Income Tax Appellate Tribunal - Delhi
Softek (P.) Ltd. vs Income-Tax Officer on 19 December, 1989
Equivalent citations: [1990]32ITD540(DELHI)
ORDER
D.N. Sharma, Judicial Member
1. This appeal filed by the assessee is directed against the order dated 20-2-1987 passed by the CIT(A) for the asst. year 1982-83.
2.The first two grounds raised in this appeal dispute the disallowance of the assessee's claim for investment allowance of Rs. 79,069 on new machinery purchased and installed during the year in question. This is the first year of assessment of the assessee which is a private limited company. It was incorporated on 19-8-1980 with the main object of taking over the business of the partnership firm M/s. Softek. The company is a software house specialising in computer programmes for mini and micro computer systems and data processing. In computation of its income for asst. year 1982-83, the assessee claimed investment allowance to the tune of Rs. 79,069 on new machinery purchased, details whereof are as under:-
Computers Rs. 3,05,485
Air conditioner Rs. 10,792
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Rs. 3,15,277
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3. The ITO noted in the assessment order that the assessee has not created any reserve during the year as prescribed under the provisions of Section 32A(4)(ii) of the Income-tax Act and, therefore, deduction on account of investment allowance cannot be allowed during the relevant asst. year.
4. The assessee appealed to the CIT(A) who took the view that the computers do not either produce or manufacture any article and that the activities involved therein would fall within the concept of processing of goods, The CIT( A) further noted that the computers are installed in the office premises and so in view of the provision of Section 32A(l)(a) such machinery and plant installed in office premises are not eligible for deduction of investment allowance. It was further noted that similar is the case in respect of the airconditioner. The CIT(A) thus confirmed the order of the ITO on the point, though for different reasons. Aggrieved, the assessee has come up in second appeal before the Tribunal.
5. Shri C.S. Aggarwal, Advocate .appearing for the assessee submitted that the computers purchased by the assessee were used for the purpose of business of manufacture or production of any articles or thing. In support of this contention reliance has been placed on the decision of the Bangalore Bench of the Tribunal in Krishna Associates v. ITO [1987] 22 ITD 530 and the decision of the Bombay Bench of the Tribunal in G.S. Revankar v. ITO a photostat copy whereof is included in the paper book filed by the assessee. It was next contended by Shri Aggarwal that the CIT(A) was not justified in holding that the computer was installed in the office premises. The place where the computers were installed was separate from the office premises and it could not be regarded as part of the office premises. In support of this contention reliance has been placed on the order of the Tribunal in the case of Metro Tyres (P.) Ltd. [IT Appeal No. 5824 (Delhi) of 1986, dated 20-10-1989].
6. Shri Aggarwal pointed out that the claim for investment allowance was disallowed by the ITO for the reason that no reserve was created during the relevant accounting year. It was submitted that under Section 32A(4)(ii) reserve is to be created in the year in which investment allowance has to be actually allowed. In the year under consideration there was a loss which was assessed at Rs. 19,081 by the ITO. It was contended that since there was no profit during the year investment allowance has to be carried forward to be allowed in future whenever there is profit and that for this reason the assessee was not required to create any reserve in the accounting year relevant to the asst. year 1982-83. In support of this contention reliance has been placed on the Board's Circular No. 202 dated 5-7-1976 which is reproduced in Taxmann's Direct Taxes Circulars, Vol. 3, page 686. The relevant portion of this circular appears at pages 701 and 702. Reliance has also been placed on the Board's Circular No. 305 dated 12-6-1981 wherein it was decided by the Board that the contents of Circular No. 259 dated 11-7-1979 regarding the creation of statutory reserve in connection with the claim of development rebate under Section 33 may be followed while considering the adequacy of the reserve created in respect of grant of investment allowance also. It was further submitted by Shri Aggarwal that in view of these circulars the assessee was not at all required to create any reserve during the relevant asst. year for claiming investment allowance on the new plant and machinery purchased and installed during the year. It was further submitted that the benevolent circulars issued by the CBDT are binding on all Income-tax authorities even if they detract from the law or an express provision contained in a statute. Shri Aggarwal further submitted that the decision of the Supreme Court in the case of Shri Shubhlaxmi Mills Ltd. v. Addl. CIT [1989] 177 ITR 193 which was concerned with the provisions relating to the grant of development rebate under Section 33(1) read with Section 34(3)(a) of the Income-tax Act, 1961 was not applicable in the instant case for the reason that the provisions of Section 32A(4)(ii) are not in pari materia with the provisions of Section 34(3)(a) governing the grant of development rebate under Section 33. According to Shri Aggarwal, even if the said decision of the Supreme Court was held applicable in the instant case, the benevolent circulars of the Board would prevail as they would be binding on the Income-tax authorities.
