1. The assessee company was incorporated on the 15th May, 1946. After incorporation the business that the assessee company did was to sell in India certain textile spinning machinery made by H & B American Machine Co., of United States of America. There was also an arrangement with this American Company by which the assessee company was to manufacture these machines in India and sell them and for this purpose the assessee company set up a factory. The building of the factory was completed before the 31st March, 1950, the major portion of the plant and machinery was also installed in this factory, but the actual production of textile machinery was not started till four or five months after the 31st March, 1950. We are concerned with the year of account of the assessee company which ends on the 31st March 1950, and for that year of account the assessee company claimed initial depreciation within the meaning of section 10 (2) (vi) of the Income-tax Act. That depreciation was not allowed by the Taxing Department and the disallowance was upheld by the Tribunal and the substantial reason for this disallowance was that the assessee company did not carry on the business of manufacturing textile machinery in the year of account, and inasmuch as it did not carry on this business, it was not entitled to initial depreciation within the meaning of section 10 (2) (vi).
2. Section 10 (2) (vi) deals with three different kinds of depreciation. The first is normal depreciation and that normal depreciation is given in respect of 'such' buildings, machinery, plant or furniture being the property of the assessee. 'Such' is equated with what appears in section 10 (2) (iv), viz., that it must be a building, machinery, plant or furniture used for the purposes of the business. The second part of section 10 (2) (vi) deals with initial depreciation and that is where the buildings have been newly erected or the machinery or plant is new, and this initial depreciation is given in respect of the year of erection as far as buildings are concerned and the year of installation as far as machinery or plant are concerned. The second part of section 10 (2) (vi) makes it clear that this initial depreciation is a further sum, a sum in addition to the normal depreciation permissible under clause (vi) and it is clear that the building, machinery or plant referred to in this part of clause (vi) are the same building, machinery or plant which have been referred to in the earlier part of clause (vi). In other words, just as for the purpose of being entitled to normal depreciation the building, machinery or plant must be used for the purpose of the business, similarly in order to be entitled to initial depreciation the building, machinery or plant must be used for the purpose of the business. Now, the building, machinery or plant must be used for the purpose of the business and the business contemplated is the business, the profits of which are being assessed to tax, because section 10 (1) provides that the tax shall be payable by the assessee under the head 'Profits and gains of business, profession or vocation carried on by him, and it is in respect of this business that under sub-section (2) various allowances are permissible and one of the allowances is the allowance referred to in clause (vi) in respect of depreciation. Therefore, the scheme of section 10 (1) and (2) is clear. To start with there must be a business which is being carried on for the purpose of earning profits and those profits are being assessed to tax. It is in respect of that business that the assessee claims various allowances under section 10 (2) and one of the allowances is depreciation, whether normal or initial. Therefore, in order that the assessee can be entitled to depreciation under section 10 (2) (vi) he must carry on a business which should yield profits and in respect of which allowance can be claimed. It is not necessary that the business should in fact yield profits. The carrying on of a business may result in loss; but the particular activity carried on by the assessee must be such as must be calculated to yield profits. The test is not the actual making of the profits; the test is whether the nature of the activity is such as possibly to yield profits to the assessee.
3. In this case, although the factory building was erected in the year of account, the question that we have to ask ourselves is whether the factory was used in connection with a business which was carried on within the meaning of section 10 (1), the expression 'carrying on' having the connotation which we have already suggested that expression should have in order to bring the business within the ambit of section 10 (1). The facts are clear and undisputed. What has been relied upon by Mr. Parpia on behalf of his client is that one hundred workers, permanent and temporary, were engaged in this factory in the year of account, that a licence was obtained for working the factory, that certain parts of the building were used for certain purposes and that certain tools were tested in order to satisfy the company whether they would be proper for the ultimate purpose of manufacturing the textile machinery. To sum up this activity, what was done up to the end of the year of account was certain pre-production operations which had to be carried out before the actual production started, and to use the language of Messrs. A. F. Ferguson & Co. from whom the assessee company obtained a letter in this connection : 'While the actual manufacture of the parts did not start during the year, the buildings were in actual use due to installation, trial runs and proving of the wide range of machine tools. This is a prerequisite of actual manufacture and time involved was nearly ten months.' Therefore, the activity indulged in by the assessee company was - and we will assume that in favour of the assessee company - an activity which was essential and a prerequisite before the actual manufacture could start, and on these facts the question is whether it could be said of the assessee company that it carried on business in the year of account. Now, none of the activities referred to was an activity which was calculated to produce profits. The activities which were calculated to produce profits did not start till four months after the close of the year of account. The profit making process, which is the essential ingredient of the carrying on of the business, only came into play when the work of production started some time after the 31st March, 1950. Till the 31st March, 1950, however necessary and essential the activities of the assessee company were, however important it was to test tools and to do other things which had to be done before actual manufacture started, these processes and activities had no connection with the making or yielding of profits.
