Income Tax Appellate Tribunal - Ahmedabad
Raw Flints (P.) Ltd. vs Income-Tax Officer on 20 January, 1987
Equivalent citations: [1987]21ITD207(AHD)
ORDER
R.M. Mehta, Accountant Member
1. All these appeals have been heard together and as common points are involved they are disposed of by a consolidated order for the sake of convenience.
2. The first common ground is regarding the claim of investment allowance in respect of the 'electrical installations'. The ITO in the course of the assessment proceedings observed that the assessee had claimed investment allowance on 'electrical installations' in addition to plant and machinery. According to the ITO investment allowance under the provisions of Section 32A of the Income-tax Act, 1961 ('the Act') was allowable only on plant and machinery owned by the assessee and used for purposes of business. The ITO was further of the opinion that 'electrical installations' were not included in the definition of 'plant' as defined in Section 43 of the Act. He accordingly proceeded to disallow the claim. In the course of the hearing of the first appeal, the learned counsel for the assessee made detailed submissions and a perusal of the order of the Commissioner (Appeals) further shows that written arguments were also filed. In the course of the hearing before the Commissioner (Appeals) the assessee sought to support his claim in respect of investment allowance and in doing so not only brought on record its manufacturing process but also sought to support its contention by referring to various judgments not only of various High Courts but the Supreme Court as well. The narration of facts, the arguments of the assessee, and the reference to various decisions runs to nearly 4 typed pages. The decision of the Commissioner (Appeals), however.'' is contained in one short paragraph which runs as under :
3. I have considered the submission very carefully but I am unable to agree with the views of the learned counsel for the simple reason that no investment allowance is admissible as per the provisions of the law on account of electric installations installed during the year under consideration. The Income-tax Officer has considered this fact carefully and has brought out all the relevant facts as per his assessment order and it is not necessary here to repeat the same but to mention that I fully agree with the findings of the Income-tax Officer that the assessee is not entitled to investment allowance for all the years under consideration on electric installations. From the definitions as made out under Section 43 of the Income-tax Act, 1961, the assessee is clearly not entitled to any investment allowance on electric installations made during the year. The assessee's claim for the same is rejected.
3. We before proceeding further would straightaway like to observe that the Commissioner (Appeals) has disposed of the matter in a very light and cursory manner without considering the arguments of the assessee or in giving his own views. According to the Commissioner (Appeals) 'the ITO has brought out all the relevant facts'. We regretfully observe that this is not so.
4. In the course of the arguments before us the learned counsel for the assessee sought to support his claim by arguing more or less on the same lines as had been done before the Commissioner (Appeals). He not only referred to the relevant portions of the order of the Commissioner (Appeals) to bring out the facts but also sought to explain the manufacturing process which the assessee was engaged in, and on the basis of which its contention was that the 'electrical installations' in its case formed part of the 'plant'. To summaries the various arguments, we first of all refer to the manufacturing process which is as follows :
(i) The assessee is engaged in the manufacture of mischmetal used as a component of flints for lighters.
(ii) The process of manufacture involves passing electrical energy through 'mixed rare earth chloride', a principal raw material, in specially fabricated electricity cells. The interaction of electricity with the raw material charges the ultimate product through cathodes and anodes, without which process, the raw material does not get converted into the finished marketable product.
(iii) Because of this process of rectification and conversion of raw materials using electricity generated and passed through a complex electrical equipments and installations this industry is known as an 'Electrometallurgical Industry'.
(iv) In other words, electricity is itself an item of raw material or stores acting as an agent to convert the basic raw material into a finished product.
(v) Unlike the other industries, where electricity is merely used as a power to run the machines, which could be done by alternative means also, in this industry electrical energy after duly converting the same as D.C. from A.C. supply is a media for manufacturing process itself.
(vi) In order to use electricity for aforesaid purpose, the appellant company set up a complex electrical equipment and installations the cost of which included cost for specially fabricated cells, air-circulations, capacitors, electric motors, air circuit breakers, aluminum armored cables, starters, copper conductors, PVC tubing's and meters, etc. This composite structure of electrical equipments is the main tool to make available the requisite process of interaction of the energy with raw materials.
5. It was further contended that in the case of the assessee-company the process of manufacture involved interaction of the raw material with electrical energy generated through the electrical installations. It was also contended that the electrical installations were the inevitable tool without which not even the primary process of manufacture could be undertaken in the assessor's case. It was also contended that the definition of the term 'plant' in Section 43 should not be given a narrow meaning since the definition was one of wide import and it must be broadly construed. It is also submitted that one has to see as to what type of operation a particular apparatus is performing in an assessee's business and in case it fulfilled the functions of a 'plant' then it was to be treated as a 'plant' and nothing else. In support of his arguments the learned counsel also referred to a communication dated 5-1-1978 addressed by the Under Secretary to the Government of Gujarat to the Secretary, Gujarat Electricity Board, which runs on the following lines :
I am directed to state that Raw Flints (P.) Ltd., Rajkot have approached Government with a request to treat them as continuous electro chemical process industries and also to exempt them from observing" staggered holiday. On careful consideration, Government is pleased to direct that Raw Flints (P.) Ltd., Rajkot engaged in the manufacture of mischmetal may be treated as a continuous process industry and may accordingly be exempted from observing staggering holidays. These orders are issued in relaxation of para 2 of Government order of Industries, Mines & Power Department No. GHU/77/108/ELC-1077/18392/K, dated 26-12-1977.
This order may be implemented pending further orders.
