Vildirect: IncomeTax-caselaws-1997-VIL-91-ITAT-JBL

1997-VIL-91-ITAT-JBL

Equivalent Citation: TTJ 059, 587,

Income Tax Appellate Tribunal JABALPUR

Date: 21.01.1997

DEPUTY COMMISSIONER OF INCOME TAX.

CENTRAL HATECHERIES (P) LTD.

BENCH

Member(s) : G. D. AGARWAL.

JUDGMENT

The appeal in ITA No. 362/Jab/1991 by the assessee is, against the order under s. 263 of the IT Act, 1961, passed by the CIT, Jabalpur. Appeal in ITA No. 17/Jab/1994 is by the Revenue, which is directed against the order of CIT(A), Jabalpur. The cross -objection is by the assessee. As the common issues are involved, these appeals and cross-objection are being disposed of together by this common order.

ITA No. 17/Jab/1994 : Revenue’s appeal

2. The first ground of Revenue’s appeal reads as under:

"The learned CIT(A) erred in deleting the addition of Rs. 29,57,698 made by the AO on account of closing stock of parental flock (birds) without properly appreciating the facts of the case."

3. At the time of hearing before us, both the parties conceded that this issue is covered in favour of the assessee by decision of the Tribunal in the case of V.N. Dubey vs. Dy. CIT vide ITA No. 10/Jab/1994. Since the facts are identical, we do not find any material to take a different view than, taken in the case of Shri V.N. Dubey. Accordingly, the order of the CIT on this issue is upheld. Ground No. 1 is rejected.

4. The ground No. 2 reads as under:

"The learned CIT(A) erred in allowing deduction under s. 80HHA at Rs. 2,38,648 which has been disallowed by the AO without considering the facts that the assessee is not a small scale industrial undertaking as envisaged by the provisions of s. 80HHA of the IT Act."

5. The facts of the case are that the assessee claimed deduction under ss. 80HHA and 80-I. After verification of the assessee’s claim, it was found by the AO that the assessee is entitled to deduction under s. 80-I. Accordingly allowed the same. In respect of the claim under s. 80HHA, he opined that the total cost of the plant and machinery as per depreciation chart is much more than Rs. 35 lakhs. Hence, the assessee is not entitled to deduction under s. 80HHA. On appeal, the CIT(A) agreed with the submissions of the assessee’s counsel, directed the AO to allow deduction under s. 80HHA. The Revenue aggrieved with the order of the CIT(A) is in appeal before us.

6. At the time of hearing, it is submitted by the learned Departmental Representative that the value of the plant and machinery owned by the assessee exceeded to Rs. 35 lakhs and, therefore, the assessee is not a small scale industrial undertaking within the meaning of s. 80HHA and, therefore, not entitled to deduction under that section. He further submitted that the building should be treated as plant and machinery, while working out the above limit of Rs. 35 lakhs, because the depreciation is claimed on the building at the rate applicable to the plant and machinery and, therefore, the building is considered as plant by the assessee himself. He, therefore, submitted that the order of the CIT(A) be reversed and the order of the AO be restored.

7. The learned counsel for the assessee argued at length. He submitted that there is a definition of the word "Plant and Machinery" for the purpose of s. 43(3). This definition is an inclusive definition and wide definition, which includes so many things within the meaning of the word ‘plant’. However, this definition would be applicable only for the purpose of computation of business income under ss. 28 to 41 and not for the purpose of s. 80HHA. For the purpose of s. 80HHA, we have to take the common parlance meaning of the word ‘Plant and Machinery’. He further submitted that Expln. (b) to s. 80HHA specifies the meaning of the word ‘small scale industrial undertaking’. As per this Explanation, various items of plant and machinery are excluded from the definition. Thus, while the definition of ‘plant’ under s. 43(3) is an inclusive definition and it includes certain items, which are not plant, the definition as per Expln. (b) to s. 80HHA excludes certain items, which are plant as per common parlance meaning. Thus, he submitted that while considering the plant and machinery for the purpose of s. 80HHA only the items, which can be considered plant in a common parlance meaning and which is required for the manufacturing or production of article or thing has to be considered. With this background, he submitted that the following items should not be considered while computing the total value of the plant and machinery:

