Gujarat High Court
Shree Vallabh Glass Works Ltd vs Jt. C I T (Asst.)....Opponent(S) on 15 December, 2014
Bench: Ks Jhaveri, K.J.Thaker
O/TAXAP/44/2001 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 44 of 2001
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE KS JHAVERI
and
HONOURABLE MR.JUSTICE K.J.THAKER
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1 Whether Reporters of Local Papers may be allowed to see YES
the judgment?
2 To be referred to the Reporter or not? YES
3 Whether their Lordships wish to see the fair copy of the NO
judgment?
4 Whether this case involves a substantial question of law as NO
to the interpretation of the constitution of India, 1950 or
any order made thereunder?
5 Whether it is to be circulated to the civil judge? NO
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SHREE VALLABH GLASS WORKS LTD.....Appellant(s)
Versus
JT. C I T (ASST.)....Opponent(s)
====================================
Appearance:
MR BHARGAV HASURKAR, ADVOCATE for the Appellant(s) No. 1
MR NITIN K MEHTA, ADVOCATE for the Opponent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE KS JHAVERI
and
HONOURABLE MR.JUSTICE K.J.THAKER
Page 1 of 10
O/TAXAP/44/2001 JUDGMENT
Date : 15/12/2014
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE K.J.THAKER)
1. By way of this appeal, the assessee, who has been denied depreciation for investment allowance under Section 32A of the Income Tax Act, 1961 (for brevity 'the IT Act'), is before us. Following two questions are posed for our consideration:
"1. Whether the appellant was entitled to depreciation of Rs.4,09,39.372/ under Section 32 and Rs.3,99,17,151/ for investment allowance under Section 32A of the Income Tax Act, 1961?
2. Whether the expenditure of Rs.1,11,485/ was allowable revenue expenditure?"
2. Brief facts emanating from the record are that during Assessment Year 198384, the assessee claimed that it had commissioned its glass manufacturing plant at Boiser and depreciation and investment allowance in respect thereof had been claimed. The Assessing Officer (AO) visited the Boiser Plant on 09/01/1986 and was informed by the officers of the unit that the Boiler was fired in June 1982 and the commercial production commenced in March 1983. The AO recorded the statements. The AO then, called upon the assessee company to produce the primary record of production of the unit to which copy of summary of Sheet Glass production at Boiser Unit from 16/03/1983 to 30/06/1983 was filed. On these facts, the AO came to the conclusion that no production of glass had taken place at Boiser Unit after the end of Accounting Year i.e. after 30/06/1982. On 12/02/1986, the Page 2 of 10 O/TAXAP/44/2001 JUDGMENT AO addressed a detailed communication to the assessee company confronting assessee with the facts and reasons in support of his proposed disallowance of depreciation and investment allowance in respect of Boiser Unit as well as preoperative expenses of Rs.1,11,485/ to which, the assessee furnished reply on 27/02/1986 and argued that the claim for department and investment allowance is to be allowed even if commercial production has not been commenced during the year. The AO disallowed the deduction of depreciation and investment allowance as well as preoperative expenses. The assessee carried the matter into appeal before the CIT (Appeals), who eventually, upheld the finding of the AO. Being aggrieved, the assessee approached the ITAT, who, after giving thoughtful consideration in the matter, upheld the orders of AO as well as the CIT(A), giving rise to present appeal.
3. In support of his claim, Mr. Hasurkar, learned advocate appearing for the appellant - assessee company, which is now under liquidation, has submitted that the authorities below have committed error, which is apparent on its face. The CIT (Appeals) and the Income Tax Appellate Tribunal (ITAT) have failed to appreciate that specific condition in Section 32 of the IT Act permitting depreciation is, "used for the purpose of business and not the commercial production", whereas, Section 32A of the IT Act which permits investment allowance, allows the relief either in the year of installation of the machinery or in the year of use and not the commercial production. He further submitted that the ITAT has erred in taking the language and conditions of both the sections to be identical when in fact, they are totally different.
