M/S
South India Viscose Ltd. Vs. Commissioner of Income Tax [1997] INSC 580 (9 July
1997)
S.C.
AGRAWAL, D.P. WADHWA
ACT:
HEADNOTE:
S.C.AARWAL.
O.
These
appeals by the assessee are directed against the judgment of the Madras High
Court dated September 23, 1981 in T.C. Nos. 437 to 439 of 1977 (reported in 135
ITR 206).
They
involve the question regarding computation of depreciation by way of Extra
Shift Allowance under Rule 5 of the Income Tax Rules. 1962 (hereinafter
referred to a 'the Rules') read with Appendix I to the Rules. The appeals
relate to assessment year 1971-72. Four questins were referred by the Income
Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') to the High
Court for opinion. Questions Nos. 1, 2 and 3 were aswered in favour of the
appellant-assessee but question No. 4 was answered against the assessee. The
appeals are confined to question No. 4 which was as under :
"Whether,
on the facts and in the circumstances of the case, the assessee is entitled to
extra shift allowance in respect of the machinery and spares which w e re added
during the relevant previous year, on the basis of double and triple shifts
worked by the entire concern?" The assessee is a public limited company
carrying on business in manufacture and sale of rayon yarn and wood pulp. The assessee
claimed multiple shift allowance during the relevant asseessment year on the
basis of the number ofdays on which the concern as a whole worked extra shift
and not with reference to the number of days on which each machine had worked.
The Income Tax Officer retricted the allowance to the number of days on which
each machinery had worked. On appeal, the Appeallate Assistant Commissioner
accepted the claim of the assessee and allowed extra shift allowance on the
basis of the number of days for which the concern as a whole worked double and
triple shifts. The Tribunal agreed with the said view of the Appellate
Assistant Commissioner. By the impugned judgment the High Court has, however,
held that in view of the provisions contained in Rule 5 of the Rules read with
Appendix I to the Rules the Income Tax Officer is required to apply his mind to
examine which machinery owned by the assessee has been used by him in extra
shift and that so long as the particular machinery has worked in extra shifts,
in the relevant years, for the specified period, it would be eligible for te
extra shift allowance on the basis of the number of days provided the letters
N.E.S.A. (No Extra Shift Allowance) do not apply to it. In taking he said view
the High Court has placed reliance on the decisions of the Calcutta High Court
in Ganesh Sugar Mills Ltd. vs.
Commissioner
of Income Tax, [1969] 76 395 (Cal), and Anantpur Textiles Ltd. vs. Commissioner
of Income Tax, [1979] 116 ITR 851 (Cal), as well as the decisions of the Allahabad
High Court in Raza Sugar Co. vs. Commissioner of Income Tax, [1970] 76 ITR 541
(All) and Kundan Sugar Mills vs. Commissioner of Income Tax. [1977] 106 ITR 704
(All).
Shri
Sunil Dogra, the learned counsel appearing for the assessee, has assailed the
interpretation placed by the High Court on Rule 5 and the provisions contained
in Appendix I to the Rules relating to the extra shift allowance and has urged
that the Tribunal had rightly construed the said provisions to mean that the
extra shift allowance has to be allowed in respect of the entire plant and
machinery if the concern has worked double shift or triple shift. Shri Dogra hs
also relied upon the circulars/instructions issued by the Central Board of
Direct Taxes (hereinafter referred to as 'the Board') directing that when a
concern has worked double shift or triple shift the 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
machinery our plant actually worked double or triple shift during the relevant
previous year. The submission is that the said circulars/instructions were
binding and that the High Court was in error in not taking into consideration the
same.
Dr. Gauri
Shankar, the learned senior counsel appearing for the Revenue, has, on the
other hand, submitted that extra shift allowance is in the nature of additional
depreciation that is granted in view of the greater intensity of use of the
plant and machinery and that the grant of the said allowance is governed by
Section 32 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act')
and Rule 5 of the Rules which lay down that the depreciation is permissible
only in respect of the individual item of the machinery and not for the
industrial concern as such. The learned counsel has also placed reliance on the
decisions of the High Court referred to in the impugned judgment and has
submitted that the circulars of the Board are only clarificatory in nature and
are not binding on the High Court or on this Court and that the matter has to
be examined on the basis of the relevant statutory provisions.
