9911796707
TMI Blog1983 (7) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... or purposes of section 80J, liabilities need not be deducted from the assets employed in the undertaking as provided under r. 19A and also whether the average capital employed by the assessee company should be taken into account for the purpose of r. 19A and not the capital as on the first day of the accounting period ? " These questions arise out of the consolidated order of the Tribunal dated July 30, 1976, in I.T. Appeals Nos. 395 and 68 (Hyd) of 1975-76 and I.T. Appeals Nos. 445 and 446 (Hyd) of 1975-76 and form the subject-matter of R.C. No. 144 of 1977. I.T. Appeal No. 68 (Hyd) of 1975-76 relates to the assessment year 1968-69. I.T. Appeal No. 395 (Hyd) of 1975-76 relates to the assessment year 1969-70. I.T. Appeal No. 445 (Hyd) of 1975-76 relates to the assessment year 1969-70 and I.T. Appeal No. 446 (Hyd) of 1975-76 relates to the assessment year 1970-71. In I.T. Appeal No. 396 (Hyd) of 1975-76 relating to the assessment year 1970-71, the following two questions are referred at the instance of the Revenue: " 1. Whether, on the facts and in the circumstances of the case, the depreciation and development rebate are allowable on the cost of roads and if so whether by tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate on the expenditure incurred for laying roads within the factory. It also claimed Rs. 6,35,400 paid to EID Parry as consideration for the purchase of technical know-how pertaining to acquisition of knowledge and experience in the field of agronomy and agricultural practices. The ITO disallowed the claim for depreciation on roads. He held that they can neither be treated as " plant " nor as " building ". The AAC rejected the claim of the assessee to treat the roads as " plant " and allowed depreciation treating them as " buildings ". The assessee carried the matter in appeal to the Appellate Tribunal and claimed that " roads " constitute " plant". The Tribunal, by its order dated August 2, 1976, disposing of I.T. Appeals Nos. 445, 446 and 395 and 68 (Hyd) of 1975-76 relating to the assessment years 1968-69, 1969-70 and 1970-71, held that the roads owned by the assessee company should be treated as " plant " and depreciation should be allowed under the provisions of the Act on that basis. This forms the subject-matter of question No. 1 both in R.C. No. 144 of 1977 and R.C. No. 82 of 1978. In respect of buildings, machinery, plant or furniture owned by the assessee and used for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naphtha and transports them in dumpers to the factory site. The approximate quantity of raw material transported in any assessment year is about 10 lakh metric tons. For moving such large quantities and heavy loads from the berthing facilities at Visakhapatnam port and transporting the same to the factory premises, the assessee had to necessarily lay good roads within the factory premises. Without making provision for excellent roads within the factory premises, the huge quantity of raw material required cannot be moved up to the point where it is actually utilised for converting them into fertilisers. It is impossible for the assessee to carry on its business of manufacturing fertilisers at the factory established for this purpose. These roads, it is claimed, are as much a part of the factory which converts these phosphates, sulphur and naphtha into fertilisers as the plant which converts them. The assessee, therefore, claims that " roads " should be taken to be plant and depreciation allowed thereon, accordingly. Alternatively, it claims depreciation on the footing that they are "buildings". The Appellate Tribunal held the roads to be " plant " for purposes of allowing depreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt rebate in respect thereof under s. 10(2)(vib). The court went further and held that the fact that the respondent claimed depreciation on the basis that the sanitary and pipeline fittings fell under " furniture and fittings " in r. 8(2) of the Indian I.T. Rules, 1922, did not detract from the position. The court also pointed out that the intention of the Legislature Was to give the word " plant" a wide meaning and held that the I.T. Rules, 1922, are meant only for carrying out the purposes of the Act and they cannot take away what is conferred by the Act or whittle down the effect of its provisions. The tests applied by the court in reaching that conclusion are 1. Whether the assets in question were required by the nature of the business which the assessee was carrying on ? 2. Whether it is one of the essential amenities or conveniences which are normally provided in such business ? The test ultimately is whether the apparatus or convenience is used for the purpose of carrying on the business or was not merely a part of the building in which the business was carried on ? In Addl. CIT v. Madras Cements Ltd. [1977] 110 ITR 281 (Mad), the question whether special reinforced fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T v. Warner Hindustan Ltd. [1979] 117 ITR 15 (AP), a well dug and constructed by Warner Hindustan Ltd., a public limited company, carrying on the business of manufacture of pharmaceuticals, was held to be "plant" within the meaning of s. 43(3), provided the well was dug for the purpose of carrying on the business of the assessee. It was found as a fact that the well was dug by the assessee to meet the needs of the factory which was engaged in manufacturing pharmaceuticals and on that basis the well was held to be " plant ". In CIT v. Elecon Engineering Co. Ltd. [1974] 96 ITR 672 (Guj), even drawings and patterns received from a foreign company under a collaboration agreement by the Elecon Engineering Co. Ltd., as part of the technical know-how, were held to be " plant " on which depreciation was allowable under s. 32. On the analogy of books which one consults to inform one's mind and thus uses them in the course of one's business or profession, and which are included within the meaning of " plant ", the court held that there is no reason to exclude from the wide meaning of the term of plant ", objects of similar nature such as drawings, patterns, designs, etc., which, like books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia) Ltd. [1981] 132 ITR 401, wherein roads were held to be " building " and not plant ". This was a decision based on a concession made by the counsel and not upon a discussion of the legal position as to whether they were " plant " or " building ". Further, the roads in that case were not laid within the factory premises but were outside it. These roads were not exclusively used by the assessee's factory but used by the general public. These roads could be said to be used in business but not roads by which the business was carried on, which is a very tangible test for determining whether the roads constituted " buildings " or " plant ". What is deducible from the several decisions cited at the Bar is that the term " plant " is a term of wide import. The definition in s. 43(3) itself is an inclusive definition and must be given a liberal construction and not a literal construction. One of the tests to be applied to determine whether a particular item is " plant " or not, is to ascertain whether it is an item by which business is carried on or only an item used in carrying on the business. That determination depends upon the type of business the assessee is carrying on. To find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, answer the first question both in R.C. No. 82 of 1978 and R.C. No. 144 of 1977, in favour of the assessee. The second question in R.C. No. 144 of 1977 is : " Whether, on the facts and in the circumstances of the case, development rebate is allowable on the enhanced cost of plant and machinery due to devaluation ? " The few facts out of which this question arises may be briefly noticed. The assessee company is an Indian company. It purchased machinery from USA prior to June 6, 1966, on deferred payment of the consideration in US dollars, a foreign currency. On June 6, 1966, Indian rupee was devalued. Consequently, the assessee company had to expend more rupees in Indian currency for paying the consideration is US dollars for the purchase of that machinery. The total amount of Indian currency spent for raising the consideration payable in US dollars for the purchase of the machinery was claimed by the assessee company to be the actual cost of machinery and on the actual cost so calculated, it claimed deduction of both depreciation and development rebate. The increase in the liability of the assessee company due to the devaluation was Rs. 4,27,69,143. The ITO permitted the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eased abnormally in direct proportion to the devaluation of the rupee, the seller of the goods was not receiving any additional consideration in terms of US dollars. The seller received the same amount of dollars which he was entitled to receive prior to devaluation of Indian currency. But the assessee company had to raise more amount of Indian currency to pay the same amount of dollars which it had agreed to pay under the contract for the purchase of the machinery. So much so, the price of the machinery purchased by the assessee company in terms of US dollars remained the same only the actual cost to be assessed increased. This highlights the fact that while the price of the machinery supplied as calculated by the seller of the machinery may remain constant, the amount payable by the purchaser of the goods may increase due to devaluation. So far as the purchaser of the goods is concerned, the total amount of expenditure he has incurred for purchasing the goods would be his actual cost. In other words, from the seller's standpoint, while there is no increase in the price of machinery, it has cost the purchaser more than what it would have cost him before devaluation of the rupee. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be construed in the sense which no commercial man would misunderstand. For this purpose, it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to 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 created as a result of such expenditure."' The Supreme Court held (headnote): "The assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The decision of the Andhra Pradesh High Court in CIT v. Challapalli Sugars Ltd. [1970] 77 ITR 392, to the contrary, was reversed and that of the Calcutta High Court in CIT v. Standard Vacuum Refining Co. of India Ltd. [1966] 61 ITR 799 was affirmed on this point." The principle enunciated by the Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation of the currency cannot be included for ascertaining the " actual cost " for this purpose. On the other hand, it is argued by Mr. Dastur, the learned counsel for the assessee, that s. 43A does not constitute an exception or proviso to s. 43. Section 43 takes in development rebate in general. Section 43A was inserted by the Finance (No. 2) Act, 1967, with effect from April I, 1967, with the intention of providing additional relief on account of increased liability incurred by the assessee consequent upon devaluation. It was never intended to take away the benefit conferred by s. 43 itself. Hence, if the assessee-company is entitled to the calculation of the actual cost on the particular facts of the case, under s. 43 then, being beneficial provision, benefit must not be withheld to the assessee by applying s. 43A. When one provision does not constitute an exception to the other, it is open to the assessee to invoke the more beneficial provision. It is, therefore, necessary to read ss. 33 and 43 in so far as they are relevant for our present purpose and s. 43A in its entirety. Section 33 makes provision for allowing deduction of a sum by way of development rebate as specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rupees to obtain the requisite foreign exchange. The amount of rupees spent by him for obtaining the requisite foreign currency for paying the price for the purchase of