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Commissioner Of Inco... v. Emirates Commercial ...

Bombay High Court

Apr 30, 2003

Judgment

Subsequent
References

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Factual and Procedural Background

The Department referred questions to the court under section 256(1) of the Income-tax Act, 1961 in respect of assessment years 1983-84 and 1984-85. The reference raised four specific questions concerning (1) allowance of maintenance expenses by the assessee on a flat owned by it and provided to employees; (2) whether those maintenance expenses resulted in perquisites and should be considered for disallowance under section 40A(5); (3) entitlement to deduction under section 32A for new computers installed in the office premises; and (4) allowance of travelling expenses incurred by head‑office staff on visits to the branch office in India. The parties included the Department and the assessee (a non-resident banking company with head office at Abu Dhabi and a branch in Bombay, as described in the proceedings). The reference records submissions by counsel for both sides and the court's findings and answers to each question.

Legal Issues Presented

“Whether the Tribunal was right in law in allowing maintenance expenses incurred by the assessee on the flat owned by it and provided to its employees?”
“Whether the Tribunal was right in law in holding that the maintenance expenses incurred by the bank on its ownership flat did not result in the provisions of perquisites to the concerned employees and that the said expenses should not be considered for computing disallowance under section 40A(5) of the Income-tax Act?”
“Whether the Tribunal was right in allowing deduction under section 32A in respect of the computers installed in the office premises?”
“Whether the Tribunal was right in law in allowing the travelling expenses of Rs. 4,20,706 incurred on the staff members of the head office on their visit to the branch office of the assessee in India?”

Arguments of the Parties

Department's Arguments

The Department (through Mr. R.V. Desai, senior counsel) challenged the section 32A deduction claimed for new computers (Rs. 7.50 lakhs). It argued the computers were like calculating machines or office appliances and did not constitute "plant or machinery" within section 32A(2)(b)(iii).
It contended that section 32A(2)(b)(iii) applies only where there is plant or machinery in an industrial undertaking for manufacture or production of any article or thing; since the assessee is in banking (not manufacturing), it could not claim section 32A benefits.
The Department relied on: Commissioner Of Income-Tax v. R. Shroff Consultants P. Ltd., [1999] 238 ITR 1018 (Bombay High Court) and Insight Diagnostic and Oncological Research Institute P. Ltd. v. Deputy CIT (Income-tax Appeal No. 247 of 2001, April 16, 2003) (reported in [2003] 262 ITR 41) to support its position.

Assessee's Arguments

The assessee (through Mr. Pardiwalla, counsel) submitted it is a non-resident banking company with a Bombay branch; it had acquired mainstream computers used in banking for preparation of accounts, analyses, balance-sheets, bank statements and processing customer data to produce management information reports.
It argued that a bank can be an "industrial undertaking" for the purposes of section 32A(2)(b)(iii) because, although rendering services, it processes inputs into outputs (data processing), i.e., it produces articles and things (information, statements, reports) by means of computers.
The assessee distinguished the computers from mere calculators or ordinary office appliances: the machines were "mainstream" computers (not PCs), housed in air-conditioned rooms and substituted for human labour rather than simple appliances operable by lay persons.
The assessee relied on: CIT v. Peerless Consultancy Services (Pvt.) Ltd., [1990] 186 ITR 609 (Calcutta High Court) (affirmed by the Supreme Court in CIT v. Peerless Consultancy and Services (P.) Ltd., [2001] 248 ITR 178); CIT v. Comp-Help Services (P.) Ltd., [2000] 246 ITR 722 (Madras High Court); and CIT v. Computerised Accounting and Management Service (P.) Ltd., [1999] 235 ITR 502 (Kerala High Court).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Citibank N.A, Bombay…Applicant; v. Commissioner Of Income-Tax, Bombay…. [2003] 262 ITR 47 (Bom)	Authority relied upon in answering Questions I and II.	The court answered Questions I and II in the negative (i.e., in favour of the Department and against the assessee) "in view of" this judgment.
Commissioner Of Income-Tax v. R. Shroff Consultants P. Ltd., [1999] 238 ITR 1018	Relied on by the Department to support the proposition that computers are office appliances and not plant/machinery under section 32A(2)(b)(iii).	The court considered the Department's reliance but ultimately found merit in the assessee's arguments on section 32A; the R. Shroff precedent did not determine the court's favourable answer to Question III.
Insight Diagnostic and Oncological Research Institute P. Ltd. v. Deputy CIT (Income-tax Appeal No. 247 of 2001) (reported in [2003] 262 ITR 41)	Relied on by the Department in support of the position that computers were office appliances.	The court noted the reliance but did not accept the Department's contention; it answered Question III in favour of the assessee.
CIT v. Peerless Consultancy Services (Pvt.) Ltd., [1990] 186 ITR 609	Relied on by the assessee to show that an undertaking rendering services may be regarded as an "industrial undertaking" for purposes of section 32A when it processes inputs into outputs.	The court treated this decision (and its affirmation by the apex court) as supportive of the assessee's position and cited it in support of answering Question III affirmatively.
CIT v. Peerless Consultancy and Services (P.) Ltd., [2001] 248 ITR 178	Affirmation by the Supreme Court of the principle relied on by the assessee from the Peerless line of cases.	The court relied on the Peerless line of authority as supportive precedent for treating the bank's computerised data processing as satisfying section 32A conditions.
CIT v. Comp-Help Services (P.) Ltd., [2000] 246 ITR 722	Relied on by the assessee (Madras High Court decision) as analogously supporting eligibility under section 32A for computer installations used in data processing activities.	The court expressly stated its view was supported by this judgment and applied it in concluding that the section 32A conditions were satisfied for the banks' computers.
CIT v. Computerised Accounting and Management Service (P.) Ltd., [1999] 235 ITR 502	Relied on by the assessee (Kerala High Court decision) to support the proposition that computer installations used for data processing qualify under section 32A.	The court cited this decision as support and applied its reasoning in concluding that the assessee's computers met the section 32A(2)(b)(iii) conditions.

