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Dhampur Sugar Mills Ltd. v. Commissioner Of Income-Tax, Lucknow.

Allahabad High Court

Jul 7, 1980

Judgment

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Structured Summary of the Opinion — Dhampur Sugar Mills Ltd. (Full Bench/Division Bench)

Factual and Procedural Background

M/s Dhampur Sugar Mills Ltd., the assessee, operates a seasonal sugar factory. For the assessment year 1964–65 the factory worked triple shift for 105 days. The assessee claimed an extra shift depreciation allowance equal to 100% of the normal depreciation allowance for triple shifts. The Income-tax Officer (ITO) awarded the extra-shift allowance on a proportionate basis — specifically 105/300 of the normal depreciation allowance — and that view was upheld in appeal and by the Income-tax Appellate Tribunal.

The Tribunal, at the instance of the assessee, referred to the High Court the question whether, having regard to the second proviso to rule 5 of the Income-tax Rules, 1962, the extra shift depreciation allowance should be calculated with reference to actual days worked (as the Tribunal had held) or at 100% of the normal depreciation allowance for the relevant year.

A Division Bench of this court found conflicting decisions within the court on the point and framed a larger question for a Full Bench: whether, having regard to rule 5 read with entry III of Appendix I, Part I, of the Income-tax Rules, 1962 (as applicable in assessment year 1964–65), depreciation allowance for multiple shift working must be allowed in proportion to the number of days the machinery or plant was used, or an amount equal to the full normal depreciation.

The Full Bench answered that the extra shift allowance must be computed in proportion to the number of days on which the machinery or plant was used and not as an amount equal to the full normal depreciation. The Division Bench recorded that answer and held in favour of the department and against the assessee.

Legal Issues Presented

Whether, having regard to the second proviso to rule 5 of the Income-tax Rules, 1962, the extra shift depreciation allowance for double and triple shift working should be calculated with reference to the actual number of days on which the extra shifts were worked or at 100% of the normal depreciation allowance for the relevant previous year?
Whether, having regard to rule 5 read with entry III of Appendix I, Part I, of the Income-tax Rules, 1962 (as applicable in assessment year 1964–65), depreciation allowance for multiple shift working has to be allowed in proportion to the number of days on which the machinery or plant was used or as an amount equal to the full allowance of normal depreciation?

Arguments of the Parties

Assessee's Arguments (as presented to the Court)

The method of computation specified in the second proviso to rule 5 (which, for seasonal factories that were worked during all working seasons, treats depreciation as if the plant had been in use throughout the year) should be extended and applied to compute the extra shift allowance.
The Appendix I, entry III note does not specifically provide for seasonal factories; therefore, the second proviso to rule 5 (the seasonal-factory provision) is the applicable and controlling yardstick for a seasonal factory such as a sugar factory.
The 300 days yardstick (used in Appendix I) cannot reasonably apply to a seasonal sugar factory which could never work for 300 days; hence if it worked for all working seasons the assessee should be entitled to full (100%) extra-shift allowance for triple shift working.

Revenue / ITO Position (as reflected in the record)

