COMMISSIONER OF INCOME TAX-I. vs. GUJARAT STATE FERTILIZER CO. LTD.

O/TAXAP/369/2002 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 369 of 2002 With TAX APPEAL NO. 384 of 2000

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE KS JHAVERI

and HONOURABLE MR.JUSTICE K.J.THAKER

================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ COMMISSIONER OF INCOME TAX-I.....Appellant(s) Versus GUJARAT STATE FERTILIZER CO. LTD.....Opponent(s) ================================================================ Appearance: MR KM PARIKH, ADVOCATE for the Appellant(s) No. 1 MR JP SHAH, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Page 1 of 28

O/TAXAP/369/2002 JUDGMENT

Date : 28/11/2014

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. The Tax Appeal No.369 of 2002 u/s.260A of the Income­tax   Act,   1961   is   filed   against   the judgment and order of the Income Tax Appellate Tribunal passed in ITA Nos.487 to 489/Ahd/1994. 2. The Tax Appeal No.384 of 2000 u/s.260A of the Income­tax   Act,   1961   is   filed   against   the judgment and order of the Income Tax Appellate Tribunal passed in ITA No.623/Ahd/1991. 3. The facts of both the appeals are identical and therefore, both these appeals are taken up for hearing and decided together as they raised common question of law. 4. As the question of law as well as the facts of both these appeals are same, we discuss only facts of Tax Appeal No.384 of 2000.  The assessee company   is   manufacturing   chemical   fertilizers, chemicals including urea, ammonium sulphate, dye­ Page 2 of 28

O/TAXAP/369/2002 JUDGMENT ammonium phosphate, caprolactum.  During the year Coast DAP Project at Sikka has started production of DAP, which is a chemical fertilizer, various details have been furnished at the time of return and   subsequently   in   course   of   assessment proceedings.   On going through the details filed the   points   of   Rental   Income,   Guest   House Expenses,   Entertainment   Expenses,   Disallowance under   Section   40A(5),   provision   for   Gratuity, etc. points were discussed. The assessee company has   filed   its   return   of   income   on   29.06.1987, declaring   income   of   Rs.10,28,33,600/­,   whereas the Assessing Officer has assessed total income of   Rs.14,31,43,634/­.     The   assessee   has   filed appeal   before   CIT(A)   who   vide   order   dated 09.11.1990, partly allowed the appeal. 5. Feeling   aggrieved   by   the   said   order,   the assessee as well as Revenue both had filed ITA No.623/Ahd/1991

and

ITA

No.727/Ahd/1991 respectively   before   the   Income   Tax   Appellate Tribunal,   Ahmedabad.     Both   these   appeals   were Page 3 of 28

O/TAXAP/369/2002 JUDGMENT partly allowed by the ITAT vide its order dated 04.05.2000.   Hence, being aggrieved by the said order, the Revenue has filed present appeal. 6. We have heard learned counsel from all the sides.   Tax   Appeal   No.384   of   2000   was   admitted vide order dated 13.11.2000. While admitting the said Appeal, following substantial questions of law arose for the determination of this Hon'ble Court; “(A)  Whether, the Tribunal was justified in allowing   deduction   of   Rs.1,38,48,000/­   on account   of   obsolescence   charges   in   respect of certain non­moving imported spare parts, though   the   said   spare   parts   were   not completely proved to be a scrap and despite the fact that the claim did not fall under Sec.32, 37, and 28 of the Act? (B) Whether   the   Tribunal   was   justified   in allowing deduction of Rs.9,266/­ in respect of guest house despite the clear provision of

section

37(4)

the

Act?” (C) Whether

the

telephone

equipment installed in the factory, mobile equipments etc. were eligible for investment allowance u/s. 32A of the Act?” 7. The counsel for the respondent has contended that the issues raised in these appeals are now concluded by the decision of this Court as well Page 4 of 28

O/TAXAP/369/2002 JUDGMENT as the decision of Hon'ble Supreme Court.  So far as   question   No.1   is   concerned,   the   Hon'ble Supreme Court in case of Commissioner of Income­ tax v. Alfa Laval (India) Ltd., reported in 295 ITR   451,   has   held   that   (i)   there   was   no undervaluation of stock, where the assessee had valued its obsolete stock at 10 per cent and had sold it in the next year at less than that value and (ii) the amount written back in the profit and   loss   account   by   way   of   adjustment   on   a recomputation of the depreciation on the basis of a circular of the Company Law Board could not be reduced   from   the   profit   eligible   under   section 32AB, and (iii) interest from customers and sales tax   set   off   received   by   the   assessee,   being profits of the business under the head “Profits and gains of business or profession” could not be excluded   while   calculating   the   deduction   under section 80HHC.   An appeal was preferred to the Supreme Court by the Department against the said decision.   The said appeal was dismissed by the Supreme Court leaving the question of law open. Page 5 of 28

