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TMI Blog2005 (1) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration the assessee-company purchased computer and claimed investment allowance on the same under section 32A of the Act. The Income-tax Officer disallowed the claim after recording a finding that the computer was an office appliance and the assessee could not be said to have been engaged in the business of manufacture or production of any article or thing. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals). The findings of the Income-tax Officer were reversed by the Commissioner of Income-tax (Appeals) who accepted the submission of the assessee that it was engaged in the business of manufacturing and providing "data systems" after using the processing machines and thus it was engaged in the business of manufacturing of articles or things. The Commissioner of Income-tax (Appeals) noted the fact that the assessee had been registered as small scale industry by the Director of Industries. Relying upon the decision of the Bombay High Court in the case of CIT v. I.B.M. World Trade Corporation [1981] 130 ITR 739 as well as the decision of the Bombay Bench of the Tribunal in the case of Rajeev H. Arora, reported in the Bombay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... things. The court held that the statements, etc., prepared by the assessee with the help of the computer containing the result of data processing cannot be regarded as articles or things within the meaning of these words used in section 32A of the Act. It was held that the assessee was not an industrial undertaking engaged in the business of manufacture or production of any article or thing and was therefore not entitled to investment allowance under section 32A of the Act. In the absence of any appearance on behalf of the respondent, Mrs. Bhatt, learned counsel for the Revenue, has very fairly drawn the attention of the court to the following decisions wherein the issues similar to the issue involved in the present case have been dealt with. In the case of CIT v. I. B. M. World Trade Corporation [1981] 130 ITR 739, the question before the Bombay High Court was as to whether E. A. machines (now called data processing machines) were office appliances not eligible for allowance of development rebate under section 33(1) of the Act. The court held that the word "appliances" is qualified by the word "office" in section 33 and those words as they are used in section 33 will, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a businessman for carrying on his business. It is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business. It would not, however, cover the stock-in-trade, that is, goods bought or made for sale by a businessman. It would also not include an article which is merely a part of the premises in which the business is carried on as distinguished from a part of the plant with which the business is carried on. An article to qualify as plant must furthermore have some degree of durability and that which is quickly consumed or worn out in the course of a few operations or within a short time cannot properly be called 'plant'. But an article would not be any the less plant because it is small in size or cheap in value or a large quantity thereof is consumed while being employed in carrying on the business. In the ultimate analysis the inquiry which must be made is as to what operation the apparatus performs in the assessee's business. The relevant test to be applied is: Does it fulfil the function of plant in the assessee's trading activity? Is it the tool of the taxpayer's trade? If it is, then it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its engaged in this activity are eligible for facilities and concessions available to the small-scale industries under the Small Industries Development Programme. Units engaged in software servicing and data processing can, therefore, be registered as a small-scale industry provided they fulfil the necessary conditions of investment on machinery and equipment, etc.'" The court agreed with the view taken by the Gujarat High Court in the case of CIT v. Ajay Printery P. Ltd. [1965] 58 ITR 811 and held that the assessee was entitled to investment allowance on the computers installed and also to deduction under section 80J of the Act. In the case of CIT v. Steel Tubes of India Ltd. (No. 1) [1997] 228 ITR 38, the Madhya Pradesh High Court relied upon the decisions rendered in the case of CIT v. Shaw Wallace and Co. Ltd. [1993] 201 ITR 17 (Cal) and in the case of CIT v. Peerless Consultancy Services Pvt. Ltd. [1990] 186 ITR 609 (Cal) and held that the computer division of the assessee-company was an industrial undertaking which satisfied the condition mentioned in section 32A(2)(b)(iii) of the Act. January 20, 2005: In the case of CIT v. Computerised Accounting and Management Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y CIT [2003] 262 ITR 41. On behalf of the assessee reliance was placed upon the decision of the Calcutta High Court in the case of CIT v. Peerless Consultancy Services Pvt. Ltd. [1990] 186 ITR 609, which was affirmed by the apex court in the case of CIT v. Peerless Consultancy and Services (P.) Ltd. [2001] 248 ITR 178. Reliance was also placed upon the judgment of the Madras High Court in the case of CIT v. Comp-Help Services P. Ltd. [2000] 246 ITR 722 and the decision of the Kerala High Court in the case of CIT v. Computerised Accounting and Management Service