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Commissioner Of Income-Tax, Punjab v. Sarveshwar Nath Nigam.
Summary of Legal Opinion
Factual and Procedural Background
This is a reference under section 66(1) of the Indian Income-tax Act, XI of 1922, made by the Income-tax Appellate Tribunal, Delhi Bench. The Tribunal referred the following question to this Court:
“Whether the assessee was entitled to depreciation for the full year on the kohlus that were let out on hire for the season consisting of a period of four months under section 10(2)(vi) of the Indian Income-tax Act read with rule 8 of the Income-tax Rules?”
The assessee, Shri Sarveshwar Nath Nigam, manufactured kohlus and sanitary fittings; some kohlus (with pans etc.) were let out annually to agriculturists for the gur crushing season. For the assessment year ending 31 July 1959 the assessee claimed depreciation for the full twelve months on the kohlus let out on hire. The Income-tax Officer allowed depreciation only for the four months during which the kohlus were actually let out, on the view that proviso (2) to rule 8 did not apply. On appeal the Appellate Assistant Commissioner held that the assessee was entitled to full depreciation for twelve months under section 12(3) of the Income-tax Act, 1922. The Department appealed; the Income-tax Appellate Tribunal, Delhi Bench, dismissed the departmental appeal on 11th November, 1957, holding that although the income should be assessed under section 10 and rule 8, the assessee was entitled to full-year depreciation. The Department applied for a reference of the question of law, and this Court received the reference.
Legal Issues Presented
- Whether the assessee was entitled to depreciation for the full year on the kohlus that were let out on hire for the season of about four months under section 10(2)(vi) read with rule 8 of the Income-tax Rules.
- (Contextual dispute between the parties) Whether the income and the allowance for depreciation in the present facts should be governed by section 10 (profits and gains of business) or by section 12 (income from other sources) of the Income-tax Act.
Arguments of the Parties
Department (represented by Shri Hardayal Hardy)
- Contended that the correct provision to govern the assessment is section 10 (income from business), not section 12.
- Argued that only the first proviso to rule 8 applies (pro rata increase "according to the number of complete months of user") and therefore depreciation should be allowed only for the four months the kohlus were let out on hire.
- Relied on the history of rule 8 and on earlier decisions (Patna and Madras High Courts in Commissioner of Income-tax v. Sahana and Sons and Commissioner of Income-tax v. Motors and General Stores Ltd.) showing that prior to the May 1948 amendment rule 8 made no provision for part-year depreciation; contended proviso (2) was incorporated in view of those decisions.
Assessee (represented by Shri G.S. Pathak)
- Relied upon section 12 and particularly subsection (3) of section 12 as an alternative view (though the Court ultimately treated section 10 as applicable).
- Argued that proviso (2) to rule 8 applies: a seasonal factory worked during all the working seasons of the previous year should be treated as if assets were in use throughout the period of ownership for the purpose of computing depreciation.
- Contended that the expression “worked by the assessee” in proviso (2) should not be read narrowly to mean personally worked by the assessee; it includes working through a licensee or hirer.
- Submitted that it would be unreasonable and lead to absurd results to deny full-year depreciation where assets are idle by reason of the seasonal nature of the business rather than by reason of the owner's action; cited Maxwell on Interpretation of Statutes and authorities (Salmon v. Duncombe; King v. Vasey & Lolly) on avoiding literal interpretations that produce absurdity.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| In re Sadhucharan Roy Chowdhry | Support for treating letting out machinery as business income under section 10; authority on entitlement to normal depreciation even if repairs are carried out by licensee. | The Court relied on this decision to support the view that section 10 applies (where letting is part of business) and to show that an owner is entitled to normal depreciation even if repairs are carried out by the licensee. |
| Commissioner of Income-tax v. Sahana and Sons | Earlier interpretation of rule 8 (pre-amendment) indicating no provision for part-year depreciation under the old rule. | Referred to by the Department as part of the historical background to rule 8 and the reason for the incorporation of proviso (2); the Court noted these decisions but held the amended rule and proviso (2) must be applied. |
| Commissioner of Income-tax v. Motors and General Stores Ltd. [1946] 14 I.T.R. 130 | Earlier authority held that under rule 8 (pre-amendment) there was no provision for allowing depreciation for part-year. | Referred to by the Department to justify a narrow construction; the Court observed that such decisions related to the period before the 1948 amendment and were not of much assistance to the present case under the amended rule. |
| Commissioner of Income-tax v. National Mills Co. Ltd. and Sadhucharan Roy Choudhry, In re | Authority for the proposition that proviso (2) to rule 8 does not require the factory to be worked personally by the assessee; working through a licensee/hirer suffices. | The Court cited this line of authority to support a broad construction of “worked by the assessee,” holding that proviso (2) can apply where the factory is worked by a licensee or hirer. |
