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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: MOTOR INDUSTRIES CO. LTD. (NO.2)
Court Name: karnataka High Court Judge(s): S. Rajendra Babu, R. V. Raveendran Title: COMMISSIONER OF INCOME-TAX vs MOTOR INDUSTRIES CO. LTD. (NO.2) Case No.: I.T.R.C. Nos.1 to 3 of 1994, Date of Judgment:1997-08-27 Reported As: 1999 PTD 2912 Result: Order accordingly
JUDGMENT
JUDGMENT ' R. V. RAVEENDRAN, J.---These three references under section 256(1) of the Income Tax Act, 1961 ("Act" for short), relate to the order of assessment, dated August 11, 1978, passed in regard to the assessm ent year 1976-77 (year ending December 31, 1975). Feeling aggrieved by the disallowance of certain expenditure in computing income chargeable under the head "Profits and gains of business" and disallowance of certain deductions in computing the total income, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) I, Bangalore. The appeal was partly allowed by order, dated February 28, 1980. Feeling aggrieved, the assessee filed I.T.A. No,322/Bang. Of 1980 and the Department filed I.T.A. No,340/Bang. Of 1980. The Tribunal by a common order, dated October 31, 1981, partly allowed both the appeals. The assessee sought reference of some questions of law in regard to the decision of the Tribunal in I.T.A. No,322/Bang. Of 1980 in R.A. No,962/Bang. Of 1981. The Department sought reference of some questions arising out of the order of the Tribunal in I.T.A. No,322/Bang. Of 1980 and I.T.A. No,340/Bang. Of 1980 in R.As. Nos.2 and 3/Bang. Of 1980. ' In pursuance of the said applications, the Tribunal by order, dated November 30, 1982, has referred the following 12 questions (questions Nos.1 to 9 at the instance of the Revenue and questions Nos.10 to 12 at the instance of the assessee) for opinion: "Whether, on the facts and in the circumstances of the case: (1) The Appellate Tribunal is right in law in holding that the assessee was entitled to get higher depreciation on canteen building? (2) The Appellate Tribunal is right in law in holding that the provision for salary and wages payable for non-utilised leave amounting to Rs,75,51,000 is an admissible deduction?
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(3) The Appellate Tribunal is right in law in holding that expenses incurred in connection with issue of rights shares, constitutes revenue expenditure deductible in computing the business income? (4) The Appellate Tribunal is right in law in holding that depreciation has to be allowed on increase in the value of assets due to fluctuation in exchange rate? (5) The Tribunal was right in upholding the jurisdiction of the Commissioner of Income-tax (Appeals) in entertaining the additional claim of the assessee for weighted deduction under section 35-B on expenses incurred on advertisement and technical literature? (6) The Appellate Tribunal is right in law in holding that the assessee is entitled to depreciation on roads, culverts and drainages around the assessee's factory? (7) The Appellate Tribunal is correct in holding that ground rent, repairs, municipal tax and depreciation in respect of the buildings owned by the assessee and used as residential quarters by an employee, cannot be treated as expenditure resulting in benefit or amenity granted to the employees by the assessee and considered as ' perquisite' for the purposes of section 40-A(5)? (8) The Appellate Tribunal is right in holding that the depreciation allowance has to be allowed on the pipe-line and sanitary fittings treating it as plant and machinery? (9) The Appellate Tribunal is correct in holding that the assessee is entitled for extra-shift allowance on the storage tank as the same is part of plant and machinery? (10) The Income-tax Appellate Tribunal was right in law in holding that the assessee would not be entitled to the benefit of initial depreciation under section 32(1)(vi) of the Income-tax Act? (11) The Tribunal was right in law in holding that the surtax payable is not a proper deduction in computing the total deduction for income-tax purposes? (12) The Income-tax Tribunal was justified in holding that the assessee was not entitled to weighted deduction under section 35-B in respect of insurance premium of Rs,35,581 paid to the Export Credit Guarantee Corporation Limited?" ' Though in paragraph 21 of the statement of case, the Tribunal states that 13 questions are referred, it is seen that only 12 questions are referred. Though the reference sought in regard to the question referred to in paragraph 9 has been rejected, apparently by oversight the Tribunal has stated in paragraph 21 that the question referred to in paragraph 9 is also referred. This is ignored. Question No,(5) has been reframed by the Tribunal. ' Re: Question No,(1): ' This relates to a claim for depreciation on canteen buildings at the same rate applicable for factory buildings, on the basis that they formed part of the factory buildings. The Income-tax Officer disallowed the claim. This was confirmed in appeal. The Tribunal, however, upheld the assessee's claim for higher depreciation. The same question arose in regard to the earlier assessm ent year 1974-75 and this Court, following the decision of the Madras High Court in CIT v. Engine Valves Ltd. (1980) 126 ITR 347 answered the question in favour of the asessee holding that