Court's Reasoning and Analysis

Overall approach: The court addressed each referred question separately and grounded its answers on prior decisions where applicable and on findings of fact recorded by the lower authorities.

Questions I and II (maintenance expenses on flat/provision of perquisites):

The court answered both Questions I and II in the negative for the Department, relying on its earlier judgment in Citibank N.A. v. Commissioner of Income-Tax ([2003] 262 ITR 47 (Bom)). The opinion states the answers are given "in view of" that judgment; no extended additional analysis on these points is set out in the provided text.

Question III (section 32A deduction for computers):

The Department argued the computers were akin to calculating machines/office appliances and not "plant or machinery" under section 32A(2)(b)(iii), and that section 32A requires plant or machinery in an industrial undertaking engaged in manufacture or production of articles or things.
The assessee contended the computers were "mainstream" machines used to process commercial/customer data into outputs (accounts, balance-sheets, management information reports) and that banks, though service providers, perform data processing that constitutes production of articles/things and thus can be industrial undertakings for section 32A purposes; the machines substituted for human labour and were not mere appliances.
The court found merit in the assessee's submission: it explained that commercial data is fed into computers as inputs and processed into outputs (necessary information, computations, statements), and that these computers are not comparable to calculators. The court noted modern bank operations (front office/back office, customer services, investment/security transactions) rely on computerised processing to produce prints/outputs used by customers and management.
On that basis the court concluded all three conditions of section 32A(2)(b)(iii) were satisfied for the computers in issue and expressly held its view was supported by Madras and Kerala High Court decisions (Comp-Help Services and Computerised Accounting and Management Service).
Accordingly, the court answered Question III in the affirmative (in favour of the assessee).

Question IV (travelling expenses of head‑office staff to Indian branch):

The court analysed section 44C: it applies to non-residents carrying on business in India through branches and imposes a ceiling/restriction on head-office expenses by allocating common expenses among entities; it addresses potential inflation of head-office claims.
However, the court found on concurrent findings of fact recorded by the Commissioner (Appeals) and the Tribunal that the officers from Abu Dhabi came to Bombay to attend work of the Bombay branch and the expenses were incurred in connection with branch work; the head office initially incurred the expense but recovered it from the branch by raising a debit note.
Because the expenditure was exclusively incurred for the branch (not a common head-office expense), the court concluded section 44C had no application to disallow the travelling expense.
The court also recorded that the Department advanced no arguments on rule 6D.
Answer to Question IV: affirmative (in favour of the assessee).

Disposition: The court disposed of the reference and recorded "no order as to costs."

