1. The short question raised on this reference under section 66(2) of the Indian Income-tax Act relates to the claim of the assessee to set off its unabsorbed depreciation of the past years against the assessable income of the assessment year 1958-59 with which we are concerned.
2. The assessee is a private limited company incorporated in the year 1942. Some of the person interested in this company were also interested in another incorporated company known as 'Bhor Industries Limited' and in the month of March, 1958, the entire block of the shares of the assessee-company were purchased by the Bhor Industries Ltd. and since that time onwards the assessee-company became a 100% subsidiary of the Bhor Industries Ltd. Now, the assessee-company, since its inception in 1942, did the business of processing of cloth. The nature of the business carried on by it, as described by the assessee, was that other parties sent their cloth to the company for being dealt with in the way they desired, such as bleaching and/or dyeing and/or calendering and/or printing and such other process as the owner of the cloth may require. In the beginning the company also used to purchase some cloth on its own account and have it processed. The whole processing work of the company was done with its own machinery and with its own skill. For the purpose of carrying out the processing work the company had purchased the necessary machinery costing about Rs. 2,36,608. Except for three short periods, one of 11 months in the year ended 31st March, 1953, the second of two months in the year ended 31st March, 1954 and the third of two months in the year ended 31st March, 1955, during which the company gave its factory together with its apparatus on lease to a stranger, the company carried on the business of processing by itself, and all throughout the time the major portion of the work done was of the Bhor Industries Ltd. During the account years 1946-47 to 1955-56 the company either sustained losses or else made very small profits so that full effect could not be given in those years to the depreciation allowance to which the company became entitled under section 10(2) (vi). At the end of the account year 1955-56, the position was that there was a loss carried forward to the extent of Rs. 45,076 and unabsorbed depreciation to the extent of Rs. 92,395 for the year 1957-58. The computed profits of the company were Rs. 64,486, and, after deducting the depreciation allowable for the current year, the assessable net profits came to Rs. 64,067. These profits were first sought to be set off against the carried forward loss of Rs. 45,076, leaving a balance of Rs. 18,991, which was set off against the unabsorbed depreciation brought forward amounting to Rs. 92,395. The result thus was that at the end of the assessment year 1957-58 the loss to be carried forward was nil and the amount of unabsorbed depreciation came to Rs. 73,404. In the assessment year 1958-59, with which we are concerned in the present reference, there was an assessable profit of Rs. 80,210. The assessee claimed to set off this profit against the amount of the unabsorbed depreciation of the past years amounting to Rs. 73,404. The claim, however, was not accepted by the Income-tax Officer, who took the view that the business which the assessee had carried on during the assessment year was not the same business which it had carried on in the previous years, to which the amount of unabsorbed depreciation of Rs. 73,404 pertained. Now, the reason why he took the said view was that in his opinion certain material changes had taken place in the nature of business carried on by the assessee during the relevant assessment year and as a result of the said changes the business which the assessee carried on in the assessment year could not be regarded as the same business which it had carried on the earlier years. Now, what had happened was this. On the 17th February, 1956, the Bhor Industries Ltd. decided to enter into a contract with the assessee-company for processing their goods on certain terms and conditions and by the use of a special kind of machinery, which the Bhor Industries intended to import from foreign countries and supply to the assessee-company, and on the same day corresponding resolutions were also passed by the board of directors of the assessee-company to enter into a contract with the Bhor Industries Ltd. for processing their goods on certain terms and conditions. In view of the said contract proposed to be entered into with the Bhor Industries, the assessee-company required space for installing the special kind of machinery, which was to be supplied to them by the Bhor Industries Ltd. and the board of directors of the assessee-company therefore resolved to sell a part of their existing machinery. In accordance with these resolutions, a contract was entered into between the two companies on the 17th of December, 1956, and the new machinery supplied by the Bhor Industries Ltd. having been installed, the assessee-company sold off its old machinery by stages and by the 31st of March, 1957, nearly the whole of the old machinery was sold off excepting one item of about Rs. 8,000. It was on the construction of the terms of the contract entered into between the Bhor Industries Limited and the assessee-company on the 17th February, 1956, and on the further facts that subsequent to the entering into this contract the assessee-company did in the assessment year only the work of the Bhor Industries Limited which was a special kind of work, and had sold off practically the whole of its own machinery that the Income-tax Officer held that the assessee did not carry on in the assessment year the same business which it had carried on in the earlier years and consequently the unabsorbed depreciation relating to the earlier years could not be set off against the profits of the assessment year. According to him, the processing in the assessment year was done on the machinery belonging to the Bhor Industries Limited, which was a special kind of machinery for the manufacture of plastic sheets. This special kind of work which was done in the assessment year, was not done as a separate section as it constituted the whole of the work that was done by the assessee during the assessment year and, consequently, the assessee during