O/TAXAP/369/2002 JUDGMENT 8. So far as question No.2 is concerned, Hon'ble Supreme Court has dealt with similar question in the   case   of   Britannia   Industries   Ltd.   v. Commissioner   of   Income­Tax   and   another,   the relevant paragraphs read as under: “The   facts   involved   in   this   case   do   not attract the provisions of  Sections 30 to 36 of   the   Act,   but   have   been   referred   to   on account   of   reference   made   thereto   under Section 37 of the Act which is important for our purpose.     In order to appreciate the arguments   advanced   on   behalf   of   the appellant, the provisions of Section 37 as they   stood   during   the   relevant   assessment year are set out herein below :­ "37. General. (1)Any expenditure (not being expenditure   of   the   nature   described   in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and   exclusively   for   the   purposes   of   the business or profession shall be allowed in computing   the   income   chargeable   under   the head   "profits   and   gains   of   business   or profession". (2) Notwithstanding   anything   contained   in sub­section (1), no expenditure in the nature of entertainment expenditure shall be allowed   in   the   case   of   a   company,   which exceeds   the   aggregate   amount   computed   as hereunder:­ i) On   the   first Rs.10,00,000/­   of   the profits   and   gains   of   the business   (computed   before making any allowance under At the rate of 1 per cent   or   Rs.5,000/­ whichever is higher; Page 6 of 28

O/TAXAP/369/2002 JUDGMENT Section   33   [or   Section 33A]   or   in   respect   of entertainment expenditure) ii)

the

next Rs.40,00,000/­   of   the   profits and   gains   of   the   business (computed   in   the   manner aforesaid) At   the   rate   of   3   = per cent; iii)

the

next Rs.1,20,00,000/­

the profits   and   gains   of   the business   (computed   in   the manner aforesaid) At   the   rate   of   4   = per cent; iv)     On   the   balance   of   the profits   and   gains   of   the business   (computed   in   the manner aforesaid) Nil (2A)   Notwithstanding anything contained in sub­Section(1)   or   sub­Section   (2),   no allowance shall be made in respect of so much of   the   expenditure   in   the   nature   of entertainment   expenditure   incurred   by   any assessee   during   any   previous   year   which expires   after   the   30th   day   of   September, 1967, as is in excess of the aggregate amount computed as hereunder:­ i) On   the   first   Rs.10,00,000/­   of   the profits   and   gains   of   the   business   or profession   (computed   before   making   any allowance under [Section 32A or] Section 33 or Section 33A or in respect of entertainment expenditure)   At the rate of = per cent or →

Rs.5,000/­ whichever is higher; ii) On   the   next   Rs.40,00,000/­   of   the profits   and   gains   of   the   business   or profession (computed in the manner aforesaid) At the rate of < per cent; → iii) On the balance of profits and gains of the business or profession (computed in the manner aforesaid) At the rate of 1/8 per →

cent. Page 7 of 28

O/TAXAP/369/2002 JUDGMENT So, however, that the allowance shall in no case exceed Rs.50,000/­. Provided that where the previous year of any assessee falls partly before and partly after the   30th   day   of   September,   1967,   the allowance   in   respect   of   such   expenditure incurred during the previous year shall not exceed­ a) In the case of a company­ i) in respect of such expenditure incurred before the 1st day of October, 1967, the sum which bears to the aggregate amount computer at the rate or rates specified in sub­Section (2),   the   same   proportion   as   the   number   of days comprised in the period commencing on the 1st day of such previous year and ending with the 30th day of September, 1967, bears to the total number of days in the previous year; ii) in respect of such expenditure incurred after the 30th day of September, 1967, the sum   which   bears   to   the   aggregate   amount computed at the rate or rates specified in this sub­section, the same proportion as the number   of   days   comprised   in   the   period commencing on the 1st day of October, 1967, and ending with the last day of the previous year bears to the total number of days in the previous year; (b) in any other case­ i) in respect of such expenditure incurred before   the   1st   day   of   October,   1967,   the amount admissible under sub­section (1); ii) in respect of such expenditure incurred after the 30th day of September, 1967, the sum   which   bears   to   the   aggregate   amount computed at the rate or rates specified in this sub­section, the same proportion as the number   of   days   comprised   in   the   period Page 8 of 28

O/TAXAP/369/2002 JUDGMENT commencing on the 1st day of October, 1967, and ending with the last day of the previous year bears to the total number of days in the previous year. [Explanation 1] :  For the purposes of this `entertainment expenditure' includes­ i) the   amount   of   any   allowance   in   the nature of entertainment allowance paid by the assessee   to   any   employee   or   other   person after the 29th of February, 1968; ii) the   amount   of   any   expenditure   in   the nature   of   entertainment   expenditure   [not being   expenditure   incurred   out   of   an allowance of the nature referred to in Clause (i) incurred after the 29th day of February, 1968,   for   the   purposes   of   the   business   or profession of the assessee by any employee or other person). Explanation  2 :  For the removal of doubts, it is hereby declared that for the purposes of this sub­section and sub­section (2B), as it stood before the 1st day of April 1977, `entertainment

expenditure'

includes expenditure   on   provision   of   hospitality   of every   kind   by   the   assessee   to   any   person, whether   by   way   of   provision   of   food   or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom   or   usage   of   trade,   but   does   not include   expenditure   on   food   or   beverages provided by the assessee to his employees in office, factory or other place of their work. (2B)   Notwithstanding anything contained in sub­section (1), no allowance shall be made in   respect   of   expenditure   incurred   by   an assessee   on   advertisement   in   any   souvenir, brochure,   tract,   pamphlet   or   the   like published by a political party. (3) Notwithstanding   anything   contained   in sub­section (1), any expenditure incurred by Page 9 of 28

