Income Tax Appellate Tribunal - Hyderabad
Assistant Commissioner Of Income-Tax vs Raasi Cements Ltd. on 29 July, 1993
Equivalent citations: [1993]47ITD610(HYD)
ORDER
Chander Singh, Accountant Member
1. These three appeals by the Revenue have been directed against the order of the Commissioner of Income-tax (Appeals) for assessment years 1984-85, 1985-86 and 1986-87.
2. The assessee is a widely held company and its shares are actively traded in the stock market. For assessment year 1984-85, the assessee had filed the return of income disclosing the income at nil. However, the Income-tax Officer did not accept the return of income filed by the assessee and made several additions which resulted in computation of total income at Rs. 5,18,240. Similarly, for assessment year 1985-86, as against the declared income of Rs. 2,87,01,990, the ITO computed the income at Rs. 9,26,50,930. For assessment year 1986-87 also, the ITO made certain additions to the income disclosed and computed the income at Rs. 3,97,14,630 as against returned income of Rs. 1,50,34,560. The various additions made by the ITO were agitated by the assessee-company before the first appellate authority who allowed the appeals of the assessee partly. Certain additions made by the ITO were deleted by the CIT (Appeals) against, which the Revenue has come up in appeal before us.
3. The first issue regarding addition on account of power subsidy, is common to all the three assessment years under consideration. During the years under consideration, the assessee received subsidy from Andhra Pradesh State Electricity Board (hereinafter called APSEB for brevity) as under :
Assessment year Subsidy received
Rs.
1984-85 67,01,570
1985-86 76,87,863
1986-87 28,13,523
The assessee, in the returns of income filed before the ITO, had claimed that the subsidy received from APSEB was capital in nature and hence it was not assessable to tax under the provisions of the Income-tax Act. The assessee had in its books of account, transferred the subsidy to the Capital Reserve Account from Revenue Account. The ITO, however, noticed that APSEB had in fact deducted the subsidy from the electricity bills and had collected only the net amount. The ITO also discovered that for assessment year 1983-84, similar claim of the assessee had been negatived. The ITO was of the view that the subsidy was revenue in nature and, therefore, he did not accept the contention of the assessee that the power subsidy received by the assessee was a capital receipt. He, therefore, treated the subsidy received as an income of the assessee for all the three years under consideration.
4. Aggrieved, the assessee filed appeals before the CIT (Appeals). The CIT (Appeals), during the course of the hearing, noticed that the power subsidy was granted to the assessee in terms of G.O. Ms. No. 455, dated 3-5-1971. The CIT (Appeals) further noticed that the power subsidy was one of the incentives offered by Government of Andhra Pradesh for rapid industrialisation, that the mere method of computation of the quantum of subsidy on power consumption could not by itself make the subsidy a revenue receipt. The CIT (Appeals) considered the applicability of the judgment of the Andhra Pradesh High Court in the case of CIT v. Sahney Steel and Press Works Ltd. [1985] 152 ITR 39, wherein it was, inter alia, laid down that there was no room or basis for dissociating the subsidy from the business of the assessee, inasmuch as the subsidy was given for development of business and not for any other unrelated purposes. The payment was not a subsidy for setting up the plant but a subsidy given for the efficient and profitable running of the industry and its growth. In the said judgment, the Andhra Pradesh High Court held that the subsidy was revenue in nature. The CIT (Appeals) was, however, of the view that the said decision is distinguishable on facts and hence he came to the conclusion that the power subsidy received by the assessee from APSEB was a capital receipt and was to be excluded in the computation of income of the assessee for all the three years under consideration. In this regard, the CIT (Appeals) followed the decision of the Madhya Pradesh High Court in the case of CIT v. Dusad Industries [1986] 162 ITR 784. He accordingly treated the subsidy received from APSEB as a capital receipt and deleted the additions made by the Assessing Officer.
5. The Revenue has come up in appeal before us. The contention of the Revenue was very strongly put by Sri S.C. Jaini, learned Senior Departmental Representative and Sri K. Vasanth Kumar, learned departmental representative. The sum and substance of the contention of the Revenue before us is that the large amount of subsidy received by the assessee was revenue in nature, that the subsidy was received to supplement the revenue expenditure incurred in initial stages of the industry and that the power consumed is for the production of commercial goods on which profits arise and on no account could it be connected with formation of assets of enduring nature so as to characterise the receipt as capital. The Revenue, in its argument, principally relied upon the decision of the Andhra Pradesh High Court in the case of Panyam Cements and Mineral Industries Ltd. v. Addl. CIT [1979] 117 ITR 770 and Sahney Steel and Press Works Ltd. (supra).
6. On the other hand, the assessee, represented by Sri S.E. Dastur, Advocate, who was assisted by Sri P.J. Pardiwala and Sri S. Ravi, Advocates, strongly argued that the power subsidy is a capital receipt not liable to tax. It is pointed out that the assessee was registered with the Additional Director of Industries, Nalgonda, Andhra Pradesh, by proceedings No. 7645/Desk 10(2) dated 31-3-1983 for 15% outright grant under the Central Investment Subsidy Scheme, 1971. The assessee was granted an eligibility certificate No. 2391/B/81, dated 22-6-1981 for 25% power subsidy with effect from 3-3-1980 for a period of 3 years. The eligibility certificate was revised in proceedings No. 2391/B/81, dated 16-3-1984 and the effective period was 3 years from 1-11-1981. The assessee's case is that the power subsidy is a part of the incentives granted by Government of Andhra Pradesh under G.O. Ms. No. 224, dated 9-3-1976.
7. With a view to understanding the import of the various Government orders issued by Government of Andhra Pradesh, Sri Dastur took us through the various G.Os. During the period 1968 to 1971, G.O. Ms. No. 1225 was in operation in the State of Andhra Pradesh which granted certain concessions and rebates to industries. The said G.O. was, however, replaced by G.O. Ms. No. 455, Industries & Commerce Department, dated 3-5-1971. For units going into production on or after 1-1-1976, G.O. Ms. No. 455, dated 3-5-1971 had no application. G.O. Ms. No. 455 was replaced by G.O.Ms. No. 224 dated 9-3-1976 issued by Government of Andhra Pradesh. G.O. Ms. No. 224 made a reference to G.O. Ms. No. 1225 dated 31-12-1968 and G.O. Ms. No. 455 dated 3-5-1991 and superseded both the said two G.Os. In the preamble to G.O. Ms. No. 224, it was stated that the Government had been considering the revision of incentives so as to more effectively serve the purpose of bringing about growth in all parts of the State, with particular attention to backward talukas and blocks. The preamble further stated that it was felt that the principles of selection and gradation should be introduced.