the assessment year had not done its old business of printing and dyeing on its own machinery and raw material but had operated on the machines of another and, consequently, the business could not be said to be the same kind of business. The view taken by the Income-tax Officer, that the business carried on in the previous year was not the same kind of business as was done in the assessment year, was accepted by the Appellate Assistant Commissioner, in appeal. According to him, the business which was carried on during the assessment year under consideration, was that of manufacturing of unsupported plastic cloth from the cloth supplied by the Bhor Industries Limited with the help of machinery supplied by that company and, therefore, was not the business which was carried by it previously. The manufacture of unsupported plastic cloth from chemicals cannot be said to be processing of cloth which was the business previously carried on. Even if the company had processed some book-binding cloth for M/s. Bhor Industries Ltd., as claimed by the assessee, that could, in the circumstances of the case, only be said to be part of the new business. In the further appeal before the Appellate Tribunal, the only question debated was whether the business carried on by the assessee in the account year ended on the 31st March, 1958, was the same business, which it had carried on before the said account year. The Tribunal has stated in its order that the hearing proceeded before them on the footing that if the business carried on by the assessee in the account year ended March 31, 1958, was the same business as it had carried on before the said account year, then the assessee's contention was to be allowed; otherwise it was to fail. The Tribunal, however, held on the question which was debated before it that the conclusion of the departmental authorities that the business, which the assessee had carried on in the assessment year was not the same which it had carried earlier years, was correct. Having considered the terms of the contract between the two companies and certain other facts, the Tribunal held that the identity and integrity of the business carried on in the assessment year could not be said to have been the same as in the earlier years as contended by the representative for the assessee and, consequently, the assessee will not be entitled to set off the unabsorbed depreciation of the earlier years in the assessment year. According to the Tribunal, on the terms of the contract and the other facts disclosed on the record, the contract entered into between the two companies on the 17th February, 1956, 'could not be regarded as an ordinary trade contract entered into between two companies, as between a company carrying on a certain business and the other being a constituent of it, in the course of its carrying on its cloth processing and finishing business.' The facts on which it based its conclusion were that subsequent to the entering into of this contract, the assessee sold off almost the whole of the machinery that had been used by it in carrying on its business in processing and finishing cloth in prior years. The small part of the machinery, which still remained with the assessee-company, was a calendering bowl, but that was not used by it in its work during the assessment year. Thus, the work done in the assessment year was entirely on a different machinery from what was used in the prior years and moreover the machinery, which was used for the processing and finishing of cloth in the assessment year, was a special type of machinery belonging to the Bhor Industries Limited. Whereas, in earlier years, the assessee-company was buying its own chemicals, colours and others raw materials for the purpose of processing and finishing the cloth, which its constituents brought to it for that purpose, under the contract with the Bhor Industries Limited, such material was
3. supplied by the Bhor Industries itself and under the terms of the contract, material supplied by the Bhor Industries Limited was to be utilised only for their work and the balance had to be returned to the Bhor Industries. According to the Tribunal, the trend of the agreement would suggest that the assessee-company had to do exclusively the work of the Bhor Industries and would not be permitted to do any other work. These facts, according to the Tribunal, constituted a material change in the nature of the business carried on by the assessee-company in the assessment year making it different from the business which it had done earlier. One effect of the change was that whereas in the prior years the assessee-company could accept anybody's orders for processing, it was now to do the processing and finishing the cloth only for the Bhor Industries Limited. Since the work for the purpose of processing and finishing was to be done on machines which were different from the machines used by the assessee for doing the work of others, the circumstance that the machinery was supplied by the Bhor Industries and was owned by it and the further fact that under the contract it had a right to make alterations or additions to the machinery were indicative of the business of the assessee-company carried on during the assessment year being different from what was carried on by the assessee-company in previous years. The Tribunal accordingly upheld the decision of the departmental authorities and dismissed the assessee's appeal before it. The assessee's application under section 66(1) having been rejected, it applied to this court under section 66(2) and on that application the Tribunal was called upon to draw up a statement of the case and refer to this court the following two questions :
'1. Whether, on the facts and in the circumstances of the case, the applicant company is entitled to set off its unabsorbed depreciation of past years amounting to Rs. 73,404 (Rupees seventy three thousand four hundred and four) against the assessable income of Rs. 80,210 (Rupees eighty thousand two hundred and ten) earned by the applicant-company in the assessment year 1958-59
2. Whether the Tribunal misdirected itself in law or acted without evidence in holding that the business of the applicant company in the assessment year 1958-59 was not the same as in the preceding years from the inception of the company ?'