Section
32 of the Act makes provision for deductions that can be allowed in respect of
depreciation of buildings, machinery, plant or furniture owned by the assessee
and used for the purposes of the business or profession. In clause (ii) of
sub-section (1) of Section 32, as it stood at the relevant time, it was
provided that in the case of buildings, machinery, plant or furniture
depreciation was allowable at such percentage on the written down value thereof
as may in case of class of cases be prescribed. The mode of computation of the
depreciation that is allowable is prescribed in the Rules. Rule 5(1) of the
Rules, as it stood at the relevant time, provided as under :
"Depreciation,
- (1) Subject to the provisions of sub-rules (2) and (3), the allowance under
clause (i) or clause (ii) of sub-section (1) of Section 32 in respect of
depreciation of buildings, machinery, plant or furniture or the allowance under
clause (i) of sub-section (1A) of Section 32 in respect of depreciation of
structure or work referred to in that sub-section shall be calculated at the
percentages specified in the second column of the Table in Part I of Appendix
to these rules on the actual cost or, as the case may be the written down value
of such of the assets aforesaid as are used for the purposes of the business of
profession of the assessee at any time during the previous year :
Provided
that in a case where the assessee has been allowed to vary the meaning of the
expression "previous year" in respect of any business or profession
under sub- section (4) of section 3 and, thereby, his income from such the
business or profession for a period of thirteen months or more is included in
his total income of any previous year, the allowance referred to in this
sub-rule, calculated in the manner stated hereinabove, shall be increased by
multiplying it by a fraction ofwhich the numerator in the number of complete
months in such previous year and the denominator is twelve." Part I of
Appendix I to the Rules contained the table of rates at which depreciation was
admissible on various classes of assets including machinery and plant. Many
items of machinery and plant had the abbreviation 'N.E.S.A.' inscribed against
them. In respect of extra shift depreciation allowance the following provision
was contained in Part I of Appendix I to the Rules :
"Extra
shift depreciation allowance:
An
extra allowance up to a maximum of an amount equal to one-half of the normal
allowance shall be allowed where a concern claims such allowance on account of
double shift working and establishes that it has worked double shift. An extra allowanc
up to a maximum of an amount equal the normal allowance, instead of one-half of
the normal allowance, shall be allowed where a concern claims such allowance on
account of triple shift working and establishes that it has worked triple
shift.
The
calculations of the extra allowance for double shift working and for triple
shift working shall be made separately in the proportion which the number of
days for which the concern worked double shift or triple shift, as the case may
be, bears to the normal number of working days during the previous year. For
this purpose, the normal number of working days the previous year shall be
deemed to be - (a) in the case of a seasonal factory or concern the number of
days on which the factory or concern actually worked during the previus year or
180 days, whichever is greater;
(b) in
any other case, the number of days on which the factory or concern actually
worked during the previous year or 240 days, whichever is greater.
Illustration
For example, where a non-seasonal concern worked 270 days during the previous
year out of which it worked triple shift on 135 days and double shift on
another 90 days, the extra depreciation allowance for triple shift working will
be 135/270, i.e., on-half, of the normal allowance, and that for double shift
working 90/270, i.e., one-third, of one-half, of the normal allowance.
The
extra shift allowance shall not be allowed in respect of any item of machinery
of plant which has been specifically excepted by inscription of the letters
"N.E.S.A." (meaning "No extra shift allowance") against it
in sub-item (ii) above and also in respect of the following items of machinery
and plant to which the general rate of depreciation of 10 per cent applies -
(Omitted)" The value of capital assets employed in production, namely,
plant and machinery, office equipment and buildings gradually depreciate
through wear and tear and obsolescence.
The
depreciation allowance allowable under Section 32(1) of the Act is intended to
enable the assessee to recover the cost of a capital asset used in business
over the period of its useful life under normal conditions. When a concern or
factory works double shift or triple shift there is greater wear and tear of
the machinery and plant. Additional depreciation allowance by way of extra
shift depreciation allowance is intended to compensate for the extra wear and
tear on account of the working of the concern or factor in double shift or
triple shift. This extra shift depreciation allowance does not differ in nature
from the normal depreciation allowance.
