The Judgment of the Court was delivered by
Ajit K. Sengupta, J.:— In this reference made at the instance of the Revenue, the following question has been referred by the Tribunal for the opinion of this court under section 256(1) of the Income-tax Act, 1961:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing depreciation on the plant and machinery of the Barakar Unit of Barakar Engineering and Foundry Works although the said unit was under lock-out throughout the previous year and the assets of the unit had not been used for a single day during the relevant previous year?”
2. This reference relates to the income-tax assessments of the assessee-company for the assessment years 1983–84 and 1984–85. The assessee was carrying on coal mining business which was nationalised in 1973. During the relevant previous year, the assessee-company derived income from carrying on a business in fabrication jobs and handling, etc. The Barakar Unit of the assessee-company was under lock-out throughout the previous years relevant to the assessment years 1983–84 and 1984–85. The assessee-company claimed depreciation in respect of assets at its Barakar Unit. The Assessing Officer found that these assets of Barakar Unit did not work even for a single day during any of the two relevant previous years corresponding to the assessment years 1983–84 and 1984–85. The Assessing Officer, therefore, disallowed the assessee's claim for depreciation on those assets in the sums of Rs. 84,498 for the assessment year 1983–84 and Rs. 1,04,038 for the assessment year 1984–85. The Appellate Assistant Commissioner as well as the Tribunal accepted the assessee's case, following the principles laid down by the Delhi High Court in Capital Bus Service (P.) Ltd. v. CIT, [1980] 123 ITR 404. Section 32(1) of the Income-tax Act, 1961, lays down two conditions to be satisfied by an assessee before claiming any depreciation. These two conditions are, firstly, that the plant and machinery must be owned by the assessee and, secondly, the plant and machinery must be used for the purposes of business of the assessee. If the aforesaid two conditions are satisfied, then the assessee is entitled to claim depreciation at the rates specified in the Appendix to the Income-tax Rules, 1962.
3. In the present case, it is not in dispute that the plant and machinery in question were owned by the assessee. The only question for consideration is whether, in view of the fact that the plant and machinery of the Barakar Engineering Unit could not be actually used because of the lock-out prevailing during the two previous years relevant to the assessment years 1983–84 and 1984–85, it could be said that the plant and machinery had actually been used for the purposes of business as contemplated under sub-section (1) of section 32 of the Act.
4. Reliance was placed on behalf of the assessee on the decision in Capital Bus Service (P.) Ltd. v. CIT, [1980] 123 ITR 404 (Delhi). The assessee-company, a transport operator maintaining a fleet of buses, kept ready for use four buses for being run on contract basis on occasions such as marriages, private tours and the like. On account of Jack of demand, those buses were not actually employed by the assessee for more than 30 days in the previous year relevant to the assessment year 1961–62. The Delhi High Court held that the expression “used for the purpose of the business” comprehended cases where the machinery was kept ready by the owner for its use in its business and the failure to use it actively in the business was not on account of its incapacity for being used for that purpose or its non-availability. The four buses were admittedly in working order and the assessee was keeping them ready for being operated, if and when some touring contracts materialised. They were not actually run on the roads not because they were being repaired or were unfit for use for one reason or the other, but only because there were not enough contracts during the year to ply the buses for more than 30 days each. This did not mean that so far as the assessee was concerned, it did not employ the buses for the purposes of business. They were kept ready for operation and the buses were there only in the business and for being used in the business. The buses were used for the purposes of business throughout the year though they were not actually plied on the roads for more than 30 days, and the assessee was entitled to grant of normal depreciation in respect of the four buses.
5. Reference was made to Liquidators of Pursa Ltd. v. CIT, [1954] 25 ITR 265, where the Supreme Court held and observed as under (at page 272):
“The words ‘used for the purposes of the business’ in section 10(2)(iv) of the Indian Income-tax Act, 1922, 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 purpose of that business which is actually, carried on and the profits of which are assessable under section 10(1). The word ‘used’ has been read in some of the pool cases in a wide sense so as to include passive as well as active user. It is not necessary, for the purposes of the present appeal, to express any opinion on that point on which the High Courts have expressed different views. It is, however, clear that in order to attract the operation of clauses (v), (vi) and (vii), the machinery and plant must be such as were used, in whatever sense that word is taken, at least for a part of the accounting year. If the machinery and plant have not at all been used at any time during the accounting year no allowance can be claimed under clause (vii) in respect of them and the second proviso also does not come into operation.”
