Tax Case (Appeal) v. M/S.chennai Petroleum Corporation Ltd536, Anna Salai, Teynampetchennai-600 018

Dated : 09.07.2013 Coram The Honourable Mrs.Justice CHITRA VENKATARAMANandThe Honourable Ms.Justice K.B.K.VASUKI Tax Case (Appeal) No.358 of 2010---Commissioner of Income Tax-IChennai ... Appellant -vs- M/s.Chennai Petroleum Corporation Ltd536, Anna Salai, TeynampetChennai-600 018 ... Respondent Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of theIncome Tax Appellate Tribunal, Chennai 'A' Bench dated 23.10.2009 passed inITA.No.1822/Mds/2006 for the assessment year 1998-99. For appellant : Mr.T.RavikumarStanding Counsel forIncome Tax Dept. For respondent : Mr.Venkata Narayananfor M/s.Subbaraya Aiyar JUDGMENT (The Judgment of the Court was made byCHITRA VENKATARAMAN, J.) The following substantial questions of law are raised by the Revenue in the present Tax Case Appealpreferred as against the order of the Income Tax Appellate Tribunal, Chennai 'A' Bench dated23.10.2009 passed in ITA.No.1822/Mds/2006 for the assessment year 1998-99."1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunalwas right in holding that the assessee was entitled to claim depreciation of Rs.2,76,68,250/- on theGas Sweetening Plant which was not actually used for the purpose of assessee's business at any timeduring the relevant previous year and when the condition of actual user for the purpose of businessprescribed under Section 32 of the Act has not been fulfilled? 2. The assessee claimed depreciation on Gas Sweetening Plant in the previous year relevant to theassessment year 1998-99. The claim was, however, rejected by the Assessing Officer on the ground that the plant was not used at any time for the purposes of the business, as required under Section32(1) of the Income Tax Act,1961. The plant was built during the previous year relevant to theAssessment Year 1997-98, but on account of non-availability of raw material viz., sour gas, the samewas not put to use. The plant was commissioned by running a test run for the first time during theprevious year relevant to the assessment year 1997-98. Considering the trial run as equivalent toputting the said plant to use, depreciation was allowed for the assessment year 1997-98 by theDepartment. However, on the ground that the assessee had not disclosed the material fact that plantwas not in use during the whole of the previous year relevant to the assessment year 1998-99, theassessment was reopened by issue of notice under Section 148 of the Income Tax Act, 1961. 3. The assessee contended that the plant was ready for use for the year under consideration and thenon-availability of raw material was an impediment to put the plant to use. Hence, the claim fordepreciation could not be denied; the only requirement under law was that plant was ready for use;hence, depreciation should be allowed. The assessee further contended that the asset was in goodcondition and it might be ready for actual use in any minute. The expression 'used' in the Statute,hence, should be understood in wider sense and that 'actual use' must be understood to includepassive use as well as active use. The assessee pointed out to the decision in the case of Commissioner of Income-tax Vs. Oriental Coal Company Limited reported in (1994) 206 ITR 682referred to by the Revenue, to bring out the distinction between the circumstances of a lock-out andthe inability to put to use an asset on grounds beyond the control of the assessee that the claim ofthe assessee be favourably considered for the grant of relief. Thus, placing reliance on the decisionin the case of Commissioner of Income-tax Vs. Union Carbide (India) Limited reported in (2002) 254ITR 488, the assessee requested that the depreciation claim be allowed. Commissioner of Income-tax Vs. Oriental Coal Company Limited reported in (1994) 206 ITR 682referred to by the Revenue, to bring out the distinction between the circumstances of a lock-out andthe inability to put to use an asset on grounds beyond the control of the assessee that the claim ofthe assessee be favourably considered for the grant of relief. Thus, placing reliance on the decisionin the case of Commissioner of Income-tax Vs. Union Carbide (India) Limited reported in (2002) 254ITR 488, the assessee requested that the depreciation claim be allowed. 4. In support of its contention, the assessee also placed reliance on the decisions of this Court in thecase of CIT Vs. Vayithri Plantations Ltd., reported in (1981) 128 ITR 675, decision of the BombayHigh Court in the case of CIT Vs. Viswanathan Bhaskar reported in 5 ITR 621 as well the decision ofthe Delhi High Court in the case of Capital Bus Service (P) Ltd Vs. CIT reported in (1980) 123 ITR404. 