| Salmon v. Duncombe [1886] 11 App. Cas. 627 | Principle of statutory interpretation: literal interpretation leading to absurdity should be avoided. | Cited (by the assessee) and relied upon in principle by the Court to justify avoiding an interpretation of “worked by the assessee” that would lead to absurd or unreasonable results in the context of seasonal operations. |
| King v. Vasey & Lolly [1905] 2 K.B. 748 | Principle of interpretation supporting modification of literal language where literal meaning leads to hardship or absurdity. | Invoked to support a purposive construction of proviso (2); the Court used this reasoning to reject a narrow, literal reading that “worked by the assessee” must mean personally worked. |
Court's Reasoning and Analysis
The Court proceeded step-by-step as follows, relying strictly on the text of the statute and on the arguments and authorities presented:
- Preliminary territorial/procedural point: The parties agreed the letting of kohlus to agriculturists was part of the assessee's business and that the income derived was business income. The Court nevertheless examined the parties' dispute whether assessment and depreciation should be governed by section 10 or section 12. The Court held that the Department's position — that section 10 applies where letting is part of the assessee's business — was correct. It observed, however, that for the specific question referred the distinction was not crucial because the depreciation claim is governed by the same statutory provisions in either event (clause (vi) of s.10(2) and the cross-reference in s.12(3)).
- Identification of the relevant statutory provisions: Clause (vi) of sub-section (2) of section 10 prescribes the allowance for depreciation; rule 8 of the Income-tax Rules prescribes the percentages and contains two provisos relevant to part-year and seasonal use.
- Construction of rule 8 provisos: The parties disputed which proviso applied. The first proviso adjusts the percentage proportionately according to the number of complete months of user where the asset was used by the assessee for not less than two months. The second proviso provides that for a seasonal factory worked by the assessee during all the working seasons of the previous year, the percentage shall be increased as if the assets had been in use throughout the period the assessee was the owner.
- Interpretation of “factory” and “worked by the assessee”: The Court rejected a narrow literal reading. It noted that the Income-tax Act does not define “factory,” and in “its popular sense” the kohlus used for making gur qualify as a factory. The Court further held that proviso (2)’s phrase “worked by the assessee” cannot reasonably be restricted to “worked personally by the assessee”; it includes factories worked through licensees or hirers. The Court relied on prior authorities (e.g., National Mills Co. Ltd. and Sadhucharan Roy Choudhry) and considered the practical effects of a narrow construction to find it unreasonable.
- Consideration of the seasonal nature of the assets and practical consequences: The Court emphasized that kohlus are inherently seasonal assets used during the crushing season and may be idle for the remainder of the year not through the owner’s fault but due to the seasonality of the business; repairs and preparation for the next season are normal. A literal construction treating “worked” as requiring continuous year-round use would produce absurd results (e.g., denying depreciation for normal closures, repairs or holidays).
- Conclusion of applicability: On these bases the Court concluded that proviso (2) to rule 8 applied. Therefore, the assessee was entitled to have the depreciation calculated as if the kohlus had been in use throughout the period of ownership for that previous year, and his claim for depreciation for the entire year was justified.
Holding and Implications
HOLDING: The Court answered the referred question in the affirmative: the assessee was entitled to the benefit of proviso (2) to rule 8 and therefore to depreciation for the entire year on the kohlus let out on hire for the crushing season.
Implications:
- Direct effect: The assessee's claim for full-year depreciation on the kohlus let out on hire for the crushing season is upheld; the assessee is entitled to have depreciation computed under proviso (2) to rule 8 for the assessment year in question.
- Costs: Parties were ordered to bear their own costs in this reference.
- Scope of precedent: The opinion does not announce that it is laying down a novel general rule beyond its statutory construction in this context; it emphasizes interpretation of the existing proviso (2) to rule 8 as applicable to seasonal factories worked through hirers or licensees. The Court also observed that many earlier decisions cited related to the pre-amendment period of rule 8 and were not directly decisive under the amended rule.
Judgment: Question answered in the affirmative. S.B. Capoor, J. concurred.
Gurdev Singh, J.:— In this reference under section 66(1) of the Indian Income-tax Act, XI of 1922, the following question has been referred to this court by the Income-tax Appellate Tribunal, Delhi Bench:
“Whether the assessee was entitled to depreciation for the full year on the kohlus that were let out on hire for the season consisting of a period of four months under section 10(2)(vi) of the Indian Income-tax Act read with rule 8 of the Income-tax Rules?”