6. In Commissioner Of Income-Tax, Tamil Nadu-1 v. Vayithri Plantations Ltd., [1981] 128 ITR 675, the Madras High Court considered the case of a company which owned a tea plantation and also a tea factory. During the previous year relevant to the assessment year 1971–72, the assessee claimed an allowance of Rs. 75,000 as development rebate under section 33(1) of the said Act. The Income-tax Officer did not allow the claim on the ground that the machinery in respect of which this claim was made was only installed and had not been used in the relevant previous year. The Tribunal referred to the directors' report and found that the machinery had been actually installed and had also been tested for manufacture of tea by trial runs during the previous year relevant to the assessment year 1971–72. But on account of frequent labour unrest, regular manufacturing of tea commenced only in June, 1971. According to the Tribunal, this was a case of passive user and the assessee was entitled to development rebate. This view was upheld by the Madras High Court.
7. We have noted the contentions of the parties. There is a difference of opinion on allowance of depreciation on plant and machinery remaining passive under pooling arrangements. In Bhikaji Venkatesh v. CIT, [1937] 5 ITR 626 (Nag), the assessee owned a ginning factory. He joined a pool of owners of such factories. Under the pooling agreement, the factories worked in rotation and during the year of accounting, the assessee's factory did not work, though he received his share of profits out of the pool. It was held by the Nagpur High Court that the assessee was not entitled to depreciation on the machinery and plant because they were not used for the purposes of business.
8. On the other hand, in CIT v. Viswanath Bhaskar Sathe, [1937] 5 ITR 621 (Bom), the assessee owned a ginning factory and was a member along with the owners of other ginning factories on a pool. During the year of assessment, the factory was not employed in the work of ginning in accordance with the pooling agreement, though he received his share of profits. The assessee was, however, under an agreement bound at his own expense to keep his gins and other working plant and machinery in good condition and in working order even when his factory was not working, so that it may be ready for actual use at any moment. The Bombay High Court held that the word “used” in section 10(2)(vi) of the Indian Income-tax Act, 1922, 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 earns the profits, although it was not actually worked, and the depreciation allowance can be granted to the assessee.
9. This case, in our view, is clearly distinguishable inasmuch as there the assessee, under a pooling agreement, was required to keep his machinery in good working order and condition and the factories were required to work only in rotation. The assessee was also entitled to receive his share of profits out of the pool even though his factory did not actually work during the relevant previous year. This was a case where no profits could have been earned by the assessee except by maintaining his factory in good working order in accordance with the pooling agreement and that involved the user of the factory and the machinery. This case, therefore, is clearly distinguishable from the facts of the present case where, in fact, the entire factory remained under lock-out and none of the assets in question were at all used during any part of the two previous years relevant to the assessment years 1983–84 and 1984–85 now in reference before us.
10. As already stated earlier, one of the conditions specified in sub-section (1) of section 32 for grant of depreciation is the actual user of plant and machinery for the purposes of business. In certain cases like a pooling arrangement or where plant and/or machinery is kept as stand-by to provide against breakdown, even a passive user may entitle the assessee to claim depreciation under section 32 because in both these cases, the machinery is kept ready for use in the factory. But, in this case, the Barakar Engineering Unit remained under lock-out throughout the two previous years relevant to the assessment years 1983–84 and 1984–85. During the lock-out period, the plant and machinery had not been actually used for the purposes of its business.
11. In our view, the second condition as specified in sub-section (1) of section 32 has not been satisfied in this case. We are fortified in this view by the principles laid down by the Supreme Court in Liquidators of Pursa Ltd. v. CIT, [1954] 25 ITR 265. The decision of the Delhi High Court cited on behalf of the assessee is wholly distinguishable. In the first case, the buses were actually run, though not for more than 30 days on account of lack of demand. But these buses were kept ready for running on contract basis throughout the relevant previous year. This is not the case here. Similarly, in the second case of Commissioner Of Income-Tax, Tamil Nadu-1 v. Vayithri Plantations Ltd., [1981] 128 ITR 675 (Mad), the machinery had been actually installed and trial runs were held during the relevant previous year, but actual manufacturing on commercial basis could not be commenced on account of frequent labour unrest. In other words/the machinery was actually used at least for trial runs during the relevant previous year. This is not the case here.
12. A lock-out is an act of the assessee in suspending the business operations. The allowance of depreciation may not depend on the actual working of the machinery but no depreciation is allowable if the assets are not used at all for the business of the assessee in the relevant previous year. In this case, admittedly, none of the assets of the business were used by the assessee during the relevant previous year.
13. In our view, since the plant and machinery in question were not actually used for the purposes of business, no depreciation is admissible to the assessee under sub-section (1) of section 32.
14. In that view of the matter, we answer the question referred in this case in the negative and in favour of the Revenue. There will be no order as to costs.
Nure Alam Chowdhury, J.:— I agree.