5. The claim of the assessee, however, was rejected by the Assessing Officer on the ground thatwhen the asset had never been put to use during the whole of the previous year relevant to theassessment year 1998-99 i.e., the second year of installation of the plant, grant of relief could not bemaintained under law. In so holding, the Assessing Officer placed reliance on the decision in thecase of CIT Vs. Oriental Coal Company Limited reported in 206 ITR 682. Thus, the assessment wascompleted. 6. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals),who also rejected the assessee's appeal, which led to filing of further appeal before the Income TaxAppellate Tribunal. 7. In support of its contention that the machinery, even though was not working on account of non-availability of raw material, yet, in view of its readiness to function, the relief should have beengranted, the assessee placed reliance on the decision in the case of CIT Vs. Heera Financial ServicesLtd., reported in 212 CTR 532, in the case of CIT Vs. Swarup Vegetable Products India Ltd., reportedin 277 ITR 60 (Allahabad) in the case of CIT Vs. Nahar Exports Ltd., reported in 296 ITR 419 and inthe case of CIT Vs. Southern Petrochemicals Industries Corporation Ltd reported in 292 ITR 632. 8. The claim of the assessee was, however, contested by the Revenue pointing out that the decisionof this Court in the case of CIT Vs. Heera Financial Services Ltd reported in 212 CTR 532 wasdistinguishable, since it related to the case of leasing out of certain films and the same could not beused by the lessee. On the other hand, the Revenue placed reliance on the decision of the Karnataka High Court in the case of DCIT Vs. Yellamma Dasappa Hospital reported in 290 ITR 353 andcontended that unless the machinery have been actually put to use, the requirements of law thus notsatisfied, the claim was to be rejected. 9. Referring to the decision in the case of CIT Vs. Vayithiri Planatations Ltd., reported in 128 ITR675, the Department contended that the same related to development rebate; hence, the relief couldnot be granted. 10. It is seen from the order of the Income Tax Appellate Tribunal that there were differencesbetween the view taken by the learned Accountant Member and the learned Judicial Member.Ultimately, it was referred to the learned Third Member. High Court in the case of DCIT Vs. Yellamma Dasappa Hospital reported in 290 ITR 353 andcontended that unless the machinery have been actually put to use, the requirements of law thus notsatisfied, the claim was to be rejected. 9. Referring to the decision in the case of CIT Vs. Vayithiri Planatations Ltd., reported in 128 ITR675, the Department contended that the same related to development rebate; hence, the relief couldnot be granted. 10. It is seen from the order of the Income Tax Appellate Tribunal that there were differencesbetween the view taken by the learned Accountant Member and the learned Judicial Member.Ultimately, it was referred to the learned Third Member. 11. A reading of the order of the Income Tax Appellate Tribunal, particularly of the learnedAccountant Member, shows the reasoning that even though Section 32 was amended and expressiontherein is 'used' by reason of which, unless and until the plant was really put to use, the depreciationcould not be granted. However, going by the decision of this Court in the case of Commissioner ofIncome Tax Vs. Vayithri Plantations Ltd reported in (1981) 128 ITR 675 (Mad), learned AccountantMember agreed with the contention of the assessee that once the plant was ready, the same wasentitled to depreciation. Thus he rejected the contention of the Revenue. Referring to the decision ofthis Court in the case of CIT Vs. Heera Financial Services Ltd reported in 212 CTR 532, whichfollowed the judgment in CIT Vs. Vayathiri Plantations reported in 128 ITR 675, the learnedAccountant Member held that once the plant was ready, the assessee was entitled to depreciation. Insupport of its reasoning, the learned Accountant Member also referred to definition of 'block ofassets' and ultimately held that once admittedly the gas plant was ready to use, it must havesuffered some wear and tear, hence, the assessee was entitled to the claim for depreciation. In thecircumstances, the Accountant Member allowed the appeal. 