O/TAXAP/369/2002 JUDGMENT an assessee after the 31st of March, 1964, on advertisement   or   on   maintenance   of   any residential   accommodation   including   any accommodation in the nature of a guest house or   in   connection   with   traveling   by   an employee or any other person (including hotel expenses   or   allowances   paid   in   connection with such travelling) shall be allowed only to   the   extent,   and   subject   to   such conditions, if any, as may be prescribed. (3A)   Notwithstanding anything contained in sub­section (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the   items   specified   in   sub­section   (3B) exceeds one hundred thousand rupees, twenty per cent of such excess shall not be allowed as   deduction   in   computing   the   income chargeable under the head `profits and gains' of business or profession. (3B)     The   expenditure   referred   to   in   sub­ section (3A) is that incurred on i) advertisement,   publicity   and   sales promotion, or ii) running and maintenance of aircraft and motor cars; or iii) payments made to hotel. Explanation: for the purposes of sub­sections (3A) and (3B): a) the expenditure specified in clause (i) to clause (iii) of sub­section (3B) shall be aggregate amount of expenditure incurred by the assessee as reduced by so much of such expenditure as is not allowed under any other provisions of this Act; b) expenditure on advertisement, publicity and   sales   promotion   shall   not   include remuneration   paid   to   employees   of   the assessee engaged in one or more of the said activities; Page 10 of 28

O/TAXAP/369/2002 JUDGMENT c) Expenditure   on   running   and   maintenance of aircraft and motor cars shall include i) expenditure   incurred   on   chartering   any aircraft and expenditure on hire charges for engaging cars plied for hire; ii) conveyance   allowance   paid   to   employees and,   where   the   assessee   is   a   company, conveyance   allowance   paid   to   its   directors also. (3C)   Nothing contained in sub­section (3A) shall   apply   in   respect   of   expenditure incurred   by   an   assessee,   being   a   domestic company as defined in clause (2) of Section 80B, or a person (other than a company) who is   resident   in   India   in   respect   of expenditure incurred wholly and exclusively on # i) advertisement,   publicity   and   sales promotion   outside   India   in   respect   of   the goods,   services   or   facilities   which   the assessee deals in or provides in the course of his business; ii) running and maintenance of motor cars in any   branch,   office   or   agency   maintained outside India for the promotion of the sale outside   India   of   such   goods,   services   or facilities. (3D)  No disallowance under sub­section (3A) shall be made­ i) in the case of an assessee engaged in the   business   of   operation   of   aircraft,   in respect   of   expenditure   incurred   on   running and maintenance of such aircraft; ii) in the case of an assessee engaged in the business of running motor cars on hire, in respect of expenditure incurred in running and maintenance of such motor cars. (4) Notwithstanding   anything   contained   in Page 11 of 28

O/TAXAP/369/2002 JUDGMENT sub­section (i) or sub­section (3): i) no allowance shall be made in respect of any   expenditure   incurred   by   the   assessee after the 28th day of February, 1970, on the maintenance of any residential accommodation in   the   nature   of   a   guest   house   (such residential accommodation being hereafter in this   sub­section   referred   to   as   "guest house"); ii) in   relation   to   the   assessment   year commencing on the 1st day of April, 1971, or any subsequent assessment year, no allowance shall be made in respect of depreciation of any   building   used   as   a   guest   house   or depreciation of any assets in a guest house: Provided   that   the   aggregate of   the expenditure referred to in clause (i) and the amount   of   any   depreciation   referred   to   in clause (ii)   shall,   for   the   purposes   of   this   sub­ section, be reduced by the amount, if any, received from persons using guest house: Provided further that nothing in this sub­ section shall apply in relation to any guest­ house maintained as a holiday  home if such guest­house­ (a) is maintained by an assessee who was throughout   the   previous   year   employed   not less than one hundred whole­time employees in a business or profession carried on by him; and (b) is   intended   for   the   exclusive   use   of such employees while on leave. Explanation ­  For the purposes of this sub­ section: (i) residential accommodation in the nature of a guest­house shall include accommodation hired or reserved by the assessee in a hotel Page 12 of 28

