Income Tax Appellate Tribunal - Hyderabad
Singh Poultry (P.) Ltd. vs Income-Tax Officer on 31 May, 1988
Equivalent citations: [1989]28ITD336(HYD)
ORDER
G. Santhanany Accountant Member
1. These appeals are, by the assessee and as they involve common issues a consolidated order is passed for the sake of convenience.
2. Ground Nos. 5, 6 and 7 do not arise out of the order of the Commissioner of Income-tax (Appeals) and as such these grounds are dismissed.
3. Ground No. 2 is about the allowability of investment allowance under Section 32A of the Income-tax Act, 1961, on the cost of parent birds purchased during the previous years. In ground No. 3, objection is taken to the view held by the lower authorities that the whole of the cost of the birds was allowed as a deduction by way of depreciation or otherwise in the computation of the income of the assessee and as a result thereof the assessee was not entitled to investment allowance under Section 32A. Thus, this ground is related to ground No. 2.
4. The assessee, known as Singh Poultry Pvt. Ltd., is engaged in hatchery business. One day old fowls are purchased and are maintained during the period of fertility. Eggs laid by the parent birds undergo an artificial process of incubation and the chicks that emerge are sold as one day old chicks. No egg is sold outside, though eggs are purchased from outside for hatching into one day old chicks. The parent birds or the fowls are not for resale. They are destroyed upon extinction of their fertility. The assessee staked its claim for investment allowance on the plea that the parent birds constituted plant. The Income-tax Officer took note of Clause (d) of the proviso to Section 32A(1) which is as follows :
Provided that no deduction shall be allowed under this section in respect of:
** ** **
(d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year.
He also relied on the decision of the Tribunal in the case of Hy-way Farms [IT Appeal Nos. 174 (Hyd.) of 1980 and 1046 (Hyd.) of 1981, dated 20-1-1983], page 4, 16th line, wherein it was observed that the cost and upkeep of the birds would constitute revenue expenditure and there was neither any question of capitalisation nor depreciation nor any terminal allowance. The Income-tax Officer held that the assessee was debiting the purchase of the birds and the feed to the profit and loss account and as such they constituted revenue expenditure and the so-called depreciation on livestock is nothing but a write-off of the parent birds on the basis of expired productivity of the birds. As the assessee was just doing nothing more than raw material-accounting whereby the opening stock and purchases less closing stock is taken as consumption, the whole of the cost of the birds consumed in the course of hatching stood debited to the revenue account and merely because the assessee was including the parent birds in the schedule of fixed assets, it would not constitute plant or machinery and in view of the proviso to Section 32A as extracted above, he negatived the claim of the assessee.
5. It may also be recalled that this is the second time the assessee is coming before the Tribunal for the assessment years 1978-79 and 1979-80. Initially, its claim for relief under Section 80J allowance under Section 32A on the equipments other than the parent birds and also claim for depreciation on parent birds were denied and the matter came before the CIT (Appeals) who by his order dated 31-5-1982 in Appeal Nos. 131, 45, 46 and 61/Com.B/CIT-11/81-82 in the case of the same assessee, upheld the claim of the assessee in so far as the relief under Section 80J and allowance under Section 32A were concerned. Both the assessee and the revenue were in appeal before the Tribunal and the Tribunal in its order dated 9-3-1983 in ITA Nos. 968 to 970/Hyd./1982 dismissed the departmental appeals. The assessee's claim for depreciation was directed to be gone into by the assessing authority in the light of the observations made in the Tribunal's order dated 17-9-1983 in ITA Nos. 962 to 964/Hyd./1982. The Income-tax Officer while framing the assessments in accordance with the directions of the Tribunal in the latter order, noticed that the assessee was making the claim for investment allowance on the parent birds and also deduction under Section 35C for the assessment years 1978-79, 1979-80 and 1980-81. For the assessment year 1981-82 the claims were before the Income-tax Officer at the time of initial assessment itself though no details were furnished separately for investment allowance.
