Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Praga Tools Ltd. on 7 August, 2001
Equivalent citations: [2001]252ITR813(AP)
JUDGMENT S. Ananda Reddy, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal, Hyderabad Bench-A, Hyderabad, referred the following question for the opinion of this court under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), arising out of its common order in I.T.A. Nos. 842 to 847 of 1979, dated August 11, 1990, for the assessment years 1967-68 to 1972-73 :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in holding that an order under Section 154 of the Income-tax Act, 1961, cannot be passed to give effect to the law laid down by the Andhra Pradesh High Court albeit in another case?"
2. The assessee is a public limited company, engaged in the manufacture of precision machine tools. The assessee-company entered into collaboration agreements with foreign companies for technical know-how in the form of designs, drawings, etc., in respect of certain machines manufactured by it.
3. In respect of the above amounts paid towards technical know-how, the assessee-company claimed depreciation, which was disallowed by the Assessing Officer for all the assessment years in question. On appeal, the Appellate Assistant Commissioner accepted the claim of the assessee. However, subsequently, the Assessing Officer brought to the notice of the Appellate Assistant Commissioner that the assessee is not entitled for the relief in the light of the judgment of this court in R. C. No. 21 of 1971, dated January 17, 1973. When this fact was brought to the notice of the Appellate Assistant Commissioner, who passed the orders in appeal on January 31, 1975, rectified the same under Section 154 of the Act, as there was a mistake apparent from the record and disallowed the depreciation originally allowed. The said order, under which the relief granted to the assessee was withdrawn, was appealed to the Income-tax Appellate Tribunal. Before the Income-tax Appellate Tribunal, the assessee contended that the issue could not be considered as an apparent mistake as there are conflicting views taken by different High Courts. Hence, the order of rectification of the Appellate Assistant Commissioner is liable to be set aside. This contention found favour with the Appellate Tribunal and the Tribunal allowed the appeal, setting aside the order of the Appellate Assistant Commissioner, rectifying his own order disallowing the depreciation originally granted. The result was that the depreciation originally granted by the Appellate Assistant Commissioner was restored. Against the said order of the Appellate Tribunal, the Revenue obtained reference of the question referred to earlier for the opinion of this court.
4. Learned standing counsel contended that the action of the Appellate Assistant Commissioner in rectifying his own order, having found that he failed to follow the decision of the jurisdictional High Court, is perfectly valid and justified as the decision rendered by the jurisdictional High Court is binding upon the Appellate Assistant Commissioner. It is contended by learned counsel that the judgment of the jurisdictional High Court was available when the Appellate Assistant Commissioner disposed of the appeals. But, he overlooked the decision of this court, as it was not brought to his notice. As soon as the said decision of the jurisdictional High Court was brought to his notice, which is binding upon the Appellate Assistant Commissioner, he had rectified his own order so as to be in conformity with the decision of the jurisdictional High Court. It is contended that the Appellate Tribunal was not justified in setting aside the action of the Appellate Assistant Commissioner holding that though the decision of the Andhra Pradesh High Court is binding on every authority in the State, it does not follow that there can be no debate. It is contended that the Tribunal had drawn a distinction between the decision of the Supreme Court and the decision of the High Court and held that only the decisions of the Supreme Court are binding, but not the decisions of the jurisdictional High Courts, which is clearly illegal and unsustainable. Therefore, it is contended that the issue is to be answered in favour of the Revenue and against the assessee.
5. Learned counsel for the assessee, on the other hand, supported the order of the Income-tax Appellate Tribunal, though not on the merits of its finding with reference to the action of the Appellate Assistant Commissioner under Section 154, but on the merits of the issue in the light of the subsequent decision of the Supreme Court, wherein it was held that technical know-how such as drawings, designs, plans, processing data, etc., can be treated as "book" and constituted plant within the terms of Section 43(3) of the Act. In the light of the said later decision of the apex court on the merits of the matter, this court need not go into the other technical aspects and therefore instead of answering the question in favour of the Revenue and directing the parties to re-agitate the issue on the merits, the issue could as well be answered in favour of the assessee on the merits of the matter. Learned counsel did not seriously contest the finding of the Appellate Tribunal in so far as the powers of the Appellate Assistant Commissioner in rectifying the order, when a binding decision of the jurisdictional High Court is brought to his notice, which he failed to consider while disposing of the appeals originally.
