Godavari Sugar Mills Ltd. vs Commissioner of Income Tax

D.R. Dhanuka J.

The Income Tax Appellate Tribunal has referred the following two questions to this court for decision u/s 256(1) of the Income Tax Act, 1961 :

"(1) Whether, on the facts and circumstances of the case, the Tribunal erred in law in valuing the sugarcane produced by the applicants from its agricultural farms and crushed at its Sakarwadi and Laxmiwadi factories at Rs. 51 per metric tonne and Rs. 51.40 per metric tonne instead of Rs. 52 per metric tonne and Rs. 52.40 per metric tonne claimed by the applicants ?

(2) Whether, on the facts and circumstances of the case, the Tribunal erred in law in allowing extra shift depreciation of Rs. 2,33,808 instead of Rs. 3,71,888 claimed by the applicants as seasonal industry ?"

On or about February 17, 1977, the attorneys for the applicants had taken out Notice of Motion No. 156 of 1977 for a direction to the Income Tax Appellate Tribunal to refer certain additional questions to this court. Accordingly, the following question was referred to this court in pursuance of the order passed on the said notice of motion. The said question is numbered as question No. 3 in the statement of case already filed, being the question which the Tribunal had originally refused to refer to this court on the application made u/s 256(1) of the Act. The said question reads as under :

"(3) Whether, on the facts and circumstances of the case, the Tribunal erred in law in confirming the allocation of Rs. 2,48,356 to the agricultural section out of donation of Rs. 6,10,512 paid by the applicants and allowing relief u/s 88 only on the amount of Rs. 2,59,320 ?"

Counsel are agreed that the said additional question be decided in this reference without waiting for the supplementary statement of case and on the basis of the statement of case already filed in this reference. We have accepted the said request.

Counsel area agreed that question No. 1 is covered by the decision of our court in the assessee''s own case in Godavari Sugar Mills Limited Vs. Commissioner of Income Tax, Bombay City-I, and the question is required to be answered in the negative and in favour of the assessee. We, accordingly, so answer the said question.

Counsel are also agreed that question No. 3 is covered by the decision of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Maharashtra Sugar Mills Ltd., Bombay, , and the circulars of the Board binding on the Department and the said question is required to be answered in the affirmative and in favour of the assessee.

We shall now proceed to deal with question No. 2, which is undoubtedly an interesting question of law so far undecided by our High Court as well as by a decision of the Hon'' ble Supreme Court. The said question is of considerable importance to seasonal factories and involves the interpretation of rules concerning grant of extra shift depreciation allowance to seasonal factories. Various High Courts have taken the same view as was taken by the Tribunal in this case. Learned counsel for the assessee has, however, submitted with considerable emphasis that the view taken by the different High Courts on the subject so far is incorrect. Learned counsel for the assessee has, therefore, endeavoured to persuade us to take a contrary view on the question under consideration and accept the interpretation of the rules put forward on behalf of the assessee.

The relevant facts pertaining to question No. 2 are as under :

The assessee carries on the business of manufacture and sale of sugar The assessee owns two seasonal factories at Laxmiwadi and Sakarwadi in the State of Maharashtra. The said factories also worked extra shift. The seasonal factories work for much lesser period than no seasonal factories. There is no controversy or dispute in respect of grant of deduction of normal depreciation allowance to the assessee. There is, however, a controversy between the parties regarding the interpretation of the relevant provisions and the method of computation required to be followed for working out extra shift depreciation allowance.

The assessee claimed deduction of sa sum of Rs. 3,71,888 on account of extra shift depreciation allowance. The Income Tax Officer allowed deduction of a sum of Rs. 2,33,808 only. The Income Tax Officer calculated the extra shift allowance at the specified rate proportionately after dividing the days during which the factories worked extra shift by 300 days in accordance with the formula prescribed in the note forming part of item III of Part I of Appendix I forming part of the Income Tax Rules, 1962. According to the Department, the above-referred formula set out in the note to item I of Part I of Appendix I (Remarks column) applies to seasonal and non- seasonal factories and all concerns alike and no distinction can be made between seasonal and non-seasonal factories for application of the formula prescribed for working out extra shift allowance. According to the assessee, the criteria of proportionate working out of extra shift allowance on the basis of the proportion between the actual days during which the machinery and plant was used for extra shifts and 300 days for the year as set out in the above-referred provisions is applicable only to non-seasonal factories. According to the contention of the assessee, the extra shift depreciation allowance is a liable to be worked out in case of seasonal factories in the light of the working days of the season and not 300 days. The assessee contends that their factories have worked extra shift for the entire period of sugarcane season and such working was liable to be treated on par with working period of 300 days and the assessee was entitled to full extra shift allowance as specified in the rules and not merely proportionate allowance. The Income Tax Officer, the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal upheld the Department''s interpretation of the relevant provisions referred to in the later part of this judgment.