4. What Mr. Parpia has emphasised is that initial depreciation is a permissible allowance if the building is erected in the year of account and what is emphasised by him is that the Legislature wanted to give an impetus to businessmen and industrialists to start new factories and to put up new machinery and therefore this initial depreciation was given, and what is said is that the test and the main test laid down by the Legislature is that a new building should be erected in the year of account, and if such a building is erected, then the assessee should not be deprived of this depreciation. Now, it is fallacious to suggest that the only condition laid down by the Legislature is that the building should be erected in the year of account. The further condition laid down by the Legislature is that the building must have been used for the purpose of the business in the year of account. Therefore, the three conditions that are necessary before an assessee becomes entitled to initial depreciation allowance are : (1) A business must be carried on by the assessee, (2) for the purpose of this business a building must be erected in the year of account, and (3) the building must be used for the purposes of the business. It is only when all these three conditions are complied with that the assessee can claim an allowance under this section. We are fully conscious of the anomaly and inconvenience which is likely to be caused to an assessee by putting this interpretation upon section 10 (2) (vi). In this very case, because the building was completed at the end of the year of account and it did not go into production for four months thereafter the assessee company cannot claim this allowance in the year of account because it did not carry on business, nor can it claim this allowance in the subsequent year of account because the building was not erected in that year of account. Therefore, as Mr. Parpia rightly says, if our interpretation is right there must be a synchronization between the erection of the building and the carrying on of the business, and if there is any time lag between the erection of the building and the carrying on of the business then the assessee would be deprived of this allowance.
5. Now, as we have had occasion often to point out, it is futile both for the Taxing Department and for the assessee to look for logic in the provisions of the Income-tax Act. Undoubtedly, if a construction which can legitimately be placed upon the Income-tax Act can avoid anomalies and inconsistencies, we should prefer that interpretation rather than the one which leads to anomalies and inconsistencies, and also if an interpretation can be legitimately put which would benefit the subject as against the Taxing Department, we would accept that interpretation in preference to the other. But, in our opinion, looking to the scheme of section 10 (2) it is not possible for us to put the construction suggested by Mr. Parpia.
6. In the first place, he says that we must give a very wide meaning to the expression 'used for the purposes of the business' and he says that on the facts of this case we should hold that the factory was used for the purposes of the business. Now, the difficulty is not in putting a wide construction upon the expression 'used' which we are prepared to do, but the difficulty lies in the expression 'purposes of the business'. Faced with this Mr. Parpia says that we must construe 'carrying on' differently when we are approaching section 10 (2) (vi) and consider the question of initial depreciation from the construction we would put when we consider section 10 (1) and the carrying on of the business in connection with the other clauses of section 10 (2). That, in our opinion, is a contention impossible to accept. If the words 'carried on by him' in section 10 (1) are the governing words which apply to all allowances claimable under section 10 (2), then we cannot possibly give on meaning to that expression when we are dealing with one allowance and a different meaning to it when we are dealing with another allowance. Therefore, if a business is not carried on for the purpose of one of the several allowances mentioned in section 10 (2), it is equally not carried on for the purpose of the allowance mentioned in clause (vi).
7. With regard to the meaning of the expression 'carrying on' there cannot be much doubt because the Supreme Court, in Liquidators of Pursa Ltd. v. Commissioner of Income-tax, has considered the scheme of section 10 (2) (iv) and section 10 (2) (v), (vi) and (vii), and at page 272 the learned Judges point out :
'The words 'used for the purposes of the business' obviously mean used 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 under section 10 (1).'
