1983-VIL-67-ITAT-

Equivalent Citation: ITD 009, 469,

Income Tax Appellate Tribunal MADRAS

IT APPEAL NOS. 937 AND 938 (MAD.) OF 1983

Date: 28.12.1983

INCOME-TAX OFFICER.

Vs

SRI VARADARAJA TEXTILES (PRIVATE) LIMITED.

BENCH

Member(s)  : T. N. C. RANGARAJAN., T. V. K. NATARAJA CHANDRAN.

JUDGMENT

Per Shri T.N.C. Rangarajan, Judicial Member ---- These two appeals by the revenue are directed against the common order of the Commissioner (Appeals) deleting certain disallowances made by the ITO in computing the total income for the assessment years 1978-79 and 1979-80.

2. The assessee is a private limited company engaged in the manufacture of cotton yarn. In the course of the previous year relevant to the assessment year 1978-79, the assessee had replaced two of the forty-eight ring frames installed in its spinning mill and in the next previous year two more ring frames as well as two draw frames. The expenditure incurred in these two years were Rs. 3,47,609 and Rs. 5,78,798, respectively. The assessee pointed out that both the ring frames and draw frames were relatively minor though essential part of the total apparatus involved in the process of converting ginned, pressed and baled cotton in to yarn in marketable form, i.e., cones and hanks. The ITO was of the opinion that the replacement after nearly 70 years cannot be held as expenditure for current repairs and, therefore, he treated the expenditure as capital expenditure. On appeal, the Commissioner (Appeals) found that these frames were only subordinate part of the whole machinery and replacement of subordinate parts cannot amount to a reconstruction of the entire machinery. He, therefore, held that the expenditure was an admissible deduction. It was also pointed out before him even in the grounds of appeal that the replacement was made after obtaining permission from the Textile Commissioner who is the authority to allow replacement or addition of spindles and the permission granted was only for replacement of the frames containing the spindles and, therefore, there was no addition to the spindle capacity of the machinery. The revenue is in appeal to contend that the gradual replacement of ring frames and draw frames after a period of 70 years is nothing but gradual reconstruction as distinguished from repairs. But, this contention goes against the principles relating to the expenditure incurred for repairing a machine. The Madras High Court has observed in the case of CIT v. Mahalakshmi Textile Mills Ltd. [1965] 56 ITR 256, subsequently affirmed by the Supreme Court in CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710, as follows :

".....The replaced part may be new and may be a new asset ; but in having regard to the nature of the expenditure, one should consider the productive unit as a whole and not pick out parts therein which are new. If such a view is taken, then even the replacement of parts which are really in the nature of current repairs can be held to be not eligible for the allowance under section 10(2)(v) for as the part is undoubtedly new, it is a new asset and because of its newness it confers some advantage. That does not appear to be the correct view to take. "

This view has been recently reiterated by the Madras High Court in the case of Mofussil Transports [T.C. No. 63 of 1970, dated 17-12-1975]. The test to be applied in such cases is as follows :

" In finding out whether a given case falls within the scope of clause (v) of section 10(2), the true test is whether, as a result of the expenditure which is claimed as expenditure for repairs, what is really being done is to preserve and maintain an already existing asset or whether the object of such expenditure was to bring a new asset into existence or to obtain a new or fresh advantage. If it is the former, then it is a 'repair'. If it is the latter, it should be considered as a replacement or renewal ......" ---Hanuman Motor Service v. CIT [1967] 66 ITR 88 (Mys.).

Applying this test, we find that by merely replacing a part of the entire machinery, no new asset was brought into existence because the original asset, namely, the entire machinery was continued to be preserved and maintained. It is also admitted position that no additional spindleage was created by this replacement because the permission was given by the Textile Commissioner only for replacement. In the circumstances, the Commissioner (Appeals) was right in allowing the claim for deduction of this expenditure as revenue expenditure and we have to confirm his order in this respect.

3. The second common point in dispute relates to an expenditure incurred for payment of a sum of Rs. 59,689 and Rs. 91,971 in settlement of a dispute under the Industrial Disputes Act, 1947. In the assessment for the assessment year 1978-79, the ITO assumed that bonus payable was only 8 1/3 per cent of the wages and in the absence of statement of allocable surplus, the sum of Rs. 59,689 was excessive bonus not allowable as a deduction. In the assessment for the assessment year 1979-80, he noted that the payment of Rs. 96,806 was excess by 5 per cent over 8.68 per cent which was the liability to pay bonus according to the available surplus. On appeal, the Commissioner (Appeals) was of the opinion that these additional payments which were made in terms of a settlement of an industrial dispute did not represent the bonus at all and were not payments under the Payment of Bonus Act, 1965. He was, therefore, of the opinion that this expenditure was incurred by the assessee for the purpose of the business to maintain industrial peace and, therefore, allowable as a deduction under section 37 of the Income-tax Act, 1961 ('the Act').