4. It may be pointed out that on the footing on which the controversy had proceeded before the departmental authorities and the Tribunal, question No. 2 is the main question to be determined and the answer to question No. 1 would depend upon the answer given to question No. 2.
5. Mr. Joshi, learned counsel for the revenue, however, has argued that the answer to question No. 1 is not wholly dependent on answer to question No. 2, but there is an independent aspect of the question No. 1, which will have to be considered even if the answer to the second question is given against the department and in favour of the assessee. We will consider this contention of Mr. Joshi when we come to consider question No. 1. We will proceed to dispose of question No. 2 first.
6. The view taken by the departmental authorities and the Tribunal is that, as a result of the contract entered into between the two companies on the 17th February, 1956, and having regard to the manner in which the contract was actually worked out, the business carried on by the assessee company during the assessment year 1958-59 could not be regarded as the same business, which it had carried on in the earlier years. Now, as we have already pointed out earlier, from its inception in 1942 up to the time it entered into the contract with the Bhor Industries Limited, the assessee had carried on the business of processing of cloth by which was meant the treating of the cloth supplied to it by its customers in the way they desired, such as bleaching, dyeing, calendering or printing or other processes, During these years its main customer was the Bhor Industries Limited and it had processed the various kinds of cloth which the Bhor Industries had supplied to it for different kinds processing work on it. The question to be considered is whether under the contract entered into with the Bhor Industries on the 17th February, 1956, the assessee-company had contracted to do a different kind of work altogether which could not be considered as of the type, kind or category, which it was doing in earlier years. Now, the preamble to the contract entered into between the parties states as follows :
'Whereas the said Laxmi Printing Works have a factory in Bombay for processing and finishing cloth and whereas Laxmi Printing Works have agreed to process and finish P. V. C. leather cloth and plain book binding cloth and other types of cloth or goods of the said Bhor Industries on certain terms and conditions hereinafter mentioned.'
7. So far as this preamble is concerned, it refers to the assessee-company as having a factory for processing and engaged in doing the work of processing and finishing cloth and the work, which is contemplated to be done by the assessee-company under the contract is again referred to as processing and finishing of certain kinds of cloth and goods belonging to the Bhor Industries. The preamble, therefore, in our opinion, suggests that it was a contract entered into between a company doing processing work and a customer wishing to have his processing work done on certain terms and conditions. It is however, argued that certain terms and conditions of this contract show that it is not a trade contract between a person doing business of processing and his constituent requiring processing work done on its, goods, but that it is a contract under which the assessee will not be doing its own processing work but will be undertaking to do the processing work of the Bhor Industries Limited on the basis of certain service terms. In other words, what is argued is that, whereas formerly the assessee-company was doing business of processing, the effect of the contract is that the processing work will be regarded as the work of the Bhor Industries Limited itself carried out through the labour and skill supplied by the assessee company as its agents or servants. We will, therefore, proceed to consider the terms of the contract on which reliance is placed and see what their effect is.
