COMMISSIONER OF INCOME-TAX VS SOUTHERN PETRO CHEMICAL INDUSTRIES CORPORATION LTD. (NO.1), 2000 PTD-MADRAS-HIGH-COURT-INDIA 1033 (1998)

(a) Income-tax---

----Depreciation---Roads laid within factory premises---Are necessary adjuncts to factory building anti are to be treated as building for purposes of depreciation---Indian Income Tax Act, 1961, S.32.

(b) Income-tax---

----Depreciation---Plant and machinery---Laboratory equipment used to test chemicals, acids and gases--Chemicals so tested have 'acidic and alkali content and have corrosive effect---Machinery and plant came into contact with corrosive chemicals---Such machinery and plant entitled to depreciation at 15 per cent. and not at 10 per cent.---Indian Income Tax Act, 1961, S.32.

(c) Income-tax---

----Depreciation---Development rebate---Horticulture expenditure---Amount spent to fix sand to earth to make site habitable and to prevent sand storms enabling construction of factory and erection of plants---Earth to be transported from other places---Was part of construction and erection of building during pre-commencement period---Expenditure incurred is part of construction cost of factory building and residential quarters of employees-- Expenditure to be capitalised for allowing depreciation and development rebate---Indian Income Tax Act, 1961, Ss.32 & 33.

(d) Income-tax---

----Depreciation---Development rebate---"Plant", meaning of-Books and periodicals---Are plant having lasting value connected with construction programme---Expenditure on books and periodicals to be capitalised for allowing depreciation and development rebate---Indian Income Tax Act, 1961, Ss.32 & 33.

(e) Income-tax---

----Depreciation---Development rebate---Miscellaneous expenses allocated to technical matters---Is expenditure incurred in connection with construction activities---Expenditure to be capitalised for allowing depreciation and development rebate---Indian Income Tax Act, 1961, Ss. 32 & 33.

(f) Income-tax---

----Development rebate---Continuation of development rebate in certain cases by S.16 of Finance Act, 1974---Contract for purchase of machinery should have been entered into before 1-12-1973---Machinery or plant should have been installed after 31-5-1974 but before 1-6-1975---Assessee should not only satisfy conditions prescribed in S.16 of Finance Act, 1974, but should also fulfil requirements of S.33 to claim benefit of rebate--Circular of C.B.D.T. does not override conditions stipulated in S.33---User of machinery for purpose of business is a sine qua non for grant of rebate notwithstanding provisions of S.16 of Finance Act, 1974, extending benefit of development rebate---No finding recorded by Tribunal whether assessee had put machinery to use either in year of installation or in the immediately succeeding previous year---Matter remanded---Indian Income Tax Act, 1961, S.33---Indian Finance Act, 1974, S.16.

Roads laid within factory premises are necessary adjuncts to the factory building and are to be treated as building for purposes of depreciation under section 32 of the Income Tax Act, 1961.

CIT v. Southern Petro Chemical Industries Corporation Ltd. (No. 2) (1998) 233 ITR 400 (Mad.) fol.

The laboratory equipment used to test chemicals, acids and gases affect the equipment and the chemicals so tested have acidic and alkali content which have a corrosive effect. The machinery and plant came into contact with corrosive chemicals and such machinery and plant is entitled to 15 per cent. depreciation and not at 10 per cent under section 32 of the Income Tax Act, 1961.

CIT v: Southern Petro Chemical Industries Corporation Ltd. (No. 2) (1998) 233 ITR 400 (Mad.) fol.

The assessee claimed capitalisation of an amount of Rs. 11,73,280 being horticulture expenditure on the ground that the expenditure was incurred to fix sand to the earth to make the site habitable and to prevent sand storms enabling construction of factory and erection of plants. The Tribunal found that the fixing of sand to the earth had to be done by transporting earth from other places and that it was part of the construction and erection of the building during the pre-commencement period. On a reference:

Held, that the expenditure incurred was part of the construction. The assessee had incurred the expenditure for preparing the land for the construction of the factory building and residential quarters of the employee-, The expenditure incurred on horticulture was part of the construction cost of the building and had to be capitalised for purposes of allowing depreciation and development under sections 32 and 33 of the Income Tax Act, 1961

CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 (SC) fol.

