Commissioner Of Income Tax v. Madhusudan Vegetable Products Co.ltd

O/ITR/7/2003 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE NO. 7 of 2003 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI andHONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ?the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ?judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ?to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ COMMISSIONER OF INCOME TAX....Applicant(s) Versus MADHUSUDAN VEGETABLE PRODUCTS CO.LTD.....Respondent(s) ================================================================ Appearance: MR NITIN K MEHTA, ADVOCATE for the Applicant(s) No. 1MR RK PATEL, ADVOCATE for the Respondent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERIandHONOURABLE MR.JUSTICE K.J.THAKER Date : 28/11/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1.This Court vide order dated 25.02.1997 directed the Tribunal to draw up a statement of Case and refer the question of law stated in the said order to this Court and accordingly this reference has come before us for consideration. The following question has been referred by the Income Tax Appellate Tribunal, Ahmedabad under Section 256(1) of the Income Tax Act, 1961 arising out of the Tribunal’s order dated 31.07.1989 in ITA No. 1783/Ahd/1989 for the Assessment Year 1982-83: “Whether, the Appellate Tribunal is right in law and on facts in directing the IAC (Asstt.) to allow the assessee’s claim for investment allowance?” 2. The IAC (Asstt.) during the course of assessment proceedings observed that the assessee which is a public limited company claimed investment allowance in respect of assets worth Rs. 84,69,945/-. On making inquiries it transpired that the assets in question had been purchased during the immediately preceding year i.e. 1981-82 but investment allowance had been claimed in A.Y 1982-83 on the ground that these had been put to use during the latter assessment year. The IAC(Asstt.) also found that the claim on account of investment allowance related to the assessee’s new unit for manufacturing sanitaryware located at Kadi near Ahmedabad, the construction of which had started in the month of September, 1979. The IAC (Asstt.) also found that the construction of buildings, Tunnel Kiln, Intermittent Kiln as also the installation of the plant and machinery had been completed in record time and the plant commissioned on 21.07.1980 and trial production had commenced. The IAC (Asstt. ) allowed investment of Rs. 1,15,337/- being 25%. 2.1The assessee preferred an appeal before the CIT(A) who confirmed the order of IAC(Asstt.). Being aggrieved by the same, the assessee appealed before the Tribunal and the Tribunal vide impugned order accepted the assessee’s claim in respect of investment allowance on various items of plant and machinery including the kiln in question. completed in record time and the plant commissioned on 21.07.1980 and trial production had commenced. The IAC (Asstt. ) allowed investment of Rs. 1,15,337/- being 25%. 2.1The assessee preferred an appeal before the CIT(A) who confirmed the order of IAC(Asstt.). Being aggrieved by the same, the assessee appealed before the Tribunal and the Tribunal vide impugned order accepted the assessee’s claim in respect of investment allowance on various items of plant and machinery including the kiln in question. 3.Mr. Nitin Mehta, learned advocate appearing for the appellant – revenue submitted that the Tribunal has erred in law in directing the Assessing Officer to allow investment allowance on drawings and designs. He has drawn the attention of this Court to the documents placed on record and submitted that the assessee changed the assessment year from March to September and has claimed depreciation for A.Y 1982-83 whereas in fact the production had already started in the year 1980-81. 3.1Mr. Mehta submitted that there was trial production and that ought to have been considered as the date for depreciation. He submitted that depreciation could not have been claimed in the previous year but in view of the amendment or change in law the assessee has claimed depreciation in the subsequent year though he has claimed depreciation of capital expenses in the previous year. He submitted that drawings and designs on which expenditure was incurred had been utilized in the year 1981-82 that being the year in which the plant and machinery (main furnace) had been installed and kept ready for use. 3.2Mr. Mehta has drawn the attention of this Court to the observations made by the Assessing Officer and submitted that the view taken by the Tribunal may be modified and the decision of CIT(A) may be restored. He submitted that the depreciation ought to have been claimed in the year 1981-82. In support of his submissions, Mr. Mehta has relied upon a decision of the Rajasthan High Court in the case of CIT vs. Nakoda Metalsreported in [2006] 204 CTR 514 (Raj) as well as a decision of this Court in the case of Assistant Commissioner of Income-Tax vs. Ashima Syntex Ltd. reported in [2001] 251 ITR 133 , decision of Calcutta High Court in the case of Commissioner of Income Tax vs. Union Carbide (I) Ltd. reported in [2002] 254 ITR 488 & the decision of Delhi High Court in the case of Commissioner of Income Tax vs. Refrigeration and allied industries Ltd reported in [2001] 247 ITR 12. 