Calcutta High Court
Commissioner Of Income-Tax vs Oil India Ltd. on 13 June, 1991
Equivalent citations: [1992]198ITR701(CAL)
JUDGMENT Shyamal Kumar Sen, J.
1. The Tribunal has referred to this court the following questions for determination :
"(1) Whether the Tribunal had any material to hold that the bungalows allotted to the executives were partly used for the purposes of the business of the asses see-company during the period of one month when the concerned employees were on leave ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that 50 per cent. of Rs. 1,84,127 should be excluded for the purpose of computing the disallowance under Section 40A(5) of the Income-tax Act, 1961 ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the disallowance of'Rs. 12,294 and Rs. 20,608 out of travelling and entertainment expenditure, respectively, under Sections 37(3) and 37(2B) of the Income-tax Act, 1961 ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income earned by the assessee from transporting the crude belonging to the Oil and Natural Gas Commission along with its own crude was attributable to the business of production of mineral oil within the meaning of item 3 of the list of articles and things specified in the Sixth Schedule to the Income-tax Act, 1961, read with Section 80B(7) and Section 80-I of the said Act?
(5) Whether, on the facts and in the circumstances of the rasp, the Tribunal was justified in holding that the assessee was entitled to relief under Section 80-I of the Income-tax Act, 1961, on the income earned by the assessee from transportation of crude oil belonging to the Oil and Natural Gas Commission ?
(6) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to relief under Section 80-I of the Income-tax Act, 1961, on the income earned by the assessee from transportation of crude oil belonging to the Oil and Natural Gas Commission ?
(7) Whether the Tribunal was justified in holding that oil wells constituted plant for the purpose of the allowance of development rebate ?
(8) Whether the Tribunal was justified in holding that the assessee was entitled to development rebate at 25 per cent. on drilling expenditure of Rs. 2,72,94,678 even though the entire sum was allowed as revenue expenditure in the assessment of the assessee-company ?"
2. The facts leading to this reference, inter alia, are that the assessee is a limited company and the assessment year involved is 1972-73 for which the previous year ended on December 31, 1971. The assessee had filed, along with the return of income, a statement showing the computation of disallowance under Section 40A(5) of the Act. While computing the disallowance under Section 40A(5), the assessee-company had deducted 8/12ths of the expenditure incurred on the maintenance of residential accommodation provided to the executives and 1/12th of depreciation in respect thereof aggregating to Rs, 1,84,127 on the ground of non-user by the employees during the leave period of one month. This claim of the assessee-company was disallowed by the Income-tax'Officer who pointed out that there was no evidence io show that each such employee left the bungalow or the accommodation with all family members with bag and baggage and that the bungalow was used for any purpose other than as residence of the employees of the company. Against this action of the Income-tax Officer, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals). It was contended before him that the perquisites of the executives in respect of rent-free bungalows, the bungalow, furniture, etc., should be calculated as if these were available to them only for a period of eleven months. It was stated that the executives were on leave for one month during the relevant previous year and, therefore, were not enjoying the perquisites for a month. This plea of the assessee was not found acceptable to the Commissioner of Income-tax (Appeals). He disallowed the assessee's claim and upheld the Income-tax Officer's action. In further appeal, the Tribunal, after observing that the bungalows were partly used by the employees and partly used for the business of the assessee-company, held that 50 per cent. of the amount as referred to above should be taken into account for the purpose of computation of disallowance under Section 40A(5) of the Act. The Income-tax Officer disallowed Rs. 12,294 out of travelling expenses under Section 37(3) of the Act. On appeal, the Commissioner of Income-tax (Appeals) held that the above sum was properly disallowable under Rule 6D of the Income-tax Rules, 1962, and confirmed the disallowance made by the Income-tax Officer. The Income-tax Officer also disallowed Rs. 20,608 as entertainment expenses under Section 37(2B) of the Act out of the total expenses of Rs. 61,825 claimed. The Commissioner of Income-tax (Appeals) confirmed the disallowance after mentioning that no details had been furnished in support of the contention that the said sum of Rs. 61,825 did not include any entertainment expenses. On further appeal by the assessee-company, the Tribunal held that the expenditure was incurred by the assessee in the field. Drilling was going on as per schedule and, therefore, the disallowance of the expenditure by the Income-tax Officer was not proper. The Tribunal, after taking note of Clause 12 of the second supplemental agreement on which the assessee relied, deleted the disallowances under Sections 37(3) and 37(2B) as sustained by the Commissioner of Income-tax (Appeals). The assessee had claimed deduction under Section 80-I of the Act in respect of a sum of Rs. 42,64,311 which represents its income from transportation of crude