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Income tax Reference No. 12-D of 1959, decided on 28^th May 1962.

Depreciation----

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Kohlus let out on hire for sugarcane crushing season alone Depreciation for full year, whether allowable" Seasonal factory", "worked by the assessee", meanings of Indian Income tax Act, 1922, S. 10(2)(vi) Indian Income tax Rules, 1922, r. 8, second proviso.

The assessee, who carried on the business of manufacture of kohlus, let out, as part of his business, some of the kohlus manufactured by him along with the pans to agriculturists, for the preparation of gur from sugarcane during the crushing season and claimed depreciation in respect of such kohlus for the entire .twelve months of the year, even though the kohlus were actually let' out only for four months in the year. The Appellate Tribunal allowed the assessee's claim. On a reference at the instance of the Commissioner:

Held, that the case was governed by the second proviso to rule 8 of the Income tax Rules and not by the first proviso, and the assessee was entitled to depreciation for the full year under section 10 (2) (vi) of the Income tax Act, read with the second proviso to rule 8, even though the kohlus were let out only for the season consisting of four months.

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 a factory. For the applicability of proviso (2) to rule 8, it is not necessary that the factory should be worked by the assessee himself ; it is enough if the factory is worked by a licensee or a hirer.

The expression "worked" in the second proviso does not mean "worked continuously for the entire year".

[Case Law referred].

Hardayal Hardy and D. K. Kapur for the Commissioner.

G. S. Pathak, R. K. Gauba, B. Dutta and Keshiv Dayal for the Assessee.

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 "

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 1969, the assessee claimed depreciation for full twelve months for the kohlur 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 11th 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.

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 Incometax 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 subsection (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 Chowdhry ((1935)3 ITR 114) further supports this view.

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.

Subsection (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).

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 subsection (2) of that section. Subsection (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 subsection (2) of section 10."

For the purpose of depreciation, it is only clause (vi) of subsection (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 subsection (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, of 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 . . ."

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."

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 he 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 Court in Commissioner of Incometax v. Sahana & Sons. ((1946) 14 I T R 106) 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.

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 applicability 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. ((1958) 34 I T R 155) and Sadhucharan Roy Choudhry, In re ((1935) 3 I T R 114). 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 note 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 & Lally ((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.

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.

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.

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. CAPOO R, J.

I agree.

Question answered in the affirmative.

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