Learned counsel for the assessee has submitted that the seasonal factories stand on a different footing from non-seasonal factories and the distinction between the two is required to be borne in mind not merely for the purpose of computing normal depreciation allowance but also for the purpose of extra shift allowance is also a depreciation allowance. Learned counsel has submitted that the second proviso to rule 5 of the Income Tax Rules, 1962, is applicable also to extra shift allowance and extra shift depreciation allowance must be computed in the case of seasonal factories in the light of the number of working days of the season and not on any other footing. Learned counsel has submitted that the second proviso to rule 5 of the said rules must be construed as an independent substantive provision and not as a proviso to the main part of rule 5. Learned counsel for the assessee has further submitted that if the remarks column appended to item III of Part I of Appendix I is liberally applied to seasonal as well as non-seasonal factories, it would lead to anomaly and injustice. Learned counsel submitted that, for the purpose of giving true effect to the principle of treating seasonal factories as a separate class, it is necessary to ignore the following portion of the remarks column appended to item III of Part I of Appendix I in the case of seasonal factories :

"For this purpose, the normal number of working days throughout the previous year shall be taken as 300, and if, for example, a concern has worked only double shift for 100 days and triple shift for another 100 days, the extra allowance for double shift shall be one-third of 50% of the normal allowance and that for triple shift shall be one-third 100 per cent. of the normal allowance."

Learned counsel for the assessee has further submitted that the last sentence in the remarks column of the said item III should not be interpreted to mean that the said rule applies to seasonal and non-seasonal factories alike. Learned counsel submitted that Explanation 1 appended to the said item III is also helpful to the assessee in his endeavour to convince the court that the criteria of dividing the actual working days of working of the extra shift by 300 and working out the proportionate allowance on this footing is not applicable to seasonal factories and is liable to be applied only to non-seasonal factories.

Learned counsel for the Revenue has argued that the rules made by the appropriate authority for computation of extra shift depreciation allowance constitute a special law and the same must be interpreted and applied according to their language literally. Learned counsel for the Revenue has further submitted that the construction of the relevant rules put forward by the Department has been accepted by various High Courts of our country in decided cases and there is no overriding reason as to why the view taken in the said judgments should not be accepted by this court. Learned counsel for the Revenue has listed the said judgments in support of his contention, as under :

(1) Additional Commissioner of Income Tax, Andhra Pradesh Vs. Sarvaraya Sugars Ltd., ; (2) Dhampur Sugar Mills Ltd. Vs. Commissioner of Income Tax, ; (3) Kundan Sugar Mills Vs. Commissioner of Income Tax, ; (4) Anantapur Textiles Ltd. Vs. Commissioner of Income Tax, ; (5) Ganesh Sugar Mills Ltd. Vs. Commissioner of Income Tax, West Bengal, III, ; (6) Buland Sugar Co. Ltd. Vs. Commissioner of Income Tax, and (7) Commissioner of Income Tax, Gujarat II Vs. Khedut Sahkari Hand Udyog Mandli, .

There is no judgment of the Supreme Court or of our High Court on the question under consideration. Learned counsel for the assessee has argued that the view expressed by the different High Courts in the reported cases relied on by learned counsel for the Revenue, with respect, is erroneous and has attempted to persuade us to take a different view of the matter and accept the interpretation of the relevant provisions put forward on behalf of the assessee. We have heard learned counsel on both sides at some length in view of importance of the matter. we have examined the issue under consideration in the light of decided cases as well as independently of case-law.