(a) Generator

He submitted that the assessee carried on the manufacturing or production of article or thing with the aid of the power supplied by the State Electricity Board. The generator is installed only as a stand by arrangement. The generator is required only because of the frequent power failure and is used only in the case of power failure. The assessee is required to instal the generator for the inability of the Government to supply power uninterruptedly. Therefore, the generator which is only a stand-by arrangement cannot be considered for denying exemption under s. 80HHA to the assessee. In support of his contention, he relied upon the definition of small scale industrial undertaking from Industries Manual issued by the Directorate of Industries, Madhya Pradesh. As per this definition, the cost of generator is to be excluded. He further submitted that the provision for grant of exemption under s. 80HHA are the beneficial provision and it should be construed liberally.

(b) Tubewell and well

He submitted that in the common parlance meaning, the tubewell and well are not the plant and machinery and, therefore, cannot be considered while working out the total value of the assessee’s plant and machinery.

(c) Motor pump

He submitted that the motor pump is used for the purpose of lifting of the water and it does not take part in the manufacturing and production of articles or things and, therefore, should be excluded while working out the value of the plant and machinery.

(d) Broiler house

He submitted that it is only a building used for keeping the chicks. It is not plant and machinery by itself and, therefore, cannot be considered for the purpose of s. 80HHA. Here, he reiterated that the definition of plant and machinery for the purpose of claim of depreciation as per s. 43(3) is very wide and the same cannot be applied for the purpose of s. 80HHA. Therefore, even if the building is treated as plant for the purpose of claim of depreciation, it cannot be and should not be treated as plant for the purpose of determining the value of the assessee’s plant and machinery for s. 80HHA.

(e) Mini Truck

He submitted that it is not a plant and machinery, but only a vehicle. The vehicle is included within the definition of ‘plant’ by s. 43(3) of the IT Act, but it cannot be considered as ‘plant’ for the purpose of s. 80HHA.

8. We have carefully considered the arguments of both the sides. The only dispute before us as, whether the assessee is a small scale industrial undertaking within the meaning of s. 80HHA. Expln. (b) to this section provides meaning of small scale industrial undertaking in the following terms:

"(b) an industrial undertaking shall be deemed to be a small scale industrial undertaking, if the aggregate value of the machinery and plant (other than tools, jigs, dies and moulds) installed, as on the last day of the previous year, for the purposes of (the business of the undertaking does not exceed:

(1) in a case where the previous year ends before the 1st day of August, 1980, ten lakh rupees;

(2) in a case where the previous year ends after the 31st day of July, 1980 but before the 18th day of March, 1985, twenty lakh rupees; and

(3) in a case where the previous year ends after the 17th day of March, 1985, thirty- five lakh rupees. and for this purposes the value of any machinery or plant shall be:

(i) in the case of any machinery or plant owned by the assessee, the actual cost thereof to the assessee; and

(ii) in the case of any machinery or plant hired by the assessee, the actual cost thereof as in the case of the owner of such machinery or plant."

9. From the above, it is apparent, the assessee would be small scale industrial undertaking, if the value of plant and machinery (excluding tools, jigs, dyes and moulds) installed for the purposes of the business of the undertaking does not exceed Rs. 35 lakhs. The business of the undertaking is hatchering of eggs. Therefore, it has to be seen, which are the plant and machinery installed for the purpose of hatchering of eggs. Only the cost of such machinery, as on the last day of the previous year has to be taken into account for determining whether the assessee is a SSI. The AO has not given any working, how he reached to the conclusion that value of assessee’s plant and machinery exceeded Rs. 35 lakhs. Therefore, the matter has to be restored to his file for fresh consideration. However, the arguments of both the sides with reference to each item of asset are considered as under:

(a) Generator

It is submitted by the learned counsel for the assessee that the generator is kept only as a stand-by arrangement to be used in case of power failure and, therefore, it has to be excluded from the meaning of "plant and machinery", while determining whether the assessee is a SSI. In support of his contention, he relied upon the Industrial Manual issued by the Directorate of Industries, Madhya Pradesh. Photocopy of the same is filed before us. We find that Industrial Manual Vol. I contains Acts, Rules, Orders, Notifications and the instructions of Government of India and Government of Madhya Pradesh. At p. 310 of this book, the Chapter provides "Registration under Small Scale Industries". It also defines small scale industries. Para 4 of this definition reads as under:

"4. Certain clarifications and explanations on the definition of small scale industries have been issued from time to time by the Government and these stand valid for the revised definition too. They are the following:

(i) In calculating the value of plant and machinery, the original prices paid by the owner, irrespective of whether the plant and machinery and new or second, will be taken into account.

(ii) The cost of equipment such as tools, jigs, dies, moulds and spare parts for maintenance and the cost of consumable stores will be excluded in computing the value of plant and machinery. Similarly, the cost of installation of plant and machinery will also be excluded.

(iii) In the case of imported machinery, import duty will be included, but not the miscellaneous expenses like transportation from the port to the site of the factory, demurrage if any paid at the port, and premium if any paid for import entitlement for import of machinery. However, shipping charge, customs clearance charges and sales-tax should be included in computing the cost of plant and machinery.

(iv) The cost of generation sets if any installed will be excluded. Similarly, the cost of extra transformer, etc., which have to be installed by a unit as per the regulations of State Electricity Board would also be excluded.

(v) The bank charges and service charges paid to the National Small Industries Corporation, or to the State Small Industries Corporation will be excluded in computing the cost of plant and machinery."

From the above, it is clear that sub-para (iv) of para 4 excludes the cost of generation set as well as the cost of extra transformer, which have to be installed by a unit. Now, the question remains is whether this clarification and Explanation issued by the Government for the purpose of registration of an industrial undertaking as a small scale industrial undertaking can be considered for the purpose of the definition of the small scale industrial undertaking for the purpose of s. 80HHA. The assessee contended that the manufacturing or production of the article or thing by the assessee undertaking is carried on with the aid of the power supplied by the Madhya Pradesh Electricity Board, a State Government undertaking. The assessee is required to instal the generator set only because of the inability of the Electricity Board to supply the power uninterruptedly. This contention could not be controverted by the learned Departmental Representative. Only after appreciating, this factual position, which is applicable in the case of many industries, the Government has decided to exclude the cost of generator set from the value of the plant and machinery for the purpose of the definition of SSI., while registering the same by the Department of Industries. Therefore, in our opinion, it would be in the interest of justice, if the value of generators is excluded while determining the value of plant and machinery for s. 80HHA also. While taking the above view, we also derive support from the decision of Hon’ble Supreme Court in the case of Bajaj Tempo Ltd. vs. CIT (1992) 104 CTR (SC) 116 : (1992) 196 ITR 188 (SC), wherein their Lordships have held :

"A provision in a taxing statute granting incentive for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it."

(b) Tubewell and well

As per Appendix. I to the IT Rules, i.e., the depreciation table, Note I building includes road, bridges culverts, wells and tubewells. Therefore, wells and tubewells should be considered as part of the building and will be considered in detail, while considering the assessee’s contention with regard to the building.

(c) Motor pump

It has been contended by the assessee that the motor pump is used for the lifting of the water only and not for the purpose of hatchering. However, we are unable to agree with the contention of the learned counsel. The water is essentially required for the purpose of hatchering activity carried on by the assessee. The motor pump is a machinery within a common parlance meaning and it is required for the purpose of the business of the industrial undertaking and, therefore, it has to be considered while determining the value of the plant and machinery.