4.The Rajasthan High Court in the case of Nakoda Metals (supra) has held as under: “9. From the undisputed facts that machines were acquired and installed during the previous year, that the assessee also acquired raw material soon after installation of machineries- and had sales of Rs. 1,62,200 in December, do provide the material on the basis of which one can reasonably infer that assessee who has acquired and installed machines and also acquired raw material, also used the same for the purpose of his business. Success or failure of venture is not the relevant consideration. It also can be reasonably inferred that assessee's contention about commencing commercial products on 1st Oct., 1987 may not be true but there is material to find that it was put to use for 4.The Rajasthan High Court in the case of Nakoda Metals (supra) has held as under: “9. From the undisputed facts that machines were acquired and installed during the previous year, that the assessee also acquired raw material soon after installation of machineries- and had sales of Rs. 1,62,200 in December, do provide the material on the basis of which one can reasonably infer that assessee who has acquired and installed machines and also acquired raw material, also used the same for the purpose of his business. Success or failure of venture is not the relevant consideration. It also can be reasonably inferred that assessee's contention about commencing commercial products on 1st Oct., 1987 may not be true but there is material to find that it was put to use for business only when it went into trial production, but when he did not get the standard product he did not take further production. This justified meager turnover. In these circumstances the findings reached by the Tribunal remain findings of fact based on relevant consideration. The whole burden of Revenue's contention is emphasis on showing date of commencement of commercial production, which was wholly irrelevant for the purpose of considering deduction on account of depreciation and investment allowance. What is needed is that, the machines must be used for assessee's business. Whether the assessee is able to successfully commence commercial production or commercial production is delayed on account of defect in trial production does not affect the allowability of deduction on account of depreciation and investment allowance if from the material on record, it can reasonably be inferred that machines were used for assessee's business during the relevant previous year. The user of machines for trial production, before giving full throttle is as much use of machines for the purpose of business. 10. The conclusion reached by the Tribunal that the assessee had used the machines in question during the previous year relevant to assessment year for his business is finding of fact. In view of the, aforesaid conclusion, we are not inclined to carry on further enquiry about the issue when installation of machinery during the previous year for the purpose of business of assessee itself amounts to user of the machine within the meaning of Section 32 or 32A. 11. Since all the questions depend on the answer of question whether the machinery acquired and installed during the previous assessment year was used for assessee's business, no question is required to be referred to this Court. “ 4.1Similarly in the case of Ashima Syntex Ltd. (supra), this Court has observed as under: “Thus, it is clear that the settled position in law is that it is not necessary that the machinery must be used for a particular number of days so as to entitle for depreciation, but it requires that it should be used for the purpose of business or profession or vocation. The trial run of the machinery is obviously for the purpose of business and not for any other purposes. What is required to be seen that the machinery must be used for the purpose of business and keeping in mind the wider meaning ascribed by various decisions of various courts for the term use, even trial production of a machinery would fall within the ambit of used for the purpose of business. Further, as the statute does not prescribe a minimum time-limit for use of the machinery, the assessee cannot be denied the benefit of depreciation on the ground that the machinery was used for a very short duration for trial run.” 4.2In the case of Union Carbide (I) Ltd., the Calcutta High Court has held as under: 4.2In the case of Union Carbide (I) Ltd., the Calcutta High Court has held as under: “Under Section 32, it