Income Tax Appellate Tribunal - Ahmedabad
Startronics & Enterprises P. Ltd. vs Deputy Commissioner Of Income Tax. on 24 October, 1994
Equivalent citations: (1996)55TTJ(AHD)167
ORDER
B. L. CHHIBBER, A. M. :
These three appeals are directed against the order of the learned CIT passed under s. 263 of the IT Act, 1961.
2. The assessee is a private limited company established by two technocrats returning to India from abroad. Dr. Kirit C. Vyas and Mrs. Bharati Vyas returned to India after staying about 16 years in the USA, established the Startronic Enterprises Pvt. Ltd. Mrs. Vyas has a Master degree in the field from IIT, Chicago and Dr. Vyas has a Doctorate degree. All the machinery required for this project was imported from the USA. The payment of the duty and installation costs of the machinery was financed by the Gujarat State Finance Corporation, Ahmedabad, Gujarat.
3. The assessee company is engaged in the business of data processing, system designing and software development and supply. While completing the assessments under s. 143(3) the learned Assessing Officer (AO) allowed to the assessee company following deductions :
Asst. yr. 1985-86
1. Investment allowance of Rs. 4,90,000 on computers
2. Additional depreciation of Rs. 1,46,714 on computers
3. Extra shift Allowance of Rs. 2,93,429 on computers Asst. yr. 1986-87 :
1. Additional depreciation Rs. 74,560 on computers.
2. Extra shirt allowance of Rs. 3,54,296 on computers.
asst. yr. 1987-88 :
1. Investment allowance of Rs. 1,76,700 on Computers
2. Extra Shift Allowance of Rs. 3,52,049 on Computers.
4. Later on, on perusal of the records of the IT proceedings in the assessees case for the abovenoted three assessment years, the learned CIT noted that the orders passed under s. 143(3) by the ITO were erroneous in so far as these were prejudicial to the interests of Revenue because, according to him, the learned AO was not justified in allowing the abovenoted allowances. He accordingly, invoked his jurisdiction under s. 263. In response to the notices issued by the CIT the assessee argued that the computers installed were plant and machinery and were entitled to investment allowance in view of the judgment of the Bombay High Court in the case of CIT vs. IBM World Trade Corpn (1986) 161 ITR 673 (Bom). The learned CIT was not satisfied with the explanations furnished and held as under :
"For the purposes of s. 32A, however, the conditions applicable to the assessees case are that (a) the machinery or plant should be new (b) it should be installed after 31st March, 1976 and (c) for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule [32A(2)(iii)]. The words article or thing denote a commercial and marketable commodity. It is an admitted fact that the output of the computer machinery by way of printout of data is not a commercial or marketable commodity. It has no use to anybody else except the person for whom the data are processed. The assessee is not really selling any goods. Its business is providing services."
In support of his contention the learned CIT also relied upon the definition of the word "article" given in the T. P. Mukherjees The Law Lexicon Second Edition at page 163 which reads as under :
"Article : The" Shorter Oxford English Dictionary (Ed. 1964), Vol. I, Page 102 says that article means, inter alia, "a piece of goods or property". Websters New World Dictionary defines an article as a commodity and commodity as "any useful thing" or "any article of commerce". (See Ed. 1962, pp. 83 and 295). Putting it simply, a "machine" is a thing and is therefore an article. Law may not all be common sense and logic may not be taboo in law Courts. A machine is after all intended to be and is conceived as a useful thing and is therefore an article."
The learned CIT further held as under :
"The word "thing" has also to be understood in this sense. One more point to be considered in this context is that a thing or article has a value in itself. The output of a computer machinery, however, has no value in itself. A copy of one printout can replace the original printout. Considering all these, I am of the opinion that since the assessee was not producing any article or thing the computer machinery installed by it is not entitled to investment allowance. The AO has allowed investment allowance without considering the issue properly. Therefore, I am satisfied that the assessment is erroneous and prejudicial to the interests of the Revenue. Therefore, the assessment is set aside. The AO is directed to make a fresh assessment. He should give adequate opportunity to the assessee to prove its case."