8. Clause 1 of the contract provides that electric power, water charges, fuel and oil and other items of expenses including labour charges would be borne by Laxmi Printing Works. The Bhor Industries shall at its own expense supply to Laxmi Printing Works the necessary cloth for the purpose of processing and finishing. Bhor Industries shall also supply the Lakshmi Printing Works the necessary chemicals, colours and other raw materials required for the purpose of processing and finishing the cloth. The said Laxmi Printing Works shall utilise such cloth and such chemicals, colours and other raw materials for the purpose of processing and finishing for the said Bhor Industries. It is argued by Mr. Joshi that the effect of this clause is that everything necessary for the processing work as such will be supplied by the Bhor Industries and the assessee-company will supply the labour and skill for the work and allow its factory to be utilised for the purpose bearing the charges, for the running of the factory, such as electric power, water charges, fuel and oil, etc. It is no doubt true that under this clause, for the work agreed to be done for the Bhor Industries, the Bhor Industries have agreed to supply certain material, which, in carrying out the processing work of other customers, the assessee-company may have to supply itself. But that, in our opinion, will not change the nature of the activity of the assessee-company. Its activity in the earlier years was that of processing. The same activity also continues under the present contract. The circumstances that certain material of a special kind, which is required to be used for the purpose of the processing work required to be done on behalf of the Bhor Industries will be supplied by the Bhor Industries will no doubt make the terms of the contract with the Bhor Industries different from the contracts entered into by the assessee with its other customers, but the contract in essence is a contract for doing the processing work entered into by the assessee in the course of its business activity, which is to do processing work for its customers as desired by them. Since the processing work desired in the present case was a special kind of work requiring special material, provision was made in the contract for the supply of the same by the customer. Thus, we see nothing in this clause which will have the effect of turning the Laxmi Printing Works from a concern carrying on the business of processing into an agent, employee or servant of the Bhor Industries on the processing work of the Bhor Industries.
9. Clause 2 relates to the chemicals, colours and raw materials supplied by the Bhor Industries for the execution of its work. This clause again, in our opinion, is quite consistent with its being a contract entered into by a customer with a processing concern on certain special terms. Clause 3, in which considerable reliance is placed on behalf of the revenue, provides as follows :
'Laxmi Printing Works shall use its own machines for the purpose of processing and finishing cloth for Bhor Industries. Bhor Industries shall also entitled to install at its own expense at the factory of the said Laxmi Printing works any further or special machinery which they may consider fit or desirable for the purpose of processing and finishing the goods. All such machinery shall lie with Laxmi Printing Works will at the risk of the said Bhor Industries. However, Laxmi Printing Works will be responsible for the maintains of the same and the said Bhor Industries shall on the termination of this agreement be entitles to take away all such machinery which they may have installed at the factory of Laxmi Printing Works.'
10. It is argued on behalf of the revenue that what was intended under this clause was that the machinery for the processing work will be supplied by the Bhor Industries and work will be done only for the Bhor Industries on the said machinery. That this was what was intended by this clause is also clear from the subsequent events, which show that Bhor Industries as a matter of fact installed new machinery so as to be suitable for its work and practically the whole of the apparatus, which was till then being used by the assessee was disposed of by it. We do not find, however, from the said clause that what was intended was that the assessee was to abandon its business of processing and take up the work of the Bhor Industries. What is provided under this clause is that the assessee-company had to use its own machines for the purpose of doing the processing work of the Bhor Industries under the agreement. If, however, the Bhor Industries thought it desirable that any further or special kind of machinery should be used for the purpose of processing and finishing its goods, it was at liberty to supply the said machinery to the assessee-company and have it installed in the factory of the assessee for such time as its work under the contract was being done by the assessee-company. It is no doubt true that in pursuance of this clause the Bhor Industries supplied new and special machinery the assessee-company and the assessee disposed of its old machinery. That however, does not mean that the assessee was abandoning its old business and taking to a new kind of business. Having regard to the work which it had undertaken to do under the contract, having regard to the volume of the work which it will be getting under the contract and having further regard to the space in the factory, which would be required for the installation of the new machinery, which was more suitable for carrying out the work of the Bhor Industries and the period for which the work was to continue, the circumstance that the assessee-company disposed of its old machinery, which it might no longer require for an indefinite period and which it may be necessary to dispose of in order to make room the new machinery for executing the work of the Bhor Industries, would not be sufficient to conclude that the assessee was abandoning its old business. Its business activity was one of processing of cloth. It was continuing the same activity but it would now be working more or less for only one customer instead of a number of customers as before. It may be pointed out that even in the earlier years a major portion of its work done was for the Bhor Industries and now under the new contract entered into with the Bhor Industries, it might not possible for it to take up work from other customers. It cannot, therefore, be said that the circumstance that it had disposed of its old machinery is at all indicative of abandoning its old business.
