1996 (4) TMI 82 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to extra-shift allowance for electrical sub-station in the factory.
2. Classification of the electrical sub-station under the Income-tax Rules.
3. Interpretation of entries in the depreciation schedule of the Income-tax Rules.
4. Determination of whether the electrical sub-station is an integral part of the main plant and machinery.

Detailed Analysis:

1. Entitlement to Extra-Shift Allowance for Electrical Sub-Station in the Factory:
The primary issue revolves around whether the assessee is entitled to extra-shift allowance for the electrical sub-station in the factory. Initially, the Income-tax Officer (ITO) granted the extra-shift allowance, but later withdrew it following an audit party's remarks, leading to reassessment under section 147(b) of the Income-tax Act. The Appellate Assistant Commissioner (AAC) reinstated the allowance, but the Tribunal later disallowed it. The High Court ultimately concluded that the electrical sub-station is an integral part of the main plant and machinery, thus entitling the assessee to the extra-shift allowance.

2. Classification of the Electrical Sub-Station under the Income-tax Rules:
The Revenue argued that the electrical sub-station falls under "electrical machinery" as per item (iv) of entry III in Part I of Appendix I to the Income-tax Rules, 1962, which excludes it from extra-shift allowance. However, the assessee contended that the sub-station should be considered an integral part of the plant and machinery. The High Court examined the classification and determined that the sub-station is not merely electrical machinery but an essential component of the manufacturing process, thereby qualifying for the allowance.

3. Interpretation of Entries in the Depreciation Schedule of the Income-tax Rules:
The High Court analyzed the relevant provisions under section 32 of the Income-tax Act and Rule 5 of the Income-tax Rules. It noted that extra-shift allowance is generally not allowed for items listed under "electrical machinery" in the depreciation schedule. However, the court emphasized the need to interpret these entries in the context of the specific manufacturing process of the assessee. The court concluded that the sub-station's role in the manufacturing process warranted its inclusion as part of the main plant and machinery, thus making it eligible for the allowance.

4. Determination of Whether the Electrical Sub-Station is an Integral Part of the Main Plant and Machinery:
The AAC's inspection and subsequent report, along with expert opinions, supported the view that the electrical sub-station is vital for the manufacturing process of calcium carbide. The court highlighted that electricity is not merely a power source but a raw material essential for the chemical reaction in the production process. The sub-station's role in stepping down voltage and integrating with the furnace system was deemed crucial. The High Court referenced similar cases, such as CIT v. New India Sugar Mills Ltd. and CIT v. Electrosteel Castings Ltd., to reinforce its decision that the sub-station is an integral part of the main plant and machinery.

Conclusion:
The High Court held that the electrical sub-station is an integral part of the main plant and machinery of the assessee's factory. It cannot be classified under the exempted category of "electrical machinery" for the purpose of denying extra-shift allowance. The court answered the question in the affirmative, favoring the assessee and against the Revenue, thus entitling the assessee to the extra-shift allowance for the electrical sub-station. There was no order as to costs, and the judgment was directed to be sent to the Income-tax Appellate Tribunal, Cochin Bench.