canteen building should be regarded as part of factory buildings. Following the said decision relating to the earlier year, in CIT v. Motor Industries Co. Ltd. (1986) 158 ITR 734 (Kar.), this question is answered in the affirmative, against the Revenue and in favour of the assessee. ' Re: Question No,(3): ' This question relates to the expenses incurred by the assessee in connection with the issue of rights shares. The assessee contended that it is a revenue expenditure deductible in computing business income. The Income-tax Officer rejected the contention and held it to be a capital expenditure. The Appellate Assistant Commissioner and the Tribunal accepted the contention of the assessee. This question arose in regard to the assessment year 1974-75 and this Court held it to be a capital expenditure--vide CIT v. Motor Industries Co. Ltd. (1988) 173 ITR 374. Following the said decision, this question is answered in the negative, against the assessee and in favour of the Revenue.
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' Re: Question No,(4): ' This question relates to entitlement to the benefit under section 43-A on the increase in liability on account of fluctuations in the exchange rates. On account of fluctuations in exchange rates, the assessee revalued its liability in respect of foreign currency loans obtained for purchase of machinery, tools and spare parts as on December 31, 1975, and made a provision of Rs,3,44,838. Out of it, Rs,2,89,582 relatable to machinery was capitalized and apportioned among various assets and depreciation was claimed; and the balance of Rs,55,256 relatable to tools/spares was debited to the profit and loss account as revenue expenditure. The claims were rejected by the Income-tax Officer. The Appellate Assistant Commissioner and the Tribunal held that the assessee was entitled to the benefit of section 43-A. The same question arose in regard to the assessment year 1974-75 and this Court upheld the view of the Tribunal holding that the claim of the assessee also attracted the Board's Circular F. No, 1(408/ 67-TPL), dated October 9, 1967, which properly interpreted the scope and ambit of section 43-A--vide CIT v. Motor Industries Co. Ltd. (1988) 173 ITR 374 (Kar). The Revenue also conceded the correctness of the decision of the Tribunal having regard to the subsequent decision of the Supreme Court in CIT v. Arvind Mills Ltd. (1992) 193 ITR 255. The question is, therefore, answered in the affirmative, against the Revenue and in favour of the assessee. ' Re: Question No,(5): ' In the appeal filed against the order of assessment, the assessee claimed weighted allowance under section 35-B in regard to expenses incurred for advertisement and technical literature. The Appellate Assistant Commissioner held that the assessee was eligible for weighted allowance under section 35-B. The Department challenged the same before the Tribunal on the ground that the claim had not been made before the Income-tax Officer. The Tribunal held that as the material and details were available on record, the Appellate Assistant Commissioner was justified in admitting the additional claim. In this context, the question whether the Commissioner of Income- tax (Appeals) could have entertained the claim of the assessee for weighted deduction under section 35-B is referred. ' Though the assessee had not claimed such weighted deduction before the Income-tax Officer, the Commissioner of Income-tax (Appeals) entertained the claim as the material and details were available in the records. When the necessary material was available and the weighted deduction is permissible under section 35-B, the claim cannot be rejected merely on the ground that it was not made before the Income-tax Officer. It is now well-settled that when the assessment is not under section 143(1), the appellate authority may permit the assessee to claim a deduction or exemption in appeal, which he had not claimed before the Income-tax Officer, particularly when the relevant material is on record--See the decision of the Supreme Court in Jute Corporation of India Ltd. v. ,CIT (1991) 187 ITR 688; Union Coal Co. Ltd. v. CIT (1968) 70 ITR 45 (Cal.t and CIT v. Sayaji Mills Ltd. (1974) 94 ITR 26 (Guj). We, therefore, answer question No,(5) in the affirmative and against the Revenue. ' Re: Question No,(6): ' This question relates to the claim for depreciation on the written down value of roads, culverts and drains within the factory premises. The Income-tax Officer disallowed the claim. The Commissioner of Income-tax (Appeals) and the Tribunal held that the assessee is eligible for such depreciation following the decision of the Bombay High Court in CIT v. Colour Chem Ltd. (1977) 106 ITR 323 and of the Madras High Court in CIT v. Lucas-TVS Ltd. (No,2) (1977) 110 ITR 346. The matter is now covered by the decision of the Supreme Court in CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 wherein it is held that roads and drains laid within the factory premises are necessary adjuncts to the factory buildings to carry on the business activity of the assessee and would fall under the definition of "building" under section 32 and the capital expenditure incurred thereon is admissible to depreciation of written down value. We, therefore, answer question No,(6) in the affirmative, against the Revenue and in favour of the assessee.