He also sought support from the two documents appended on pages 9 and 10 of the paper book. We, however, do not consider these documents as they have not been filed either before the ITO or before the Commissioner (Appeals). On the basis of these arguments the learned counsel for the assessee sought to submit that the assessee was engaged in a continuous electro chemical process industry in which electrical installations formed an integral part of its manufacturing process and should be considered as a 'plant' rather than ordinary electrical installation. In support of his various arguments, the learned counsel placed reliance on the following judgments :
Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86 (SC), approving the decision of the Gujarat High Court in the case of CIT v. Elecon Engg. Co. Ltd. [1974] 96 ITR 672, CIT v. Tarun Commercial Mills Ltd. [1985] 151 ITR 75 (Guj.) and CIT v. Taj Mahal Hotel [1971] 82 ITR 44 (SC). The learned departmental representative, on the other hand, sought to support the orders of the ITO and the Commissioner (Appeals).
6. We have examined the rival contentions and have also perused the case law cited by the learned counsel. It is seen that the only basis on which the lower authorities have rejected the contention is that the definition of 'plant' as contained in Section 43 does not include 'electrical installations'. According to us this is a narrow approach adopted by the revenue specially when the term 'plant' has now been made so exhaustive that it includes practically every type of equipment and item which can be envisaged and which can come into use for business purposes. For this purpose, we refer to the depreciation table marked 'Appendix I, Part I' forming part of the Income-tax Rules, 1962. In item III the items categorized under the head 'Machinery and plant' are so exhaustive that they include cycles, motor cars, cmematograpn mms ana DUIDS 01 studio lights. The list is so long that one can find every type of equipment classified as machinery and plant.
7. We would also like to observe at this stage that investment allowance is allowed to an assessee under the provisions of Section 32A. Sub-section (1) of Section 32A mentions the quantum of the deduction whereas Sub-section (2) details the items which are entitled to the said investment allowance. The types of assets which are not entitled to investment allowance and as detailed in Section 32A(1) are as under :
(a) any machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest house ;
(b) any office appliances or road transport vehicles ;
(c) any ship, machinery or plant in respect of which the deduction by way of development rebate is allowable under Section 33 : and
(d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head 'Profits and gains of business or profession' of any one previous year.
8. The other provision is in respect of those articles or things which are specified in the list in the Eleventh Schedule of the Act. A perusal of the aforesaid Schedule does not mention the item, the manufacture of which the assessee-company is engaged in. We would also at this stage like to observe that the various decisions relied upon by the learned counsel for the assessee support his arguments inasmuch as even 'books are being treated as a plant' and we would go to the extent of saying that even technical know-how is being treated as a 'plant'.
9. We are accordingly of the view that in the case of the assessee the electrical installations are an integral part of manufacturing process and cannot be divorced from 'plant and machinery'. We would accordingly hold that the assessee is entitled to its claim for investment allowance in respect of 'electrical installations'. This is subject to fulfillment of various conditions laid down by law. As a result, the first common ground in the appeals is allowed.
10. The second common ground for all the three years under appeal pertains to the claim in respect of additional depreciation on 'electrical installations'.
11. At the time of hearing the learned counsel for the assessee submitted that he did not wish to press the claim. This common ground is accordingly rejected for all the three years.
12. The third common ground for all the three years pertains to the disallowance made by the ITO under the provisions of Section 40A(5) of the Act. The ITO was of the opinion that the perquisites to the 'technical adviser' exceeded the statutory limit as compared to the salary of the technical adviser. The ITO accordingly proceeded to make the disallowances in all the three years which came to Rs. 437, Rs. 855 and Us. 2,809, respectively. The assessee's case before the ITO was that the definition of the term 'salary' under Section 17 of the Act was wide enough to include all types of payments to an employee. The assessee's contention was that 'royalty' paid to the technical adviser was part of his salary. The rejection of the claim by the ITO was upheld by the Commissioner (Appeals). In the course of the hearing before us the learned counsel for the assessee contended that in case the 'royalty' paid to the technical adviser for all the three years is treated as part of his salary then the perquisite provided to him in all the three years would be within the statutory limit envisaged by Section 40A(5). The learned departmental representative, on the other hand, strongly supported the orders of lower authorities.
13. We have examined the rival contentions. There is no doubt that the definition of the term 'salary' given in Section 17 is wide enough to include all types of payments to an employee. However, in the case before us nothing has been brought on record to show whether the payment of 'royalty' was a part of the terms of employment between the company and the technical adviser. There is no discussion in the orders of the lower authorities as to what is the nature of the 'royalty' paid to the technical adviser and on which basis it has been quantified. We in the fitness of things restore this issue back to the file of the ITO for all the three years under appeal to enable him to find out the proper facts and thereafter give a decision as to whether royalty formed part of the salary of the technical adviser. This ground is accordingly restored back to the file of the ITO for all the three years under appeal.
14. The only other ground which survives pertains to the disallowance of vehicle expenses amounting to Rs. 615 for the assessment year 1981-82. The ITO proceeded to make the aforesaid disallowance by working out the same at 15 per cent of the total claim of Rs. 4,102. The action of the ITO was confirmed by the Commissioner (Appeals). It has been contended by the learned counsel before us that the entire amount of Rs. 4,102 has been expended on the employees of the company and in fact pertained to maintenance of scooters used by the employees of the company for office purposes. It was also contended that the director of the company had his own personal car and the expenditure of Rs. 4,102 did not include any expenses of the director's car. This statement of the learned counsel was not challenged by the learned departmental representative and we are accordingly inclined to accept the same. We further observe from the assessment orders pertaining to the assessment years 1979-80 and 1980-81 that no such disallowance has been made by the ITO. We are accordingly inclined to allow the claim of the assessee and we do so.
15. As a result, the appeals are partly allowed.