COMMISSIONER OF INCOME-TAX vs. GUJARAT MINISTEEL LIMITED

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ITR/192/1988HC GujaratGJHC24013268198816 January 2001Author: HONOURABLE MR. JUSTICE J.M.PANCHAL,HONOURABLE MR. JUSTICE MOHIT S. SHAH4 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the assessee was entitled to depreciation on the building, plant, machinery, and electrical installations for Assessment Years 1977-78 and 1978-79. The Court's reasoning was based on the principle laid down in its own prior decision in Khimji Visram & Sons vs. CIT (1994) 209 ITR 993. This precedent emphasized a liberal construction of Section 37 of the Income-tax Act, 1961, stating that expenditure wholly and exclusively for business purposes, not being capital or personal, should be allowed. The Court interpreted this to include measures for the preservation of business assets and property. Therefore, even during a period of passive use due to market conditions, the assets were considered to be held for the purpose of business, justifying the claim for depreciation. The reference was answered in favor of the assessee and against the revenue.

What were the facts?

The assessee, Gujarat Steel Limited, a mini steel plant, ceased commercial production from August 7, 1975, to April 1978, due to a steel market glut and labor issues. Production restarted in May 1978. For Assessment Years 1977-78 and 1978-79, the assessee initially did not claim depreciation before the Income Tax Officer (ITO). However, before the Commissioner of Income Tax (Appeals) [CIT(A)], an additional ground was raised, arguing entitlement to depreciation on building, plant, machinery, and electrical installations due to their passive use during the non-operational period. The CIT(A) allowed the claim. The revenue appealed to the Income-Tax Appellate Tribunal (ITAT). Due to a difference of opinion, a third member was appointed, who also held that the assessee was entitled to depreciation on these assets for the relevant assessment years.

What were the issues?

1. Whether, in law and on facts, the assessee was entitled to depreciation on its building, plant & machinery, and electrical installations for Assessment Years 1977-78 and 1978-79, considering the passive use of these assets during a period of business cessation. This issue turns on the interpretation of provisions related to depreciation and business expenditure. Assessee's Contention: The assessee argued that despite the plant being non-operational, the assets were in passive use and therefore entitled to depreciation. The CIT(A) and the third member of the ITAT accepted this contention. Revenue's Contention: The revenue challenged the CIT(A)'s finding before the Tribunal, implying that passive use did not warrant depreciation. The revenue's specific arguments before the Tribunal are not detailed in the judgment, but their challenge indicates disagreement with the assessee's claim.

Which sections of the Income-tax Act were involved?

Section 37

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 192 of 1988

For Approval and Signature:

Hon'ble MR.JUSTICE J.M.PANCHAL and Hon'ble MR.JUSTICE M.S.SHAH

============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge? : NO -------------------------------------------------------------- COMMISSIONER OF INCOME-TAX Versus GUJARAT MINISTEEL LIMITED -------------------------------------------------------------- Appearance: MR AKIL KURESHI with MR MANISH R BHATT for Petitioner MR BR SHAH for Respondent No. 1

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CORAM : MR.JUSTICE J.M.PANCHAL and MR.JUSTICE M.S.SHAH

Date of decision: 16/01/2001

ORAL JUDGEMENT (Per : MR.JUSTICE J.M.PANCHAL)

At the instance of the revenue, the Income-tax Appellate Tribunal, Ahmedabad Bench "B" has referred the following question of law for opinion of this Court in respect of Assessment Years 1977-78 and 1978-79 :-

"Whether in law and on facts the assessee was entitled to depreciation on the building, plant & machinery and electrical installations for the A.Ys. 1977-78 and 1978-79 ?"

2.

The assessee is a Limited Company and was running a mini steel plant. The mini steel plant started its commercial production in December, 1974. The plant was running till August 6, 1975. There was a glut thereafter in the steel market and the assessee had also labour problem. Consequently, the plant could not run between the period from August 7, 1975 and April 1978. The plant was restarted in May, 1978. The assessee in assessment year 1977-78 did not claim depreciation before the ITO. However, an additional ground was taken up before the CIT(A) and it was indicated that due to glut in the steel market and labour problem, the assessee was having the passive use of its building, plant, machinery as well as electrical installations and, therefore, entitled to depreciation. The CIT(A) accepted the claim of the assessee for the assessment years 1977-78 and 1978-79. The revenue challenged the finding of the CIT(A) before the Tribunal. In view of difference of opinion, the point was referred to the third Member of the Tribunal who held that there was passive use of the plant and machinery and, therefore, the assessee was entitled to depreciation on the building, plant, machinery and electrical installations.

3.

We have heard the learned counsel for the parties. In our view, the controversy raised in the present reference is concluded by the decision of this Court in Khimji Visram & Sons vs. CIT, (1994) 209 ITR 993. In the said case, the assessee-Company carried on business in cotton on a wholesale basis. It had its office in Ahmedabad. For expansion of its business activities, it purchased a premises in Bombay in May, 1975 and for furnishing them, it handed over its possession to its agent and after furnishing and repairs were over, it commenced its business from January, 1977 from the said premises. The assessee claimed deduction of ground rent, maintenance charges, municipal taxes and depreciation in respect of the premises for the assessment year 1976-77. The assessee's claim was allowed by the Tribunal. On a reference, the High Court has held as under :-

"The general principles relating to business

expenditure are - (a) section 37 of the Income-tax Act, 1961 is required to be construed liberally; (b) section 37 is of general nature and it operates in a wide range covering all expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, which is not capital in nature or personal expenses of the assessee; (c) it may take into account not only the day-to-day running expenses of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process and assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commencing or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business; (d) unless there is express or implied prohibition under other provisions of the Act, if the expenditure is covered by the provisions of section 37, then the necessary deduction is required to be given; (e) the words "profits and gains" in trade are to be understood in their natural and proper sense, i.e. in a sense in which it is understood by a prudent businessman. Therefore, unless the Legislature intended a departure from the principle that an expenditure laid out or expended wholly and exclusively for the purposes of the business and which expenditure is not capital in nature or personal expenses it should not be allowed in computing the income from the business, deduction should be granted for the said expenses; (f) sections 30 to 36 deal with specified expenses and for specific purposes. The nature of expenditure in those sections would be relatable only to the purposes mentioned therein."

4.

In view of the principle laid down by the High Court in the above referred to decision, we are of the opinion that the assessee was entitled to depreciation on the building, plant, machinery and electrical installations for the assessment years 1977-78 and 1978-79. The reference is answered in favour of the assessee and against the revenue.

The reference accordingly stands disposed of with no order as to costs.

(J.M. Panchal, J.)

(M.S. Shah, J.)

sundar/-

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