Income Tax Appellate Tribunal - Ahmedabad
Income-Tax Officer vs Klin Products (Morvi) (P.) Ltd. on 29 June, 1987
Equivalent citations: [1987]23ITD423(AHD)
ORDER
R.M. Mehta, Accountant Member
1. This appeal is directed against the order of the Commissioner (Appeals) whereby he has directed the ITO to allow deduction Under Sections 33B and 80J of the Income-tax Act, 1961. The following grounds have been urged by the Revenue :
(1) The learned CIT(A) has erred in law and on facts in directing the ITO to allow deduction Under Section 33B of Rs. 2,11,266 by estimating 60% of the W.D.V. of assets.
(2) The learned CIT(A) further erred in law and on facts in directing the ITO to grant relief Under Section 80J.
(3) On the facts of the case the CIT(A) ought to have upheld the order of the ITO.
(4) It is, therefore, prayed that the order of the CIT(A) may be set aside and that of the ITO be restored to the above extent.
2. The first ground pertains to the deduction allowed by the CIT(A) Under Section 33B of the Act. The ITO in the course of the assessment proceedings observed that the assessee had claimed a sum of Rs. 2,69,230 by way of rehabilitation allowance Under Section 33B. He made detailed enquiries from the assessee in support of its claim. After doing so he concluded that the assessee was not entitled to the deduction inasmuch as various conditions envisaged by the section were not satisfied. The detailed reasoning of the ITO in rejecting the claim is recorded as under :
The assessee has claimed rehabilitation allowance Under Section 33B to the tune of Rs. 2,69,230. A detailed calculation how the figure has been arrived is given in the statement filed along with the return of income. It is argued by Shri J.J. Rayani that on account of flood, the assessee's factory was damaged and hence the assessee's case falls under provisions of Section 33B of the I.T. Act.
(i) As regards method of computation of allowance, it is explained by Shri J.J. Rayani that some of the assets of factory were totally destroyed and washed away in flood. Accordingly, these assets were written off and terminal loss Under Section 32(i)(iii) to the tune of Rs. 62,300 is claimed. Thus the assessee has claimed investment allowance at the rate of 6 0% of the terminal loss of Rs. 62,300 and 60% of the value of the remaining assets of Rs. 4,83,022.
(ii) I have gone through the contentions put forth by the assessee's ITP orally as well as in writing and due consideration have been given.
As laid down Under Section 33B where the business of any industrial undertaking is discontinued in any previous year by reason of extensive damage or destruction of any building, machinery, plant or furniture owned by the assessee and for the purpose of such business as a direct result of flood then rehabilitation allowance is to be allowed as per terms and conditions laid down Under Section 33B of the I.T. Act.
In the case of the assessee-company, the business was never discontinued. As stated by the assessee-co. itself, the business was temporarily suspended. Accordingly, the first condition that 'business should be discontinued' is not satisfied by the assessee-company.
The second condition for this allowance is that there should be extensive damages or destruction of building, machinery and plant of the assessee-company. In this case, there was no extensive damages or destruction caused to the assessee's assets, because out of the total assets, the assessee has written off assets having value of Rs. 1,22,232 as on 30-6-79 and claim of terminal allowance of Rs. 62,300. Thus, this is not a case that an extensive damage or destruction were caused to the assessee's assets.
Now coming to the method of calculation of allowance under this section as laid down in section, rehabilitation allowance equivalent to 60% of the amount of the deduction allowable to him under Clause (ii) of Section (iii) of Sub-section 32 in respect of building, machinery, plant or furniture so damaged or destroyed is to be taken as base.
In this case, as mentioned above, the assessee has claimed investment allowance on two counts partly 60% of the terminal loss claim and mainly 60 per cent of the remaining assets which have not been written off. To be more precise, the value of fixed assets as on 1-7-79 were filed at Rs. 5,45,321 out of which assessee has written off assets worth Rs. 63,300 leaving behind the value of remaining assets at Rs. 4,83,021. The assessee has claimed written down value @ 60 per cent of Rs. 4,83,021 and 60 per cent of Rs. 62,300. As laid down in the section, rehabilitation allowance is to be allowed on the 60 per cent of the amount deductible Under Section 32(1)(iii). Thus, the assessee has not also followed the method of calculation of rehabilitation allowance as laid down under this section.
