1996 (5) TMI 100 - AT - Income Tax

Issues Involved:
1. Extra Shift Allowance (E.S.A.) calculation basis.
2. Exclusion of medical reimbursement from perquisites under section 40(c)/40A.
3. Investment allowance on water coolers.

Issue 1: Extra Shift Allowance (E.S.A.) Calculation Basis

The main dispute in this appeal relates to whether Extra Shift Allowance (E.S.A.) should be calculated for the concern as a whole or for each plant and machinery individually. The Assessing Officer calculated E.S.A. based on the number of shifts worked by each machinery, relying on the decision of the Madras High Court in South India Viscose Ltd. v. CIT [1982] 135 ITR 206/10 Taxman 295. The CIT (Appeals) directed that E.S.A. should be allowed for the concern as a whole, based on an earlier Tribunal judgment.

The department relied on several cases, including South India Viscose Ltd., Anantapur Textiles Ltd. v. CIT [1979] 116 ITR 851 (Cal.), Raza Sugar Co. v. CIT [1970] 76 ITR 541 (AU.), Kundan Sugar Mills v. CIT [1977] 106 ITR 704 (All.), and Kerala Financial Corpn. v. CIT [1994] 210 ITR 129/75 Taxman 573 (SC). The assessee relied on C.B.D.T. Instruction No. 1605 dated 26-2-1985, Sriram Bearings Ltd. v. CIT [1993] 199 ITR 579 (Cal.), K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC), Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 (SC), and Kichna Sugar Co. Ltd. v. CST [1995] UPTC 1028.

The Tribunal analyzed the arguments and judgments, noting that the provision regarding extra shift depreciation allowance in Schedule 2 Appendix-I to the Income-tax Rules, 1962, uses the word "concern." However, it was held that the Income-tax Officer must determine which machinery worked extra shifts and calculate E.S.A. accordingly. The Central Board of Direct Taxes (CBDT) issued Instruction No. 1605, directing that E.S.A. be calculated based on the factory's working days rather than individual machinery. The Tribunal found that the CBDT instruction, which deviates from the law, cannot override the provisions of the Act, as held in Kerala Financial Corpn.'s case. Therefore, E.S.A. should be calculated for each machinery based on the number of shifts worked.

Issue 2: Exclusion of Medical Reimbursement from Perquisites

The dispute here concerns whether medical reimbursement to the Director of the assessee-company should be excluded from perquisites for calculating ceiling limits under section 40(c)/40A. The CIT (Appeals) held that the ceiling should be computed after excluding medical reimbursement, following an earlier order. The department objected, relying on CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19/10 Taxman 258 (FB), which dealt with house rent allowance under section 40(a)(v).

The Tribunal found that the department's reliance was misplaced as the cited case dealt with a different issue. Instead, it relied on Asbestos Cement Ltd. v. CIT [1991] 192 ITR 89, which held that medical reimbursement is not covered by section 40(c) and is not a perquisite under section 40A(5). Therefore, the Tribunal rejected the department's ground of appeal.

Issue 3: Investment Allowance on Water Coolers

The final issue is whether investment allowance can be given on water coolers. The Assessing Officer rejected the claim, considering water coolers as office appliances. The CIT (Appeals) allowed the claim, noting that the water coolers were installed in factory premises. The department objected, arguing that water coolers are not used in manufacturing.

The Tribunal considered the rival submissions and the decision in CIT v. Technico Enterprise (P.) Ltd. [1994] 206 ITR 36/73 Taxman 204, which held that investment allowance is not admissible for items not directly employed in manufacturing. The Tribunal concluded that even if water coolers were installed in factory premises, they are not directly used in manufacturing or production. Hence, investment allowance is not admissible on water coolers.

Conclusion:
The department's appeal is partly allowed. E.S.A. should be calculated for each machinery based on the number of shifts worked. Medical reimbursement is excluded from perquisites for calculating ceiling limits under section 40(c)/40A. Investment allowance is not admissible on water coolers.

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