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First Income-tax Officer Vs. Garware Wall Ropes Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)13ITD331(Mum.)
AppellantFirst Income-tax Officer
RespondentGarware Wall Ropes Ltd.
Excerpt:
.....in law, the learned commissioner (appeals) ought to have rejected the assessee's claim regarding extra shift allowance instead of setting aside the assessment on this issue without any valid basis.2. it is common ground that the assessee-company took over the business of manufacture of synthetic ropes and twines from garware filament corpn. (p.) ltd. for a sum of rs. 22,49,100 on 1-10-1977 which happened to be the first day of the assessee's previous year for the assessment year 1979-80. the capacity of this unit was only 400 metric tons. with a view to expand its manufacturing activity, the assessee applied for and received a licence to set up a new manufacturing unit of 2,000 metric tons on 15-9-1977. it is also common ground that the plant and machinery for the new unit themselves.....
Judgment:
1. The first effective ground in this appeal by the department relating to the assessment of the assessee, a company, for the assessment year 1979-80 is: On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) ought to have rejected the assessee's claim regarding extra shift allowance instead of setting aside the assessment on this issue without any valid basis.

2. It is common ground that the assessee-company took over the business of manufacture of synthetic ropes and twines from Garware Filament Corpn. (P.) Ltd. for a sum of Rs. 22,49,100 on 1-10-1977 which happened to be the first day of the assessee's previous year for the assessment year 1979-80. The capacity of this unit was only 400 metric tons. With a view to expand its manufacturing activity, the assessee applied for and received a licence to set up a new manufacturing unit of 2,000 metric tons on 15-9-1977. It is also common ground that the plant and machinery for the new unit themselves cost the assessee more than Rs. 75 lakhs and fixed assets acquired for the purpose during the year exceeded Rs. 1 crore.

3. The new unit was set up and started working with effect from 6-9-1978. The assessee claimed that it was entitled to extra shift allowance for the full year as the new unit was nothing but an expansion of the old unit and as the existing unit, admittedly, functioned triple shift throughout the previous year. On the other hand, the ITO held that unlike depreciation, extra shift allowance is allowable on the basis of actual days the new unit has worked double or triple shift. The Commissioner (Appeals) has considered this issue in paragraph No. 2 of his order. After discussing certain aspects regarding the extra shift allowance, theoretically, he has set aside the assessment with directions to reframe the assessment in accordance with law.

4. It is submitted by Shri C.K. Vohra, the senior departmental representative, that the ITO having given reasons for allowing extra shift allowance on the basis of number of days the new unit actually worked double or triple shift, the Commissioner (Appeals) was not at all justified in setting aside the order. Instead, he should have considered and decided whether and to what extent the reading of the provisions by the ITO was correct. The counsel for the assessee has, on the other hand, reiterated that the so called new unit is not altogether a new unit. It has been set up by way of expansion of the existing unit and, therefore, when the existing unit worked triple shift throughout the year, the assessee was entitled to the extra shift allowance even with regard to the new unit for the full year. In this context, it is pointed out that in the following assessment year the ITO has himself allowed the extra shift allowance on that basis and that though the ITO has stated in his order that the extra shift allowance in respect of the new unit is allowed only for the days it has worked double or triple shift, he has actually allowed extra shift allowance on the basis of functioning of each machine for the days it worked double or triple shift.

5. Having heard the parties and after going through the schedule of depreciation, we find that the schedule clearly provides for calculation of extra shift allowance for double and triple shift working on the basis of the number of days for which the 'concern' worked double or triple shift. The first question that arises for consideration is whether the word 'concern' is used in the schedule for depreciation under the head 'Extra shift depreciation allowance' means the unit as such or each machinery units. Having regard to the facts of the case, namely, the capacity of the existing plant which has been taken over by the assessee from its sister concern and the new plant which is much bigger in capacity, we are of the view that the word 'concern' herein means a particular unit. This is more so as the provision contemplates calculation of the allowance on the basis of some concerns working double shift and some other concerns working single shift or triple shift. Accordingly, there being no dispute that the new unit has been set up on 6-9-1978, we are in agreement with the ITO that the extra shift allowance is to be computed on the basis of the days the new unit has functioned double or triple shift. In the decision of the Madras High Court in the case of South India Viscose Ltd. v. CIT [1982] 135 ITR 206 it is held that the extra shift allowance is to be worked out in respect of each machinery depending on the number of shifts worked by all such machinery. However, in the instant case, the ITO having himself held that the extra shift allowance is allowable to the assessee for the days the new unit has worked double or triple shift as well as the fact that the rule making authority has in its wisdom used the word 'concern' and not 'machine' or 'machinery', we are inclined to hold that the assessee is entitled to the extra shift allowance on the basis of the number of days the new unit as such has worked double or triple shift. The order of the Commissioner (Appeals) in this regard is set aside and the ITO is directed to modify the quantum of the extra shift allowance accordingly.

