Income Tax Appellate Tribunal - Cochin
Forbes Ewart & Figgis P. Ltd. vs Income Tax Officer. (Also Lac V. Forbes, ... on 12 April, 1993
Equivalent citations: (1993)47TTJ(COCH)76
ORDER
G. SANTHANAM, A. M. :
These appeals are by the assessee as well as by the Revenue. They are taken up for disposal in a common order for the sake of convenience.
2. ITA No. 465/Coch/1987; Asst. yr. 1982-83: is the assessees appeal for the asst. yr. 1982-83 and ITA No. 534/Coch/87 is the Revenues appeal for the same assessment year. The assessee is a closely held company which derives income mainly from tea broking business and is also a partner in two firms, viz., (1) Forbes (Tea Brokers), Coimbatore and (2) Forbes & Co. (Tea Brokers), Coonoor, which are also engaged in the business of tea auction. It has also a rubber masticating mill at Ettumanoor, which is used for grinding, masticating and mixing rubber for others on job work basis with the raw materials supplied by tyre manufacturers. The assessee claimed investment allowance on the cost of plant and machinery installed in the rubber mixing mill and the ITO disallowed the claim on the basis that the assessee was only doing job works and was not engaged in the production or manufacture of any article or thing. On appeal, the CIT(A) held that merely because the assessees plant and machinery were used for doing job works of others, it cannot be said that it was not eligible to get investment allowance. For this proposition, he relied on the following decisions :
(i) T. Venkateswara Rao & Co. vs. ITO (1983) Taxation 70(6)-80;
(ii) ITO vs. Generals New Tread (1985) Taxation 79(6)-141;
(iii) Sri Balaji Metal Finishers vs. ITO (1986) Taxation 80(4)-117;
(iv) Durandel Foods P. Ltd. vs. ITO (1984) Taxation 72 (6A)-27.
The CIT(A) further held that the assessee was manufacturing or producing a commercially different product, namely, masticated rubber and, therefore, it was engaged in the manufacture or production of an article or thing. Further it had complied with the other provisions of S. 32A of the IT Act and, therefore, the claim of the assessee for investment allowance cannot be rejected. The Revenue is on appeal against the order of the CIT(A).
3. Having heard rival submissions and perused the order of the CIT(A) we do not find any justification to interfere with the order of the first appellate authority. There is a preponderance of judicial opinion in favour of the assessee that investment allowance cannot be denied on the ground that the assessee was doing only job work for the sake of others and was not itself engaged in the business of manufacture or production of an article or thing. It is our considered view that masticated rubber is a commercially different product from that of natural rubber. Merely because masticated rubber is used as an intermediate product in the manufacture of tyres it cannot be said that the assessee was disentitled to investment allowance. These is no requirement under S. 32A that the product manufactured or produced is an ultimate product. Further, masticated rubber might be an intermediate product in the case of tyre manufacturers but as far as the assessee is concerned it is the final product. Smt. Susie B. Varghese, the learned Departmental Representative, contended that the assessee was only adding strength to the natural rubber and, therefore, it was only one varied form of natural rubber. We do not accept such a contention because to the natural rubber carbon black and other chemicals are added and the rubber is processed before the masticated rubber in sheet form emerges from the operation. It has been held by the Allahabad High Court in the case of CST vs. Kaderul Sahatta Dawakhana (1984) Tax LR 2918 that mixing of medicines suitable to a person amounted to manufacture as a different article had come into existence. In North Bengal Stores Ltd. vs. Member, Board of Revenue, Bengal 1 STC 157, the Calcutta High Court held that a dispensing chemist is engaged in the production of compounds or mixtures and their Lordships held as follows :
"Prescriptions specify the components of resultant mixtures or compounds which are obtained when the prescriptions are dispensed. They may be for internal use, for example, liquids in bottles, and solids in capsules, or for outward application, for example, ointments, plasters and powders. When customers give prescriptions to a dispensing chemist to be made up, thereby they place orders for the resultant compounds or mixtures to be supplied, and, by accepting to dispense the prescriptions, the chemist agrees to sell to his customers such compounds or mixtures. Dispensing is necessary for the purpose of obtaining the mixture. Until prescriptions are dispensed and the compounds obtained, the chemist has not got the goods, which his customers have ordered and which he has agreed to sell. The process of dispensing is carried out for the purpose of producing the contract goods. When dispensing has taken place, but not before, the chemist has the goods with which to supply his customers and which he has agreed to sell to them. The resultant mixtures, after dispensing prescriptions, are the goods sold by a dispensing chemist to this customers; the process of dispensing is to produce those goods for sale, without which process sales of mixtures or compounds cannot be effected by a chemist. Even if that process is not the manufacture of goods, as articles of furniture, mechanical appliances and paints are made from raw materials, nevertheless, since it is the production of goods for the purpose of selling to customers, the chemist who dispenses prescriptions thereby produces goods for sale."