Books and periodicals are plant having a lasting value connected with the construction programme and the assessee is entitled to depreciation under section 32 of the Act on books and periodicals.

Scientific Engineering House (P.) Ltd. v. CIT (1986) 157 ITR 86 (SC) fol.

The miscellaneous expenses allocated to technical matters was expenditure incurred in connection with the construction activities and such expenditure had to be capitalised for the purpose of allowing depreciation and development rebate.

The assessee had entered into a contract for purchase of machinery before December 1, 1973. The assessee had installed the plant before May 31, 1975. The Income-tax Officer disallowed the claim of the assessee on the ground that the machinery was not brought into use in the assessment year in question or in the immediately succeeding assessment year 1977-78. The first appellate authority relied upon a circular issued by the Board and held that the machinery had been installed before June 1, 1975, and, therefore, the assessee was entitled to development rebate and it was not necessary that the assessee should also bring the machinery into use for its business purposes. The Tribunal held that the development rebate allowance can be claimed and allowed either in the year of installation or in the year in which the plant was first put to use in the immediately succeeding year. The Tribunal also held that there was no condition that the machinery should also have been used in the year of grant of allowance under section 33(1)(a) of the Act. On a reference:

Held. (i) that section 16 of the Finance Act, 1974, continued the benefit of grant of development rebate in respect of certain cases. The conditions for the applicability of section 16(c) of the Finance Act, 1974, are that the assessee should have entered into contract for the purchase of machinery before December 1, 1973, and such machinery or plant should have been "installed" by the assessee after May 31, 1974, but before June 1, 1975, in which case the notification withdrawing the development rebate would not apply. Section 16, inter alia, also provides that the provisions of the Income-tax Act shall in effect apply in relation to ship, machinery or plant subject to the condition specified in clause (c). The assessee had satisfied the. condition mentioned in clause (c) that in order to claim the benefit of development rebate the assessee should. not only satisfy the conditions prescribed in section 16 of the Finance Act, 1974, but should also fulfil the requirements of section 33 of the Income-tax Act and if it fails to satisfy any one of the conditions contained in any of the provisions, the claim of the assessee would fail. Both the provisions must be read conjointly and harmoniously and section 16 of the Finance Act, 1974, is not envisaged to override the provisions of section 33 of the Income Tax Act, 1961. Therefore, the view of the Tribunal that the user is not a prerequisite condition for the grant of development rebate was not legally sustainable and its view, that the condition regarding user was taken away by the provisions contained in section 16 of the Finance Act, 1974, was not sustainable in law.

(ii) That the circular of the CBDT does not have any overriding effect over the statutory conditions stipulated under section 33 of the Act, but the circular reiterates that the development rebate would continue to be allowed in respect of machinery or plant where the conditions specified in clauses (a) to (c) of section 16 of the Finance Act, 1974, are satisfied and the conditions contained in the Income-tax Act are also fulfilled. The circular also has not dispensed with the requirement of the user of the machinery or plant in the assessment year for the grant of development rebate.

C. V. Rajan for the Commissioner.

P. P. S. Janarthana Raja for the Assessee

JUDGMENT

N. V. BALASUBRAMANIAN, J.---In this tax case reference we are concerned with the assessment year 1976-77 and the questions of law referred for our consideration read as under:

"(1)Whether the Tribunal is correct in law and is justified in holding that the assessee is entitled to depreciation on roads to the extent of Rs.1,86,260?

(2) Whether, on the facts and in the Circumstances of the case, the Tribunal is justified in law in allowing depreciation at the rate of 15 per cent. as against 10 per cent. allowed in the assessment in respect of laboratory and other equipment?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that expenses on horticulture, books and, periodicals and miscellaneous expenses allocated to technical matters should be allowed to be capitalised for the purpose of allowing depreciation and development rebate?