12. Learned Judicial Member, however, took a different view based on the decision in the case of CITVs. Maps Tours and Travels reported in (2003) 260 ITR 655 as well as in the case of CIT Vs. VayithriPlantations Ltd reported in 128 ITR 675. Learned Judicial Member pointed out that after theamendment to Section 32(1) of the Income Tax Act, 1961 made by Taxation Law (Amendment andMiscellaneous Provision) Act, 1986 with effect from 01.04.1988, assets should be such, as has beenused for the purpose of the business, profession or vocation for at least a part of the year. Thus,unless the assets have been put to use, the claim of the assessee could not be granted. In thisconnection, learned Judicial Member referred to the decision of the Bombay High Court in the caseof Dineshkumar Gulabchand Agarwal Vs CIT reported in 267 ITR 768 holding that the word 'used'meant 'actually used' and not merely 'ready for use'. Learned Judicial Member pointed out that inthe case of CIT Vs. Maps Tours and Travels reported in (2003) 260 ITR 655, cars bought on the lastday of the accounting year were not registered for being brought on road, and there was noevidence of having used those cars before the end of the accounting year in the business of theassessee. Thus, this Court held that the assessee was not entitled to depreciation in respect of thosevehicles. Learned Judicial Member further referred to the decisions in the case of B.Malini and Co.Vs. CIT reported in (1995) 214 ITR 192 (Bombay), in the case of DCIT Vs. Yellamma DasappaHospital reported in 290 ITR 353 and in the case of DCIT Vs. N.K.Industries Ltd., reported in 305ITR 274 (SC) and held that even under the amended provision, the assessee was entitled to the claimfor depreciation, only if the assets were, in fact, used for business purposes. Thus learned JudicialMember rejected the claim of the assessee. 13. On account of conflicting views of the two members, the matter was referred to the ThirdMember- Vice President of the Income Tax Appellate Tribunal, who agreed with the view taken bylearned Accountant Member in favour of the assessee. In coming to this conclusion, learned Vice- President referred to the decision of the Bombay High Court in the case of Whittle Anderson Ltd Vs.CIT reported in (1971) 79 ITR 613, which was also referred to by this Court in the case of CIT Vs.Vayithri Plantations Ltd reported in 128 ITR 675 and held that in order to claim depreciation underSection 32 of the Income Tax Act, 1961, it was not necessary that machinery in question should havebeen actually used in the previous year for the purposes of business. It is seen that the machinerywas kept in the relevant previous year, though not actually used for the reasons beyond theassessee's control. Learned Vice-President referred to the decision of the Bombay High Court in thecase of CIT Vs Viswanath Bhaskar Sathe reported in (1937) 5 ITR 621 (Bom.), rendered under the1922 Act and held that having regard to the similarity of provisions under the 1961 Act and that thedecision in the case of CIT Vs Viswanath Bhaskar Sathe reported in (1937) 5 ITR 621 (Bom.) wassubsequently followed by this Court in the case of Commissioner of Income Tax Vs. VayithriPlantations Ltd reported in 128 ITR 675 (Mad), the claim of the assessee merited to be consideredunder Section 32 of the Income Tax Act. 14. Referring to the decision of the Supreme Court in the case of CIT Vs. Mc.Dowell and Co.Ltd.,(No.2) reported in (2009) 314 ITR 174, learned Vice President pointed out that the Apex Courtremanded the case to the Assessing Officer for finding out the relevant facts and hence, the samecannot be of any assistance. As far as the decision in the case of CIT Vs. Maps Tours and Travelsreported in (2003) 260 ITR 655 was concerned, the judgment turned on its peculiar facts therein.However, in view of the decision of the Bombay High Court in the case of the Whittle Anderson LtdVs. CIT reported in (1971) 79 ITR 613 and the decision in the case of CIT Vs. Viswanath BhaskarSathe reported in (1937) 5 ITR 621 (Bom), learned Vice President agreed with the learned Accountant Member that the case of the assessee merited to be answered in its favour. Thus, theThird Member-Vice President agreed with the Accountant Member and granted the relief. Aggrievedby this, Revenue has preferred this Tax Case Appeal. 15. Section 32 of the Income Tax Act, as is relevant for consideration, reads as under:- " Section 32. Depreciation-(1) In respect of depreciation of - (i)buildings, machinery, plant or furniture being tangibel assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April,1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, thefollowing deductions shall be allowed- (i)in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed, (ii)in the case of any block of assets, such percentage on the written down value thereof as may beprescribed." 16. The Supreme Court had an occasion to consider the phrase 'use for the purpose of business' in (i)buildings, machinery, plant or furniture being tangibel assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April,1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, thefollowing deductions shall be allowed- (i)in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed, (ii)in the case of any block of assets, such percentage on the written down value thereof as may beprescribed." 