(d) Broiler house building

It has been contended by the learned Departmental Representative that since the depreciation is claimed on the building at the rate applicable to the plant, it should be considered as plant. It has been contended by the learned counsel for the assessee that the definition of the plant for the purpose of allowing depreciation is altogether different than for the purpose of s. 80HHA., We have considered the argument of rival parties and have also perused the order of the AO. In the assessment order, there is no finding whether the broiler house, i.e., the building is plant or not. In a common parlance meaning, to ascertain whether the building is plant or not, functional test has to be applied. Functional test is whether the building itself is a apparatus required for carrying on the business activity of the undertaking and hence, a tool of the trade or whether it is only a place of business or shelter provided for keeping the plant and machinery or the stock. It would be plant in the former case, i.e., when the structure itself is a tool of the trade, but where it is only a place of business, i.e., for keeping the stock or providing space for fitting the plant and machinery or shelter thereto, it would only be a building.

We do not find any discussion in the assessment order on this aspect of the matter and, therefore, we direct the AO to examine whether the broiler house or the building was a plant in the light of our above discussion. We do not agree with the submissions of the learned counsel for the assessee that the building can be treated as plant for the purpose of allowing depreciation and at the same time has to be excluded for the purpose of working out the value of the plant and machinery under s. 80HHA. The AO, therefore, has to determine whether the building is a plant or not. If he reached to the conclusion that it is not a plant, he shall be at liberty to take the appropriate action in accordance with law to revise the depreciation allowed thereon.

(e) Hatcher setter

The learned counsel for the assessee himself admitted that it is a plant required for the purpose of the hatchering activity of the industrial undertaking.

(f) Mini Truck

Though the truck is a machinery but it is neither installed nor used for the purpose of hatchering. Therefore, in our opinion, it has to be excluded while determining the value of the plant and machinery for the purpose of s. 80HHA.

In the light of above discussion, the AO shall work out whether the value of the plant and machinery installed by the assessee for the purpose of the business of the undertaking as on the last day of the previous year exceeded Rs. 35 lakhs. If it is so, he shall repeat the disallowance under s. 80HHA, but if the value so worked out is below Rs. 35 lakhs, the assessee should be treated as small scale industrial undertaking and the benefit of deduction under s. 80HHA be allowed to it.

10. The next ground of appeal is against the deletion of the addition of Rs. 1,50,000 by the CIT(A).

11. The facts of the case are that the assessee-company made a deposit of Rs. 10 lakhs with Shri V.N. Dubey. The deposit was made under an agreement for hiring of shed of Shri V.N. Dubey. The AO was of the opinion that advance of the sum of Rs. 10 lakhs without charging of interest was unjustified and the assessee has forgone the interest deliberately. He, therefore, calculated the interest @15% and made the addition of Rs. 1,50,000. On appeal, the CIT(A) deleted the same. Hence, this appeal by the Revenue.

11.1. At the time of hearing before us, it is submitted by the learned Departmental Representative that Shri V.N. Dubey is the promoter as well as the director of the assessee-company. He also has the substantial interest in the business of the assessee-company. The assessee-company has advanced a sum of Rs. 10 lakhs to Shri Dubey without charging any interest thereon. It was a clear case of tax avoidance and, therefore, the AO was fully justified in making the addition of Rs. 1.50 lakhs calculating the interest @15% on the money advanced.

12. The learned counsel for the assessee supported the order of the CIT(A) on two grounds :

(a) that the assessee-company has taken on hire, the shed owned by Shri V.N. Dubey. The area of the shed is 50,120 sq. ft. As per the lease agreement dt. 1st Aug., 1988, the assessee has to deposit the sum of Rs. 10 lakhs and pay the rent @Rs. 10,000 per month. He submitted that the deposit as well as rent is paid as per the agreement. The agreement is not found to be non-genuine or collusive and, therefore, a sum of Rs. 10 lakhs was deposited for a business consideration. He further submitted that even after considering the interest on the deposit of the sum of Rs. 10 lakhs, the burden of gross rent per month to the assessee would be Rs. 22,500 (Rs. 10,000 rent paid plus Rs. 12,500 interest @ 15% per annum). That the rent of Rs. 22,500 for a shed of total area of 53,120 sq. ft. is much less than prevailing market rent.

