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Commissioner Of Income-Tax v. E.I.D Parry Ltd.
Factual and Procedural Background
This opinion records the response of this Court (K.A. Thanikkachalam, J.) to three questions which the Tribunal referred to the Court under section 256(2) of the Income-Tax Act, 1961, in respect of the assessment year 1971-72. The three questions relate respectively to: (1) entitlement to relief under section 80J for a seed processing unit; (2) entitlement to relief under section 80J for a cattle feed unit; and (3) entitlement to a higher rate of depreciation and higher development rebate for items of plant and machinery that purportedly come into contact with corrosive chemicals. The record shows that the Tribunal and lower authorities had already considered factual material on some aspects (notably the seed processing unit and certain findings by the Appellate Assistant Commissioner about corrosive chemicals), and that earlier judgments in related proceedings involving the same assessee had addressed similar issues. The Court was asked to answer the three referred questions or otherwise to remit issues requiring factual inquiry back to the Tribunal.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 80J(4) of the Income-Tax Act, 1961, the Appellate Tribunal was right in holding that the assessee is entitled to relief under section 80J in respect of its seed processing unit?
- Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 80J(4)(iii) of the Income-Tax Act, the Appellate Tribunal was right in holding that the assessee is entitled to relief under section 80J in respect of its cattle feed unit?
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to higher rate of depreciation and development rebate in respect of items of plant and machinery which came into contact with corrosive chemicals?
Arguments of the Parties
Revenue (Department) — main submissions
- At the hearing before this Court, learned standing counsel for the Department submitted that the assessee was not entitled to higher depreciation because the machinery used in the factory was not coming into contact with corrosive materials.
- The Department relied on authorities to support the interpretation that substances such as filtered sugarcane juice or the components of molasses are not "corrosive chemicals" for the purpose of the special rates entry; specific High Court decisions cited include: CIT v. Saraswati Industrial Syndicate Ltd. (Punjab & Haryana High Court), K.C.P. Ltd. v. CIT (Andhra Pradesh High Court), and Gwalior Sugar Co. (P.) Ltd. v. CIT (Madhya Pradesh High Court).
- At the Tribunal stage (as recorded in the opinion), the Revenue did not dispute the Appellate Assistant Commissioner's factual finding that chemicals used in the manufacture of sugar corroded the machinery, but before this Court the Department contested entitlement to the higher rate.
Assessee — main submissions
- The assessee placed before the Appellate Assistant Commissioner a statement/list identifying corrosive substances and items of equipment in the sugar mill subject to corrosive action; the Appellate Assistant Commissioner accepted that those substances corroded the machinery and allowed higher depreciation and development rebate accordingly.
- Learned counsel for the assessee relied on authority holding that entitlement to higher depreciation depends on the facts of each case and that, where machinery comes into contact with corrosive materials, higher rates are available (e.g., Delhi High Court decision in CIT v. Bharat Commerce and Industry Ltd.).
