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Commissioner Of Income-Tax, Bombay City-I v. I.B.M World Trade Corporation
Judgment Summary — M.N. Chandurkar, J.
Factual and Procedural Background
In assessment proceedings for the assessment year 1962-63 a sum of Rs. 3,56,154 was determined as development rebate under s.33(1) of the Income-tax Act, 1961, in respect of data processing (EA) machines, card plant machinery and workshop machinery; the ITO allowed that deduction. The Commissioner of Income Tax, taking the view that the amount could not be allowed, issued a notice under s.263 and, after hearing the assessee, held that the EA Machines were part of “office appliances”. The Commissioner therefore held that development rebate to the extent of Rs. 3,50,870 had been wrongly allowed and directed the ITO to revise the assessment.
The assessee appealed, and the Income-tax Appellate Tribunal examined the technical nature of the machines, their operation in systems, and their use by customers. The Tribunal concluded that the machines were not office appliances, and that the assessee’s business of letting those machines on hire qualified them for development rebate under s.33(1) of the Income-tax Act, 1961 (and it also referred to s.10(2)(vib) of the Indian I.T. Act, 1922). At the instance of the revenue the following question was referred to this Court under s.256(1) of the I.T. Act, 1961: whether EA Machines were office appliances not eligible for allowance of development rebate under section 33(1) of the Income-tax Act, 1961.
The Court heard submissions and examined dictionary meanings and a prior judicial decision dealing with similar machines for a different statutory purpose (a municipal octroi dispute). The Court ultimately answered the referred question.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, EA Machines (data processing machines) were "office appliances" and therefore not eligible for allowance of development rebate under section 33(1) of the Income-tax Act, 1961.
Arguments of the Parties
Revenue / Commissioner
- The Commissioner took the view that the amount of development rebate was not allowable because EA Machines constituted office appliances and fell within the exclusion in s.33(1) of the Income-tax Act, 1961. (The opinion records the Commissioner's view and consequent order under s.263 removing the earlier allowance.)
Assessee / Counsel (Mr. Joshi)
- Mr. Joshi referred to dictionary meanings (Random House) and argued that the word “appliance” includes an “instrument, apparatus or device for a particular purpose or use”, and contended that where s.33(1) excludes “office appliances” even an apparatus may have to be included within the meaning of “office appliances”.
- The assessee (as found by the Tribunal and stated before the Commissioner) highlighted the peculiar technical nature of data-processing machines: they function as systems made up of multiple machine categories (input, processing, output, etc.); require special installations (air-conditioning, special rooms, separate power supplies, floor strengthening); demand extensive operator and engineering training; and are used for complex computational, accounting, billing and scientific tasks rather than simple office functions.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Miscellaneous Petition No. 330 of 1968 (decided 10 August 1972) — dispute between the present assessee and the Municipal Corporation of Greater Bombay | The learned single judge held that machines similar to the ones in question were not to be treated as "appliances" for the purpose then under consideration; appliances were described as articles generally meant for domestic use and personal convenience. | The Court relied on this earlier decision to support the proposition that, given the nature of the machines, they should not be classified as "appliances" and thus reinforced the conclusion that they were not "office appliances". |
Court's Reasoning and Analysis
The Court's analysis proceeded through several linked steps, based strictly on findings recorded by the Tribunal and statements placed before the Commissioner:
- Lexical inquiry: The Court considered dictionary definitions (Random House) of “appliance” and “apparatus”. “Appliance” was noted as “an instrument, apparatus or device for a particular purpose or use”; “apparatus” was defined as (1) a group or aggregate of instruments, machinery, tools, materials having a particular function and (2) any complex instrument or machine for a particular purpose. The Court observed that “apparatus” is of wider import and that scientific apparatus falls within the statutory definition of “plant” in s.43(3), but that not every apparatus would necessarily be an “appliance”.
- Contextual construction: Because s.33 employs the qualified phrase “office appliances”, the Court held those words must be construed in the context of appliances “which are generally used in an office as an aid or a facility for the proper functioning of the office.” That qualification narrows the ordinary meaning of “appliance” for the purposes of s.33.
- Consideration of technical and factual findings: The Tribunal had found, and the Court recorded, detailed technical characteristics of the machines and the data-processing industry: (a) a single machine often has no commercial use by itself — a combination of machines forming a "system" is required; (b) systems include input, storage, control, processing and output components; (c) systems range widely in cost and complexity, requiring special floor foundations, air-conditioning, separate power supplies and other installations; (d) machines perform sophisticated functions (pay-roll computations, billing, accounts, quality control, scientific computations), and (e) operation and installation require highly trained engineers and operators with substantial training periods.
- Functional distinction: On these factual findings the Court emphasized the qualitative difference between the data-processing machines and ordinary “office appliances.” The data-processing machines were described as scientific, complex and often substitutes for highly qualified human intellectual work rather than simple aids for routine office tasks.