4. In these appeals, the contention of the revenue is that the amount paid was in the nature of bonus and since it was in excess of the amount payable under the Payment of Bonus Act, it could not be allowed as a deduction because of the proviso to section 36(1)(ii) of the Act. We are unable to accept this contention for more than one reason. Firstly, the amount was not in fact bonus at all because it was paid in settlement of an industrial dispute and not as a payment under the Payment of Bonus Act. The Payment of Bonus Act provides that where a bonus is paid under the Act, it shall be set off against the available surplus and any allocable surplus remaining undistributed has to be set on and set off both backwards and forwards. Therefore, if this amount is paid on account of bonus, it has to come out of the allocable surplus of the next year if there is no allocable surplus in the current year. It is admitted that this payment has not been adjusted against the allocable surplus of any accounting year. Hence, admittedly, this was not an amount paid under the Payment of Bonus Act. Secondly, even assuming that it was in the nature of a bonus, the maximum prescribed under the Payment of Bonus Act is 20 per cent and as the amount paid is within that ceiling prescribed, it cannot be disallowed under the provisions of section 36(1)(ii). Thirdly, it is actually an expenditure laid out for the purpose of the business and, therefore, wholly allowable under section 37(1). We must, therefore, confirm the order of the Commissioner (Appeals) on this point.

5. [This para is not reproduced here as it involves minor issue.]

6. The last point in dispute relates to the computation of the depreciation allowance. The assessee had computed the depreciation including the extra shift allowance taking the number of days the concern as a whole had worked multiple shifts. But the ITO computed the extra shift allowance only with respect to new machinery which had worked extra shifts and, thus, limited the depreciation allowance. On appeal, the Commissioner (Appeals) found that the computation made by the assessee was in conformity with the direction given by the CBDT and since the instructions of the CBDT were binding on the ITO, he directed the ITO to accept the assessee's computation.

7. The revenue is in appeal on this point, but we are of the opinion that such an appeal is not maintainable. Before we point out the infirmity in the appeal, we may notice the background to the issue of the circular by the CBDT. Originally, the depreciation for the machinery was to be computed only with regard to the actual number of days for which the machinery worked. Later, the rules have been amended to provide that depreciation should be granted in respect of machinery which have been used at any time in the previous year. Yet, the Direct Tax Advisory Committee was informed that the intention was to grant extra shift allowance only in respect of that machinery which actually worked extra shift and not in respect of all the machinery in the concern (Minutes of the 19th meeting of the Direct Tax Advisory Committee held on 5-11-1963). But, later, the CBDT issued the following circular [vide CBDT's letter No. 10/83/69-IT (A-II), dated 28-9-1970---CBDT Bulletin XVI/II/93, p.139] :

" Subject : Calculation of depreciation---Extra shift allowance in respect of Plant and Machinery :

I am directed to refer to your letter No. A/21233/CT/6A-102/69-70 dated 1st November, 1969 on the above subject and to say that the Board have decided that where a concern has worked double shift or triple shift, extra shift allowance will be allowed in respect of the entire plant and machinery used by the concern without making any attempt to determine the number of days on which each machine actually worked double or triple shift during the relevant previous year. "

