Income Tax Appellate Tribunal - Allahabad
Assistant Commissioner Of Income Tax vs J. K. Cotton & Spinning Wvg. Mill Co. Ltd. on 27 May, 1996
Equivalent citations: [1997]62ITD151(ALL)
ORDER
V.K. Sinha, A.M.
1. This is an appeal filed by the Department.
2. The main dispute in this appeal relates to the question whether extra-shift allowance (ESA) is allowable in respect of the concern as a whole or in respect of each plant and machinery :
3. The AO calculated ESA in respect of each machinery depending on the number of shifts worked by such machinery, relying on the decision of the Madras High Court in South India Viscose Ltd. vs. CIT (1982) 135 ITR 206 (Mad).
4. The CIT(A) observed that the issue was covered by an order of the CIT(A) for the previous year according to which, ESA has to be allowed for the concern as a whole, and not in respect of each machinery separately. According to him, it was based on a judgment of the Tribunal, though particulars of the same have not been given. He directed the AO to allow the ESA on the above basis. The Department is now in appeal before us.
5. Both sides have argued before us with a considerable learning and erudition. The Department has relied on the following :
1. South India Viscose Ltd. vs. CIT (supra);
2. Anantpur Textiles Ltd. vs. CIT (1979) 116 ITR 851 (Cal);
3. Raza Sugar Company vs. CIT (1970) 76 ITR 541 (All);
4. Kundan Sugar Mills vs. CIT (1977) 106 ITR 704 (All); and
5. Kerala Financial Corporation vs. CIT (1994) 210 ITR 129 (SC).
6. On the other hand, the learned counsel for the assessee has relied on the following :
1. CBDT Instruction No. 1605 dt. 26th February, 1985;
2. Sriram Bearings Ltd. vs. CIT (1993) 199 ITR 579 (Cal);
3. K. P. Varghese vs. ITO (1981) 131 ITR 597 (SC);
4. Navnit Lal C. Javeri vs. K. K. Sen, AAC (1965) 56 ITR 198 (SC); and
5. Kichna Sugar Co. Ltd. vs. CST 1995 UPTC 1028.
7. We will now proceed to analyse the arguments of the two sides and the impact of the above judgments.
8. We will commence with the decision in South India Viscose Ltd. (supra) relied upon by the learned Departmental Representative, at serial. No. 1 above. It will take care of the decisions at serial Nos. 2, 3 and 4 also, since the decision in the case of South India Viscose Ltd. (supra) has relied on them. The assessee in that case claimed grant of ESA in respect of various machinery on the basis of the number of days on which the concern as a whole had worked and not with reference to the number of days on which each machinery had worked. The ITO restricted the allowance to the number of days each machinery had worked. The AAC and the Tribunal, however, held that the assessee was entitled to ESA in respect of the machineries so long as the concern as a whole had worked multiple shifts. The provision regarding extra-shift depreciation allowance appearing in Sch.-2 Appendix-I to the IT Rules, 1962 has been reproduced in the judgment and relevant extract is given below :
"(IV) Extra-shift depreciation allowance - An extra allowance upto a maximum of an amount equal to one-half of the normal allowance should be allowed where concern claims such allowance on account of double shift working and establishes that it has worked double shift. An extra allowance upto a maximum of an amount equal to the normal allowance, instead of one-half of the normal allowance, shall be allowed where a concern claims such allowance on account of triple shift working and establishes that it has worked triple shift."
9. It was held that the word "concern" which has been used above showed that the ITO would be obliged to allow Extra-shift depreciation only if the assessee had made a claim therefor and if the assessee did not choose to make a claim, the ITO was not required to give the allowance. Except for the use of the word "concern", it could not be said that the rule gave any kind of global allowance on all the machinery purchased by the company and set up in its business.
10. It was held that the ITO had to apply his mind which machinery owned by the assessee had been used by him in extra-shift and treat it as eligible for extra shift allowance on the basis of number of days it had worked. After giving this decision it was stated that the conclusion was strengthened by the decision of the Calcutta High Court in Anantpur Textiles Ltd. vs. CIT (supra). It was also stated that there were two decisions of the Allahabad High Court in Raza Sugar Company vs. CIT (supra) and Kundan Sugar Mills vs. CIT (supra) taking the same view.