- Reliance on earlier judicial treatment: The Court noted a prior decision (Misc. Petition No. 330 of 1968) where similar machines were not treated as “appliances” in the context of octroi liability; this supported the narrower understanding of “appliances” applied in the present statutory context.
- Conclusion of classification: Applying the lexical, contextual and factual analyses, the Court concluded it was difficult to classify the EA/data-processing machines as “office appliances” within s.33. The Tribunal’s conclusion that the machines were not office appliances was upheld.
Holding and Implications
Holding: The Court answered the referred question in favour of the assessee and held that EA Machines (data processing machines) were not “office appliances” and therefore were eligible for allowance of development rebate under s.33(1) of the Income-tax Act, 1961.
Direct consequences: The order withdrawing the grant of development rebate was set aside insofar as it treated EA Machines as office appliances; the assessee remains eligible for the development rebate for the machines in question. The Court directed that the revenue pay the costs of the assessee.
Broader implications: The opinion does not set out or discuss any novel legal doctrine beyond its application to the facts; it confines its conclusion to the construction of “office appliances” in s.33(1) on the facts of this case and by reference to the prior decision cited. No broader new precedent is expressly articulated in the text beyond this decision on classification in the circumstances described.
M.N Chandurkar, J.:— The question which has been referred to this court under s. 256(1) of the I.T Act, 1961, at the instance of the revenue is as follows:
“Whether, on the facts and in the circumstances of the case, EA Machines (now called Data Processing Machines) were office appliances not eligible for allowance of development rebate under section 33(1)((2) appears to be a mistake) of the Income-tax Act, 1961?”
2. In assessment proceedings in respect of the assessment year 1962-63, a sum of Rs. 3,56,154 was determined as development rebate under s. 33(1) of the I.T Act, 1961, on DP Machines (EAM), card plant machinery and workshop machinery, and the ITO allowed that amount as a deduction.
3. The Commissioner having taken the view that the amount could not be allowed as a deduction issued a notice under s. 263 of the I.T Act, 1961, and after hearing the assessee took the view that EA Machines were part of the office appliances. He, therefore, held that development rebate to the extent of Rs. 3,50,870 was wrongly allowed as a deduction, and made an order withdrawing the grant of development rebate. He directed the ITO to revise the assessment of the assessee. Before the Commissioner certain peculiar features of the data processing industry and the nature of the machinery which was used by the assessee were brought to his notice in the following words:
“Unlike the products of most industries, including the office appliances industry, a unique feature of the data processing industry is that a single machine by itself is of no commercial use. A combination of machines is necessary in order to constitute a system which is of commercial value to the user. This is due to the fact that commercially usable installations must include input, special purpose, processing and output machines. Each of these four categories consists of a large number of different machine types ranging in value from a few hundred dollars in the case of simple input machines to millions of dollars in the case of complex processing machines. Due to the availability of a wide variety of technical specifications and capacities, hardly any installation is identical with another. Other significant facts are the physical size of the machines, the necessity of special air-conditioning and dust proofing, and specially designed rooms for using the more complex types of installation, the necessity for separate power supplies, and in many cases floor strengthening, etc.
The company maintains a corps of highly trained engineers, both for maintaining its machines and for establishing the machine configurations and technical specifications best suited to meet different customer data processing requirements. It is also important to bear in mind that certain machine types are designed specifically for scientific use and have no commercial applications. In contradistinction to the normal concept of office appliances the training period required for an operator of the simplest input unit manufactured by IBM is approximately 3 months. For highly sophisticated computing systems, the training period for programming staff, etc., assuming a high level of mathematical ability, is between six to nine months.”
4. In respect of the assessment year 1961-62 also, though development rebate was earlier allowed by the ITO, proceedings under s. 154 of the Act for rectification of the original assessment were taken and the development _ rebate earlier allowed was withdrawn. That order was confirmed by the AAC, and the matter was, therefore, taken to the Income-tax Appellate Tribunal in respect of the assessment years 1961-62 and 1962-63.
5. The Tribunal went in detail into the matter in which the data processing machines function, and found that if the data processing machine was fed with the code numbers of workers, their rates of pay and the number of hours worked, the machine would work out their total pay and make deductions for provident fund, superannuation, loan recovery, etc., and strike the balance and print a wage sheet for the week or the month. Quality control and cost production was also found to be an important function performed by the machine. The machine was also found to be capable of printing bills for customers in respect of the issues for sale, and it could also draw monthly accounts from the information stored in it. Referring to the system in which a group of machines came to function together, the Tribunal observed as follows:
“A group of machines is used to make up a ‘system’ which can be used for various purposes according to the requirements of a business or industry. A system's cost varies from Rs. 2 lakhs to Rs. 30 lakhs and over, and requires special floor foundations and in most cases air-conditioning. Data processing systems include computers, and such computers are installed only, in well known industrial and business establishments. Computers can be used for mathematical equations, providing mathematical answers to complex business, industrial and scientific problems.”
