1. This is a reference at the instance of the assessee under s. 66(1) of the Indian I. T. Act, 1922. Two questions are referred to us and they are as follows :
'(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to have the carry forward of the business loss determined by the Income-tax Officer in pursuance of the return filed after the expiry of the period prescribed in the general notice issued under s. 22(1) of the Indian Income-tax Act, 192
(2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to have depreciation on the cost of rollers as revenue deduction ?'
2. The assessee is a co-operative society engaged in the business of manufacture of sugar and having its factory at Ichalkaranji. We are concerned in this reference with the assessment year 1960-61. Now, as far as question No. 1 is concerned, it appears to us to be unnecessary to set out the facts giving rise to this question inasmuch as both counsel are agreed that the answer to be given to this question is concluded in favour of the assessee by the decision of the Supreme Court in CIT v. Kulu Valley Transport Co. P. Ltd.  77 ITR 518. It is accordingly agreed that the question will, in accordance with the decision, be required to be answered in the affirmative and in favour of the assessee.
3. That leaves for consideration question No. 2 only. As far as this question is concerned, in the course of assessment proceedings, the ITO did not allow depreciation to the assessee on rollers to which, in the opinion of the ITO, the assessee was not entitled as per Schedule under r. 8. A contention appears to have been raised in the alternative before the ITO that the entire cost of the rollers should be allowed as revenue expenditure which was also negatived by the officer holding that only when the roller was replaced can the cost of replacement be allowed as indicated by the Schedule. Thus, both the alternative submission of the assessee were negatived by the ITO. There were also a number of other items in the order of the ITO to which the assessee objected and it carried the matter in appeal to the AAC.
4. Before the AAC, it was contended on behalf of the assessee that the previous year of the assessee was the first year of business in which the whole unit of machinery and plant was installed for the first time along with the rollers which were the integral parts of the crushing machinery. Despite the specific provision to the contrary in the Schedule, it was urged before the AAC that this did not mean that no depreciation was allowable on the cost of rollers installed along with the machinery for the first time. The AAC found the argument quite convincing and reasonable. According to the AAC, although nil depreciation is mentioned against rollers in the Schedule, this would only be in the case of subsequent replacement of the rollers when, instead of depreciation on its cost, the full cost of the roller on replacement is to be allowed as revenue expenditure. According to the AAC, therefore, since at the time when the machinery was first installed the rollers formed an integral part of the whole unit, they should not be treated separately but would be entitled to such depreciation as the entire machinery would attract. Accordingly, the ITO was directed to allow depreciation at the rate of 9% on the sum of Rs. 6,22,638 being the cost of the rollers included in plant and machinery. It may be stated that in the appeal the AAC gave partial relief to the assessee so that both the ITO and the assessee filed their respective appeals to the Income-tax Appellate Tribunal. Both these appeals were consolidated and we are only concerned with the portion of the consolidated order dealing with the question of depreciation on rollers. The Tribunal considered the position for itself and held that the assessee was not entitled to have depreciation on rollers. In its view, the roller was not an integral part of the machinery but was something detachable from the body of the machinery. The Tribunal felt that the Schedule was quite categorical and nil rate of depreciation was provided for rollers. If that was so, the Tribunal felt itself unable to accept the reasoning of the AAC. Accordingly, the order and directions given by the AAC to allow depreciation at the rate of 9% on the item were reversed by the Tribunal. It is this reversal which has resulted in question No. 2 being referred to the High Court at the instance of the assessee.
5. Before us, Mr. Munim on behalf of the assessee drew our attention to the Schedule under r. 8 of the Indian I. T. Rules, 1922. The said Schedule is to be found at page 144 of Vol. II of Kanga and Palkhivala's Law and Practice of Income-tax, 4th edn. The Schedule is quite specific and as far as sugar works are concerned, a rate of 9% is provided as the rate of depreciation on the written down value, but the item is mentioned as `A'. `-(iv) Sugar works except rollers'. As far as rollers are concerned then we have another item, viz., Item `A'. -` (xiii) which reads : Rollers used in flour mills and sugar works.' The rate provided is nil and a remark is to be found added which is to the effect that the cost of replacement of the rollers will be allowed as revenue expenditure. Under the Indian I. T. Act, 1922, deduction for normal depreciation is provided under s. 10(2) (vi) and it is made clear by the statutory provision that it will be at the percentage prescribed on the written down value. It is found that as far as certain items are concerned e.g., the rollers in flour mills and sugar works and similarly wooden match frames used in match factories as also salt pans, reservoirs, and condensers, etc., made of impervious clay, bulbs of studio lights, coal tubs, winding ropes, haulage ropes and sand stowing pipes, direct fire glass melting furnaces, a nil rate of depreciation is provided with remarks to the effect that replacements will be allowed as revenue expenditure.
6. Mr. Munim on behalf of the assessee drew our attention to the change effected by the Rules prescribed by I. T. Act, 1961, and it is found by perusal of item F under the head 'Machinery and plant (2) ' that for most of these items for which nil rate of depreciation has been prescribed under the Schedule to the Rules under the Indian I. T. Act, 1922, 100% rate of depreciation is prescribed under the Schedule to the I. T. Act, 1922, which are framed under the I. T. Act, 1961. The effect of the change is easy to perceive. The Act of 1922 and the Rules framed thereunder prescribing the percentage of depreciation as they stand would work in a way adversely in cases of assessee such as the assessee before us who had expended over Rs. 6,50,000 on rollers. Although these rollers were attached to and in that way part of machinery, nil rate of depreciation is prescribed and, therefore, since under s. 10(2) (vi) a deduction by way of such depreciation is only at the prescribed rate and the prescribed rate is nil, no depreciation would be allowed as and by way of deduction. It is only when the rollers outlive their useful life and when they are replaced, that the cost of replacement will be available to the assessee as a revenue deduction. There is thus considerable economic logic in the grievance of the assessee that there is no provision for reduction in the amount expended by the assessee to-words the cost of the rollers installed for the first time along with the machinery of the sugar works. This has been rectified by the new rules. Law, and particularly income-tax law, is not necessarily in consonance with economics or logic. It appears to us that the AAC was swayed by the economic logic and held in favour of the assessee that the provision in the Schedule was applicable only at the replacement stage without there being any warrant in the language of the Schedule to justify such a conclusion. Although the loss to the assessee must be conceded, it is a loss occasioned by the language of the provision and we are inclined to agree with the Tribunal that the language must be given effect to irrespective of the economic consequences. There is no warrant for restricting the application of the Schedule to the rollers subsequently installed as replacement part and of allowing notional depreciation on the rollers which are first installed as an integral part of the machinery. In this view of the matter, it appears to us that the Tribunal was entirely right in rejecting the claim for depreciation made by the assessee. There is equally no substance in the argument that these rollers should be considered to be such items as can be detached from the machinery and plant and the cost of the same should be regarded as revenue expenditure. As the Schedule makes it clear, they are part of the machinery and plant but an item for which no depreciation is provided till the stage of replacement is reached. Thus, on neither footing are we able to accept the contentions raised on behalf of the assessee.
7. In the result, the questions referred to us are answered as follows :
Question No. 1 :
Following the decision of the Supreme Court in the case of CIT v. Kulu Valley Transport Co. P. Ltd. : 77ITR518(SC) , in the affirmative and in favour of the assessee. Question No. 2 : In the negative and in favour of the revenue.
8. Parties, however, will bear their own costs of the reference.