6. The Income-tax Officer disallowed the claims of the assessee and the assessee agitated the matter in appeal in vain before the CIT (Appeals).
7. Sri B. Satyanarayana Murty, learned chartered Accountant for the assessee, submitted that the assessee is an industrial undertaking in the ratio of the decision of the Tribunal in Sri Venkateswara Hatcheries (P.) Ltd. v. ITO [1983] 2 SOT 591 (Mad.). The parent birds are not meant for resale. They are purchased and brought to use for the purposes of the business. The parent birds constitute 'plant' because it is a tool with which the eggs are obtained which are put under artificial incubation for hatching into one day old chicks. Thus, they constitute 'plant'. He relied on the decision of the Gujarat High Court in CIT v. Elecon Engg. Co. Ltd. [1974] 96 ITR 672. He also relied on the decision of the Bombay Bench of the Tribunal in the case of Ruia Stud & Agricultural Farms (P.) Ltd. v. Sixth ITO [1985] 14 ITD 429. The authorities below, according to him, erred in not appreciating the method of accounting of the assessee for the parent birds in the proper perspective. At no point of time the whole of the cost of the parent birds was written off in any one previous year. Merely because the opening stock, purchases and the stock of birds at the end of the year are displayed in the profit and loss account, it would not amount to writing off the whole cost of the parent birds. Such method of accounting cannot be compared to anything like the consumption of raw materials. The birds themselves are not used as raw materials but they are only used as tools for laying the eggs which are used as raw material for hatching into one day old chicks by artificial incubation. Thus, the birds themselves constitute 'plant' for which the assessee is entitled to investment allowance. Therefore, there is a difference between the concept of the birds in a poultry farm and the concept of the birds in a hatchery business. In a poultry farm, the parent birds themselves are meant for resale, but in a hatchery business, which is the business of the assessee, the parent birds are not meant for resale and they are destroyed as soon as their utility is over. This position has been admitted by the Income-tax Officer. Therefore, the assessee is entitled for investment allowance on the cost of the parent birds. As for allowance under Section 35C, he submitted that the assessee was purchasing eggs from the poultry farms and in that connection it was rendering services to the poultry farmers and, therefore, the assessee is entitled for deduction under Section 35C.
8. Sri P. Radhakrishna Murty, learned departmental representative, submitted that the cost of the birds has been treated only as revenue expenditure, and once an item is treated as a revenue expenditure, no investment allowance is exigible on the same. The case of animals is covered by Section 36(1)(vi) wherein deduction is allowed when such animals die or become permanently useless for the purpose of the business of the assessee, to the extent of the difference between the actual cost to the assessee in respect of the animals and the amount, if any, realised in respect of the carcasses of animals. Therefore, when a provision is there taking care of the loss of animals, that provision should exclude any other provision and, therefore, the assessee is not entitled to any investment allowance. There is difficulty in holding the parent birds as 'plant' because of the variety of birds involved and also the large number of birds that may be purchased and found alive. Even if the parent birds are treated as 'plant' he submitted that they are not brought to use for a period of 20 weeks during which period they do not produce any eggs and, therefore, the birds purchased within a period of 20 weeks prior to the end of the year should not be reckoned for the grant of the allowance. As for deduction under Section 35C, he relied on the orders of the Income-tax Officer.