On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) ought to have rejected the assessee's claim regarding deduction under Section 35D instead of setting aside the assessment on this issue without any valid basis.

The assessee claimed deduction under Section 35D of the Income-tax Act, 1961 ('the Act'), on investment of Rs. 1,35,22,034. The ITO found that the capital employed by the assessee in the old and new unit worked out to Rs. 95,57,181--shares worth Rs. 60 lakhs and long-term loans Rs. 35,57,181. Observing that the cost of the assets in the new unit was only Rs. 85,55,599, the ITO allowed the assessee deduction under Section 35D on that basis. The Commissioner (Appeals) has referred to this issue in paragraph No. 3 of his order. Observing that the assessment order does not give the necessary details and since he was setting aside the assessment on other grounds, he has set aside the assessment directing the ITO to reconsider the issue after fully setting out the facts in the assessment order.

7. It is submitted before us by the departmental representative that here also the Commissioner (Appeals) was not at all justified in setting aside the assessment. The ITO has given good reasons for allowing the relief under Section 35D on the basis of the capital employed at Rs. 85,55,599. The Commissioner (Appeals) should have found fault with the order of assessment before setting aside the order. The counsel for the assessee has, on the other hand, relied on the order of the Commissioner (Appeals). In particular, it is stated that the relief under Section 35D is being allowed to the assessee by the ITO himself according to the claim made by the assessee in the following year.

8. We have gone through the provisions of Section 35D carefully. As we understand, the purpose of enacting Section 35D, with effect from 1-4-1971, is that certain expenses which are of preliminary nature and which are not otherwise allowable deductions should be allowed as deductions as laid down in that section. In our view, the requirements of Section 35D are (i) any expenditure specified in Sub-section (2) thereof has been incurred by an assessee after 31-3-1970, and (ii) it is incurred before the commencement of the business or if after the commencement of the business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit. The assessee, in the present case, admittedly, took over the existing unit which started functioning with effect from the first day of the previous year. Therefore, the assessee will come under Section 35D, if at all, under the second situation, namely, after the commencement of the business in connection with the extension of his industrial undertaking or in connection with the setting up of a new industrial unit. It is for this reason that the assessee is able to say that it has incurred the expenditure of Rs. 6,13,308 which is of the nature specified in Sub-section (2) of Section 35 of the Act. Now, the above sum of Rs. 6,13,308 is, admittedly, more than two and a half per cent of the cost of the project or the capital employed in the business of the assessee as laid down in Sub-section (3) of Section 35D which provides that the excess, if any, will have to be ignored. Admittedly, the assessee has exercised the option and requires that the deduction should be calculated at two and a half per cent of the capital employed in the business of the company. Actually it is on this basis that the assessee has claimed deduction under Section 35D on the capital investment of Rs. 1,35,22,034. It is necessary for this purpose to refer to the provisions of Section 35D(3), particularly Explanation (b) which reads as under: (i) in a case referred to in Clause (i) of Sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the business of the company commences; (ii) in a case referred to in Clause (ii) of Sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the extension of the industrial undertaking is completed or, as the case may be, the new industrial unit commences production or operation, in so far as such capital, debentures and long-term borrowings have been issued or obtained in connection with the extension of the industrial undertaking or the setting up of the new industrial unit of the company; To our mind, the expression 'capital employed in the business of the company', as defined, clearly provides that the deduction is to be computed on the basis of the share capital, debentures and long-term borrowings to the extent they had been issued or obtained in connection with the extension of the industrial undertaking or the setting up of the new industrial unit of the company. Since this, in our view, is what has been clearly provided by the section, we do not think that the ITO computing the relief under Section 35D in some other manner in the subsequent year has any bearing on the issue before us. Accordingly, we hold that the relief computed by the ITO was correct and the Commissioner (Appeals) was not justified in setting aside the order.


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