Kerala High Court
Travancore Electro Chemical ... vs Commissioner Of Income-Tax on 10 April, 1996
Equivalent citations: [1997]224ITR273(KER)
Author: K.S. Radhakrishnan
Bench: K.S. Radhakrishnan
JUDGMENT K.K. Usha, J.
1. The Cochin Bench of the Income-tax Appellate Tribunal has referred for the opinion of this court under Section 256(2) of the Income-tax Act, 1961, the following question of law arising out of the order of the Tribunal dated February 23, 1981, in I. T. A. Nos. 788 (Coch) of 1977-78 and 494 (Coch) of 1978-79 :
" Whether the assessee is entitled to extra-shift allowance in respect of electrical sub-station in the factory ?"
2. The reference relates to income-tax assessment for the years 1922-73, 1973-74 and 1974-75. The assessee is a public limited company, engagd in manufacturing calcium carbide by a method which involves passing of the electricity through the mixture of limeshell and charcoal. For the assessment years 1972-73, 1973-74 and 1974-75, originally the assessment proceedings were completed granting extra-shift allowance to the assessee in respect of the electrical sub-station. Pursuant to remarks made by the audit party, the assessments were reopened by the Income-tax Officer under Section 147(b) rejecting the objection raised by the assessee to such proposal. The Income-tax Officer completed the assessment withdrawing the relief granted by way of extra-shift allowance in respect of electrical substation. The assessee's appeals were allowed by the Appellate Assistant Commissioner granting extra-shift allowance as claimed by the assessee for the assessment years 1974-75.
3. The Department took up the matter in appeal before the Tribunal. By its order dated March 14, 1978, the Income-tax Appellate Tribunal set aside the order of the Appellate Assistant Commissioner with a direction to decide the matter afresh after making a local inspection along with the Income-tax Officer and then to decide the appeal. There was also a direction to the Appellate Assistant Commissioner to prepare a detailed note of local inspection about the machinery, particularly about the disputed items with reference to the description of the machinery. He was also directed to refer in his report as to whether it is possible to treat it as separate machinery which can be classified as electrical machinery as contended by the Income-tax Officer or whether it is only a part of the general machinery and such other relevant material. The Appellate Assistant Commissioner was further directed to keep the report in his file and both sides were allowed to peruse the report, For the assessment years 1972-73, 1973-74 and 1974-75, there were appeals by the Department which were remanded back to the Appellate Assistant Commissioner to be disposed of in the light of the direction given in the order for the assessment year 1974-75.
4. The Appellate Assistant Commissioner visited the assessee's factory along with the Income-tax Officer, personally inspected the machinery and a report was made taking the view that the electrical sub-station forms an integral part of the assessee's plant and machinery. On this basis, the appeals were disposed of in favour of the assessee. The Appellate Assistant Commissioner held that for the manufacture of calcium carbide, raw materials are limeshell, carbon and electricity. Electricity was not a source of power alone, but was actually consumed for the manufacture of the ultimate product and, therefore, the machinery for which the Income-tax Officer denied extra-shift allowance are part and parcel of the general machinery of the assessee. He also held that the furnace used cannot work independently without the sub-station and the plants are completely interdependent for the purpose of the assessee's business. On this basis, the Income-tax Officer was directed to give the extra-shift allowance to the assessee in respect of the electrical sub-station also.
5. Aggrieved by the orders of the Appellate Assistant Commissioner, the Department filed an appeal before the Tribunal. It was contended by the Department that the Appellate Assistant Commissioner ought to have found that under the Income-tax Rules electrical machinery such as switch gears, transformers and other stationary plant and wiring has been specifically excluded from the scope of extra-shift allowance and, therefore, the assessee's claim should have been rejected. The Tribunal held that the electrical sub-station is a separate unit answering the description in entry III of the depreciation schedule and there was no basis for the assessee's claim that the electrical sub-station was an integral part of the calcium carbide plant. The Tribunal disallowed the claim of the assessee for the extra-shift allowance. The assessee filed O.P. Nos, 1228 of 1982 and 1226 of 1982 before this court for compelling the Tribunal to refer the question regarding eligibility for extra-shift allowance. By judgment dated January 20, 1985, this court directed the Tribunal to refer the common question under Section 256(2) of the Income-tax Act.
6. It is contended by the assessee that the Tribunal has committed an error in coming to the conclusion that the sub-station would come within the scope of the term "electrical machinery" in column 1 under item (iv) of entry III of Part I of Appendix I to the Income-tax Rules, 1962, for the purpose of rate of depreciation. According to the assessee, the enquiry should have been whether the sub-station forms a vital and inseparable part of the plant and machinery. The entire approach of the Tribunal was, therefore, misconceived. On the other hand, the Revenue contended that the sub-station would come under column (1), electrical machinery, switch gear, transformers and other stationary plant and wiring and fittings, electric lights and fan installation under item (iv) and not under the main entry, "machinery and plant" (not being a ship) and it is, therefore, clear that the assessee is not entitled to extra-shift allowance.
