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Commissioner Of Income-Tax v. Electronics Research Industries Pvt. Ltd.
Legal Opinion Summary — K. Shivashankar Bhat, J.
Factual and Procedural Background
The assessee is engaged in the manufacture of electronic equipment and had installed an internal telephone system comprising about 20 lines. The assessee claimed that this installation was a "plant" and sought an investment allowance under section 32A of the Income-tax Act, 1961. The assessing authority (original authority) denied the allowance. On appeal the Commissioner of Income-tax (Appeals) granted the allowance. That appellate order was affirmed by the Appellate Tribunal. The Revenue sought a reference under the provisions of the Income-tax Act to determine whether the Appellate Tribunal was correct in law in treating the internal telephone system as the assessee's factory "plant" and in allowing investment allowance under section 32A.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the Commissioner (Appeals) and concluding that the internal telephone system should be considered as the assessee's "plant" for the factory?
- Whether, consequently, investment allowance under section 32A of the Income-tax Act should be granted for that internal telephone system, notwithstanding the proviso excluding "office appliances"?
Arguments of the Parties
Revenue's Arguments (as presented by Mr. Chanderkumar)
- The internal telephone system is merely a facility comparable to office equipment and does not by itself produce goods; therefore it is not a "plant" under section 32A.
- To qualify under section 32A(1) an installation should be of a nature that by itself produces goods or directly aids in the production of goods; there must be a direct nexus between the installation and production.
- Telephone installations are "office appliances" falling within the second proviso to section 32A and are excluded from investment allowance; their being located in a production area does not alter their character as office appliances.
- The installation in question is not a "scientific apparatus" and reliance on decisions treating such installations as scientific apparatus is misplaced; further, the definition of "scientific research" in section 43(4) is unrelated and should not be conflated with the concept of plant.
The opinion does not provide a detailed, point-by-point statement of the assessee's counsel's arguments; rather, it records the appellate and tribunal outcomes in favour of the assessee and engages primarily with the Revenue's contentions and prior authority.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Mohan Meakin Breweries Ltd., [1980] 122 ITR 203 (Himachal Pradesh High Court) | Held that an internal telephone system is a scientific apparatus used for the purpose of the business and is not necessarily an "office appliance" when it substantially serves production; emphasised that usefulness in harmonising and coordinating manufacturing process makes it plant. | The court relied on this decision to support the proposition that an internal telephone system serving manufacturing coordination can be a plant and thus qualify for allowance; treated the decision as directly relevant and persuasive. |
| Commissioner Of Income-Tax v. Tata Chemicals Ltd., [1986] 162 ITR 662 (Bombay High Court) | Accepted the principle enunciated in the Mohan Meakin Breweries Ltd. decision (i.e., telephone exchanges used in factories can be plant rather than office appliances). | The Bench accepted the Himachal Pradesh principle as correct; the present court notes that Bombay High Court accepted that principle and that no elaborate discussion was necessary in that decision. |
| CIT v. Tarun Commercial Mills Ltd., [1985] 151 ITR 75 (Gujarat High Court) | Discussed the concept of "plant" and cited earlier authority (Elecon) for a broad, functional test: whether the article is a tool of the taxpayer's trade and used in carrying on business. | The court used the discussion and quoted passage cited in Tarun Commercial Mills to reinforce the broad test for "plant" and to apply that reasoning to the telephone installation. |
| CIT v. Elecon Engineering Co. Ltd., [1974] 96 ITR 672 (Gujarat); affirmed [1987] 166 ITR 66 (Supreme Court) | Provides a comprehensive statement of the essential characteristics of "plant": wide import, includes articles used to carry on business, durability, not confined to mechanical apparatus, and the relevant test is whether it fulfils the function of plant in the assessee's trading activity. | The opinion quotes and applies the Elecon formulation as a principal guiding test — that "plant" must be viewed broadly and functionally (is it a tool of the taxpayer's trade), and therefore telephone installations can qualify if they fulfil such function. |
| Taj Mahal Hotels' case, [1971] 82 ITR 44 (Supreme Court) | Observed that the word "plant" must be liberally understood. | The court referenced this Supreme Court observation to support a liberal construction of "plant" in the context of section 32A. |
| CIT v. Malayalam Plantations Ltd., [1964] 53 ITR 140 (Supreme Court) | Held that the expression "for the purpose of the business" is wide in scope — encompassing day-to-day running, rationalisation of administration, modernisation, preservation of the business, and other acts incidental to carrying on the business. | The court relied on this headnote to reject a narrow interpretation requiring direct production nexus; it used the broad scope of "for the purpose of the business" to conclude telephone installation used for coordination/efficiency is covered. |
Court's Reasoning and Analysis
The court began by identifying the statutory framework: section 32A(1) allows an investment allowance in respect of machinery or plant which is owned by the assessee and wholly used for the purposes of the business, subject to provisos including an exclusion for "office appliances" (second proviso). The court noted that the definition of "plant" in section 43(3) is inclusive and broad.