Holding and Implications

DISPOSED OF

Final answers to the referred questions (as stated in the opinion):

Question I — Answered in the negative: in favour of the Department and against the assessee (in view of Citibank N.A. judgment).
Question II — Answered in the negative: in favour of the Department and against the assessee (in view of Citibank N.A. judgment).
Question III — Answered in the affirmative: in favour of the assessee and against the Department (the court held the computers satisfied the conditions of section 32A(2)(b)(iii)).
Question IV — Answered in the affirmative: in favour of the assessee and against the Department (section 44C did not apply because the expenses were exclusively for the branch and were recovered from the branch).

Implications: The direct effects are limited to the parties in this reference — the Department prevailed on Questions I and II, while the assessee prevailed on Questions III and IV. The court applied existing precedents to resolve the issues; the opinion does not purport to create a new principle of law beyond application of those authorities to these facts. The reference is disposed of with no order as to costs.

Show all summary ...

S.H Kapadia, J.:— The Department has come by way of reference under section 256(1) of the Income-tax Act, 1961, in respect of the assessment years 1983-84 and 1984-85. The questions referred to us for our opinion are as follows:

“Question 1 : Whether the Tribunal was right in law in allowing maintenance expenses incurred by the assessee on the flat owned by it and provided to its employees?”

Answer : In view of our judgment in the case of Citibank N.A, Bombay…Applicant; v. Commissioner Of Income-Tax, Bombay…. decided on March 5, 2003, vide Income-tax Reference No. 5 of 1994 ([2003] 262 ITR 47 (Bom)), we answer the above question No. I in the negative, i.e, in favour of the Department and against the assessee.

“Question II : Whether the Tribunal was right in law in holding that the maintenance expenses incurred by the bank on its ownership flat did not result in the provisions of perquisites to the concerned employees and that the said expenses should not be considered for computing disallowance under section 40A(5) of the Income-tax Act?”

Answer : In view of our decision in the case of Citibank N.A, Bombay…Applicant; v. Commissioner Of Income-Tax, Bombay…., [2003] 262 ITR 47 (Bom), the above question No. II is answered in the negative, i.e, in favour of the Department and against the assessee.

“Question 111 : Whether the Tribunal was right in allowing deduction under section 32A in respect of the computers installed in the office premises?”

Arguments on question No. III:

2. Mr. R.V Desai, learned senior counsel appearing on behalf of the Department, submitted that in this case, the assessee had claimed deduction of Rs. 7.50 lakhs on account of investment allowance under section 32A of the Income-tax Act for new computers installed in the office premises.

3. He contended that these computers were like calculating machines and, therefore, they were in the nature of office appliances and that they did not constitute plant or machinery under section 32A(2)(b)(iii). He contended that these computers merely aided in the proper functioning of the office and, therefore, they were in the nature of office appliances and, therefore, the assessee was not entitled to deduction under section 32A(2)(b)(iii). He contended that in order to attract section 32A(2)(b)(iii), there should be existence of plant or machinery in an industrial undertaking for the purposes of the business of manufacture or production of any article or thing. It was argued that the assessee was in banking business. That, it was not an industrial undertaking as it was not in the business of manufacturing articles or things. He, therefore, contended that the assessee was not entitled to the benefit of deduction under section 32A of the Income-tax Act. In this connection, he placed reliance on the judgment of the Bombay High Court in the case of Commissioner Of Income-Tax v. R. Shroff Consultants P. Ltd., [1999] 238 ITR 1018. He also relied upon a judgment of the Bombay High Court in the case of Insight Diagnostic and Oncological Research Institute P. Ltd. v. Deputy CIT decided on April 16, 2003, vide Income-tax Appeal No. 247 of 2001 (unreported) (since reported in [2003] 262 ITR 41).