A persual
of Rule 591) sows that normal depreciation allowance under sction 32 in respect
of depreciation of buildings, machinery, plant or furniture has to be
calculated at the percentages specified in the second column of Part I of
Appendix I to the Rules on the actual cost or, as the case may be the written
down value of such of the assets aforesaid as are used for the purposes of the
business of profession of the assessee at any time during the previous year.
Under Part I of Appendix I to the Rules extra shift depreciation allance, up to
maximum of an amount equal to one-half of the normal allowance, was allowable
where as concern claimed such allowance on account of double shift working and
was able to establish that it as worked double shift. In cases where concern
claimed such allowance on account of triple shift working and was able to
establish that it had workd triple shift extra shift depreciation allowance up
to a maximum of an amount equal to normal allowance was allowable. The extra
allowance had to be calculated separetely in the proportion which the number of
days for which the concern worked double shift of triple shift, as the case may
be, was bearing to the normal number of working days during the previous year.
The normal number of working days during the previous year in the case of a
seasonal factory or concern was deemed to be the number of days on which the
factory or concern actually worked during the previous year or 180 days. whichever
as greater and in any other case, the number of days on which the factory or
concern actually worked during the previous year or 240 days, whichever was
greater. The extra shift allowance was not allowable in respect of any item of
machinery or plan which has been specifically excepted by inscription of the latters
"N.E.S.A." against it in sub-item (ii) of the said Appendix. The said
allowance was also not allowable on certain specified items of machinery and
plant to which the general rate of depreciation of 10% was applicable. It would
thus appear that for the purpose of calculating extra shift allowance allowable
under Part I of Appendix I to the Rules what was required to be determined was
the actual number of days on which the concern had worked double shift or
triple shift, as the case may be. For the purpose of calculating the extra
shift depreciation allowance under Part I of Appendix I to the Rules it was not
necessary to determine the actual number of days on which the particular item
of machinery or plant, on which such allowance was claimed, had been used in
double shift or triple during the relevant previous year.
Tribunal
has laid emphasis on the word "concern" in the aforementioned
provisions in Part I of Appendix I to the Rules relating to extra shift
depreciation allowance and has observed that "there is no warrant to
interpret the expression 'the concern worked' to mean 'the machinery
worked". While reversing the said view of the Tribunal, the High Court has
observed that the word "concern" has been used in the said passage to
show that the Income Tax Officer is obliged to allow extra shift depreciation
allowance only if the assessee has made a claim therefor and that if the assessee
dd not choose to make such a claim the Income Tax Officer is not obliged to
give the allowance. In taking the said view the High Court has failed to take
note of the words "the number of days for which the concern worked double
shift or triple shift, as the case may be" in the following paragraph in
Appendix I indicating the mode of calculation of the extra allowance for double
shift working or triple shift working as well as the words "the number of
days on which the factory or concern actually worked during the previous
year" in clauses (a) and (b) in the said paragraph which clearly indicate
that for the purpose of calculating the extra shift depreciation allowance
allowable under Part I of Appendix I to the Rules the number of days on which
the concern as a whole actually worked double shift and triple shift has to be
determined and it is not necessary to see whether any particular item of
machinery or plant had actually been used in double shift or triple shift on
the days on which the concern had worked in double shift or triple shift. All
that was excluded from extra shift It is no doubt true that under Section 32(1)
of the Act depreciation is allowable on buildings, machinery, plant or
furniture owned by the assessee and used for the purpose of the business or
profession and in Rule 5 it was laid down that the depreciation shall becalculated
on the written down value of the assets as are used for the purposes of
business or profession of the assessee at any time during the previous year.
