Commissioner of Income Tax vs Industrial Plants Ltd.

Ajit K. Sengupta, J.—In this reference u/s 256(2) of the income tax Act, 1961 (''the Act'') for the assessment years 1976-77 to 1979-80 the following common question of law has been referred to this Court:

Whether, on the facts and in the circumstances of this case, the Tribunal was justified in cancelling the order of the ITO passed u/s 154 of the income tax Act, 1961 withdrawing depreciation on plant and machinery allowed in the original assessment?

The facts are that the factory of the assessee-company was under lock-out throughout the relevant previous year. The facts were corroborated in the Director''s report that the lock-out in the factory was declared with effect from 14-12-1974 which was still continuing to the last day of the relevant previous year. But through mistake depreciation on plant and machinery in the said factory was allowed in the original assessment. The ITO was of the view that in the circumstances the factory did not work even for a day during the years under reference and, therefore, the assessee was not entitled to any depreciation allowance, but as depreciation had already been allowed, it was definitely a mistake apparent from the record. He initiated action u/s 154 of the Act to rectify the mistake to which the assessee objected. The ITO held that depreciation was allowable when the assets owned by the assessee were also used for the purpose of the business or profession of the assessee. He pointed out that since the factory was closed since 14-12-1974, the factory was not in use because of the complete cessation of work and, therefore, depreciation was wrongly allowed in the original assessment. He referred to the decision of the Supreme Court in the case of The Liquidators of Pursa Limited Vs. Commissioner of Income Tax, Bihar, and concluded that on the facts and in the circumstances of the case it would be evident that there was neither active nor passive user of the machinery and plant of the factory of the assessee. He, therefore, withdrew depreciation of Rs, 4,97,620 for the assessment year 1976-77. Similarly, for the other, assessment years, the ITO passed identical orders withdrawing the depreciation allowed earlier.

The Commissioner (Appeals) considered the contentions and the facts of the case as mentioned by the ITO. He found that the issue involved was a debatable point of law on which different opinions were possible. He was of the view that the ITO was not justified in applying section 154 and, therefore, cancelled the order. The Commissioner (Appeals) did not consider the contention of the assessee which was made on merit as he has allowed the claim of the assessee on legal ground.

On further appeal, the Tribunal heard both the sides and perused the orders of the ITO and the Commissioner (Appeals)., The Tribunal observed that, as pointed out by the Commissioner (Appeals), the scope of section 154 is limited. The Tribunal after going through the facts of the case and the decisions relied on before it was of the view that two different options are possible. The Tribunal, accordingly, sustained the order of the Commissioner (Appeals).

At the hearing before us contentions which were before the Tribunal have been reiterated. There is no dispute that in the factory a lock-out had to be declared by the employer. The question is, however, whether in such a case where the plant and machinery could not be worked because of the lockout the assessee is entitled to the depreciation. There is a divergence of judicial opinion on this question. The Madras High Court, in the case of Commissioner of Income Tax, Tamil Nadu-I Vs. Vayithri Plantations Ltd., considered the decisions of the different High Courts. There the machinery was installed and kept ready for use but could not be used due to extraneous circumstances. The Madras High Court was of the view that the word ''used'' would also be extended to the passive user. Inasmuch as the machinery which was kept ready could not be used for labour unrest, it should be taken that the machinery was in use as contemplated by the Act. After referring to the several decisions of the different High Courts as well as the Supreme Court, the Madras High Court observed as follows:

The result of these cases is to establish that the machinery could be ''used'' for the purposes of the business so long as it is kept ready for such user. Any ''forced idleness'' of the machinery cannot disentitle the assessee from getting the benefit of the allowance. In the present case, from the directors'' report, which has already been extracted and the contents of which are not at all in dispute, it is clear that the assessee was prevented from using the machinery because of the frequent labour unrest. In these circumstances, we consider that, in the present case, the assessee would be eligible for the allowance as the machinery was kept ready for use and in that sense had been ''used'' for the purpose of that business, as contemplated under the provision. (p. 681)

In our view, it will appear from the divergent judicial opinion on the construction of the expression ''used'' in section 32 of the Act that the said expression has been interpreted to mean active as well as passive user by the assessee. In other words, to decide this question, a long-drawn process of reasoning is necessary and conceivably two different opinions are possible. This cannot be done in a proceeding initiated u/s 154. The Supreme Court in the case of T.S. Balaram, Income Tax Officer, Company Circle IV, Bombay Vs. Volkart Brothers, Bombay, held that where two conceivable views are possible and where long drawn process of reasoning is necessary to ascertain the mistake, it will not be a mistake apparent from the record. We are of the view that having regard to the divergence of judicial opinion on the question raised this is not a fit case where ITO could have invoked the jurisdiction u/s 154 for withdrawing depreciation on the plant and machinery on the ground that the plant and machinery was not used because of the lock-out. We, therefore, answer this question in this reference in the affirmative and in favour of the assessee. There will be no order as to costs.

Sen, J.

I agree.