This made it amply clear that the Government has no intention to compute extra shift allowance with regard to each individual machinery having already decided to simplify the calculation with reference to the working of the concern especially when depreciation itself is granted for the entire year without reference to the actual number of days of the working of the individual machinery. In this situation, it is not clear why the ITO framed an assessment contrary to the current instructions. When a similar assessment was made, the matter came up to the Tribunal but the revenue did not produce the circular. The Tribunal held in the case of South India Viscose Ltd. v. CIT [1982] 135 ITR 206 (Mad.) that under the Income-tax Rules, 1962 ('the Rules'), extra shift allowance may have to be calculated with regard to the actual number of days of the working of each machinery. The High Court was not apprised of the circular. Actually, when such a circular exists, the litigation itself was a needless exercise and if the circular had been produced before the High Court, the reference application would have become infructuous. The Supreme Court has repeatedly held that the circular of the Board is binding on the ITO and they must carry out the instructions even if it is in deviation of the actual legal position. Therefore, though the decision of the High Court may be that under the Rules, the depreciation may have to be calculated with reference to the actual working of each machinery, the ITO would be bound to follow the instructions of the CBDT and calculate the depreciation with reference to the working of the concern as such. In this context, it is well to remember that depreciation represents that part of a cost of fixed asset to the owner which is not recoverable when the asset is finally out of use by him. Provision against this loss of capital is an integral part of conducting the business during the effective commercial life of the asset and it depends upon the cost of asset, the probable value realised on ultimate resale and the length of time during which the asset will be commercially used. Since this last factor is not susceptible of precise calculation, the Act has authorised the CBDT to prescribe the methodical process of distributing the cost of asset over the various periods in which it is deemed that the asset will earn revenue. When in exercise of that power especially granted by the Act, the CBDT has given instructions to the ITOs to follow the simplified procedure of computing the depreciation, we fail to see why the Commissioner should object the order of the Commissioner (Appeals) directing the ITO to follow that circular. In fact, in another case when the Commissioner originally objected to similar such direction being carried out and caused a reference being made to the High Court, the learned counsel for the revenue did not press for an answer to the question as can be seen by the case reported in CIT v. Poly-Ene General Industries [1976] 104 ITR 242, 245 (Mad.). This decision shows that in certain cases, the circular of the CBDT is being followed and in the present assessee's case, the Commissioner objects to this circular being followed. That action is, prima facie, discriminatory and cannot be sustained. The justification for this appeal is that there is a decision of the High Court on this point and the officers charged with the execution of the statute may be required to follow the decision of the High Court rather than the circular of the CBDT. Perhaps, the ITO finds it easy to defy the CBDT on the pretext of being bound by the decision of the Madras High Court which was obtained, without bringing to the notice of the Court, the existence of the circular but we do not know how the officers charged with executing the statute could answer the Parliament when it is realised that the circulars issued by the CBDT have to be placed before the Parliament because this circular is a modification of a rule and is required to be placed before the Parliament under section 296 of the Act. The Commissioner (Appeals) appears to have also overlooked the fact that the Supreme Court has held in the case of K.P. Varghese v. ITO [1981] 131 ITR 597, 612 that the circular is binding even if it is to be found not in accordance with the correct interpretation or deviates from such construction.

8. Section 253(2) of the Act provides that the Commissioner may, if he objects to any order passed by the Commissioner (Appeals), direct the ITO to file an appeal to the Tribunal against the order. But, this does not mean that every order of the Commissioner (Appeals) which interferes with the assessment made by the ITO can be objected to. The objection must be reasonable and rational and cannot be made without regard to the correctness of the order appealed against. This power itself is a discretionary power and is coupled with the duty to act fairly. The exercise of this power is also a matter of review by the Tribunal because an administrative Tribunal is duty bound to determine whether the power of the Commissioner has been exercised in a manner that complies with certain implied legal requirements. De Smith's Judicial Review of Administrative Action at page 323 states that in some context it may be confined to the question whether the competent authority has kept within the four corners of the Act and whether it has acted in good faith, but usually they will pursue their inquiry further and will consider whether the repository of a discretion although acting in good faith has abused its power by exercising it for an inadmissible purpose or on irrelevant grounds or without regard to relevant considerations or with gross unreasonableness. We find the following statement of law on this point :

" The emphasis that the Courts have recently placed on an implied duty to exercise discretionary powers fairly must normally be understood to mean a duty to adopt a fair procedure. But there is no doubt that the idea of fairness is also a substantive principle. It is implicit in the concept of a judicial discretion, and it includes a duty to be impartial and not to discriminate on unacceptable grounds or to delay the making of the decision to the prejudice of fundamental rights. "

9. Applying this test, we find that the appeal has been filed with respect to this question in the present assessee's case arbitrarily and unfairly because an appeal against another assessee with regard to the application of the same circular of the CBDT has not been pressed before the High Court. Moreover, the appeal has been filed without regard to the most relevant consideration, namely, the law stated by the Supreme Court is binding on all authorities and that the ITO must carry out the circular issued by the CBDT. In the circumstances, we must hold that the appeal of the revenue on this point is not maintainable at all and we, therefore, refuse to entertain the ground of appeal relating to the computation of extra shift allowance.

10. In the result, the appeals are dismissed.

 

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