4. As against this, Mr. Mehta, learned advocate appearing for the Page 3 of 10 O/TAXAP/44/2001 JUDGMENT respondent, took us through the record and proceedings and the order passed by the Assessing Officer, CIT (Appeals) as well as the ITAT and contended that as the plant and machinery were not used to derive production, the depreciation could not have granted.
5. Having heard the learned advocates appearing for the respective parties, it is relevant for us to reproduce the provisions of Section 32A of the IT Act, relevant of which are as follow:
"32A. Investment allowance:
(1) In respect of a ship or an aircraft or machinery or plant specified in sub section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty five per cent of the actual cost of the ship, aircraft, machinery or plant to the assessee:
Provided that in respect of a ship or an aircraft or machinery or plant specified in sub section (8B), this sub section shall have effect as if for the words"
twenty five percent", the words" twenty per cent" had been substituted:] Provided further] that no deduction shall be allowed under this section in respect of Page 4 of 10 O/TAXAP/44/2001 JUDGMENT
(a) any machinery or plant installed in any office premises or an 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.
Explanation. For the purposes of this sub section,"
actual cost" means the actual cost of the ship, aircraft, machinery or plant to the assessee as reduced by that part of such cost which has been met out of the amount released to the assessee under sub section (6) of section 32AB.]........."
6. Thus, in interpreting the same, it would be relevant to go to the factual scenario, which emerges from the record from order of CIT (Appeals) in paras 18 to 21 of his order, which are extracted hereunder:
"18. The next major objection is with regard to the claim of depreciation and investment allowance in respect of Boiser plant. The appellant claimed the following items in respect of Boiser Plant during the year:
Sr. Particulars Amt. (Rs.)
1 Start up expenses 1,11,485/
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O/TAXAP/44/2001 JUDGMENT
2 Depreciation on Boiser Plant 4,09,39,372/
3 Investment Allowance on Plant 3,99,17,151/
and Machinery installed
Total 8,09,68,008/
The Income Tax Officer has discussed it in detail in para 23 of the assessment order. The Income tax Officer found that in the annual report of the year 198182, there is a mention of the fact that "This year the company has commissioned its glass manufacturing plant at Boiser". He did not find any production or sale of Boiser Unit during the year. He obtained the process flow chart of the plant and also visited the plant on 9.1.1986. In the course of the discussion on the working of the plant during the visit he has informed that the Boiser plant was fired in June, 1982 but the commercial production started in March, 1983, almost after nine months. On the basis of the scrutiny or account he found that the production started from 16th March, 1983. He issued show cause notice to this effect that the aforesaid items cannot be allowed. The appellant company gave the following submissions to the Assessing Officer to justify its claim:
"i) Plant and machinery at Boiser Unit were commissioned on 24.6.1982 and photographs taken on the inauguration of the plant were produced.
ii) At the time of visit of the ITO, Cen. Cir. V, Ahmedabad at the Boiser Plant u/s. 133A, the machineries were installed and were in operation at that point of time.
iii) The records from the respective departments are being obtained and will be produced as soon as received.
iv) The claim for depreciation, addition depreciation and extra shift depreciation on plant and machinery installed and put into use in the Boiser factory has been correctly made u/s. 32 of the I.T. Act.Page 6 of 10
O/TAXAP/44/2001 JUDGMENT
v) The claim for investment allowance on plant
and machinery installed and put to use is also correctly made u/s. 32A of the I.T. Act.
vi) Claim for depreciation and investment allowance have nothing to do with 'Production' and 'Commercial Production'.
vii) At the time of firing of furnace on 24.6.1982, all furnace machines and various utilities were working.
viii) The statement recorded by the Income Tax Officer at the time of visit of Boiser plant u/s. 133A on 31.7.1982 shows the consumption of fuel like coke, LPG., LDO and HSD."
