Income Tax Appellate Tribunal - Pune
Inspecting Assistant Commissioner vs P.C.S. Data Products (P.) Ltd. on 2 April, 1993
Equivalent citations: [1993]47ITD26(PUNE)
ORDER
T.V.K. Natarajachandran, Accountant Member
1. These appeals by the revenue are consolidated and disposed of by a common order for the sake of convenience, as they involve common issue.
2. These appeals pertain to assessment years 1984-85 and 1985-86 and arise out of the consolidated order of the CIT (A), Pune dated 8-12-1987 wherein he directed the Assessing Officer to allow investment allowance of Rs. 5,45,047 for 1984-85 and Rs. 9,72,987 for 1985-86 on the cost of computers manufactured and installed in the premises of companies to which they are released. The CIT (A) also held that the assessee is entitled to depreciation of 100 per cent on the value of furniture and fixture in terms of first proviso to Section 32(1)(ii) of the Act as amended by the Finance Act, 1983 with effect from 1-4-1984. Revenue has taken two separate grounds to urge that the CIT (A) erred in allowing investment allowance on computer system and erred in allowing depreciation at 100 per cent on the value of furniture and fittings holding them as plant and machinery and therefore, it was prayed that the orders of the CIT (A) should be vacated and those of the Assessing Officer be restored.
3. The assessee is a company which manufactures computer systems, computer components and its accessories. The assessment years involved are 1984-85 and 1985-86 for which the respective financial years are previous years. It follows mercantile method of accounting for its business. While computing the total income, the Assessing Officer disallowed investment allowance on computer machinery (PCS-3001 Micro computer with 512 KB memory) and the system was given on lease to M/s Associated Cement Co. Ltd. for their Delhi office. For the claim, the decision of the Special Bench of the Tribunal, Madras in the case of First Leasing Co. of India Ltd. v. ITO [1983] 3 ITD 808 was relied upon.
4. The Assessing Officer rejected the claim on the ground that it is not used for the business of manufacturing carried on by the assessee, but it was used by Associated Cement Co. Ltd. for their business. Secondly, it is seen that though the assessee is a small scale industry, the computer is not installed for the purpose of business of manufacture or production of any article or things. Therefore, the claim of investment allowance was rejected for the years under consideration.
5. The assessee also claimed 100 per cent depreciation on the value of furniture and fittings installed in the Bombay factory. These items include steel cupboards, tables, office cupboards etc. It was claimed by the assessee that these items were used in the factory for production and therefore should be considered as plant and machinery. The value of each item was said to be below Rs. 5,000.
6. This claim was rejected by the Assessing Officer, as according to him they were nothing but furniture and fixtures entitled to depreciation at 10 per cent.
7. On appeal, the CIT (A) relying on the judgment of the Bombay High Court in the case of CIT v. I.B.M. World Trade Corporation [1981] 130 ITR 739, another decision in the case of CIT v. International Computers Ltd. [1981] 131 ITR 1 : 7 Taxman 128 (Bom.) and the decision of the Tribunal, Madras, in the case of First Leasing Co. of India Ltd. (supra) held that the claim of investment allowance in respect of cost of two computers manufactured and installed by it in the premises of two companies, the assessee is entitled to investment allowance subject to the provisions of Section 80VVA of the Income-tax Act, 1961.
8. As regards the furniture used in the factory, he held that they were styled as furniture and fixtures and in fact installed and used in the process of manufacturing of computers by the assessee's technicians and employees. The individual items of these furniture and fixtures were less than Rs. 5,000 and therefore, they are entitled to depreciation at 100 per cent.
9. At the time of hearing, the learned departmental representative has been heard at length and he has reiterated the grounds taken by the revenue. According to him, the issue regarding grant of investment allowance on computer system leased out stands covered by the decision of the Karnataka High Court in the case of CIT v. Shaan Finance (P.) Ltd. [1993] 199 ITR 409. As regards the furniture and fixtures, he pointed out that they were described as furniture and fittings in the balance sheet. He also pointed out that the assessee admitted that the furniture and fittings were used in the business for the purpose for which they were meant to be used. In this connection, he pointed out that the functional test, namely, with which the assessee carried on business or is it a setting in which the work is done was required to be ascertained and determined. He has relied on the decision of the Supreme Court in the case of Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86 : [1985] 23 Taxman 66 for the functional test laid down by the Supreme Court regarding plant. The term "plant" would apply to different articles depending upon the particular facts of the case. He pointed out that in the case of Tata Hydraulic Co. dam was held as a plant because with the help of such dam the assessee derived business of generation and supply of electricity. From the depreciation schedule contained in the Income-tax Rules, buildings and furniture and fittings are to be excluded from the term plant. Therefore, he justified the action of the Assessing Officer.