machinery would be the assessee's actual cost of the asset. Having regard to the devaluation of the rupee on June 6, 1966, and having regard to the fact that the assessee had prior to that date ordered for the machinery in United States, the price of which was to be paid in US dollars, the assessee had to raise an additional sum of money in rupees for purchasing the US dollars, for paying the consideration due from it to the suppliers of the machinery. Unless he raised additional sum in Indian currency, the assessee could not have acquired the asset. Though in terms of foreign currency its liability remained the same, it being an assessee in India whose income is assessed in Indian currency would have to necessarily incur additional expenditure for obtaining the said asset. Though the amount of foreign currency payable by the assessee remained constant and the price of machinery in terms of foreign currency did not increase, the cost of the asset to the assessee had undoubtedly increased. What is relevant for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to them in section 2 of the Foreign Exchange Regulation Act, 1947 (7 of 1947)." Section 43A(1) opens with a non obstante clause and makes provision for addition or deduction of the amount of liability of the assessee as expressed in Indian currency in calculating the actual cost of the asset to the assessee on account of acquiring any asset from a country outside India for the purpose of his business or profession and in consequence of a change in the rate of exchange at any time after the acquisition of such asset. The several conditions for the application of sub-section (1) of section 43A are : (1) that the assessee should have acquired an asset for the purpose of his business or profession from a country outside India ; and (2) that the increase or reduction in the liability of the assessee, as expressed in Indian currency for making payment towards the cost of the asset, should have been occasioned by a change in the rate of exchange. Any amount borrowed by him from any person directly or indirectly in any foreign currency specifically for the purpose of acquiring the asset is also to be taken into account in arriving at the actual cost of the asset to the assessee. In oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in s. 43(1) itself includes the additional liability occasioned due to the devaluation of Indian rupee, the assessee would be entitled to claim development rebate on the basis of such increased cost of the machinery because of s. 33 read with s. 43 itself and not because of s. 43A(1). The assessee, in such a case, need not and does not claim the benefit of s. 43A(1) for the calculation of the actual cost of the asset to him. Section 43A gives an additional benefit in cases to which s. 43 read with s. 33 is not specifically applicable for certain purposes. Mr. Sreerama Rao, the learned counsel for the Revenue, contends that if such an interpretation is given, s. 43A would become redundant. He asserts that the increase or decrease in liability occasioned due to the change in the rate of exchange is specifically provided for under s. 43A and, as such, s. 43A would override s. 43 read with s. 33, and sub-s. (2) of s. 43A would apply. Therefore, this increased liability may be taken into account for allowing other deductions like depreciation, but not for allowing development rebate. This, in our opinion, is not a correct reading of s. 43A. That result neither follows from a litera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1982] 133 ITR 382. In Addl. CIT v. Kwality Spg. Mills (P.) Ltd. [1977] 109 ITR 646, a Division Bench of the Madras High Court held that the effect of sub-s. (2) of s. 43A of the I.T. Act is only to exclude the applicability of sub-s. (1) thereof to the computation of the actual cost for determining the development rebate allowable under s. 33. In computing the actual cost of an asset for the purpose of development rebate, the only statutory provision relevant is s. 43(1) defining " actual cost ". In that view, it allowed a sum of Rs. 48,342 which was the increase in the actual cost of the acquisition of certain machinery from Russia consequent upon the devaluation of the rupee. In Arvind Mills Ltd.'s case [1978] 112 ITR 64, the Gujarat High Court, considering a case in which the claim for calculating the actual cost by adding the increased liability occasioned by the devaluation during the middle of the previous year relevant for the assessment year, held that the assessee had to pay for the imported machinery acquired by it during the course of the relevant previous year in foreign currency. It was not possessed of foreign currency of its own and it had, therefore, to borrow th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 43 read with s. 33, on account of anything contained in s. 43A(1) or s. 43A(2) of the Act when, admittedly, as a consequence of devaluation, he had to raise more Indian currency for meeting his liability to pay the price in US dollars for acquiring the asset in terms of the contract entered into between the assessee and US suppliers of machinery prior to June 6, 1966. Even de hors s. 43A, the actual cost of acquiring the asset to the assessee in such a case would include the increased liability occasioned due to devaluation. Since the machinery was installed in 1968 which is the previous year for the relevant assessment year, the assessee would be entitled to claim development rebate under s. 43 read with s. 33. For these reasons, we hold that the assessee is entitled to development rebate on the enhanced cost of plant and machinery due to devaluation as claimed by him. We, accordingly, answer the second question in R.C. No. 144 of 1977, in favour of the assessee and against the Revenue. Question No. 4 in R.C. No. 144 of 1977 and question No. 2 in R.C. No. 82 of 1978: The fourth question in R.C. No. 144 of 1977 and the second question in R.C. No. 82 of 1978, referred at the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tra vires the Act to