As stated above, the assessee does not fulfil any of the conditions as laid down under the section hence the assessee's claim of rehabilitation allowance Under Section 33B is negatived.
3. The CIT(A) however accepted various contentions of the assessee and allowed the claim Under Section 33B. In doing so he observed as under :
The next ground is with regard to the claim of the assessee made Under Section 33B. The ITO has stated that in his assessment order that the conditions as laid down as per the provisions of Section 33B of the Act are not satisfied in the case of the assessee. Therefore, he has rejected the claim of the assessee-company. The learned counsel, on the other hand, has urged that the ITO has again failed to appreciate the facts of the present case inasmuch as extensive damage to the building and the machinery has caused because of the floods which took place in Morvi in the month of August 1979 and assessee is entitled to deduction Under Section 33B as also it is entitled to a claim Under Section 80J. The learned counsel has also relied upon a comparable case of M/s. Super Scientific Clock Mfg. Co. for the asstt. year 1980-81. The assessee, in that case, made a claim Under Section 33B on account of extensive damages done to the machinery ; the claim was about Rs. 24,00,000. The ITO after considering the facts of that case, has allowed 60 per cent of Rs. 18,00,000 against the claim made by the assessee at 60 per cent of Rs. 24,00,000. The learned counsel has also stated that the ITO, Morvi, in the case of M/s. Jaibharat Tiles Co. Morvi, for A.Y. 1981-82, has allowed rehabilitation allowance. The learned counsel has also cited the decision of the CIT(A) Rajkot in the case of M/s. Scientific Clock Mfg. Co. for the A.Y. 1980-81. On that basis, it is urged by the learned counsel that the assessee is entitled to deduction Under Section 33B. It is contended that the business was not discontinued but it was temporarily suspended. Reliance has been placed on 89 ITR p. 252 and 89 ITR p. 230. The learned counsel has also explained the meaning of word "Discontinued". In this respect, he has relied upon the Supreme Court decision in the case of 112 ITR p. 776. On the basis of the same, it is urged that extensive damage is separate and distinct from other loss or destruction and thus, it is urged that the ITO may be directed to allow the same.
I have considered these submissions very carefully and on perusal of the comparable case that the ITO himself has allowed in the case of M/s. Scientific Clock Mfg. Co. of Morvi the claim made and as the factory of the assessee-company is situated in Morvi, the facts of the present case and that of the comparable case of M/s. Scientific Clock Mfg. Co. are more or less the same because the floods which took place in Morvi in the month of August 1979 have affected the assessee as well as other assessees of Morvi who are carrying on the business activities at Morvi. The ITO in that case for A.Y. 1980-81, has considered and allowed a huge amount of allowance Under Section 33B. The ITO has worked out the claim of the assessee in that case @ 60 per cent of 18 lakhs, i.e. more than 10 lakhs of rupees as rehabilitation allowance Under Section 33B. The CIT(A) Rajkot has also allowed such rehabilitation allowance Under Section 33B in the case of M/s. Super Scientific Clock Mfg. Co. Morvi. The CIT(A) Rajkot in appeal No. CIT-R-229-84-85, in the case of M/s. Super Scientific Clock Mfg. Co. Morvi for A.Y. 1981-82, in his order dt. 16-8-1984 has allowed the claim Under Section 33B. Since the facts of assessee-company are similar to that obtained in the case of M/s. Super Scientific Clock Mfg. Co. of Morvi, I hereby direct the ITO to allow the claim of deduction Under Section 33B However, the assessee-company has made a claim at Rs. 2,69,230. The assessee has worked out the written down value at Rs. 4,83,021 and the deductions available @ 80 per cent of the same has been taken and claimed. However, this estimate is on the high side. In my opinion 60 per cent of such written down value would be the reasonable amount instead of the estimate made by the assessee at 80 per cent. Therefore, the working for arriving at the figure of allowable rehabilitation allowance Under Section 33B is as under :
Rs.
(i) Written down value (after excluding
the assets written off) 4,83,021
(ii) 60 per cent of the same 2,89,812
(iii) 60 per cent of this amount is
eligible for claim as rehabilitation
allowance Under Section 32(1)(iii) 1,73,886
(iv) (a) The terminal allowance of the value of the
assets written off eligible Under
Section 32(1)(iii) Rs. 62,300
(b) 60 per cent of this amount is Rs. 37,380 37,380
Total amount eligible for deduction ________
Under Section 33B 2,11,266
________
As against the above working, the assessee company has claimed the same at Rs. 2,69,230. The Income-tax Officer is directed to allow a deduction Under Section 33B at Rs. 2,11,266.