The Income Tax Officer did not find any favour in the submissions given before him. He held that the provisions of section 32 and 32A would apply only if the assets are owned by the assessee and also used for the purpose of business or production. He referred to the decision of Allahabad High Court in the case of Niranjanlal Ramthandra Vs. C.I.T., 49 ITR 177 (All.) to say that 'used for the purpose of business or profession' means that the machinery or plant must be used for the purpose of that business which is actually carried on and the profits of which are assessable, at least for a part of accounting year. Also referred to the decision of Gujarat High Court in the case of C.I.T. Vs. Saurashtra Cement & Chemical Industries Ltd. 91 ITR 170 (Guj.) that depreciation is allowable from the commencement of the business. On the analysis of the facts given in para 23.9 of the order, the officer has found that the production of glass started only in March, 1983.
19. It was submitted before me that the furnace of the glass plant was fired on 24th June, 1982. To evade this fact photographs were produced, although nothing can be made out from the photographs as to the particular date. It was further submitted that the Page 7 of 10 O/TAXAP/44/2001 JUDGMENT claim of depreciation and investment allowance has nothing to do with the production or commercial production of the commodities to be manufactured. The word "used" should be understood in wider sense. The counsel of the appellant made reference to the decisions in 79 ITR 613, 128 ITR 675, 123 ITR 404 to say that even if machinery is kept ready for use at any moment, it should be taken to have been used for the purpose of business. It was emphasized that once the furnace was fired, all the plant and machinery will have to be used since they are related to the working of the furnace.
20. I have considered the submissions of the appellant. It is true that the furnace was fired on 24.6.1982 for testing and taking out its moisture for future use. It is also true that the rawmaterials were not bought for any production even on trial basis. The production is started in March, 1983. The following evidence collected by the Income Tax Officer need be highlighted:
"i. Separate books of account have been maintained for the Boiser Plant from 197879.
ii. The Auditors have observed in their separate annual report dated 9.11.1982 for the year 198182 for Boiser Plant that the following machineries are 'Under Installation' and that commercial production has not begun"
a) Furnace Machinery Rs. 4,27,490/
b) Batch Machinery Rs.22,91,756/
iii. Shri H. C. Patel, Asstt. General Manager (Technical) has started (sic. stated) on oath u/s. 131 at the time of survey u/s. 133A on 31.7.1982 that;
a) Electronic Load Cell system with Interlock Feed Back System in the Batch House was under
installation and;Page 8 of 10
O/TAXAP/44/2001 JUDGMENT
b) An order for importing Automatic Glass Cutting
Machines (Belgium) was placed and the same were not yet received and installed.
iv. The furnace had to be fired atleast for a period of four months in advance and its temperature raised slowly for drying the moisture absorbed during long period of construction, for ensuring equal expansion of all metallic parts to maintain alignments of the machine tables and their rollers.
v. The assessee has treated the revenue expenses of Rs.2,27,44,379/ incurred from 24.6.1982 to 15.3.1983 in its books of account for Boiser Unit as "Preoperative expenses" 'as per the standard accounting practice recommended in such a case' as per Note No. 9 of the statement of total income for A. Y. 198485 filed on 29.6.1984.
vi. General Manager (Commercial), the General Manager (Technical) and Commercial Manager in their statements recorded on oath u/s. 131 of the time of visit of Boiser Plant on 9.1.86 it is admitted that Commercial Production of the plant was started in March, 1983.
vii. As per books of account and records of Boiser Unit, the production of glass started on 16.3.1983 and the first sale was made on 24.3.1983."
7. This finding of fact has been reiterated by the Tribunal and the Tribunal also decided against the assessee as far as depreciation is concerned, and therefore, we do not think that the findings are bad in law or are such as which call for our interference. Thus, this issue has to be decided against the appellant. We, likewise, answer the questions as follows:
1) The appellant was not entitled to depreciation of Page 9 of 10 O/TAXAP/44/2001 JUDGMENT Rs.4,09,39,372/ for investment allowance under Section 32A of the IT Act.
2) The expenditure of Rs.1,11,485/ was not allowable as revenue expenditure.
7.1 In above backdrop, this Tax Appeal being devoid of any merits, is dismissed.
[ K. S. Jhaveri, J. ] [ K. J. Thaker, J. ] hiren Page 10 of 10