11. Clause 4 provides for the Bhor Industries making additions to the special kind of machinery, which it may supply for the purpose of its own work being carried on conveniently and suitably. We do not think that this clause has any further effect on the nature of the work than clause 3, which we have already considered above. Clauses 5, 6 and 7 are not very material, but it is on clauses 8, 9 and 10 that Mr. Joshi for the revenue has specially relied. Under clause 8 it was agreed between the parties that the consideration for the processing and finishing of the goods of the Bhor Industries as processing charges should be at the rate that may be mutually agreed upon according to the qualities and processes required to be carried out from time to time on submission of bills by the assessee-company. The Income-tax Officer found that the payment made by the Bhor Industries to the assessee-company was at the rate of six annas per pound was to be taken. Before the Tribunal, however, it was stated by the representative for the assessee that the rate was fixed at six annas per pound of pigment used in processing cloth. Relying on this clause in the context of the effect that was given to it in the working out of the contract, Mr. Joshi has argued that what was intended under this clause was that the assessee-company was to be paid the labour charges for the work done calculated on the basis of six annas per pound of pigment used for the processing work and consequently the contract contemplated that the work was to be done thereunder on the basis of labour and work supplied by the assessee and the material being supplied by the Bhor Industries. We find, however, from the wording of the clause itself that the consideration was fixed for the processing and finishing of goods, which, as we have pointed out, was the nature of the business of the assessee right from its very inception. That the rates for processing and finishing of the goods for this particular customer, viz., the Bhor Industries, were fixed on a certain different basis having regard to the material the machinery supplied by the Bhor Industries, did not make the work done anything else excepting the work of processing and finishing, which was the business of the assessee-company.
12. Clause 8, on its wording, far from giving any indication that a new business was being contemplated under this contract, shows that the contract was one which related to the processing and finishing work on the goods of others which the assessee-company was ever carrying on and this clause only provides for special rates to be arrived at by mutual agreement between the parties having regard to certain other special features of the contract between the parties, viz., the supplying by the Bhor Industries certain material, which normally the assessee would be required to use itself and the use of the machinery lent for the purpose of carrying out this work by the Bhor Industries.
13. Clause 9 required the assessee to keep proper separate accounts containing full and accurate particulars of all cloth, chemicals, colours and other raw materials consigned to them by the Bhor Industries for processing and finishing, etc., and the assessee was required to forward to the Bhor Industries monthly statements in respect of the consumption of material in the processing and finishing of the cloth of the Bhor Industries and showing therein the remaining balance with the assessee. Mr. Joshi says that this clause again emphasises the work undertake by the assessee as the work of supplying labour and skill. We find, however, that having regard to the special terms of the contract entered into between the parties, where cloth, chemical, colours, or other raw material, which the Bhor Industries had agreed to supply instead of the assessee finding them itself, this term was necessary to be included in the terms of the contract because the goods supplied by the Bhor Industries were only meant to be used for the processing and finishing work, which was done for it and not for any other customer. This clause, again in our opinion, does not show, as is contended by Mr. Joshi that the nature of the business contemplated under the contract was a different kind of business.
14. Clause 10 related to the termination of the contract by either party by one month's notice in writing and the consequences to follow on such termination. In our opinion, this clause has no bearing on the nature of the work undertaken to be done under the contract by the assessee-company in the context of the point under consideration.