O/TAXAP/369/2002 JUDGMENT for   the   period   exceeding   one   hundred   and eighty­two days during the previous year; and (ii) the   expenditure   incurred   on   the maintenance of a guest­house shall, in a case where the residential accommodation has been hired by the assessee, include also the rent paid in respect of such accommodation. (5)  For the removal of doubts, it is hereby declared that any accommodation, by whatever name called, maintained, hired, reserved or otherwise arranged by the assessee for the purpose of providing lodging or boarding and lodging to any person (including any employee or, where the assessee is a company, also any director   of,   or   the   holder   of   any   other office in, the company), on tour or visit to the   place   at   which   such   accommodation   is situated, is accommodation in the nature of a guest­house within the meaning of sub­section (4)." The aforesaid provision of the Income Tax Act has undergone several changes from time to time   and   some   of   the   portions,   which   are relevant   for   a   decision   in   this   case   have since been omitted.   However, it may be of interest   to   note   that   Sub­section   (1)   of Section 37 was brought on the statute book in 1964   and   underwent   several   other   changes thereafter.   Sub­section (3) of Section 37 was   inserted   by   the   Finance   Act   1964   with effect   from   1st   April,   1964   and   was, thereafter, omitted by the Finance Act, 1997 with   effect   from   1st   April,   1998. Similarly Sub­section (4) was inserted by the Finance Act 1970 with effect from 1st April, 1970   and   was,   thereafter,   omitted   by   the Finance Act, 1997 with effect from 1st April, 1998. As will be apparent from a reading of Sub­ section (1) of Section 37 of the Act, any expenditure   not   being   expenditure   of   the nature described in Sections 30 to 36, inter Page 13 of 28

O/TAXAP/369/2002 JUDGMENT alia,   allowed   and   expended   wholly   and exclusively for the purposes of business or profession, is to be allowed in computing the income chargeable under the heading "profits and gains of business or profession".     In other words, Section 37 is to be read to the exclusion   of   the   amounts   allowable   under Sections 30 to 36. Although, the expression "premises used for the purposes of the business or profession" has   been   used   along   with   the   expression "buildings and furniture" under Sections 30, 31 and 32 of the Act, for the first time the expression

"residential

accommodation including any accommodation in the nature of a guest house" has been used in Sub­section (3) of Section 37 of the Act.   As will be seen, Sub­section (3) of Section 37 indicates that   notwithstanding   anything   contained   in Sub­section (1) any expenditure incurred by an assessee after 31st of March, 1964, inter alia,   on   maintenance   of   any   residential accommodation in the nature of a guest house and  hotel expenses, would be allowed only to the extent and subject to such conditions, if any, as may be prescribed. Sub­section (4), which was inserted in the statute   book   with   effect   from   1st   April, 1970,   is   specific   and   provides   that notwithstanding   anything   contained   in   Sub­ section (1) and Sub­section (3) no allowance shall be made in respect of any expenditure incurred by the assessee after 28th February, 1970, on the maintenance of any residential accommodation in the nature of guest house and no allowance shall be made in respect of depreciation of any building used as a guest house or depreciation of any assets in the guest   house.       However,   a   guest   house maintained   as   holiday   home   in   the circumstances   indicated   have   been   excluded from the purview of Sub­section (4) referred to hereinabove. Inasmuch as, doubts still remained

regarding

the

nature

of Page 14 of 28

O/TAXAP/369/2002 JUDGMENT accommodation used as a guest house by the companies,   Sub­section   (5)   was   included   in Section 37 by the Finance Act in 1983 with effect   from   1st   April   1979   and   was subsequently omitted by the Finance Act, 1997 with effect from 1st April, 1998.   At the relevant   point   of   time,   namely,   the assessment year 1994­1995, all the aforesaid provisions of Section 37 were available and, therefore,   applicable   to   the   case   of   the appellant­company. Dr. Debi Prasad Pal, learned senior counsel, appearing on behalf of the company, urged that Sections 30 to 32 deal with specific types of expenditure which are   allowable   in   terms   of   the   said provisions, whereas Section 37 deals with all other   expenditure,   not   being   expenditure described in Sections 30 to 36 of the Act, subject to the conditions: (a) the expenditure must not be of a capital expenditure; (b) expenditure   must   not   be   of   a   personal nature; and (c) the expenditure must be incurred wholly and exclusively for the purposes of business. Dr. Pal also urged that Section 37 contains general   provisions   allowing   deductions   in respect   of   expenditure   not   included   within Sections 30 to 36 of the Act.   Dr Pal also urged that since expenditure incurred by the assessee   towards   payment   of   rent,   rates, taxes,   repairs   and   insurance   of   premises, buildings and furniture used for the purposes of   the   business   or   profession   has   been provided for specifically under Sections 30, 31 and 32 of the Act, by virtue of the non­ obstante clause used in Sub­section (1) of Section 37 such expenses could not again be referable   to   Section   37   and   the   different provisions thereof.   In other words, Dr. Pal urged that since the aforesaid expenses had been specifically allowed to be deducted the said benefit could not be taken away by the including     of   the   expression   "residential Page 15 of 28