is necessary that the machinery is owned, wholly or partly, by the assessee and "used for the purposes of the business" ; it is the interpretation of the word "use" in this phrase which would be partly determinative of this reference. Once ownership by the assessee and the lapse of the whole previous year are established, a full year of shelf-life of the machinery in question has inexorably lapsed. If it is found that during that year the machinery cannot be said to have been used for the purpose of the assessee's business, then depreciation cannot be allowed but once it is shown that the assessee has put the machinery to use, for the purpose of the assessee's business, then further inquiry about the degree or type of use is not permitted to be scrutinised by the language of the section. It might be that the assessee's use is to keep it as a stand by for the whole year ; it might again be that the assessee has to use it for a trial production or in some other purpose for the assessee's business, which is not immediately productive of commercial profit ; these would, again, not go against the assessee. Once the assessee can establish bona fide use of the machinery for the purposes of the assessee's business, then and in that event, the assessee establishes the assessee's right to claim depreciation.” 4.3The Delhi High Court in the case of Refrigeration and allied industries (supra) has held as under: “...The principal factors responsible for reduction in value of a capital asset and, therefore, responsible for depreciation are : (i) ordinary wear and tear ; (ii) unusual damage ; (iii) inadequacy ; and (iv) obsolescence These factors include not only those relating to physical deterioration, but also those referring to the suitability of the asset as an economically productive unit after a period of time The depreciation allowance under section 32 is, however, a statutory allowance not confined expressly to diminution in the value of the asset by reason of wear and tear The allowance can be claimed, if the asset in question is shown to be capable of diminishing in value on account of any factor known to the prevailing accounting or commercial practice (see CIT v Elecon Engineering Co Ltd [1974] 96 ITR 672 (Guj)) The two ingredients for depreciation allowance are : (i) that the depreciable asset is owned by the assessee, and (ii) that it is used for the purpose of the assessee's business or profession subject, however, to the provisions of section 34 These aspects have been elaborately dealt with by one of us...” 5.Mr. R.K. Patel, learned advocate appearing for the assessee supported the impugned order and submitted that in view of the fact that gas was not supplied by ONGC and therefore there was no other option but to change the burner and same was installed only in February 1981. He submitted that trial production was started on 01.03.1981 which falls in assessment year 1982-83. He further contended that the Tribunal rightly accepted the contentions raised by the assessee. He has drawn the attention of this Court to the observations made by the Tribunal and submitted that the same being in accordance with law does not call for any interference by this Court. 5.Mr. R.K. Patel, learned advocate appearing for the assessee supported the impugned order and submitted that in view of the fact that gas was not supplied by ONGC and therefore there was no other option but to change the burner and same was installed only in February 1981. He submitted that trial production was started on 01.03.1981 which falls in assessment year 1982-83. He further contended that the Tribunal rightly accepted the contentions raised by the assessee. He has drawn the attention of this Court to the observations made by the Tribunal and submitted that the same being in accordance with law does not call for any interference by this Court. 6.Having heard learned advocates for the parties and having gone through the records, we are of the opinion that keeping in mind the permissible change of financial year, the assessee was permitted to change the financial year from 01.09.1980 and all crucial dates namely change of burner and installation of same was done in 1981 and production had started on 01.03.1981. We are of the opinion that even if the argument of Mr. Mehta is accepted the actual production or maximum production has factually started on 01.03.1981 and not on 21.07.1980 as contended. 6.1We have not lost sight of the fact that the assessee had full intention of starting the regular commercial production but could not do so on account of non availability of natural gas as it was supplied to it only from 17.09.1981. In the meantime, the assessee had imported oil burner from Germany and it was with the aid of this equipment that it was able to enter into the realm of commercial production with effect from 01.03.1981. 