15. On a construction of the terms of the contract itself, it cannot be said, in our opinion, that the work which the assessee had undertaken to do under this contract and its activity in carrying out that work on the terms of this contract would constitute a business of a kind different from the one which it was carrying on before that time. In our opinion, on the construction of the contract itself, it was nothing more than a contract entered into by the assessee in the course of its business of processing and finishing goods with a constituent. Although the contract was attended by certain special terms, it was still a contract for the processing and finishing work, which was always the business activity of the assessee-company; and although in the carrying out of this work the assessee may, instead of using its own machinery, use the machinery supplied to it by the customer and instead of using certain materials of its own in the matter of doing the work, use such material supplied by the constituent, the business of the assessee remained the same as before and the circumstance that whereas business in earlier years was done on the machinery which belonged to the assessee itself, while in the year of account it was done on the machinery supplied to it by the constituent did not change the essential nature of the business activity. So long as the essential nature of the activity remains the same, the change in the manner or method of carrying on that business will not change the nature of the business activity. The assessee's business being that of processing and finishing of goods, so long as nature of the activity remains the same, the change in the manner of carrying out of the business whether with the help of the machinery belonging to the assessee itself or with the help of the machinery which is hired or even lent by the customer for the purpose of carrying out his orders would not change the nature of the business activity. In Commissioner of Income-tax v. National Mills Co. Ltd. a company, which was carrying on the business of manufacturing textiles, went into liquidation and the liquidator let the plant and machinery of the company at a monthly rent for a period of three years on certain terms, which gave the lessee an option to purchase the plant and machinery at the end of the expiration of the lease and the lessors covenanted with the lessee to assist them in the running of the mills and securing quotes, licences and permits, etc., and to place at the disposal of the lessees covenanted to provide and allow the lessors accommodation in the premises for their use as officers and records, free of rent. On the question whether the income from the letting out of the plant and machinery for carrying on the business of manufacturing textiles could be regarded as income from business, it was argued that the income arose from the activity of letting out of the plant and machinery and not from the activity of business. It was held by the Supreme Court that the income derived from the lease of the plant and machinery was income from business. It was observed that in order that the income of the assessee should be business income, it is not necessary that the income should be produced by the assessee utilising the assessee's assets itself and so long as the assets are used as business assets, it is irrelevant whether the business assist are exploited and used by the assessee itself or someone else. Where, instead of carrying on the business by itself, the assessee permits someone else to use the assets and carry on the identical business the activity of the assessee is a business activity. Mr. Kolah has relied on this case for his proposition that the nature of the activity as a business activity does not change because the assessee does not himself employ the business assets but lets it out to others, who employ it in business. The assets it still employed in business by the assessee; there being only a change in the method of employment and such change of method has no effect on the nature of the activity. Mr. Kolah argues that in the case before us the business activity of the assessee has remained the same although there may have been some change in the method of carrying out that activity.
16. Mr. Joshi has sought to distinguish that case on the ground that that case concerned itself with the question as to whether the income was business income or not and not with the question as to whether the business was the same business or a different kind of business. It may be that there is that distinction, which is pointed out by Mr. Joshi. However, in so far as the case holds that the income from the letting of the assets received by the assessee was his income from the business because the asset was a business asset and was still employed in carrying on the same kind of business as was carried on by the assessee, the letting constituting merely a method of carrying on the business, it helps him in the present case to contend that by changing the method of carrying on an activity, the nature of the activity cannot be said to have been changed. The activity carried on by the assessee is the activity of processing. The said activity remains the same under the present contract, though in carrying out the said activity certain special terms with regard to the manner and method of carrying out that activity have been agreed to between the parties to the contract. On the construction of the contract itself, therefore, we hold that the work undertaken to be done by the assessee did not constitute an activity on the part of the assessee, which was different from the activity or business which it carried on in earlier years.
17. The Tribunal has relied on other facts disclosed on the record for carrying out this contract, which, in its opinion, showed that the nature of the business of the assessee had changed. The first was that subsequent to the entering into this contract, the assessee sold the whole of its old machinery and what little remained of it, it did not use in the year of assessment. The new machinery with which the work was done in the assessment year was a special type of machinery which belonged to the Bhor Industries Limited. In carrying out the work under the contract it did not use its own chemicals, colours and other raw materials as it formerly did, not use its own chemicals, colours and other raw material as it formerly did, but used those that were supplied by the Bhor Industries. Although there were no clear terms in the contract that the new machinery would not be utilised for the purpose of carrying out the orders of other customers, according to the Tribunal the trend of the agreement suggested that the assessee-company could not be permitted to do the work of others. In view of these facts the profit making apparatus did not belong to the assessee and the manner in which the work was done in earlier years also changed in the assessment year. It was because of these facts that the Tribunal took the view that the business carried on by the assessee in the assessment year could not be regarded as the same kind of business.