(4) Whether the tribunal is correct in law in holding that the assessee would be entitled to development rebate in respect of machinery which were installed before June 1, 1975?"

Before considering the questions of law on the merits, it is necessary to mention that we heard another tax case reference arising out of the assessment of income of the same assessee for the assessment year 1978-79 and some of the questions in both the tax cases are common.

The first question relates to the grant. of depreciation on roads and' we have in the assessee's own case in T.C. No. 1093 of 1985 (CIT v. Southern Petrochemical Industries Corporation Ltd. (No.2) (1998) 233 ITR 400, by judgment of even date held that the assessee was entitled to depreciation on roads. Following -the said decision, we answer the first question of law in the affirmative and against the Revenue.

The second question deals with the claim of the assessee for depreciation at the rate of 15 per cent. on certain equipment of the assessee which came into contact with some corrosive chemicals. We have held in the same judgment that the finding of the Appellate Tribunal that the equipment came into contact with corrosive elements is a finding of fact and the assessee was eligible for 15 per cent. depreciation and, therefore, the second question is required to be and is answered in the affirmative and against the Revenue.

The third question relates to the claim for capitalisation of certain pre-commencement expenses, viz., (i) auditor's remuneration, (ii) auditor's travelling allowance, (iii) horticulture, (iv) books and periodicals and subscriptions to association, and (v) miscellaneous expenses allocated to technical matters. With reference to the first two items, viz., auditor's remuneration and auditor's travelling allowance, the expenditure was not capitalised and the findings regarding these two items have become final against the assessee. Similarly, the subscription to association was held to be not liable to be capitalised and the finding against the assessee has also become final. The issue in controversy is with reference to capitalisation of the expenses on horticulture and books and periodicals and also miscellaneous expenses of Rs.6,88,081. In so far as horticulture expenditure is concerned, the assessee claimed capitalisation of a sum of Rs.11,73,280 on the ground that the assessee spent the money with a view to fix sand to the earth to make the site habitable and to prevent sand storms enabling construction of factory and erection of plants. The Tribunal found that the fixing of sand to the earth had to be done by transporting earth from other places. The Tribunal found that it was a part of construction and erection of the building during the pre-commencement period. We hold that the Tribunal's view that the expenditure is a part of construction is correct. The contention of learned counsel for the Revenue was that the depreciation is allowable only on the cost of the building and since the expenditure was incurred on the land, the expenditure cannot be regarded as a part of the cost of the building. We are of the opinion that it is similar to the expenditure incurred on laying roads. The Supreme Court in the case of CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149, held that the factory roads could be regarded as a part of the building. The assessee had incurred the expenditure for preparing the land for the construction of the factory, building and residential quarters of the employees of the assessee. We are of the view that the Tribunal was correct in holding that the sum of Rs.11,73,280 spent on horticulture should be regarded as a part of construction cost of the building.

In so far as the expenditure on books and periodicals is concerned, the books and periodicals are treated as plant having a lasting value connected with the construction programme. The Supreme Court in the case of Scientific Engineering House (P.) Ltd. v. CIT (1986) 157 ITR 86 held that the expression "plant" has a wider meaning and books, periodicals and technical know-how documentation should be regarded as plant. Therefore, the Tribunal was right in holding that the assessee is entitled to depreciation on books and periodicals in a sum of Rs.4,03,762.

In so far as other miscellaneous expenses of Rs.6,88,081 are concerned, the Tribunal, on the basis. of materials, has found that the expenses were incurred in connection with construction activities and they were liable to be capitalised. In view of that finding of fact, we are of the opinion that the Tribunal was right in holding that the three items in question, viz., horticulture, books and periodicals and miscellaneous expenses, should be allowed to. be capitalised for the purpose. of depreciation and development rebate.