2. The facts giving rise to it are as under:
The assessee, Shri Sarveshwar Nath Nigam, manufactures kohlus and sanitary fittings, etc. Some of the kohlus along with pans, etc., are let out every year to agriculturists for the preparation of gur during the crushing season. In the course of assessment proceedings for the year ending 31st July, 1959, the assessee claimed depreciation for full twelve months for the kohlus let out on hire. The Income-tax Officer allowed depreciation only for four months in the year for which the kohlus had been actually let out, being of the opinion that proviso (2) to rule 8 of the Income-tax Rules did not apply to the case. On appeal by the assessee, the Appellate Assistant Commissioner held that the assessee was entitled to full depreciation for twelve months under section 12(3) of the Indian Income-tax Act, 1922. An appeal preferred by the Income-tax department against this order, dated 5th March, 1957, was dismissed by the Income-tax Appellate Tribunal, Delhi Bench, on nth November, 1957. Though the Tribunal was of the opinion that the income earned by the assessee by the hiring of kohlus had to be assessed under section 10 of the Indian Income-tax Act, under rule 8 of the Income-tax Rules he was entitled to the full depreciation for twelve months and not only for the crushing season lasting for about four months. The department feeling dissatisfied applied for reference of the question of law arising in the case, and it is on acceptance of that application that the question reproduced above has been referred to this court.
3. The facts set out above are not disputed. It is common case of the parties before us that the letting out of kohlus to agriculturists for the crushing season was part of the assessee's business, and the income derived therefrom had to be assessed as income from his business. The parties, however, do not agree as to the provision under which this income has to be assessed and depreciation allowed. Whereas Shri Hardayal Hardy, appearing for the department, has contended that the case would be governed by section 10 of the Indian Income-tax Act, 1922, the assessee's learned counsel, Shri G.S Pathak, relies upon the provisions of section 12 of that Act, and urges that the depreciation be assessed in accordance with sub-section (3) of that section. The position taken up by the department is correct. Since it is admitted that the hiring of kohlus is a part of the assessee's business, section 10 would apply, as it relates to the assessment of the income from business, and not section 12 which refers to income from “other sources”. The decision in In re Sadhucharan Roy Chowdhry1 further supports this view.
4. The question whether section 10 or section 12 applies is not of much importance so far as the question referred to us is concerned, as in both cases the depreciation claimed for the kohlus let out on hire is governed by the same provisions of law.
5. Sub-section (2) of section 10 sets out the allowances that have to be made in computing the profits and gains of business, and the relevant provisions regarding depreciation is contained in clause (vi).
6. The allowances for any expenditure, etc., which have to be made in computing the income from “other sources” under section 12 of the Act, are detailed in sub-section (2) of that section. Sub-section (3) of section 12 provides:
“Where an assessee lets on hire machinery, plant or furniture belonging to him, he shall be entitled to allowances in accordance with the provisions of clauses (iv), (v), (vi) and (vii) of sub-section (2) of section 10.”
7. For the purpose of depreciation, it is only clause (vi) of sub-section (2) of section 10, that is relevant. It is thus obvious that the question which we are called upon to answer has to be determined with reference to clause (vi) of sub-section (2) of section 10 of the Act, which runs as follows…
“10. (2) Such profits or gains shall be computed after making the following allowances, namely:
(vi) in respect of depreciation of such buildings, machinery, plant, or furniture being the property of the assessee, a sum equivalent, where the assets are ships other than ships ordinarily plying on inland waters, to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed…”
8. In order to find out what percentages are prescribed for depreciation, we have to refer to rule 8 of the Indian Income-tax Rules, 1922, which reads:
“The allowance under section 10(2)(vi) of the Act in respect of depreciation of buildings, machinery, plant or furniture shall be at percentages of the written down value or original cost, as the case may be, equal to one-twelfth the number shown in the corresponding entry in the second column of the following statement:
Provided that if the buildings, machinery, plant or furniture have been used by the assessee in his business for not less than two months during the previous year, the percentage shall be increased proportionately according to the number of complete months of user by the assessee:
Provided further that in the case of a seasonal factory worked by the assessee during all the working seasons of the previous year, the percentage shall be increased as if the buildings, machinery, plant or furniture had been in use throughout the period the assessee was the owner thereof during the previous year.”