4. On the other hand, Mr. Pardiwalla, learned counsel appearing on behalf of the assessee, submitted that the assessee is a non-resident banking company, having its head office at Abu Dhabi. He contended that the branch office of the bank is in Bombay and, during the assessment year in question, the asses-see acquired mainstream computers which were utilised in banking business for preparation of accounts, analysis, balance-sheets and bank statements. That, these computers were used to process the customers' data and the output which resulted from these computers consisted of management information reports. He contended that even a bank could constitute an industrial undertaking under section 32A(2)(b)(iii) in the sense that although it is rendering service still, in the course of its business, it produces articles and things. That, inputs were processed by the computers and transformed into different outputs. That, the assessee used to receive vouchers, which were converted into balance-sheets. He contended that mainsteam computers were not PCs. They were required to be kept in separate air-conditioned rooms. He, therefore, contended that as along as the assessee used these computers for production of articles and things, the assessee could be regarded as an industrial undertaking. He relied upon the judgment of the Calcutta High Court in the case of CIT v. Peerless Consultancy Services (Pvt.) Ltd., [1990] 186 ITR 609, which decision has been affirmed by the apex court vide CIT v. Peerless Consultancy and Services (P.) Ltd., [2001] 248 ITR 178. He also relied upon the judgment of the Madras High Court in the case of CIT v. Comp-Help Services (P.) Ltd., [2000] 246 ITR 722. He also relied upon the judgment of the Kerala High Court in the case of CIT v. Computerised Accounting and Management Service (P.) Ltd., [1999] 235 ITR 502. He contended that the computers were not appliances as computers constituted substitutes for human labour. That, appliances could be operated by even lay persons.

Findings on question No. III:

5. We find merit in the arguments advanced on behalf of the assessee on this point. It is, no doubt, true that the judgments cited on behalf of the assessee refer to the assessees whose business was confined to data processing for their clients. Today, we have computerised accounting in the banks. In the case of computers, which existed during the relevant assessment year and even today, the operation of the computers in principle remains the same. That, commercial data is fed into the computers as inputs as per the requirement of various customers and the data is processed to get necessary information, computation and statements as outputs. These computers cannot be compared to calculators. Today, in matters of investments and security transactions, banks have a front office and back office. Today, under customer services, the banks render several services including providing information to customers on the basis of which the customers would make investments. All this is based on the print outs which constitute information, computations and statements. In the circumstances, we are of the view that all the three conditions of section 32A(2)(b)(iii) are satisfied. Our view is supported by the judgment of the Madras High Court in the case of CIT v. Comp-Help Services (P.) Ltd., [2000] 246 ITR 722 as also by the jugment of the Kerala High Court in the case of CIT v. Computerised Accounting and Management Service Pvt. Ltd., [1999] 235 ITR 502. We do not find any merit in the argument of the Department that these two judgments do not apply because, in those cases, the assessee was in the business of data processing. The nature of the services rendered by the bank to its customers does involve the work of data processing. It is on the basis of this data processing that the information is provided to its customers by the bank. It is on the basis of this data processing that the balance-sheets are prepared. It is on the basis of this data processing done by the computers that the management information reports come out.

Answer : In the circumstances, we answer the above question No. III in the affirmative, i.e, in favour of the assessee and against the Department.

“Question IV : Whether the Tribunal was right in law in allowing the travelling expenses of Rs. 4,20,706 incurred on the staff members of the head office on their visit to the branch office of the assessee in India?”

Findings on question No. IV:

6. Section 44C is applicable only in the cases of those non-residents, who carry on business in India through their branches. The said section was introduced to get over difficulties in scrutinising claims in respect of general administrative expenses incurred by the foreign head office in so far as such expenses stand related to their business or profession in India having regard to the fact that foreign companies operating through branches in India sometimes try to reduce incidence of tax in India by inflating their claims in respect of the head office expenses. In other words, section 44C seeks to impose a ceiling/restriction on head office expenses. However, section 44C contemplates allocation of expenses amongst various entities. That, the expenditure which is covered by section 44C is of a common nature, which is incurred for the various branches or which is incurred for the head office and the branch. However, in this case, we are concerned with the expenditure exclusively incurred for the branch. In this case, there is a concurrent finding of fact recorded by the Commissioner (Appeals) as well as the Tribunal stating that the officers came from the head office at Abu Dhabi to Bombay to attend to the work of the Bombay branch and, in connection with that work, the expense was incurred. That, the expense was initially incurred by the head office which was recovered by the head office from the branch in India by raising a debit note. Therefore, the expense was incurred for the branch office in India. These are concurrent findings of fact. We do not wish to interfere with those findings. Hence, section 44C has no application.

7. Before concluding it may be mentioned that no arguments were advanced by the Department on rule 6D.

Answer : In the circumstance, we answer the above question No. IV in the affirmative, i.e, in favour of the assessee and against the Department.

8. Accordingly, the above reference is disposed of with no order as to costs.