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Commissioner Of Income-Tax, Mumbai v. International Data Management Ltd. .

Bombay High Court

Feb 20, 2003

Judgment

Subsequent
References

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Factual and Procedural Background

This appeal arises from an aggrieved Revenue Department appeal against the Tribunal's decision, brought under section 260-A of the Income-tax Act, concerning Assessment Year 1988-1989. The assessee is described as being engaged in manufacture and sale of data processing cards, ribbons and mini micro-based systems, development of computer software, provision of technical consultancy services domestically and abroad, operation of a Data Processing Centre, dealing in computer software and hardware, and testing suitability of goods manufactured by other concerns prior to their use.

The Department raised seven questions in the appeal. The learned Judge (S.H. Kapadia, J.) preferred to answer the appeal question-wise. The primary issues related to (inter alia) entitlement to deductions under section 32AB, treatment of internally capitalised machinery, capitalisation out of work-in-progress of earlier years, entitlement to deduction under section 80I (including interpretation of the XIth Schedule and its amendment w.r.t. computers and data processing machines), classification of service/maintenance receipts as industrial income, and deletion of an addition for unutilised Modvat credit.

Legal Issues Presented

Whether the Tribunal was right in law in confirming the order of the CIT(A) directing the Assessing Officer to allow the assessee's claim under section 32AB despite alleged failure to furnish prescribed particulars of machinery and the audit account under section 32AB(5)?
Whether capitalization of certain machineries amounted to purchase of machineries and hence were eligible for deduction under section 32AB?
Whether the Tribunal erred in confirming the CIT(A)'s direction to allow deduction under section 32AB on amounts capitalised under the head "plant and machinery" out of work-in-progress of earlier years?
Whether deduction under section 80I is available to the assessee despite the unit having started manufacturing prior to 1-4-1988 (in light of item 22 of the XIth Schedule and its explanation)?
Whether the amendment to the XIth Schedule (excluding computers and data processing machines) applies to both old and new units which commence production after 1-4-1988 for the first time?
Whether the assessee is not entitled to deduction under section 80I on merits because income from service charges, maintenance revenue and lease rent cannot be treated as income derived from an industrial undertaking within the meaning of section 80I?
Whether the Tribunal was right in law in deleting the addition of Rs. 45,217/- made by the Assessing Officer on account of unutilised Modvat credit?

Arguments of the Parties

Department / Assessing Officer (as recorded)

Under section 32AB(5) deduction is not admissible unless the assessee furnishes, along with the return of income, the Audit Report in the prescribed form — and in this case the audit report was not submitted along with the return, so deduction under section 32AB should be disallowed (Question 1 argument).
The amount of Rs. 5,49,632 was the capitalised cost of plant and machinery representing internal capitalisation (machinery assembled by the assessee) and therefore did not constitute a "purchase" of new machinery within the meaning of section 32AB(1)(b) (Question 2 argument).
Amounts capitalised under the head "Plant and Machinery" out of work-in-progress of earlier years were not incurred out of the current year's taxable profits; therefore, they do not qualify for deduction under section 32AB which requires expenditure out of income chargeable to tax (Question 3 argument).
The exclusion of computers from item 22 of the XIth Schedule (per explanation) became effective only from 1-4-1988; thus computers manufactured prior to 1-4-1988 should remain within item 22 and be ineligible for section 80I deduction (Question 4 argument advanced administratively by AO).
Receipts by way of service and maintenance charges are not part of profits derived from an industrial undertaking and thus should be excluded when computing eligible profits under section 80I (Question 6 argument).
Assessing Officer made an addition of Rs. 45,217 on account of unutilised Modvat credit (Question 7), implying Revenue's view that it should be taxed; however, Revenue's senior counsel later conceded that this issue was covered by a Bombay High Court decision.