Investment allowance is allowable whether the assessee is engaged in manufacture or production. So in either view of the matter, we hold that the assessee is entitled to the benefit of investment allowance. For these reason, we dismiss the Revenues appeal.
4. ITA No. 535/Coch/87 is the Revenues appeal for the asst. yr. 1983-84 and the issue is identical. For the reasons stated in the preceding paragraph, the appeal is dismissed.
5. ITA No. 465/Coch/1987 is the assessees appeal for the asst. yr. 1982-83 and the point at issue is whether the State Investment Subsidy will go to reduce the cost of plant and machinery and building for the purpose of depreciation. The assessee received an amount of Rs. 2,47,440 as subsidy from the Industries Department of the Government of Kerala for the asst. yr. 1982-83. The ITO took the figure at Rs. 5,39,293 as it represented the sanctioned amount. He apportioned the said sum among the various assets and reduced the cost of such assets for purpose of computing depreciation thereon. On appeal, the CIT(A) agreed with the ITO that the State Investment Subsidy was not in the nature of Central Investment Subsidy and, therefore, such subsidy will go to reduce the cost of the asset. However, he held that the ITO erred in taking the sanctioned figure instead of the actual amount received by way of subsidy and in this view of the matter, he held that a sum of Rs. 2,47,440 for the asst. yr. 1982-83, being the subsidy received by the assessee from the Government of Kerala will be reckoned for purpose of reducing the cost of the assets. For similar reason, be rejected the claim of the assessee for the asst. yrs. 1983-84 and 1984-85.
6. We have heard rival submissions. The assessee has furnished an abstract of the communication of the Industries Department and the same is as follows :
"Industries - Package of Assistance - Incentives to development of industries - Amendments - issued Industries (P) Department G.O. (P) No. 386/79/1D Dated, Trivendrum 9th Nov., 1979 Read : 1. G.O. (P) 194/79/1D dt. 11th April, 1979
2. G.O. (P) 235/79/1D dt. 25th May, 1979
3. G.O. (P) 236/79/1D dt. 25th May, 1979 ORDER The incentive now given to the Industries, in the State are too meagre and inadequate to attract industries to this State. This is particularly so, whether position is compared to the incentives available for the industries in many other States. Further there are certain inherent disincentives also peculiar to this State such as prevalence of high wage rates, minimum wages for certain sections, lack of availability of raw materials, etc. The scope for offering some further incentives to the industries so as to encourage existing industries in the State and to attract new industries has been under the consideration of Government.
2. In this connection it was felt that the question of strengthening traditional industries which were labour intensive, rehabilitation of sick units and the promotional activities for the growth of new industries should be examined in depth for identifying the problems and for adoption of various measures necessary to promote industrial growth in the State. A Committee consisting of the following officers was, therefore, set up to study the various problems and submit report :
1. Sri R. Gopalaswamy, Commissioner for Economic Development
2. Sri V. Ramachandran, Chairman, Kerala State Industrial Development Corporation
3. Sri K. V. Ramakrishnan, Special Secretary (Industries)
4. Sri K. V. Rabindran Nair, Special Secretary (Finance)
5. Sri C. P. Nair, Secretary (Taxes)
6. Smt. J. Lalithambika, Additional Secretary (Industries);
7. Sri K. R. Rajen, Director of Industries & Commerce
3. The Committee finalised its report on 20th March, 1979.
4. Government have considered the recommendations and suggestions of the committee in detail and issued orders in G. O. (P) 194/79/1D dt. 11th April, 1979 contemplating a package of measures for promoting industrial development in Kerala.