8. The first concession or subsidy granted by the State Government under G.O. Ms. No. 224 is the investment subsidy. This is given to all entrepreneurs for setting up new industrial units and/or for undertaking substantial expansion. The quantum is computed at 10% of the general cost, subject to a ceiling of Rs. 10,00,000. The subsidy is available for industrial units in all the areas which have been declared as backward under the six-point formula. It is further noteworthy that investment subsidy is granted only to such areas which are not covered by the Central Subsidy Scheme. In scheduled tribal areas, the investment subsidy granted is higher in quantum. In other words, the State investment subsidy was an alternative to the Central subsidy.
9. The second subsidy granted by G.O. Ms. No. 224 is interest subsidy for educated self-employed or technocrats where the capital does not exceed Rs. 5,00,000. This is obviously for the purpose of alleviating the unemployment problem among the educated.
10. The third incentive is interest-free sales-tax loan. Undertakings set up in the municipal limits of Hyderabad, Seeunderabad, Vijayawada and Visakhapatnam are excluded from consideration. The quantum of loan was to be determined with reference to the quantum of sales-tax paid to Government of Andhra Pradesh on the construction material, plant and machinery and purchase tax and sales tax payable for a period of 5 years subject to certain limits. In G.O. Ms. No. 224, it is explicitly stated that the Scheme of State Incentives will be operated on the model of Central Subsidy Scheme. The entrepreneurs would have to register with the Director of Industries for claiming further incentives.
11. G.O.Ms. No. 224 has three annexures. Annexure I specifies the list of backward blocks and talukas under the Six Point Formula excluding Central investment subsidy areas and scheduled areas. Annexure II specifies the list of scheduled (tribal) areas in the State of Andhra Pradesh. Annexure III specifies the list of 65 industries which are excluded from the purview of the scheme formulated by Government of Andhra Pradesh in G.O.Ms. No. 224.
12. Realising the necessity for grant of further concessions, Government of Andhra Pradesh issued G.O. Ms. No. 654, Industries & Commerce, dated 13-7-1976, granting one further incentive, in the form of power subsidy, the said G.O. states that the Government has considered the proposal of Director of Industries and has decided that new industrial units registered for regular production on or after 1-1-1976, not being the 65 excluded industries notified in G.O. Ms. No. 224, Industries & Commerce, dated 9-3-1976, wherein the revised scheme of State incentives was approved, would be eligible for this power subsidy. Both G.O. Ms. No. 224 and G.O. Ms. No. 654 apply to industries which went into production after 1-1-1976. In other words, G.O. Ms. No. 654 dated 13-7-1976 is nothing but a part, of the package of incentives which the State Government has already notified in G.O. Ms. No. 224. The link between G.O. Ms. No. 224 and G.O. Ms. No. 654 is further established inasmuch as the 65 industries which are excluded from the purview of the former are also the very same industries which are not entitled for the benefit under the latter. There were further additions and deletions to the list of industries brought under G.O. Ms. No. 224 and consequently under G.O. Ms. No. 654. To link up these two G.Os., Sri Dastur draws our District Industries Centre, Nalgonda, which is extracted below :-
Sub :- INVESTMENT SUBSIDY - Sanction of Investment Subsidy 25% Power Tariff and IFST Loan to M/s Raasi Cement Ltd.. Vishnupuram (V) Miryalguda (Ex.P.S.) Nalgonda District Certain Clarification- Regarding.
Ref.- Your Letter No. RCL/AC/93 dated 31-3-1993.
This has reference to your request for Clarification on the subject. G.O. Ms. No. 224 dated 9-3-1976 offered few of Incentives for the Industries. The State Government wanted to extend the Incentives and had hence issued G.O. Ms. No. 654 dated 13-7-1976. The power subsidy was part of the package of Incentives offered under G.O. Ms. No. 224 dated 9-3-1976 for all the new Industries.
The learned counsel thus points out that the letter from the General Manager, District Industries Centre, makes it clear that power subsidy was also part of the package of incentives offered by Government of Andhra Pradesh in G.O. Ms. No. 224 dated 9-3-1976. The learned counsel continues and states that this is further evident from G.O. Ms. No. 375 dated 23-8-1985 which replaced G.O.Ms. No. 224 with effect from 1-4-1984, refers to the incentives and subsidies granted under G.O. Ms. No. 224 of 1976 and includes in the list power subsidy. APSEB issued B.P. No. 691, Comml. dated 10-8-1976 adopting the criteria set up by the State of Andhra Pradesh in G.O. Ms. No. 654 for the grant of power subsidy. The list of excluded industries specified in Annexure to B.P. No. 691 is identical with the list in Annexure III to G.O. Ms. No. 224.
13. The learned counsel further states that it is not disputed and it cannot be, that power subsidy granted by Government of Andhra Pradesh is one of the incentives which are passed on by the State through APSEB. In other words, the source of subsidy is Government of Andhra Pradesh while the medium of disbursement of subsidy is chosen to be APSEB.
14. On the aforesaid facts, it is urged that the question is whether the subsidy granted to the assessee under G.O. Ms. No. 654 read with G.O. Ms. No. 224 is capital or revenue in nature. The learned counsel asserts that firstly the objective behind the grant of concessions under G.O. Ms. No. 224, as further extended by G.O. Ms. No. 654, is for bringing about rapid industrial growth in the State and for stimulating the entrepreneurial development. It is an accepted fact that so far as the investment subsidy is concerned, the Central Investment Subsidy is a capital receipt. This has bern accepted by the Central Board of Direct Taxes in the Board's circular No. 142 dated 1-8-1981, in ITR 151 (St.). On the same pattern, the investment subsidy which is granted by the State Government under G.O. Ms. No. 224 would also be capital in nature and not assessable to tax, as held by the Income-tax Appellate Tribunal in ITO v. S.V. Earths and Chemicals (P.) Ltd. [1986] 18 ITD 196 (Hyd.). Insofar as the interest subsidy granted to educated self-employed is concerned, it has been held in Seaham Harbour Dock Co. v. Crook (Inspector of Taxes) 16 TC 333 that subsidy for mitigating unemployment is capital in nature. There can be little room for doubt that the interest-free sales tax loan, which is granted by the State Government, cannot be on the revenue account at all. It is submitted that one of the fundamental principles of interpretation is that the meaning of a word should be gathered from the meaning of the other words with which it keeps company. Likewise, the nature of one subsidy must be construed in the same manner as the other subsidies which are granted under the Government Order. The investment subsidy, the interest subsidy to educated unemployed and the Interest-free sales tax loan being clearly capital in nature, the power subsidy cannot be dissociated and treated as revenue in nature. In the opinion of the learned counsel, it was a package of incentives and what applies to one must apply to all. This principle, the learned counsel asserts, is supported by the decision of the Madras Bench of the Tribunal in Vispro Foundry Engineers (P.) Ltd. v. ITO [1984] 7 ITD 721. It cannot be that out of, say, five incentives granted under one scheme, four are capital in nature and one is revenue in nature, when the common objective is to pursue industrialisation.