11. Thereafter CBDT issued Instruction No. 1605 dt. 26th February, 1985, taking notice of the above decisions and directing that grant of extra-shift allowance for plant and machinery be calculated not with reference to the number of days each machinery and plant had worked but with reference to the working of a factory. The relevant extract is given below :
"Subsequently, the Allahabad High Court in Kundan Sugar Mills vs. CIT (1977) 106 ITR 704 (All), the Calcutta High Court in the case of Anantpur Textiles Ltd. vs. CIT (1979) 116 ITR 851 (Cal) and lately the Madras High Court in South India Viscose Ltd. vs. CIT (1982) 135 ITR 206 (Mad), have held that extra-shift allowance would be admissible with reference to the number of days on which the particular machinery or plant has worked extra-shift and not on the basis of the working of the concern. It may be mentioned that Board's letter dt. 28th September, 1970, and the Circular No. 109 dt. 20th March, 1973 [see (1973) 89 ITR (St.) 30], have not been cited before these Courts and, therefore, had not been considered by them. Revenue audit has been raising objections on the basis of these decisions where the AO's had allowed extra-shift allowance on the basis of the working of the concern as a whole instead of the working of individual plant and machinery.
The instructions issued earlier have been considered again by the Board. In exercise of the powers conferred by s. 119(1) of the IT Act, 1961, the CBDT, being of the opinion that it is expedient for the proper administration of these provisions, directs that the grant of extra-shift allowance for plant and machinery be calculated with reference to the working of a factory situated at a place and not with reference to the number of days each machinery and plant has worked. Where a concern has more than one factory, the extra-shift allowance will be regulated for each factory in the above manner. As the determination of the number of days each machinery or plant has worked in a factory is cumbersome, the existing instructions and the present clarification are aimed at simplifying the calculation of extra-shift allowance [F. No. 202/27/84-11(All)] dt. 26th February, 1985, from the CBDT."
12. It is the assessee's case that the above instructions constitute or benevolent circular which is binding on IT authorities even if it relaxes the rigour of law. Reliance is placed on the decision of the Calcutta High Court in the case of Sriram Bearings Ltd. (supra) where the very same circular was considered and it was held that instructions of CBDT to mitigate hardship in application of statutory provisions is binding on IT authorities. This judgment, it may be noted, was delivered on 22nd August, 1989 though it is reported in (1993) 199 ITR 579 (supra).
13. The assessee has also relied on the decision of the Supreme Court in K. P. Varghese vs. ITO (supra). Relevant extract is given below :
"But the construction which is commending itself to us does not rest merely on the principle of contemporanea expositio. The two circulars of the CBDT to which we have just referred are legally binding on the Revenue and this binding character attaches to the two circulars even if they be found not in accordance with the correct interpretation of sub-s. (2) and they depart or deviate from such construction. It is now well settled as a result of two decisions of this Court, one in Navnit Lal C. Javeri vs. K. K. Sen, AAC (1965) 56 ITR 198 (SC) and the other in Ellerman Lines Ltd. vs. CIT (1971) 82 ITR 913 (SC), that circulars issued by the CBDT under s. 119 of the Act are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act".
14. The learned counsel for the assessee further strengthened his argument relying on a decision of the jurisdictional High Court in the case of Kichha Sugar Company Ltd. (supra) it may be noted that the judgment was delivered on 23rd December, 1994. Here also the learned counsel for the revisionist contended that the circular issued by the CST was binding on the authorities, whereas the learned standing counsel contended that the circular was against the provisions of the Sales-tax Act and, therefore, it was not binding on the AO. For this proposition he placed reliance on a judgment of the Hon'ble Supreme Court in Bengal Iron Corpn. vs. CTO (1993) UPTC 1312. Faced by different judgments of the Hon'ble Supreme Court taking contrary views, their Lordships held that the judgment of the Hon'ble Supreme Court in Navnit Lal C. Javeri (supra) which was a five judges Bench, had to be followed as against the judgment in the case of Bengal Iron Corpn. (supra) which a judgment by the two Judges. The relevant extract is given below :