The ITO required the assessee to prove actual double or triple shift working and computed the extra allowance in proportion to the actual number of days the extra shifts were worked, using 300 as the normal number of working days for computation. In the present case this produced an allowance of 105/300 of the normal allowance where triple shift was worked for 105 days.
The Appendix I, Part I (entry III) note is a specific provision governing the computation of extra allowance for machinery and plant, and it prescribes calculation in proportion to the number of days worked.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Raza Sugar Co. v. CIT, [1970] 76 ITR 541 (All)	Cited as authority accepting the view that the extra shift allowance should be computed proportionately to the number of days worked (i.e., application of the Appendix I note).	Listed among decisions of this court that adopted the proportionate-days method; relied on as supporting the Full Bench conclusion.
Shadi Lal Sugar and General Mills Ltd. v. CIT, [1976] 103 ITR 748 (All)	Same principle — acceptance of proportionate computation of extra shift allowance.	Relied on by the Full Bench as part of a line of authorities endorsing proportional calculation.
Kundan Sugar Mills v. Commissioner Of Income-Tax, U.P., [1977] 106 ITR 704 (All)	Same principle — supports proportionate-days computation for extra shift allowance.	Placed with other All-India decisions supporting the department's approach.
Ganesh Sugar Mills Ltd. v. CIT, [1969] 73 ITR 395 (Cal)	Calcutta High Court decision accepting the proportionate-days approach under the Appendix I note.	Cited as a High Court decision consistent with the view that Appendix I governs the computation and applies to seasonal factories.
Anantapur Textiles Ltd. v. CIT, [1979] 116 ITR 851 (Cal)	Another Calcutta High Court decision adopting the proportionate method.	Used to show judicial consensus in favour of proportional computation prior to the Full Bench decision.
CIT v. Khedut Sahakari Khand Udyog Mandli, [1976] 104 ITR 206 (Guj)	Gujarat High Court decision aligned with the proportionate-days computation under Appendix I.	Also cited as supporting authority for the departmental position.
L.H. Sugar Factories and Oil Milts (P.) Ltd. v. CIT, [1979] 118 ITR 985 (All)	Held (in that decision) that for double and triple shift working 100% of the normal depreciation allowance is admissible and the actual number of days on which the factory worked such extra shifts is immaterial.	Described in the opinion as a discordant/allied decision; the Full Bench considered this position erroneous on the point of extra-shift computation and reached a contrary conclusion.
J.K. Synthetics Ltd. v. Commissioner Of Income-Tax, [1979] 118 ITR 629 (All)	Held that the normal allowance (for purposes of Appendix I explanation) referred to the figure of normal depreciation if machinery/plant worked for 180 days or more (i.e., method of computing normal depreciation), not a hypothetical figure.	The Full Bench clarified that J.K. Synthetics dealt only with computation of the normal allowance and did not decide that extra-shift allowance should be granted at 100% irrespective of days; J.K. was relied on to correct the misreading in L.H. Sugar decision.
Dhampur Sugar Mills Ltd. v. CIT, [1980] UPTC 915	Referenced as being in the same position as the L.H. Sugar decision (i.e., contrary view).	Mentioned to show similar treatment in earlier proceedings; Full Bench treated that line of authority as not correctly stating the law on extra-shift computation.

Court's Reasoning and Analysis

The Full Bench's reasoning proceeded from a close textual analysis of the statutory scheme and the relevant rules:

Statutory context: Section 32 of the Income-tax Act, 1961, allows depreciation and contemplates computation "according to the Rules." Rule 5 prescribes the method for computing normal depreciation, and its second proviso provides a special rule for seasonal factories — treating buildings/machinery/plant/furniture "as if" in use throughout the period the assessee was owner during the previous year when the seasonal factory was worked during all working seasons.
Partition of subject-matter: Rule 5 (and its second proviso) deals with the general computation of normal depreciation for various assets (including buildings, machinery, plant, furniture). However, the extra shift allowance (additional depreciation for double/triple shift working) is governed not by rule 5 itself but by Part I of Appendix I to the Rules, entry III ("Machinery and plant") and its accompanying remarks and Explanation 1.
Appendix I is a specific, self-contained code for extra allowances: The Appendix's remarks explicitly limit the extra allowance to machinery and plant (not to buildings or furniture), set maximum percentages for double (up to 50%) and triple (up to 100%) shift working, and prescribe that "The calculations of the extra allowances ... shall be made separately in the proportion which the number of days for which the concern worked double shift or triple shift ... bears to the normal number of working days throughout the previous year." For this purpose the normal number of working days was to be taken as 300 (for the period in question).
Plain meaning and an illustrative example: The Appendix note gives an illustration (100 days triple shift produces one-third of 100% of the normal allowance) and states "this applies to all concerns," making clear the provision is meant to be broadly applicable, including to seasonal factories.
Specificity prevails over the general proviso: Because Appendix I, entry III, and its Explanation 1 constitute a specific provision addressing extra shift allowance (including a special method for computing the "normal allowance" for the purposes of the extra allowance), that special provision displaces any attempt to apply the second proviso to rule 5 for calculation of the extra shift allowance. The first Explanation in Appendix I prescribes how to calculate "normal allowance" for purposes of the extra-shift computation and is a self-contained special rule.
Practical and documentary support: The prescribed tax form (referred in Appendix II) requires assessees to state the number of days for which extra shifts were worked, reinforcing the Appendix's approach that the extra allowance is to be computed on an actual-days basis for each plant/machinery item.
Post-1964 amendment noted but not retrospective: The Appendix note was modified effective 1 April 1970 to change the "normal number of working days" (reducing the general figure from 300 to 240 and treating seasonal factories as 180). This liberalized the allowance prospectively but was not retrospective and did not create a connection with the second proviso to rule 5; thus the second proviso remained inapplicable for computing extra allowances for the year in question.
Addressing conflicting precedents: The court reviewed prior decisions. A line of authorities (including several All-India and High Court decisions cited in the opinion) supported the proportionate-days method. A contrary decision (L.H. Sugar) had held that full normal depreciation was admissible regardless of days; the Full Bench concluded that L.H. Sugar had misread J.K. Synthetics (which had decided only the method for computing the normal allowance) and therefore L.H.'s broader conclusion about extra-shift computation was incorrect.
Conclusion from the analysis: Applying the Appendix I note (entry III and Explanation 1), the extra shift allowance must be computed in proportion to the number of days the machinery or plant actually worked extra shifts (using the normal number of working days prescribed in the Appendix for that assessment period). In the present case, triple shift for 105 days yields an extra allowance equal to 105/300 of the normal allowance — consistent with the ITO's computation and the Tribunal's view.

