relief under section 80-I of the Act and for higher development rebate. However, in regard to the disallowance in respect of depreciation on motor cars, the Tribunal took the view, after making a reference to section 38(2) of the Act, that the cars had been used in the accounting period for the purpose of business and even if such user was for a single day, depreciation is admissible in full and, in terms of section 38(2) of the Act, no portion of the depreciation should be disallowed and the assessee will be entitled to relief of depreciation as claimed. That is how, under section 256(2) of the Act, at the instance of the Revenue, the following common questions of law, for the assessment years 1971-72 and 1972-73, have been referred to this court for its opinion.

“(1) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in sustaining the finding of the Appellate Assistant Commissioner that a component part of the machinery manufactured by the assessee falls under the items listed in the Sixth Schedule and, therefore, the assessee would be entitled to relief under section 80-I in respect of a portion of its profits?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to higher development rebate in respect of the machinery exclusively used for the manufacture of gears?

(3) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the assessee would be entitled to full depreciation in respect of the cars used by it?”

2. Learned counsel for the Revenue contended that the manufacture of gears was not the business of the assessee, but only an intermediate step in the process of the manufacture of the end products, viz., cranes and winches, which were sold by the assessee, and the Tribunal was, therefore, in error in holding that the assessee would be entitled to the benefit of relief under section 80-I of the Act.

3. On the other hand, learned counsel for the assessee submitted that the manufacture of gears by the assessee, falling under item 22 of the Sixth Schedule, would be sufficient to enable the assessee to claim the benefit of relief under section 80-I of the Act, and that would be available to the assessee, whether the gears manufactured are sold as such or are used by the assessee in the other products manufactured by it. Strong reliance in this connection was also placed upon the decision reported in CIT v. Standard Motor Products of India Ltd., [1981] 131 ITR 300 (Mad).

4. Under section 80B(7) of the Act, priority industry, among others, means the business of manufacture or production of any one or more of the articles or things specified in the list in the Sixth Schedule. Item 22 of Schedule VI is “gears”. Before the authorities below and also before this court, it was not disputed that the assessee, during the relevant assessment years, had been manufacturing or producing gears and, therefore, the assessee was engaged in the manufacture or production of gears, one of the items specified in Schedule VI and in a priority industry as well. likewise, it had also not been disputed that the gross total income of the assessee included profits and gains attributable to the priority industry carried on by the assessee during the relevant assessment years. The only ground on which the Income-tax Officer disallowed the claim of the assessee for relief under section 80-I of the Act was that the business of the assessee was the manufacture and sale of cranes and winches and those were not included in Schedule VI, though the Appellate Assistant Commissioner and the Tribunal had taken the view that the assessee would be entitled to the benefit of relief under section 80-I of the Act, as it manufactured gears falling under item 22 of Schedule VI which would be a priority industry. In order to claim relief under section 80-I, the assessee should be engaged in the production or manufacture of one or more of the items enumerated in Schedule VI, in which event, the assessee should be regarded as engaged in a priority industry and the gross total income of the assessee should include profits and gains attributable to such priority industry. In that case, the assessee would be entitled to deduction from such profits and gains, of an amount, as specified in section 80-I of the Act, in computing the total income of the company. The emphasis appears to us to be on the granting of relief to such of those assessees as are engaged in priority industries in the manufacture of one or more of the items enumerated in Schedule VI of the Act. It may be that one of the items manufactured falling under Schedule VI is sold as such by the assessee. Equally, such an item manufactured by the assessee and falling under Schedule VI could be used by the assessee as a component in the other products manufactured by it. In either event, it would be a case of manufacture by the assessee of one of the items falling under Schedule VI. Therefore, the manufacture of gears, falling under item 22 of Schedule VI by the assessee, and the use thereof by the assessee as a component in the other products manufactured by it would not render the manufacture of gears, as such, any the less the manufacture or production of gears by the assessee, falling within item 22 of the Sixth Schedule. We may also in this connection refer to the decision in CIT v. Standard Motor Products of India Ltd., [1981] 131 ITR 300 (Mad). In that case, the assessee-company manufactured motor cars and it claimed relief under section 80-I in respect of the internal combustion engines manufactured by it and fitted into the cars produced by the asses-see. In dealing with the propriety of the claim so made by the assessee, it was pointed out by this court that there is no limitation in section 80-I of the Act and internal combustion engines, whether sold as such or used in the automobiles produced by the assessee, would still be engines manufactured by the assessee, falling within Part III of the First Schedule to the Finance Act, 1965, and that there was no logical basis for encouraging the sale by the assessee and possible use by another manufacturer in the production of automobiles while discouraging the use by the assessee himself for the same purpose. It was also further pointed out that if an assessee can carry on business of manufacturing other goods and still be eligible for the relief, there is no reason why the assessee cannot use the listed items produced by him in making other goods and that the taxing authority should see whether the profits attributable to the manufacture of any one or more of the listed items formed part of the taxable income and if so, the assessee would be eligible for the rebate. We are of the view that the principle of this decision would squarely stand attracted to this case as well and the Tribunal was, therefore, quite right in holding that the manufacture of gears by the assessee which formed a component part in the cranes and winches manufactured by the assessee would entitle the assessee to relief under section 80-I of the Act in respect of the portion of the profits attributable to such manufacture. We, therefore, answer the first question referred to us in the affirmative and against the Revenue.