- The assessee also relied on regional authority (Kodiyal Foods and Fats Pvt. Ltd. v. CIT) where an expert certificate that sodium chloride corroded machinery was accepted and higher depreciation allowed.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax v. E.I.D. Parry (India) Ltd., [1996] 218 ITR 713 | Earlier judgment of this Court holding that the seed processing unit of the same assessee was entitled to relief under section 80J. | The Court relied on this earlier decision to answer Question No. 1 in the affirmative and against the Department (i.e., uphold relief under section 80J for the seed processing unit). |
| CIT v. Saraswati Industrial Syndicate Ltd., [1982] 136 ITR 758 | Holds that filtered sugarcane juice which comes into contact with machines before crystallisation cannot be treated as a "corrosive chemical" within the special rates entry; the entry does not contemplate non-free chemicals of corrosive effect, per that High Court. | Relied on by the Revenue to argue that machinery used in sugar manufacture is not entitled to higher depreciation under the "corrosive chemicals" entry; cited in the Court's discussion of conflicting authorities. |
| CIT v. Saraswati Industrial Syndicate Ltd., [1982] 136 ITR 361 | Referenced by the opinion as an earlier decision that was referred to by the Punjab & Haryana High Court in reaching its conclusion (as recorded in the text). | Identified in the factual summary of authorities; the Court noted the chain of authorities but did not adopt or disapprove that earlier reference beyond recording it. |
| K.C.P. Ltd. v. CIT, [1988] 174 ITR 225 (Andhra Pradesh High Court) | Principle that the assessee must precisely explain the nature of the corrosive chemicals and how the plant/machinery comes into contact with them; absence of such material leads to factual findings against the assessee. | Relied on by the Revenue; the Court recorded this as part of the authorities showing that entitlement to higher depreciation is fact‑specific and depends on adequate material placed on record. |
| Gwalior Sugar Co. (P.) Ltd. v. CIT, [1989] 178 ITR 415 (Madhya Pradesh High Court) | Held that machinery coming into contact with molasses (containing iron, lead and copper) did not amount to contact with "corrosive chemicals", and hence higher depreciation was not allowed. | Relied on by the Revenue and recorded by the Court to show another authority adopting a narrow view of the term "corrosive chemicals". |
| CIT v. Bharat Commerce and Industry Ltd., [1992] 193 ITR 375 (Delhi High Court) | Holds that the question of entitlement to higher depreciation depends on the factual matrix of each case; if machinery comes into contact with corrosive materials, the assessee is entitled to the higher rate. | Relied on by the assessee; the Court recorded this authority as supporting a fact-specific enquiry and used that principle in directing a remand to the Tribunal to verify facts. |
| Kodiyal Foods and Fats Pvt. Ltd. v. CIT, [1992] 193 ITR 411 (Karnataka High Court) | Accepted an expert certificate that machinery came into contact with sodium chloride and that atmospheric corrosion justified higher depreciation. | Relied on by the assessee; recorded by the Court as an example where factual/material evidence (an expert certificate) supported allowance of higher depreciation. |
Court's Reasoning and Analysis
The Court treated each referred question separately and applied a combination of precedent and factual review to determine whether an answer could be given on the record before it.
Question No. 1 (seed processing unit)
The Court observed that an earlier judgment of this Court in proceedings involving the same assessee (Commissioner of Income-Tax v. E.I.D. Parry (India) Ltd., [1996] 218 ITR 713) had already held that the seed processing unit was entitled to relief under section 80J. On that basis the Court found no infirmity in the Tribunal's order for the assessment year under consideration and answered Question No. 1 in the affirmative and against the Department.
Question No. 2 (cattle feed unit)
The Court noted that the same issue arose in earlier assessment years for the same assessee and that in those earlier proceedings the Court had observed that no material was on record to show what manufacturing or processing activity the assessee carried out in producing cattle feed. Consistent with that earlier direction, and because the facts necessary to determine entitlement were not before the Court in the present record, the Court concluded that the proper course was to remit the issue to the Tribunal for reconsideration on the merits. The question was therefore returned unanswered and remitted for fact-finding.
Question No. 3 (higher depreciation and development rebate for machinery contacting corrosive chemicals)
The Court summarized the factual posture: the assessee had filed, before the Appellate Assistant Commissioner, a statement naming corrosive substances and the items of equipment subject to corrosive action; the Appellate Assistant Commissioner accepted that those substances corroded the machinery and allowed higher depreciation and development rebate. The Tribunal upheld that allowance, and the Revenue, as recorded, had not disputed the factual finding at that stage. Before this Court the Department contested entitlement, relying on High Court authorities that adopt a stricter or narrower view of "corrosive chemicals" and emphasizing the need for clear factual material.
The Court reviewed the conflicting case law and distilled the governing approach: entitlement to higher rates under the special rates entry is fact-specific and requires proof that the plant and machinery actually come into contact with corrosive materials. Given that the list and particulars (the list produced before the Appellate Assistant Commissioner, and details of the specific items of machinery allegedly affected) were not placed before this Court, and the Court could not verify the factual basis on the record, the Court directed the Tribunal to verify these facts. If the Tribunal finds on facts that the machinery came into contact with corrosive chemicals, it must allow the higher depreciation; otherwise the claim must fail. Accordingly, Question No. 3 (both the depreciation and the development rebate aspects) was not answered on the merits and was remitted to the Tribunal for fact-finding and decision according to law.