4. The learned D.R. in the course of his arguments strongly supported the order of the ITO. According to him the claim had been rightly rejected by the ITO since the assessee did not satisfy the various conditions laid down Under Section 33B. It was contended that the business had not been "discontinued" but only temporarily suspended. He also referred to the circular issued by CBDT pertaining to Section 33B wherein they had indicated the conditions which had to be complied with before the claim could be allowed. He also referred to the Memo explaining the provisions in the Finance (No. 2) Bill, 1967 under which Section 33B was inserted. According to him, a combined reading of the provisions of the section as also the Memo and the CBDT circular clearly indicated that the assessee was not entitled for the deduction as relevant conditions were not satisfied. The main contention of the learned DR was that the assessee was not entitled to the claim but it was alternatively submitted that in case it was held that the assessee was entitled then, the CIT(A)'s order was not correct in so far as the computation was concerned. It was urged that the claim had to be quantified at 60 per cent of the amount of the deduction allowable under Clause ((77) of Sub-section (1) of Section 32 which in this case happened to be a sum of Rs. 62,300. According to him, 60 per cent of this came to Rs. 37,380 only. It was submitted that as against this the CIT(A) had allowed a deduction of Rs. 2,11,266 by taking into consideration all the assets which had not even been written off.
5. It was also submitted that the provisions of the section were absolutely clear and they had to be construed in a strict manner. According to him, it was immaterial if any hardship was caused to a particular assessee by interpreting a taxing statute in such a strict manner. According to him, it was a well settled proposition that where the language of a section was plain and unambiguous it was not open to the courts to read into it limitations which were not there. It was further submitted that the intention had to be gathered from the words 'actually used' in the legislation and what was unexpressed had the same value as to what was unintended. For these propositions he relied on the following decisions Swadeshi Polytex Ltd. v. ITO [1981] 127 ITR 287 (All.) at page 295, CED v. Amarlal [1984] 147 ITR 243 (Mad.) and Vidarbha Co-op. Marketing Society Ltd. v. CIT [1985] 156 ITR 422 (Bom.).
It was accordingly urged that the order of the ITO be restored.
6. The learned counsel for the assessee, on the other hand, strongly supported the order of the CIT(A). According to him, the floods in August 1979 had resulted in extensive damage to the factory premises as well as machineries. According to him, the assessee could not resume its business for a period of 6 to 7 months and the same remained discontinued. He also supported the order of the CIT(A) in respect of the deduction which had been allowed in respect of assets other than those on which deduction had been allowed Under Section 32(1)(iii). In support of his arguments he referred extensively to the paper book filed by him runing into 76 pages. Reliance was also placed by him on the following decisions :
(i) CIT v. Engg. Works of India (P.) Ltd. [1977] 108 ITR 11 (Cal.)
(ii) CGT v. T.S. Krishna [1984] 149 ITR 99 (Mad.) at p. 102.
(iii) CIT v. Sirpur Paper Mills Ltd. [1978] 112 ITR 776 (SC).
It was urged that the rehabilitation allowance being a concession the provisions of the section should be liberally construed. He accordingly urged that the order of the CIT(A) be confirmed.
7. In his reply the learned D.R. made an impassioned plea in support of his alternative contention to the effect that in respect of assets which had not been destroyed, no deduction Under Section 33B could be allowed. According to him, depreciation had already been allowed on these assets in the earlier years as also the year under appeal and further deduction Under Section 33B would mean a double deduction. According to him, Section 33B would apply only to assets which had been completely damaged and not capable of any use.