6. Heard both sides and considered the material on record.
7. The merits of the matter relate to whether the technical know-how, viz., drawings, plans and other related data, would constitute a capital asset and therefore, the assessee would be entitled to depreciation or not and whether the rectification made by the Appellate Assistant Commissioner was proper and just ?
8. It is not in dispute as set out by the Income-tax Appellate Tribunal that the technical know-how would constitute a capital asset. But the dispute was in respect of such assets the assessee is not entitled for depreciation in the light of the decision of this court in R. C. No. 21 of 1971 dated January 17, 1973. The Appellate Assistant Commissioner disposed of the appeals originally on January 31, 1975, accepting the claim of the assessee. But at that time the judgment of the jurisdictional High Court was not brought to his notice. Thereafter, the Assessing Officer brought to the notice of the Appellate Assistant Commissioner about the said binding decision of the jurisdictional High Court. Therefore, the Appellate Assistant Commissioner rectified his own order by resorting to the provisions of Section 154 of the Act. When the said order was assailed in appeal, the Tribunal treated that issue as a debatable issue and held that the Appellate Assistant Commissioner was not justified in rectifying his order under Section 154 of the Act and therefore, cancelled the order of the Appellate Assistant Commissioner passed under Section 154. A similar issue was considered by the apex court in the case of S.A.L. Narayana Row, CIT v. Model Mills Nagpur Ltd. . In that case, the assessee-company was assessed to tax for the assessment year 1952-53 on a total income of Rs. 23,596. The company, however, distributed Rs. 2,66,788 as dividend in the previous year. The Income-tax Officer, therefore, by his order dated July 27, 1955, levied an additional tax on the excess dividend declared by the asses-see-company and ordered the company to pay the additional tax on the excess dividend Rs. 33,348.08. The said order was complied with. Thereafter, it appears that the Bombay High Court in Khatau Mahanji Spinning and Weaving Co. Ltd. v. CIT held that the levy of tax on the excess dividend was illegal. The assessee-company, on September 28,
9. 1956, applied to the Income-tax Officer for refund of the tax paid. It was not expressly stated in the application that the order be rectified under Section 35 of the Indian Income-tax Act, and an order for refund be made. But the Income-tax Officer declined to accede to the request of the assessee by his order dated November 2, 1957. According to the Assessing Officer, the assessment was completed long back before the judgment of the Bombay High Court in the case of Khatau Mahanji Spinning and Weaving Co. Ltd. . Against the said order, the assessee-company preferred a revision unsuccessfully before the Commissioner of Income-tax and therefore, approached the Bombay High Court on the original side under article 226 of the Constitution for a direction to the Income-tax Officer to revise the order dated November 2, 1957, and seeking refund of the amount. The High Court allowed the said application. Thereafter, the matter was taken in appeal to the apex court. The apex court upheld the view of the High Court, observing as under (page 69) :
"There is no doubt that, in view of the judgment of this court in CIT v. Khatau Makanji Spinning and Weaving Co. Ltd. , the levy of an additional tax was illegal. It was urged, however, before the High Court that no application for rectification under Section 35 of the Income-tax Act was presented by the respondent-company, and, therefore, the company was not entitled to the relief claimed by it. The High Court rejected the contention principally on the ground that the income-tax authorities had themselves treated the application as one under Section 35 and had rejected the same on the merits. As already pointed out, the application to the Income-tax Officer was one in which a request for rectification of the order was implicit and the Commissioner in dealing with the application for refund treated that application in that light.
In our view, the High Court was right in making the order, directing the Commissioner to refund the amount of tax which was illegally collected. The appeal, therefore, fails and is dismissed."
10. A similar issue was also considered by this court in the case of B.V.K. Seshavataram v. CIT . In this case, the claim relates to the depreciation on fractional share. Though originally depreciation was allowed on fractional shares, subsequently a decision was rendered by the apex court that depreciation is not allowable in respect of fractional share in assets. In view of the said decision of the apex court, an order was passed under Section 154. While considering the said issue, this court held that the subsequent decision of the Supreme Court could form the basis for the rectification of the order of assessment under Section 154 of the Act.