18. We are unable to agree with the view taken by the Tribunal, because, in our opinion, the facts mentioned by it cannot lead to the conclusion that there has been a change of business. As we have already pointed out, the circumstance whether the business in carried on with one's own apparatus or with hired or borrowed apparatus does not make the business different. Supposing a person for a few years uses the apparatus which belongs to him and then for later years dispose of his apparatus and does the business on apparatus which he has borrowed from others. There cannot, in such a case be said to have been a change in his business. The circumstances that for the working of this contract with the customer certain special terms as to the supply of chemicals and colours were entered into would again not change the nature of the business activity. As we have already pointed out earlier, all transactions and contracts entered into in the course of the same business need not have precisely the same terms and conditions and it is quite possible that the terms of two contracts entered into in the course of the same business may vary considerably from each other. What is necessary to be seen is whether the contract entered into with the Bhor Industries in the present case was a contract in the course of the business of the assessee or was it indicative of some other new kind of business undertaken by the assessee. We do not find either on the terms of the contract or on the additional facts from the record relied upon by the Tribunal that a conclusion is possible that the assessee-company had abandoned its former business and had entered upon some different business during the assessment year. We cannot, therefore, agree with the view taken by the departmental authorities and the Tribunal and the second question must consequently be answered in favour of the assessee and against the department.
19. As we have already stated earlier, the controversy before the departmental authorities and the Tribunal was only as to whether the business of the assessee in the assessment year was the same or different business and before the Tribunal the appeal had proceeded on the footing that the success or the failure of the assessee was to depend upon the answer to the said question. In view of the said position adopted by the parties before the Tribunal, the first question arising for determination on the order of the Tribunal would appear to be question whose answer will follow from the answer to the second question. Mr. Kolah for the assessee contended that that is how the question really is. If that be so, on the second question having been answered in favour of the assessee, automatically the first question must be answered in its favour.
20. Mr. Joshi has, however, argued that the first question is not wholly dependent on the answer to the second question, but it has an aspect, which still remains to be considered and it is because its answer does not automatically follow and something still required to be considered in connection with the claim of the assessee relating to the unabsorbed depreciation of past years amounting Rs. 73,404, that the question has been framed. He has in that connection argued that, even assuming that his aspect has not been argued before the Tribunal and considered by it, it is still an aspect of the question, which was raised in the assessment of the assessee, and is, therefore, capable of being argued even though the Tribunal has not considered it. His argument is that the question raised before the Tribunal, whatever may be the basis on which it was argued, was whether the assessee was entitled to claim the amount of the unabsorbed depreciation under the provisions of clause (b) of the proviso to section 10(2) (vi) of the Act. If, on the interpretation of the said provision, he is not entitled to the said allowance, although the argument on this aspect of the matter was not advanced before the Tribunal, it could still be advanced before this court in the present reference and the assessee's claim to the amount be shown to be unsubstainable.