The Tribunal thus took the view that having regard to the highly technical nature of the machines and the varied purposes to which they could be put to use, they could not be regarded as office appliances in the offices of the various customers to whom the machines were let on hire. The Tribunal found that as far as the assessee was concerned, it was the business of the assessee to let these machines on hire to customers and they were wholly used for the purposes of its business of letting, out the machines on hire to customers. Accordingly, the Tribunal held that the assessee was eligible for allowance of development rebate under s.; 33(1) of the I.T Act, 1961, and s. 10(2)(vib) of the Indian I.T Act, 1922. On these facts, the question reproduced above has been referred to this; court at the instance of the revenue.
Mr. Joshi has referred us to the meaning of the word “appliance” in Random House Dictionary, which gives the meaning of “appliance” as “an instrument, apparatus or device for a particular purpose or use” and it is contended that when s. 33(1) of the I.T Act refers; to exclusion of office appliances for the purposes of eligibility in respect of development rebate, even an apparatus will have to be included ‘within the meaning of the words “office appliances”.
6. Now, the meaning of the word “apparatus” given in the Random House Dictionary is:
“1. a group or aggregate of instruments, machinery, tools, materials, etc., having a particular function or intended for a specific use.
2. any complex instrument or machine for a particular purpose.”
7. It is, no doubt, true that the word “apparatus” is a word of much wider import and the definition of “plant” in s. 43(3) shows that scientific apparatus is included in the word “plant”, But, while a given appliance may be in the form of an apparatus, the converse will not always be true and every apparatus will not necessarily be an appliance. It is important to remember that the word “appliances” is qualified by the word “office” in s. 33 and those words as they are used ins. 33 will, therefore, have to be construed in the context of appliances wich are generally used in an office as an aid or a facility for the proper functioning of the office. The facts found by the Tribunal and the statement made before the Commissioner, which does not seem to have been disputed before him, show the complicated nature of the machinery in respect of which the assessee was claiming the development rebate. The machinery was such that it could not be easily operated by laymen and special training for a period which may cover three months in some cases and a much longer period in others was necessary in order to equip a person with the knowledge and art of operating these machines. The installation and operation was obviously on a scientific basis and even for the purposes of installation, certain special conditions had to be provided in the form of air-conditioning or a particular temperature. The purposes for which such machines, which can baldly be described as computers are used, are now well known and in highly scientifically developed systems, they have their own roles to play and they cannot be equated, therefore, with office appliances which, in our view, would be of a much simpler nature. They are really substitutes for human labour not in the sense of manual labour but in a sense they perform intellectual functions which would normally be performed by highly qualified engineers. One machine by itself serves no purpose, but what has to be used is a group of machines which make up a “system”. The basic functions of a computer are, (1) input, (2) storage, (3) control, (4) processing, and (5) output. The processor has to translate the language of the programmer into the computer-code form which is used internally by the computer. A computer system or an electronic data-processing system is physically a collection of electromechanical and electronic components and devices assembled in metal cases (modules) and cabinets. These contain switching and communications components such as transistors, diodes, capacitors, resistors, and integrated circuits, all combined into various types of circuitry, together with memory systems,; power supplies, delay lines, and various types of magnetic media such as tapes and wires for carrying and transforming data and information, as coded, into instructions and computations. In view of the functions which the “system” is capable of performing, it is difficult to classify these machines as office appliances.
8. The meaning of the word “appliance”, though in a different context, fell for consideration before a learned single judge of this court in Miscellaneous Petition No. 330 of 1968, decided on 10th August, 1972, in a dispute between the present assessee and the Municipal Corporation of Greater Bombay in respect of liability to octroi and the question was whether the machines like the one with which we are dealing were machines under item 50; of the Schedule to the Bombay Municipal Corporation Act, or M ere kinds of apparatus and appliances and spares as contemplated by items 52 of the said Schedule. The learned judge while dealing with the machines similar to the machines in question held that appliances may generally be articles which are meant for domestic use and personal convenience. The contention of the Municipal Corporation that the machinery did not fall within item 50 was rejected. It is-true that that decision was dealing with the liability to octroi, but all that we are trying to point out is that having regard to the nature of the machines, even for that purpose, the machines were not treated as appliances, the meaning of which was restricted to articles which were meant for domestic use and personal convenience.
9. In the instant case, the word “appliances” was qualified by the word “office”. That, however, will not affect the question that essentially what is contemplated by the term “office appliances” would be something which would normally be used by way of a facility; or aid for the proper functioning of the office.
10. In this view of the matter, we see no error in the view taken by the Income-tax Appellate Tribunal and the answer to the question must be that the EA Machines were not office appliances and were eligible for allowance of development rebate under s. 33(1) of the I.T Act, 1961. The revenue to pay the costs of the assessee.
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