15. The learned counsel further urges that the decision in the case of Panyam Cements & Mineral Industries Ltd. (supra) relied on by the Revenue, has in fact no application to the facts of the case. In that judgment, he points out, the High Court, was concerned with the interpretation of another C.O., viz., G.O. Ms. No. 678 dated 27-4-1961. The argument advanced on behalf of the assessee in that case was that the benefit of power tariff concession could not be taxed inasmuch as it was a windfall income or a casual or non-recurring receipt. The court held that even if it was to be held a casual and non-recurring receipt, in view of the fact that it arose from the carrying on of business, the same could be brought to tax. The other question with which the High Court was concerned was whether the rebate in charges received by the assessee was exigible to tax under Section 41(1) of the IT Act. It may be noticed that no argument had been advanced before the Andhra Pradesh High Court in that case that the receipt in question was capital in nature. It is a settled proposition of law, as has been enunciated by the Gujarat High Court in CIT v. Chunilal Khushaldas [1974] 93 ITR 369, that a judgment is not an authority on an issue which has not been argued and considered by the court. The learned counsel takes us through the following passage from the judgment of the Gujarat High Court and points out that this passage makes the point very clear :-
We shall presently refer to these cases but before we do so, we must reiterate what has often been said before, that when we are considering the pronouncements of judges which are binding upon us, the greatest possible case must be taken to relate the observations of a judge to the precise issues before him and to confine such observations, even though expressed in broad terms, to the general compass of the question before him, unless he makes it clear that he intended his remarks to have a wider ambit.
16. The learned counsel for the assessee also takes us through the judgment of the Andhra Pradesh High Court in the case of Sahney Steel &. Press Works Ltd. [supra] and points out that in the said case, the Honourable High Court was concerned with G.O. Ms. No. 455 dated 3-5-1971 in which the various concessions and reliefs which were granted to the entrepreneur were the following, viz.:
(a) Refund of sales tax on raw materials, machinery and finished goods to a maximum of 10% of the equity capital;
(b) Subsidy on the power consumed for production to the extent of 10% for certain industries and 12 1/2% for certain other industries;
(c) Exemption from payment of water rate for water drawn;
(d) Refund of water rate in respect of water drawn from Government sources; and
(e) Concession in the amount of land revenue or taxes with respect to land offered for establishing of any industry.
In addition to the aforesaid, certain incentives such as sale or lease of Government land or grant of financial assistance for establishing industries in certain backward areas, were offered. It will be evident that in the case of Sahney Steel & Press Works Ltd. (supra), investment subsidy was not part of the scheme. The court was not at all concerned with either investment subsidy under the Central Investment Subsidy Scheme, 1971, or anything similar to State Investment subsidy offered under G.O. Ms. No. 224. Further, G.O. Ms. No. 455 is not modelled on the Central Incentive Scheme unlike G.O. Ms. No. 224. That is a clear distinction between G.O. Ms. No. 455 considered by the Andhra Pradesh High Court and G.O. Ms. No. 224 read with G.O. Ms. No. 654 which is in issue before us now. He points out that it is undisputable that investment subsidy is on capital account. Whereas there was such a subsidy under G.O. Ms. No. 654, there was no such subsidy under G.O.Ms. No. 455. The said judgment of the Andhra Pradesh High Court is, however, an authority for the purpose of showing that all subsidies are not a necessarily revenue in character. In fact, that was the argument which had been canvassed on behalf of the Revenue before the Andhra Pradesh High Court. This was, however, repelled by the High Court by stating that it was not willing to accept the proposition on such a broad footing. Under G.O. Ms. No. 455, as noticed by the High Court, the subsidies, refunds and other financial concessions were deemed to be development grants. The High Court analysed the meaning of the word "development" and found that they were with a view to strengthen the unit financially so that it can run efficiently and can become strong and grow. In contrast, G.O. Ms. No. 224 does hot state that the subsidies are deemed to be development grants. Having regard to the fact that it was for establishing the unit, the subsidies are capital in nature.
17. Further, the learned counsel draws our attention to the decision in the case of Senairam Doongarmall v. CIT [1961] 42 ITR 392, in which the Supreme Court held that "it is the quality of payment that is decisive of the character of the payment and not the method of payment or its measure and makes it fall within capital or revenue". Power subsidy was granted along with other incentives for establishment of the unit and not for development of the unit. It is the assessee's submission that the receipt is clearly capital in nature and hence not taxable. Sri Dastur, therefore, urges that the order of the CIT (Appeals) is correct on facts and in law and, therefore, should be upheld.
18. In reply, however, the learned departmental representative strongly opposes the submission of the learned counsel for the assessee and points out that the assessee received the subsidy under G.O. Ms. No. 654 and, as a matter of fact, it was not a subsidy as such but it was only a concessional rate allowed by APSEB for the payment of energy charges. In the opinion of the learned departmental representative, it is only an indirect cash assistance to the assessee. The learned departmental representative also points out that Sri Dastur, on behalf of the assessee, had argued that three subsidies in G.O.Ms. No. 224 are respectively A, B and C of the said G.O. and D of the said G.O. was considered in G.O. Ms.No. 654. In the opinion of the learned departmental representative, A, B and C of G.O. Ms. No. 224 are separate from D Of G.O. Ms. No. 654. Thus, these two G.Os. are totally independent of each other and cannot be construed as a part of the same G.O. The learned departmental representative draws our attention, again, to the decision of the Andhra Pradesh High Court in the case of Sahney Steel & Press Works Ltd. (supra) and points out that the observations of the High Court at page 48 support the case of the department. It is also contended that the decision in the case of Panyam Cements & Mineral Industries Ltd. (supra) cannot be distinguished by saying that it deals only with investment subsidy. The learned departmental representative, therefore, reiterates that the CIT (Appeals) was in error in deleting the addition.
