Gujarat High Court
Commissioner Of Income-Tax vs J.H. Kharawala on 28 July, 1993
Equivalent citations: [1994]208ITR691(GUJ)
JUDGMENT G.T. Nanavati, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following question to this court under section 256(1) of the Income-tax Act, 1961 :
"Whether the assessee was entitled to claim initial depreciation at 20% in respect of new machinery installed at a cost of Rs. 3,42,248 ?"
2. This reference relates to the assessment year 1976-77. During the accounting period which ended on March 31, 1976, the assessee installed new machinery of the value of Rs. 3,42,248. During the assessment proceedings, the assessee claimed depreciation of Rs. 68,450 being 20 per cent. of Rs. 3,42,248. On a scrutiny of the balance-sheet the Income-tax Officer found that as a result of this new addition, the actual cost of machinery of the assessee was Rs. 9,84,244 and, therefore, it was not entitled to claim 20 per cent. depreciation on the ground that it was a small scale industry. The Income-tax Officer rejected the contention raised on behalf of the assessee that the written down value of the machinery on the last day of the previous year was to be taken into consideration. The assessee preferred an appeal before the Appellate Assistant Commissioner. The appeal was allowed on the ground that the assessee-company was registered as a small scale industry with the State Small Scale Industries Department and that as the actual cost occurring in part (3) of the Explanation to clause (vi) of section 32(1) would mean in respect of the expenditure of the machinery installed in the earlier year as written down value of that machinery, the aggregate value of the machinery and plant installed by the assessee-company did not exceed Rs. 7,50,000. The Revenue then preferred an appeal to the Tribunal challenging the order passed by the Appellate Assistant Commissioner. The Tribunal held that as the assessee's industrial undertaking is registered as a small scale industry with the State Small Scale Industries Department, there was no reason why the benefit of section 32(1)(vi) should not be given to it. Taking that view, it confirmed the order passed by the Appellate Assistant Commissioner and dismissed the appeal. The Revenue then moved the Tribunal to refer the above-stated question to this court.
3. What is contended by learned counsel for the Revenue is that the benefit of 20 per cent. initial depreciation has been granted to the assessee treating it a small scale industry on a wholly irrelevant consideration. He submitted that whether an industrial undertaking should be regarded as a small scale industry or not has to be decided with reference to the Explanation to section 32(1)(vi) as by enacting the Explanation, the Legislature has specifically provided that for the purpose of that clause, only that industrial undertaking should be regarded as a small scale industry which satisfied the conditions laid down by that Explanation.
4. In order to appreciate the contentions, it is necessary to refer to the said Explanation. Section 32(1)(vi) as it stood at the relevant time read as under :
"(vi) in the case of a new ship or new aircraft acquired after the 31st day of May, 1974, by an assessee engaged in the business of operation of ships or aircraft or in the case of new machinery or plant (other than office appliance or road transport vehicles) installed after that date for the purpose of business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or thing specified in items 1 to 24 (both inclusive) in the list in the Ninth Schedule or in the case of case of new machinery or plant (other than office appliances or road transport vehicles) installed after that date in a small-scale industrial undertaking for the purposes of business of manufacture or production of any other articles or thing, a sum equal to twenty per cent. of the actual cost of the ship, aircraft, machinery or plant to the assessee, in respect of the previous year in which the ship or aircraft is acquired or the machinery or plant is 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; but any such sum not be deductible in determining the written down value for the purposes of clause (ii) :
Provided that the assessee may, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139, whether fixed originally or on extension, for furnishing the return of income for the assessment year in respect of which he first became entitled to deduction under this clause, furnish to the Income-tax Officer a declaration in writing that the provisions of this clause shall not apply to him, and if he does so, the provisions of this clause shall not apply to him for that assessment year and for every subsequent assessment year; so, however, that the assessee may, by notice in writing, furnish to the Income-tax Officer before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139, whether fixed originally or on extension, for furnishing the return of income for any such subsequent assessment year, revoke his declaration and upon such revocation, the provisions of this clause shall apply to the assessee for that subsequent assessment year and for every assessment year thereafter :
Provided further that no deduction shall be allowed under this clause in respect of -
(a) any machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest-house,
(b) any ship, aircraft, machinery or plant in respect of which the deduction by way of development rebate is allowable under section 33; and
(c) any ship or aircraft acquired after the 31st day of March, 1976, or any machinery or plant installed after that date.