Assessee (as recorded)

The assessee claimed deduction under section 32AB supported by an Audit Report under section 32AB(5) and particulars of machinery; the claim was partly allowed by the AO on merits and the Audit Report was found to be on the AO's file (Question 1).
The assessee asserted that internally manufactured and assembled machinery, when transferred at cost to the manufacturing business, should be treated as "purchase" for the purpose of section 32AB(1)(b) (Question 2).
The assessee relied on earlier favourable Tribunal decisions for preceding years and contended that capitalisation from work-in-progress of earlier years should be eligible under section 32AB because the section only requires expenditure out of income chargeable to tax and does not limit it to current year's profits (Question 3).
The assessee contended that computers and data processing machines are not akin to the "office machines and apparatus" listed in item 22 of the XIth Schedule, and thus are excluded from that item as clarified by the explanation (Questions 4 and 5).
The assessee maintained that service and maintenance receipts are directly connected with and arise from its manufacturing/data-processing business and therefore form part of profits of the industrial undertaking eligible under section 80I (Question 6).
On Question 7, the assessee benefitted from the department's concession (via counsel) that the issue was covered by precedent.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income-tax v. Indo Nippon Chemical Co. Ltd., 245 ITR 384 (Bombay High Court)	Used by the parties / court as determinative authority on the tax treatment of unutilised Modvat credit (the specific legal principle is referenced in the opinion as covering the issue).	The court held that Question No. 7 was squarely covered by this judgment and accordingly answered Question No. 7 in favour of the assessee (deletion of the addition of Rs. 45,217/- was sustained).

Court's Reasoning and Analysis

The court proceeded question-wise, applying statutory text, record facts, prior Tribunal findings and the parties' contentions as follows.

Question No. 1 (Section 32AB — audit report / particulars)

The court rejected the Revenue's argument that deduction under section 32AB was inadmissible because the Audit Report was not filed with the return. The court observed (a) that this argument was not part of the framed question, (b) that the assessee had claimed the deduction on the basis of an Audit Report under section 32AB(5) and that the AO had partly allowed the claim on merits, and (c) that the R&P indicated the Audit Report was on the AO's file with no finding that it arrived only during assessment proceedings. As to the alleged failure to furnish prescribed particulars of machinery, the court noted there was no finding by the AO to that effect and that the Commissioner of Income-tax had remanded the matter for better particulars — an action which indicated the particulars had been supplied. On these bases the court answered Question No. 1 in favour of the assessee.

Question No. 2 (Internal capitalisation vs. "purchase" under section 32AB)

The court examined section 32AB(1)(b), which allows deduction where an assessee utilises income for purchase of any new machinery or plant, and the facts showing the assessee capitalised the value of machinery assembled by it (Rs. 5,49,632 included in total). The AO's view that internal capitalisation (machinery assembled by the assessee itself) was not a "purchase" attractable for relief was rejected. The court reasoned that if purchase from outside qualifies, equivalently manufacturing a machine and transferring it at cost to the manufacturing business should also qualify. Hence Question No. 2 was answered in favour of the assessee.

Question No. 3 (Capitalisation out of prior years' work-in-progress)

The AO had held that amounts capitalised out of work-in-progress of earlier years were not incurred out of income chargeable to tax in the current year and therefore not eligible under section 32AB. The court rejected that stand for two principal reasons recorded in the opinion: (1) the assessee had succeeded on the same point for earlier years and the department had not pursued a reference or application to this Court, indicating acceptance of the Tribunal's view for earlier years; and (2) the court's conclusion under Question No. 2 that internal manufacture and transfer at cost qualifies under section 32AB removed the AO's basis for refusing relief. The court also noted that section 32AB requires expenditure to be out of income chargeable to tax but contains no restriction that it must be from the current year's profits. Accordingly Question No. 3 was answered in the assessee's favour.