The Court therefore followed a bifurcated approach: apply precedent where it was directly on point (Q1), and remit fact-sensitive matters (Q2 and Q3) where necessary evidentiary particulars were absent from the record before the Court.
Holding and Implications
Holding:
- Question No. 1: Answered in the affirmative; the Court upheld the Tribunal's grant of relief under section 80J for the seed processing unit (decision against the Department).
- Question No. 2: Returned unanswered and remitted to the Tribunal for reconsideration on the merits because the necessary facts as to the manufacturing/processing activity for the cattle feed unit were not on the record.
- Question No. 3: Returned unanswered and remitted to the Tribunal to verify whether the assessee's machinery actually came into contact with corrosive chemicals and whether higher depreciation and higher development rebate should be allowed; if the Tribunal finds the factual basis established, it should grant relief in accordance with law.
Implications:
The immediate consequence is that the assessee's entitlement under section 80J for the seed processing unit is confirmed on the basis of this Court's earlier decision. The questions concerning the cattle feed unit and the sugar machinery's entitlement to higher depreciation and higher development rebate are fact-dependent and must be re-examined by the Tribunal with appropriate factual inquiry and hearing of the assessee. The opinion does not purport to lay down any new general legal principle beyond applying existing authorities and directing remittal where the record is insufficient; therefore, no new precedent is established by this order. The Court directed the Tribunal to ascertain and verify the relevant facts and to decide accordingly. The Court also recorded that there shall be no costs.
K.A Thanikkachalam, J.:— In compliance with the direction of this court, dated April 6, 1983, the Tribunal referred the following three questions for the opinion of this court under section 256(2) of the Income-Tax Act, 1961, hereinafter referred to as the “Act”, for the assessment year 1971-72:
“1. Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 80J(4) of the Income-Tax Act, 1961, the Appellate Tribunal was right in holding that the assessee is entitled to relief under section 80J in respect of its seed processing unit?
2. Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 80J(4)(iii) of the Income-Tax Act, the Appellate Tribunal was right in holding that the assessee is entitled to relief under section 80 in respect of its cattle feed unit?
3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to higher rate of depreciation and development rebate in respect of items of plant and machinery, which came into contact with corrosive chemicals?”
2. In so far as question No. 1 is concerned, it relates to relief under section 80J in respect of the seed processing unit. A similar question came up for consideration before this court in the case of the same assessee in T.C Nos. 742 of 1982 and 301 to 303 of 1983 (Commissioner Of Income-Tax v. E.I.D Parry (India) Ltd. [1996] 218 ITR 713), wherein this court, by judgment dated March 29, 1995, held that the seed processing unit is entitled to relief under section 80J of the Act. Accordingly, we hold that there is no infirmity in the order passed by the Tribunal in the assessment year under consideration in granting relief under section 80J of the Act in respect of the seed processing unit. Accordingly, we answer this question (question No. 1) referred to us in the affirmative and against the Department.
3. In so far as question No. 2 is concerned, it relates to relief under section 80J in respect of the cattle feed unit. This issue also came up for consideration before this court in the case of the same assessee in the assessment years 1972-73 to 1974-75 in T.C Nos. 742 of 1982 and 301 to 303 of 1983 (Commissioner Of Income-Tax v. E.I.D Parry (India) Ltd. [1996] 218 ITR 713), judgment dated March 29, 1995) wherein this court held that inasmuch as no material was available on record in the matter to show what is the manufacturing activity or processing activity which the assessee is indulging in in producing the cattle feed. In order to verify this aspect, we directed the Tribunal in the earlier assessment year [to consider] the facts arising on this aspect and decide the issue accordingly. Since the same is arising in the present assessment year under consideration and since the facts are not available on record to show as to what is the manufacturing activity or processing activity which the assessee is doing in producing the cattle feed, we consider that in accordance with the order passed by this court in respect of the earlier years in the case of the same assessee, the proper course would be to remit back this issue also to the Tribunal for reconsideration on the merits. Accordingly, we do so. Thus we are returning question No. 2 unanswered.
