Jharkhand High Court
T.R.F. Limited vs Commissioner Of Income Tax on 12 July, 2006
Equivalent citations: (2007)213CTR(JHARKHAND)557, [2008]298ITR78(JHARKHAND), [2006(4)JCR21(JHR)]
Author: M.Y. Eqbal
Bench: M.Y. Eqbal, D.P. Singh
ORDER M.Y. Eqbal, J.
Page 2324
1. At the instance of the Assessee, on an application filed under Section 256(2) of the Income Tax Act, 1961 the Income Tax Appellate Tribunal, Patna Bench, Patna, has referred the following question to this Court for decision relating to assessment year, 1984-85:
(i) Whether the Tribunal is correct in law in holding that on computer, investment allowance and additional depreciation are not allowed?
(ii) Whether, on the facts and in the circumstances of the appellant's case, the Tribunal is justified in law in holding that the computer installed and used in the factory premises of the appellant is not entitled to investment allowance and additional depreciation.?
(iii) Whether, on the facts and in the circumstances of the appellant's case, the Tribunal is justified in law in holding that the computer installed in the factory premises is not a part of the manufacturing machinery since it itself does not manufacture or produce any article or thing dealt by the Assessee?
2. The Assessee is on Engineering Company manufacturing various materials handling equipments. The Assessee installed and commissioned computer system accessories during the previous year relating to assessment years 1984-85. The Assessee claimed depreciation at the rate of 2% as per the provisions of Section 32 as well as investment allowances under Section 32A of the Income Tax Act. The Assessee claimed depreciation and investment allowances on the ground that the computer system is a plant installed in its factory premises. The claim of the Assessee was disallowed by the Assessing Officer holding that the computers were used by the Assessee for accounting purposes. The Assessing Officer further held that if the computers are treated as a plant, then the rate of depreciation can be that of applicable to plants and machineries and not special rate provided for computer. The Assessee then challenged the said assessment order by filing First Appeal before the Appellate Commissioner of Income Tax. The appellate Commissioner of Income Tax, relying upon the two decisions of the Bombay High Court reported in 130 I.T.R., 739 and 131 I.T.R., page 1, came to the conclusion that Page 2325 the computers were plants and all works were done on these computes with facilitated smooth running of the business. The appellate authority thus allowed the claim of the Assessee for investment allowance as well as additional depreciation. The revenue then approached the Tribunal by preferring Second Appeal. The Appellate Tribunal, considering the decisions rendered by the Calcutta High Court, took the view that since the computers were not producing any material or thing which is meant for business activities of the Assessee, rather, the computer system was utilized, inter alia, for accounting purposes, that is, for maintaining the stock of raw materials and the finished goods, the Assessee is not entitled to investment allowance under Section 33A or additional depreciation under Section 32(1)(2)(a) of the Income Tax Act. In the aforesaid circumstances, at the instance of the Assessee, the instant reference has been made for answering the questions quoted hereinabove.
3. Before appreciating the submissions made by the learned Counsels appearing for the parties, I would first like to discuss the decisions given by the different High Courts.
4. In the case of "CIT v. Datacons (P) Ltd. , the Karnataka High Court held that:
Where a company is engaged in processing the date furnished by its customers by using IBM Unit Record Machine Computer, i.e. the vouchers and statements of accounts received from its customers, and converts them into balance-sheets, stock accounts, sales analysis, etc. which are printed as per the requirements of the customers, the assessee, in all these activities, has to play an active role by co-ordinating the activities and collating the information. Such activities amount to "processing" of goods. The assessee in such circumstances was, therefore, held to be an industrial company which has been defined under Section 2(7)(c) of the Finance (No. 2) Act of 1977, to mean, a company which is mainly engaged in the business of generation and 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. In view of the above decision of the Karnataka High Court, the assessee-company can be said to be an industrial undertaking which is engaged in the manufacture or production of articles or things not specified in the Eleventh Schedule.