The fourth question raises the issue of the eligibility of the claim for development rebate. It relates to the claim of the assessee for development rebate .of a sum of Rs.2,81,05,077. The facts are not very clear and according to the Tribunal, the assessee has installed and erected plant before May 31, 1975. It was also found that the assessee had entered into a contract for the purchase of machineries before December 1, 1973, and the Tribunal accepted the evidence produced. The Income-tax Officer disallowed the claim of the assessee on the ground that the machineries were not brought into use in the assessment year in question or in the immediately succeeding assessment year 1977-78. The first appellate authority relied upon a circular issued by the Board and held that the machineries had been installed before June 1, 1975, and, therefore, the assessee was entitled to development rebate and it is not necessary that the assessee should also bring the machineries into use for its business purpose. The Appellate Tribunal held that the development rebate allowance can be claimed and allowed. either in the year of installation or in the year in which the plant was first put to use in the immediately succeeding year. The Tribunal, therefore, held that it can be allowed either in the year of installation or in the succeeding year in which the machinery was put into use. The Tribunal also held that there is no condition that the machinery should have also been used in the year of grant of allowance under section 33(1)(a) of the Act.

The first appellate authority relied upon the provisions of section 16 of the Finance Act, 1974. Before referring to section 16 of the Finance Act, 1974, it is necessary to notice that the development rebate granted under section 33 of the Act was withdrawn by a Notification No. S. O. 2167, dated May 28, 1971 (see (1971) 81 ITR (St.) 45), and under the said notification, the grant of development rebate was discontinued in respect of ship acquired or machinery or plant installed after May 31, 1974. Section 16 of the Finance Act, 1974, continued the benefit of grant of development rebate in respect of certain cases and we are concerned with section 16(c) of the Finance Act, 1974. We have seen that one of the essential conditions for the applicability of section 16(c) is that the assessee should furnish before the Income-tax Officer the particulars that the assessee had entered into contract for the purchase of machineries before 1st day of December, 1973, and if such condition is satisfied, section 16 of the Finance Act, 1974, provides that in case any machinery or plant was "installed" by the assessee after May 31, 1974, but before June 1, 1975, the notification withdrawing the development rebate would not apply. Section 16, inter alia, also provides that the provisions of the Income-tax Act, shall in effect apply in relation to ship, machinery or plant subject to the condition specified in clause (c). We have seen that the assessee had satisfied the condition mentioned in clause (c), viz., the assessee should have installed the machinery before June 1, 1975, and had furnished the evidence that the assessee had entered into a contract for the purchase of the machinery before December 1, 1973.

The only question that remains is whether the assessee should also put the machinery to use to claim the benefit of development rebate. The development rebate is allowed as a deductible item in the computation of business income in the year in which the machinery or plant was installed provided the asset was also used for the purpose of business in the year of installation. If the asset had been put to use in the immediately succeeding year, the assessee would be entitled to development rebate in the immediately succeeding year as provided in section 33(1) of the Act. The essential and prerequisite conditions for the grant of development rebate are that there should be an installation of the machinery and user of the same for the purpose of business and unless the said twin conditions are satisfied, the assessee is not eligible to claim development rebate and the allowance will be granted only on satisfaction of the two conditions either in the year of installation of the machinery or in the immediately succeeding previous year. It is not enough for the assessee to claim the development rebate on the ground that the machinery or plant was installed but the condition regarding the user for the purpose of its business should also be fulfilled. The view of the Appellate Tribunal that because of the provisions of section 16 of the Finance Act, the condition regarding the user need not be complied with in the year of grant of development rebate is not borne out on a fair reading of section 16 of the Finance Act. The Provisions. of section 16 of the Finance Act, 1974, on the other hand, indicate that the provisions of the Income-tax Act shall have effect in relation to the ship, machinery or plant and under section 33(1)(a) of the Act, the machinery should have been installed and also put to use either in the year of installation or in the year immediately succeeding the previous year. Therefore, section 16 of the Finance Act, 1974, in our view, extending the benefit of discontinued development rebate cannot be construed to hold that it has dispensed with the condition regarding user of the machinery for the purpose of grant of development rebate. We are of the view that the condition regarding the user of the machinery is re-imposed by the provisions contained, in section 16 of the Finance Act, 1974, which lays down that 'the provisions of the Income-tax Act, shall have effect in relation to the machinery or plant. In other words, in order to claim the benefit of development rebate, the, assessee should not only satisfy the conditions prescribed in section 16 of the Finance Act, 1974, but should also fulfil the requirements of section 33 of the Income-tax Act and if it fails to satisfy any one of. the conditions contained-in any of the provisions, the claim of the assessee should fail. In our view, both the provisions must be read conjointly and harmoniously and section 16 of the Finance Act, 1974, is not envisaged to override the provisions of section 33 of the Income Tax Act, 1961. Therefore, the view of the Appellate Tribunal that the user is not a prerequisite condition for the grant of development rebate is not legally sustainable and its view that the condition regarding user is taken away by the provisions contained in section 16 of the Finance Act, 1974, is not sustainable in law.

