1. This is a consolidated reference of three reference applications made before the Tribunal for the assessment year 1971-72. The following are the questions which have been referred :
'1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 36,983 of any portion thereof, representing the additional amount paid by it in respect of the instalments payable for the purchase of the machinery falling within the relevant previous year, on account of the fall in the value of the rupee due to fluctuation in the rate of exchange
2. Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 13,000 being the expenditure incurred by it, for providing coffee, etc., to its customers
3. Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 11,875 paid by it to the E.P.S. card-holders during the relevant previous year by way of compensation
4. Whether, on the facts and in the circumstances of the case, the assessee is entitled to extra shift allowance in respect of the machinery and spares which were added during the relevant previous year, on the basis of double and triple shifts worked by the entire concern ?'
2. The assessee is a public limited company carrying on business in the manufacture and sale of rayon yarn and wood pulp. It had purchased machinery, etc., from Italy on deferred payment terms. The consideration was payable in Italian currency. Consequent on the fall in the exchange value of rupee, the assessee had to pay a larger amount in terms of rupees in respect of the instalments payable during the accounting year ending on December 31, 1970. The total amount so paid came to Rs. 36,983. The assessee claimed the said amount as deduction. But the claim was rejected on the ground that the payment was manifestly in the nature of a capital expenditure. The assessee appealed to the AAC without success. When the matter reached the Tribunal on further appeal at the instance of the assessee with reference to this point, the Tribunal considered that a sum of Rs. 31,132 represented the third instalments of interest on a loan taken from an institution in Italy and it allowed the said amount as deduction. As far as the balance is concerned, the Tribunal confirmed the disallowance as made by the AAC. It is this part of the order of the Tribunal that was questioned both by the assessee and by the department. The department contested the allowance of Rs. 31,060 and the assessee, of the disallowance of the Rs. 5,923. These two objections are combined in the first question framed above.
3. For the department, the contention urged was that the whole of this amount represented only a capital expenditure as it related to machinery and cannot be allowed as deduction. For the assessee, the contention was that even assuming that the amount could not be allowed as a deduction, the provisions of s. 43A should have been applied and the relief appropriately given to the assessee.
4. Section 43A was introduced by s. 17 of the Finance Act of 1967 with effect from 1st April, 1967. That enacted a special provision to take note of the world-wide phenomenon of exchange fluctuations. Broadly stated, the extra amount paid as a result of the change in the value of the currency would have to be deemed to be part of the actual cost of the machinery. As this provision was in force in the relevant year, the contention of the assessee is that at least the relief due to the assessee applying this provision should have been worked out.
5. After considering this matter, we think it proper to return the reference on this question without rendering any answer as the matter has not been considered by the Tribunal at the time when the appeal was heard. Further, we find that there is some difficulty in answering the reference even on the basis of the facts as stated, and the annexures as they are before us. In annex. 'E', the Tribunal has given the 5th and 6th instalments in respect of the machinery as amounting to Rs. 5,923.68. After deducting this amount out of the total of Rs. 36,983, the Tribunal has proceeded on the basis that the rest of the amount is not capital in nature. We find on a scrutiny of annex. 'E' that the third instalments in respect of the loan payable to Italian institution on the purchase of pulp plant came to Rs. 31,142.47. At any rate, this would represent an instalments with reference to the cost of the machinery. This statement appears to have been not properly scrutinized. There was also some discussion before us as to whether s. 43A could be applied to this year especially when the machinery had been already purchased on instalments and return of the loan had already commenced. The Tribunal will thus have to go into the actual figures of the capital part of the machinery and apply s. 43A if it is found to be applicable.
6. The second question relates to the sum of Rs. 13,000 which has been broadly described in the question as for provision of coffee, etc., to the customers. The Tribunal has analysed this figure in para. 8 of its order. The amounts total to Rs. 14,850. The assessee appears to have restricted the claim only to the extent of Rs. 13,000 under this head. The ITO disallowed it and the AAC on appeal has allowed the claim. The department appealed to the Tribunal which has of the view that the expenditure could not be treated in the nature of entertainment expenses, but represented only expenses on account of common courtesy given to a visitor. It was also characterised as 'elementary refreshment'.