Section 10 (2) (vi) of the Indian Income Tax Act, 1922, provided for grant of depreciation allowance on the assets specified therein to be computed in the manner specified therein. The relevant part of rule 8 of the Indian Income Tax Rules, 1922, provided, inter alia, for extra shift depreciation allowance. Rule 8 of the above referred rules was interpreted by the Calcutta High Court in Ganesh Sugar Mills Ltd. Vs. Commissioner of Income Tax, West Bengal, III, . The relevant part of rule 8 is almost in pari materia with the rule under consideration. In the above case, the assessee. The factory of the assessee had worked extra shift throughout the season. The Income Tax Appellate Tribunal disallowed the said claim. The High Court of Calcutta, inter alia, observed as under (headnote) :

"Under the Note to clause III of rule 8 of the Income Tax Rules, 1922, the maximum of the extra shift depreciation allowable for working double shift is 50 per cent., while that of triple shift is 100 per cent. of the normal depreciation calculated for the whole year and to this maximum the proportion of the actual number of days for which the plant and machinery had been working extra shift to 300 which is taken as the normal number of working days in a year, has to be applied. As this principle would apply to all concerns, whether the general rate or any special rate applies, there is no scope for the application of the principle of the second proviso to the main rule 8 in calculating the allowances for extra shift depreciation in the case of seasonal factories."

Section 32(1) of the Income Tax Act, 1961, reads as under :

"32 (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 - .....

(ii) in the case of buildings, machinery, plant or furniture, other than ships covered by clause (i), such percentage on the written down value thereof as may in any case or class of cases be prescribed :

Provided that where the actual cost of any machinery or plant does not exceed seven hundred and fifty rupees, the actual cost thereof shall be allowed as a deduction is respect of the previous year in which such machinery or plant is first put to use by the assessee for the purposes of his business or profession...."

"Prescribed" means "prescribed by rules made under the Act".

Rule 5 of the Income Tax Rules, 1962, prescribes as follows (see [1962] 45 ITR 17) :

"5. 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 shall be at a percentage of the actual cost or the written down value, as the case may be, equal to (i) 100 per cent. (ii) fifty per cent. or (iii) nil per cent. of the number shown in the corresponding entry in the second column of the statement in Part I of Appendix I to these rules according as the buildings, machinery, plant or furniture have been used by the assessee in his business or profession during the previous year (i) for a period of 180 days or more, (ii) for a period of less than 180 days but more than thirty days, or (iii) for a period of thirty days or less than thirty days, respectively..."

The first proviso (sic) to rule 5 is irrelevant for our purpose. The second (sic) proviso to rule 5 reads as under : (see [1962] 45 ITR 17) :

"Provided further that in the case of a seasonal factory worked by the assessee during all the working seasons of the previous year, depreciation shall be allowed as if the buildings, machinery, plant or furniture had been in use throughout the period the assessee was the owner thereof during the previous year."

Item III of Part I of Appendix I, referred to in rule 5, reads as under : (see [1964] 53 ITR 19) :

----------------------------------------------------------------- Class of Rate Remarks asset Number on the basis of which the percent- age is to be calculated on the w.d.v. except where otherwise indi- cated in the case of ocean-going steamers. ------------------------------------------------------------------ 1 2 3 ------------------------------------------------------------------ III. Machinery and plant An extra allowance up to a (i) General rate maximum of 50 per cent. of the normal allowance shall be allowed by the income tax Officer where a concern claims such allowance on account of double shift working and satisfies the Income Tax Officer that the concern has actually worked double shift. An extra allowance up to a maximum of 100 per cent. of the normal allowance, instead of 50 per cent. shall be allowed in computing the total income assessable for any assessment year commencing on or after April 1, 1964, where a concern proves that it has worked triple shift. The calculations of the extra allowances 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 throughout the previous year. For this purpose, the normal number of working days throughout the previous year shall be taken as 300, and if, for example, a concern has worked only double shift for 100 days and triple shift for another 100 days, the extra allowance for double shift shall be one-third of 50% of the normal allowance and that for triple shift shall be one-third of 100 per cent. of the normal allowance. This applies to all concerns whether the general rate or any special rate of depreciation applies to them, but does not apply to an item of machinery or plant which has been specifically excepted by the inscription of the letters ''N. E. S. A.'' against it. Explanation 1. - For this purpose, the normal allowance means the amount of depreciation allowance (other than the extra depreciation allowance for multiple shift working) that would have been allowed under rule 5 if the machinery or plant had been used during the previous year for a period of 180 days or more, or in the case of a seasonal factory, if that factory had been worked by the assessee during all the working seasons of the previous year. Explanation 2. - For removal of doubts, it is hereby declared that no extra allowance for double of triple shift working shall be allowed in a case where the machinery or plant has been used for a period of thirty days or less than thirty days during the previous year." --------------------------------------------------------------------