8. We have examined the rival contentions and have also perused the paper book filed by the assessee. Before we proceed further we would like to set out the provisions of Section 33B which was inserted with effect from 1-4-1967 :
33B. Where the business of any industrial undertaking carried on in India is discontinued in any previous year by reason of extensive damage to, or destruction of, any building, machinery, plant or furniture owned by the assessee and used for the purposes of such business as a direct result of-
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature ; or
(ii) riot or civil disturbance ; or
(iii) accidental fire or explosion ; or
(iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), and, thereafter, at any time before the expiry of three years from the end of such previous year, the business is re-established, reconstructed or revived by the assessee, he shall, in respect of the previous year in which the business is so re-established, reconstructed or revived, be allowed a deduction of a sum by way of rehabilitation allowance equivalent to sixty per cent of the amount of the deduction allowable to him under Clause (iii) of Sub-section (1) of Section 32 in respect of the building, machinery, plant or furniture so damaged or destroyed ;
Provided that no deduction under this section shall be allowed in relation to the assessment year commencing on the 1st day of April, 1985, or any subsequent assessment year.
Explanation : In this section, 'industrial undertaking' means any undertaking which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining.
The aforesaid section was introduced with a view to providing some sort of a relief to the assessees who had suffered extensive damage to the building, machinery, plant etc. as a result of natural calamities. Admittedly during the year under consideration there were floods in Morvi where the industrial undertaking of the assessee is located. It is obvious that there was a dislocation in the working as a result of the floods and also that the damage was caused to the factory building as well as other fixed assets. We have however to examine whether there was a "discontinuance of business" within the meaning of Section 33B, as also the fact whether "extensive" damage had been caused as a result of the floods which took place in Morvi on 11-8-1979.
9. A perusal of the assessment order shows that the assessee claimed a sum of Rs. 4,04,623 under the head "Flood Rehabilitation Account". Out of this, Rs. 2,14,063 pertains to the building and Rs. 1,89,660 related to the machinery. The I.T.O. while examining this claim of the assessee observed as under :
It is an admitted fact that the assessee's buildings were damaged on account of flood and they were completely destroyed. By spending this huge amount, the factory building, office building and Majdoor quarters have been newly constructed. By spending this amount, the assessee will definitely derive the enduring nature of benefit. Accordingly, I hold that Rs. 2,14,963 spent after renovation or reconstruction of building situated in the factory premises are of capital nature and hence the same is disallowed. However, depreciation on the same will be allowed at the usual rate.
As regards expenses of Rs. 1,89,660 spent for machinery the assessee has not furnished detailed copy of the account. Accordingly, it is not Possible to verify as to what types of expenses have been incurred after repairs of machineries. However, the principle applied in the building account will also be applicable in the machinery account i.e. by spending such a huge amount of Rs. 1,89,660 after repairs of machinery the assessee company will derive enduring benefit. Hence this amount of expenditure is also treated as capital expenditure.
(Emphasis supplied)
10. It is apparent that extensive damage was caused to the fixed assets of the assessee resulting in such a huge expenditure to bring them back to their original condition. It is another thing whether such expenditure is to be considered on revenue account or capital account. We even have on record a certificate dt. 20-9-1979 issued by the Commissioner of Industries, Gujarat Government wherein one of the relevant clauses reads as under ;
Certified that the damage suffered by M/s. Klin Products (Morvi) Pvt. Ltd. Morvi during the flood of 11-8-1979 has been assessed at Rs. 12,71,700 (Rupees twelve lac seventy one thousand seven hundred only) by the office of the Industrial Commissioner, Ahmedabad.
It is quite clear that even the Gujarat Govt. has assessed the damage arising as a result of the flood at a figure of Rs. 12,71,700.
11. The second aspect to be considered is whether the business has been "discontinued" as a result of such extensive damage. The assessee's previous year is from 1-7-1979 to 30-6-1980. The floods took place on 11-8-1979 when the previous year had progressed only for a period of six weeks. The learned counsel for the assessee has stated that the business was re-commenced after a period of 7 to 8 months which would mean somewhere in March, 1980. In other words the working operations have been only for a period of five months out of 12 months. According to us, the word "discontinued" would also mean complete stoppage for some time which may not necessarily be very long. There is no doubt that the provisions of the section allow an assessee to restart operations within a period of three years from the end of the previous year. This however does not mean that there is any bar to re-commence earlier than that.
12. A perusal of the P & L Account placed on the paper book further shows that the sales of the assessee have come down to a figure of Rs. 33.39 lacs as against the figure of Rs. 53.52 lacs in the immediately preceding year. In other words the entire operations of the assessee were affected by the floods.