9. We have heard rival submissions and perused the records. The point for consideration is whether the parent birds could be construed as 'plant' so as to be eligible for investment allowance under Section 32A of the Income-tax Act. 'Plant' has not been denned in the Act. Lindley, LJ, in Yarmouth v. France [1887] 19 QBD 647 (QB) at 658, observed that there is no definition of plant in the Act, but "in its ordinary sense, it includes whatever apparatus is used by a businessman for carrying on his business,--not his stock-in-trade which he buys or makes for sale ; but all goods and chattels fixed or movable, live or dead, which he keeps for permanent employment in his business" [Emphasis supplied.] Rowlatt, J, in Daphne v. Shaw [1926] 11 TC 256 (KB), interpreted 'plant' to mean "apparatus, alive or dead, stationary or movable, to achieve the operations which a person wants to achieve in his vocation". In Elecon Engg. Co. Ltd.'s case (supra), it was observed by the Gujarat High Court (pp. 686-7) that the word 'plant' "has come up for interpretation before various courts on numerous occasions in the context of different statutes and the catena of judicial decisions shows that it is a word of wide and varied import susceptible of diverse meanings depending upon its setting in the scheme of the statute". Their Lordships, after enumerating an amazing variety of articles, objects or things regarded as plant or not plant, referred to the ratio decidendi of the Supreme Court in CIT v. Taj Mahal Hotel [1971] 82 ITR 44, to the effect: (i) that the word 'plant' must be given a wide meaning having regard to the fact that articles like books and surgical instruments are expressly included in the definition of plant; (ii) that its meaning is not confined only to an apparatus used in mechanical or industrial business or manufacture of finished goods from raw goods ; and (iii) that the definition of plant given in Yarmouth's case (supra) as expounded in Jarrold (H.M. inspector of Taxes) v. John Good & Sons Ltd. [1962] 40 TC 681 (CA) furnishes the true apposite test for judging whether a given article is plant. The relevant test to be applied is : does it fulfil the function of plant in the assessee's trading activity ? Is it the tool of the taxpayer's trade ? If it is, then it is plant. Thus, their Lordships held that in the business of an engineering company, drawings and patterns acquired from foreign company as well as the know-how forming the basis of the business of the assessee were 'plant'.
10. In the case of the assessee before us, it is not in dispute that the parent bird which is purchased as a one day old chick is maintained solely and wholly for the purpose of laying eggs till its period of fertility is exhausted, such eggs being hatched into one day old chicks by the process of artificial incubation. The parent birds are not for resale. There is no difficulty for us in holding that the parent bird is 'plant', firstly because it is not for resale, and secondly because it is used by the assessee for producing eggs which are hatched by artificial process into one day old chicks meant for sale. That the hatchery is an industrial undertaking is concluded by the decision of the Tribunal in the case of Sri Venkateswara Hatcheries (P.) Ltd. (supra) and also in the assessee's own case in the decision cited supra.
11. The Income-tax Officer declined to grant the investment allowance on the ground that the whole of the cost of the parent bird was allowed as deduction in computing the income chargeable under the head "Profits and gains of business" of any one previous year and thus invoked Clause (d) of the proviso to Section 32A(1). The only point to be seen in the ease before us is whether the assessee had claimed the entire cost of the parent bird as a deduction in computing its profits.
12. This takes us to the method of accounting of the assessee which has also been discussed by the Income-tax Officer in his order. For the assessment years 1978-79 and 1979-80, the method of accounting for the parent birds adopted by the assessee has been set out in the order of the Tribunal dated 17-9-1983 in ITA Nos. 962, 963 and 964/Hyd./1982 in the assessee's own case thus :
Broadly, it was considered that each hen would lay 210 eggs in the period of utility and out of this l/3rd; i.e., 70 eggs would be hatched and chicks would be obtained, i.e., 70 chicks would be obtained. Based on the number of chicks to be obtained from eggs yet to be laid, the value of the birds was calculated. For example, 2,512 birds were purchased in November 1976 for Rs. 74,657. They had laid about 198 eggs and 12 eggs were normally expected which meant 4 chicks out of average yield of 70. Therefore, the value of this block was taken at 4/70 of Rs. 74,657 or Rs. 4,266 which gave a value of Rs. 1.70 per bird. This was the method of valuation followed in the accounting year ended 31-3-1979 also. For example, in the year ended 31-3-1978, from the cost of livestock of Rs. 8.80 lakhs, the value of closing stock of Rs. 5.40 lakhs was reduced and the balance of Rs. 3.40 lakhs was claimed as a write-off. In the assessment year 1980-81, the value per bird was taken based on its age according to number of weeks and said to be as prescribed by the insurance authorities.