Learned counsel for the Revenue submitted as under :

(1) Rule 5 of the Income Tax Rules, 1962, deals with the subject of grant of normal depreciation allowance on building, machinery, plant and furniture and it has nothing to do with the grant of extra shift depreciation allowance. Neither the main part of rule 5 nor the second proviso in question has any application to the grant of extra shift depreciation allowance.

(2) Rule 5 makes a differentiation between seasonal and non-seasonal factories for the purpose of computation of normal depreciation allowance only. The assessee is entitled to normal depreciation allowance in full even if its factory has worked for 180 days or more in the year and has remained idle for the rest of the period. The second proviso to rule 5 carves out an exception to the above-referred rule of minimum working of 180 days or more for grant of normal depreciation allowance in the case of seasonal factories. The second proviso to rule 5 provides that, in the case of seasonal factories, the assessee shall become entitled to normal depreciation allowance in full as specified under the law if the seasonal factory of the assessee has worked for all the seasons of the year even though the aggregate duration of such working may be less that 180 days.

(3) The rules make sharp distinction between the criteria to be applied in the case of grant of normal depreciation allowance on the one hand and extra shift depreciation allowance on the other hand. Special provisions are made by rule-making authorities in item III of Part I of Appendix I for grant of extra shift depreciation allowance. The said provision prescribes the formula for computation of extra shift allowance which is applicable to seasonal and non-seasonal factories alike. The said formula is applicable to all concerns. A non-seasonal factory is not entitled to grant of extra shift depreciation allowance in full even if it has worked for 180 days. It is specifically provided in this special rule for extra shift depreciation allowance that the extra shift allowance shall be calculated proportionately in the context of the actual working of the plant and machinery extra shift by dividing the same with the figure of 300.

(4) Explanation 1 appended to item III Part I of Appendix I does not affect the formula for calculation of extra shift depreciation allowance with reference to the yardstick of 300 days mentioned in item III of Part I of Appendix I.

We have carefully considered the various submissions of learned counsel on both sides and gone through the legislative history of the rules and the relevant case law. We are in complete agreement with the reasoning and conclusion of the judgments cited by Dr. Balasubramanian, learned counsel for the Revenue, and particularly the judgment of the Full Bench of the High Court of Andhra Pradesh in the case of Additional Commissioner of Income Tax, Andhra Pradesh Vs. Sarvaraya Sugars Ltd., . It is not possible to accept the submission of Mr. Dastur, learned counsel for the assessee, that the distinction made between seasonal and non-seasonal factories for the purpose of computation of normal depreciation allowance must necessarily be maintained for the purpose of computing extra shift depreciation allowance. It is for the law-making authorities to decide whether, for the purpose of extra shift allowance, a uniform formula should be prescribed both for seasonal and non-seasonal factories. If the rule-making authorities have prescribed a uniform formula in this behalf for the purpose of computation of extra shift depreciation allowance, we cannot rewrite the said rule and extend the second proviso to rule 5 to the case of extra shift allowance or ignore some of the pertinent words, phrases or sentences appearing in item III of Part I of Appendix I, as suggested by Mr. Dastur, merely in an attempt to make the provisions more equitable. In any event, the provisions as they stand appear to be equitable and have stood the test of time. We are not convinced that giving effect to the plain and literal meaning to the provisions will lead to anomaly and absurdity. We are more than convinced that the view taken by the different High Courts is correct and we must fall in line with the view taken by the other High Courts for the sake of uniformity of construction and no overriding reason is proved by the assessee to our satisfaction in the light of which we could have perhaps taken a different view. Learned counsel for the assessee has submitted that the second proviso to rule 5 should not be considered as a proviso at all as it carves out nothing of the main rule. We are not convinced with this argument. The main rule 5 provides that 180 days shall be deemed to be the normal working days for the grant of full normal working days for the grant of full normal depreciation allowance in case of depreciation of building, machinery, plant or furniture. The second proviso to rule 5 provides that the said basis of working or use of the building, machinery, plant and furniture for 180 days for grant of full normal depreciation allowance shall not be applicable to the case of seasonal factories. If the seasonal factories have worked for all the seasons of the year and its total working has been even for 3 or 4 months or less than 180 days, that is considered sufficient for the purpose of grant of normal depreciation allowance. A totally different principle is to be applied in the case of extra shift depreciation allowance. If is specifically set out in the remarks column of item III of Part I of Appendix I as under :