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' Re: Question No,(7): ' This relates to the addition of Rs,44,269 by the Income-tax Officer being the amount spent on repairs, municipal taxes and ground rent, and depreciation in respect of the assessee's own buildings allowed to be used as residential quarters by its employees, treating them as expenditure resulting in a benefit or amenity granted to the employees by the assessee considered as a perquisite for the purpose of section 40-A(5). The addition was deleted by the Commissioner of Income-tax (Appeals) and that was affirmed by the Tribunal by following the decision in CIT v. Travancore Tea Estate Co. Ltd. (1980) 122 ITR 557 (Ker). The matter is now covered by the decision of this Court in the case of the petitioner relating to the assessment year 1974-75. (CIT v. Motor Industries Co. Ltd. (1988) 173 ITR 374). Following the said decision, question No,(7) is answered in the affirmative, against the Revenue and in favour of the assessee in regard to (i) depreciation on buildings, and (ii) payment of property tax and ground rent, and (iii) expenditure on repairs. This is subject, however, to a rider in so far as repairs are concerned; what cannot be added under section 40-A(5) is only the amount spent for normal and routine upkeep and maintenance; and any amount spent in excess to meet the special requirements of the employee in occupation can be added under section 40-A(5). Having regard to the modest amount involved in this case, it has to be held that nothing need be added under section 40-A(5). ' Re: Questions Nos.(8) and (9): ' Question No,(8) is whether depreciation is admissible on pipelines and sanitary fittings treating them as plant and machinery. The Income-tax Officer held that pipelines and sanitary fittings, tanks, cannot be held to be plant. He allowed depreciation of only five per cent. And held that extra-shift allowance was not admissible. The Commissioner of Income-tax (Appeals) held that they should be treated as plant and depreciation should be allowed at 10 per cent. This was upheld by the Tribunal. ' Question No,(9) is whether extra shift allowance is admissible on storage tanks treating them as part of plant and machinery. The Income-tax Officer held that storage tanks were not "plant", but only formed part of building. The Commissioner of Income-tax (Appeals) and the Tribunal have accepted the assessee's claim that storage tanks will have to be classified as "plant", and entitled to extra-shift allowance. ' These are covered by the decision of this Court in the case of the petitioner relating to the assessm ent year 1974-75 in CIT v. Motor Industries Co. Ltd. (1988) 173 ITR 374. Following the said decision, this question has to be answered in the negative and against the assessee. This Court held that the question whether water supply system (pipelines/sanitary fittings) and storage tanks are "plant" or not, depends on their relation to the nature of the business carried on by the assessee and the question will have to be decided in each case, on the facts and circumstances, by applying the "functional test" evolved by the High Court of Allahabad in CIT v. Kanodia Warehousing Corporation (1980) 121 ITR 996. As the Tribunal had not determined the matter by applying such principle, this Court answered the question in the negative and held that the Tribunal should apply the functional test evolved in Kanodia's case (1980) 121 ITR 996 (All) and redetermine the facts afresh. ' We find that neither the Income-tax Officer nor the Commissioner of Income-tax (Appeals) nor the Tribunal has examined the matter by applying the functional test. Hence, following the decision in CIT v. Motor Industries Co. Ltd. (1988) 173 ITR 374, we answer questions Nos.(8) and (9) in the negative and hold that the Tribunal shall re-examine whether pipelines, sanitary fittings and storage tanks are "plant" by applying the functional test, and then decide the rate of depreciation and decide whether extra shift allowance is admissible. ' Re: Question No,(10):