19. We have considered the rival submissions in the light of judicial decisions adverted to by the parties to the dispute. After a careful consideration of the facts of the case, we are of the view that the learned counsel for the assessee has made out a very strong case in support of the decision of the CIT (Appeals). It is seen from the G.Os. under reference that the power subsidy as per G.O. Ms. No. 455 dated 3-5-1971 was given to the industrialists for the developmental activities. As a matter of fact, the relevant portion of the G.O. has been extracted by the CIT (Appeals) in para 5.4 of his order which clearly indicates that the said subsidy was a development grant which, in our view, cannot be considered as a revenue receipt. Areading of the G.O. as a whole also goes to prove that Government of Andhra Pradesh, through APSEB, had given the subsidy for the development of the industry and for rapid industrialisation of the State of Andhra Pradesh. Therefore, the character of such a subsidy has to be capital in nature. The principle that a capital receipt spells capital expenditure or vice versa is simple but is not necessarily sound. The argument that ordinarily the nature and character of a receipt is the same as that of expenditure with regard to a particular transaction and that an amount received as capital receipt would be capital expenditure in the hands of the payer cannot be accepted as universally correct. The cases of the payer and the payee have to be divided upon independent consideration of the facts concerning each of them. Therefore, with a view to understand whether the power subsidy received by the assessee is capital or revenue in nature, all facts have to be taken into consideration. This, in fact, in our view, is not a receipt of part of profit by the assessee or a supplement to the profit of the assessee and, therefore, it has to be considered as capital in nature. As a matter of fact, the decision of the Madhya Pradesh High Court in the case of Dusad Industries (supra) supports the case of the assessee. In the said case, under a scheme framed by the Government of Madhya Pradesh, the Government granted sales tax subsidies to industries set up in backward areas in the State for a specific period from the date of starting production. Under one of the clauses of the agreement between the Government and the grantee, the grantee was entitled to a subsidy of 50% of the sales tax paid in the last three years or 8% of the capital actually employed, whichever was less. The assessee, whose industries were situated in a backward area in the State, claimed that the sales tax subsidies received by it were not assessable to tax on the grounds that the subsidy was an additional assistance given by the Government as an incentive to the small-scale industries in backward areas for capital investment and not to supplement the profits of the assessee, that the subsidy did not amount to refund of sales tax as the same was subject to certain terms and conditions and that, therefore, the subsidy was a receipt of a capital nature and not liable to tax. On these facts, the Madhya Pradesh High Court held:
As the subsidy was given on the basis of a particular scheme for a specified period in respect of industries situated only in backward areas, the same was given by way of an incentive for capital investment and not by way of addition to the profits of the assessee. Therefore, the sales tax subsidies received by the assessee were not assessable to tax as revenue receipts.
20. It is also essential to mention that in the G.O. under reference, the Government had granted investment subsidy, interest subsidy to educated unemployed and interest-free sales tax loan subsidy which were clearly in capital nature. The power subsidy, therefore, cannot be treated separately from the other three subsidies. Since the three subsidies mentioned above were held to be capital in nature, the power subsidy, being one of the package of incentives and forming part of the same scheme, cannot be taken out separately and treated as a revenue receipt. Considering all the facts and circumstances of the case, therefore, we are of the view that the CIT (Appeals) was justified in deleting the addition. We, therefore, uphold his decision.
21. The next issue regarding disallowance under Section 43B is relevant only to assessment years 1985-86 and 1986-87. For assessment year 1985-86, the assessee's accounting period ended on 30-6-1984 and for the said period, the assessee had collected the following amounts which were not remitted by it to Government, viz.:
Rs.
(1) APGST 38,78,700
(2) CST 3,41,489
(3) Karnataka sales tax 1,87,688
(4) Surcharge on KST 23,769
(5) Tamilnadu GST 10,57,755
(6) Surcharge on TNGST 1,05,775
(7) EPF 577
(8) Differential APGST at H.O. 3,11,335
(9) Outstanding turnover tax 1,23,228
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Total : 60,30,116
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Similar details for assessment year 1986-87 are as under :
Rs.
(1) Karnataka sales tax 2,91,567
(2) Surcharge on KST 29,156
(3) Rural Development Costs 24,611
(4) CST 3,96,238
(5) TNGST 8,51,946
(6) APGST 37,93,899
(7) Surcharge on TNGST 85,195
(8) Family Pension Fund 54,865
(93 Welfare Cess 9,940
(10) Provident Fund 48,575
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Total: 55,85,992
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The ITO, during the course of the assessment proceedings, found out that the assessee did not pay the sales tax collected from various customers. The assessee was, however, maintaining a separate Sales Tax Account in the Ledger. The ITO, therefore, wrote a letter to the company and invited objections, if any, against the application of Section 43B of the IT Act. The ITO was of the view that certain payments have to be allowed on actual payment only and, therefore, since the assessee had not made the payment, it was not entitled for the deduction. Hence, in his opinion, the provisions of Section 43B were applicable. The assessee, however, contended before the ITO that regarding amounts mentioned by the ITO in his letter addressed to the assessee, the payments were made within the stipulated time under the Sales tax Act. The ITO was, therefore, informed that the provisions of Section 43B were not applicable. Reliance was placed by the assessee on the decision of the Tribunal in the case of S. Govindaraja Reddiarv. ITO [1986] 19 ITD 177 (Coch.) and it was pleaded that since the payments had been made within the stipulated time, no disallowance could be made. The ITO, however, did not agree with the assessee and made the addition.
22. The issue was examined in detail by the CIT (Appeals) and by following the decisions of the Tribunal mentioned by him in his appellate order, he was of the view that the provisions of Section 43 B were not attracted in the case of the assessee. The CIT (Appeals) also followed the decision of the jurisdictional High Court in the case of Srikakollu Subba Rao and Co. v. Union of India [1988] 173 ITR 708 (AP).
23. The Revenue is aggrieved and has come up in appeal before us. The learned departmental representative has, however, fairly conceded that this issue has been fully covered by our own decision in the case of Jeevanlal Narsi and Sons v. ITO [1992] 42 ITD 719 (Hyd.). It is more or less settled now that the provisions of Section 43B do not apply in a case where the payment of sales tax has been made within the stipulated time though after the end of the accounting year relevant to the assessment year under consideration. If the payment has been made by the assessee during the time allowed, no disallowance under Section 43B could therefore, be made. We have gone through the assessment orders of the ITO and the appellate order of the CIT (Appeals) and find that the dates of payment have been mentioned and, therefore, we restore this matter back to the Assessing Officer with a direction that if the assessee has made the payment, within the stipulated time, no disallowance need be made under Section 43B of the IT Act. Subject to above, this ground is treated as allowed.
24. Ground Nos. 3 and 4 of the Revenue are relevant for assessment year 1985-86 only and are related to Mineral Rights Tax and excess provision for Mineral Rights Tax. Both the grounds are dealt with together for the sake of convenience.
25. Before we come to the reasons for which the disallowance has been made by the department and it has been deleted by the CIT (Appeals), it is essential to briefly mention the legislative background of the relevant legislation. The Legislature of Andhra Pradesh had enacted the Andhra Pradesh (Mineral Rights) Tax Act, 1975 (Act 14 of 1975) (hereinafter referred to as MRT Act). Under Section 3 of the said Act, the Government was entitled to collect mineral rights tax from every holder of mining lease at such percentage of the amount of royalty payable under Mines and Mineral (Regulation & Development) Act, 1957, as the Government may by notification fix. When the MRT Act was introduced, the rate of tax levied under the said Act was 25% of the royalty payable. The tax had been raised from time to time. By G.O. Ms. No. 23, dated 18-1-1984, the State Government had raised the tax to 900% of the royalty payable under Section 9 of the Mines and Minerals (Regulation & Development) Act, 1957. Various holders of mining leases, including the assessee before us, challenged G.O. Ms. No. 23 by way of writ partition in the High Court of Andhra Pradesh. The assessee filed W.P. No. 6566/84 and obtained an interim stay of the operation of the said G.O. The writ petition was finally disposed of by the High Court on 19-10-1984 allowing the assessee's writ as also the other batch of cases. The Honourable High Court held that under Section 3 of the MRT Act, the State Government could only notify the percentage of tax, therefore, it could not exceed 100% of the royalty. This decision was rendered after the end of the previous year on 30-6-1984 which was relevant to assessment year 1985-86.