7. Shri Satish Khosla, learned Departmental Representative, on the other hand, fully supported the impugned order of the CIT(A). It was further contended that the Circulars of the Board which detract from law would not be binding on courts including the Tribunal and that in view of the decision of the Supreme Court in the case of Shri Shubhlaxmi Mills Ltd. (supra), the assessee's claim for investment allowance was rightly disallowed by the ITO on the ground that no reserve was created as required under Section 32A(4)(ii). In this connection it was further submitted that the provisions governing the grant of investment allowance are in pari materia with the provisions governing the grant of development rebate under Section 33 read with Section 34(3)(a). In support of the contention the circulars issued by the Board which are against the law are not binding on the Income-tax authorities, reliance has been placed on the decision of the Delhi High Court in Delhi Flour Mills Co. Ltd. v. CIT [1974] 95 ITR 151.
8. We have considered the rival submissions as also the facts on record. Section 32A was brought on the statute book by the Finance Act, 1976. Section 32A replaced the scheme of initial depreciation allowance by a scheme of in vestment allowance. The new scheme is broadly on the lines of development rebate scheme that was discontinued earlier. Investment allowance is admissible in accordance with the provisions of Section 32A in respect of the year of instalment of the machinery or plant or in the immediately succeeding year if the machinery or plant is put to use in that year. The allowance is, however, granted subject to the creation of reserve equal to 75% of the amount actually to be allowed which should be debited to the profit & loss account of that year. It has further been provided in Section 32A(3) that only so much of the investment allowance is to be allowed in any year as is sufficient to reduce the total income to nil and the balance of investment allowance is to be carried forward to the following asst. year and so on up to 8 assessment years. Section 32A(4)(ii) is as follows:-
(4) The deduction under Sub-section (1) shall be allowed only if the following conditions are fulfilled, namely:-
(i)...
(ii) an amount equal to seventy-five per cent of the investment allowance to be actually allowed is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the 'Investment Allowance Reserve Account') to be utilised-
9. The provisions governing grant of development rebtate are contained in Sections 33 and 34. Section 34(3)(a) reads as under:-
The deduction referred to in Section 33 shall not be allowed unless an amount equal to seventy-five per cent of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the assessee during a period of eight years next following for the purposes of the business of the undertaking, other than -
10. A comparison of the provisions contained in Section 32A(4)(ii) and Section 34(3)(a) does "go to show that the provisions relating to the grant of investment allowance are in part materia with the provisions governing the grant of development rebate.
11. In Shri Shubhlaxmi Mills Ltd.'s case (supra), Their Lordships of the Supreme Court considered the provisions of Section 33(1) and Section 34(3)(a) and held that in order to claim deduction on account of development rebate under Section 33(1) it is obligatory that debit entries in the profit and loss account and the credit entry in the reserve account should be made in the relevant previous year in which the machinery or plant is installed or first put to use. The development rebate contemplated by Section 33(1) cannot be allowed as a deduction unless a reserve account has been created in the previous year in which the installation or first use occur. It was further held that mere book entries will suffice for creating such a reserve fund. This decision of the Supreme Court, in our opinion, will also apply to the provisions of Section 32A(4)(ii). So, the law as enunciated by the Supreme Court in the said decision and which is also applicable to the provisions governing the grant of investment allowance, is that investment allowance under Section 32A cannot be allowed unless a reserve has been created in the previous year in which the installation or first use occurs. However, the assessee's contention is that the aforesaid Board's Circulars give a concession to the assessee and the benevolent circulars are binding on the Income-tax authorities with the result that the assessee's claim for investment allowance should have been allowed though it could be allowed only in the year in which there is profit and so it has to be carried forward up to a period of eight years as provided under Section 32A.