Questions No. 4 and 5 (Section 80I, XIth Schedule, and treatment of computers/data-processing machines)

The court analysed item 22 of the XIth Schedule and its explanation. Item 22 lists "office machines and apparatus" (e.g., typewriters, calculating machines, cash registering machines, etc.) and the explanation clarifies that "office machines and apparatus" includes machines used in offices and for data processing not being computers within the meaning of section 32AB. The Revenue's administrative position that the exclusion of computers became effective only from 1-4-1988 (so that computers manufactured before 1-4-1988 would remain within item 22) was rejected. The court observed that the XIth Schedule existed since 1-4-1978, that the explanation to item 22 is clarificatory and must be read with the item, and that computers and data processing machines are not comparable to the listed office appliances. Thus computers are excluded from item 22 and the assessee was entitled to deduction under section 80I even if manufacturing commenced prior to 1-4-1988. For Question No. 5 the court held the amendment excluding computers and data processing machines applies to both old and new units which commence production after 1-4-1988 for the first time, reiterating the explanatory and purposive reading of item 22 and the explanation, and noting prior Tribunal decisions in favour of the assessee that had not been challenged by the department.

Question No. 6 (Characterisation of service/maintenance receipts for section 80I)

The court considered section 80I(1)'s requirement that the deduction is in respect of profits derived from an industrial undertaking. The AO excluded receipts by way of service and maintenance charges from profits of a manufacturing undertaking, treating them as not eligible. The court accepted the Tribunal's factual finding — recorded in earlier years — that the assessee's service and maintenance receipts had a direct nexus with its main manufacturing/data-processing business and arose from the same economic activity. The court declined to interfere with that factual finding and therefore answered Question No. 6 in favour of the assessee.

Question No. 7 (Unutilised Modvat credit)

The court recorded that Revenue's senior counsel stated the issue under Question No. 7 was squarely covered by the Bombay High Court decision in Commissioner of Income-tax v. Indo Nippon Chemical Co. Ltd., 245 ITR 384. On that basis, the court answered Question No. 7 in favour of the assessee and against the department (i.e., deletion of the Rs. 45,217 addition was sustained).

Holding and Implications

APPEAL DISMISSED.

Holding (core rulings):

The court answered all seven questions in favour of the assessee and against the department (as summarised in the question-wise analysis): section 32AB relief was available despite the Revenue's procedural/contention points; internally manufactured and capitalised machinery transferred at cost qualifies under section 32AB; capitalisation out of earlier years' work-in-progress did not bar section 32AB relief; computers and data processing machines are excluded from item 22 of the XIth Schedule and section 80I relief was available; the XIth Schedule amendment applies to old and new units commencing production after 1-4-1988; service and maintenance receipts formed part of industrial undertaking profits for section 80I purposes; and the Modvat credit addition was correctly deleted following binding precedent.
The appeal was dismissed and the court made no order as to costs.

Implications:

Direct effect on the parties: The departmental appeal fails in its entirety. The assessee's entitlement to the various deductions and adjustments contested by the AO (as recited in the seven questions) was upheld.
Broader implications: The opinion relies on statutory interpretation of section 32AB and section 80I and the XIth Schedule's explanation to item 22, and it invokes existing Tribunal findings and an authoritative High Court precedent for Modvat credit. The opinion itself does not purport to establish a novel legal principle beyond applying the statutory text and existing authority; the court noted the earlier Tribunal views and the unchallenged antecedent decisions but did not record the creation of new precedent in this opinion.

Appeal dismissed.

Show all summary ...

S.H Kapadia, J.:— Being aggrieved by the decision of the Tribunal, the department has come by way of Appeal under section 260-A of the Income-tax Act, in all raising 7 questions. The Appeal concerned Assessment Years 1988-1989.

FACTS:

2. The assessee is engaged in the business of manufacture and sale of data processing cards, ribbons and mini micro-based systems. It also develops computer software and it also provides technical consultancy service in India and abroad. It also carries on data processing activity with Data Processing Machines installed at its Data Centre. The assessee is also a dealer in computer software and computer hardware. The assessee also receives goods manufactured by other Concerns and before those goods could be used, their suitability is tested by the assessee.

