Commissioner of Income Tax vs Gujarat State Fertilizer Co.

K.A. Puj, J.—Income Tax Reference No. 102 of 1987 is arising out of R. A. Nos. 904 and 905/Ahd of 1985 preferred by the Revenue before the Income Tax Appellate Tribunal. These two reference applications are, in turn, arising out of I. T. A. Nos. 216 and 231/Ahd of 1982 which were filed by the assessee as well as the Department before the Income Tax Appellate Tribunal, Ahmedabad, for the assessment year 1973-74. Since the present Income Tax Reference No. 102 of 1987 is arising out of two separate reference applications, it is ordered to be split up in Income Tax References Nos. 102 and 102A of 1987.

At the instance of the Revenue, the Income Tax Appellate Tribunal had referred the following questions for the opinion of this court :

"1. Whether the Tribunal is right in law and on facts in upholding the claim of the assessee for investment allowance on compound walls and fencing ?

Whether the expenditure of Rs. 1,84,197 being guest house expenses is not disallowable u/s 37(4) of the Income Tax Act, 1961 ?

Whether the assessee is entitled to the allowance of expenditure of Rs. 24,375 in view of the decision of the Gujarat High Court in the case of Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., and the said expenditure is not hit by the provisions of Section 37(2B) of the Income Tax Act, 1961 ?

Whether the Tribunal is right in law and on fact in holding that the assessee is entitled to depreciation on fencing at the rate applicable to plant ?

Whether the assessee is entitled to allowance of development rebate on effluent system, telephone equipment and instruments claimed for the reasons stated by the Tribunal or otherwise ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to the allowance of depreciation on lunch room, extension of canteen, partition wall ?"

As far as question No. 1 is concerned, it is observed by the Tribunal in the statement of case that the assessee had claimed investment allowance on the value of compound wall, fencing, roads and culverts. The claims made by the assessee stood rejected by the Income Tax Officer and the Commissioner of Income Tax (Appeals). However, on further appeal, the Tribunal, following its decision in the assessee''s own case for the assessment years 1977-78 to 1979-80 in I. T. A. Nos. 696 to 698/Ahd of 1983 upheld the claim of the assessee in regard to the value of compound wall and fencing and directed the Income Tax Officer to allow investment allowance thereon.

At the time of hearing of this reference, Mr. B. B. Naik, the learned standing counsel appearing for the Revenue, has pointed out that the issue raised in this question is squarely covered by the decision of this court in the assessee''s own case, i.e., Commissioner of Income Tax Vs. Gujarat State Fertilizer Co. Ltd., , wherein it is held that buildings have been separately classified as an asset for the purpose of depreciation u/s 32 of the Act whereas buildings as such have not been included for considering the claim for development rebate u/s 33 unless the building itself can be said to be a plant. It is only the machinery or a plant that will qualify for the claim u/s 33 for development rebate. A building ordinarily cannot be considered to be a plant. Roads laid within the factory are an integral part of the factory building. Culverts are parts of roads. An assessee would not be entitled to development rebate on roads, culverts and compound wall of its factory. Following this decision, it was urged by Mr. Naik that what is applicable to development rebate will equally apply to the investment allowance and hence in view of the above finding given by this court in the assessee''s own case, the assessee is not entitled to investment allowance on compound walls and fencing. We are in respectful agreement with the above decision and hold that the Tribunal is not right in law and on facts in upholding the claim of the assessee to investment allowance on compound walls and fencing. Question No. 1 is, therefore, answered in the negative, i.e., in favour of the Revenue and against the assessee.

As far as question No. 2 is concerned, it is observed by the Tribunal in the statement of case that the assessee had claimed guest house expenses of Rs. 1,84,197 as deduction in computing its business income. The claim stood rejected by the Income Tax Officer in view of the provisions contained in Section 37(4) of the Income Tax Act, 1961. In appeal before the Commissioner of Income Tax (Appeals), the decision was taken by him, following the decision of this court in the case of Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., and upheld the claim of the assessee and deleted the said disallowance. On further appeal by the Revenue before the Tribunal it was held by the Tribunal, following its decision in the assessee''s own case for the assessment year 1971-72 in I. T. A. No. 1856/1857 (Ahd) of 1983 that the assessee was entitled to the deduction on account of guest house expenses.

At the time of hearing of this reference, our attention was drawn to the earlier decision of this court in the assessee''s own case in Income Tax Reference No. 905/Ahd of 1985 wherein this court has upheld the view taken by the Tribunal, following the decision in Commissioner of Income Tax Vs. Gaekwar Mills Ltd., , wherein it is held that having regard to the facts and circumstances of the case, the accommodation in question maintained by the assessee was a residential accommodation in the nature of a guest house, within the meaning of Clause (i) of Section 37(4). However, since the said expenditure had not been incurred for the maintenance of residential accommodation in the nature of guest house, no part thereof could be disallowed u/s 37(4) of the Act. Since this court, in the earlier reference, has followed the decision in Commissioner of Income Tax Vs. Gaekwar Mills Ltd., , we hold that the expenditure of Rs. 1,84,197, being guest house expenses, is not disallowable u/s 37(4) of the Act. We, therefore, answer question No. 2 in the affirmative, i.e., in favour of the assessee and against the Revenue.

As far as question No. 3 is concerned, the Tribunal has observed in the statement of case, that the Income Tax Officer disallowed the claim of the assessee with regard to expenditure of Rs. 24,375 treating the said expenditure as entertainment expenditure. In appeal, the said claim of the assessee was allowed by the Commissioner of Income Tax (Appeals) following the decision of this court in the case of Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., . The Tribunal, on further appeal, following its decision in I. T. A. Nos. 968, 1235 and 2168/Ahd of 1979, dated April 7, 1982, upheld the decision of the Commissioner of Income Tax (Appeals).