12. In Delhi Flour Mills Ltd. (supra) cited on behalf of the Department in respect of a decision of the Central Board of Direct Taxes, it was held by the Delhi High Court that decisions of the Central Board are not binding upon courts. They are meant only for the guidance of Departmental authorities. It was further held that if the departmental decisions are not in accordance with the provisions of the statute, they have to be disregarded. However, there are a number of decisions of the highest court of the land which support the view canvassed before us on behalf of the assessee. The first decision is in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 (SC). The decision in this case was given by five Hon'ble Judges of the Supreme Court. It was held that circulars issued by Central Board of Revenue would be binding on all officers and persons employed in the execution of the Income-tax Act. In Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC) their Lordships referred to the earlier decision of the Supreme Court in Navnit Lal C. Javeri's case (supra) and observed that the directions given in the circular which was considered in that case clearly deviated from the provisions of the Act, yet it was held by the Court that the circular was binding on the Income-tax authorities. These earlier decisions were followed by the Supreme Court in O1. Varghese v. ITO [1981] 131 ITR 597 wherein it was held that the circulars of the CBDT are binding on the Revenue. It was held by Their Lordships that it is now well settled as a result of two decisions, one in Navnit Lal C. Javeri's case (supra) and the other in Ellerman Lines Ltd. 's case (supra) that circulars issued by the CBDT under Section 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. In view of these decisions of the Supreme Court it must be held that the circulars of the Board even if they deviate from the law or from the provisions of the Act are binding on all Income-tax authorities, with the result that they are bound to frame assessments in accordance with the instructions of the CBDT issued under Section 119 even if such instructions deviate from the law. Here it will also be useful to refer to a decision of the Kerala High Court in CIT v. Punalur Paper Mills Ltd. [1988] 170 ITR 37. It was held in that case by the Kerala High Court that circulars issued by the CBDT have the force of law and are binding on all officers of the Department. The benevolent circulars are in the nature of administrative relief and will go to the assistance of the assessee. They supplant the law and not supplement the law. The circulars can deviate from the provisions of Act. It was further held that it is not open to the Department to contend, even in cases where the circular goes beyond the terms of the section, that the circular has no legal effect or should not be given effect to. By issue of the circular, the rigour of law can be relaxed by giving administrative relief.
13. In view of the legal position as emerging from the aforesaid decisions of the Supreme Court, the assessing officer was bound to frame the assessment in this case in accordance with the instructions issued by the CBDT and contained in the circulars relied upon by the assessee, even if those circulars deviate from the provisions of the Act.
14. Soon after insertion of Section 32A by the Finance Act, 1976, the CBDT issued circular No. 202 dated 5-7-1976 which is reproduced in the Taxmann's Direct Taxes Circulars, Vol. 3 and begins at page 686. The relevant portion of the circular is at pages 701 and 702. It is stated in the circular that the position has been clarified in relation to investment allowance in Sub-section (4) of Section 32A. The relevant portion of the circular is as follows:-
A taxpayer will not, therefore, be required to create investment allowance reserve during the year of installation of machinery or plant if there is no income in that year and such reserve should be created in the year when there is income.
15. The CBDT issued circular No. 259 dated 11-7-79 (see pages 225 and 226 at Taxmann's Direct Taxes Circulars, Vol. I) which contained instructions to the effect that the condition for creation of requisite reserve in connection with the claim of development rebate under Section 33 would stand satisfied if the sum total of the reserve created either in the year of installation or use or in the subsequent year or years is equal to the requisite amounts Of 75% of the actual amount of development rebate in any subsequent year or years. The Board decided vide circular No. 305 dated 12-6-1981 that the contents of circular No. 259 dated 11-7-1979 may be followed while considering the adequacy of the reserve created in respect of the grant of investment allowance also. Though these circulars of the CBDT deviate from the relevant provisions of the Income-tax Act, 1961, in view of the law as enunciated by the Supreme Court in the case of Shri Subhlaxmi Mills Ltd. (supra), they are binding on the Income-tax authorities and the ITO was, therefore, bound to follow the instructions contained in these circulars while considering the claim of the assessee for grant of investment allowance. In view of these circulars the assessee was not required to create in vestment allowance reserve during the year as there were no income in this year. Such reserve should be created in the year when there is income. In view of the Board's circulars it must be held that the assessee's claim for investment allowance was not disallowable on the ground that no reserve has been created during this year.
16. As has already been pointed out above, the CIT(A) upheld the order of the ITO for different reasons. He was of the view that the computers do not either produce or manufacture any article. On this point there is a decision of the Bangalore Bench of the Tribunal in Krishna Associates' case (supra) wherein on similar facts, it was held by the Tribunal that data processed and printed out would certainly be a thing produced by the assessee even if not a thing manufactured by it. The assessee was, therefore, entitled to deduction under Section 32A. Respectfully following the said decision of the Tribunal, we hold that the assessee is engaged in the business of production of an article or thing and that the computers are being used for that purpose. The assessee will also be entitled to investment allowance on the airconditioner provided it is found that it is not installed in the office premises.