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' The assessee claimed initial depreciation of Rs,43,08,219 on machinery, under section 32(1)(vi). The Income-tax Officer denied the same on the ground that manufacture of spark plugs and fuel injection equipment are not manufacture or production of any of the items specified in the Ninth Schedule to the Act. This was confirmed by the Commissioner of Income-tax (Appeals) and also by the Tribunal. ' The assessee contends that section 32(1)(vi) allowed a deduction of 20 per cent. Of the actual cost of machinery or plant installed for the manufacture or production of any of the articles specified in Items Nos.1 to 24 in the list in the Ninth Schedule; that Item No,8 enumerated in the said list is "industrial and agricultural machinery'; the assessee manufactures spark plugs and fuel injection equipment which are fitted in agricultural machines like tractors; that "industrial and agricultural machinery" will include their components also: and, therefore, the assessee is entitled to the benefit of initial depreciation under section 32(1)(vi). ' The Ninth Schedule does not refer to components of industrial and agricultural machinery. Section 32(1)(vi) gives the benefit of initial depreciation in respect of plant and machinery installed for the manufacture or production of any article or thing by a small scale industrial undertaking; but in regard to assessees other than small scale industrial undertakings, initial depreciation is admitted only in regard to manufacture or production of any one or more of the articles or things specified in Items Nos.1 to 24 in the list in the Ninth Schedule. If the legislative intent was to include components or accessories, it would have been specifically mentioned in the list. When the section specifically states that the initial depreciation is available in respect of articles or things specified in Items Nos.1 to 24 in the Ninth Schedule, it is not possible or permissible to include something which is not in the list and read Item No, 8 of "industrial and agricultural machinery and its components". In fact, a comparison with section 33(1)(b)(B)(i) read with the Fifth Schedule is of some assistance to show that where the Legislature intended to include components, it specifically did so. Section 33(1)(b) (B)(i) provided for development rebate at the rates specified in regard to machinery or plant installed for the purpose of business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule. In the list contained in the Fifth Schedule, Item No,4 is industrial machinery as specified, Item No,9 is tractors, earth-moving machinery and agricultural implements, and Item No,(24) is component parts of the articles mentioned in Items Nos.4, 9 and other articles specified. It is thus, clear that manufacture or production of spark plugs and fuel injection equipment for "agricultural machinery" cannot be equated to production of "agricultural machinery'. In fact, in regard to the assessment year 1975- 76, a similar view has been taken by this Court in the case of the assessee, by order, dated March 28, 1989, in I.T.R.C. Nos.189-193 of 1980. The decision of the Income-tax Officer, the Commissioner of Income-tax (Appeals) and the Tribunal is in accordance with law. Question No,(10), is, therefore, answered in the affirmative, against the assessee and in favour of the Revenue. ' Re: Question No,(11): ' The assessee claimed deduction of surtax liability in computing the total income for purposes of income-tax. The Income-tax Officer rejected it on the ground that surtax is a tax on income. The Commissioner of Income-tax (Appeals) and the Tribunal confirmed the said rejection. ' Section 40(a)(ii) provides that notwithstanding anything to the contrary in sections 30 to 39, any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". Even apart from the provisions of this clause, a sum paid as tax on profits or gains of any business cannot be deducted in computing the profits for purposes of income-tax, under the general law of income-tax. This Court in CIT v. International Instruments (P.) Ltd. (1983) 144 ITR 936, has held that surtax payable under the Companies (Profits) Surtax Act, 1964, on the chargeable
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profits is nothing but an additional tax on the profits and gains of an assessee's business and, therefore, surtax cannot be deducted for computing the total income. Hence, question No,(11) is answered in the affirmative, against the assessee and in favour of the Revenue. ' Re: Question No,(12): ' The assessee claimed weighted deduction under section 35-B(1) (b)(ii) in respect of insurance premium paid to the Export Credit Guarantee Corporation Ltd. The Income-tax Officer did not allow weighted deduction in that behalf. In fact, he clubbed it with certain other matters in regard to which weighted deduction was claimed and disposed or the matter without any independent consideration of this claim. The Commissioner of Income-tax (Appeals) confirmed the said decision. He also did not consider the matter separately. The Tribunal also confirmed the disallowance following its decision on a similar question in regard to the assessment year 1975-76. The matter is now covered by the decision of this Court in CIT v. J.B. Advani & Co. (Mysore) (Pvt.) Ltd. (1987) 163 ITR 638, wherein this Court held that premium paid