The court summarized the Revenue's contention that an installation should directly produce goods or directly aid production to qualify as plant and that telephone systems are merely office appliances excluded by the proviso. The court rejected this narrow, direct-nexus test.
The analysis turned to precedent. The court accepted and relied upon the reasoning in Mohan Meakin Breweries Ltd., and the Bombay High Court's subsequent acceptance of that approach in Tata Chemicals, which treated internal telephone systems installed in factory complexes as scientific apparatus/plant where they substantially served the production process by harmonising and coordinating manufacturing activities. The court also relied on the Elecon line of authority (as cited in Tarun Commercial Mills) for a broad, functional test of "plant" — asking whether the article fulfils the function of plant in the assessee's trading activity, whether it is a tool of the taxpayer's trade, and applying a liberal construction.
The court further invoked the Supreme Court's statement in Malayalam Plantations that "for the purpose of the business" is wide in scope and can include measures that facilitate efficient running and administration of the business. On that footing the court concluded that anything used for the purpose of business, including installations which facilitate production or increase efficiency, may be plant.
The court addressed the argument that the installation was not a "scientific apparatus" and that the definition of scientific research in section 43(4) was being improperly relied upon. The court clarified that whether an installation is a "scientific apparatus" was not decisive for section 32A(1); the controlling question is whether the article falls within the inclusive definition of "plant" in section 43(3). It also noted that decisions under section 33 are equally applicable in principle to section 32A because the concept of "plant" is the same.
Applying these principles to the facts — that the internal telephone system is installed in the factory area, is essential for harmonising and coordinating the manufacturing process, and substantially and essentially serves production — the court concluded that the telephone installation cannot be classified as an "office appliance" for the purposes of the proviso and therefore qualifies as "plant" under section 32A.
Holding and Implications
Holding: The reference is answered in the affirmative and against the Revenue — the Appellate Tribunal was right in law in upholding the Commissioner (Appeals) in treating the internal telephone system as the assessee's "plant" and entitling it to investment allowance under section 32A.
Implications:
- The direct consequence is that the internal telephone installation in the assessee's factory area is to be treated as plant and is eligible for investment allowance under section 32A, notwithstanding that such an installation might otherwise be described as an office facility if used primarily for office purposes.
- The decision endorses a functional and liberal construction of "plant" (drawing on Elecon and related authorities) and rejects a restrictive test requiring the item to directly produce goods or have a direct production nexus; installations that facilitate production or increase operational efficiency can qualify.
- The opinion applies established precedent and principles rather than announcing novel law; it accepts prior high-court authority (Mohan Meakin; Tata Chemicals) and Supreme Court guidance (Elecon, Taj Mahal Hotels, Malayalam Plantations) as governing the correct approach.
K. Shivashankar Bhat, J.:— The following question has been referred to us for consideration under the provisions of the Income-tax Act, 1961:
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the order of the Commissioner of Income-tax (Appeals) that the internal telephone system should be considered as ‘plant’ of the assessee's factory and investment allowance has to be granted?”