26. The State Government immediately got Ordinance No. 34/84 promulgated on 20-11-1984 amending Section 3 of the MRT Act by substitution of the words "at such rate not exceeding 10 times" for the words "at such percentage". This was to cure the defect pointed out by the Andhra Pradesh High Court. The assessee again challenged the Ordinance No. 34/84 by way of writ petition No. 1641/84 in the High Court of Andhra Pradesh and obtained conditional interim order dated 20-12-1984 in W.P.M.P. 22051/84. By virtue of this order, the assessee was required to pay 200% of the royalty for the period prior to 20-11-1984 in two equal instalments on 18-1-1985 and 18-2-1985. The collection of royalty for the period after 21-11-1984 had been stayed. Ordinance No. 34 of 1984 was replaced by Andhra Pradesh (Mineral Rights) Tax (Amendment) Act, 1985 (Act No. 7 of 1985), with effect from 7-4-1985. The said Amendment Act also repealed the Ordinance No. 34/84. Subsequent to the end of the assessee's accounting year, Government of Andhra Pradesh issued G.O. Ms. No. 360 dated 12-8-1985 reducing the percentage of tax to 300% from 900%..
27. During the accounting year ending on 30-6-1984, the assessee made a total provision of Rs. 1,20,54,940 for the royalty payable in terms of G.O.Ms. No. 23, dated 18-1-1984 and MRT Act. The entire provision made by the assessee was disallowed by the ITO. He disallowed a sum of Rs. 33,61,656 holding that it was a tax and the provisions of Section 43B of the IT Act applied and inasmuch as the amount had not been paid, it was not allowable as a deduction. Insofar as the excess provision is concerned, the ITO did not consider its allowability.
28. The CIT (Appeals), however, allowed the provision for mineral rights tax entirely. He held that insofar as the provision to the extent of Rs. 31,96,720 is concerned, the provisions of Section 43B of the IT Act did not apply, because it was a cess and Section 43B covers cess only with effect from 1-4-1989. With respect to the balance of Rs. 88,58,220 which was the excess provision for mining rights tax (in view of the subsequent reduction by G.O.Ms. No. 360, dated 12-8-1985), the CIT (Appeals) upheld the assessee's claim for allowance based on the judgment of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971]82 ITR 363. The decision of the CIT (Appeals) thus was entirely in favour of the assessee against which the Revenue is aggrieved.
29. In its appeal, the revenue attacks the order of the CIT (Appeals) on the ground that Section 43B applies to the provision for mineral rights tax in a sum of Rs. 31,96,720. The Revenue also objects to the allowance of alleged excess provision for mineral rights tax on the ground that there was no liability to pay the same. The learned departmental representative strongly urges that the CIT (Appeals) has not properly appreciated the facts of the case and has allowed the relief to the assessee without any justifiable reasons. As a matter of fact, there is no controversy as far as the application of the provisions of Section 43B is concerned. The learned departmental representative points out that the Supreme Court has held that it is in the nature of tax and, therefore, the provisions of Section 43B are applicable. In this regard, the learned departmental representative has drawn our attention to the decision of the Supreme Court in the case of India Cement Ltd. v. State of Tamil Nadu AIR 1990 SC 85. Regarding the excess provision for mineral rights tax, the learned departmental representative draws our attention to the letter of the assessee dated 23-10-1987. The deletion ordered by the CIT (Appeals) is said to be unjustified and, therefore, the learned departmental representative contends that his order should be reversed and that of the ITO restored.
30. Sri Dastur, learned counsel for the assessee, on the other hand, supports the order of the CIT (Appeals). He points out that the Andhra Pradesh High Court in the case of KCP Ltd. v. Government of Andhra Pradesh 1990 (2) ALT 398 DB, had followed thejudgment of the Supreme Court in India Cement Ltd.'s case (supra) and held that the State Government did not have the power to impose the mineral rights tax. The Andhra Pradesh Mineral Rights Tax Act, 1985, had been struck down by the High Court. The High Court had held that the power to levy tax on mines and minerals was an occupied field and only the Parliament could legislate in this behalf. The declaration that the levy was invalid extended to the date of commencement of the statute, although for the purpose of the refund of mineral rights tax earlier collected, the court had made it prospective. The assessee, the learned counsel points out, relies in this regard on Article 265 of the Constitution of India according to which "No tax shall be levied or collected except by authority of law". The assessee's case is that the compulsory exaction, which has no authority of law, cannot be called a tax. Consequently, the provisions of Section 43B can have no application. The learned counsel submits that the sum of Rs. 31,96,720 is not a tax but is a sum which the Government is permitted to retain by virtue of the orders of the High Court. It is a compulsory exaction not being a tax and the authority not to refund flows from the court order itself. In this regard, the learned counsel places reliance upon the decision of the Delhi Bench of the Income-tax Appellate Tribunal in IAC v. DalmiaCement (B.) Ltd. [1991] 37 ITD 335 (Delhi) where on consideration of identical facts, he points out, the Tribunal was pleased to hold that the provisions of Section 43B of the IT Act did not apply. Insofar as the excess provision is concerned, the learned counsel submits that inasmuch as the liability had arisen within the previous year ending on 30-6-1984, the correct position would be that the liability would have to be allowed during the year ending on 30-6-1984. The fact that by the time the assessment was made G.O. Ms. No. 360, dated 12-8-1985 had been issued, would not make a difference, in the opinion of the learned counsel. In the year in which there was a cessation of liability, the provisions of Section 41(1) would apply. For this proposition, the learned counsel places reliance upon the judgment of the Bombay High Court in the case of Srikant Textiles v. CIT [1971] 81 ITR 222. As a matter of fact, the assessee had offered the provision on being written back in the year 1987-88 which has been assessed protectively by the Assessing Officer. It is further submitted that in view of the decision of the Supreme Court in the case of Union of India v. J.K. Synthetics Ltd. [1993] 199 ITR 14, no particular purpose would be served by bringing it to tax in 1985-86 and to direct its deletion in 1987-88. Therefore, even on this principle, the entire provision for mineral rights tax is an admissible deduction for assessment year 1985-86. The learned counsel thus maintains that the order of the CIT (Appeals) is correct on facts and sound in law and should, therefore, be upheld.
