Income Tax Appellate Tribunal - Ahmedabad
Income-Tax Officer vs N.K. Patel And Co. on 28 November, 1986
Equivalent citations: [1987]20ITD220(AHD)
ORDER
R.M. Mehta, Accountant Member
1. In this appeal, the revenue has challenged the action of the Commissioner (Appeals) in respect of the following grounds :
1. The learned Commissioner (Appeals) has erred in law and on the facts of the case in holding that the assessee-firm is engaged in construction or manufacture or production of an article or thing. He further erred in directing to allow investment allowance on the cost of road roller used by the assessee in the construction of road.
2. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) ought to have held that construction of road does not amount to manufacture or production of an article or thing.
3. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) ought to have held that the assessee is not entitled to investment allowance in respect of the road roller purchased by the assessee for construction of road.
2. The assessee admittedly is a firm of contractors. The ITO in the course of the assessment proceedings observed that the assessee had claimed investment allowance of Rs. 60,082 in respect of a road roller of the value of Rs. 2,40,328. In support of the claim, the assessee contended : (7) that this was a new machinery purchased for the road construction project. (2) It was further claimed that the business was of manufacture or production of any article or thing which in this case happened to be a new road. (3) That all conditions prescribed for the claim of investment allowance had been fulfilled.
3. The ITO after examining the case observed as follows :
The tar and metal is poured on the road and what the road roller does is to level the tar and metal which are placed on the road. It is thus seen that the road roller itself does not produce or manufacture any finished product, but it only moves on the tar and metal placed on kachha road and thereby kachha road is converted into pakka road because of the pressure brought by the road roller. Road roller itself is thus not a manufacturer or the producer, but it only moves on the road like other transport vehicle. The only difference is that it gives a pressure on the road and it does not carry any goods or passengers. In my opinion, the purchase of road roller does not entitle the assessee to the investment allowance because it does not manufacture or produce any article as envisaged under the provisions of Section 32A of the Income-tax Act, 1961. The claim of investment allowance is therefore rejected.
4. Before the Commissioner (Appeals), the assessee sought to support the claim by explaining the process of road construction outlining the various steps involved and the material to be used. It was contended that both labour and machinery were used for road construction work. It was also submitted that items used in the 'manufacture' of a road were (1) hot mix plate, (2) paver finisher, and (3) road roller. It was further contended that the following three tests laid down were also fulfilled :
(1) That a commodity was produced.
(2) That the process involved labour as well as machinery.
(3) That the end-product was different.
5. The assessee supported his arguments with the following authorities : CIT v. M.R. Gopal [1965] 58 ITR 598 (Mad.), CIT v. Lakhtar Cotton Press Co. (P.) Ltd. [1983] 142 ITR 503 (Guj.) and Idandas v. Anant Ramchandra Phadke AIR 1982 SC 127.
6. The learned Commissioner (Appeals) allowed the claim of the assessee as follows :
I have carefully considered the ITO's arguments and submissions made by the assessee's counsel. I have also considered the various case laws, and the test laid down by the various Courts including the Supreme Court. As stated by the counsel the raw materials used are different from the end-product. Labour and machinery are employed. The end-product is different than the raw material used in the process of manufacture of roads. In this view of the matter, I am of the view that the assessee must succeed if the Income-tax Officer is directed to allow investment allowance on road roller provided other conditions under Section 32A(2)(b)(iii) are fulfilled. This ground of appeal is, therefore, taken to be allowed.
7. The revenue is in appeal against the decision of the Commissioner (Appeals). The learned departmental representative has strongly supported the order of the ITO. It was contended that road-making is not a manufacturing activity. It was further submitted that the end result was not a thing or article which has any marketability. He referred to the decision of the Bombay High Court in the case of CIT v. Shah Construction Co. Ltd. [1983] 142 ITR 696 in support of his arguments.