Holding and Implications

Holding: The Full Bench held that the extra shift allowance for double and triple shift working must be computed in proportion to the number of days on which the machinery or plant was actually used for such extra shift-working, and not as an amount equal to the full normal depreciation allowance.

Direct implications (as stated in the opinion):

The Full Bench answered the referred question in favour of the department and against the assessee.
In the specific facts of this case, the extra allowance for triple shift working is to be computed as 105/300 of the normal allowance (as granted by the revenue authorities and upheld by the Tribunal).
The Division Bench recorded the Full Bench answer and ordered that there shall be no order as to costs.

Note: The opinion explains that the Appendix I note (entry III) is a specific code for extra shift allowance computation and that later rule amendments (effective 1 April 1970) altered the "normal number of working days" prospectively (to 240 generally and 180 for seasonal factories), but such amendment was not retrospective for the assessment year in dispute.

Show all summary ...

Satish Chandra, C.J:— M/s. Dhampur Sugar Mills Ltd., the assessee, owns and runs a sugar factory. It wo???ks seasonally. For the assessment year 1964-65, it worked triple shift for 105 days. It claimed 100% of the normal depreciation allowance for the triple shifts. The ITO allowed extra shift allowance to the extent of 105 to 300 of the normal depreciation allowance. This view was upheld in appeal as well as by the Tribunal in further appeal.

2. At the instance of the assessee, the Tribunal referred the following question of law for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, and having regard to the second proviso to rule 5 of the Income-tax Rules, 1962, the Tribunal was right in holding that the extra shift depreciation allow ance for double and triple shift working in the case of the assessee-company was to be calculated with reference to the actual number of days on which the extra shifts worked and not at 100% of the normal depreciation allowance for the relevant previous year?”

3. When the case came up for hearing before a Division Bench, it found that on this matter there was a conflict of opinion in this court. It referred the following question of law for decision by a larger Bench:

“Whether having regard to rule 5 read with entry III of Appendix I, Part I, of the Income-tax Rules, 1962, as applicable in the assessment year 1964-65, depreciation allowance for multiple shift working has to be allowed in proportion to the number of days on which the machinery or plant was used or an amount equal to the full allowance of normal depreciation?”

4. Section 32 of the I.T Act, 1961, deals with depreciation. Under cl. (ii) of sub-s. (1), in the case of buildings, machinery, plant or furniture, the allowable deduction is such percentage on the written down value thereof as may, in any case or class of cases, be prescribed. The computation of depreciation allowance is to be done according to the Rules. Rule 5 refers to depreciation. We shall refer to its provisions as they were in operation for the period relevant to the assessment year 1964-65. Sub-rule (1) of r. 5 provided the method of computation of depreciation generally. The second proviso referred to a seasonal factory. It stated:

“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.”