4. In so far as question No. 3 is concerned, it relates to higher rate of depreciation and development rebate in respect of items of plant and machinery which come into contact with corrosive chemicals. The assessee is also manufacturing sugar. The assessee claimed that the machinery involved for that purpose came into contact with corrosive chemicals and, therefore, a higher rate of depreciation and development rebate were admissible under entry B(7) in item (ii), Special Rates under the head “III-Machinery and Plant” in Appendix I, Part I, of the Income-Tax Rules, 1962, which reads “Machinery and plant coming into contact with corrosive chemicals”. The assessee had filed before the Appellate Assistant Commissioner a statement giving the names of corrosive substances and the items of equipment of the assessee in the sugar mill, which were subject to corrosive action. The Appellate Assistant Commissioner accepted the claim of the assessee that the said substances were chemicals, which corroded the machinery and hence allowed depreciation and development rebate at the higher rate. Aggrieved, the Revenue preferred an appeal before the Appellate Tribunal, but did not dispute the finding of fact given by the Appellate Assistant Commissioner that there were several chemical substances used in the manufacture of sugar, which itself is a chemical and that such substances did, in fact, corrode the machinery. The Revenue pleaded that the depreciation at the higher rate should not be allowed under the entry referred to above. According to the Tribunal, since the Revenue did not dispute that the machinery in the sugar factory came into contact with corrosive chemicals, it upheld the view taken by the Appellate Assistant Commissioner. The Tribunal also noted that the Revenue had not appealed against the allowance of similar claim for the preceding assessment year 1970-71 by the Appellate Assistant Commissioner.
5. Before us, learned standing counsel appearing for the Department submitted that the assessee is not entitled to higher depreciation since the machinery used in the said factory is not coming into contact with corrosive materials. Reliance was placed upon the decision of the Punjab and Haryana High Court in CIT v. Saraswati Industrial Syndicate Ltd. [1982] 136 ITR 758, wherein the Punjab and Haryana High Court held that the filtered sugarcane juice which comes into contact with the machines before it is converted into crystallised sugar cannot be said to be a corrosive chemical. Therefore, the Tribunal was not right in holding that the words “corrosive chemicals” employed in entry (ii) (B)(7) of Para. III of Pt. I of Appendix I to the Income-Tax rules, 1962, contemplated not only free chemicals but also non-free chemicals of corrosive effect. This decision was rendered after referring to the decision in CIT v. Saraswati Industrial Syndicate Ltd., [1982] 136 ITR 361.
6. Reliance was also placed upon the decision of the Andhra Pradesh High Court in K.C.P Ltd. v. CIT [1988] 174 ITR 225 wherein the assessee claimed higher depreciation at 15 per cent, in accordance with section 32 read with Income-Tax Rules, 1962, Appendix I, Part I, entry III(ii) B, item 7. Here also the assessee was carrying on business in manufacture of sugar. While considering the request made by the assessee, the Andhra Pradesh High Court held that the nature of the corrosive chemicals involved and how, in the process of manufacturing, the plant and machinery came into contact with those corrosive chemicals should have been explained precisely by the assessee. At no stage of the proceeding, did the assessee place before the income-tax authorities the relevant details to appreciate the contention that corrosive chemicals came into contact with the assessee's plant and machinery during the course of manufacture of sugar. The finding of the Income-Tax Officer was categorical that the assessee's plant and machinery was not coming into contact with any corrosive chemicals and it was also the finding of the Tribunal. This finding was a finding of fact and no question of law arose.
7. Learned standing counsel for the Department also brought to our notice the decision of the Madhya Pradesh High Court in Gwalior Sugar Co. (P.) Ltd. v. CIT [1989] 178 ITR 415, wherein the Madhya Pradesh High Court held that though the machinery used in the manufacture of sugar came into contact with molasses, which contains iron, lead and copper; iron, lead and copper are not corrosive chemicals and hence the machinery used in the manufacture of sugar is not entitled to the higher rate of depreciation. The Madhya Pradesh High Court followed the decision in [1982] 136 ITR 758, rendered by the Punjab and Haryana High Court in the case of CIT v. Saraswati Industrial Syndicate Ltd.