That only means that depreciation allowance shall be allowable on the machinery
or plant that is used for the purposes of business or profession of the assessee
at any time during the relevant previous year. The said provisions in Section
31(1) and Rule 5 do not require that for the purpose of calculating the normal
depreciation allowance it is necessary to determine the exact period during
which a particular item of machinery or plant had been actually used during the
previous year. So also for the purpose of calculating the extra shift
depreciation allowance, which does not differ in nature from the normal
depreciation allowance, it cannot be said that it is necessary to determine the
exact period during which a particular item of machinery of plant had been
actually used in the double/triple shift during the relevant previous year. The
High Court, in our opinion, was in error in construing Rule 5 and Part I of
Appendix I to the Rules to hold that the Income Tax Officer is required to
apply his mind to examine which machinery, owned by the assessee, had been used
in the extra shift.
For
accepting the claim of the assessee the depreciation allowance were the items
of machinery of plant against which the letters N.E.S.A. were inscribed in sub-
item (ii) of the Table in Part I of Appendix to the Rules and certain specified
items of machinery or plant to which general rate of depreciation of 10% was
applicable.
The
High Court has observed that if the assessee's contention was accepted, then
even if a small item of machinery in a corner of a huge factory has worked
extra shift, the entire factory would be eligible for the extra shift allowance
in respect of all items of machinery, whether they actually worked or not.
These observations fail to give effect to the provisions governing extra shift
depreciation allowance. The said provisions postulate that such allowance would
be allowable when the concern works double shift or triple shift. It means that
the concern as a whole should have worked extra shift. It cannot be said that
when a small item of machinery in a corner of a huge factory has worked extra
shift, the concern as such has worked extra shift.
On a
proper construction of the provisions cntained in Part I to Appendix I to the
Rules relating to extra shift depreciation allowance it must be held that for
the purpose of claiming the said allowance the assessee must establish that the
concern had worked double shift or triple shift and, if he succeeds in
establishing that the concern had actually worked double shift or triple shift
on particular days in the previous year. extra shift depreciation allowance
would be allowable in accordance with formula laid down in the said provision
on the various items of machinery of plant except the items against which the
letters N.E.S.A.
are
inscribed in sub-item (ii) of Table in Part I of Appendix I as well as the
items of machinery and plant expressly specified to which the general rate of
depreciation of 10% was applicable. Except these excluded items the extra shift
depreciation allowance would be allowable on all items of machinery and plant
on which normal depreciation in allowable and has been allowed.
We may
now briefly refer to the decisions of the High Courts of Allahabad and Calcutta on which reliance has been placed
in the impugned judgment of the High Court.
Ganesh
Sugar Mills Ltd. vs Commissioner of Income Tax, [supra] was a case of a
seasonal sugar factory which hadworked only during that period of the year when
sugarcane was available. A claim for maximum of 50% of the normal depreciation
by way of extra shift depreciation allowance was made under Rule 8 of the
Income Tax Rules, 1922 irrespective of the number of days on which the plant
and machinery had been worked extra shift. The said claim of the assessee was
rejected by the Calcutta High Court and it was held that in respect of seasonal
factories special provisions had been made in clause II of Rule 8 and extra
shift allowance could only be granted in accordance with the said provision.
Similarly in Raza Sugar Co, vs. Commissioner of Income Tax [supra] the Allahabad
High Court was dealing with the claim for 50% over the normal depreciation as
extra shift allowance in respect of a seasonal sugar factory under Rule 8 of
the 1922 Rules. Rejecting the said claim it was held that such allowance was to
be restricted to the extent laid down in the said rule as regards seasonal
factories.
In Kundan
Sugar Mills vs. Commissioner of Income Tax [supra] also the Allahabad High
Court was dealing with a seasonal sugar factory and the High Court has followed
its earlier decision in Raza Sugar Co. vs. Commissioner of Income Tax [supra].
These decisions relating to seasonal factories have, in our opinion, no bearing
on the question falling for consideration in the present case.
Anantpur
Textiles Ltd. vs. Commissioner of Income Tax [supra] was a case governed by
Rule 5 of the Rules read with Appendix I to Rules as they stood prior to
amendment extra shift allowance on the ground that the factory had worked
triple shift for 330 days during the previous year. The Income Tax Officer
found that some of the items of the machinery had not been used for the entire
period of the triple shift as those items of machinery wer installed on
different dates in the year. Calculating from the dates of installaton, the
Income Tax Officer arrived at the number of days each item of machinery was put
to use during the year of account and allowed proportionate extra shift
allowance.