Pvt. Ltd. [1999] 235 ITR 502. The court held as follows: "It is, no doubt, true that the judgments cited on behalf of the assessee refer to the assessees whose business was confined to data processing for their clients. Today, we have computerised accounting in the banks. In the case of computers, which existed during the relevant assessment year and even today, the operation of the computers in principle remains the same. That, commercial data is fed into the computers as inputs as per the requirement of various customers and the data is processed to get necessary information, computation and statements as outputs. These c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Wallace and Co. Ltd. [1993] 201 ITR 17 the Calcutta High Court followed the decision rendered in the case of CIT v. Peerless Consultancy Services (P.) Ltd. [1990] 186 ITR 609 (Cal). Against the decision of the Calcutta High Court in the case of CIT v. Peerless Consultancy Services (P.) Ltd. [1990] 186 ITR 609, the Revenue had carried the matter in appeal before the hon'ble Supreme Court. The Supreme Court ([2001] 248 ITR 178) rejected the appeal and affirmed the decision of the Calcutta High Court. Thus, it would be relevant to refer to the aforesaid decisions also. In the case of CIT v. Datacons (P.) Ltd. [1985] 155 ITR 66 (Karn), the assessee was carrying on the activity of processing data furnished by its customers by using IBM Unit Record Machine Computers. The question before the Karnataka High Court was whether the assessee was an industrial company entitled to a concessional rate of taxation. The court observed that the term "industrial company" has been described as including a company engaged in the processing of goods. The court discussed at length the activities carried out by the company while processing the data and held as follows: "It will be clear from these activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dmissible in respect of machinery or plant installed in any industrial undertaking for the purpose of business of construction, manufacture or production of any article or thing not being an article or thing specified in the list in the Eleventh Schedule. There is no dispute that 'data-processing' or 'computer' is not mentioned in the Eleventh Schedule. If, as held by the Division Bench in Peerless Consultancy Services (Pvt.) Ltd. [1990] 186 ITR 609 (Cal), the assessee-company is an industrial company, there is no reason why such a company will not be entitled to the benefit of the investment allowance. Investment allowance will not be admissible in respect of office appliances. In our view, having regard to the nature and function of the computer and the data processing system, it cannot be said that they are office appliances. An industrial company is a company engaged in the manufacture or processing of goods. 'Data-processing' means the converting of raw data to machine-readable form and its subsequent processing (as storing, updating, combining, rearranging or printing out) by a computer. 'Computer' means 'one that computes: specifically a programmable electronic device that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc., are therefore capable of being regarded as new articles. The court observed that the term "industry" as used in section 32A refers to industries which are engaged in the manufacture or production of goods or articles or things. The court held that the balance-sheets and other documents obtained as a result of the operation of the data processing system being articles which are obtained by processing, amounts to production, and therefore, the data processing company must be held to be an industrial company engaged in the production of articles. The court referred to the decision of the Bombay High Court in the case of CIT v. I. B. M. World Trade Corporation [1981] 130 ITR 739, the decision of the Karnataka High Court in the case of CIT v. Datacons (P.) Ltd. [1985] 155 ITR 66, as well as the decision of the Calcutta High Court in the case of CIT v. Peerless Consultancy Services Pvt. Ltd. [1990] 186 ITR 609 and held in favour of the assessee. The decision of the Calcutta High Court in the case of CIT v. Peerless Consultancy Services Pvt. Ltd. [1990] 186 ITR 609 was carried in appeal before the hon'ble Supreme Court. The attention of the Supreme Court was drawn to the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arily depend upon the function to which the said machinery/apparatus is put, regardless of the location where the machinery/ apparatus is situated. This is over and above the test of the end-product being an entirely different commercial commodity vis-a-vis the input. Therefore, in the case of computer system or data processing system, the inputs which are fed in are entirely different, in a different form with different indicators. As against that, the end-product, viz., balance-sheets, various accounts, statements, analysis, etc., which emerge by way of print outs are distinct and different from the inputs, inasmuch as what comes out is having different connotation and use. Thus, the 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. In the circumstances, there is no error of law in the order of the Tribunal in holding that the assessee-company which provides computer services to other concerns was an industrial undertaking engaged in the business of manufacture or production and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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