7. The learned counsel for the Commissioner contended that the Tribunal was wrong in allowing this amount as deduction. The matter is concluded by a decision of this court in CIT v. Karuppuswamy Nadar & Sons : 120ITR140(Mad) , wherein it was pointed out that any expenses incurred in the supply of coffee, etc., to the customers was not in the nature of entertainment expenditure so as to be disallowed under the Act. It was also pointed out that it would be a misnomer to call coffee or tea as an item of entertainment.
8. The learned counsel for the Commissioner invited our attention to the fact that a sum of Rs. 7,303 had been expended at the factory, while the other amounts are comparatively small having been incurred in other places. Having regard to the location of the factory in an out of the way place at some distance away from the town of Coimbatore, it would have been necessary to incur a larger amount towards expenditure in this connection. At any rate, in the absence of any investigation on the part of the income-tax authority to show that there was any other element than the business element in the said expenditure, we do not think it possible to go into it further in order to examine it for the first time as to whether the expenditure includes any non-business element in it. The question is answered, accordingly, in the affirmative and in favour of the assessee.
9. The third question arises on the following facts : The assessee was granted licence for the import of wood pulp, the main raw material for producing rayon yarn. Under the export promotion scheme, the licence was granted to a manufacturer to import raw material on condition that the finished product was sold at concessional rates to persons specified by the Textile Commissioner. In pursuance of this policy, the rayon yarn produced by the assessee was allotted to weavers at concessional price. The assessee delivered rayon yarn at concessional rates to the various weavers who held the cards for this purpose till the end of 1964. In 1965, the Textile Commissioner increased the quantities of yarn to be delivered at concessional rates. At that stage, representations were made to the Textile Commissioner who waived the requirement of supply of the said yarn at concessional rates to the allottees. In the meantime, the market price for rayon yarn went up and the rate at which the assessee had to supply to the cardholders remained stationary. The assessee would thus have suffered some losses if it were to comply with the requirement of the Textile Commissioner. In order to avoid its loss, it reached a settlement with the weavers through the medium of the manufacturers' association and the dealers, as a result of which the assessee had to pay the weavers at the rate of Rs. 2 per kilogram as compensation for the non-supply of the yarn at concessional rates. It is in this process that a sum of Rs. 11,875 was paid by the assessee to the said cardholders. The amount was not allowed as a deduction by the ITO. He characterised the payment as an illegal one, apparently on the view that there was a breach of the conditions under which the import of wood pulp was permitted. On appeal, the AAC allowed the amount as deduction and the department appealed to the Tribunal. The Tribunal had examined a similar claim in its order for the assessment years 1966-67 and 1967-68, and for the reasons given in the said order which has been made an annexure, the Tribunal allowed the amount as deduction. The allowance of this mount is the subject-matter of question No. 3.
10. It is not clear as to whether the allowance for the earlier year of similar payment made to the weavers is the subject-matter of any reference and if so what happened to it. We have gone through the order of the Tribunal for the said year. We find that the amount has been paid only in order to enable the assessee to take advantage of the market prices which were more than the amount at which rayon yarn would have to be supplied to the allottees. Nowhere in the order of the AAC or the Tribunal is there any finding that this represented any payment for the breach of any statutory obligation. In the light of the finding that the amount had been paid only for settling the claims of the weavers so as to earn a profit that would ordinarily accrue to the assessee if it sold the goods in the open market, the amount paid can only be treated as wholly and exclusively incurred in the course of the business of the assessee. It is not in the nature of a penalty for an infraction of law, as, if so, it would have been paid to the Government and not to the weavers. There is no question of any breach of contract because the allottees did not make any grievance of it and claim any amount from the assessee. The voluntary nature of the payment was emphasised by the learned counsel for the Commissioner as if it had any effect on its allowability under the Act. Section 37 contemplates the allowance of even amounts which are voluntarily incurred on principles of commercial expediency.