The
said order of the Income Tacx Officer was upheld by the Income Tax appellate
Tribunal which held that when normal depreciation allowance is to be granted on
each item of machinery as per the number of days it had worked, the extra shift
allowance should also follow the same principle. The correctness of this view
was assailed by the assessee before the Calcutta High Court. It was urged that
normal depreciation was governed by Rule 5 and it was allowable on the basis of
the number of days the particular plant and had been used by the assessee in
its business during the previous year but the said provision had no application
to the case of extra shift allowance for which necessary provision was made in
Appendix I in Part I and that for qualifying for extra shift allowance the assessee
was only required to prove that the concern of the assessee had worked double
shift or triple shift and it was not the requirement of the relevant provision
that each item of machinery must have worked double shift or triple shift.
The
said contention of the assessee was negatived by the Calcutta High Court and in
that context it was said that the extra shift depreciation allowance is allowed
on each item of plant and machinery on the basis of days or working and that
depreciation allowance is not allowed to any concern irrespective of and
independent of the question of plant and machinery of the concern and their
working. In taking the said view the High Court laid emphasis on Explanation 2
in the provision governing extra shift allowance contained in Appendix I, as it
stood at that time, whereby it was declared that no extra allowance for double
or triple shift working shall be allowed in a case where the machinery or plant
has been used for a period of 30 days or less than 30 days during the previous
year. The High Court has said:
"Explanation
2 which provides that no extra allowance for triple shift working should be
allowed in a case where the machinery or plant has been used for a period of 30
days of less during the previous year also indicates that in computing the
extra allowance for triple shift working of the concern the item of machinery
and the number of days which the same had worked are to be taken into consideration."
[p.860] The High Court has also emphasised that under Rule 5 in the case of
computation of normal depreciation allowance the actual working of each plant
and machinery was material and depreciation allowance was to be computed on the
basis of the number of days each plant and machinery worked during the previous
year provided the plant or machinery was otherwise qualified to claim the
depreciation allowance.
The
provisions of Rule 5 relating to depreciation as well as the provisions
relating to extra shift depreciation allowance contained in Appendix I of the
Rules on which the said decision is based were amended and the present cae is
governed by the amended provisions. Under Rule 5, as amended, normal
depreciation allowance was allowable "on the actual cost or, as the case
may be, the written down value of such of the assets aforesaid as are used for
the purpose of business or profession of the assessee at any time during the
previous year" and it was not dependent on the number of days a particular
item of machinery or plant was used in the previous year. In the amended
provisions governing extra shift depreciation allowance in Appendix 1 tothe
Rules there was no provision similar to Explanation 2 that was contained
earlier. On the other hand, in the amended provision it was prescribed that for
the purpose of claculating extra shift allowance what has to be seen is the
number of days on which the concern had actually worked duble shift or triple
shift.
In
these circumstances, the decision in Anantpur Textiles Ltd. vs. Commissioner of
Income Tax [supra] cannot have application to the present case.
The
decisions of theHigh Courts of Calcutta and Allahabad, on which the reliance
was placed in the impugned judgment of the High Cour, thus, do not lend any
assistance to the interpretation placed by the High Court in the impugned
judgment on the provisions governing extra shift allowance contained in Part I
of Appendix I to the Rules.
We may
at this stage refer to the circulars/instructions issued by the Board. By their
letter dated September 28, 1970 the Board had laid down that the extra shift allownce
will be allowed in respect of the entire plant machinery used by a concern
which has worked extra shift without making any attempt to determine the number
of days on which each machinery or plant actually worked extra shift during the
relevant previous year. By Circular No. 109 dated March 20, 1973 the Board clarified the legal position regarding
depreciation allowance in respect of normal, double/triple shift working in
seasonal factories and other concerns. The said Circular contained separate
directions regarding calculating normal depreciation and extra shift allowance upto
assessment year 1969-70 and from assessment year 1970-71 onwards. As regards
extra shift allowance from assessment year 1970-71 onwards it was indicated
that the said allowance should be calculated separately for the period for whcih
the concern has actually worked double shift only and the period for which it
has worked triple shift, expressed in terms of the proportion which such period
bears to the normal number of working days during the previous year. In the
latter dated September
29, 1979 from the
Under Secretary to the Board to the Commissioner of Income Tax, Calcutta (Central) on the subject of
calculation of depreciation, extra shift allowance in respect of plant and
machinery, it was stated :
"I
am directed to refer to your letter No. A/21233/CT/6A/102/69-70 dated 1.11.1969
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 th entire plant and machinery used by a concern which has
worked extra shift without making any attempt to determine the number of days
on which each machinery of plant actually worked extra shift during the
relevant previous year." Subsequently the Board issued Instruction No.
