At the instance of the Commissioner of Income-tax the Appellate Tribunal, Bombay, has stated the case under section 66(1) of the Income-tax Act, 1922, and referred to this court for its opinion the following question of law :
'(1) Whether, on the facts and circumstances of the case, and in law the Tribunal was justified in allowing the assessees claim for depreciation under section 10(2)(vi) of the Act ?'
'(2) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 10,804 incurred by the assessee is allowable as a deduction under section 10 ?'
The assessment year under consideration is 1955-56, the relevant previous year being 1953-54 ending on 30th June, 1954. The assessee is a public limited company carrying on the business of manufacturing sugar from sugarcane. Since sugarcane was in short supply, the assessee, with a view to avoiding uneconomic competition, entered into an agreement with Messrs. Joara Sugar Mills (hereinafter called the mills) on 4th November, 1953. The material terms of that agreement is contained in clause 1, which reads :
'The company will not work its factory for the season 1953-54 in consideration whereof the mills agree to share the profits on the sale of the sugar manufactured in their factory in the proportion of one hundred to the mills and sixty-three to the company.'
In pursuance of this agreement, the assessee did not work its factory during the account year, received Rs. 1,50,632 under the arrangement set out in the agreement dated 4th November, 1953, offered in the return submitted for that year the aforesaid amount for assessment as its business income and claimed allowance under section 10(2)(vi) of the Act on the depreciation of its machinery for that year. The Income-tax Officer and the Appellate Assistant Commissioner concurred in disallowing the claim but on a further appeal by the assessee, the Tribunal by its order dated 3rd November, 1961, held that the machinery was kept ready for use in that year and therefore, the assessee was entitled to full depreciation. Thereupon, the Commissioner moved the Tribunal under section 66(1) of the Act to state the case and refer to this court the first of the two questions set out in the opening paragraph. In the course of the proceedings initiated upon that application the assessee in its reply dated 5th March, 1964, wanted the Tribunal to refer the second of the two questions and, relying upon Girdhardas & Co. Ltd. v. Commissioner of Income-tax, the Tribunal did no on the view that the question arose out of its order and was also one of law.
So far as the second question is concerned, we are unable to share the opinion of the Bombay High Court in Girdhardas & Co. Ltd. v. Commissioner of Income-tax, which was later followed by the Rajasthan High Court in Educational & Civil Reserve Fund No. 1 v. Commissioner of Income-tax to effect that, where a losing party applies under section 66(1) of the Act for a reference, the other party also may ask for a reference of other questions of law which arise from the order of the Tribunal. Before a reference can be made, there must be an application which is made within the period of limitation prescribed by section 66(1). Secondly, where it is made by an assessee, it must be accompanied by a deposit of Rs. 100. Thirdly, the application itself has to be made in the form prescribed by rule 22A of the Income-tax Rules, which must not only be signed by the assessee or by the authorised representative but which must also state the question of law arising out of the order that is desired to be referred to the High Court. Finally, the rules of this court require that the amount deposited under section 66(1) should continue to be there till the reference is answered. It is plain enough that, in this particular case, the assessee could have applied for referring the second question but it did not choose so to do. That being so, we see no good reason why the requirements of law should be dispensed with in favour of such an assessee and it should be allowed to derive the advantage of such a reference. We are not here concern ed with a winning party who could never apply for a reference and we should not be regarded as expressing any opinion on the question whether it could ask for such a reference without a regular application under section 66(1). In our opinion, the second question could not have been referred to this court without an application under section 66(1) duly made by the assessee and we decline to answer it.
On the first question, we think the view taken by the Tribunal is incorrect. In the opinion of the Tribunal the word 'used' as occurring in section 10(2) should be given a wider meaning and it should be regarded as embracing passive as well as active user. Where, therefore, the machinery was kept ready for use - though not actually used - under an express contract under which profits of business were derived, it should be held that the machinery was used for the purpose of business. In support of this view, the Tribunal relied upon Commissioner of Income-tax v. V. Bhaskar Sathe and Commissioner of Income-tax v. Dalmia Cement Ltd. We, however, agree with the contrary view taken in Bhikaji Venkatesh v. Commissioner of Income-tax and Central Provinces Manganese Ore Co. v. Commissioner of Income-tax. In our opinion, such allowance is given under section 10(2) of the Act not for depreciation of the machinery as such but for depreciation as a consequence of carrying on the business. We derive some support for our opinion from the following observations of the Supreme Court in Liquidators of Pursa Ltd. v. Commissioner of Income-tax :
'The wordsused 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). The word used has been read in some of the pool cases in a wide sense so as to include a passive as well as active user. It is not necessary, for the purposes of the present appeal, to express any opinion on that point on which the High Courts have expressed different views. It is, however, clear that in order to attract the operation of clauses (v), (vi) and (vii) the machinery and plant must be such as were used, in whatever sense that word is taken, at least for a part of the accounting year. If the machinery and plant have not at all been used at any time during the accounting year, no allowance can be claimed under clause (vii) in respect of them and the second proviso also does not come into operation.'
In our opinion, the basic concept underlying this allowance is that depreciation should result as a consequence of the machinery being actually used or employed in the earning of income. That being so, it is not material whether or not the machinery is kept ready for use so long as it is not actually used in the earning of income. That being our view, we are unable to accept the wider interpretation of the word 'used' as given in the Bombay and Patna cases.
In the view we have taken of the two questions, we answer the first question in the negative and decline to answer the second question. We direct that the assessee shall pay all costs of this reference. Hearing fee Rs. 100.