"It is thus clear that the revisionist availed the concession under s. 3G of the Act in pursuance of a specific determination by the Government and the issue of a circular by the Commissioner. Learned counsel for the revisionist contended that the circular issued by the Commissioner in exercise of powers under r. 4(2) of the UP ST Rules is binding on the authorities and, therefore, the AO was not entitled to levy the amounts in question under s. 3G(3) of the Act when the revisionist had acted in accordance with the position of law as explained by the Government and subsequently by the Commissioner in the aforesaid circular. Learned standing counsel, on the other hand contended that the Government's letter as well as circular issued by the Commissioner were against the provisions of s. 3G(2) of the UP ST Act and, therefore, they were not binding on the AO. For this proposition, he placed reliance on a judgment of the Hon'ble Supreme Court in Bengal Iron Corpn. vs. CIT 1993 UPTC 1312. In that case the Government had passed an order stating that 'cast iron casting' were to be treated as cast iron. The Hon'ble Supreme Court held that the two were different things and the clarification/circulars issued by the Central Government/or State Government represent merely their understanding of the statutory provisions and are not binding upon the Courts. This is a judgment by two Judges. On the other hand there is a series of judgments by the Hon'ble Supreme Court taking a contrary view. In Navnit Lal C. Javeri vs. K. K. Sen, AAC (1965) 56 ITR 198 (SC), a five Judges Bench of the Supreme Court while dealing with a circular issued by the Central Board of Revenue under the IT Act, 1922 held that a circular which was issued by the Board would be binding on all officers and persons employed in the execution of the Act. The circular that was the subject-matter of consideration before the Hon'ble Supreme Court deviated from the provisions of the Act and yet the Court held that the circular was binding on the ITO. This judgment was followed in Ellerman Lines Ltd. vs. CIT (1971) 82 ITR 913 (SC). These two judgements were again followed by the Supreme Court in K. P. Varghese vs. ITO (1981) 131 ITR 597 (SC), in which it was observed as under :
"But the construction is commending itself to us does not rest merely on the principle of contemporanea expositio. The two circulars of the CBDT to which we have just referred are legally binding on the Revenue and this binding character attaches to the two circulars even if they be found not in accordance with the correct interpretation of sub-s. (2) and they depart or deviate from such construction. It is now well settled as a result of two decisions of this Court, one in Navnit Lal C. Javeri vs. K. K. Sen, AAC (1965) 56 ITR 198 (SC) and the other in Ellerman Lines Ltd. vs. CIT (1971) 82 ITR 913 (SC), that circulars issued by the CBDT under s. 119 of the Act are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act."
Thus, it has been the consistent view of the Supreme Court that beneficial circulars that explain the legal position or otherwise mitigate the rigour of law are binding on the authorities administering the taxing statute. Therefore, in view of the judgment of a larger Bench of the Supreme Court, the judgment relied on by the learned standing counsel cannot be followed."
15. We now come to the judgment of the Supreme Court in Kerala Financial Corpn. vs. CIT (supra), relied upon by the Department. It may be noted that the judgment was delivered on 12th May, 1994. It was held therein that circulars of CBDT cannot detract from or override the provisions of the IT Act, 1961. Relevant extract is given below :
"Shri Salve would, however, urge that a little different view of the matter had been taken by the two Judge Bench of this Court in K. P. Varghese vs. ITO (1981) 131 ITR 597 (SC), in which it was observed at p. 615 that circulars issued under the aforesaid provisions are binding on all officers "even if they deviate from the provisions of the Act". As to what was sought to be conveyed by the word "deviate" is not clear to us. This much, however, is apparent that this Court did not mean, while saying as above, that circular can override any provision of the Act or, to put it in the language of Mukharji, J., detract from the Act. Though Shri Salve has urged that the decision in Varghese's case (supra) has been affirmed by a Constitution Bench in C. B. Gautam vs. Union of India (1993) 199 ITR 530 (SC), reference to that case shows that Varghese's case (supra) was mentioned in para 22 (at p. 548). While stating that the conclusion arrived at, namely, that the provisions of Chapter XX-C of the Act are to be resorted to only where there is significant under-valuation of the immovable property with a view to evading tax, finds support from the decision in Varghese's case (supra). This shows that what was stated about permissibility of circulars to "deviate" from the provisions of the Act was not one which was affirmed by the Constitution Bench.
The fact that the circular to which Shri Salve has referred is one which had been issued in exercise of the powers conferred by s. 119 of the Act has no significance in so far as the point under consideration, namely, whether the circular can override or detract from the provisions of the Act is concerned, inasmuch as what s. 119 has empowered is to issue orders, instructions or directions for the "proper administration" of the Act or for such other purposes specified in sub-s. (2) of the section. Such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provision of law enacted by Parliament. Such a contention cannot seriously be even raised."