O/TAXAP/369/2002 JUDGMENT accommodation including any accommodation in the nature of a guest house"  in Sub­section (3) of Section 37 of the said Act. Dr. Pal then   urged   that   having   allowed   a   partial benefit, it could not have been the intention of the Legislature to take away the entire benefit   by   incorporating     Sub­section   (4) with effect from 1st April, 1970.   It was urged that such a view would be borne out from the fact that the provisions relating to the   restrictions   imposed   with   regard   to expenses incurred towards the maintenance and other   expenditure   of   guest   houses   run   by companies,   were   sought   to   be   omitted   with effect from 1st April, 1998.Dr.   Pal   urged that   the   interpretation   regarding   the allowability of rents, repairs, insurance and maintenance   expenses   of   guest   houses   under Section   37(3)   of   the   Act   fall   for consideration   of   the   Bombay   High   Court   in Commissioner of Income Tax vs. Chase Bright Steel Limited., reported in (1989) 177 ITR 124,     wherein   it   was   held   that   business expenditure, such as rent for premises used as a guest house and amounts spent on repairs to   furniture   used   therein,   could   not   be disallowed under Section 37(3) of the Act, inasmuch as the same had been allowed under Sections 30 and 31 of the Act. Dr. Pal also referred to another decision of the Bombay High Court in Century   Spinning and Manufacturing Co. Ltd. vs. Commissioner of   Income   Tax,   reported   in   (1991)   189   ITR 660, where following its earlier decision in the case of Chase Bright Steel Private Ltd. (supra), it was held that Sub­Section (4) of Section   37     of   the   Act   is   a   non­obstante clause   in   relation   to   Sub­section   (1)   and Sub­Section   (3)   of   Section   37   and   if   any expenditure or allowance was made allowable in other sections of the Act, the same could not be withdrawn or denied to the assessee because of the prohibitory provisions of Sub­ section (4) of Section 37. Page 16 of 28

O/TAXAP/369/2002 JUDGMENT A similar view appears to have been expressed by   the   Gujarat   High   Court   in   case   of Commissioner   of   Income   Tax   vs.   Ahmedabad Manufacturing and Calico Printing Co. Ltd., reported in (1992) 197 ITR 538; wherein it was also held that expenses incurred of the nature described in Sections 30 to 36 could not be disallowed under Section 37 (4) of the Act. Dr.   Pal   also   referred   to   a   Full   Bench decision   of   the   Kerala   High   Court   in Commissioner   of   Income   Tax   vs.   Travancore Cements Ltd., reported in (1999) 240 ITR 816, wherein a distinction was sought to be made between the expression "repairs" as used in Section 37 and the expression "maintenance" as   used   in   Sub­section   (3A)   and   (3B)   of Section 37.   Based on such distinction, it was   held   that   the   non­obstante   clause   in Section 37 (3A) cannot have any overriding effect   in   respect   of   other   provisions pertaining to the allowances of expenditure under Sections 30 to 36 of the Act. Dr. Pal submitted that a similar distinction has been made by the Madras High Court in Commissioner of Income Tax vs. South India Viscose   Ltd.,   reportesd   in   (2003)   259   ITR 107.  Based on such distinction, it was held that rent paid for a guest house has been specifically   dealt   with   in   Section   30   and could   not,   therefore,   be   disallowed   under Sub­section (4) of Section 37. Dr. Pal lastly referred to two decisions of the Calcutta High Court in Kesoram Industries and   Cotton   Mills   Ltd.   vs.   Commissioner   of Income Tax, reported in (1991) 191 ITR 518 and   Commissioner   of   Income   Tax   vs.   Upper Ganges Sugar Mills Ltd., reported in (1994) 206 ITR 215, which have both taken the view that   business   expenditure   for   guest   houses would not be allowable, having regard to the provisions of Section 37(4) of the Act. Page 17 of 28

O/TAXAP/369/2002 JUDGMENT Dr.  Pal submitted that apart from the said two decisions of the Calcutta High Court, the uniform decision of most of the High Courts appears   to   be   that   since   the   expenditure incurred for rents, rates, taxes, repairs and insurance   of   buildings   and   premises   and furniture used for the purposes of business or   profession,   have   been   specifically provided for in Sections 30, 31 and 32 of the Act, benefits thereof could not be denied to the assessee under the relevant provisions of Section 37 of the Act. Dr. Pal urged that the judgment under appeal did not give any independent reasoning but was rendered following the decision of the Calcutta High Court in Century Spinning and Manufacturing Co. Ltd. and Upper Ganges Sugar Mills Ltd. (supra) and could not therefore be sustained. Appearing for the Revenue, Mr. Rajeev Dutta, learned   senior   counsel,   however,   contended that the provisions of Section 37 would have to be read in isolation from the provisions of   Sections     30   to   36   of   the   Act   as contemplated   by   the   non­obstante   clause   in Sub­section (1) of Section 37.     Mr. Dutta urged that the provisions of Section 37 had been   correctly   interpreted   in   the   two decisions   of   the   Calcutta   High   Court   in Century Spinning and Manufacturing Co. Ltd. and Upper Ganges Sugar Mills Ltd. (supra). Mr.   Dutta   urged   that   it   was   the   clear intention of the Legislature to exclude the benefit   of   deduction   in   respect   of   guest houses which were being run and maintained by companies   in   a   lavish   manner.     Mr.   Dutta submitted that while premises and buildings had   been   referred   to   in   general   terms   in Sections   30,   31   and   32   of   the   Act,   guest houses   had   been   separately   categorized   for the   purposes   of   Section   37   which   would   be quite   evident   from   the   manner   in   which expenses,   including   rent   and   maintenance, Page 18 of 28

