Cessation of business and property income treatment determine depreciation claims, while holding costs may still remain deductible.

Manufacturing activity had in substance ceased where the plant was dismantled, premises were leased, and the business model shifted to rental exploitation of property; depreciation and carry forward or set-off of unabsorbed depreciation were therefore not available on the footing of continuing business. Rental receipts from the properties were assessable as income from property, not business income or income from other sources. Even so, expenditure referable to holding and preserving the assets remained deductible to the extent connected with that holding.

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Issues: (i) Whether the assessee had ceased to carry on business during the relevant years so as to disentitle it to depreciation and carry forward/set-off of unabsorbed depreciation; (ii) Whether income from letting out the properties was assessable as income from property or as business income or income from other sources; (iii) Whether, even if no business was carried on, the assessee was still entitled to depreciation and set-off of unabsorbed depreciation carried forward from the income of the material year; (iv) Whether the assessee was entitled to deduction of expenditure referable to the holding of the assets.

Issue (i): Whether the assessee had ceased to carry on business during the relevant years so as to disentitle it to depreciation and carry forward/set-off of unabsorbed depreciation.

Analysis: The directors' reports showed closure of the manufacturing activity, dismantling and disposal of the plant, leasing of the premises, lack of finance, and a shift towards developing the property as a source of rental income. The factual position pointed not to a temporary lull but to a cessation of the original business.

Conclusion: The assessee had ceased to carry on business in the relevant years, and the claim to depreciation and set-off of unabsorbed depreciation on that footing failed.

Issue (ii): Whether income from letting out the properties was assessable as income from property or as business income or income from other sources.

Analysis: The letting out of the properties was treated as an independent source of income after the manufacturing business had come to an end. The rentals arose from ownership of property and not from carrying on the former business.

Conclusion: The rental income was assessable as income from property.

Issue (iii): Whether, even if no business was carried on, the assessee was still entitled to depreciation and set-off of unabsorbed depreciation carried forward from the income of the material year.

Analysis: Since the business had in fact stopped, depreciation attributable to the discontinued business could not be allowed and the unabsorbed depreciation could not be carried forward and set off against income of the relevant years.

Conclusion: The assessee was not entitled to depreciation or set-off of unabsorbed depreciation carried forward.

Issue (iv): Whether the assessee was entitled to deduction of expenditure referable to the holding of the assets.

Analysis: Expenditure incurred in retaining and holding the assets, including expenses connected with maintaining the property and the assets, was allowable to the extent it was referable to such holding, even though no business income was earned. The allowance was consistent with the governing principle that expenditure incurred to preserve income-producing assets can be deductible.

Conclusion: The assessee was entitled to deduction of the expenditure referable to the holding of the assets.

Final Conclusion: The reference was answered mainly against the assessee on the core business and depreciation issues, but the deduction claim relating to holding expenses was allowed.

Ratio Decidendi: Where the manufacturing activity has in substance ceased and the assets are retained only for disposal or for earning rental income, the business cannot be treated as continuing for depreciation and set-off purposes; however, expenditure incurred in preserving or holding the assets may still be deductible to the extent it is referable to that holding.

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