to ECGCL is for obtaining information regarding markets outside India in respect of goods in which it was doing business and, therefore, it would fall under section 35-B(1)(b). Following the said decision, question No,(12) is answered in the negative, i,e,, in favour of the assessee and against the Revenue. ' Re: Question No,(2): ' This question relates to a provision of Rs,75,51,000 made and debited by the assessee, under the head "Salary and wages" in respect of unutilised leave by its employees as on December 31, 1975. During the earlier years, the assessee had not made any such provision, as it used to debit only the actual payments made in the accounting year, towards unutilized leave. ' The assessee contended that the provision of Rs,75,51,000 was made by evaluating the number of days of leave standing to the credit of the individual employees, with reference to their salary, as at the end of the accounting year; that a systematic and regular record of leave earned and utilised by its employees was maintained and the liability had been quantified with reference to the individual rate of salary, as at the end of December, 1975. It was stated that the leave entitlement was as per the provisions of the Factories Act, 1948, read with memoranda of settlement entered into between the assessee and the employees' association from time to time and there was no separate scheme governing the matter. ' The Income-tax Officer held that the provision made was only to meet a contingent liability and not an ascertained liability and, therefore, disallowed the expenditure relying on the decision of the Madhya Pradesh High Court in Chhaganlal Textile Mills (P.) Ltd. v. CIT (1966) 62 ITR 274 (MP) and the decision of the Bombay High Court in CIT v. Rajkumar Mills Ltd. (1971) 80 ITR 244. ' In an appeal by the assessee, the Commissioner of Income-tax (Appeals) found that the assessee had got regular leave records for all its employees in conformity with the Factories Act, 1948, and had given full details in regard to the provision made; that apart from annual leave, the employees were also entitled to premium leave depending on the length of their service as also sick leave; that the assessee had a systematic and regular record of leave earned and utilised during the year in respect' of each employee and the liability of Rs,75,51,000 had been quantified from such records. He, therefore, held that the provision of Rs,75,51,000 was not a contingent liability, but an expenditure that was allowable. He purported to follow two decisions of the Supreme Court in Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 and Metal Box Co. Of India Ltd. v. Their Workmen (169) 73 ITR 53. The Revenue filed a second appeal before the Tribunal. The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals), holding that the assessee was entitled to claim the said provision as an expenditure. Feeling aggrieved, the Revenue has sought this reference. ' Before examining the rival contentions, it is necessary to notice the provisions relating to leave, as applicable to the employees of the assessee.
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' The assessee does not have any "scheme" in regard to leave. The certified standing orders for employees of the assessee provides that an employee shall be allowed leave with salary/wages subject to and in accordance with the Indian Factories Act. ' Chapter VIII of the Factories Act, 1948, deals with annual leave with wages. Section 78 provides that the provisions of the said Chapter shall not operate to the prejudice of any right to which a worker may be entitled under any law or under the terms of any award, agreement (including settlement) or contract of service. ' Section 79 deals with annual leave with wages. Section 80 deals with wages during leave period. ' Subsection (1) of section 79, inter alia, provides that every worker who has worked for a period of 240 days or more in a factory during a calendar year shall be allowed during the subsequent calendar year, leave with wages at the rate of one day for every twenty days of work performed by him during the previous calendar year. Explanation 1 clarifies that the leave earned in the year prior to that in which the leave is enjoyed shall be deemed to be days on which the worker has worked in a factory for the purpose of computation of the period of 240 days or more, but he shall not earn leave for those days. ' Subsection (3) of section 79 provides that if a worker is discharged or dismissed from service or quits his employment or is superannuated or dies while in service, during the course of the calendar year, he or his heir/nominee, as the case…
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