1956 (9) TMI 60 - HC - Income Tax

Assessee denied initial depreciation for factory building not actively used for business.

MACHINERY MANUFACTURERS CORPORATION LTD. Versus COMMISSIONER OF INCOME-TAX, BOMBAY

The court held that the assessee company was not entitled to initial depreciation allowance for the factory building as it was not used for the purposes ... - Issues Involved:1. Entitlement to initial depreciation allowance under section 10(2)(vi) of the Income-tax Act.2. Necessity of carrying on business and using the building for the purposes of the business in the year of erection.3. Whether pre-production activities constitute carrying on of business.4. Connection between different business activities for the purpose of claiming depreciation.5. Interpretation of 'used for the purposes of the business' in the context of initial depreciation allowance.Issue-Wise Detailed Analysis:1. Entitlement to Initial Depreciation Allowance:The primary issue was whether the assessee company was entitled to initial depreciation allowance for the factory building erected in the year of account ending on 31st March, 1950. The assessee claimed initial depreciation under section 10(2)(vi) of the Income-tax Act, but the claim was disallowed by the Income-tax Officer, Appellate Assistant Commissioner, and the Appellate Tribunal. The Tribunal stated, 'We are satisfied that the assessee is not entitled to any depreciation allowance in respect of this building, because it was not used for the purposes of the business which in fact was not carried on in the year of account.'2. Necessity of Carrying on Business and Using the Building:The judgment emphasized that for claiming initial depreciation, it is necessary that the business should be carried on in the year of account and the building should be used for the purposes of the business. The court stated, '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.' The assessee's argument that the building was in passive use due to installation and trial runs was not accepted as sufficient for claiming depreciation.3. Pre-Production Activities and Carrying on Business:The court examined whether pre-production activities such as installation, trial runs, and proving of machine tools constituted carrying on of business. It concluded that these activities, although essential prerequisites for actual manufacture, did not amount to carrying on business. The court noted, 'None of the activities referred to was an activity which was calculated to produce profits. The activities which were calculated to produce profits did not start till four months after the close of the year of account.'4. Connection Between Different Business Activities:The judgment addressed whether the business of selling imported textile machinery and the business of manufacturing machinery were connected for the purpose of claiming depreciation. The court held that there was no connection between the two activities, stating, 'The factory had no such relation because the factory was being erected for the purpose of doing a different business by the assessee company which had not yet started.'5. Interpretation of 'Used for the Purposes of the Business':The court interpreted the phrase 'used for the purposes of the business' in the context of initial depreciation allowance. It emphasized that the building must be used for the purpose of the business carried on by the assessee in the year of account. The court stated, '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.'Conclusion:The court concluded that the assessee company was not entitled to initial depreciation allowance for the factory building as it was not used for the purposes of the business in the year of account. The question submitted to the court was answered in the negative. The court also highlighted the potential injustice caused by the lacuna in the law and requested the Taxing Authorities to consider the assessee's case sympathetically. The judgment stated, '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.'