From this it will be evident that the assessee was not claiming as deduction the whole of the cost of the parent birds in any one accounting year but only a part of their cost as represented by their expired productivity. The embargo on the grant of investment allowance as contained in the proviso referred to therein would apply only when the whole of the cost is deducted and not when part of the cost is considered for deduction. Thus, we reject the contention of the revenue.
13. The mere fact that the assessee displayed in its profit and loss account the opening stock of parent birds together with the purchases of parent birds as reduced by the year-end value of the parent-birds would not be tantamount to claiming the entire cost of the parent birds as deduction, nor would such a display, make these parent birds something akin to consumption of raw materials. The parent birds are not raw materials nor can th.ey be dubbed as stock-in-trade ready for sale but are plant and because of their aging or loss of fertility, their value is reduced, whether we call such reduction in value as depreciation or otherwise. There is no escape from the conclusion that the parent birds as an instrument of production of eggs for which they are employed by the assessee can be viewed only as plant eligible for investment allowance.
14. The other objection of the Income-tax Officer is that the Tribunal in the case of Hy-way Farms (supra) had taken the view that the cost and upkeep of the birds are revenue expenses and there was no question of either capitalisation or depreciation or terminal allowance. These observations of the Tribunal, are in the case of poultry but not hatchery. In a poultry farm, the chicks are reared, eggs are laid by the grown up birds and both eggs and grown up birds are sold out. Thus, both the birds and the eggs are stock-in-trade of a poultry business. However, in the case of the assessee, as has been admitted by the Income-tax Officer, the birds are never sold. Only the eggs laid by the birds and also the eggs purchased from outside are hatched into one day old chicks which alone are sold. The parent birds, being destroyed after the expiry of their period of fertility, do not form part of stock-in-trade of the assessee. This is the difference between a poultry farm such as Hy-Way Farms and the case of the assessee. If this difference is kept in view, the observations of the Tribunal in the case of Hy-Way Farms (supra) is quite understandable and the same is not applicable to the facts of the case before us though, for purposes of method of accounting, reliance was placed on poultry farm accounting.
15. Turning to the question whether only the machinery or plant on which depreciation is allowed is eligible for investment allowance, we are inclined to hold that it is immaterial whether any depreciation was allowed on a machinery or plant in order to be eligible for investment allowance. This is very clear from the wording of Clause (d) of the proviso to Section 32A(1). The said proviso disentitled the assessee to claim deduction for investment allowance in the cases mentioned in Clauses (a), to (d) thereof. Clause (d) is as follows :
(d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head 'Profits and gains of business or profession' of any one previous year.
The expression "or otherwise" may take in its sweep any mode of writing off the whole of the actual cost of the machinery or plant. We have already held that in the light of the method of accounting followed by the assessee, the whole of the cost of the parent birds was not deducted in any one previous year but only a part of their cost representing the expired portion of productivity either as a proportion of the unexpired period of productivity as related to the whole period of productivity (for the assessment years 1978-79 and 1979-80) or by the mode of the age factor representing the productivity (for the assessment year 1981-82) as approved by the insurance authorities. For this reason also, the assessee is entitled to investment allowance.
16. We notice that the assessee had claimed investment allowance on the flock purchased during the year. The birds are prone to diseases. Therefore, we feel that it is only in respect of the value of the birds contained in the flock purchased during the year and brought to use for purposes of production which did not die due to disease or by efflux of time and which remained in stock at the end of the year that should be counted for the grant of investment allowance. There is no effective discussion whether the assessee had created the requisite reserve for claiming the investment allowance for the assessment year 1981-82. The Income-tax Officer is directed to verify the figures of birds that are alive at the end of each year and grant investment allowance on the purchase value of such birds during any one previous year, provided the assessee had created the requisite reserve in its books of account.