5. In the case of "CIT v. IBM World Trade Corporation , the Bombay High Court held that:
A data processing machine is a complicated machinery which could not be easily operated by lay men and special training for a period which may exceed three months in some cases and a much longer period in others is necessary in order to equip a person with the knowledge and art of operating these machines. The installation and operation of the machines is on a scientific basis and even for the purposes of installation, certain special conditions have to be provided in the form of air-conditioning or a particular temperature. The purposes for which such machines, which can be described as computers, are used are well-known and, in highly scientifically developed systems, they have their own role to play and they cannot be equated with office appliances which would be of a much simpler nature.
6. The Bombay High Court again took the same view in the case of "CIT v. IBM World Trade Corporation and held that data processing machines are Page 2326 not office appliances and are entitled to development rebate under Section 33 of the Income Tax Act, 1961.
7. The Calcutta High Court in the case of in the case of CIT v. Shaw Wallace and Co. Ltd.(1993)2001 ITR-17 observed:
Investment allowance is admissible in respect of machinery or plant installed in any industrial undertaking for the purpose of business of construction, manufacture or production of any article or thing not being an article or thing specified in the list in the Eleventh Schedule. There is no dispute that "data-processing" or "computer" is not mentioned in the Eleventh Schedule. If, as held by the Division Bench in Peerless Consultancy Services (Pvt.) Ltd the assessee-Company is an industrial company, there is no reason why such a company will not be entitled to the benefit of the investment allowance. Investment allowance will not be admissible in respect of office appliances. In our view, having regard to the nature and function of the computer and the date processing system, it cannot be said that they are office appliances. An industrial company is a company engaged in the manufacture or processing of goods "Data-processing" means the converting of raw data to machine-readable form and its subsequent processing (as storing, updating, combining, rearranging or printing out) by a computer. "Computer" means "one that computes; specifically a programmable electronic device that can store, retrieve, and process data". There cannot be any doubt that raw data cannot be equated with the result derived. It is different in form and substance.
8. In the case of "Commissioner of Income Tax v. Fort Gloster Industries Ltd." , a similar question arose for consideration before a Division Bench of the same Calcutta High Court on the reference made under Section 256(1) of the Income Tax Act as to whether on the facts and in the circumstances of the case, the Tribunal was justified in not upholding the finding of the Commissioner of Income-Tax (Appeals) to the effect that the computer installed in the factory premises does not form a part of the manufacturing unit intimately connected with the production of manufacturing any article or thing and as such investment allowance under Section 32A of the Income Tax Act was not allowable. The Court held:
The assessment year involved is 1984 for which the accounting year ended on March 31, 1984, About the use of the computer in question, the Tribunal has found the following facts:
In this case, there is no dispute that the computer has been installed in the special cabin constructed within the factory premises. The computer was used for processing raw materials, data, straw data, wages and salaries payments, etc. and also for monitoring the details of production. In such a case, if we apply the functional test on the fact of the computer installed here, it is in the line of the manufacturing process in the cable division of the assessee.
It has been contended on behalf of the Revenue that this computer was not used for manufacture but the Tribunal's finding is that the computer is used for processing raw materials, data, straw data, and for monitoring the details of production, If that be so, we fail to see how it is not a part of the business of manufacture of the cable division of the assessee. The Tribunal has found that Page 2327 the computer has been installed in a special cabin constructed within the factory premises itself.
On behalf of the Revenue, reliance was placed on a judgment of this Court in the case of CIT v. Technico Enterprises Pvt. Ltd.. But in that case a specific finding of fact was that the computer was purchased and utilized for accounting purposes only. On the basis of that finding, the court came to the conclusion that the computer did not qualify for additional depreciation or investment allowance. But this judgment must not be read as to have laid down that under no circumstance can a computer be utilized for manufacturing purpose.
There is a judgment of the Bombay High Court on this point in the case of CIT v. I.B.M. World Trade Corporation . It was held that the computer utilized in that case should be treated as an apparatus and as a plant for the purpose of Section 43(3) of the Income Tax Act, 1961. In view of the facts found by the Tribunal and the judgments noted above, we are of the view that the questions should be answered in the affirmative and in favour of the assessee.