16. After careful consideration we find that although the judgment of the Hon'ble Supreme Court in the case of Kerala Financial Corpn. (supra) was delivered on 12th May, 1994, it was not brought to the notice of the Hon'ble Allahabad High Court in the case of Kichha Sugar Co. Ltd. (supra), though it was delivered on 23rd December, 1994. In the case of Kerala Financial Corpn. (supra), a distinction has been made between the words "deviate" as used in the case of K. P. Varghese vs. ITO (supra) as well as Navnit Lal C. Javeri (supra), and the words "override" and "detract from". It has been specifically clarified that the Hon'ble Supreme Court did not mean in the case of K. P. Varghese vs. ITO (supra) that circulars can override any provision of the Act or detract from the Act. Thereafter in concise but powerful words, the Supreme Court held that the directions under s. 119 of the IT Act, 1961 cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegate/authority to even amend the provision of law enacted by Parliament.
17. In the case before us CBDT. Instruction No. 1605 dt. 26th February, 1985 detracts from or overrides the provisions of law as held by three High Courts (see the cases relied upon by the learned Departmental Representative), which includes two decisions of the jurisdictional High Court in the cases of Raza Sugar Company vs. CIT (supra) and Kundan Sugar Mills vs. CIT (supra). We respectfully follow the judgment of the Hon'ble Supreme Court in the case of Kerala Financial Corpn. (supra) and hold that the CBDT instruction cannot be binding on the IT authorities and the decision of the jurisdictional High Court in the above two cases must be followed. It is accordingly held that ESA should be worked out in respect of each machinery depending on number of shift worked by such machinery and not on the basis of the concern as a whole. The Departmental ground of appeal in this regard is allowed.
18. The next dispute relates to the question whether medical reimbursement to the director of the assessee-company is to be excluded from the purview of perquisites for the purpose of calculating ceiling limits under s. 40(c)/40A. The CIT(A) followed his earlier order for asst. yr. 1986-87 and held that the ceiling should be computed after excluding the medical reimbursement. The Department objects to this finding.
19. The learned Departmental Representative relied on a decision of the Kerala High Court in CIT vs. Common Wealth Trust Ltd. (1982) 135 ITR 19 (Ker) (FB). In that case it was held that house rent allowance amounted to "benefit amenity or perquisite" and, therefore, it was within the scope of s. 40(a)(v). This is the case relied upon by the AO also. On the other hand, the learned counsel for the assessee relied on a decision of the Bombay High Court in Asbestos Cement Ltd. vs. CIT (1991) 192 ITR 89 (Bom).
20. After considering the rival submissions we find that the Department has relied on a decision dealing with an entirely different issue. The Kerala High Court was considering the scope of s. 40(a)(v) of the Act and not s. 40A(5) of the Act. Sec. 40(a)(v) of the Act lays down that notwithstanding anything contrary in ss. 30 to 39, certain amounts shall not be deducted in computing the income chargeable under the head "profits and gains of business computation". The dispute before us is not the same. In the circumstances the case relied upon by the Department is not at all applicable.
21. On the other hand, the decision on the case of Asbestos Cement Ltd. (supra) is directly applicable. It was held therein that reimbursement of medical expenses of director/employees were not covered by s. 40(c) and were not perquisites for s. 40A(5) of the Act. Respectfully following the decision, we reject this ground of appeal of the Department.
22. The last dispute relates to the question whether investment allowance can be given on water coolers.
23. The AO noticed that investment allowance had been claimed on cost of water coolers Rs. 14,374. He made a remark that water coolers were office appliances on which investment allowance could not be allowed, the claim was rejected.
24. The CIT(A) was informed during appeal by the assessee that the water coolers were installed in factory premises. In view of this submission he directed that investment allowance should be allowed as a deduction as per law. The Department objects to this finding.
25. The learned Departmental Representative has submitted that such a claim was not put forward before the AO and water coolers cannot be said to be used in manufacture of any article or thing. Reliance was placed on a decision of the Calcutta High Court in CIT vs. Technico Enterprises (P) Ltd. (1994) 206 ITR 36 (Cal). The learned counsel for the assessee, on the other hand, relied upon the orders of the CIT(A).
26. We have considered the rival submissions. In the case Technico Enterprises (P) Ltd. (supra), it was observed that conceptually speaking, anything that is a tool of trade is plant. But one thing was clear, viz, that the term "tool of trade" signified close and direct connection between the tool and the assessee's trade. The plant must be employed directly in the manufacture or production of goods. In that case there was no dispute that a computer purchased by the assessee was not part of manufacturing machinery. It was, therefore, held that investment allowance was not admissible. We would respectfully apply the ratio to the facts and circumstances of the case. Even if the water cooler was installed in factory premises, it cannot be said that was employed directly in the manufacture or production of goods. We, therefore, hold that the investment allowance is not admissible on the water cooler. This ground of the Department is allowed.
27. In the result, the Department's appeal is partly allowed.