8. The learned Counsel for the assessee, on the other hand, supported the decision of the Commissioner (Appeals) and repeated arguments similar to the ones as had been advanced before him. In addition to the authorities cited before the Commissioner (Appeals) he pressed into service the following decisions : CIT v. Ajay Printery (P.) Ltd. [1965] 58 ITR 811 (Guj.), Progressive Engg. Co. v. ITO [1983] 3 ITD 172 (Hyd.), Mishit Synthetics (P.) Ltd. v. ITO [1984] 7 ITD 486 (Ahd.), Shri Raj Kumar Singh &Co.v. ITO [1986] 16 ITD 202 (All.) and First ITO v. Dr. P. Vittal Bhat [1983] 6 ITD 560 (Bang.) (SB).
The learned Counsel also sought to distinguish the decision in Shah Construction Co. Ltd.'s case (supra) and relied upon by the departmental representative.
9. We have considered the rival submissions and at the outset we hold that the decision in Shah Construction Co, Ltd.'s case (supra) was considering whether the assessee-company was either wholly or mainly engaged in the manufacture or processing of goods. This issue is not before us in the assessee's case. The decision in the case of Lakhtar Cotton Press Co. (P.) Ltd. (supra) was on the point of 'concessional rate of tax' applicable to a company engaged in the business of ginning and pressing of cotton which was held to be a 'processing activity'. In the decisions in the cases of Dr. P. Vittal Bhat (supra) and Nishit Synthetics (P.) Ltd. (supra), the Tribunal was considering what constituted 'production of an article' and what resulted in a 'manufacturing activity'. The decision in the case of M.R. Gopal (supra) considered the claim of the assessee under Section 15C of the Indian Income-tax Act, 1922 ('the 1922 Act'). The case of Ajay Printery (P.) Ltd. (supra) dealt with the issue whether printing of balance sheets, etc., amounted to 'manufacture of goods' within the meaning of Section 23A of the 1922 Act. In other words some of these decisions did not deal with Section 32A of the Income-tax Act, 1961 ('the Act") at all whereas some others dealt primarily with the aspect whether a particular type of activity was 'manufacture' or 'production' for purposes of Section 32A. However, none of these decisions dealt with the third activity referred to in the section, namely, construction [section 32A(2)(h)(iii)]. This aspect has been, however, considered in the case of Progressive Engg. Co. (supra). The decision in that case was that an assessee doing business as a contractor would be entitled to investment allowance on its machinery used in the construction of a dam. It was held that the word 'article' or 'thing' mentioned in Section 32A(2)(b)(iii) need not be confined to movable property only. It was further held that the addition of the word 'thing' coupled with the use of the word 'construction' made the assessee's eligibility to the claim on account of investment allowance clearer. In the case of Shri Raj Kumar Singh & Co. (supra) the Tribunal allowed the claim of investment allowance to an assessee who was assisting the main contractor engaged in the construction of mine roads for purposes of quarrying, blasting, collecting, carriage and stocking of boulders and metal.
10. In both the above decisions it may be noticed that the assessees were carrying on composite activities of various types leading to the main activity of construction of a dam or a road. In the present appeal before us on the other hand there is no finding by any of the lower authorities as to whether such composite activities were carried on by the assessee. There is no doubt that a road has been constructed for which a road roller has been used. There must have, however, been some other items of machinery with which the assessee must have carried out the processes of heating, mixing, spreading and levelling of the various ingredients such as tar, metal, gravel, sand, etc., on the road before the road roller actually went into action. Although there is a reference in the order of the Commissioner (Appeals) to (1) plate, and (2) paver finisher, there is no finding as to whether these items of machinery were allowed investment allowance or whether in fact it was claimed or not.
11. According to us a contractor who is engaged in the construction of a road is entitled to investment allowance in respect of the plant and machinery (including a road roller) used for such construction provided it carries on all the composite activities prior to using the road roller itself. We further hold that a road is an article or thing and that such an article or thing is not prohibited by the Eleventh Schedule to the Act. We would accordingly direct the ITO to examine whether the road roller was used along with some other machineries engaged in a composite activity of road construction. If so then the assessee is entitled to succeed in its claim. This is the view we have taken in the preceding paras. We accordingly restore the matter to the file of the ITO for this limited purpose.
12. As a result, the appeal of the revenue is allowed for statistical purposes.