oil belonging to the Oil and Natural Gas Commission. This claim of the assessee was negatived by the Income-tax Officer. On appeal, the Commissioner of Income-tax (Appeals) upheld the order of the Income-tax Officer. On further appeal by the assessee, the Tribunal, following its decision in the assessee's own case for the assessment year 1971-72 in I. T. A. No. 2707/(Cal) of 1979, directed the Income-tax Officer to allow the relief under Section 80-I. The assessee showed, drilling expenditure of Rs. 2,72,94,678 and claimed development rebate at 25 per cent. of the said amount at Rs. 68,23,670 by filing the return on August 14, 1978. This claim of the assessee was refused by the Income-tax Officer on the ground that the assessment was not made in the ordinary way but in terms of the second supplemental agreement dated July 27, 1961, under which the entire drilling expenditure of Rs. 2,72,94,678 incurred in respect of the oil wells had been allowed as deduction. On appeal, the Commissioner of Income-tax (Appeals) upheld the Income-tax Officer's action. He pointed out that the oil wells did not constitute plant in the assessee's business of production of crude oils and, therefore, development rebate was not admissible. On further appeal, the Tribunal, after considering various case-laws and the circular relied on by the assessee, held that the oil well was the plant of the assessee which turned the output into money values which, in turn, became the income of the assessee and, therefore, the assessee was entitled to development rebate even though the whole of the expenditure was allowed as revenue expenditure. The Tribunal thus referred the matter back to the Income-tax Officer to allow development rebate provided the assessee satisfied the other conditions.
3. So far as question No. 1 is concerned, it appears as already noted that the assessee had filed along with the return of income a statement showing the computation of disallowance under Section 40A(5) of the Act.
While computing the disallowance under Section 40A(5), the assessee-company had deducted 8/12ths of the expenditure incurred on the maintenance of residential accommodation provided to executives and 1/12th of depreciation in respect thereof aggregating to Rs. 1,84,127 on the ground of non-user by the employees during the leave period of one month. This claim of the assessee-company was disallowed by the Income-tax Officer since there was no evidence to show that each such employee left the bungalow or the accommodation with all his family members and bag and baggage and that the bungalow was used for any purpose other than for the residence of the employees of the company. The assessee preferred an appeal to the Commissioner of Income-tax (Appeals ). It was contended on behalf of the assessee that perquisites of the executives in respect of the rent-free bungalows, the bungalow furniture should be calculated as if these were available to them only for a period of eleven months, and it was urged that the executives were on leave for one month during the relevant previous year and, therefore, were not enjoying the perquisites for one month. This plea of the assessee was not accepted by the Commissioner of Income-tax (Appeals). In further appeal to the Tribunal, it was observed that the bungalows were partly used by the employees and partly used for the business of the assessee-company. It was held that 50 per cent. of the amount as referred to above should be taken into account for the purpose of computation of disallowance under Section 40A(5) of the Act.
4. Before the Tribunal, the question was raised by the assessee that the sum of Rs. 18,32,944 should not have been disallowed under Section 40A(5) of the Act. The disallowance was made by the Income-tax Officer for repairs and maintenance, depreciation and wages for bungalows occupied by the employees. The Tribunal accepted the contention of the assessee and held that the maintenance as well as depreciation of the bungalows cannot be taken into consideration and, accordingly, the said sum of Rs. 18,32,944 was deleted. The Revenue had not come up in reference against the said decision of the Tribunal. Therefore, the entire amount of Rs. 18,32,944 representing repairs and maintenance of bungalows occupied by the employees has been held to be not disallowable under Section 40A(5) of the Act.
5. Learned advocate has relied upon the following decisions :
(1) CIT v. Davidson of India Pvt. Ltd. .
(2) C/r v. Motor Industries Co. Ltd. [1988] 173 ITR 374 (Kar).
6. The assessee made an alternative contention that, in any event, Rs. 1,84,127 could not be included by the Income-tax Officer for the maintenance of the bungalows and depreciation for the period of one month during which the employees are on leave. The Tribunal allowed 50 per cent. of the said disallowance, under Section 40A(5) of the Act.
7. In our opinion, both the said questions Nos. 1 and 2 have become academic in view of the fact that the Tribunal has allowed the whole of the amount of Rs. 18,32,944 representing the expenses for the repair and maintenance of the bungalows occupied by the employees for the entire 12 months. Having allowed the entire expenses for the 12 months, the question of not allowing one month's expenses representing Rs. 1,84,127 does not arise. Therefore, the said questions are now academic as the Department has not challenged the decision of the Tribunal on the main issue, viz., the repairs and maintenance expenses amounting to Rs. 18,32.944 should not be disallowed under Section 40A(5) of the Act.
Accordingly, we decline to answer both questions Nos. 1 and 2.