2. The assessee is engaged in the manufacture of electronic equipment. It has an internal telephone system with about 20 lines. This installation is claimed to be a plant and investment allowance was claimed by the assessee. However, the original authority did not grant the allowance but, on appeal, the same was granted by the Commissioner (Appeals). This order of the first appellate authority was affirmed by the Appellate Tribunal. Hence, this reference at the instance of the Revenue. The question arose under section 32A of the Income-tax Act. As per this section:
“Section 32A.— (1) In respect of a ship or an aircraft or machinery or plant specified in sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum byway of investment allowance equal to twenty-five per cent of the actual cost of the ship, aircraft, machinery or plant to the assessee:
The second proviso to this section says that:
“No deduction shall be allowed under this section in respect of—
(a) any machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest house;
(b) any office appliances or road transport vehicles;”
(other clauses not necessary here)
3. The other relevant provision will be the definition of plant found in clause (3) of section 43 of, the Act wherein the definition of plant is an inclusive one, including ships, vehicles, books, scientific apparatus and surgical equipment used for the purpose of business or profession.
4. Mr. Chanderkumar, learned counsel for the Revenue, contended that the internal telephone system is only a facility which is on par with office equipment which does not by itself produce any goods and, therefore, this system cannot be considered as plant. According to learned counsel, any installation to fall within section 32A(1) should be of such a nature which by itself produces the goods or aids in production of goods. A mere facility which facilitates communication does not result in any production of goods or aid the production of goods and, therefore, it cannot be said to be “used for the purpose of business”. Learned counsel advanced a theory of direct nexus between production and installation. Mr. Chanderkumar also contended that telephone installations are office appliances which fall under clause (b) of section 32A and just because they are installed in the place of production, they do not cease to be office appliances.
5. This question directly came up for consideration before the Himachal Pradesh High Court and the decision is reported in CIT v. Mohan Meakin Breweries Ltd., [1980] 122 ITR 203. After referring to sections 33 and 43 of the Act, the Bench observed at page 215:
“Internal telephone system is undoubtedly a scientific apparatus used for the purpose of the business of the assessee. There is, therefore, no difficulty, in concluding that it is a plant. That, however, would not conclude the matter because even if a particular item is a plant it would not earn development rebate if it is found to be an office appliance. Therefore, the real question to be considered is whether the internal telephone system is an ‘office appliance’. There is no statutory definition of the expression ‘office appliance’. However, the plain meaning of this expression suggests that an ‘office appliance’ is an appliance which is primarily used for office purposes. The question, therefore, is whether the internal telephone system which is installed by the assessee in its factories in the complex is for the purpose of office. It is evident that this internal telephone system installed in the factories is for the purpose of efficient organisation of the manufacturing process carried on by these factories. If some of these appliances are put in the offices of technical and managerial executives, or even at their residences, that would not make any difference because these technical executives and managers are expected to see that the machines installed in the factories are efficiently working and giving proper production. Therefore, if it is found that a particular plant or machinery is substantially and essentially for the purpose of production, such plant and machinery cannot be taken as covered by the expression ‘office appliances’. The Appellate Assistant Commissioner has taken a view that this internal telephone system cannot earn development rebate because by itself it produces nothing. This concept is totally outdated if it is found that the plant or machinery in question is helpful in making the other machines run properly and efficiently. It cannot be doubted that the internal telephone system installed in the different factories Of the complex would be quite essential in harmonising and co-ordinating the manufacturing process undertaken by the assessee. We are, therefore, of the opinion that the installation of the internal telephone system cannot be construed as ‘office appliances’. It can, therefore, earn development rebate under section 33, and, therefore, we answer question No. 2 by saying that the Tribunal was justified in allowing the deduction by way of development rebate to the extent of Rs. 7,731 in respect of the telephone exchange installed in the factory area.”