Explanation. - For the purposes of this clause, -
(1) 'new ship' or 'new aircraft' includes a ship or aircraft which before the date of acquisition by the assessee was used by any other person, if it was not at any time previous to the date of such acquisition owned by any person resident in India;
(2) 'new machinery or plant' includes machinery or plant which before its installation by the assessee was used outside India by any other person, if the following conditions are fulfilled, namely :-
(a) such machinery or plant was not, at any time previous to the date of such installation by the assessee, used in India;
(b) such machinery or plant is imported into India from any country outside India; and
(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the Indian Income-tax Act, 1922 (11 of 1922), or this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee;
(3) an industrial undertaking shall be deemed to be a small-scale industrial undertaking, if the aggregate value of the machinery and plant installed, as on the last day of the previous year, for the purpose of the business of the undertaking does not exceed seven hundred and fifty thousand rupees; and for this purpose the value of any machinery or plant shall be, -
(a) in the case of any machinery or plant owned by the assessee, the actual post thereof to the assessee; and
(b) in the case of any machinery or plant hired by the assessee, the actual cost thereof as in the case of the owner of such machinery or plant."
5. Section 32 provides for depreciation. Sub-section (1) provides for depreciation in respect of building, machinery, plant or furniture owned by the assessee and used for the purposes of his business or profession. Clause (vi) of sub-section (1) provided for one time depreciation of 20 per cent. on the actual cost of ship, aircraft, machinery or plant. It gave an option to assessee to claim depreciation either in the year in which the machinery or plant was installed or the year in which the assessee had put it to use. But this special depreciation was confined to small scale industrial undertakings. Thus, it was a special provision made for the benefit of small-scale industrial undertakings. By the Explanation, "new ship" and "new machinery or plant" were defined. The Legislature also provided by that Explanation as to which undertaking was to be regarded as a small-scale industrial undertaking. By the said Explanation, it also provided how the value of the machinery or plant was to be determined. Thus, it cannot be gainsaid that the Legislature thought it fit to make a special provision in this behalf. If registration of an industrial undertaking with the respective State department was to be regarded as sufficient for making such undertaking a small-scale industrial undertaking, then the Legislature would not have made this special provision. Moreover, that would have resulted in discrimination inasmuch as the test laid down for treating an industrial undertaking as a small-scale industrial undertaking might have varied from State to State. Thus, the Legislature, in order to see that there was uniformity, made this special provision and for that reason, it will have to be held that for the purpose of determining whether an industrial undertaking is a small-scale undertaking or not, resort had to be taken to the Explanation to section 32(1)(vi) and not to any other provision of law whereby an industrial undertaking was to be regarded as a small-scale industrial undertaking for other purposes. The Tribunal was, therefore, in error in proceeding on the basis that since the assessee was registered as a small-scale industrial undertaking with the Small-Scale Industries Department, the benefit of section 32(1)(vi) was available to it irrespective of different provision made by that Explanation in that behalf.
