9911796707
TMI Blog1994 (10) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income-tax on the basis of an agreed statement of case, which is as follows : The assessee, Gopal Plastics Private Limited, is a company manufacturing plastic industrial components and other allied articles. For the assessment year 1976-77, the accounting year ended with the financial year on March 31, 1976, the assessee claimed depreciation on the basis that it was engaged in an industry manufacturing articles specified in the Ninth Schedule of the Act and was a small-scale industrial undertaking under section 32(1)(vi) of the Income-tax Act, 1961. It claimed that the aggregate value of the machinery and plant in stock during the relevant year did not exceed the value of Rs. 7,50,000 with reference to the cost thereof. The Income-tax Officer, however, took the view that the amount spent by the assessee, i.e., a sum of Rs. 10,005 as service and installation charges in respect of the machinery purchased by it, was required to be taken into account in calculating the aggregate value of the machinery and plant in stock. The assessee claimed relief under section 80J of the Act on the ground that it had used second-hand machinery, the value of which was less than 20 per cent. of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircraft 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 appliances or road transport vehicles) installed after that date for the purposes 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 things specified in items 1 to 24 (both inclusive) in the List in the Ninth Schedule or in the 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 things ; 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 shall not be deductible in determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat from the balance-sheet, it was found that the cost of the machinery and plant installed as on the last day of the previous year exceeded Rs. 7,50,000. He, however, noted the case of the assessee that while determining the nature of an industry, the cost of equipment such as tools, etc., and service charges, bank charges, etc., should be excluded, for which the assessee placed reliance on a letter of the Government of India, Ministry of Industries and Civil Supplies, dated February 25, 1977, and noted : " If the abovesaid circular where installations, service charges, bank charges, etc., are excluded, it followed the company would then be entitled to initial depreciation and, hence, the company should be given an allowance of Rs. 1,02,285. I have carefully examined the circumstances under which the assessee is claiming initial depreciation. The definition given by the Ministry of Industries and Civil Supplies which is mainly to facilitate loans and licences cannot be applied to the definition of a small-scale industry under the Income-tax Act. The cost of the machinery as per the Income-tax Act includes all the abovesaid items, namely, installation charges, service charges paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en for the purpose of ascertaining the actual cost to the owner who is a hirer to limit the actual cost by deducting the cost of installation. It may be then the rationale, is that the cost of acquisition should also include the installation charges, yet because it is a deeming provision the interpretation placed by the Appellate Assistant Commissioner is tenable. Accordingly, we see no merit in this ground of appeal." Learned counsel for the Revenue has raised a contention that depreciation is permissible in respect of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of business or profession. He has drawn our attention to the use of the words owned by the assessee and used for the purposes of business or profession in sub-section (1) of section 32 for deduction subject to the provisions of section 34 under various clauses including clause (vi) as above and submitted that what is found in Explanation (3)(b) above cannot affect the value or the cost of the machinery which is put to use by the assessee only after its installation in his industry. In Shree Vallabh Glass Works Ltd. v. CIT [1981] 127 ITR 37, the Gujarat High Court has considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary'." The Gujarat Court has concluded as follows : "Therefore, all items of expenditure incurred during the period of construction of the plant were capitalised and such capitalisation of expenditure incurred prior to the machinery going into production was approved by the Supreme Court. It must be pointed out that in Challapalli Sugars' case [1975] 98 ITR 167 before the Supreme Court the only dispute was with reference to the item of interest paid on the amounts borrowed by the assessee-company, being interest for the period prior to the actual commencement of the production of the company, but as regards the capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be the actual cost thereof as in the case of the owner of such machinery or plant, i.e., the actual cost which the owner of the machinery or plant disclosed or incurred and not the hirer. It is not possible to ignore that deduction is allowed in respect of depreciation to the owner who is using the machinery for the purposes of business or profession. In such a case, the written down value is relevant and the first proviso to clause (ii) of section 32(1) says, provided that where the actual cost of any machinery or plant does not exceed seven hundred and fifty rupees, the actual cost thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessee for the purposes of his business or profession. This will naturally lead to a meaning as above to the expression "actual cost" incurred in putting the machinery or plant to use by the assessee for the purposes of his business or profession. In the case of a hirer, the machinery or plant is put to use by him, but the actual cost thereof has to be worked out on the basis of the cost that the owner of such machinery or plant had incurred. The additional cost incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year, but