16. The Supreme Court had an occasion to consider the phrase 'use for the purpose of business' in the case of Liquidators of Pursa Ltd Vs. Commissioner of Income Tax reported in (1954) 025 ITR0265. The facts were that the assessee therein was carrying on business of growing sugarcane andmanufacturing and selling sugar. It commenced the process of winding up of the company by thesale of the factory and other assets in 1943. The agreement for sale of business towards winding upprovided that the vendor was to sell and demise to the purchaser for a certain sum, all the lands,buildings, machinery and plant as on 9th August, 1943, but the stocks of manufactured sugar on thatdate were expressly excluded from the agreement. The assessee continued to sell the sugar stock,valued at Rs.6 lakhs upto June, 1944 and it went into voluntary liquidation in June, 1945. Admittedly,between 9th August 1943 and 10th December, 1943, it being the date of agreement and the date ofsale of the machinery, land and building, the assessee never used the machinery and plant for thepurpose of manufacturing sugar or for any other purpose except that of keeping them in trim and running order. On the question as to whether the assessee was entitled to depreciation during thisperiod, the Supreme Court considered the provisions of Section 10, as amended by Act VII of 1939,which reads as under:-"10.(1) The tax shall be payable by an assessee under the head 'Profits and gains of business,profession or vocation' in respect of the profits or gains of any business, profession or vocationcarried on by him.(2) Such profits or gains shall be computed after making the following allowance, namely :- (i)................(ii)...............(iii).............. (iv) in respect of insurance against risk of damage or destruction of buildings, machinery, plant,furniture, stocks or stores used for the purposes of the business, profession or vocation the amountof any premium paid ;(v) in respect of current repairs to such buildings, machinery, plant, or furniture, the amount paid onaccount thereof ;(vi) in respect of depreciation of such buildings, machinery plant, or furniture being the property ofthe assessee, a sum equivalent to such percentage on the original cost thereof to the assessee asmay in any case or class of cases be prescribed : ............. (vii) in respect of any machinery or plant which has been sold or discarded, the amount by which thewritten down value of the machinery of plant exceeds the amount for which the machinery or plantis actually sold or its scrap value : Provided that such amount is actually written off in the books of the assessee : Provided further that where the amount for which any such machinery or plant is sold exceeds thewritten down value, the excess shall be deemed to be profits of the previous year in which the saletook place .................. " ............. (vii) in respect of any machinery or plant which has been sold or discarded, the amount by which thewritten down value of the machinery of plant exceeds the amount for which the machinery or plantis actually sold or its scrap value : Provided that such amount is actually written off in the books of the assessee : Provided further that where the amount for which any such machinery or plant is sold exceeds thewritten down value, the excess shall be deemed to be profits of the previous year in which the saletook place .................. " The Apex Court pointed out that the critical words which are essentially constituent for the purposeof considering the claim of the assessee was machinery or plant "used for the purposes of business,profession or vocation" . The words "used for the purposes of business" obviously means used for thepurpose of enabling the owner to carry on the business and earn profits in the business. In otherwords, the machinery or plant must be used for the purpose of that business which is actuallycarried on and the profits of which are assessable under Section 10(1). It pointed out that the sale ofthe machinery and plant was not an operation in furtherance of the business carried on by thecompany but was a realisation of the assets in the process of gradual winding up of its business,which ultimately ended up with the liquidation of the company. Even if the sale of sugar be regardedas carrying on of business, the machinery not being used and not having had any connection withthe carrying on of that limited business during the accounting year, Section 10(2)(vii) could have noapplication. 