21. Instead of going into this controversy as to whether the aspect which Mr. Joshi for the revenue wants to canvass before us is permissible to be canvassed by him or not, we will proceed to dispose of the aspect on merits. Mr. Joshi's argument is that under section 10(2) (vi) what is allowed is an allowance for depreciation of buildings, machinery, plant or furniture which is the property of the assessee used for the purpose of the business in the assessment year. In order that an allowance by way of depreciation should be permissible to an assessee, the conditions required to be satisfied under section 10(2) (vi) are, firstly, that there must be a business of the assessee in the assessment year and, secondly, the buildings, machinery or plant, etc., belonging to the assessee must be used for the purpose of the business. When we go to clause (b) of the proviso, which deals with the unabsorbed depreciation, what has been provided is that the unabsorbed depreciation shall be added to the amount of the depreciation for the following year and deemed to be a part of that allowance, or, if there is no allowance for that year, be deemed to be the allowance for that year and so on for seceding years. What Mr. Joshi argues is that the unabsorbed depreciation under this clause (b) is by fiction treated as the allowance for the year of assessment and then considered as a permissible allowance for the assessment year and given effect to. Under clause (b), therefore, in order to give effect to the unabsorbed depreciation in the earlier years in the assessment year, it is first to be deemed as an allowance for the assessment year. Now, for an allowance of depreciation in the assessment year, the building, plant and machinery in respect of which the allowance is claimed, must be in use in the said year. Since the fiction under clause (b) treats it as an allowance for the assessment year, it postulates the use of the machinery, plant, etc., in respect of which it is claimed, in the assessment year. According to the learned counsel, if unabsorbed depreciation is to be claimed by the assessee in the assessment year, the machinery in respect of which it relates must be in use in the assessment year. In the present case he says that the machinery in respect of which depreciation was claimed was no longer in use; practically the whole of it having been sold off and a little part of it, which remained, had not been employed in doing any work. According to the learned counsel, therefore, the unabsorbed depreciation is not capable of being claimed by the assessee in the present case.
22. We do not agree with this interpretation which the learned counsel has put on the provision of clause (b) of the proviso. It is not disputed that the amount of Rs. 73,404, which is the amount of the unabsorbed depreciation, is made up of the depreciation allowed in respect of the earlier years during which earlier years, the machinery in respect of which depreciation was allowed, was in use and the depreciation claimed was clearly permissible. Why it was not absorbed in the earlier years was that there were no profits against which it could be absorbed. Now, this unabsorbed depreciation, which, under the law, was allowed to be carried forward, had to be deemed to be an allowance in the assessment year under clause (b) of the proviso to section 10(2) (vi). Now what clause (b) says is that if there is depreciation, which was allowed in earlier years and which remained unabsorbed and, therefore, carried forward to the assessment year and added to the depreciation of that year and if there be no allowance in that year, it would be treated as an allowance for that year. The only qualification for it to be treated as an allowance for the year is that it must have been properly allowed in earlier years and by reason of its not being absorbed, must have been allowed to be carried forward to the assessment year. The qualification of its being allowable on the basis of the machinery in respect of which it is claimed being in use was properly satisfied when the depreciation was allowed. There is nothing in clause (b) of the proviso to section 10(2) (vi) which requires the qualification to be satisfied again, viz., that the machinery in respect of which it has been claimed in past years is in use in the assessment year also. Supposing for instance the assessee has a plant on which depreciation has been allowed in a number of years, but the depreciation has remained in arrears because there were no profits against which it could be set off and in a later year the plant becomes scrap and is replaced by another plant. On the argument advanced by Mr. Joshi, the unabsorbed depreciation will not be available to the assessee to be set off in the assessment of the later year. It may be pointed out that the whole basis of the depreciation allowance being allowed is that the assessee may be allowed to be reimbursed in respect of the plant or machinery, which he has used for the purpose of his business for earning profits on which he pays tax and which in the process of the business wears out and deteriorates. On the argument advanced by Mr. Joshi, if the plant is used right up to the time it becomes scrap, the moment it is replaced by another plant, the depreciation which has been allowed to the assessee in the earlier years in which he has used the plant and which unfortunately for him he has not been able to set off against the profits, is lost to him because the plant is no more in the year in which there are profits to claim a set off. In our opinion, therefore, the interpretation that is sought to be put on the provision of clause (b) of the proviso to section 10(2) (vi) by the learned counsel for the revenue cannot be accepted and it cannot be said that in order to get advantage of the unabsorbed depreciation carried forward to the assessment year under the said provisions, the plant or machinery in respect of which the depreciation had been allowed, must still be in use in the assessment year.
23. In our opinion, therefore, this aspect of the first question, which Mr. Joshi has sought to urge before us for the first time, even though it be allowed to be argued, cannot avail him to get an answer to the said question in favour of the department.
24. In the result, therefore, our answer to each of the two questions referred to us is in the affirmative.
25. The assessee will get its costs from the Commissioner.
26. Questions answered in the affirmative.