O/TAXAP/369/2002 JUDGMENT were   sought   to   be   withdrawn   in   respect   of such guest houses.   Mr. Dutta submitted that the   intention   of   the   Legislature   would   be further   clear   from   the   insertion   of   Sub­ section (5) which brought within the scope and ambit of Section 37(4) all accommodation by whatever name called in the nature of a guest house. In   support   of   his   submissions,   Mr.   Dutta referred to the decision of Rajasthan High Court   in   Commissioner   of   Income   Tax   vs. Instrumentation Ltd. reported in (2002) 258 ITR   513,   where   upon   considering   the   views expressed by the Bombay High Court and the Gujarat High Court   in the cases of Chase Bright   Steel   Ltd.   and   Ahmedabad   Mfg.   And Calico Printing   Co. Ltd. (supra),   it was urged that expenditure incurred towards rent and maintenance of guest houses after 28th February 1970, was not deductible in view of Section 37(4) of the Act. Reference has also been made to a decision of the   Madras   High   Court   in   Commissioner   of Income   Tax   vs.   Mathurantakam   Co­operative Sugar Mills Ltd., reported in (2000) 241 ITR 817;   wherein   certain   expenses,   which   came within the mischief of Section 37(4) of the Act were disallowed. Other similar decisions of the Madras and the Rajasthan High Courts were also referred to. Mr. Dutta lastly referred to another decision of the Calcutta High Court in the case of Commissioner of Income Tax vs. Biswanath Tea Co. Ltd. (2003) 264 ITR 166 to which one of us (Hon'ble Altamas Kabir, J) was a party. In the said case the Calcutta High Court had occasion   to   consider   the   various   decisions which have also been cited by Dr. Pal in the instant case and upon a consideration of the language of Section 37(4), it was held that having regard to the unambiguous   bar   incorporated   under   Sub­ Page 19 of 28

O/TAXAP/369/2002 JUDGMENT section   (4)   of   Section   37,   the   benefits indicated   in   Sections   30   to   36   although, independent   of   Section   37,   could   not   be related to the guest house maintained by the assessee.   It was held that apart from the view taken in Upper Ganges Sugar Mills Ltd. and Kesoram Industries and Cotton Mills Ltd., any   other   interpretation   would   negate   the object of the prohibition engrafted in Sub­ Section (4). The only question which we are called upon to consider in the instant case is whether the expression 'premises and buildings' referred to in Sections 30 and 32 and used for the purposes of the business or profession would include   within   its   scope   and   ambit   the expression

'residential

accommodation including any accommodation in the nature of guest house' used in Sub­sections (3), (4) and (5) of Section 37 of the Act.  While the two expressions can be similarly interpreted, a   distinction   has   been   sought   to   be introduced for the purposes of Section 37 by specifying   the   nature   of   building   to   be   a guest house.   In our view, the intention of the   Legislature   appears   to   be   clear   and unambiguous and was intended to exclude the expenses   towards   rents,   repairs   and   also maintenance   of   premises/accommodation   used for   the   purposes   of   a   guest   house   of   the nature   indicated   in   Sub­section   (4)   of Section 37.   When the language of a statue is clear and unambiguous, the courts are to interpret the same in its literal  sense and not to give it a meaning which would cause violence to the provisions   of   the   statute. If   the Legislature had intended that deduction would be   allowable   in   respect   of   all   types   of buildings/accommodations   used   for   the purposes of business or profession, then it would not have felt the need to amend the provisions   of   Section   37   so   as   to   make   a definite distinction with regard to buildings used   as   guest   houses   as   defined   in   Sub­ Page 20 of 28

O/TAXAP/369/2002 JUDGMENT section (5) of Section 37 and the provisions of   Sections   31   and   32   would   have   been sufficient   for   the   said   purpose.       The decisions   cited   by   Dr.   Pal   contemplate situations where specific provision had been made in Sections 30 to 36 of the Act and it was   felt   that   what   had   been   specifically provided  therein could not be excluded under Section 37. The clarification introduced by way of Sub­ section   (5)   to   Section   37   was   also   not considered in the said case. As mentioned in the decision of the Calcutta High Court in the case of Biswanath Tea Co. Ltd. (supra), any other interpretation would negate the very purpose of Sub­section (4) of Section 37. It   is   another   matter   that   at   a   subsequent point   of   time,   the   Legislature   felt   it necessary to omit the said provisions, but they were in the statute book at the relevant point of time.   The rigours of the same,  in our view, cannot be avoided in the instant case. The   appeal   is   accordingly   dismissed,   but without any order as to costs.” 9. So   far   as   question   No.3   is   concerned,   the same   is   covered   by   the   decision   of   Hon'ble Supreme Court in case of Commissioner of Income­ Tax V. Gujarat Narmada Vally Fertilizer Co. Ltd., reported in 281 ITR 297. “   The   Income   Tax   Appellate   Tribunal, Ahmedabad Bench   "B"   has   referred   the following questions under Section 256(1) of Page 21 of 28