8. It is said by Mr. Parpia that, even so, the assessee company was carrying on business in the year of account because it was selling textile machinery even if it had not started any factory, and Mr. Parpia says that if this business was carried on by the assessee company then it is sufficient to enable it to claim an allowance under section 10 (2), and it is further urged by Mr. Parpia that we cannot separately consider the business of selling textile machinery and of manufacturing it. Now, in the first place, no connection has been suggested between selling imported textile machinery and manufacturing it in India. Mr. Parpia says that from the very start when the agreement was entered into with the American company, the assessee company contemplated manufacturing textile machinery. Now, to contemplate a thing is not the same as doing it, and however deep the contemplation and however solemn the resolve, the actual production and the actual manufacture, as already pointed out, did not start till after the 31st March, 1950. Therefore, the only business that was carried on up to the 31st March, 1950, was the business of selling textile machinery. It is clear that in order to claim initial depreciation with regard to this factory, the factory must have some relation to the business carried on by the assessee company. The factory had no such relation because the factory was being erected for the purpose of doing a different business by the assessee company which had not yet started. In this very case before the Supreme Court to which reference has been made, a similar question arose, because there the assessee was doing both the business of selling sugar and also manufacturing sugar, and the sale of the machinery and plant of this company, and after holding that 'the sale of the machinery and plant of this company, and after holding that 'the sale of the machinery and plant was not an operation in furtherance of the business carried on by the company but was a realisation of its assets in the process of gradual winding up of its business which eventually culminated in the voluntary liquidation of the company', the Supreme Court considered this question from another aspect and this is what the learned Judges say :
'Even if the sale of the stock of sugar be regarded as carrying on of the business by the company and not a realisation of its assets with a view to winding up, the machinery or plant not being used during the accounting year at all and in any event not having had any connection with the carrying on of that limited business during the accounting year, section 10 (2) (vii) can have no application to the sale of any such machinery or plant.'
9. Therefore, in the case before us, the factory or the building in respect of which the assessee company is claiming depreciation must have a connection with the limited business which the assessee company was doing in the year of account, viz., the selling of textile machinery. It was not doing the more comprehensive business which it contemplated, viz., the manufacture and sale of textile machinery. Therefore, for the purpose of deciding whether the assessee company is entitled to this allowance we have not to consider a business with regard to which preparation had been made and which was proposed to be carried on later on, but we have only to consider that limited business which was actually carried on in the year of account.
10. Mr. Parpia strongly relied on a judgment of this Court in W. I. Vegetable Products Ltd. v. Commissioner of Income-tax. That judgment, in our opinion, far from helping Mr. Parpia's contention, really goes against him. What we were there considering was the expression 'setting up of a business' used in section 2 (11) and we pointed out that there was a difference between setting up of a business and the commencement of a business and at page 158 we said :
'The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced.'
11. Now, here we have to consider not the setting up of the business but the commencement of the business, and even if the business was set up in the sense that the building of the factory was complete and part of the machinery was installed, there was an interregnum between the setting up an the ultimate commencement of the business which took place four months after the close of the year of account.
12. Mr. Parpia also referred to a decision of the Madras High Court in General Corporation Ltd. v. Commissioner of Income-tax. The facts there were entirely different from the facts we have before us. There actual business of mining went on, that business was discontinued, and after discontinuance it was resumed, and the first thing that was done in order to resume the business was a certain amount of prospecting work and the expenses of this prospecting work were claimed as expenses of a business which was carried on, and the Court held that although actual mining operation had not started, the expenses of the prospecting work were permissible allowances. Now, apart from the fact that in this case a business had already commenced, it was carried on, and it had to be temporarily suspended, the other important fact which the judgment clearly sets out is that one of the objects of the company was to search for, win, work and get mica. Therefore, even when it was prospecting or searching for mica, the company was carrying on business within the meaning of its objects as contained in the memorandum of association. Finally, as Mr. Justice Madhavan Nair says at page 355 :
'It is not necessary to discuss the various illustrative cases brought to our notice as the decision whether the business was being carried on must depend in each case on its own facts and not on any general theory of law.'
13. Therefore, we must decide the case before us on the facts which have been established, and on the facts established we agree with the Tribunal that the factory was not used for the purpose of the business which in fact was not carried on in the year of account.
14. The result, therefore, is that the question submitted to us must be answered in the negative.
15. Before we part with this reference, we must draw the attention of the Taxing Authorities to the obvious injustice which the assessee company has suffered by reason of what we must consider to be a lacuna in the law. If the intention of the Legislature was to give an impetus to an assessee who sets up new buildings and installs new machinery, then there is no reason why this particular assessee should not get the benefit of initial depreciation. There is no reason on principle why this assessee should have got the benefit of initial depreciation if it had completed its building a few months before the year of account and had commenced production, We, therefore, request the Authorities to sympathetically consider the case of the assessee and to give such relief as they think proper.
16. The assessee to pay the costs of this reference.
17. Reference answered in the negative.