7. By virtue of the provisions contained under Section 32, an assessee is entitled to deduction for all machinery, plant, etc., owned by the assessee and used for the purpose of its business or profession at specific percentages as prescribed. Rule 5 of the Income-tax Rules, 1962, provides that the allowance in respect of depreciation of buildings, machinery, plant or furniture etc., shall be calculated at the percentages specified in the second column of the Table in Part I of Appendix I to the Rules. In Part I, entry III(i), it is provided that the general rate applicable to machinery and plant (not being a ship) for which no special rate has been prescribed under item (ii) shall be 10 per cent. Under item (iv), provision is made for extra-shift depreciation allowance for an amount equal to one-half of the normal allowance, where a concern claims such allowance on account of double shift work and establishes that it has worked double shift. It is also provided that extra-shift allowance shall not be allowed in respect of any item of machinery or plant which has been specifically excepted by inscription of the letters "N. E. S. A." (meaning "No Extra-Shift Allowance") against it in sub-item (ii) and also in respect of the items of machinery and plant specifically referred to under the item and for which the general rate of depreciation of 10 per cent. applies. In this list, item No. 1 is shown as, "Electrical machinery--Switchgear and instrument, transformers and other stationary plant and wiring and fittings of electric light and fan installations".
8. The question arising for consideration in this case is whether the sub-station would come under the exempted category of electrical machinery or whether it is the integrated part of main plant and machinery of the manufacturing unit of the assessee. As mentioned earlier, after the first order of the Tribunal remanding the matter, the Appellate Assistant Commissioner inspected the plant of the assessee along with the Income-tax Officer. The view taken by the Appellate Assistant Commissioner after his inspection as reflected in the order dated June 30, 1978, reads as follows:
" The appellant is correct in the argument that the electrical substation, the electronic controls and the weighing apparatus are part and parcel of the plant. Since the reaction producing calcium carbide takes place only at the proper temperature, the electrical sub-station involved in the electrical thermal process is the very heart of the plant. The unit cannot work independently of the same. The entire unit is depending upon it. It cannot, therefore, be said that the plant can work extra-shift without the sub-station. For these reasons, on facts, I hold the appellant is entitled to extra-shift allowance as claimed."
9. The assessee had produced before the Tribunal a report by the area leader and the head of division of electrothermics and metallurgy and the project manager, calcium silicide and calcium carbide projects, Central Electrochemical Research Institute (Council of Scientific and Industrial Research). A portion of the above report has been quoted in paragraph 10 of the order of the Tribunal. The full text of the report was made available to us at the time of hearing. It reads as follows :
" The process of manufacturing calcium carbide involves a reaction between lime and carbon under the influence of electric arc to form calcium carbide. Different carbonaceous materials could be used for the reduction of lime with carbon at these high temperatures in the electric arc. Soderberg self-baking electrodes have been advantageously employed in the place of pre-baked electrodes.
A consumption of 3,000 to 3,500 kwh of electric energy per ton of calcium carbide produced occurs when lime is used. When lime stone/limeshells or coral lime stone is employed in the place of lime, the electric energy consumption in the production of calcium carbide gets stepped up to 4,500 to 5,500 kwh depending upon the furnace operating conditions. This is because the decomposition of calcium carbonate to calcium oxide is an endothermic reaction, i.e., absorbing considerable amounts of heat for this purpose and the heat is to be supplied by electricity only, when calcium carbonate source is fed in the place of calcium oxide.
The integrated electrical machinery consists of stepping down from the electricity transmission line of the electricity board from 110/66 KV to 11 KV by suitable transformers and switchgears and further utilising the same by furnace transformer to bring from 11 KV, i.e, from 11000V to 130V. Hence, from the transmission line of the electricity board up to stepping down to 130V and connecting the furnace is an integrated electrical equipment system which forms part of the arc furnace itself.
We are, therefore, of the opinion that all electrical equipments like current transformers, potential transformers, switchgears, busbars, etc., of power intensive calcium carbide industry form an integral part of the total plant and machinery as good as the furnace itself. It also takes into account the raw material feed systems, packing system, etc. Electricity is utilised as a reaction agent/raw material to supply necessary heat very advantageously inside the arc furnace. It is not utilised as a motive agent in this calcium carbide industry. It is not possible to produce calcium carbide by any other process economically and also without using all the electrical equipments already indicated."
10. Calcium carbide is the most important compound of calcium. It was by an accident in the year 1892, T. L. Wilson happened to produce calcium carbide. It was recorded that while he was attempting to prepare metallic calcium from lime and tar in an electric furnace at Spray, N. C., the produce obtained being not calcium, was thrown into a nearby stream and it was found liberating great quantities of combustible gas. The first factory for the production of calcium carbide was built at Niagara Falls in 1896.