5. Regarding the claim for higher development rebate which forms the subject-matter of the second question referred, we find from sections 33(1)(a) and 33(1)(b)(B)(i)(a) and (b) of the Act, that if the machinery or plant had been installed by the assessee for the purpose of manufacture or production of any one or more of the articles catalogued in Schedule V, then, the assessee would be entitled to the benefit of higher development rebate as provided therein. The Income-tax Officer proceeded to deny the benefit of higher development rebate to the assessee, as in his view, it was not engaged in the manufacture or production of one of the items falling under Schedule V. However, the Appellate Assistant Commissioner found that the assessee should be allowed development rebate at a higher rate if it could establish that there had been exclusive use of certain plant and machinery installed for the manufacture of gears only, and that, if the assessee failed to make out a case for exclusive use of the plant and machinery solely for the manufacture of gears, the assessee's claim for higher development rebate was not admissible. A further direction was also given that the assessee should furnish the relevant particulars in this behalf before the Income-tax Officer which should be considered by the Income-tax Officer for the purpose of determining the admissibility of the development rebate at a higher rate as claimed by the assessee. This direction was also upheld by the Tribunal. We do not see how, when the assessee is engaged in the manufacture of gears, falling under item 22 of Schedule V, having installed machinery for that purpose, the benefit of higher development rebate can be refused. Of course, the availability of higher development rebate would depend upon the assessee establishing the installation and use of plant and machinery exclusively for the manufacture of gears and the Appellate Assistant Commissioner had directed that the particulars should be furnished by the assessee and the matter should be looked into by the Income-tax Officer and that direction had been upheld by the Tribunal. Besides, the Tribunal had also, in the course of its order, stated that when the plant or machinery is exclusively used in the manufacture of gears, it follows that the machinery had been installed for that purpose and that view, in our opinion, is unassailable. We, therefore, answer the second question also in the affirmative and against the Revenue.