11. In CIT v. Vasantha Mills Ltd. : 120ITR321(Mad) and CIT v. Surya Prabha Mills (P.) Ltd. : 123ITR654(Mad) , similar claims have been considered. In the case of Vasantha Mills Ltd. : 120ITR321(Mad) , the assessee made the payment in the following circumstances : The assessee, as a textile mill, was directed to pack a particular variety of cloth under the Cotton Textiles (Control) Order, 1948. It did not comply with this direction and instead paid a sum of Rs. 30,872 in lieu thereof as provided for in one of the clauses of the Control Order. The claim of the assessee for deduction did not succeed before the ITO, but the AAC and the Tribunal accepted the assessee's claim. This court answered the question referred holding that the Tribunal was right in allowing the amount as business expenditure under s. 37(1) of the Act. Similarly, in Surya Prabha Mills' case : 123ITR654(Mad) , the assessee was allotted foreign cotton through the medium of Indian Cotton Mills' Federation. The assessee had to give a guarantee of Rs. 100 per bale of the quantity of cotton which it agreed to accept. The foreign cotton was distributed pro rata on the basis of the acceptance communicated to the Federation. The units which rejected their share forfeited their quota. As against a quota of 715 bales, the assessee imported 374 bales and it had to pay Rs. 34,100 as the guarantee payment for the 341 bales not imported. It is this amount which was claimed as a deduction, and it was held that there was no question of any violation of any law and that the whole arrangement was only contractual between the Mills and the Federation. This decision has also been subsequently followed by this court, in T.C. Nos. 303 and 304 of 1977 dated September 8, 1981 (CIT v. Textool Co. Ltd.) (see p. 200 supra) and T.C. Nos. 165 and 166 of 1977 dated September 14, 1981 (CIT v. Lakshmi Mills Co. Ltd.) (see p. 203 supra). On an examination of a similar question on a number of occasions, it has been uniformly held that the amount is allowable as deduction. We see no justification of the facts here to go against this current of authorities.
12. The learned counsel for the Commissioner submitted that the present case would fall within the scope of the decision in M. S. P. Senthikumara Nadar & Sons v. CIT : 32ITR138(Mad) . This decision has been examined in CIT v. Vasantha Mills Ltd. : 120ITR321(Mad) and, therefore, we do not think it necessary to cover the same ground again. It is sufficient for us to say that in that case what was paid represented penalty to a statutory body and that is not the position here.
13. Having regard to the facts here, we consider that the allowance in the present case is proper and, therefore, the question is answered in the affirmative and in favour of the assessee.
14. The last question relates to the claim for extra shift allowance. The assessee is a concern engaged in the manufacture of viscose yarn and claimed multiple shift allowance during this year. This claim was based on the number of days on which the concern as a whole worked and not with reference to the number of days on which each machinery had worked. The ITO restricted the allowance to the number of days each machinery had worked. The AAC and the Tribunal accepted the assessee's claim. The question is, whether the Tribunal acted properly in accepting the assessee's claim for extra shift allowance on the basis of the working of the whole factory without reference to the individual machinery which had worked extra shifts.
15. Rule 5 of the I.T. Rules provides for rates of depreciation in accordance with the terms of the Schedule. The extra shift allowance is only an additional form of depreciation. In the Schedule certain types of machinery are not eligible for extra shift allowance and certain others specified therein alone are eligible for the extra shift allowance. In relation to extra shift depreciation allowance, the following appears in the Schedule to App. I to the I.T. Rules :
'(IV) Extra shift depreciation allowance.
An extra allowance up to a maximum of an amount equal to one-half of the normal allowance shall be allowed where a concern claims such allowance on account of double shift working and establishes that it has worked double shift. An extra allowance up to a maximum of an amount equal to the normal allowance, instead of one-half of the normal allowance, shall be allowed where a concern claims such allowance on account of triple shift working and establishes that it has worked triple shift.
The calculations of the extra allowance for double shift working and for triple shift working shall be made separately in the proportion which the number of days for which the concern worked double shift or triple shift, as the case may be, bears to the normal number of working days during the previous year. For this purpose, the normal number of working days during the previous year shall be deemed to be -
(a) in the case of seasonal factory or concern, the number of days on which the factory or concern actually worked during the previous year or 180 days, whichever is greater;
(b) in any other case, the number of days on which the factory or concern actually worked during the previous year or 240 days, whichever is greater.