9. There is no dispute between the parties that the depreciation in the present case has to be determined in accordance with this rule. They, however, disagree as to the proviso which applies to the present case. Whereas on behalf of the assessee it is contended that the depreciation should be determined in accordance with the second proviso to rule 8, the learned counsel for the department has urged that it is the first proviso to this rule which applies, and it is only for the actual period of four months, for which the kohlus had been let out on hire, that should be taken into account for assessing the depreciation. In support of his argument, Shri Hardy has referred to the history of rules, and pointed out that this rule, as it stood before its amendment in May 1948, made no provision for allowing depreciation for a part of the year where the machinery had not been used for purpose of business for the entire year. According to him, proviso (2) was incorporated in the rule in view of the decisions of the Patna and the Madras High Courts in Commissioner of Income-tax v. Sahana and Sons and Commissioner of Income-tax v. Motors and General Stores Ltd. [1946] 14 I.T.R 130. where it was held that under rule 8 there was no provision for allowing depreciation for a part of the year, and consequently where the machinery was used not for the entire year but for a part of it, depreciation had to be allowed for full twelve months.
10. Arguing against resort to proviso (2), Shri Hardy has contended that it applied only to a “seasonal factory worked by the assessee”, and it would not govern the present case as the kohlus were neither a factory nor were worked by the assessee himself. It is true that proviso (2) to rule 8 refers to a “seasonal factory worked by the assessee”, yet we do not find any justification for placing a narrow construction on this expression. The word “factory” is not defined in the Income-tax Act, and in its popular sense, kohlus, which are used in connection with the manufacture of gur, must be deemed as a factory.-There is abundant authority for the proposition that for the applic-, ability of proviso (2) to rule 8, it is not necessary that the factory should be worked by the assessee himself, and it is enough if the factory is worked by a licensee or a hirer. Reference in this connection may be made to Commissioner of Income-tax v. National Mills Co. Ltd. and Sadhucharan Roy Choudhry, In re. Even otherwise, it seems to us to be unreasonable why under proviso (2) to rule 8, in the case of a seasonal factory, the depreciation should be allowed only if the factory is worked by the assessee himself and not by a hirer when the income earned from letting out the machinery is taken into account for the purpose of assessing the income-tax. The expression “worked by the assessee” occurring in this proviso cannot be interpreted to mean as “worked personally by the assessee.” The use of the word “worked” had become necessary in this proviso because of the subsequent part of the proviso which lays down that the assessee should have worked the factory “during all the working seasons” What was contemplated by proviso (2) to rule 8 is that before depreciation for the full year is allowed in the case of a seasonal factory, the factory must have been put to use for the entire season for which the seasonal work can be carried on and not for a part of the same. In the case before us, it is not disputed that kohlus, etc., which are meant for being used as sugarcane crushers, were let out for the entire crushing season. We agree with Shri Pathak that from the very nature of the business for which the kohlus were let out on hire it was impossible to put them to use for the entire year, and if the kohlus supplied lie idle and out of use for a part of the assessment year, not on account of any fault of the assessee but because of the seasonal nature of the business for which they are meant, it will be unreasonable to disallow depreciation for the period during which the kohlus were either under repairs or were being kept ready for use in the following season. Quoting from Maxwell on Interpretation of Statutes, page 229, tenth edition, and relying upon Salmon v. Duncombe 1886 11 App. Cas. 627. and King v. Vasey & Lolly [1905] 2 K.B 748. Shri Pathak has urged that if the literal interpretation leads to absurd results and hardship which the legislature could not have intended, it should be avoided, and in case of doubt even the language may be modified. It is, however, not necessary to go to that extent as we are of the opinion that the expression “worked by the assessee” used in proviso (2) covers the case of working a seasonal factory through a licensee or a hirer, and does not mean that the assessee should personally run the factory. The various decisions cited by the parties' counsel on the applicability of section 10(2)(vi) and rule 8 relate to the period prior to the amendment of rule 8 and are thus not of much assistance.
11. The assessee had exploited to his advantage the kohlus that he had let on hire by giving them to the hirer for the entire crushing season. He had not kept these kohlus as idle assets. After the crushing season was over, he had to repair the kohlus keeping them in readiness for use during the next season. In Sadhucharan Roy Chowdhry In re it was held by the Calcutta High Court that even if the repairs were to be carried by the licensee, the owner was entitled to the normal depreciation.
12. The expression “worked” in proviso (2) does not mean “worked continuously for the entire year”. A different construction would lead to absurd results. It would mean that even where the factory is closed on account of normal holidays or for repairs or on account of the normal closing hours, depreciation would not be allowed for that period.
13. In view of what has been said above, I am of the opinion that the assessee was entitled to the benefit of proviso (2) to rule 8, and his claim for depreciation for the entire year was justified. I would, accordingly, answer in the affirmative the question referred to us. Parties are left to bear their own costs.
S.B Capoor, J.:— I agree.
15. Question answered in the affirmative.
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