6.2The Tribunal in its impugned order more particularly paras 23 & 24 has observed as under: “23. We now take up for consideration the issue pertaining to the grant of Investment Allowance on the drawings and designs obtained by the assessee from West Germany. The amount in question is Rs. 4,72,671/-. The authorities below rejected the claim on the ground that drawings & designs related to the said kiln whose installation and construction had been completed in all respects in A.Y. 1981-82 itself and that being a year in which the assessee was not entitled to Investment Allowance. The assessee’s case on the other hand is that since the kiln had been actually put to use in A.Y. 82-83 the claim for Investment Allowance in respect of drawings and designs is consequential. Both the parties have relied on the decision of the Hon’ble Karnataka High Court in the case of Mysore Iron & Steel Ltd. (supra), the learned DR in support of his arguments and the assessee’s counsel in support of his. 24.We after examining the rival submissions are of the view that the assessee would be entitled to Investment Allowance in respect of the expenditure incurred for importing the drawings and designs. There is no doubt that the construction of the kiln had been completed in all respects in A.Y. 1981-82 itself and that also with the aid of these drawings and designs but the same was put to use only in A.Y. 1982-83. We have already accepted the assessee’s claim in respect of Investment Allowance on various items of plant and machinery including the kiln in question. A common sense view would require that both the things should be considered together viz. the drawing and designs as also the amount spent on the construction of the kiln although the other view is also possible i.e. the examination of the claim in erspect of each of the items isolated from the other. We however propose to consider the claim as consolidated one for both the items and accept the assessee’s arguments in respect of Investment Allowance on drawings and designs in A.Y. 1982-83 itself.” 6.3The provisions of section 32A which reads as follows 6.3The provisions of section 32A which reads as follows gives an option to the assessee to make the claim either in the year in which the machinery is purchased and installed or in the year in which the machinery is first put to use and that being the immediate succeeding assessment year. “32A. Investment allowance (1)In respect of a ship or an aircraft or machinery or plant specified in sub- section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty- five per cent of the actual cost of the ship, aircraft, machinery or plant to the assessee: Provided that in respect of a ship or an aircraft or machinery or plant specified in sub- section (8B), this sub- section shall have effect as if for the words" twenty- five percent", the words" twenty per cent" had been substituted:] Provided further] that no deduction shall be allowed under this section in respect of- (a)any machinery or plant installed in any office premises or an residential accommodation, including any accommodation in the nature of a guest house; (b)any office appliances or road transport vehicles; (c)any ship, machinery or plant in respect of which the deduction by way of development rebate is allowable under section 33; and (d)any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head " Profits and gains of business or profession" of any one previous year. Explanation.- For the purposes of this sub- section," actual cost" means the actual cost of the ship, aircraft, machinery or plant to the assessee as reduced by that part of such cost which has been met out of the amount released to the assessee under sub- section (6) of section 32AB.] 7.Considering the fact that the date on which the commercial production started was 01.03.1981 the assessment year considered by the assessee was rightly 1982-83. In fact it goes without saying that even in the statement of facts, it is a matter of factual assertion that the IAC (Asstt.) has noted that the assessee had not claimed any Investment Allowance on the assets for the year 1981-82. 7.1We are in complete agreement with the reasonings adopted by the Tribunal and the findings of fact arrived at and do not see any reason for interference. We have also considered the decisions cited by learned advocate for the revenue in the present case. However, considering the facts of the present case, we do not think the said decisions shall be applicable to the peculiar facts of the present case. The said decisions would have governed this case had the Assessing Officer not permitted change of assessment year. The facts of the said cases are not similar to the facts of the present case and therefore they are not helpful to the revenue. 8.For the foregoing reasons, we answer the question referred to us in the affirmative i.e. in favour of the assessee and against the revenue. Reference stands answered accordingly. divya (K.S.JHAVERI, J.) (K.J.THAKER, J)