1605 dated February 26, 1985 wherein, after referring to the decisions of the Allahabad
High Court in Kundan Sugar Mills vs. Commissioner of Income Tax [supra] and the
Calcutta High Court in Anantpur Textiles Ltd. vs. Commissioner of Income Tax
[supra] as well as the impugned judgment it has been stated :
"The
instructions issued earlier has been considered again by the Board. In exercise
of the powers conferred by Sec. 119(1) of the Income Tax Act, 1961, the Central
Board of Direct Taxes, being of the opinion, that it is expedient for the
proper administration of these provisions directs that the grant of extra shift
allowance for plant and machinery be calculated with reference to the working
of a factory situated at a place and not with reference to the number of days
each machinery or plant has worked. Where a concern has more than one factory,
the extra shift allowance will be regulated for each factory in the above
manner.
As the
determination of the number of days for each machinery of plant has worked in a
factory is cumbersome, the existing instructions and the present clarification
are aimed at simplifying the calculation of extra shift allowance." Shri Dogra
has submitted that the circulars of the Board are binding on the authorities
and has placed reliance on the decision of this Court in K.P.Varghese vs.
Income Tax Officer, Ernakulam & Anr. [1981] 131 ITR 597, wherein it has
been laid down that apart from the fact that circulars of the Board are binding
on the tax department they are in the nature of contemporanea expositio
furnishing legitimate aid in the construction to the relevant provisions. Shri Dogra
has also placed reliance on the decision of this Court in Keshavji Ravi &
Co. vs. Commissioner of Income Tax, [1990] 183 ITR 1 [SC], wherein it has been
laid down that the circulars of the Board are statutory in character though the
Court did not consider it necessary to go into the question whether such
circulars are recognised legitimate aid to statutory construction. The learned
counsel has alsorelied on the decision of this Court in Commissioner of Income
Tax v. Vasudeo V. Dempo, 1993 Supp. (1) SCC 612, wherein it was held that
circulars issued by the Department are clearly meant to be accepted by the
authorities, Dr. Gauri Shankar has, on the other hand, submitted that the
circulars of the Board are not binding on the High Court or on this Court and
has placed reliance on the decision of this Court in Kerala Financial
Corporation vs. Commissioner of Income Tax. [1994] 210 ITR 129, wherein it has
been laid down that circulars or instructions on directions of the Board cannot
override the provisions of the question whether the circulars/instructions
issued by the Board referred to above can be taken into consideration for the
purpose of construing the provisions of Rule 5 and Appendix 1 to the Rules
because the circulars/instructions referred-to-above are in consonance with the
construction placed by us on the said provisions.
For
the reasons aforementioned it must be held that extra shift allowance had to be
calculated on the basis of number of days during which the concern had actually
worked double shift or triple shift and the said allowance was not required to
be calculated on the basis of number of days a particular item of machinery or
plant had worked double shift or triple shift, we are, therefore, unable to
uphold the impugned judgment of the High Court in this regard. In our opinion,
the Tribunal had rightly held that the extra shift allowance had to be
calculated on the basis of the number of days on which the concern worked as a
whole double shift or triple shift and not on the basis of each item of
machinery being used in double shift or triple shift.
Question
No.4 must, therefore, be answered in the affirmative i.e., in favour of the assessee
and against the Revenue.
In the
result, the appeals are allowed, the impugned judgment of the High Court insofar
as it relates to question No. 4 is set aside and the said question is answered
in the affirmative, i.e, in favour of the assessee and against the Revenue. No
order as to costs.
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