BEAUMONT, C.J. - This is a reference made by the Commissioner of Income Tax under Sec. 66(2) of the Indian Income Tax Act, which raises a question lying in a very small compass but one easier to state than to answer.
It appear that the assessee, during the year of assessment, which was the year ending March 31, 1936, owned a ginning factory in Dhulia, and he was a member, with the owners of other ginning factories, of a pool. The Commissioner finds as a fact, that during the year of assessment the factory of the assessee was not actually employed in the work of ginning; and presumably it was not so employed under some arrangement made by the pool, although I have not been referred to any clause of the pool agreement under which factories of some of the members Can be closed. But under clause 16 of the agreement, it is provided as follows :-
'In order to entitle the parties hereto to keep their respective shares in the said pool as mentioned in clause 7 hereof, they shall keep and maintain at Dhulia during the continuance of this agreement his or their gins or other working plant with the machinery appertaining thereto as they exist at the date of this agreement and shall at all times at their own expenses keep the same in good repair and condition and in working order and shall no not during the said term remove or permit to be removed any such gi gins or machinery at Dhulia to any other place or places : Provided always that any of the parties hereto shall be at liberty if they so desire to close his or their factory or factories and dispense with his or their staff and workmen for any period during the contract period, retaining nevertheless his or their right to receive his or their share in the said pool.'
That clause appears to impose on the assessee the obligation during the year of assessment at his own expense to keep his gins and other working plant and machinery in good repair and condition and working order; and it is on account of this obligation that he becomes entitled to a share of the profits made by the pool.
The question is, whether, in these circumstances, the Income Tax Officer was correct in deciding that the assessee was not entitled to any allowance on account of depreciation of the machinery in his cotton gin. Now, depreciation is allowed under Sec. 10(2)(vi) of the Indian Income Tax Act 'in respect of depreciation of such building.' machinery, plant or furniture, To find out what the asses see' at the rates specified therein. To find out what 'such' machinery, plant or furniture means, we have to refer to sub-sec. (iv) of Sec. 10(2) which authorises an allowance in respect of insurance of machinery, plant and furniture used for the purpose of the business. The question, therefore, resolves itself into this - was the machinery of the assessee during the year of assessment used for the purposes of the business from which his profit was derived I agree with the view expressed by the Commissioner of Income Tax, and in the cases to which he refers, that 'used' denotes actual user, and not merely being capable of being used. But that does not dispose of the question whether, when machinery is kept ready for use at any moment in a particular factory under an express contract from which taxable profits are earned, the machinery Can be said to be used for the purposes of the business which earns the profits, although it is not actually worked. To my mind, it is so used. The business from which the profits were derived was that of ginning factories, and the contribution of the assessee to that business was the obligation to keep his machinery ready for actual use at any moment. It is, no doubt, true, as the learned Advocate General says, that it is possible to give the word 'used' a more limited meaning and hold that it includes only the actual work of the machinery. But I think that the word 'used' in this section may be given a wider meaning and embraces passive as well as active user. Machinery which is kept idle may well depreciate, particularly during the monsoon season. It seems to me that the ultimate test is, whether, without the particular user of the machinery relied upon the profits sought to be taxed could have been made; and as I read the agreement in the case, the profits of the assessee during the year under assessment could not have been earned except by his maintaining his factory in good working order, and that involves the user of the factory and the machinery. That view is not in any way inconsistent with the views of the Lahore High Court in Shri Gopalji Company v. Commissioner of Income Tax, Punjab and N.W.F. Provinces and in Radha Kishen & Sons v. Commissioner of Income Tax, Punjab, where the facts were different. The case of Bhikaji v. commissioner of Income Tax, Central and United Provinces, is no doubt nearer to this case, but it does not appear from the report of that case that there was any covenant to maintain the machinery in question in reserve ready for actual use during the year of assessment; and I base my decision entirely on the existence of such a covenant in the case.
In my opinion, the question raised must be answered in the negative. We allow the assessee costs on the original side scale.
BLACKWELL, J. - I agree.
NOTE : The case of Bhikaji Venkatesh referred to in the above judgment is reported below :-