31. Having regard to the rival submissions, we do not find any infirmity in the order of the first appellate authority. The assessee, as already mentioned in the facts of the case, is required to pay royalty in respect of mining rights of limestone at the rates prescribed by the Government. In addition to this royalty, the assessee has to further pay mineral rights tax at a percentage of this royalty as notified by Government of Andhra Pradesh from time to time under the provisions of the MRT Act. The nature of the payment, therefore, appears to be a cess to which the provisions of Section 43B have no application. Moreover, at the relevant time, the provisions of Section 43B were applicable to "any sum payable by the assessee by way of tax or duty under any law for the time being in force". The section, therefore, speaks of tax and duty. The word "tax", as commonly understood, is a compulsory exaction of money by a public authority for public purposes, enforceable by law and is not payment for services rendered. Thus, the tax to be enforceable by law should also be imposed by authority of law and even the collection should be made by authority of law. In other words, unless the tax has been lawfully levied, it cannot be collected and unless the tax is lawfully levied, it cannot fall under the provisions of Section 43B of the IT Act. We have mentioned above that the High Court of Andhra Pradesh has already given a finding that only Parliament is empowered to legislate on the subject and, therefore, the tax imposed by Government, of Andhra Pradesh was perhaps contrary to the constitutional provisions. Such being the case, the imposition cannot be a tax and cannot fall under Section 43B of the IT Act.
32. Similar issue was considered by the ITAT, Delhi Bench 'A' in the case of Dalmia Cement (B.) Ltd. (supra). In the said case, the assessee-company had been allowed to quarry limestone in certain areas by the State Government. In respect of such quarrying, the assessee had to pay certain royalties to the State Government and cess in respect of royalty payable under Section 115 of the Madras Panchayat Act. On appeal, the High Court stayed the payment of cess and the assessee made an appeal to the Supreme Court. As per the aforesaid levy, the assessee had to pay certain amount representing the cess on royalty. Pending the decision of the Supreme Court for the assessment year 1984-85, the assessee claimed deduction in respect of the aforesaid liability as a statutory liability. The ITO disallowed the assessee's claim on the ground that the cess was a tax within the meaning of Section 43B and since it was not paid by the assessee, deduction was not available. On these facts, it was held:
It would be seen from Article 277 of the Constitution that other species of taxes are duties, cess or fees. Now in Section 43B, as it was originally enacted, the expression 'taxes and duties' alone were included, cesses or fees were not part of the section. Nevertheless, the department had been attempting to include market cess as a prohibited item under Section 43B. The Supreme Court in the case of OmParkashAgarwal v. Girt Raj Kishori [1987] 164 ITR 376 had brought out a distinction between 'tax' and 'fees. Whereas tax is an imposition for public purposes without reference to special benefit to taxpayer, the essential character of fee is that it should be co-related to expenses incurred by the Government in rendering services. Thus, even if a cess would be tax in the longer sense, it was no tax in the narrower sense and it would not come under Section 43B. Therefore, the levy of cess although a tax for the purpose of Constitution, was not a tax within the meaning of Section 43B....
33. In the case before us, we are also of the view that the CIT (Appeals)was justified in deleting the addition on the ground that the payment was in the nature of cess and cess was not covered under Section 43B. In addition, as we have already mentioned above, the said tax was not levied as per authority of law and cannot, therefore, be considered as tax which would fall within the provisions of Section 43B. We accordingly uphold the order of the CIT (Appeals) and reject the Revenue's grounds.
34. The next ground of appeal of the Revenue regarding leave encashment to employees is common to all the three years under consideration. It may, however, be mentioned first that the ITO has again applied the provisions of Section 43B for the purpose of disallowance of provision for leave encashment. The disallowance made by the ITO in the three years under consideration is as under :-
Asst. year Amount disallowed
Rs.
1984-85 1,48,401
1985-86 3,46,757
1986-87 4,17,800
35. The service conditions between the assessee and its employees stipulate that privilege leave lying to the credit of the employees in excess of 30 days can be allowed to be encashed for the following purposes, viz.,
(i) Marriage of self, daughter/son or dependent sister/brother;
(ii) Ceremonial occasions or functions necessitating large expenditure on the part of the employee;
(iii) Overseas or outstation education of children;
(iv) Prolonged sickness of employee or his dependent;
(v) Payment of insurance premium or public provident fund;
(vi) Purchase of land and construction of house or own building; and
(vii) Purchase of vehicle or conveyance.
This facility given by the assessee to its employees is a facility in service and not a retirement facility. The assessee had to provide for payment of cash for unutilised portion of employees' leave during the year of account. The assessee claimed deduction in the three years under consideration on the ground that it is an ascertained liability and the expenses are incidental to the business of the assessee. The ITO, however, for the reasons mentioned by him, did not agree with the assessee and disallowed the amount under the provisions of Section 43B of the IT Act.
36. The CIT (Appeals), on appeal, considered the matter afresh and was of the view that the ITO had no justification to disallow the leave encashment.
37. In the appeals before us, the learned departmental representative has argued that the leave encashment is not deductible as perhaps it is a contingent liability. The liability has not been ascertained and, as a matter of fact, for the years under consideration, there was no liability to be deducted from the total income and the learned departmental representative, therefore, justifies the addition. By drawing our attention to the Supreme Court judgment in the case of Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66, the learned departmental representative points out that the income-tax law makes a distinction between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The liability in praesenti is deductible and not the latter. The facts of the case of the assessee have amply demonstrated that the liability is de futuro and hence contingent. The learned departmental representative also points out that the case of the Revenue is supported by another decision of the Supreme Court in the case of CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643.
38. The learned departmental representative has also drawn our attention to the conditions attached to the encashment of leave. He points out that since so many conditions are attached before the leave could be allowed to be encashed, it would be a contingent liability and, therefore cannot be allowed to be deducted.
39. The learned counsel for the assessee, however, points out that the Tribunal has to decide (1) whether the assessee is entitled to the deduction and (2) the quantum of deduction. Before he proceeded to argue the case fully, he fairly conceded that the liability is not on actuarial basis but merely on the basis of incremental liability having regard to the number of days of leave to the credit of all the employees. He submits that for the purpose of determination of the actual amount allowable under this head, it may be necessary to direct the assessee to furnish actuarial certificates and on that basis to direct the ITO to allow the liability.
40. However, insofar as the admissibility of the liability itself as a deduction is concerned, the learned counsel points out that the assessee is entitled to the deduction. The learned counsel brings to our notice the judgment of the House of Lords in Southern Railway of Peru Ltd. v. Owen (Inspector of Taxes) [1957] 32 ITR 737.The relevant passage from the said judgment at page 754 is extracted below:
...whereas it is possible that any one of its many employees may forfeit his benefit and so never require a payment, the substantial facts of the situation are that when the company has paid every salary and wage that is due for current remuneration of the year it has not by any means wholly discharged itself of the pecuniary burden which falls upon it in respect of the year's employment. This is a long-term application of the practice by which provision for holidays with pay in the coming year is charged in part against the receipts of the previous year.