10. The learned counsel for the assessee, on the other hand, submitted that so far as the first issue is concerned, the decision of the CIT (A) stands covered by the decision of the Karnataka High Court in the case of Shaan Finance (P.) Ltd. (supra). Coming to depreciation on furniture and fittings, it was urged that they satisfy the functional test and therefore, the CIT (A) was justified in granting 100 per cent depreciation thereon.
11. We have duly considered the submission of the parties and the case laws relied upon by them. As regards investment allowance on computer systems manufactured and leased out by the assessee, the judgment of the Karnataka High Court in the case of Shaan Finance (P.) Ltd. (supra) supports the decision of the CIT (A) and therefore, the order of the CIT (A) on this point is upheld.
12. Coming to the furniture and fittings, we disagree with the conclusion of the CIT (A) for the simple reason that even though furniture and fittings were used in the factory premises, nonetheless, they should be of such nature as to individually fit in with the description of plant or machinery in the widest connotation of the term and they should be capable of rendering assistance to the manufacture or production of article or thing. It is not enough that they were utilised by the staff who were engaged in the production of computer system, but they should have nexus with the manufacturing activities itself and they should be inextricably connected with the plant and machinery utilised for manufacturing computer system. In the case of CIT v. Central Bank of India Ltd. [1976] 103 ITR 196 (Bom.), air-conditioning equipment installed in a safe deposit vault of a bank is held to be entitled to development rebate under Section lO(2)(vib) of the Income-tax Act, 1922. The Bombay High Court relied on the decision of the Supreme Court in the case of CIT v. Taj Mahal Hotel [1971] 82 ITR 44. The Supreme Court was concerned in that case with the question whether sanitary and pipeline fittings installed in one of its branches fell within the definition of plant and the question was answered in the affirmative because taken the sanitary and pipeline fittings separately by themselves they could satisfy the functional test of plant or taking them in the context of provision of amenities or facilities they should also satisfy the definition of plant. The heating installation of a building may be passive, but nonetheless it would be a plant. Similarly, air-conditioning equipment installed in a safe deposit vault of a bank is plant and is entitled to development rebate under Section 10(2)(vib) of the Income-tax Act, 1922, according to their Lordships of the Bombay High Court in the case of Central Bank of India Ltd. (supra). Air-conditioning plants, tube-wells and refrigerators were held to be plant or machinery within the meaning of Section 12 of the Income-tax Act, 1922 by their Lordships of Calcutta High Court in the case of Chitpore Golabari Co. (P.) Ltd. v. CIT [1971] 82 ITR 753. Therein, their Lordships have held that the word "plant" is a word of wide import and the word "machinery", prima facie, means some mechanical contrivances which by themselves or in combination with one or more other mechanical contrivances by the combined movement and inter-dependent operation of their respective parts generate power or evoke, modify, apply or direct natural forces with the object in each case of effecting a definite and specific result. It is from this specific result point of view air-conditioning plants, tube-wells and refrigerators were held to be plant and machinery in that case. Adopting the definite and specific result point of view, the various furniture and fittings etc. claimed by the assessee do not fit in with the functional test so as to satisfy the definition of plant or machinery. In the case of CIT v. Tarun Commercial Mills Ltd. [1985] 151 ITR 75 : [1984] 16 Taxman 18 (Guj.), the question of grant of development rebate on air-conditioners and electric fans installed in office came up for consideration and the functional test was required to be applied to decide the issue. It was held by the Gujarat High Court that air-conditioners or electric fans are instruments which would advance the performance of business of the assessee and therefore, they were entitled to be included within the term "plant". In the case of CIT v. Machinery Mfg. Corporation Ltd. [1992] 198 ITR 559 (Cal.) the claim of investment allowance on fire extinguishers and time-office equipment was rejected on the ground that they were not inextricably connected with the production of any article or thing and they were not plant or machinery installed for the purpose of business of construction, manufacture or production of any article or thing. Although the nature of the items has been furnished, the function or role played by each and every item in the manufacture of computer systems has not been furnished. We are satisfied that there is no nexus or connection inextricable with the production or manufacture of computer systems so as to warrant a conclusion that they are plant or machinery so as to be eligible for depreciation at 100 per cent thereon. Therefore, we do not agree with the reasons and conclusion of the CIT (A) on this issue and therefore its decision on this point is reversed and that of the Assessing Officer is restored.
13. In the result, the appeals are partly allowed.