"For this purpose. - the normal number of working days throughout the previous year shall be taken as 300 ..." It is also stated in the also invited our attention to the judgment of our court in Commissioner of Income Tax, Bombay City-III Vs. Bombay State Transport Corporation, , wherein it was held that Explanation 2 appended to the said item III providing that no extra shift depreciation allowance shall be allowed in a case where the machinery or plant had been used for 30 days or less was inconsistent with the provisions contained in section 32 of the Act. With respect, this judgment has no relevance to the issue under consideration before us.

In the result, we hold as under :

(1) The assessee is entitled to extra shift depreciation allowance as may be computed in accordance with the formula prescribed in the remarks column of item III of Part I of Appendix I referred to in rule 5 of the Income Tax Rules, 1962. The extra shift allowance must be computed by applying the same formula for seasonal and non-seasonal factories alike, i.e., by first working out the proportion which the number of actual working days of extra shift bears to 300 days, apply the prescribed rate of depreciation to each item of machinery and plant for which extra shift allowance is permissible and then compute the quantum at the rate of 50% or 100% of the "normal allowance" in the case of double shift and triple shift, respectively.

(2) The "Remarks column" of item III of Part I of Appendix I to the Income Tax Rules, 1962, constitutes a special law for calculation of extra shift depreciation allowance. The said provision applies to the exclusion of the general provisions meant to be applied only for computation of "normal allowance". No extra shift allowance is permissible in case of items of machinery and plant which have been specifically excepted by the inscription of the letters "N. E. S. A." against it in the said appendix forming part of the rules.

(3) Second proviso to rule 5 is not applicable to computation of extra shift allowance. It is a proviso in the true sense of the term and not an independent provision. The second proviso to rule 5 cannot be invoked by seasonal factories for computation of extra shift allowance. The criteria of the factory being required to work for 180 days or more for grant of full normal allowance is not applicable for computation of extra shift depreciation allowance in the case of non-seasonal factories. Criteria of 300 days prescribed in the remarks column of item III of Part I of Appendix I is applicable alike to seasonal and non-seasonal factories and all concerns alike.

(4) Explanation 1 to item III of Part I of Appendix I shall have to be read consistently with the criteria of working out the proportion in the light of legal fiction of 300 days being prescribed as normal number of working days for the year.

(5) Specific provisions for computation of extra shift allowance cannot be ignored or interpreted contrary to their plain meaning merely on the ground that the extension of the second proviso to rule 5 to cases of extra shift allowance would be more just and reasonable according to the assessee.

(6) The rule-making authorities can prescribe different criteria and different methods of computation for calculation of normal allowance on the one hand and extra shift allowance on the other. It is not correct to state that the plain and literal interpretation of the provisions would create an anomaly and the remarks column of item III of Part I of Appendix I, should be, therefore, applied to seasonal factories after deleting or omitting the last three sentences therefrom. No such exercise is permissible. Mere prescription of different methods of computation for calculation of normal allowance and extra shift allowance does not create any anomaly.

(7) The construction of relevant rules by different High Courts of the country appears to us, with respect, to be correct. We, respectfully, follow the decisions of different High Courts which hold the field.

(8) The rule-making authority has created different legal fictions for computation of normal allowance and extra shift allowance. The said fictions are to be applied in their respective areas of operation and cannot be inter-mixed or interchanged.

We, therefore, answer question No. 2 in the negative and in favour of the Revenue.

There shall be no order as to costs.