For example, where a non-seasonal concern worked 270 days during the previous year out of which it worked triple shift on 135 days and double shift on another 90 days, the extra depreciation allowance for triple shift working will be 135/270, i.e., one-half, of the normal allowance, and that for double shift working 90/270, i.e., one-third, of one-half of the normal allowance.
The extra shift allowance shall not be allowed in respect of any item of machinery or plant which has been specifically excepted by inscription of the letters 'N.E.S.A.' (meaning 'No Extra Shift Allowance') against it in sub-item (ii) above and also in respect of the following items of machinery and plant to which the general rate of depreciation of 10 per cent. applies :- ...'
16. The learned counsel for the assessee contends that so long as the concern had worked extra shifts, the entire machinery of the concern would be eligible for the allowance, except with reference to the machinery which does not qualify for extra sift allowance. For the department, the contention was that the rates of depreciation set out in the Schedule is with reference to the individual items of machinery and the rates also vary. It was, therefore, contended that it is the individual items of machinery which have to be taken into account and the extra allowance granted with reference to the machinery which have worked extra shift and which are eligible for extra shift allowance. The further contention for the department was that ordinary depreciation is calculated on the value of the machinery at the particular rates set out in the Appendix, even though the machinery had worked only for one day in the relevant year, while the extra shift allowance is available only if the machinery had worked for the requisite number of days as given in the notification, thereby showing that particular items of machinery are alone eligible for it.
17. We have carefully considered the rival contentions. The only peg on which the Tribunal hands its conclusion is the use of the word 'concern' in the passage extracted above. The word 'concern' has been used in the passage to show that the ITO is obliged to allow extra shift depreciation allowance, only if the assessee made a claim therefor. If the assessee did not choose to make a claim, then the ITO is not required or obliged to give the allowance. Except for the use of the word 'concern' in the above extracted passage, we do not find that the passage gives a kind of global allowance on all the machinery purchased by a company and set up in its business. In the Schedule there are several items of machinery which are excluded from the scope of extra shift allowance. The letters used for this purpose are 'N.E.S.A.' meaning 'no extra shift allowance.' At the close of the passage extraced from the Appendix it would be found that the extra shift allowance is not to be allowed in respect of any item of machinery or plant which has been specifically excepted by the inscription of the letters 'N.E.S.A.' The result is that the ITO is required to apply his mind to examine which machinery owned by the assessee has been used by him in extra shifts. So long as the particular machinery has worked in extra shifts, in the relevant year, for the specified period, it would be eligible for the extra shift allowance on the basis of the number of days, provided N.E.S.A. does not apply to it. If the assessee's contention were to be accepted, then if a small item of machinery in a corner of a huge factory has worked extra shifts, then the entire factory would be eligible for the extra shift allowance for all items of machinery, whether they worked or not. Such a proposition has only to be stated to be rejected. Such a contention would also militate against the concept of depreciation, which is really an allowance for the wear and tear of machinery used in the business. The claim made here does not bear this test.
18. Our conclusion is strengthened by the decision of the Calcutta High Court in Anantapur Textiles Ltd. v. CIT : 116ITR851(Cal) , where the Calcutta High Court, in answering a reference on an identical question, took the same view as given above, In fact that decision follows an earlier one in Ganesh Sugar Mills Ltd. v. CIT : 73ITR395(Cal) of the same court. There are two decisions of the Allahabad High Court in Raza Sugar Co. v. CIT : 76ITR541(All) and Kundan Sugar Mills v. CIT : 106ITR704(All) , taking the same view. The result is, the 4th question is answered in the negative and in favour of the revenue. As neither party has wholly succeeded, there will be no order as to costs.
19. The learned counsel for the assessee made an oral application for grant of leave to appeal to the Supreme Court with reference to question No. 4 dealing with the claim for extra shift allowance. We do not consider that this is a fit matte for the grant of leave for two reasons. One is that the same view has commended itself to three courts on more than one occasion and the other is the interpretation of the rule appears to be quite plain on its face. We decline to grant leave.