17. Sri Radhakrishna Murty vehemently argued that the birds are put to use not immediately but after an interval of 20 weeks and, at any rate, they are supposed to have been put to use only 20 weeks after their purchase during the previous year. In other words, if at all any investment allowance is to be granted, it should be restricted only to the birds that were purchased at least 20 weeks before the end of the previous year as during that period of 20 weeks, the birds do not lay eggs. This appears to be a valid objection and, therefore, the Income-tax Officer while working out the purchase value of the birds that are alive at the end of the year for purposes of granting investment allowance, will exclude the cost of the birds which were purchased within a period of 20 weeks prior to the end of the previous year.
18. Sri Radhakrishna Murty argued that Section 36(1)(m) takes care of the animals and that being so, the same should not be treated as 'plant' as the whole of the cost less the sale value of the carcasses is allowed as a deduction in the previous year in which the animal has died or has become permanently useless. In our view, this does not disentitle the assessee to treat the parent bird or the animal as plant in certain specified circumstances. The reason is that even in the case of assets on which depreciation is claimed, the difference between the written down value and the sale price or the scrap value at the time of sale or scrapping of such asset is taken as a terminal allowance in the case of loss and as balancing charge in the case of profit. Therefore, the provision in Section 36(1)(vi) does not operate against the concept of treating the animal or the bird as plant in specified circumstances. In this view of the matter, we are supported by the decision of the Tribunal in Ruia Stud & Agricultural Farms (P.) Ltd.'s case (supra), wherein (as per head-notes) the Tribunal held as follows :
In respect of horses, as in case of other assets, they were only the basic material with the help of which income was earned. It is settled that what is normally utilised as the apparatus or base which is itself not a stock-in-trade, but which can be utilised as the basic item with which profits can be earned, has been regarded as plant. Therefore, even though a horse pan be a stock-in-trade in certain circumstances, in the instant case,. where the horses were used only as a medium for procreation of horses and livestock breeding, they could very well be understood as plant. Therefore, the assessee was clearly entitled to treat the value of the horses as plant and claim depreciation on that basis.
As regards the claim on account of the death of a horse, the assessee was entitled to the benefit of Section 36(1)(vi), notwithstanding the fact that if the horse had continued living in the succeeding year on the basis of being treated as a plant, depreciation would have been granted. The Commissioner (Appeals)'s order was, accordingly, justified in this regard.
Of course, we are not concerned with the relief under Section 36(1)(vi) but we are relying on this decision only to emphasise that the animal or the bird can be treated as plant in spite of the provisions of Section 36(1)(vi).