O/TAXAP/369/2002 JUDGMENT the Income Tax Act, 1961 (the Act) at the instance   of   Commissioner   of   Income   Tax, Baroda. "(1) Whether, on the facts and in the circumstances   of   the   case,   the Appellate Tribunal was right in law in holding that the drainage and sewerage network

constituted

plant

and machinery   and   was   entitled   to investment   allowance   u/s   32A   of   the I.T.Act on its cost of Rs.63,54,058/­? (2) Whether, on the facts and in the circumstances   of   the   case,   the Appellate Tribunal was right in law in holding that tractor­trailers used for lifting   and   carrying   equipments   and materials   constituted   plant   and machinery   and   were   entitled   to investment   allowance   u/s   32A   of   the I.T.Act?" The respondent assessee company is a Public Limited   Company   carrying   on   business   of manufacture   of   chemical   fertilizers.   The Assessment Year is 1983­84 and the relevant accounting period is calender year 1982. The assessee   company   installed   drainage   and sewerage network costing Rs.63,54,058/­ and claimed investment allowance on the said sum on the basis that the same formed part and parcel of plant and machinery. The claim was rejected   by   the   Assessing   Officer   and Commissioner (Appeals). The   assessee   carried   the   matter   in   appeal before   the   Tribunal   and   the   Tribunal   held that   the   assessee   was   entitled   to   the investment allowance claimed by holding that the   drainage   and   sewerage   network   was installed for the purpose involving handling of waste quantities of materials obtained on chemical   reaction   while   manufacturing fertilizers.   That   the   said   network   was utilised to channelize the fluids consisting of   effluent,   blowout   washing   spillage   and leakage from various sections and units of Page 22 of 28

O/TAXAP/369/2002 JUDGMENT the main plant, which were either pumped or otherwise   collected   thereafter   for   the purposes   of   treatment   and   re­cycling   or being   released.   The   Tribunal,   therefore, found that the drainage and sewerage network running through the factory and attached to the   plant   and   machinery   was   a   part   and parcel of plant and machinery itself. In   relation   to   the   second   question,   the assessee   claimed   that   certain   tractor trailers were used in factory premises for lifting   and   carrying   equipments   and materials. The cost of such tractor trailers was   Rs.2,82,508/­   and   on   the   said   sum   , investment   allowance   was   claimed.   The Assessing   Officer   rejected   the   claim   by holding   that   they   were   road   transport vehicles.   The   CIT   (Appeals)   confirmed   the said finding. The   Tribunal,   for   the   reasons   stated   in paragraph No.9 of its order, held that huge quantities   of   raw   materials,   finished products and equipments were required to be handled   and   transported   within   the   factory premises   and   for   such   handling   and transportation,   the   tractor   trailers   were used   entitling   the   assessee   to   claim investment allowance. The matter has been heard on 9th and 10th March 2005, but the learned advocate for the applicant   is   absent.   However,   the   learned advocate   for   the   respondent   assessee   Shri Manish J. Shah is present and has made his submissions in support of the order made by the Tribunal. In   relation   to   question   No.1,   the   issue stands   concluded   by   ratio   of   decision rendered   by   this   Court   in   case   of Commissioner of Income­Tax v. Gujarat State Fertilizers   Co.   Ltd.,   reported   at   240   ITR 536. For the reasons stated in the aforesaid decision   of   this   Court,   question   No.1   is Page 23 of 28

O/TAXAP/369/2002 JUDGMENT answered in the affirmative i.e. in favour of   the   assessee   and   against   revenue.   The Tribunal   was   right   in   holding   that   the drainage   and   sewerage   network   was   entitled to investment allowance under Section 32A of the   Act   on   the   investment   cost   of Rs.63,54,058/­. In   relation   to   the   second   question,   the following decisions were cited on behalf of the assessee to submit that various courts have held that tractors – trailers used in the   factory   premises   for   lifting   and carrying   equipments   and   materials   would   be "plant" within the meaning of definition of the   said   term   under   Section   43(3)   of   the Act. It was further submitted that, for the purposes of ascertaining whether an item of plant or machinery is entitled to investment allowance   or   not,   has   to   be   tested   by considering   the   function   such   plant   or machinery performs during the conduct of the business of an assessee. (1) Shiv Construction Co. v. Commissioner of Income Tax, 165 ITR 160 (Guj.) (2)   Commissioner   of   Income   Tax   v. U.P.Paschimi Kshetriya Vikas Nigam Ltd., 264 ITR 273 (Alh.) (3)   Commissioner   of   Income   Tax   v.   Tarun Commercial Mills Ltd., 151 ITR 75 (Guj.) (4)   Commissioner   of   Income   Tax   v.   SLM Maneklal Industries Ltd., 205 ITR 547 (Guj.) (5)   Commissioner   of   Income   Tax   v. Progressive   Engineering   Co.,   230   ITR   729 (A.P.) (6) Commissioner   of   Income   Tax   v.   Sibson Construction & Co. 221 ITR 468 (Gauhati) (7) Commissioner   of   Income   Tax   v.   Nandlal Parshuram, 239 ITR 497 (Gauhati) It is apparent that the Tribunal has found that   the   tractor   trailers   were   used   to transport huge quantities of raw materials, finished products and equipments within the factory premises. In light of this finding Page 24 of 28