11. In the light of the above decisions, we do not find that there would be any dispute in so far as the proposition advanced by the Department. But, however, here on the merits of the case, there is a judgment of the apex court in the case of Scientific Engineering House P. Ltd. v. CIT , wherein it was held that the documentation service comprised of drawings, designs, plans, processing data, etc., can be treated as "book" and constitutes "plant" and accordingly depreciation was allowed on such documentation. In the light of the said decision the technical know-how acquired by the assessee-company could be considered as a capital asset in respect of which the assessee-company is entitled for depreciation. In the above decision, the assessee-company, which manufactures scientific instruments and apparatus, entered into collaboration agreements with a Hungarian company for the manufacture of theodolites and microscopes. Under those agreements, the foreign collaborator agreed, in consideration of Rs. 80,000 in each case, to supply to the assessee all technical know-how required for the manufacture of those instruments. Pursuant to the agreements, the assessee made full payment of Rs. 1,60,000 and claimed depreciation in respect of those payments. The claim was rejected by the Tribunal on the ground that the supply of designs, etc., was only incidental to or in furtherance of other services, without going into the question, whether the documents fell within the meaning of the expression "book". On a reference, the High Court held that the documentation service was incidental to the other services and the entire sum of Rs. 1,60,000 was capital expenditure but what was brought into existence was a non-depreciable asset and the appellant was not entitled to any relief. On appeal, the apex court accepting the claim of the assessee held (headnote) :
"(i) That, reading clauses 3 and 6(a) together, it was clear that rendition of documentation service was really the main service to be rendered by the foreign collaborator.
(ii) That the various documents such as drawings, designs, charts, plans, processing data and other literature included in documentation service, the supply whereof was undertaken by the foreign collaborator, more or less formed the tools by using which the business of manufacturing the instruments was to be done by the appellant and for acquiring such technical know-how through these documents, a lump sum payment was made. This expenditure was incurred by the appellant as and by way of purchase price of the drawings, designs, charts, plans, processing data and other literature, etc., comprised in 'documentation service' and was of a capital nature as a result whereof a capital asset of technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature was acquired by the appellant.
(iii) That 'plant' was not necessarily confined to an apparatus which was used for mechanical operations or process or was employed in mechanical or industrial business. But in order to qualify as 'plant', the particular article had to have some degree of durability. The test to be applied was : Did the article fulfil the function of a plant in the assessee's trading activity ? Was it a tool of his trade with which he carried on his business ? If the answer was in the affirmative, it would be a 'plant'.
(iv) That the drawings, designs, charts, plans, processing data and other literature comprised in the 'documentation service' as specified in clause 3 constituted a 'book' and fell within the definition of 'plant' in Section 43(3) of the Income-tax Act, 1961. The purpose of rendering such documentation service by supplying these documents to the appellant was to enable it to undertake its trading activity of manufacturing theodolites and microscopes and these documents had a vital function to perform in the manufacture of these instruments ; in fact, it was with the aid of these complete and up-to-date set of documents that the appellant was able to commence its manufacturing activity and these documents really formed the basis of the business of manufacturing the instruments in question. That by themselves these documents did not perform any mechanical operations or processes did not militate against their being a plant since they were in a sense the basic tools of the assessee's trade having a fairly enduring utility, though owing to technological advances they might or would in course of time become obsolete. The capital asset acquired by the appellant, viz., the technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature, fell within the definition of 'plant' and was, therefore, a depreciable asset."
12. In the light of the above judgment of the apex court, the documents in question that are supplied under various collaboration agreements, would constitute "plant" for the purpose of depreciation. In the light of the said finding, the assessee is entitled for depreciation. Therefore, the rectification made by the Appellate Assistant Commissioner disallowing the depreciation originally granted is not in accordance with law laid down by the apex court. Though at the time when the order was passed it may be in accordance with the decision of the jurisdictional High Court, but in view of the subsequent decision of the apex court, the assessee is entitled for depreciation and the rectification order passed by the Appellate Assistant Commissioner is not in accordance with law.
13. Under the above circumstances, though not for the same reasons considered by the Income-tax Appellate Tribunal, but for the subsequent decision rendered by the apex court on the merits of the matter, we answer the question against the Revenue and in favour of the assessee.
14. In the result, the reference is answered accordingly. No costs.