19. Thus, in principle, we have decided that the assessee is entitled to investment allowance on the cost of the parent birds as computed above. However, for the assessment years 1978-79 and 1979-80, no claim for investment allowance on the cost of parent birds was made before the Income-tax Officer at the time of original assessment. A general claim for investment allowance was made. In the course of the appellate proceedings also, no specific ground or argument was taken for the grant of investment allowance on parent birds. The Tribunal in its order dated 21-3-1983 in ITA Nos. 968 to 970/Hyd./1982, while disposing of the appeals of the department, had upheld the view of the Commissioner (Appeals) that the assessee was entitled to investment allowance under Section 32A. The Income-tax Officer had allowed investment allowance on the hatchery equipments in pursuance of the order of the CIT (Appeals). Thereupon, the assessee had filed a rectification petition before the Income-tax Officer stating that the assessee was entitled for the investment allowance on the cost of parent birds also and prayed for the rectification of mistake emanating from the consequential order of the Income-tax Officer. This petition for rectification of mistake apparent from records is pending before the Income-tax Officer. However, in the consequential proceedings arising out of the directions of the Tribunal in ITA Nos. 962, 963 and 964/Hyd./1982 on the question of allowability of depreciation or depletion in respect of the parent birds, the assessee in its letter dated 21-5-1984, staked its claim for investment allowance on the parent birds. This is not a case where the assessment itself was set aside or annulled or directed to be done de novo. We feel that the question of investment allowance on the cost of parent birds cannot be legally agitated by the assessee when the Tribunal has restored the matter to the Income-tax Officer on the specific question of allowability of depreciation or depletion allowance. In this view of the matter, we are supported by the decisions of the Honourable Andhra Pradesh High Court in Pulipati Subbarao & Co. v. AAC [1959] 35 ITR 673 and Calcutta High Court in CIT v. Bandaru Sanyasi Raju [1981] 127 ITR 453. However, we may add that this will not preclude the assessee from pursuing the matter before the Income-tax Officer in its petition under Section 154 which it had already filed in relation to the consequential order passed by the Income-tax Officer arising out of the order of the CIT (Appeals) which had come up before the Tribunal in ITA Nos. 968 to 970/Hyd./1982 wherein the Tribunal had held that the assessee is entitled to deduction under Section 32A.
20. Similarly, for the assessment years 1978-79 and 1979-80, the assessee had staked its claim for deduction under Section 35C in the consequential proceedings before the Income-tax Officer arising out of the order of the Tribunal in ITA Nos. 962, 963 and 964/Hyd./ 1982 and for reasons mentioned heretobefore, such a plea cannot be taken at that stage of the proceedings.
21. This leaves us to consider the question of the allowability of deduction under s. 35C for the assessment year 1981-82 which was canvassed before the Income-tax Officer in the course of the original assessment proceedings. The assessee had incurred expenditure on doctors and technicians for services provided to poultry farmers, salaries paid to laboratory doctors and testing charges. All these services are admittedly to poultry farmers who may or may not be the assessee's customers. The Income-tax Officer disallowed the claim of the assessee for the reason that the assessee is not making or manufacturing "an article or thing which is made from or/and uses as raw material, any product of agriculture, animal husbandry or dairy or poultry farming...and...Services to a person who is cultivator, grower or producer of such product in India". He has also quoted certain extracts of passages which are not found in the section and the origin and the source of which is not known.
22. Sri Satyanarayana Murty submitted that the assessee, an industrial undertaking engaged in the hatchery business, is purchasing eggs also from the poultry farms for purposes of hatching into one day old chicks in addition to the eggs laid by its own birds used in the process of hatching. He has also filed a statement from the materials furnished before the Income-tax Officer regarding the purchase of goods from the poultry farmers. These facts are not controverted. The eggs purchased from the poultry farmers may be considered as raw materials of the assessee from out of which the one day old chicks are produced by the artificial method of incubation. The poultry farmers supply these eggs and it is in the interest of the assessee to provide information on techniques or methods of poultry farming or advice on such techniques or methods. The Income-tax Officer has found that the assessee in particular had rendered services to the poultry farmers on the use of poultry feed mix and healthy breeding of commercial birds by engaging the services of doctors and technicians and laboratory tests. Certainly, these services were rendered to the poultry farmers with a view to getting good raw material viz., eggs from them for further use in the process of hatching into one day old chicks. In the light of the decision of the Calcutta High Court in Ramnugger Cane & Sugar Co. Ltd. v. CIT [1981] 128 ITR 716, the only restriction is that the expenditure should be incurred for goods, services or facilities to certain persons other than and distinct from the assessee itself which provided the goods or facilities. Therefore, the Income-tax Officer is directed to verify the quantum of the expenditure which would be eligible for deduction under Section 35C and allow the weighted deduction for which purpose the matter is restored to his file.
23. In the result, the appeals for the assessment years 1978-79 and 1979-80 are dismissed and the appeal for the assessment year 1981-82 is allowed.