(b) that Shri V.N. Dubey is being assessed to tax at the maximum marginal rate and, in fact, the assessee is getting deduction under ss. 80HH and 80-I, so the question of avoidance of tax does not arise, because the burden of tax is more in the case of V.N. Dubey than in the case of the assessee-company.

13. We have carefully considered the arguments of both the sides. The genuineness of agreement dt. 1st Aug., 1988, is not disputed. The assessee has taken on lease a huge shed with the area of 53,120 sq. ft., when as per agreement, the assessee has to pay a sum of Rs. 10,000 as rent and deposit a sum of Rs. 10 lakhs, the AO was not justified in charging the interest on presumptive basis ignoring the agreement. We, therefore, uphold the order of the CIT(A) deleting the addition of Rs. 1,50,000. Ground No. 3 of the Revenue's appeal is rejected.

C.O. No. 15/Jab/1994

14. Ground No. 1 of the cross-objection is only in support of the order of the CIT(A). The same being infructuous is dismissed.

15. Grounds No. 2 and 3 are only alternative grounds. However, in view of our decision to ground No. 1 of the Revenue’s appeal, grounds No. 2 and 3 of the cross- objections do not survive. Hence, the same are rejected.

16. Ground No. 4 which is against the claim of deduction under s. 32AB is not pressed. Hence, the same is rejected.

17. Ground No. 5 is the assessee’s claim to treat the income of Rs. 44,000 being the matador hire charges as industrial income.

18. At the time of hearing before us, the learned counsel for the assessee was unable to establish, how the running of the matador was directly related to the manufacturing or production of article or thing so as to make it industrial income. Therefore, we find no merit in this ground of the cross-objection. The same is rejected.

19. Ground No. 6 is also an alternative argument with regard to the addition of Rs. 1,50,000 on account of non-charging of interest. As we have already upheld the order of the CIT(A) in this respect, this ground No. 6 of the C.O. does not require any adjudication. The same is rejected.

20. Ground No. 7 of the cross-objection reads as under:

"Under the facts and in the circumstances of the case the learned CIT(A) should have held that the assessment order though dt. 22nd March, 1993, is not passed within the limitation period prescribed in s. 153 of the IT Act, 1961, hence, whole assessment order is bad in law."

21. At the time of hearing before us, it was pointed out by the learned counsel for the assessee that this issue is covered by the decision of the Tribunal vide ITA No. 358/Jab/1991, etc., in the case of Shri V.N. Dubey vide order dt. 4th Nov., 1996. We find that under the identical facts, the Tribunal in the case of Shri V.N. Dubey has set aside the matter to the file of the CIT(A) to be decided afresh. Since the facts are identical, we set aside this matter back to the file of the CIT(A) with the direction that he shall reexamine the issue after giving opportunity of being heard to the assessee and pass a speaking order considering all the arguments of the assessee.

ITA No. 362/Jab/1991—Assessee’s appeal

22. This appeal by the assessee is against the order of the CIT, Jabalpur, passed under s. 263 of the Act. All the issues arising out of the order under s. 263 have already been decided by us, while disposing of the Revenue’s appeal in ITA No. 17/Jab/1994. As such this appeal has become infructuous. Hence, dismissed.

23. In the result, the Revenue’s appeal, i.e., ITA No. 17/Jab/94 and assessee’s cross-objection, i.e., No. 15/Jab/1994 are deemed to be partly allowed for statistical purposes. The assessee’s appeal vide ITA No. 362/Jab/1991 is dismissed.

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