Commissioner of Income Tax vs Heera Financial Services Ltd.

P.D. Dinakaran, J.—The Revenue has preferred the above appeal against the order of the tribunal, Madras ''A'' Bench dt. 15th Dec, 2006 in ITA No. 977/Mad/2003 for the asst. yr. 1997-98 raising the following substantial questions of law:

(a) Whether in the facts and circumstances of the case, the Tribunal was right in allowing depreciation on the film roll leased out which was not used by the lessee and returned in the same year?

(b) Whether in the facts and circumstances of the case, the Tribunal was right in allowing depreciation on an asset which was neither used nor kept ready for use, applying the theory of passive user?

2.1 The relevant assessment year is 1997-98. The assessee is doing business of hire purchase and leasing finance. For the assessment year, the assessee bought positive film rolls for a sum of Rs. 6,35,982 on 30th Aug., 1996 and entered into an agreement with M/s Shivashree Pictures on 30th Aug., 1996 for leasing the films. In the P & L a/c for the period ending on 31st March, 1997, lease rent was disclosed as Rs. 1,97,500. The assessee claimed depreciation on the films leased out. But, subsequently, on account of the strike in the film industry, the lessee returned the film rolls to the assessee in September, 1997 stating that the film rolls could not be used by it and accordingly, requested for cancellation of lease agreement. The AO even though disallowed depreciation originally, later allowed u/s 143(1) of the Act. But the assessee pleaded that it was following mercantile system of accounting and accordingly, it had credited the lease rent in the accounts and also claimed depreciation. The lease rent which was accounted as income during the period ending on 31st March, 1997 and which could not be recovered was written off as bad debt during the accounting year 31st March, 1998.

2.2 The AO reopened the assessment and held that the lease rent offered by the assessee at Rs. 1,97,500 was claimed as bad debt in the subsequent assessment year and the assessment for the asst. yr. 1998-99 had become final and therefore, disallowed the depreciation originally allowed and withdrew the depreciation of Rs. 6,35,98b.

2.3 Aggrieved by the said order, the assessee preferred an appeal before the CIT, who allowed the claim of the assessee, following the ratio laid down by this Court in Commissioner of Income Tax, Tamil Nadu-I Vs. Vayithri Plantations Ltd., , wherein it was held that the assets "kept ready for use" were eligible for depreciation/development rebate.

2.4 The Tribunal confirmed the order of the CIT on the appeal preferred by the Revenue. Hence, the present appeal.

The substantial questions of law raised by the Revenue revolves on the pivotal issue as to the application of the theory of passive user for the purpose of allowing depreciation on the assets.

4.1 In CIT v. Vayithih Plantation Ltd. (supra), the issue for consideration before a Division Bench of this Court, was when the machinery kept ready for use during the relevant, accounting year, but could not be used because of labour unrest, could it be taken that the machinery had been taken for use for the purpose of business as contemplated u/s 33 of the IT Act, 1961, (for brevity ''the Act'') for entitlement of the assessee to the grant of development rebate,

4.2 In the said case, the assessee company completed construction of the building and installation of the machinery before 31st March, 1971, but could not start the regular manufacture of the machinery because of the frequent labour unrest. However, the assessee claimed development rebate in respect of those machineries u/s 33(1) of the Act.

4.3 The AO rejected the claim on the ground that the machinery in respect of which the claim was made had only been installed, but had not been used in the year of account and hence, amount could be allowed as deduction in the next year when the machinery was actually brought into use. On appeal, the AO was directed to grant the allowance. On further appeal by the Revenue, the Tribunal held that when the machinery was installed and kept ready for use, but could not be'' used for extraneous circumstances, it would amount to passive user and accordingly, agreed with the CIT in directing the AO to grant allowances.

4.4 On reference, the Division Bench held that as the machinery was kept ready for use, but could not be used because of labour unrest, it had to be taken that, the machinery had been used for the purpose of business as contemplated u/s 33 of the Act and accordingly, the assessee would be entitled to development rebate.

4.5 While so holding, the Division Bench, followed the ratio laid down in COMMISSIONER OF INCOME TAX, BOMBAY Vs. VISWANATH BHASKAR SATHE., , The Liquidators of Pursa Limited Vs. Commissioner of Income Tax, Bihar, and Whittle Anderson Ltd. Vs. Commissioner of Income Tax, Bombay City I, .

5.1 In CIT v. Viswanath Bhaskar Sathe (supra), the Bombay High Court has held, that the word ''used'' in Section 10(2)(vi) of the IT Act, 1922, has to be given a wider meaning and embraces passive as well as active user. The machinery which is kept idle may well depreciate, particularly, during the monsoon season. The ultimate test would be whether the profits sought to be taxed could have been made without the particular user of the machinery that is relied upon. If the answer is that the profit could not have been earned except by maintaining the factory in good working order and that involves the user of the factory and machinery, the assessee is entitled to depreciation.

5.2 The apex Court in Liquidators of Pursa Ltd. v. CIT (supra), considering the expression ''used for the purpose of business'' as found in Section 10(2)(iv) of the Act, 1922, held that the expression ''used for the purpose of business'' means 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 u/s 10(1) of the IT Act, 1922. While interpreting the. word ''used'', the apex Court held that the word ''used'' had been read in some of the pool cases in a wide sense so as to include a passive as well as active user. In order to attract the operation of Sections 10(2)(v), (vi) and (vii) of the IT Act, 1922, the machinery and plant must be such as were used in whatever sense that word is taken at least for a part of accounting year.

5.3 The Bombay High Court in Whittle Anderson Ltd. v. CIT (supra), where the Court had again dealt with the case of machinery owned by a person who had entered into a pooling arrangement regarding cotton, ginning and pressing, following the decision of the apex Court in Liquidate of Pursa Ltd. v. CIT (supra), held that although two out of four presses which were directly in the pooling arrangement were to remain idle while the two presses worked, it was clear that the owners of those presses, which were idle, had to keep them ready for use at any time and the contingency for their use could also arise at any time, upon the terms of the agreement and with regard to the definition of the word ''used'', it was observed that even the presses which remained under forced idleness were in use during the entire period of the year.

5.4 The Division Bench of this Court in CIT v. Vayithiri Plantation Ltd. (supra) observing that the apex Court in Liquidators of Pursa Ltd. v. CIT (supra) did not express any opinion on the correctness or otherwise of the decision in what are called as the pool cases, held that any forced idleness of the machinery cannot disentitle the assessee from getting the benefit of the allowance.

In the instant case, as in the case of CIT v. Vayithiri Plantation Ltd. (supra), the film roll leased out could not be used by the lessee, even though it was kept ready for the use, on account of strike in the film industry. Therefore, the film roll in question, which were kept under forced idleness, were in use during the entire period of the year. Consequently, the assessee, even though was a passive user, is deemed to be an active user within the meaning of the word ''used'', as the film roll was kept ready for use and therefore, the Tribunal, in our considered opinion, had rightly applied the ratio laid down in CIT v. Vayithiri Plantation Ltd. (supra) and allowed depreciation as claimed u/s 32 of the Act.

Finding no substantial question, of law arises for consideration, the appeal is dismissed. No costs.