9. In the case of Commissioner of Income Tax v. Technico Enterprises Pvt. Ltd." , the fact of the case was that the assessee-company was engaged in the manufacture of chemicals. It was plainly admitted before the court by the learned Counsel for the assessee that the computer purchased by the assessee was not part of the manufacturing machinery. According to him, the computer was utilized for accounting purposes, that is to say, for maintaining the stock of raw materials and the finished goods and also for other accounts of the business of the assessee-company. It was also admitted by learned Counsel for the assessee that no outside job was done by the assessee through the computer. However, it is contended by him that the said computer was the tool of the trade of the assessee. According to him, in this modern world, even the manufacturing process becomes easy and convenient with the help of a computer through which the accounts of raw materials and finished goods are maintained. Further, it was contended by him that a computer cannot be treated as an office appliance. In support of this fact he placed reliance upon the judgments of the Bombay High Court in the cases of CIT v. IBM World Trade Corporation and CIT v. IBM World Trade Corporation . The contention of learned Departmental representative was that even if, as held by the Bombay High Court, the computer is taken to be outside the ambit of office appliance', the assessee cannot get investment allowance unless it is established that the computer is used for the purposes of business of manufacture or production of any article or thing. The computer may not be directly employed for the purpose of manufacture or production of any article but it is certainly used for the purposes of such business. The word 'business' used in Section 32A(2)(iii) is significant. The business of manufacture cannot be restricted to the actual process of manufacture. The Court therefore, found that the Income tax Officer did not make a mistake in allowing investment allowance and additional depreciation on the computer. The order of the Commissioner of Income tax was, therefore, reversed and that of the Income tax Officer was restored." The Court held:
With regard to the merits of the case, namely, that the assessee was entitled to investment allowance under Section 32A(1) in the sum of Rs. 39,784 and Page 2328 additional depreciation under Section 32(1)(iia) of the Income-tax Act, 1961, on a computer purchased by the assessee during the previous year relevant to the assessment year, it appears to us from the order of the Tribunal that there is no dispute that the computer purchased by the assessee is not part of the manufacturing machinery. According to the learned advocate for the assessee, the computer is utilized for accounting purposes, that is to say, for maintaining the stock of raw material and the finished goods and so also for other accounts of the business of the assessee- company. It is also admitted that, in the relevant order, no outside job work was done by the assessee through this computer. The only contention of the assessee was that the said computer was the tool of the trade of the assessee. It was submitted that the manufacturing process becomes easy and convenient with the help of a computer through which the accounts of raw materials and finished goods are maintained. It is also contended that a computer cannot be treated as an office appliance. The Division Bench of the Bombay High Court in the case of CIT v. IBM World Trade Corporation held that, even if the computer is taken outside the ambit of office appliances, the assessee cannot get investment allowance unless it is established that the computer is used for the purposes of business of manufacture or production of any article or thing.
10. Their Lordships further observed:
Data processing machines are complicated machinery which could not be easily operated by lay men and special training for a period which may cover three months in some cases and a much longer period in others is necessary in order to equip a person with the knowledge and art of operating these machines. The installation and operation of the machines is on a scientific basis and even for the purposes of installation, certain special conditions have to be provided in the form of air-conditioning or a particular temperature. The purposes for which such machines, which can be described as computers, are used are well-known and, in highly scientifically developed systems, they have their own roles to play and they cannot be equated, therefore, with office appliances which would be of a much simpler nature. They are really substitutes for human labour not in the sense of manual labour but in the sense they perform intellectual functions, which would normally be performed by highly qualified engineers. One machine by itself serves no purpose, but what has to be used is a group of machines, which make up a "system". The basic functions of a computer are:(i) input; (ii) storage; (iii) control; (iv) processing; and (v) output. The processor has to translate the language of the programmer into the computer code form, which is used internally by the computer. A computer system or an electronic data processing system is physically a collection of electro-mechanical and electronic components and devices assembled in metal cases (modules) and cabinets. These contain switching and communication components such as transistors, diodes, capacitors, resistors and integrated circuits all combined into various types of circuitry, together with memory systems, power supplies, delay lines and various types of magnetic media such as tapes and wires for carrying and transforming data and information, as coded, into instructions and computations. In view of the varied functions which the "system" is capable of performing, data processing machines cannot be classified as "office appliance" and are eligible for allowance of development Page 2329 rebate under Section 33(1) of the Income tax Act, 1961 (corresponding to Section 10(2)(vib) of the Indian Income Tax Act, 1922).