5. Government have further examined the matter in the light of announcements made by the Minister (Industries & Forests) in the Assembly on the subject, and are pleased to approve the following package of measures for promoting industrial development in Kerala in supersession of the order issued in the Government orders read above."
The scheme is extended to both medium and large scale industries and as regards the State Investment Subsidy it has been stated as follows :
"A State Investment Subsidy of 10% of capital investment subject to a maximum of Rs. 10 lakhs will be given to industries in all the districts of the State except the three districts of Cannanore, Malappuram and Alleppey where Central Investment Subsidy of 15% will be available. The subsidy will be available to industries of diversification, expansion or fresh investment after 1st April, 1979."
If the industry is a small scale unit, the subsidy will be regulated as follows :
"A uniform State investment subsidy of 10% of the capital investment will be made available to small scale industries in all districts except the districts of Cannanore, Malappuram and Alleppey where Central Investment Subsidy, available. The subsidy will be available for diversification, expansion or fresh investment after 1st April, 1979."
The assessee is not a small scale unit and, therefore, the former scheme would be applicable to it. From the general scheme of subsidy as contained in the abstract of communication, it is evident that the scheme is intended to promote the growth of new industries as well as the existing industries and, therefore, thought the subsidy is measured along with the cost input it was not given in reimbursement of such cost. Therefore, the scheme framed by the State Government is on par with the central subsidy scheme and, in fact, it is applicable only in areas where the central subsidy scheme is not in operation. Hence, the CIT(A) erred in holding that the State Investment Subsidy Scheme is different in nature from the Central Subsidy Scheme. The purpose is to promote growth of industries. For these reasons, we set aside the order of the CIT(A) on this issue and hold that the amount of subsidy received from the State Government should be excluded from the cost of the assets for purpose of computing depreciation and investment allowance.
7. The second issue in the assessees appeals common to all the years is against the disallowance of expenditure incurred by the assessee for serving tea, snacks, etc., to its employees and bidders in the auction hall. The disallowance on this score was as follows :
Assessment year Amount 1982-83 Rs. 2,385 1983-84 Rs. 16,349 1984-85 Rs. 20,829 It is contended before us that as the assessee has spent the amounts on auction bidders and also on its staff, the same will not partake of the nature of entertainment expenditure. Even if it is held to be entertainment expenditure, suitable allowance should have been given under S. 37(2) of the IT Act. The learned Departmental Representative relied on the orders of the CIT(A).
8. Having regard to rival submissions and the materials on record, we hold that 25% of the expenditure in question can be said to have been spent on the staff in connection with auction bidding. The rest of it, we hold, is in the nature of entertainment expenditure, but then it has to be regulated under the provisions of S. 37(2) of the IT Act. With these directions, the common ground is disposed of.
9. There is one more issue in the assessees appeal for the asst. yr. 1983-84 which is as follows :
"4. The CIT(A) went wrong in disallowing an amount of Rs. 17,000 paid by the assessee to KITCO for preparing the project report. The authorities below went wrong in disallowing the claim. Merely because KITCO is not an approved by the Central Board, for this purpose, the claim is allowable as a business expenditure. If the claim is not allowable as revenue expenditure, the appellant is entitled to depreciation on the same."
The CIT(A) upheld the disallowance for the following reasons :
"For project report, a sum of Rs. 17,000 was claimed as preliminary expenses in respect of project report prepared by KITCO. The appellant had claimed it as a revenue expenditure or in the alternative, as an expenditure under S. 35D dealing with amortisation of certain preliminary expenses. The appellant stated that this item of expenditure would fall under S. 35D(2)(a)(ii). In this case the report was submitted by KITCO. For purposes of the allowance of expenditure under this section the report should be by a concern which is approved by the CBDT. The appellants learned counsel has not produced any evidence before me to state that KITCO is approved by the CBDT."
10. Having regard to rival submissions, we do not find any justification to take different view. If the assessee has not produced materials even before the appellate authority that KITCO is an approved institution, its arguments remain only as bare assertions; not has it been shown that the project report has resulted in the creation of an asset. In the absence of both, the only thing that the appellate authority could do is to confirm the disallowance. The CIT(A) is right in doing so and we uphold his action.
11. In the result, the appeals of the Revenue are dismissed and the appeals of the assessee are partly allowed.