3. For the sake of convenience, we prefer to answer this Appeal Question-wise.

4. Question No. 1 reads as follows:

Question No. 1:

1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the order of the CIT (Appeals) in directing the Assessing Officer to allow the claim of the assessee under section 32AB of the Income Tax Act 1961 in spite of the fact that the assessee had failed to furnish the prescribed particulars of machineries and also the audit account under section 32AB(5) in support of its claim?

5. The argument advanced on behalf of the department on the above question was that under section 32AB(5) deduction was not admissible unless the assessee furnishes, along with his Return of income, the Audit Report in the prescribed form, duly signed and verified by the Accountant. It was argued that in this case, the audit Report was not submitted along with the Return of income and, therefore, the assessee was not entitled to deduction under section 32AB. There is no merit in this argument. Firstly, this argument is not there in the above quoted question. Secondly, in this case, the assessee had claimed deduction of Rs. 19,58,043.00 under section 32AB of the Act on the basis of the Audit Report under section 32AB(5). This claim has been partly allowed by the AO on merits. There is no finding of the AO rejecting the claim of the assessee on the ground that the Audit Report was not annexed with the Return. In the interest of justice we also perused the R and P which indicates that the Audit Report is there on the file of the AO. There is no finding recorded by the AO that this Report came on the file during the assessment proceedings and that the Report was not there along with the Return. Therefore, the argument of the department is rejected. Lastly, it was urged that in any event, the assessee did not furnish prescribed particulars of machinery and in the circumstances, the assessee was not entitled to deduction under section 32AB. Here also, there is no finding of fact recorded by the AO. On the contrary, the Commissioner of Income-tax has come to the conclusion that the matter should be remanded for better particulars. To call for better particulars indicates that the assessee had supplied the prescribed particulars of machinery. In the circumstances, Question No. 1 is answered in the affirmative i.e in favour of the assessee and against the department.

Question No. 2:

2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the findings of the CIT(A) that capitalization of certain machineries amounted to purchase of machineries and hence the same were eligible for deduction under section 32AB of the Income Tax Act, 1961?

6. Section 32AB, inter alia, states that where an assessee whose total income includes income chargeable to tax under the Head “Profits and Gains of Business”, has out of such income, utilised any amount during the previous year for purchase of any new machinery or plant, would be entitled to deduction under section 32AB(1)(b). In this case, the Audit Report filed by the assessee shows that the assessee had utilised a sum of Rs. 24,23,230.00 inclusive of an amount of Rs. 5,49,632.00 being the value of the machinery assembled by the assessee and capitalised. On this basis, the assessee claimed a deduction. However, the AO took the view that the amount of Rs. 5,49,632.00 represented capitalised cost of plant and machinery and, therefore, it represented internal capitalisation. According to the AO such internal capitalisation would not attract the relief under section 32AB because, according to the AO, section 32AB(1)(b) contemplates purchase of new machinery of plant. Therefore, the AO rejected the relief under section 32AB to the assessee. According to the AO, the assessee should have purchased the machinery. According to the AO, the assessee did not purchase the machinery. According to the AO, the machinery was assembled by the assessee itself. Therefore, the AO denied the relief to the assessee. We do not find any merit in the argument of the department. If an assessee manufactures a machine itself and transfers the same at cost to its business of manufacture and claims that it has purchased the machinery, it is certainly entitled to relief under section 32AB(1)(b). If an assessee, by making necessary arrangements for purchase from outside, is entitled to claim deduction under section 32AB, then one fails to understand why an assessee who manufactures the machine itself and transfers the same at cost to its business of manufacture cannot claim the same relief. In the circumstances, we answer Question No. 2 in the affirmative i.e in favour of the assessee and against the department.

Question No. 3:

3. Whether on the facts and in the circumstances of the case and in law and without prejudice to the above, the Tribunal erred in confirming the Order of CIT(A) in directing the Assessing Officer to allow deduction under section 32AB on amounts capitalised under the head plant and machinery out of work in progress of earlier years?

