TMI Blog1968 (2) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... ries 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 apart 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 Indust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee 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 on in the 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 betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng cloth and other types of cloth or goods of the said Bhor Industries on certain terms and conditions hereinafter mentioned." 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, suggest 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, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 y 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 carrying on the processing work of the Bhor Industries. 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, on 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 be entitled to instal at its own expense at the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for 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 be 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. Clause 4 provides for the Bhor Industries making additions to the special kind of machinery, which it may supply for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 undertaken by the assessee as the work of supplying labour and skill. We find, however, that having regard to the special terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod of carrying on the 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 the 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 quotas, licences and permits, etc., and to place at the disposal of the lessees such quotas, licences and permits as could be legally transferred and the lessees covenanted to provide and allow t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness, 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract 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. 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 a 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 a 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 succeeding years. What Mr. Joshi argues is that the unabsorbed deprerciation under this clause (b) is by fiction treated as the allowance fo 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 for 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 machiney, 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 processor 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 rev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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