11. Calcium carbide is prepared from quicklime and carbon at 2,000 to 2,000C. "The source of carbon is usually coke, anthracite, or petroleum coke. Coke is most widely used. It should be compact and have a low ash content, a low ignition point, and high electrical resistivity, so that the bulk of the furnace charge will be highly resistant to the flow of energy. Thus, the energy is concentrated, resulting in a more rapid and complete reaction. ... The furnace consists of a steel shell with the side walls lined with ordinary firebrick and the bottom covered with carbon blocks or anthracite to withstand the extremely hot, alkaline conditions. Most of the larger furnaces use three-phase electric current and have suspended in the shell three vertical electrodes. Improvements include the "closed" furnace, where almost all the carbon monoxide from the reaction is collected and utilised, and Soderberg continuous self-baking electrodes, which permit larger capacity furnaces than the old prebaked electrodes. . . . The lime and coke are charged continuously with intermittent or continuous tapping of the liquid produce directly into cast-iron chill pots of about five tons capacity each." (See Chemical Process Industries by R. Norris Shreve, Late Professor Emeritus of Chemical Engineering, Purdue University and Joseph A. Brink, Jr., Consulting Chemical Engineer, Professor and Chairman of Chemical Engineering, Washington State University, fourth edition, (International Student Edition), pages 242 and 243).
12. From the above, it is clear that electricity is not used as a power to work the plant and machinery, but it is used as a raw material in the very process itself. It is not a case where electricity can be substituted in this process by any other source of energy. Reliance was placed by learned counsel appearing on behalf of the assessee on the following decisions in support of his contention that even if the electric sub-station can be brought under the entry "Electrical machinery" in the schedule, in the nature of the manufacturing process carried on by the assessee, the electrical substation must be treated as an integral part of the main plant and machinery, CIT v. New India Sugar Mills Ltd. and CIT v. Electrosteel Castings Ltd. [1981] 130 ITR 25 (Orissa). In CIT v. New India Sugar Mills Ltd., the question that came up for consideration before the High Court of Calcutta was whether the assessee was entitled to extra-shift allowance in respect of transformer, pumping set and tube-well inside the factory. The Income-tax Officer had taken the view that pumping set and tube-well on which extra-shift depreciation allowance was claimed will come under hydraulic work and, therefore, no extra-shift allowance is allowable. So also, since transformer is included as item (1) in Appendix I, entry III(iv), as "Electrical machinery switch gear and instrument transformers, etc.", no extra-shift allowance can be claimed on these items also. The High Court affirmed the finding of the Tribunal that the abovementioned items cannot be looked at as separate items for the purpose of extra-shift allowance, but they are part of the plant itself. So also, in CIT v. Electrosteel Castings Ltd. [1981] 130 ITR 25, a Division Bench of the High Court of Orissa constituted of Chief Justice R.N. Misra as his Lordship then was, and Justice J.K. Mohanty held that the sanitary and water supply installations inside a factory do not come under the head "Hydraulic works, pipelines and sluices" excepted from grant of extra-shift depreciation allowance. It was held that sanitary and water supply installations installed in a factory of the assessee manufacturing steel castings, cannot be treated as separate machinery to come under exempted item, "hydraulic works, pipelines and sluices". Similar view was taken by the Supreme Court in CIT v. Taj Mahal Hotel [1971] 82 ITR 44. It was held that sanitary fittings, etc., in the bath-room in a hotel will come within the definition of the word "plant" under Section 10(2)(vib) read with Section 10(5) of the Indian Income-tax Act, 1922.
13. In the order of the Tribunal, reference is made to the decision in CIT v. M.S. Sahadevan [1980] 123 ITR 820 (Mad). We do not find that this decision has any relevance in deciding the question involved in the present case. What was considered there was whether a particular machinery is electrical machinery or not. It was held that an electrical machinery is one inbuilt into which is the electric motor which forms a vital and inseparable part of the machinery. What we are concerned with in this case is whether the electric sub-station is part of the main plant and machinery of the factory. In order to find out whether a particular machinery is part of the main plant, the enquiry which has to be made is as to what operation the apparatus performs in the assessee's business. This is the view taken by a Division Bench of the Gujarat High Court in CIT v. Elecon Engineering Co. Ltd. [1974] 96 ITR 672. The report regarding the process involved in calcium carbide manufacturing shows that electricity is used as raw material and, therefore, the sub-station is an integral part of the main plant.
14. Learned counsel for the Revenue raised an objection that even if this court comes to the conclusion that the electric sub-station is part of the main plant, this court will not interfere with the finding of the Tribunal as it is a finding of fact. We find no merit in this contention. What is required in this case is interpretation of the entries in the schedule and the effect on one on the other. A question involving such interpretation cannot be termed as a pure question of fact.
15. We, therefore, hold that the electrical sub-station attached to the Tranvancore Electro Chemical Industries Ltd. is part of its main plant and machinery and it cannot be treated as an item coming under item (iv) of entry III of Part I of Appendix I disentitling the assessee to claim extra-shift allowance. The question referred is, therefore, answered in the affirmative, in favour of the assessee and against the Revenue. There will be no order as to costs.
16. A copy of this judgment under the seal of this court and the signature of the Registrar will be sent to the Income-tax Appellate Tribunal, Cochin Bench.