7. As stated above, the assessee claimed a deduction of Rs. 19,58,043.00 under section 32AB. The assessee claimed to have utilised Rs. 24,23,230.00 inclusive of an amount of Rs. 5,49,632.00 being the value of the machinery assembled by the company and capitalised. One of the reasons for rejecting the relief under section 32AB to the assessee, as given by the AO, was that the assessee had not purchased the machinery out of the taxable profits of the business during the year under consideration. According to the AO, assessee was not entitled to the relief on amounts capitalised under the Head “Plant and Machinery” out of the work in progress of earlier year. According to the AO, the asset should have been generated from the current year's profits and not from the profits of the past years if the assessee wanted relief under section 32AB. According to the AO, under section 32AB, the expenditure should have been incurred from income which was chargeable to tax and, therefore, in this case, the assessee was not entitled to deduction under section 32AB because the assessee had capitalised the amount under the Head “Plant and Machinery” out of work in progress of earlier years. We do not find any merit in the stand adopted by the department for two reasons. Firstly, the assessee had succeeded on this very point for the earlier years. The department has not come by way of a Reference/Application to this Court. Therefore, the department has accepted the view of the Tribunal for the earlier years, which view was in favour of the assessee. Secondly, as held by us, it was not necessary for the assessee to purchase the new machinery from the market in order to get the deduction under section 32AB. That the assessee was entitled to deduction under section 32AB even if the assessee had manufactured the machine itself and had transferred the same at cost to its business of manufacture. Therefore, if the assessee, by capitalizing machinery manufactured by itself, transfers the same at cost to its business of manufacture, then the assessee would be entitled to relief under section 32AB(1)(b). Further, under section 32AB we do not find any restriction to the effect that the amount should be spent only from current year's profit. Section 32AB only stipulates that the amount should be spent out of income which is chargeable to tax. In the circumstances, Question No. 3 is answered in the affirmative i.e in favour of the assessee and against the department.

Question No. 4:

4. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the order of the Commissioner (Appeals) in holding that deduction under section 80I will be available to the assessee in spite of the fact that the unit started manufacturing prior to 1-4-1988?

8. In this case, we are concerned with Assessment Year 1988-1989. Section 80I falls in Chapter VIA, which deals with deductions in respect of certain incomes. Section 80I(1), inter alia, lays down that where the gross total income of an assessee includes profits derived from an Industrial undertaking, there shall be allowed in computing the total income of the assessee, a deduction of 20%. Under section 80I(2), it is, inter alia, laid down that section 80I(1) shall apply to Industrial undertakings which fulfill 4 stipulated conditions. One of such conditions is mentioned in section 80I(2)(iii) which states that if an Industrial undertaking manufactures articles specified in the XIth Schedule, then such Industrial undertaking shall not be allowed the benefit of deduction under section 80I. In this connection, the department has relied upon item No. 22 of the XIth Schedule, which is quoted hereinbelow.

Item 22:

“22. Office machines and apparatus such as typewriters, calculating machines, cash registering machines, cheque writing machines, intercom machines and teleprinters.

Explanation: The expression “office machines and apparatus” includes all machines and apparatus used in offices, shops, factories, workshops, educational institutions, railway stations, hotels and restaurants for doing office work (and for data processing not being computers within the meaning of section 32AB).”