The learned counsel points out that this judgment of the House of Lords has been quoted with approval by the Supreme Court in Metal. Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53. On the basis of the facts of the case, the learned counsel asserts that the provision for leave encashment is an admissible deduction, but, however, he concedes that it should be valued on actuarial basis.
41. Regarding the department's reliance upon the judgment in Indian Molasses Co. (P.) Ltd.'s case (supra) and Gemini Cashew Sales Corpn.'s case (supra), the learned counsel points out that these two decisions are wholly beside the point. Admittedly, in the present case, there is no liability posterior to closure as the assessee continued its business beyond the previous year. There is no possibility of there being any resulting trust in favour of the assessee. Thus, the learned counsel contends that the decision of the CIT (Appeals) should be approved.
42. Having regard to the rival submissions, we are of the view that the liability of the assessee is ascertained and as a matter of fact enforceable in terms of its contracts with the employees. The liability is, therefore, an allowable deduction. The quantum of the liability, however, has to be determined with reference to the actuarial valuation. We, therefore, direct the ITO to obtain the actuarial valuation from the assessee and allow the liability accordingly. The Revenue fails on this ground.
43. The next issue, regarding the provision for shortfall in levy cement share is relevant only for assessment year 1984-85. During the year under consideration, the assessee had debited a sum of Rs. 1,04,106 as provision for excess realisation on account of utilisation of levy quota and claimed the same as deductible. Before the ITO, the assessee had submitted that in accordance with the orders of the Cement Controller of India, levy quota had been fixed at 1,49,082 tonnes, whereas the assessee had supplied levy cement only to the extent of 1,20,493 tonnes, resulting in a shortage of 28,594 tonnes. Consequently, the realisation on the sale of the said cement was in excess of what it should have been in levy quota was fulfilled, for which a provision was made. The ITO disallowed the provision. In appeal, however, the CIT (Appeals), by following the judgment in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), Qantas Airways Ltd. v. ITO, and ITO v. Wanson (India) Ltd., [1983] 5 ITD 102 (Pune), allowed the said provision.
44. In appeal before us, the learned departmental representative urges that the provision made by the assessee was not a liability to be deducted from the total income of the assessee. As a matter of fact, the learned departmental representative is of the view, that the assessee had deliberately avoided meeting the levy obligation and that it did not receive any demand notice to pay the difference. The learned departmental representative has heavily relied on the fact that the assessee-company itself had reversed the entry in the subsequent year and, therefore, he urges that the demand should not be allowed to be deducted.
45. On the other hand, Sri Dastur opposes the contention of the learned departmental representative. He points out that Government of India had issued Cement (Control) Order, 1967, in exercise of the powers conferred under Section 18G and Section 25 of the Industries (Development & Regulation) Act, 1951 (65 of 1951). In terms of Clause 1A of the said Order, the provisions thereof, excepting Clause 9A, were to apply in relation to levy cement. The expression "levy cement" is defined in Clause 2(d) of the said Order. Under Clause 3 of the said Order, no purchaser can remove cement, whether sold or unsold, except with previous permission in writing of the Central Government. Under Clause 9 of the Control Order, there is a compensatory payment to be made to the Cement Regulation Account in the event of removal of cement under Clause 3 of the Control Order.
46. The assessee had not been able to fulfil the levy quota requirement under the Cement Control Order, in view of the fact that the allottee had defaulted in lifting the quantities in accordance with the realisation orders of the Regional Cement Controller, Madras. The assessee was thus left with no option except to dispose of the cement in the open market. Our attention has been drawn by the learned counsel to the correspondence between the assessee-company and the Deputy Cement Controller which indicates that it was on account of default on the part of the allottees that the levy quota could not be fulfilled.
47. It is also a fact that in the previous year relevant to the immediately succeeding assessment year viz., 1985-86, the quota of the earlier year had been fulfilled and the provision made in the accounts relevant to assessment year 1984-85 had been reversed. The learned counsel submits that in view of the judgment of the Supreme Court in the case of J.K. Synthetics Ltd., (supra) no particular purpose would be served by taking the said provision in assessment year 1984-85 while the assessee itself reversed the provision in assessment year 1985-86.
48. On merits, the learned counsel submits that in view of the Cement Control Order, which was in force and was binding on the assessee, the amount realised in excess ought to have been paid in terms of Clause 9 of the Control Order. However, with the permission of the Controller of Cement, the levy quota was fulfilled in the subsequent year. Therefore, during the year of account relevant to assessment year 1984-85, the excess realisation was not an amount which could be said to have come to the common till of the assessee. There was a crystallisation and quantified liability which was, therefore, allowable. By drawing our attention to the decision of the Andhra Pradesh High Court in the case of CIT v. Chodavaram Co-operative Sugars Ltd. [1987] 163 ITR 420, the learned counsel points out that the assessee did not collect the excess sale price as part of its trading receipt. On more or less similar facts, it was held by the High Court:
The right to collect the amount in excess of the price fixed by the Control Order was saddled with the obligation to deposit the amount in a separate account and the assessee was always held accountable for the excess collection, pending the decision of the Supreme Court. The provisions of the Levy Sugar Price Equalisation Fund Act, 1976, clearly imposed an obligation on the assessee to repay the money to the constituents whether the excess price was collected before or after the commencement of the Act. Therefore, the assessee did not collect the excess sale price as part of its trading receipts.
The learned counsel, therefore, contends that the action of the Assessing Officer is not correct.
49. The facts of the case suggest that the diversion of part of the assessee's stock in levy account to the open market was on account of commercial expediency. It was not a failure on the part of the assessee to fulfil its quota in levy account, but it was the failure of the authorities to clear the levy cement on which the assessee had no control. It was also true that as per the provisions, the assessee had to fulfil its quota of levy cement, if not in this year, then in the next year. We are, therefore, of the view that the assessee's case is supported not only by the decisions adverted to by the CIT (Appeals) but by the decision of the jurisdictional High Court in the case of Chodavaram Co-operative Sugars Ltd. (supra). An appreciation of the facts of the case showed that the assessee did not collect the excess price as part of trading receipts for the year under consideration and, therefore, it should not be disallowed for this year. We, therefore, following the reasons recorded by the CIT (Appeals) in his appellate order, uphold his order and negative the contention of the Revenue.
50. The next issue regarding disallowance of replacement of diesel engine is relevant only for assessment year 1986-87. During the course of the assessment proceedings, the ITO found that the assessee had claimed a sum of Rs. 6,18,425 on account of repairs and maintenance of quarry equipment. The said sum included Rs. 4,00,000 on account of cost of new diesel engine purchased. The assessee pleaded before the ITO that the cost of diesel engine represented replacement cost and hence an allowable deduction. The Assessing Officer did not agree with the contention of the assessee and made a disallowance of Rs. 4 lakhs. The assessee, however, succeeded before the first appellate authority.