the extent it prescribes the mode of calculating the capital employed at variance with the Act, in particular by excluding all borrowed capital and by directing capital employed to be calculated only as on the first day of the accounting year and ignoring the capital employed during the rest of the year. Thus, the Bench upheld the assessee's contention and held in favour of the assessee. We find ourselves in agreement with the view expressed therein. Accordingly, we answer question No. 4 in R.C. No. 144 of 1977 and question No. 2 in R.C. No. 82 of 1978 in favour of the assessee and against the Revenue. Question No. 3 in R.C. No. 144 of 1977. The assessee company computed the disallowance on account of perquisites paid to its employees at Rs. 2,58,197. It arrived at this figure taking into account the perquisite enjoyed by its employees whose salary was exempt from tax under s. 10(6)(vii) of the I.T. Act. By its letter dated November 21, 1972, the assessee company requested the ITO for taking the figure to be disallowed at Rs. 56,983 instead of Rs. 2,58,197. The ITO rejected the assessee's entire claim on the ground that though the salaries of foreign techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36 ; and (i) any expenditure referred to in clause (ix) of sub-section (1) of section 36 : Provided further that nothing in this sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head 'Salaries' is seven thousand five hundred rupees or less. <?xml:namespace prefix = st2 /> Explanation I. -The provisions of this sub-clause shall apply notwithstanding that any amount not to be allowed under this sub-clause is included in the total income of the employee. Explanation 2.-In this sub-clause, the word 'salary' shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule." Clause (v) was inserted in s. 40(a) by the Finance Act, 1968, with effect from April 1, 1969, and was again omitted by the Finance (No. 2) Act, 1971, with effect from April. 1, 1972. These provisions are re-enacted with modifications in s. 40A with effect from the same date. During the assessment year with which we are now concerned, this provision was in force. In clause (2)(b) of Part A of the Fourth Schedule, the word " salary is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,500 or less. It is argued for the assessee that remuneration paid to an employee of company which was otherwise chargeable under the head " Salaries " in the case of a foreign technician is exempt. The salary of a foreign technician being exempt from tax, the question of the perquisites provided to him being taxable would not arise. The contention of the Revenue is that in order that the proviso may apply, there should be some income chargeable under the head " Salaries " and such salary payable should be less than Rs. 7,500. Since the salary payable to a foreign technician is wholly exempt and is not income chargeable under the head " Salaries ", the proviso has no application. When once the proviso is not applicable, the amount expended for providing perquisites in so far as it exceeds 1/5th of the salary payable or Rs. 1,000, whichever is less, shall not be deducted in calculating the profits and gains of business or profession. The scheme of s. 40 is that in computing the income chargeable under the head " Profits and gains of business or profession " among others, any expenditure incurred in making provision of any benefit or amenity or perquisite shall not be deducted, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s view of the matter, we uphold the conclusion arrived at by the Tribunal and accordingly answer this question in favour of the assessee company. Third question in R.C. No. 82 of 1978: The assessee claimed that the relief under s. 80J of the Act should be granted in respect of depreciable assets, on the capital employed representing the assets of the undertaking by taking into consideration the " written down value " of the assets as per the books of account and not as per the income-tax assessment. According to the learned counsel for the assessee, in the absence of any definition of written down value in r. 19A, the " written down value " should be assessed on the basis of the method of accounting employed by the assessee. The Tribunal rejected the assessee's contention and construed the meaning of the expression " written down value " as mentioned in r. 19A(2)(i). On the above facts, at the instance of the assessee, the following question is referred: " Whether, on the facts and in the circumstances of the case, the ` written down value' in r. 19A(2)(i) should be taken as 'written down value' as defined in s. 43(6) of the I.T. Act, 1961 ? " Rule 19A lays down the method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down value, the purpose for which such calculation is being made must be the guide. The written down value or the capital employed is being computed for the purpose of ascertaining the deduction in respect of the profits and gains which a newly established industrial undertaking is entitled to under s. 43A. If that be the purpose for which the written down value or the capital employed is to be ascertained and there is no special method laid down either under the Act or the Rules for the purpose of ascertaining the written down value, we see no reason why the provisions of ss. 28 to 43A should be ignored. The computation of the capital employed also, in our view, should be in accordance with those sections, for, that will affect the ultimate quantum of income liable to be taxed. We are not impressed by the contention that while in r. 19(6)(iv) " written down value " has been defined as meaning written down value computed under sub-s. (6) of s. 43, as if for the words "previous year", the words "computation period " were substituted, the same definition is not given under s. 19A and, therefore, the written down value as evidenced from the books of account of the assessee should be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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