17. According to the CIT(A), the computers and the airconditioner are installed in the office premises. On behalf of the assessee reliance has been placed on the decision of the Tribunal in the case of Metro Tyres (P.) Ltd. (supra). In that case it was held that the place where the computer is installed cannot be treated as part of the office premises and that by its very nature the computers have to be located in a separate room having airconditioning facility. On behalf of the Department reliance has been placed on the decision of the Karnataka High Court in Syndicate Bank v. CIT [1984] 150 ITR 198/16 Taxman 363. In that case the Karnataka High Court considered the assessee's claim for development rebate on Safe Deposit Locker Cabinet. The High Court took note of some guidelines issued by the National Institute of Bank Management in regard to the manner in which Safe Deposit Locker Cabinets are installed. Those guidelines gave indication that Safe Deposit Locker Cabinets are located in an isolated strong room where no administrative work is carried out and all and Sundry are not allowed access to that place. It was observed by the High Court that if that is so the assessee cannot be denied development rebate and Section 33(6) cannot be a bar to the grant of that relief. In the instant case, so far the computers are concerned, they are necessarily installed in a separate room having airconditioning facility. The place where the computers are installed cannot be regarded as part of the office premises. However, it is not known if the airconditioner purchased during the year is also installed in the same room or rooms where the computers are installed. No material is available on the record to ascertain if the airconditioner purchased during the year is installed in the administrative office of the assessee or it is installed in the room where the computers are installed. Therefore, it will be necessary to restore this issue to the file of the ITO.
In view of what has been said above, we hold that the assessee is entitled to investment allowance on computers purchased and installed during the year even though no reserve has been created in this year. The investment allowance, however, shall be actually allowed only in the year in which there is income and it is in that year that reserve will have to be created by the assessee. The quantum of investment allowance has to be determined by the assessing officer and deduction in respect thereof shall, be allowed in accordance with the provisions of Section 32A(3). However, before the investment allowance is actually allowed, the assessing officer will have to ascertain whether the requirement of creating reserve is fulfilled in accordance with the instructions issued by the CBDT in the aforesaid circulars.
18. The assessing officer shall ascertain if the airconditioner purchased during the year has been installed in the room in which the computers are installed or if it is installed in the administrative office. If it is found that the airconditioner is installed in the same room in which the computers are installed, the assessee shall be entitled to investment allowance under Section 32A in respect of the airconditioner also and in that event the directions already given above regarding grant of investment allowance shall be followed.
19. The next ground disputes the disallowance of Rs. 9,175 under Section 37(2A). The assessee debited a sum of Rs. 14,175 by way of business promotion. The ITO held that these expenses are in the nature of entertainment expenses. He, therefore, allowed deduction only to the extent of Rs. 5,000 and disallowed the balance of these expenses under Section 37(2A). The disallowance was sustained in appeal by the CIT(A).
20. Shri Aggarwal submitted before us that the entire expenses amounting to Rs. 14,175 were not in the nature of entertainment expenses as would be clear from the details of the expenses given at pages 17 & 18 of the paper book filed by the assessee. It was stated that a part of the expenditure was also incurred on providing food, refreshments etc. to the staff and to that extent the claim was allowable. On the basis of the details furnished by the assessee it was further submitted that the expenses to the extent of Rs. 2,600 incurred on providing food, refreshments etc. to the staff in the office was an allowable business expenditure. It was further submitted that a part of the expenses incurred on guests/customers was also allowable because of participation of some of the employees of the assessee company. The learned Departmental Representative, on the other hand, fully supported the impugned order of the CIT(A) on the point
21. We have perused the details of the expenses which are given at pages 17 & 18 of the paper book filed by the assessee. These details do go to show that against some items it is specifically stated that the expenditure was spent for entertaining the clients. It cannot be disputed that some of the expenses were incurred on providing food etc. to the employees in the office premises and, therefore, the entire expenses cannot be disallowed on the ground that they were incurred on entertaining clients or customers. Considering the facts of the case and the details of the business promotion expenses, we are of the view that 50% of the entire expenses may be allowed on the ground that they were incurred on providing food, refreshments etc. to the employees in the office premises. So the total disallowance will be restricted to Rs. 7,088. The assessment shall be modified accordingly.
22. The last ground states that the CIT(A) erred in not disposing of the additional ground of appeal filed at the time of hearing relating to the disallowance of Rs. 9,125 under Section 40A(3). The assessee has filed a copy of the additional ground of appeal said to have been filed before the CIT(A) disputing the disallowance of Rs. 9,125 under Section 40A(3).This additional ground has not been considered by the CIT(A) in the impugned order. Shri C.S. Aggarwal stated at the bar that he had represented the assessee before the CIT(A) and that the additional ground, a copy whereof is included in the paper book, was in fact filed before the CIT(A). The learned Departmental Representative was not in a position to controvert this fact for the reason that he did not have with him the record of the CIT(A). After hearing the learned authorised representatives of the parties, we are of the opinion that it will be proper to give necessary directions to the CIT(A) in this regard. We direct the CIT(A) to verify if the aforesaid additional ground was filed before him by the assessee at the time of hearing of the appeal. If the additional ground was filed before the CIT( A) as contended before us on behalf of the assessee, he shall consider its admissibility and thereafter, dispose of the issue in accordance with law after giving an opportunity of hearing to the parties.
23. In view of what has been said above, the appeal is partly allowed to the extent indicated above.