6. On the third question, learned counsel for the Revenue submitted that the Tribunal committed an error in allowing the entire depreciation claimed by the assessee on the cars, without reference to the scope and effect of section 38(2) of the Act especially when it had been found by all the authorities that the cars had been subjected to mixed user, i.e, business as well as non-business purposes. It was also pointed out that the Tribunal had erroneously proceeded to apply rule 5 of the Income-tax Rules (hereinafter referred to as the Rules), which would be appropriately applicable only to a case falling under section 32 and not to a case falling under section 38(2), as here. Attention in this connection was drawn to the decisions in Commissioner Of Income-Tax, Patna… v. Messrs Sobharam Jokhiram…Opposite Party., [1960] 39 ITR 299 (Patna); Waterfall Estates Ltd. v. CIT, [1981] 131 ITR 223 (Mad) and CIT v. K.L Bhasin and Co., [1986] 158 ITR 623 (Pat). On the other hand, learned counsel for the assessee submitted that the Tribunal had not rendered any finding regarding the user of the cars for business and non-business purposes and, therefore, section 38(2) cannot be invoked at all. Relying upon the decision in Punjab National Bank Ltd. v. Commissioner Of Income-Tax, Delhi I., [1983] 141 ITR 886 (Delhi), learned counsel submitted that the proportionate disallowance of depreciation was rightly set aside by the Tribunal and that did not call for any interference.