11. In another case, the Calcutta High Court held that assessee is entitled to investment allowance in respect of generator on the ground that processing of data on behalf of its customers was processing of goods. The said judgment was challenged by the Revenue by filing appeal before the Supreme Court and the Apex Court in the case of "Commissioner of Income Tax v. Peerless Consultancy and Services (P) Ltd. (2001) 248 ITR 178 while dismissing the appeal observed:
We have read the judgment under appeal. The Appellate Assistant Commissioner and the Tribunal have granted to the respondent-company the benefit that an industrial company gets and accordingly, granted it investment allowance in respect of a generator installed by it. It has been held by them that when the respondent-company processes data on behalf of its clients, it processes goods.
Our attention has been drawn to the judgment of the Calcutta High Court in CIT v. Shaw Wallace And Co. Ltd. which, in turn, has referred to the Judgment of the Karnataka High Court in CIT v. Datacons (P) Ltd. .
Learned Counsel for the Revenue has been unable to show us any judgment of a court of this country or abroad, which takes the view that the processing of data is not the processing of goods. He has sought to take us back to the primary material; it is not the function of this Court to assess such primary material. The primary material, if any, should have been placed before the income-tax authorities or the Tribunal.
12. Section 32A of the Income Tax Act was inserted by the Finance Act, 1976 (66 of 1976) with effect from 1st April, 1976 i.e. for and from assessment year 1976-77. Sub-section (1) of Section 32A provides that 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 business carried on by him, in accordance with and subject to the provisions of Section 32A, deductions shall be allowed 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, investment allowance equal to 25% of the actual cost of the ship, aircraft, machinery or plant shall be allowed to the assessee. Sub-section (2A) of Section 32A as inserted by the Act of 1976 w.e.f. 1.4.1976 which provides that deductions under Sub-section (1) shall not be denied in respect of any machinery or plant installed and used mainly for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the 11th Schedule by reason only that such machinery or plant is also used for the purposes of business of construction, manufacture or production of any article or thing specified in the said list.
13. In other words, sometimes a machinery or plant installed and used mainly for the purposes of business of construction, manufacture or production of any article or thing, not specified in the list, may have been partly used for the purposes of business of manufacture or production of any article or thing specified in the said list. An investment allowance is not intended to be denied in such cases.
Page 2330
14. As noticed above, the assessee is an engineering company manufacturing various materials handling equipment. It had installed and commissioned a NALCO 5000 Supercomputer system with accessories during the previous year relevant to assessment year 1984-85. The assessee-company claimed depreciation of 20% on computer which is a special rate prescribed for computers. It also claimed an additional depreciation as well as investment allowance under Section 32A of the Act. These claims were made by the assesses on the ground that the computer system was part of the plant and was installed in the factory premises under suitable temperature condition. It was the specific case of the assessee that these computers were installed in the factory premises for the purposes of business of manufacture and production of article which fact has not been denied by the Revenue. It has not been disputed that the computers installed by the assessee was used for processing raw materials, data, wages and salary payment and for monitoring the details of production. It can, therefore, be safely held that the assessee was entitled to investment allowance and depreciation. The ration decided by the Calcutta High Court in Commissioner of Income Tax v. Technico Enterprises Pvt. Ltd. has been distinguished by the same High Court in the case of Commissioner of Income Tax v. Fort Gloster Industries Ltd. . In the case of Technico Enterprises (supra) it was admitted by the assessee that the computer purchased by the assessee was not part of the manufacturing machinery. The computer was used only for accounting purposes. On this fact it was held that investment allowance was not admissible. In our view investment allowance is admissible in respect of the industrial undertaking for the purpose of business of construction, manufacture or production or any article or thing.
15. We are, therefore, of the view that the questions should be answered in affirmative and in favour of the assessee. The reference is answered accordingly.