O/TAXAP/369/2002 JUDGMENT of fact, it is not possible to state that the tractor trailers would fall within the meaning   of   road   transport   vehicles.   Road transport   vehicles   would,   in   common parlance, mean vehicles which are used for transportation   of   goods   or   passengers   by road.   In   normal   circumstances,   a   tractor trailer   is   not   used   for   transportation   of people   at   least,   though   in   given   set   of circumstances   it   may   be   involved   in transportation   of   goods.   However,   what   is material is as to where such transportation takes place. In the facts of the case, as noted   hereinbefore,   the   Tribunal   has   found on facts that the tractor trailers have been used for handling and transportation of raw materials, finished products and equipments within the factory premises only. In these circumstances, applying the functional test, it may be safely stated that the decision of the   Tribunal   holding   that   the   assessee   is entitled to investment allowance by treating such   tractor   trailers   as   "plant"   under Section 32A of the Act, is correct. However,   there   is   one   more   aspect   of   the matter. Section 32A(1) of the Act stipulates that   investment   allowance   equal   to   25%   of the actual cost of the plant or machinery is allowable as a deduction in respect of the previous   year   in   which   the   machinery   or plant was installed, or first put to use in the   immediately   succeeding   previous   year, then,   in   respect   of   that   previous   year. Therefore, whether tractor trailer could be termed   to   have   been   installed   in   the previous year, even if it is treated to be a plant, is required to be answered. In the case of Commissioner of Income Tax v. Thyristors Controls Pvt. Ltd., 207 ITR 317, this Court was called upon to decide whether books containing practical know­how kept in the   office   premises   were   entitled   to investment   allowance   under   Section   32A   of Page 25 of 28

O/TAXAP/369/2002 JUDGMENT the Act. After holding that books would be plant within the meaning of section 32A(1) of the Act, the Court held that: "The   word   "installed"   occurring   in section   32A(1)   would   not   necessarily mean   that   it   should   be   fixed   in   a position, but the word is also used in the sense of "induct" or "introduce" or "placing an apparatus in position for   service   or   use"   as   held   by   the Supreme Court in CIT v. Mir Mohammad Ali   [1964]   53   ITR   165.   The   word "installed"   would   mean   to   place   in position for service or use or to set up for service or use. The books would be installed when they would be placed for use in the premises in question" It   may   be   noted   that   similar   view   is expressed by the Bombay High Court in case of   Commissioner   of   Income   Tax   v.   Bharat Radiators P. Ltd., 239 ITR 608 in relation to   patterns   and   dyes   and   electrical installations. Therefore,   applying   the   aforesaid   test,   it is   apparent   that   the   tractor   trailer   was inducted or introduced in the business and was,   therefore,   installed   for   the   purposes of   the   business   of   the   assessee   entitling the assessee to claim investment allowance. In the result, question No.2 is answered in the   affirmative   i.e.   in   favour   of   the assessee   and   against   revenue.   The   Tribunal was   justified   in   holding   that   tractor trailers   used   for   lifting   and   carrying equipments   and   materials   constituted   plant and   machinery   and   were   entitled   to investment   allowance   under   Section   32A   of the Act. The

Reference

stands

disposed

of accordingly. There shall be no order as to costs.“ Page 26 of 28

O/TAXAP/369/2002 JUDGMENT 10. Hence,   in   view   of   the   above   decision,   we answer issue No.3 in favour of the assessee and against the Revenue. 11. In   view   of   the   above,   we   concur   with   the findings recorded by the learned Tribunal based on   decision   of   Jurisdictional   High   Court   and since the issues are already concluded vide the judgment rendered in the above decisions, we are not   assigning   elaborate   reasons   for   disposing these appeals.  Accordingly, the questions of law are answered as follows: I. In   both   the   appeals,   Issue   No.1   is answered   in   favour   of   the   assessee   and against the Department. II. In Tax Appeal No.384 of 2000, issue No.2 is   answered   in   favour   of   the   Revenue   and against   the   assessee   and   issue   No.3   is answered   in   favour   of   the   assessee   and against the Revenue. 12. The appeals stand disposed of accordingly. Page 27 of 28

O/TAXAP/369/2002 JUDGMENT (K.S.JHAVERI, J.) (K.J.THAKER, J) ANKIT Page 28 of 28