7. Before the Income-tax Officer, it was not disputed that the cars had been used for business and non-business purposes as well. Even in the course of the appeals preferred by the assessee before the Appellate Assistant Commissioner, the only plea taken was that the disallowance was on the high side. That there was a user of the cars for business purposes and non-business purposes as well was not disputed before the appellate authority. Nor was this in any manner questioned before the Tribunal. In view of the factual user of the cars for business as well as non-business purposes not having been challenged before any of the authorities, it has to be taken that the cars in respect of which depreciation had been claimed by the assessee had been used for business as well as non-business purposes. In such a situation, the proper provision under which the claim for depreciation has to be considered and dealt with is section 38(2) and not section 32(1) read with rule 5 of the Rules. The Tribunal, in the course of its order, had made a reference to section 38(2) of the Act, but had never the-less proceeded to hold that the user of the cars by the assessee, even for one day in the course of the accounting year, would enable the assessee to get the benefit of depreciation for the whole year. In so holding, the Tribunal had misdirected itself and erroneously applied rule 5 of the Rules, applicable to section 32, to a case falling under section 38(2) of the Act. Section 32(1) provides for depreciation of building, plant, machinery or furniture owned by the assessee and used exclusively for purposes of business or profession, while section 38(2) provides for depreciation with reference to user of building, plant, machinery or furniture not exclusively for the purposes of business or profession. In a case in which the building, machinery, plant or furniture owned by the assessee is not exclusively used for purposes of business or profession, section 38(2) restricts the depreciation to a fair proportionate part thereof to be determined by the Income-tax Officer, after taking into account the user of the building, machinery, plant or furniture, for purposes of the business or profession. In the case of a mixed user of the building, machinery, plant or furniture, the claim for depreciation has to be considered under section 38(2) and not under section 32(1) of the Act. rule 5 of the Rules would be applicable only to cases falling under section 32(1) and not to cases falling under section 38(2) of the Act, as in this case, where there is a statutory imposition of a restriction on the depreciation allowable which should be determined by the Income-tax Officer after taking into account the user of the building, machinery, plant or furniture for purposes of the business or profession. We find that the Tribunal, in this case, had referred to section 38(2) of the Act, but had proceeded to apply rule 5 of the Rules, as if section 32(1) of the Act stood attracted even to a case of admitted mixed user of the cars for business as well as non-business purposes. We may in this connection usefully refer to Commissioner Of Income-Tax, Patna… v. Messrs Sobharam Jokhiram…Opposite Party., [1960] 39 ITR 299 (Pat). The assessee therein who derived income from property and business purchased a new car on June 22, 1951, and used it only for four months during the accounting year for business as well as private purposes. The Income-tax Officer allowed depreciation proportionately at one-third and disallowed one-half of that, as the car was used personally for private purposes and allowed finally depreciation in a sum of Rs. 1,200. The Appellate Assistant Commissioner took the view that the assessee was entitled to Rs. 1,200 as initial depreciation. But the Tribunal allowed a deduction of Rs. 2,400 as claimed by the assessee. On a reference, the Patna High Court pointed out, referring to section 10(2)(vi) and section 10(3) of the Indian Income-tax Act, 1922, that section 10(2)(vi) is controlled by section 10(3) of that Act which expressly restricted the allowance to a fair proportional part of the amount which would be allowable if the machinery was wholly used for the purposes of business, in a case where the machinery was not wholly used for the purposes of the business, but was used both for the purposes of business and for private purposes. Again, in Waterfall Estates Ltd. v. CIT, [1981] 131 ITR 223 (Mad), referring to section 38(1) and (2) of the Act, it was pointed out that sub-section (1) deals with cases where the expenditure is partly personal and partly for the purpose of business, while sub-section (2) of section 38 applies to cases where part of the expenditure was with reference to nonbusiness activities, in which case, proportionate allowance is contemplated and that section 38 is applicable only to those cases where the expenditure or allowance relates to the business only in part and would not apply where the asset is wholly, and not partly, used for the purpose of the business. This decision also supports the contention of learned counsel for the Revenue that the Tribunal was not right in proceeding to apply rule 5 of the Rules, applicable to section 32, and in not dealing with the matter under section 38(2) of the Act. In CIT v. K.L Bhasin and Co., [1986] 158 ITR 623 (Pat), one of the questions that arose was the admissibility of the claim for depreciation in respect of the cars used for business as well as personal purposes of the partners. The Income-tax Officer disallowed one-third of the depreciation which was affirmed on appeal but the Tribunal held that the assessee was entitled to full depreciation. On a reference, the court pointed out that though rule 5 of the Rules clearly laid down that depreciation has to be allowed in full, where the assets were used for the purpose of the business or profession of the assessee at any time during the previous year, yet, where section 38(2) of the Act applied, rule 5 of the Rules will not be applicable and if a plant is partly used for business purposes and partly for non-business purposes, then, the disallowance in depreciation has to be made proportionately. The decision in Punjab National Bank Ltd. v. Commissioner Of Income-Tax, Delhi I., [1983] 141 ITR 886 (Delhi), relied on by counsel for the assessee, is really not of much assistance. In that case, in a six storeyed building owned by the assessee-bank, five floors were in the occupation of the assessee and one floor was let out to a party, and the whole building was fitted with an air-conditioning plant and provided with lift facility. In considering the propriety of the full allowance for depreciation allowed by the Tribunal on the air-conditioning plant and the lift in the building so owned by the assessee, the court pointed out that the air-conditioning plant and lift were used for purposes of the business of the assessee and that they were also used by the customers of the bank and also the visitors to the bank and that would justify the allowance of the depreciation claimed by the assessee in full. The court also had not considered the effect of the restriction imposed under section 38(2) on the allowability of depreciation. Thus, it is seen that depreciation had been allowed in full in that case on a clear finding that the air-conditioning plant and lift were used for business purposes of the assessee and without reference to section 38(2) of the Act while, on the facts of this case, we find that there had been an admittedly mixed user of the cars for the purposes of business and non-business purposes and that, in our opinion, would make all the difference to the applicability of the decision in Punjab National Bank v. CIT, [1983] 141 ITR 886 (Delhi). We are of the view that the decision in Punjab National Bank v. CIT, [1983] 141 ITR 886 (Delhi) would not, in any manner, help the assessee to contend that the depreciation on cars should be allowed in toto. Applying, therefore, the principles laid down in Commissioner Of Income-Tax, Patna… v. Messrs Sobharam Jokhiram…Opposite Party., [1960] 39 ITR 299 (Pat), Waterfall Estates Ltd. v. CIT, [1981] 131 ITR 223 (Mad) and CIT v. K.L Bhasin and Co., [1986] 158 ITR 623 (Pat), we hold that the Tribunal was in error in holding that the assessee would be entitled to full depreciation in respect of the cars used by it. We, therefore, answer the third question referred to us in the negative and in favour of the Revenue. In view of the partial success of the Revenue and the assessee in these references, we do not make any order as to costs.