At the time of hearing of this reference, our attention was drawn to the decision of the Supreme Court in the case of CIT v. Patel Brothers and Co. Ltd. : [1995]215ITR165(SC) . At the time of hearing of the appeal before the Tribunal, the claim of the assessee was allowed following the decision of this court in the case of Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., . The said decision has been affirmed by the Supreme Court in the above referred case. The apex court has held in the said decision that the expenditure incurred by the assessee in providing ordinary meals to outstation customers according to established business practice, was a permissible deduction in respect of Sub-section (2A) of Section 37, in the computation of total income for the purpose of payment of tax under the Act during the relevant period prior to April 1, 1976. Following this decision, we hold that the assessee is entitled to the allowance of expenditure of Rs. 24,375 in view of the decision of this court in the case of Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., , as affirmed by the Supreme Court in CIT v. Patel Brothers and Co. Ltd. : [1995]215ITR165(SC) , and that the said expenditure is not hit by the provisions of Section 37(2B) of the Act. We, therefore, answer question No. 3 in the affirmative, i.e., in favour of the assessee and against the Revenue.

As far as question No. 4 is concerned, the Tribunal has observed in the statement of case that the assessee claimed depreciation on fencing, roads and culverts at the rate applicable. This claim of the assessee was rejected by the Income Tax Officer. The Tribunal, following its decision in the assessee''s own case for the assessment years 1977-78 to 1979-80 in I. T.A. Nos. 696 to 698/Ahd of 1983 held that the assessee was entitled to depreciation on roads and culverts at the rate applicable to building and on fencing at the rate of applicable to building.

At the time of hearing of this reference, our attention was drawn to the decision of this court in the assessee''s own case for the earlier years, wherein this court has taken the view that the assessee is entitled to depreciation on fencing at the rate applicable to building and not at the rate applicable to plant. We, therefore, hold that the Tribunal is right to the extent that the assessee is entitled to depreciation on fencing at the rate applicable to building. We, therefore, answer question No. 4 in the above terms accordingly.

As far as question No. 5 is concerned, the Tribunal has observed in the statement of case that the assessee claimed development rebate on effluent system, telephonic equipment and instruments which was rejected by the Income Tax Officer, but the same was allowed in appeal by the Commissioner of Income Tax (Appeals). The Tribunal allowed the said claim of the assessee following its decision in the assessee''s own case for the assessment years 1968-69 and 1969-70.

At the time of hearing of this reference, it was submitted before us that as far as the assessee''s claim for allowance of development rebate on effluent system is concerned, the issue is squarely covered by the decision of this court in the assessee''s own case reported in Commissioner of Income Tax Vs. Gujarat State Fertilizer Co. Ltd., , wherein it was held that an effluent discharge system for discharge of effluents which have come into existence as a result of operation of the plant must be deemed to be part of the plant. As discharge of effluents is an integral part of operation of the plant, the pumps and drainage pumps are necessary adjuncts of the plant itself and therefore "plant" within the meaning of Section 33 of the Act and the cost of acquisition of new pumps and installation of drainage pipes for effluent disposal is entitled to development rebate. We, therefore, hold that the assessee is entitled to development rebate on effluent system. As far as the assessee''s claim regarding development rebate on telephonic equipment is concerned, our attention is drawn to the decision of this court in the assessee''s own case, reported in Commissioner of Income Tax Vs. Gujarat State Fertilizers Company Ltd., , wherein it is held that no development rebate is to be allowed in respect of telephone equipment installed in office building after March 31,1965. Following this decision, we hold that the assessee is not entitled to development rebate on telephone equipment.

As far as the assessee''s claim regarding development rebate on instruments is concerned, it was submitted that these instruments were installed at the training centre for workers. This court has taken the view in an earlier year, that where a medical instrument has been installed in a hospital run by the assessee for labour welfare it would be entitled to development rebate. Following this decision, we hold that the assessee is entitled to development rebate on instruments. We, therefore, answer question No. 5 in the above terms meaning thereby the assessee is entitled to development rebate on effluent system as well as instruments. However, the assessee is not entitled to development rebate on telephone instruments.

As far as question No. 6 is concerned, it is observed by the Tribunal in the statement of case that the assessee has claimed depreciation on various items as set out in question No. 6. The said claim of the assessee was rejected by the Income Tax Officer, which was allowed by the Tribunal following its decision in the assessee''s own case for the assessment years 1977-78 and 1979-80. It is submitted that the decision of the Tribunal for the assessment years 1977-78 and 1979-80 rests there only and it was not taken further in any reference before this court. It is further submitted that the claim of the assessee has to be viewed in the context of the provision made in Section 32(1)(iv) of the Act, which runs as under :

"32. Depreciation.--(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed.--. . .

(iv) in the case of any building which has been newly erected after the 31st day of March, 1961, where the building is used solely for the purpose of residence of persons employed in the business and the income of each such person chargeable under the head ''Salaries'' is seven thousand five hundred rupees or less, or where the building is used solely or mainly for the welfare of such persons as a hospital, creche, school, canteen, library, recreational centre, shelter, rest-room, or lunch-room, a sum equal to twenty per cent, of the actual cost of the building to the assessee in respect of the previous year of erection of the building ; but any such sum shall not be deductible in determining the written down value for the purposes of Clause (ii) of Sub-Section (1)."

The items, which are referred to in question No. 6, find place in the Section itself, and a prima fade reading of the Section itself makes it clear that the assessee is entitled to depreciation on such items. We, therefore, hold that the assessee is entitled to the allowance of depreciation on kitchen, extension of canteen and partition. We, therefore, answer question No. 6 in the affirmative, i.e., in favour of the assessee and against the Revenue.

These references are accordingly disposed of with no order as to costs.