The Appellate Tribunal relied upon a circular of the Board which reads as under:

"By the Finance Act, 1974 (20 of 1974), in section 16 thereof, an independent provision was made so as to continue the development rebate for a specified period in the following cases:

(a) in the case of a ship acquired after 31st May, 1974, but before 1st June, 1975, if the taxpayer furnishes evidence to the satisfaction of the Assessing Officer that he had entered into a contract for the purpose of such ships with the builder or owner thereof before 1st December, 1973;

(b) in the case of machinery or plant (other than a coal-fired boiler, furnace, kiln, oven or the like, or machinery or plant for converting any boiler, furnace, kiln, oven and the like from oil to coal firing) installed by the taxpayer after 31st March, 1974, but before 1st June, 1975, if the taxpayer furnishes evidence to the satisfaction of the Assessing Officer that (a) he had purchased such machinery or plant before 1st December, 1973, or (b) had entered into a contract for the purchase of such machinery or plant, with the manufacturer or owner of or a dealer in, such machinery or plant, before that date, or (c) had, where such machinery or plant has been manufactured in an undertaking owned by him taken steps for the manufacture of such machinery or plant before that date;

(c) in the case of machinery or plant, being a coal-fired boiler, furnace, kiln, oven or the like or any machinery or plant for converting any boiler, furnace, kiln, oven or the like from oil firing to coal-firing, installed by the taxpayer after 31st May, 1974, but before 1st June, 1977. The effect of this independent provision was that notwithstanding the withdrawal of development rebate in respect of ships acquired or machinery or plant installed after 31st May, 1974, development rebate was to continue to be allowed in respect of ships and machinery and plants where the conditions specified above and those in the Income-tax Act, had been fulfilled."

We are of the opinion that the circular of the Board does not have any overriding effect over the statutory conditions stipulated under section 33 of the Act, but the circular, in our view, reiterates that the development rebate would continue to be allowed in respect of machinery or plant where the conditions specified in clauses (a) to (c) of section 16 of the Finance Act, 1974, are satisfied and the conditions contained in the Income-tax Act are also fulfilled. The circular also has not dispensed with the requirement of the user of the machinery or plant in the assessment year for the grant of development rebate.

Since the first appellate authority as well as the Tribunal has not recorded any finding whether the assessee had put the machinery to use either in the year of installation or in the immediately succeeding previous year, the Tribunal, is directed to determine the question whether the assessee had put the machinery to use for the purpose of business either. in the year of installation or in the immediately succeeding year. If the assessee had not put the machinery to use in the year of installation or in the immediately succeeding year, the assessee is ineligible to claim the development rebate. Since the user of the machinery for the purpose of business is a sine qua non for the grant of development rebate, notwithstanding the provisions of section 16 of the Finance Act, 1974, extending the benefit of development rebate, the Tribunal is directed to consider and give a finding regarding the user of the machinery in question. Accordingly, we answer the , fourth question in the negative and in favour of the Revenue, but the answer is subject to the direction earlier given regarding the user of the machinery.

However, in the circumstances of the case, there will be no order as to costs.

M.B.A./3349/FC Order accordingly.