5. This was the normal depreciation allowance. Rule 5 or its second proviso did not refer to or lay down the criteria for computing the extra shift allowance. This aspect has been dealt with by Part I of Appendix I to the Rules and at serial number III, which is headed as “Machinery and plant”, the remarks in column No. 3 are:

“An extra allowance up to a maximum of 50% 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% of the normal allowance, instead of 50%, shall be allowed in computing the total income assessable for any assessment year commencing on or after the first day of April, 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 working days 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% 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…………”

6. It is noticeable that the extra allowance is only for machinery and plant, unlike the normal allowance which extends to buildings or furniture in addition to machinery and plant. Then the remark in column 3 of the Appendix exclusively provides the method for computing the extra allowance for double and triple shift working. Its Explanation 1 lays down the method of calculating the normal allowance for purposes of computing the extra allowance for double or triple shift working. The note in the remarks column of the Appendix is hence a self-contained code for determining the extra allowance for double and triple shift working.

7. The note requires that the ITO be satisfied that the concern has actually worked double or triple shift. For double shift the maximum extra allowance is 50% of the normal allowance. For triple shift the extra allowance runs up to 100% of the normal allowance. The note specifically provides that the calculation of the extra allowance shall be made in the proportion which the number of days for which the concern worked double or triple shift, as the case may be, bears to the normal number of working days throughout the previous year. The normal number of working days for this purpose shall be taken as 300.

8. Not content with such a specific provision for computation, the note goes on to give an illustration. If a concern has worked triple shift for 100 days, the extra allowance shall be one-third of 100% of the normal allowance.

9. The note does not leave its application in doubt. It says “this applies to all concerns……”

10. The method of computation of extra allowance as given ???n the remarks column No. 3 of the Appendix/will obviously be applicable to seasonal factories also. In the present case the assessee-company worked triple shift for 105 days. The extra allowance will be 105/300 of the normal allowance. This is what the revenue authorities have granted.

11. Learned counsel for the assessee invited us to extend the method of computation specified in the second proviso to r. 5 to the working out of the extra shift allowance as well. Learned counsel stressed that the note in the remarks column of the Appendix does not specifically provide for a seasonal factory. The second proviso to r. 5 is the only provision applicable to a seasonal factory. For this reason, it should be applicable. There are several difficulties in accepting this submission.

12. In the first place, the note in the remarks column expressly says “this applies to all concerns”. This will include a seasonal factory.

13. In the second place, the second proviso specifies the method of working out the normal allowance for building, machinery, plant and furniture. The extra shift allowance is given only to machinery and plant. Then the first Explanation is a special provision. It will exclude the applicability of the general provision contained in the second proviso to r. 5 for computing the normal allowance. The first Explanation applies also to a seasonal factory. The normal allowance for a seasonal factory for computing the extra shift allowance has to be worked out according to the first Explanation to the note in the remarks column. For this purpose, recourse cannot be had to the second proviso to r. 5.

14. For the assessee, it was stressed that the yardstick of 300 working days cannot possibly apply to a seasonal factory like a sugar factory because it can never work for 300 days in a year. Therefore, the method provided in the second proviso that if it has worked throughout the working season it should get 100% extra allowance for triple shift working, ought to apply. We are unable to agree. The opening part of the note in the remarks column provides for the eligibility to extra allowance, the condition being that the concern has actually worked double or triple shift to the satisfaction of the ITO. If so, the maximum allowance is 50% in case of double shift and 100% for triple shift of the normal allowance. Thereafter, the note lays down the mode or method of computation of the extra allowance. The extra allowance is computed for each plant or machinery that has been worked double or triple shift. The allowance is not given to the assessee as such. It is confined to the actual or triple shift working of the plant or machinery. The form prescribed under r 34(1) (sic) of the Rules and referred to in Appendix II of the I.T Rules requires the assessee to specifically state the number of days for which extra shifts worked. This makes it abundantly clear that the extra shift allowance has to be calculated on the basis of the number of days the plant or machinery has actually worked.