9. A bare reading of item 22 shows that Office machines and apparatus such as calculators, cash writing machines, cheque writing machines, intercoms, teleprinters etc. do not qualify for deduction. However, a bare reading of item 22 with the explanation indicates that “computers”, within the meaning of section 32AB would not fall within the ambit of item 22. In other words, “computers” stand excluded from the XIth Schedule. The AO accepts this position. However, it is argued on behalf of the AO that the above exclusion of computers came on the statute book only from 1st April 1988. The AO took the view that computers manufactured after 1st April, 1988 would certainly fall outside the XIth Schedule. However, the AO found that this exclusion will not apply to computers manufactured prior to 1st April, 1988. We do not find any merit in this argument. The XIth Schedule was on the statute right from 1st April, 1978. The provision of section 80i(2)(iii) contemplates that deduction under section 80I shall not be available if the assessee is engaged in manufacture of an article specified in the XIth Schedule. The explanation to item 22 is not a substantive provision. It has to be read with item 22. The XIth Schedule lists out certain articles which are luxury items. Therefore, the Parliament, in it's wisdom, thought that deduction under section 80I should not be granted for manufacture of these items. Computers, therefore, cannot be equated to Office appliances or luxury items. The purpose of giving an explanation to item 22 is only to clarify ambiguities in item 22. Even without the specific exclusion, computers could not have formed part of Office machines and apparatus. One cannot compare computers with typewriters, calculating machines, intercoms, teleprinters etc. In the circumstances, the assessee was entitled to deduction under section 80I even though it started manufacturing prior to 1st April 1988. Accordingly, Question No. 4 is answered in the affirmative i.e in favour of the assessee and against the department.

Question No. 5.

5. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the order of the CIT(A) holding that the benefit under the amendment to XI Schedule will be applicable to both the old as well as the new units which commence production after 1-4-1988 for the first time?

10. For the reasons given herein above, we hold that the benefit of amendment to the XIth Schedule excluding Computers and Data Processing machines would be applicable to both, old and new Units, which commence production after 1st April, 1988. Secondly, if one reads item 22 along with the explanation, it is clear that in view of the nature of Data Processing Machines and Computers and the functions which they perform, it is difficult to compare Data Processing Machines and Computers to typewriters, calculating machines etc. and, therefore, the words “Office machines and apparatus” as used in item 22 stand associated only with typewriters, calculating machines etc. and not with Data Processing Machines and Computers. Lastly, we may point out that even in the earlier years the Tribunal had taken the same view in favour of the assessee and that decision of the Tribunal has not been challenged by the department. For the aforestated reasons, we answer Question No. 5 in the affirmative i.e in favour of the assessee and against the department.

Question No. 6:

6. Whether on the facts and in the circumstances of the case and in law and without prejudice to the above, the assessee is not entitled to deduction under section 80I on merits as the assessee's income from service charges, maintenance revenue and lease rent cannot be treated as income derived from industrial undertaking within the meaning of section 80I?

11. Under section 80I(1), special deduction is given in respect of profits and gains derived from industrial undertaking. According to the AO, receipts by way of service and maintenance charges have been included in profits derived from manufacturing operations. That these receipt cannot form part of profits derived from Industrial undertaking. Therefore, the AO excluded receipt of service charges and maintenance charges from the eligible profits. In this case, the assessee is engaged in the business of manufacture and state of Data Processing cards, ribbons and mini micro-based systems. It is also a dealer in computer software and computer hardware. This finding is also recorded by the Tribunal in its Orders for the earlier years. The assessee derives income as it renders service and maintenance facility to its clients for which it charges service and maintenance charges. Therefore, there is a direct nexus between the impugned receipts and the main business activity of the assessee. This is a finding of fact also recorded by the Tribunal. We do not see any reason to interfere with this finding of fact. Accordingly, we answer the Question in the affirmative i.e in favour of the assessee and against the department.

Question No. 7”

7. Whether on the facts and in the circumstances of the case the Tribunal was right in law in deleting the addition of Rs. 45,217/- made by the Assessing Officer to the total income of the assessee on account of unutilized Modvat Credit?

12. Mr. Desai learned senior counsel appearing on behalf of the department fairly states that the issue under Question No. 7 is squarely covered by the judgment of the Bombay High Court in the case of Commissioner of Income-tax v. Indo Nippon Chemical Co. Ltd., reported in 245 ITR Page 384. Accordingly, we answer the said Question in the affirmative i.e in favour of the assessee and against the department.

13. Accordingly, the appeal is dismissed with no order as to costs.