8. In this context, learned counsel appearing for the assessee relied upon the decision of the Delhi High Court in CIT v. Bharat Commerce and Industry Ltd. [1992] 193 ITR 375. According to the facts arising in that case the assessee claimed higher depreciation at 15 per cent, since the machinery used in the manufacture of synthetic yarn are coming into contact with corrosive materials. While answering the question raised on this aspect, the Delhi High Court held that the decision on this aspect depends upon the facts arising in each case with regard to the machinery coming into contact with corrosive materials. According to the Delhi High Court once the machinery is coming into contact with corrosive material, the assessee is entitled to the higher rate of depreciation.
9. Learned counsel appearing for the assessee also relied upon the decision of the Karnataka High Court in Kodiyal Foods and Fats Pvt. Ltd. v. CIT [1992] 193 ITR 411, wherein the Karnataka High Court allowed higher depreciation since the machinery is coming into contact with corrosive materials. The assessee who processed fish, fish meal and fish oil claimed depreciation at 15 per cent, on machinery used in its business on the ground that it came into contact with corrosive chemicals. A certificate/report of the Assistant Professor of Chemical Engineering, who certified that the machinery in question came into contact with the corrosive chemical, viz., sodium chloride, and further that the factory was situated on a sea-shore, causing severe atmospheric corrosion to the entire plant and machinery. This certificate was accepted by the High Court while answering the question whether the assessee is entitled to higher depreciation since the machinery is coming into contact with sodium chloride (common salt) in favour of the assessee.
10. A combined reading of the decisions produced before us would go to show that in order to get higher depreciation of 15 per cent, under entry B(7) in item (ii), special rates, under the head “III-Machinery and Plant” in Appendix I, Part I, of the Income-Tax Rules, 1962, the assessee must establish that the machinery used for manufacturing its products is coming into contact with corrosive materials. In the present case learned counsel appearing for the assessee submitted that the assessee has produced a list of chemicals coming into contact with machinery used in the production of sugar. After verifying these facts, the Appellate Assistant Commissioner held that the assessee is entitled to higher depreciation. It was also pointed out that in the earlier years in the case of the same assessee, this finding was accepted by the Appellate Assistant Commissioner. For these reasons it was submitted that the assessee satisfied on facts that the machinery used in the manufacture of sugar came into contact with corrosive materials. The list showing the chemicals used in the manufacture of sugar produced before the Appellate Assistant Commissioner was not made available before us. It is also not known as to what are the items of machinery which came into contact with the kind of corrosive materials. In the absence of these particulars, we consider that the proper course would be to direct the Tribunal to verify this aspect and allow higher depreciation if the machinery used by the assessee for manufacturing sugar came into contact with corrosive materials. Accordingly we do so. The Tribunal is directed to verify this aspect and grant relief if the assessee satisfied on facts that its machinery came into contact with corrosive chemicals. In that view of the matter, this question is also returned unanswered.
11. Question No. 3 also deals with grant of higher development rebate by the Tribunal. According to the Tribunal, the assessee is entitled to higher development rebate, as per the Fifth Schedule read with section 33(1)(b)(B)(i) of the Act. We also heard learned counsel appearing for the assessee, who submitted that after furnishing proper materials on this aspect and after verifying the same, the authorities below and the Tribunal allowed higher development rebate. But before us no material is available on record to verify whether the assessee is entitled to higher development rebate. It is not known as to what are the items of industrial machinery that were used by the assessee in the assessment year under consideration for grant of higher development rebate. In such circumstances, we are unable to answer the question relating to this aspect one way or the other. Accordingly, we direct the Tribunal to ascertain the facts on this aspect and decide the same in accordance with law after hearing learned counsel appearing for the assessee. Therefore, on this aspect also we are not providing any answer to question No. 3. Accordingly, the same is returned unanswered. No costs.
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