17. In the decision reported in (1971) 79 ITR 613 (Whittle Anderson Ltd Vs. Commissioner ofIncome-tax, Bombay City I. , the word 'used' as found in Section 10(2) of the Act, was considered bythe Bombay High Court. There, the Company which was engaged in Cotton ginning and pressingfactory, entered into a pooling agreement on February 8, 1950 with two other concerns, owning inall 4 presses, which was to be in force till October 20, 1960. On the question whether "such building,machinery or plant" in Clause (vii) means "building, machinery or plant" used for the purposes of thebusiness, profession or vocation", the Bombay High Court held that even though two out of the fourpresses which were directly in the pooling arrangement were to remain idle, while the two pressesworked, the owners of those presses which were idle, had to keep them ready for use at any timeand the contingency for their use could also, upon the terms of the agreement, arise at any time.Having regard to the above meaning of the word "used", even these presses which remained underforced idleness, were held as in use during the entire period of the year. Thus, the assesseecontinued to use its machinery within the meaning of the word "used" under Section 10(2)(vii) and the word "used" in the Section should be understood in a wider sense so as to embrace passive aswell as active use. When machinery was kept ready for use at any moment in a particular factoryunder an express agreement from which taxable profits were earned, the machinery could be said tobe "used" for the purposes of the business which earned the profits although it was not actuallyworked. In so holding, the Bombay High Court followed the decision reported in (1937) 5 ITR 626(Bhikaji Venkatesh Vs. Commissioner of Income Tax). 18. We are in entire agreement with the view expressed by the Bombay High Court in the decisionreported in (1971) 79 ITR 613 (Whittle Anderson Ltd Vs. Commissioner of Income Tax, Bombay CityI.) following the decision reported in (1937) 5 ITR 626 (Bhikaji Venkatesh Vs. Commissioner ofIncome-tax ) in the light of the decision of this Court reported in 128 ITR 675 (CIT Vs. VayithiriPlantations Ltd). 18. We are in entire agreement with the view expressed by the Bombay High Court in the decisionreported in (1971) 79 ITR 613 (Whittle Anderson Ltd Vs. Commissioner of Income Tax, Bombay CityI.) following the decision reported in (1937) 5 ITR 626 (Bhikaji Venkatesh Vs. Commissioner ofIncome-tax ) in the light of the decision of this Court reported in 128 ITR 675 (CIT Vs. VayithiriPlantations Ltd). 19. Even though learned Standing counsel appearing for the Revenue contended that such decisionrelated to the case of development under Section 33 of the Income Tax Act, yet, this Court referredto the decision under Section 32 of the Income Tax Act in the context of the expression 'used for thepurpose of business' as explained in (1954) 25 ITR 265 (Liquidators of Pursa Ltd Vs CIT) and heldthat so long as the business was going and the machinery got ready for use but due to certainextraneous circumstances, the machinery could not be put to use, the said fact could not stand in theway of granting relief under Section 32 of the Act. 20. As far as the decision of this Court reported in 260 ITR 655 (CIT Vs. Maps Tours and Travels) isconcerned, if under law, there is a prohibition on the assessee to put the cars on roads for want ofregistration, considering such prohibition, the claim of the assessee under Section 32 of the IncomeTax Act could not be granted. Thus the above said decision has to be seen in the light of the factsand circumstances of the case; hence, the same would not be of any assistance to the assessee. Infact, learned Standing counsel appearing for the Revenue fairly stated before this Court that in thedecisions reported in (2009) 311 ITR 202 (Commissioner of Income Tax Vs. Southern PetrochemicalIndustries Corporation Ltd.,) and (2008) 301 ITR 255 (Commissioner of Income Tax Vs. SouthernPetrochemical Industries Corporation Ltd.,), this Court had considered the grant of depreciationeven to stand-by machinery. When that being the case, we do not find any justifiable ground todisturb the reasoning of the majority members of the Income Tax Appellate Tribunal. 21. Under the stated circumstances, on the admitted case that business was a going concern and themachinery could not be put to use due to raw material paucity, we reject the Revenue's contention,thereby, confirm the majority view of the Income Tax Appellate Tribunal. 22. In the result, the Tax Case Appeal is allowed. No costs. 1.The Commissioner of Income Tax, Chennai. 2.The Commissioner of Income Tax (Appeals) VI121, Nungambakkam High Court, Nungamabakkam,Chennai-34 3. The Income Tax Appellate Tribunal,Chennai Bench B