51. Before us, the learned departmental representative has contended that the CIT (Appeals) was in error in allowing replacement of diesel engine as a revenue expenditure. The CIT (Appeals) ought to have considered the fact that the diesel engine is an independent machinery which can be fitted in any machinery so as to make the machine function. In the opinion of the learned departmental representative, the CIT (Appeals) ought to have considered the fact that the new asset can exist independently and has its distinct identity apart from a composite unit and hence, in the opinion of the learned departmental representative, the deduction cannot be allowed as a revenue expenditure.
52. On the other hand, the learned counsel for the assessee supports the decision of the CIT (Appeals).
53. We have considered the submissions of the parties to the dispute. This issue is squarely covered by the decision of the Mysore High Court in the case of Hanuman Motor Service v. CIT [1967] 66 ITR 88, in which the assessee was a firm of bus operators. Previously their buses were run with petrol engines which were subsequently replaced with diesel engines. On the fact of that case, it was held that the replacement of worn out parts of a machinery does not by itself bring a new asset into existence. Such a replacement of engine in the slid decision was held to be a revenue expenditure. Similarly, the issue was also examined by the Andhra Pradesh High Court in the case of Nathmal Bankatlal Parikh and Co. v. CIT [1980] 122 ITR 168 (FB), in which the replacement of old diesel engine by a new one did not bring any new asset into existence, in the opinion of the Honourable High Court. The expenditure incurred, therefore, was held to be in the nature of current repairs and hence admissible. Respectfully following the judicial precedents adverted to above, we are of the view that the CIT (Appeals) was justified in allowing the claim of the assessee.
54. The next issue in these appeals is regarding investment allowance on certain assets. This issue is relevant for assessment years 1984-85 and 1985-86. The assets on which the investment allowance was claimed are as under :-
Name of the asset Cost
Rs.
(1) Air-conditioners 79,587
(2) Plant roads 1,52,139
(3) Telephone exchange 99,960
For assessment year 1985-86, the assessee claimed investment allowance of Rs. 77,614 on the cost of a new air-conditioner. The ITO examined the claim of the assessee and found that the assessee had used the air-conditioner in its Head Office and not in the factory and, therefore, he decided that the air-conditioner used in the office came under office equipment and hence a prohibited item in terms of the Eleventh Schedule. He also took the view that the telephone exchange installed at the factory of the assessee was also in the nature of office apparatus coming under item 22 of the Eleventh Schedule. As regards plant roads, the ITO took the view that they are more in the nature of building and not plant and machinery. The CIT (Appeals), however, agreed with the contention of the assessee and allowed its claim.
55. The learned departmental representative objects to the section of the CIT (Appeals) and contends that the air-conditioner, telephone exchange etc., on which the investment allowance had been claimed, fall in the category of office equipment and, therefore, the CIT (Appeals) was not justified to allow the claim of the assessee. It is, therefore, prayed that the order of the CIT (Appeals) should be reversed.
56. The learned counsel for the assessee, on the other hand, supports the decision of the CIT (Appeals).
57. Having regard to the rival submissions, we are of the view that the CIT (Appeals) was justified in allowing the investment allowance on telephone exchange. This issue was examined by the Himachal Pradesh High Court in the case of CIT v. Mohan Meakin Breweries Ltd. [1980] 122 ITR 203. In the said decision, it was held that internal telephone system is a scientific apparatus used by a businessman for the purpose of his business and is, therefore, a plant. The investment allowance on telephone system was, therefore, held allowable as per the observations of the Honourable High Court at page 206 of the report. This issue was also considered by the Tribunal in the case of 7710 v. Electronics Research Industries (P.) Ltd. [1986] 17 ITD 769 (Bang.), in which the assessee"s claim for investment allowance on the internal telephones was upheld. We, therefore, upheld the decision of the CIT (Appeals) as far as the investment allowance on telephone exchange is concerned.
58. As far as investment allowance on air-conditioner is concerned, it is seen that the ratio of the decision of the Tribunal in IAC v. Fulford (I) Ltd. [1989] 34 TTJ 285, Bombay Bench, supports the decision of the CIT (Appeals). However, we direct the ITO to ascertain whether the air-conditioners are installed in the office or in the factory. If the air-conditioners are installed in the office, the assessee would not be entitled to investment allowance. However, if such air-conditioners are installed in the factory, we direct the Assessing Officer to allow the investment allowance.
59. Coming to the investment allowance on plant roads, we are of the view that the assessee is not at all entitled to the investment allowance in view of the decision of the Supreme Court in the case of CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. [1992] 196 ITR 149. We, therefore, reverse the decision of the CIT (Appeals) on this count. This ground of the Revenue is thus partly allowed.
60. The last issue raised by the Revenue is relevant for assessment years 1985-86 and 1986-87 and is regarding the expenditure on maintenance of guest house. For assessment years 1985-86 and 1986-87, the ITO had disallowed Rs. 57,335 and Rs. 82,843 respectively. The assessee had argued before the ITO that the expenses were allowable. In appeal, the CIT (Appeals) examined the issue and was of the view that 50% of the expenses should be allowed towards expenses relating to the assessee's own employees and that only the balance 50% should be disallowed. This ground of the assessee was, therefore, partly allowed by the CIT (Appeals).
61. Before us, the learned departmental representative objects to the decision of the CIT (Appeals) and draws our attention to Section 37(5) of the IT Act. He urges that in view of the provisions of the IT Act, the CIT (Appeals) was not justified in allowing part of the expenditure.
62. On the other hand, the learned counsel for the assessee points out that the expenses claimed by the assessee were not claimed under Section 37(1) of the IT Act. By drawing our attention to the decision of the Bombay High Court in the case of CIT v. Chase Bright Steel Ltd. (No. 1) [1989] 177 ITR 124, points out that for guest house expenses which could be disallowed are the expenses which are claimed under Section 37(1) of the IT Act. If the expenses are claimed under Sections 30 to 36, they cannot be disallowed. He also points out that the accommodation is in the nature of a transit house and, therefore, in the strict sense of the term, it is not a guest house. The accommodation is used by the employees and executives of the company whenever they visit the factory. There is no accommodation available anywhere near the factory of the assessee. The place itself is inaccessible and is a god-forsaken place. He, therefore, justifies the action of the CIT (Appeals) in allowing 50% of the expenditure.
63. We have carefully gone through the order of the CIT (Appeals) and have also considered the arguments of the parties to the dispute. We do not find any infirmity in the order of the CIT (Appeals). For the reasons mentioned by him in his appellate order, we uphold his decision.
64. In the result, the appeals are partly allowed.