8. Question No, 3 is whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the disallowance of Rs. 12,294 and Rs. 20,608 out of travelling and entertainment expenditure, respectively, under Sections 37(3) and 37(2B) of the Income-tax Act.
9. It has been submitted that Clause 12 of the second supplemental agreement indicated that the expenditure incurred by the assessee for the exploration or on prospecting and drilling for crude oil in India were to be treated as business expenditure. The assessee was entitled to deduction under Sections 37(3) and 37(2B) of the Income-tax Act.
10. It may be noted that the Tribunal has found that the assessee was doing exploration and prospecting and drilling for crude oil in India. The expenditure was incurred by the assessee in the field. The drilling was going on as per schedule and, therefore, the disallowance of the expenditure by the Income tax Officer under Sections 37(3) and 37(2B) of the Act was not proper in view of Article 12(ii) of the second supplemental agreement which provides, inter alia, that all expenditure on exploration/prospecting/drilling which is incurred by Oil India Ltd. subsequent to the effective date of the grant of any mining lease is to be allowed as a deduction for tax purposes in the year in which the expenditure is incurred. The Tribunal has categorically found that the said expenditure was incurred by the assessee in the field and such drilling was going on as per schedule.
This finding is a finding of fact and has not been challenged. Therefore, all the expenditure which have been incurred were expenditure on exploration and/or prospecting and/or drilling and should be allowed in view of Article 12(ii) of the second supplemental agreement.
Accordingly, we answer question No. 3 in the affirmative and in favour of the assessee.
11. Questions Nos. 4 and 5 are covered by the judgment of this court in the case of the same assessee in Income-tax Reference No. 387 of 1981--CIT v. Oil India Ltd. [1992] 196 ITR 366. The said reference was disposed of on July 4, 1989, by Ajit Kumar Sengupta and B. P. Banerjee JJ. Following the decision of the Division Bench on the said question, we answer questions Nos. 4 and 5 in the affirmative and in favour of the assessee.
12. Question No. 6 is whether the Tribunal was justified in holding that the oil wells constituted plant for the purpose of the allowance of development rebate. The Tribunal has found that the assessee claimed drilling expenditure of Rs. 2,72,94,678 and claimed development rebate at 25 per cent. of the said amount at Rs. 68,83,670. The Income-tax Officer did not allow the claim on the ground that the whole of the expenditure claimed by the assessee has been allowed to it. The Commissioner of Income-tax (Appeals), relying on several decisions, stated that the well was not plant and, therefore, the assessee was not entitled for development rebate.
13. The Tribunal pointed out that oil well is an apparatus used by the assessee for the purpose of deriving income from crude oil after drilling the well. Under the circumstances, the well is a plant of the assessee used for its business of exploration of crude oil.
14. In fact, the assessee relied upon the Circular of the Department being No. 582-25/605 J. M. dated January 23, 1926. The said circular categorically lays down that wells and pipes are plant.
15. The Supreme Court decision in the case of Scientific Engineering House P. Ltd. v. CIT was relied upon by Dr. Pal.
16. The Supreme Court, in the said judgment, has quoted with approval from the decision reported in Yarmouth v. France [1887J 19 QBD 647 that " there is no definition of plant in the Act : but in its ordinary sense, it includes whatever apparatus is used by a businessman for carrying on his business,--not his stock-in-trade which he buys or makes for sale ; but all goods and chattels, fixed or movable, live or dead, which be keeps for permanent employment in his business ".
17. The same view has been taken by the House of Lords in Hinton v. Maden and Ireland Ltd. [1959] 38 TC 391, 417 and 424.
18. In Income-tax Reference No. 260 of 1987 (Tribeni Tissues Ltd. v. CIT , the Division Bench of this court presided over by Ajit Kumar Sengupta J., held that tube-well is a plant entitled to investment allowance.
19. It has been further decided that a well dug for the purpose of carrying on business is a plant both for the purposes of depreciation and for development rebate. In this connection, we take note of the following decisions :
(1) CJT v. Warner Hindustan Ltd. .
(2) CIT v. Warner Hindustan Ltd. .
20. In the case of CIT v. Hindusthan Motors Ltd. , the expenditure was allowed under Clause 12(ii) of the second supplemental agreement and not as a revenue expenditure.
21. Development rebate is allowable under Section 33 of the Act over and above the recoupment of the total cost of machinery by way of depreciation allowance. The allowance under Section 33 of the Act is obviously given to provide an incentive for industrial expansion. It has no connection with depreciation allowance, which is an yearly feature.
22. Accordingly, question No. 6 is answered in the affirmative and in favour of the assessee.
23. Question No. 7 is also answered in the affirmative and in favour of the assessee.
24. There will be no order as to costs.
Ajit K. Sengupta, J.
25. I agree.