13. We are accordingly of the view that the assessee is entitled to the deduction Under Section 33B in respect of Rehabilitation allowance since according to us various conditions laid down by the section are duly satisfied. We however do not uphold the order of the CIT(A) in respect of the quantum which is to be allowed as a deduction. The CIT(A) has not only allowed 60% of the amount of terminal allowance but he has also directed that 60% of the value of the other assets would also qualify. According to us the provisions of the section are absolutely clear and we once again reproduce the relevant portion :
be allowed a deduction of a sum by way of rehabilitation allowance equivalent to sixty per cent of the amount of the deduction allowable to him under Clause (iii) of Sub-section (1) of Section 32 in respect of the building, machinery, plant or furniture so damaged or destroyed :
According to us, there is no scope for any doubt as to how the quantum is to be worked out. It may be mentioned that in respect of other assets which had been affected by the floods the assessee has already claimed a sum of Rs. 4,04,623 under the head "Flood Rehabilitation Account" (as already discussed). In case a deduction Under Section 33B is once again allowed then it would mean double deduction.
14. We would accordingly uphold the order of the CIT(A) only to the extent of allowing the claim Under Section 33B in respect of the amount claimed as terminal allowance Under Section 32(1)(iii). The balance amount directed to be allowed by the CIT(A) is treated as withdrawn.
15. The second ground in the appeal pertains to the relief granted to the assessee Under Section 80J. The I.T.O. while rejecting the claim observed as follows :
The assessee company has also claimed deduction Under Section 80J of Rs. 68,900, as per working given along with the return of income. During the course of assessment proceedings, the assessee was directed to give explanation on what ground they are claiming deduction Under Section 80J when the business itself has not been started or commenced during the previous year relevant to A.Y. 1981-82.
In this connection, the assessee company's ITP Shri Raiyani has drawn my attention to the proviso of Section 80J(4). As laid down in this proviso, it is mentioned that condition in Clause (i) shall not apply in respect of any industrial undertakings which is formed as a result of re-establishment, re-construction or revival by the assessee of the business of any such industrial undertakings as referred to in Section 33B and within the period specified in that section.
As discussed above, the assessee company's claim of deduction Under Section 33B is negatived as the conditions laid down in this section have not been fulfilled by the assessee company. Accordingly, when the assessee's case does not fall under the purview of Section 33B of IT Act, they are not entitled to benefit of the proviso to Section 80J(4).
In view of the above, the assessee company's claim Under Section 80J is also negatived.
16. The CIT(A) however accepted the claim of the assessee and in doing so observed as follows :
The next point is with regard to the claim made Under Section 80J. The claim Under Section 80J is consequential to the allowance allowable Under Section 33B. As it has been held that the assessee is entitled to deduction Under Section 33B, as per the Explanation to Section 80J(4) the assessee is entitled to a claim Under Section 80J. The claim in this respect has been made at Rs. 68,900. The assessee has worked out the written down value of the assets and current value of the liabilities etc. The ITO is hereby directed to verify the correctness of the working given by the assessee company for the claim made Under Section 80J. As stated above, the assessee is entitled to deduction Under Section 80J in view of the fact that deduction Under Section 33B is eligible and allowable to the assessee company. The ITO is directed to verify the correct working and allow the same Under Section 80J.
17. The learned DR supported the order of the ITO whereas the learned counsel for the assessee supported the order of the CIT(A).
18. We have examined the rival contentions and are of the view that the claim Under Section 80J has not been considered in its proper perspective either by the ITO or by the CIT(A). Both of them have considered the claim as consequential to the claim of the assessee Under Section 33B, The being of the view that since the assessee did not do any business during the year, it was not. entitled to the deduction. For this finding he relied on the view which he had taken in rejecting the claim Under Section 33B. In this connection he referred to the proviso to Section 80J(4). The CIT(A) on the other hand, upheld the claim for deduction only on the ground that since the claim Under Section 33B was to be allowed the deduction Under Section 80J followed consequently. We are of the view that since the assessee's claim Under Section 33B has been accepted by us with modifications we would restore the issue pertaining to the claim Under Section 80J back to the file of the ITO. We do so since there is no finding in his order or discussion on merits. We do not know as to whether a similar claim was made by the assessee in the earlier years and, if so, what was its fate. The I.T.O. is directed to process the claim de novo after satisfying himself as to whether the assessee is entitled or not. For this purpose he will afford a reasonable opportunity of being heard to the assessee.
19. As a result the appeal is partly allowed.