6. It was submitted by learned counsel for the assessee that even if the question as to whether the assessee was to be regarded as a small-scale industrial undertaking or not was to be decided with reference to the Explanation to clause (vi) of section 32(1), the assessee satisfied the test laid down therein and, therefore, also, the assessee was entitled to the benefit of 20 per cent. initial depreciation provided under section 32(2)(vi). He submitted that on a correct interpretation of Explanation (3) only the aggregate value of the machinery and plant installed during the previous year was to be taken into account and not the value of the machinery and plant installed in the earlier year. In the alternative, he submitted that even if the value of the plant and machinery of the earlier year was to be taken into consideration, then only the written down value of the machinery and plant could have been taken into consideration and in either case, the value of the machinery and plant did not exceed Rs. 7,50,000. In our opinion, there is no substance in this contention raised on behalf of the assessee. In order to determine whether an industrial undertaking was a small-scale industrial undertaking, what was required to be taken into consideration was the aggregate value of the machinery and plant installed as on the last day of the previous year. We cannot read into the words "previous year" as suggested by learned counsel for the assessee for the reason that that would defeat the very purpose of that provision. The use of the words "aggregate value" by the Legislature clearly indicates that the value of all machinery and plant installed till the last day of the previous year was to be taken into consideration for the purpose of deciding whether it exceeded the limit of Rs. 7,50,000. We cannot, therefore, construe the aggregate value of the machinery and plant installed as the aggregate value of the machinery and plant installed during the previous year. The intention of the Legislature clearly appears to be to give special benefit to those undertakings which did not have machinery and plant of the value of more than Rs. 7,50,000. If the interpretation as suggested by learned counsel for the assessee is accepted, then, an industrial undertaking which had, in the first year, installed machinery and plant worth say Rs. 7,00,000 and which had again installed machinery and plant worth say Rs. 7,00,000 in the subsequent year, would have become entitled to the benefit of this provision ever though its plant and machinery were of a total value of Rs. 14,00,000. Again, the alternative contention also cannot be accepted for the simple reason that the Legislature itself had provided how the aggregate value of machinery and plant was to be determined. It was provided by the Explanation that the value of any machinery or plant for the purpose of the clause was the actual cost thereof to the assessee in the case of machinery and plant owned by the assessee. Thus, for determining the aggregate value of the machinery and plant, what was required to be taken into consideration was the actual cost. It was, however, submitted that the expression "actual cost" would mean written down value as in the definition of the term "actual cost", concept of written down value is implicit. In order to support this contention, he drew our attention to section 43 which defines the term "actual cost" and also to other parts of section 32(1). It is true that section 43(1) defines the term "actual cost" for the purpose of sections 28 to 41 and thus, the said definition can apply to section 32 also. It is difficult to appreciate how actual cost in the context of section 32(1)(vi) could be given any other meaning except the actual cost of the asset. If the assessee has acquired a depreciable asset then it is provided in section 43 that in certain circumstances only, written down value would be treated as actual cost of the asset to the assessee. The other parts of section 32(1) provide for depreciation as generally understood and it is in that context that it is provided that depreciation should be worked out on the basis of the written down value of the asset. But so far as Explanation (3) is concerned, though the term "actual cost" was not differently defined, what is required to be borne in mind is that it was really for the purpose of finding out the aggregate value of machinery and plant that we will have to consider what is the actual cost of the asset which was acquired. The only purpose for which the exercise was to be undertaken was to find out whether an industrial undertaking was a small-scale industrial undertaking or not and that it was to be decided that reference to the aggregate value of the machinery and plant installed by the assessee. Considering the purpose for which exercise was required to be undertaken, it is not possible to agree with the contention raised on behalf of the assessee that the term "actual cost" would mean the written down value of the asset in the case of an asset installed earlier than in the previous year. Whether the machinery and plant were installed at a time or in different lots, the intention of the Legislature was to see that the benefit contemplated by section 32(1)(vi) was not to be given to those industrial undertakings which had installed machinery and plant of the value of more than Rs. 7,50,000. Thus, the interpretation suggested by learned counsel for the assessee is not consistent with the purpose and object of the provision.
7. It is not in dispute that if actual cost and not the written down value of the machinery and plant installed by the assessee was to be taken into consideration, then it did exceed the limit of Rs. 7,50,000.
8. For all the reasons, the question referred to us is answered in the negative, that is, in favour of the Revenue and against the assessee. Reference is disposed of accordingly. No order as to costs.