any such sum shall not be deductible except in cases falling under the proviso. Such deductions are contemplated under section 80J of the Act where the gross total income of an assessee which includes any profits and gains derived from an industrial under-taking is subject to a rebate of six per cent. per annum on the capital employed for the said purpose. This section, however, applies to any industrial undertaking which fulfils all the following conditions, viz. : (i) it is not formed by the splitting up, or the reconstruction, of a business already in existence ; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose ; (iii) it manufactures or produces articles, or operates one or more cold storage plant or plants, in any part of India and has begun or begins to manufacture or produce articles or to operate such plant or plants at any time within the period of thirty-three years next following the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking; (iv) in a case where the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers and switches used in fluorescent lamps. The assessee-company, for the said purpose, had purchased land and building from a company E, for a consideration. It also purchased from a company P previously used plant and machinery together with licences and stock-in-trade on April 16, 1962. The assessee-company started its manufacturing activity on June 1, 1962, with the aid of the machinery so purchased. Subsequently, the assessee purchased a fully automatic Swiss lathe and also an extrusion press from Germany for manufacture of brass pins and aluminium containers. A fully automatic vacuum machine was also installed to increase the output of fluorescent starters and switches with minimum waste of labour. In the course of assessment proceedings for the assessment years 1966-67 and 1967-68, the assessee claimed the relief of tax holiday under section 84 of the Act inasmuch as having regard to the acquisition and installation of new machinery, the provisions of section 84(2)(ii) read with the Explanation to sub-section (3) were satisfied in the years of assessment and as such it became entitled to the relief which was available to newly established undertakings as from the said years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rescribed in clause (ii) of sub-section (2) is fulfilled, then, as from the assessment year in which such condition is satisfied, the benefit of tax holiday will be available to it for the remaining period of the five-year term. This appears to us to be the only reasonable construction possible having regard to the plain words of the statutory enactment. The view which we are inclined to take as aforesaid on the plain language of the statute is supported also by the object behind the enactment and avoids the frustration of such object. We have already adverted to the object of the enactment, namely, to encourage the setting up of new industrial undertakings in which there is substantial investment of fresh capital. The Legislature could not have intended that the outlay of substantial capital for the purpose of new machinery, plant or building should necessarily be in the very first year of the commencement of manufacture or production. In fact, there are many industrial units which add to their building, machinery or plant as the business grows and more capital becomes available. If the construction for which the Revenue contends were accepted, such industrial units would be deni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment was made. In our opinion, therefore, even the alternative submission made on behalf of the Revenue must be rejected." The Gujarat High Court has not accepted the contention that the word "formation" or "formed" as found in section 80J (section 84(2)(ii) then) is the same as the legal birth of an undertaking with the concept of its becoming a unit of production by acquisition and installation of plant and machinery. The Karnataka High Court, however, in the case of CIT v. Nippon Electronics (India) Pvt. Ltd. [1990] 181 ITR 518 has taken a contrary view. It has held (headnote) : "The word 'formed' also suggests that the transfer contemplated is one at the time of formation of the new undertaking. The eligibility for exemption has to be tested in the initial assessment year. Therefore, the exemption would not be available if, in the initial assessment year, the proportion of the old assets transferred or utilised for the new business is above 20 per cent. of the total investment, though in any subsequent year, even if it be within five years, new investment is made so as to reduce the proportion of the value of old assets to below 20 per cent." We have no direct help from any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h could not be disputed, even by the Income-tax Officer. But tools and implements worth Rs. 3,500 were transferred to it from the previous firm. Technically speaking, it was transfer of material used in a previous business. One could say, as was vehemently urged by learned counsel for the Department, that where the language of the statute was clear, there was no scope for interpretation. If the submission of learned counsel is accepted, then once it is found that the material used in the undertaking was of a previous business, there was an end of the inquiry and the assessee was precluded from claiming any benefit. The words of a statute are undoubtedly the best guide. But, if their meaning gets clouded, then the courts are required to clear the haze. Sub-section (2) advances the objective of sub-section (1) by including in it every undertaking except if it is covered by clause (i) for which it is necessary that it should not be formed by transfer of building or machinery. The restriction or denial of benefit arises not by transfer of building or material to the new company but that it should not be formed by such transfer. This is the key to interpretation. The formation should no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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