The CIT further held that since computers were installed in the office premises, additional depreciation was not admissible on the same. He further held that extra shift allowance for triple shift to the data processing equipment was also not admissible in view of the provisions of Depreciation Schedule Part-III C(5). He accordingly set aside the orders passed by the AO.
5. Shri J. P. Shah, the learned counsel for the assessee, submitted that the CIT is not justified in setting aside the assessments framed by the ITO by the impugned orders. He submitted that the CIT failed to appreciate that investment allowance is the successor of the development rebate and the CBDT has also pointed out that its Circulars on development rebate very much apply to the investment allowance e.g. a circular on development rebate regarding providing a reserve in the year of losses. According to the learned counsel for the assessee, the CIT further erred in pointing out that the decision of the Bombay High Court in the case of CIT vs. IBM World Trade Corpn. (supra) and other judgments did not apply to the facts of the case when in fact each one of them applies. According to the learned counsel, the CIT further erred in pointing out that s. 33 did not require the production of article or thing whereas s. 32 requires a production of an article or thing. The CIT failed to appreciate that even if the construction put by him was correct then on the undisputed facts the computers of the assessee company did produce articles or things. If they did not do that, the assessee wonders what they do. The learned counsel for the assessee vehemently submitted that the CIT erred in when he observed that "the output of the computers machinery has no value in itself." According to the learned counsel the computers installed by the assessee company are plant and machinery and are entitled to investment allowance. In support of his contention he relied upon the following decisions :
Krishna Associates vs. ITO (1987) 22 ITD 530 (Bang), ITO vs. Computility India P. Ltd. ITA No. 3826/Bom/1983, ITO vs. Rajesh R. Arora ITA No. 453/Bom/1982 dt. 30th March, 1984 and G. S. Revankar vs. ITO ITA Nos. 2260 to 2262/Bom/86 reported in BCA Journal, September, 1988.
The learned counsel for the assessee further submitted that since the computers were plant and machinery though installed in the office premises, were entitled to additional depreciation. He however did not press on the third issue i.e. extra shift allowance.
6. The learned Departmental Representative strongly supported the orders of the CIT.
7. We have considered the rival submissions. As stated above, the assessee is engaged in the business of data processing, system designing and Software development and supply. In fact, the business of the assessee can be broadly classified in the two areas, one manufacture of general purpose of multi-user software and the other is production of a system as per the specifications, requirements and necessities of a particular customer. The business as mentioned above is carried out by a team of technical persons employed by the company. The system used by the company will consist of a very complicated set of plant and machinery and equipment. Under the circumstances, we do not agree with the observations of the CIT that the assessee does not produce any article or thing and is engaged in providing services. In our opinion, in view of the decided case of CIT vs. Ajay Printery Pvt. Ltd. (1965) 58 ITR 811 (Guj) in the instant case the data processing and print out would certainly be a thing produced by the assessee even if not a thing manufactured by the assessee. The assessee was therefore entitled to the deductions under s. 32A. In this we are fortified by the judgment of the Allahabad High Court in the case of Singh Engg. Works P. Ltd. vs. CIT (1979) 119 ITR 891 (All) and the judgment of the Bombay High Court in the case of IBM World Trade Corpn. (supra) and the four judgments of Tribunal relied upon by the assessees counsel referred to supra.
8. As regards the second issue i.e. disallowance of additional depreciation by the CIT, since we have held that the computer machinery installed by the assessee are plant and machinery as a natural corollary the assessee would be entitled to additional depreciation and we accordingly hold that the CIT is not justified in setting aside the assessments on this issue.
9. As regards the third issue i.e. extra shift allowance the assessee has not pressed this issue and to this extent we uphold the orders of the CIT.
10. In the result, the appeals are allowed in part.