15. The note in the remarks column of Appendix I was modified with effect from April 1, 1970. For calculating the extra shift allowance the normal number of working days, which, till then, was 300, was changed. In the case of a seasonal factory or concern, the normal number of working days were to be treated as 180 irrespective of the number of days on which the factory or concern actually worked during the whole year. In other cases, the figure was 240 days. Thus, the number of normal working days was reduced from 300 to 240 generally and 180 in the case of seasonal factories. This change no doubt liberalized the grant of extra shift allowance. But this change was not made retrospective. Further, even according to this change, the normal number of working days have been artificially fixed. There is no co-relation with the provision in the second proviso to r. 5 where the criteria is that the concern worked throughout all the working season irrespective of the number of days. For this reason also the second proviso to r. 5 cannot be utilized.

16. This view has been accepted by this court in several cases: Raza Sugar Co. v. CIT, [1970] 76 ITR 541 (All), Shadi Lal Sugar and General Mills Ltd. v. CIT, [1976] 103 ITR 748 (All), Kundan Sugar Mills v. Commissioner Of Income-Tax, U.P, [1977] 106 ITR 704 (All). The same view has been accepted by the Calcutta High Court in Ganesh Sugar Mills Ltd. v. CIT, [1969] 73 ITR 395 and in Anantapur Textiles Ltd. v. CIT, [1979] 116 ITR 851 (Cal) as well as by the Gujarat High Court in CIT v. Khedut Sahakari Khand Udyog Mandli, [1976] 104 ITR 206.

17. A discordant note was, however, struck by this court in L.H Sugar Factories and Oil Milts (P.) Ltd. v. CIT, [1979] 118 ITR 985 (All). It was observed in this case (p. 988):

“In relation to the fifth question, the position is that in J.K Synthetics Ltd. v. Commissioner Of Income-Tax., [1979] 118 ITR 629 (All) this court has held that the normal allowance referred to in Explanation I under ‘Machinery and plant’ in Appendix I, relating to r. 5 of the Income-tax Rules, 1962, refers to the figure of normal depreciation had the machinery and plant worked for a period of 180 days or more and not the hypothetical figure of normal depreciation.”

18. Having said so, the Bench went on to hold (p. 988):

“For double and triple shift working, 100% of such normal depreciation allowance is admissible. The actual number of days on which the factory worked such extra shifts is immaterial. In view of this decision, the fifth question is liable to be answered in favour of the assessee.”

19. In J.K Synthetics case, [1979] 118 ITR 629 (All), the only question raised and decided by this court related to the method of computing the normal depreciation allowance. It was held that the method provided in the first Explanation to the note in the Appendix was applicable to compute the normal depreciation for calculating the extra shift allowance. In that case there was no dispute as to the method of calculating the extra shift allowance. The Bench erroneously held that J.K Synthetics case, [1979] 118 ITR 629 (All) decided that for double and triple shift working 100% of such normal depreciation allowance is admissible and that the actual number of days on which the factory worked such extra shifts, is immaterial. In respect of this matter, the decision in L.H Sugar Factories and Oil Mills (P) Ltd., [1979] 118 ITR 985 (All) does not lay down the correct law. The same is the position in the case of Dhampur Sugar M???lls Ltd v. CIT, [1980] UPTC 915. Th??? question of law referred to the Full Bench is accordingly answered by holding that the extra shift allowance has to be computed in proportion to the number of days on which the machinery or plant was used and not the amount equal to the full amount of normal depreciation. Let th??? papers be laid before the Bench concerned with this opinion and answer.

ORDER OF DIVISION BENCH

R.R Rastogi, J.:— The Income-tax Appellate Tribunal has referred the following question of law for our opinion:

“Whether, on the facts and in the circumstances of the case, and having regard to the second proviso to rule 5 of the Income-tax Rules, 1962, the Tribunal was right in holding that the extra shift depreciation allowance for double and triple shift working in the case of the assessee-company was to be calculated with reference to the actual number of days on which the extra shifts worked and not at 100% of the normal depreciation allowance for the relevant previous year?”

20. In view of the conflict of opinion between two Division Bench decisions of this court we had referred the following question for decision to the Full Bench:

21. The Full Bench has now answered the question by saying that the extra shift allowance has to be computed in proportion to the number of days on which the machinery or plant was used, and not at an amount equal to the full amount of normal depreciation.

22. In view of the above, we answer the question referred in favour of the department, and against the assessee. There shall be no order as to costs.