6. The said decision was accepted by the Bombay High Court in the decision in Commissioner Of Income-Tax v. Tata Chemicals Ltd., [1986] 162 ITR 662 (Bom). Learned counsel for the parties as well as the Bench proceeded after accepting the principle stated in the aforesaid Himachal Pradesh High Court decision and consequently no elaborate discussion is found. However, the fact remains that the Bench of the Bombay High Court has accepted the principle as a correct one.
7. In the decision in CIT v. Tarun Commercial Mills Ltd., [1985] 151 ITR 75, the Bench of the Gujarat High Court has considered the concept of plant. At page 78, the Bench has quoted an earlier decision which is quite relevant here, i.e, CIT v. Elecon Engineering Co. Ltd., [1974] 96 ITR 672 (Guj):
“On reviewing these authorities, a broad consensus emerges from which the essential characteristics of plant can be clearly gleaned. The word ‘plant’, in its ordinary meaning, is a word of wide import and in the context of section 32 it must be broadly construed. It includes any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business. It is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business. It would not, however, cover the stock-in-trade, that is, goods bought or made for sale by a businessman. It would also not include an article which is merely a part of the premises in which the business is carried on as distinguished from a part of the plant with which the business is carried on. An article to qualify as plant must furthermore have some degree of durability and that which is quickly consumed or worn out in the course of a few operations or within a short time cannot properly be called ‘plant’. But an article would not be any the less plant because it is small in size or cheap in value or a large quantity thereof is consumed while being employed in carrying on the business. In the ultimate analysis the inquiry which must be made is as to what operation the apparatus performs in the assessee's business. The relevant test to be applied is: Does it fulfil the function of plant in the assessee's trading activity? Is it the tool of the taxpayer's trade? If it is, then it is plant no matter that it is not very long-lasting or does not contain working parts such as a machine does and plays a merely passive role in the accomplishment of the trading purpose.”
(This decision was affirmed by the Supreme Court in the decision in CIT v. Elecon Engineering Co. Ltd. : [1987] 166 ITR 66.)
8. The Gujarat High Court also referred to the Supreme Court decision in Taj Mahal Hotels' case, [1971] 82 ITR 44 wherein the Supreme Court has observed that the word “plant” will have to be liberally understood.
9. The contention of learned counsel for the Revenue that the installation in question by itself should produce goods or should aid directly the production of goods cannot be accepted having regard to the opening clause in section 32A where the phraseology used is that the plant should be owned by the assessee and should be wholly used for the purpose of business and the purpose of the business is again a phrase of wide import as has been stated by the Supreme Court in CIT v. Malayalam Plantations Ltd., [1964] 53 ITR 140. It was observed by the Supreme Court thus (headnote):
“The expression ‘for the purpose of the business’ is wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide; it may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on a business; it may comprehend many other acts incidental to the carrying on of the business.”
10. From the aforesaid decision, it is clear that the concept of plant can-not be limited to the actual installation of machinery which produces goods by itself. Anything which is used for the purpose of business including any installation which facilitates the production or increases the efficiency of the business will be plant. It is in this context that the Act includes certain varieties of plant and machinery for the benefit of allowance as is clear from the second proviso to section 32A(1). Mr. Chanderkumar, learned counsel for the Revenue, however, contended that the installation in question is not a scientific apparatus at all and, therefore, the basis of the Himachal Pradesh High Court decision cannot be accepted as a correct provision of law. The question for the purpose of section 32A(1) is not whether the installation is a scientific apparatus or not, but the question is whether the plant is as defined under section 43(3). The definition is an inclusive definition, as the very definition indicates that articles like books are also included in the definition of plant. Further, it cannot be ruled out that a telephone installation for internal communication is not a scientific apparatus. Mr. Chanderkumar's contention is based on the definition of scientific research found in section 43(4). But that is an entirely different definition which has nothing to do with the concept of plant or scientific apparatus. The aforesaid decisions no doubt arise under section 33 of the Act but the principles will be equally applicable to cases falling under section 32A. The concept of plant will be the same whether it falls under section 32A or 33(1).
11. In these circumstances, we have no doubt that the answer will have to be in the affirmative and against the Revenue. Reference is answered accordingly.
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