2005 (1) TMI 40 - HC - Income Tax

Investment allowance under section 32A - Whether Tribunal was right in law in holding that the assessee-company which provided computer services to other concerns was an industrial undertaking engaged in the business of manufacture or production and thus eligible for investment allowance under section 32A on the cost of computer? - activity of data processing through the use of computers is one which would amount to business of manufacture or production of articles or things and the unit which undertakes such computer services for other concerns would be an industrial undertaking. - there is no error of law in the order of the Tribunal - In the result, the question referred to the court for its opinion is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.

Issues Involved:
1. Eligibility of the assessee-company for investment allowance under section 32A of the Income-tax Act, 1961, on the cost of computers.
2. Determination of whether the assessee's activity constitutes "manufacture or production" of articles or things.
3. Classification of computers as office appliances or as plant.

Detailed Analysis:

1. Eligibility for Investment Allowance under Section 32A:
The core issue was whether the assessee-company, engaged in providing computer services, qualifies for investment allowance under section 32A of the Income-tax Act, 1961. The Income-tax Officer initially disallowed the claim, categorizing the computer as an office appliance. However, the Commissioner of Income-tax (Appeals) reversed this decision, recognizing the assessee's engagement in manufacturing "data systems" and thus qualifying for investment allowance. The Tribunal upheld this view, relying on precedents such as CIT v. International Computers Ltd. and CIT v. I.B.M. World Trade Corporation.

2. Activity Constituting "Manufacture or Production":
The Tribunal and Commissioner of Income-tax (Appeals) concluded that the assessee was engaged in the business of manufacturing or producing articles or things. This conclusion was supported by various judicial precedents. For instance, the Bombay High Court in CIT v. I.B.M. World Trade Corporation and CIT v. International Computers Ltd. held that data processing machines are not office appliances and qualify for development rebate. Similarly, the Madhya Pradesh High Court in CIT v. Oswal Data Processors recognized data processing as an industrial activity.

3. Classification of Computers:
The classification of computers was pivotal. The Tribunal and Commissioner of Income-tax (Appeals) viewed computers as "plant" rather than office appliances. This view was supported by the Gujarat High Court in CIT v. Tarun Commercial Mills Ltd., which emphasized the functional role of apparatus in business activities. The court noted that the term "plant" encompasses any apparatus used in business operations, not confined to mechanical or industrial processes. The Bombay High Court in CIT v. I.B.M. World Trade Corporation also held that data processing systems, due to their varied functions, cannot be classified as office appliances.

Conclusion:
The High Court concluded that the assessee-company, by providing computer services, was engaged in the business of manufacture or production of articles or things. Consequently, the company qualified as an industrial undertaking eligible for investment allowance under section 32A of the Act. The court affirmed the Tribunal's decision, answering the referred question in the affirmative, favoring the assessee and against the Revenue. The reference was disposed of with no order as to costs.

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