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Saraswati Industrial Syndicate Ltd. v. Commissioner Of Income Tax Haryana, Rohtak .
Factual and Procedural Background
The assessee, a sugar manufacturer, claimed depreciation at the higher rate of 15% on certain machinery used in its manufacturing process. The claim relied on Item III(ii)B(7) of Part I, Appendix I to the Income-tax Rules, 1962, which grants an enhanced rate where machinery “comes into contact with corrosive chemicals.”
The Income-tax Officer rejected the claim, stating that cane juice was not a “chemical” and that the small quantities of sulphuric and phosphoric acids used during processing did not bring the machinery into contact with corrosive chemicals. The Appellate Assistant Commissioner upheld this view. On further appeal, the Income Tax Appellate Tribunal (ITAT) ruled in favour of the assessee, holding that the rule covered both “free” and “non-free” chemicals with corrosive effect.
The Revenue obtained a reference to the Punjab and Haryana High Court, which answered the stated question against the assessee. The present appeal challenges that High Court decision.
Legal Issues Presented
- Whether, for the purpose of Item III(ii)B(7) of Part I of Appendix I to the Income-tax Rules, 1962, the phrase “corrosive chemicals” includes non-free chemicals of corrosive effect (such as sugarcane juice treated with acids) so as to justify a higher rate of depreciation on the assessee’s machinery.
Arguments of the Parties
Assessee's Arguments
- The machinery comes into contact with sugarcane juice that has been treated with sulphuric and phosphoric acids, both of which have a corrosive effect on metal.
- Item III(ii)B(7) covers machinery exposed to any substance that possesses a corrosive effect, whether or not the corrosive chemicals are “free.”
- An expert opinion supporting this position was filed, although the expert was not produced for cross-examination.
Revenue's Arguments
- Cane juice is not obtained through a chemical process and is itself not a “chemical.”
- The acids used are in very small quantities, confined to a specific stage of production, and do not themselves come into contact with the machinery.
- Only machinery exposed to chemicals with “high corrosive potential” qualifies for the higher depreciation rate, which the sugar-manufacturing process allegedly does not involve.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Supreme Court observed that both the Income-tax Officer and the High Court had made technical assertions without an evidentiary basis. While it was open to reject the expert’s affidavit because the expert was unavailable for cross-examination, the authorities could not substitute their own technical views without evidence. If the High Court required additional material, it should have remitted the case to the Tribunal for further fact-finding.
Interpreting Item III(ii)B(7), the Court clarified that its purpose is to compensate for the accelerated wear of machinery caused by exposure to substances with corrosive effects. The rule does not demand contact with a “pure” corrosive chemical; it suffices that the material passing through the machinery contains chemicals that corrode and thereby shorten the machinery’s life.
Given this construction, the Tribunal was directed to record additional evidence—after giving both sides an opportunity to adduce it—on whether the assessee’s machinery in fact comes into contact with substances having a corrosive effect. The Tribunal must then prepare a supplemental statement of case for the High Court, which will rehear the reference in light of the new findings and the Supreme Court’s interpretation.
Holding and Implications
Holding: The appeals are allowed; the judgments and orders of the Punjab and Haryana High Court are set aside. The matters are remanded to the Income Tax Appellate Tribunal for fresh evidence and preparation of a supplemental statement of case, after which the High Court will reconsider the question.
Implications: The decision clarifies that Item III(ii)B(7) encompasses machinery exposed to materials containing corrosive chemicals, not merely to pure chemicals. However, because the case has been remanded for fact-finding, no final precedent on the factual application is set; the immediate effect is to reopen the evidentiary record and afford the assessee another opportunity to substantiate its claim.
S.P Bharucha, J.— Under appeal are the judgments and orders of Division Benches of the Punjab and Haryana High Court. The assessment years involved are Assessment Years 1970-71 to 1977-78. The High Court answered in the negative and in favour of the Revenue the following question:
“Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the words ‘corrosive chemicals’ employed in Item (ii)B(7) of para III of Part I of Appendix I to the Income Tax Rules, 1962 contemplates not only free chemicals but also non-free chemicals of corrosive effect.”
The assessee is in appeal.
2. The assessee manufactures, among other things, sugar. It claimed depreciation at the higher rate of 15% on machinery it used in the manufacture of sugar, which was detailed in a statement placed before the Income Tax Officer. It did so having regard to Item III(ii)B(7) of para III of Part I of Appendix I to the Income Tax Rules, 1962, which reads thus:
“III. (ii)B(7) Machinery and plant coming into contact with corrosive chemicals. rate of depreciation 15%”
3. The assessee filed in support of its case the opinion of an expert. The Income Tax Officer rejected the assessee's claim of higher depreciation at the rate of 15% on such machinery. He declined to consider the expert opinion on the ground that the assessee was unable to produce the expert for cross-examination. He referred to the meaning of the word “chemical” and concluded that cane juice was not something which was obtained through a chemical process nor was it used for chemical effect. The contention of the assessee that during the manufacture of sugar, the juice was treated with corrosive chemicals like sulphuric and phosphoric acid which had corrosive effect on the sugar machinery could not be given any importance as the quantity used was quite small and it was not those acids which came into contact with the machinery. They formed a very small part and their use was confined to a particular stage. It was the cane juice which was the main substance that came into contact with the machinery. The Appellate Assistant Commissioner dismissed the assessee's appeal. His view was that depreciation was allowable at the higher rate on such plant and machinery in which chemicals with high corrosive potentials were used for manufacturing purposes and the manufacture of sugar did not fall in such category.
4. The Income Tax Appellate Tribunal disagreed. It noted that the only criticism directed against the statement which had been tendered by the assessee before the Income Tax Officer was that it included machinery that came in contact not with corrosive chemicals but with cane juice and molasses which were not corrosive chemicals but, at best, corrosive materials. The Tribunal found no force in this criticism for the reason that the corrosive chemicals contemplated in the said entry were not only free chemicals but also non-free chemicals provided they were corrosive in effect so far as metals are concerned.
5. Out of the order of the Tribunal, the question quoted above was referred to the High Court. The High Court disagreed with the Tribunal for the reason that according to it, lime and sulphuric acid were mixed with the sugarcane juice to filter and purify the juice but by their mixture, the juice itself was not converted into a chemical. Reference was made to the dictionary meaning of the word “chemical” and it was said that it was obvious therefrom that sugarcane juice could not be covered by the term simply because some acid has been mixed with it for its filtration. The acid and the lime were mixed in the sugarcane juice for the purpose of its filtration and once the chemical reaction had been caused, most of its effect was lost. Whatever remained settled down along with the sediments at the bottom. Thereafter, the filtered sugarcane juice which came into contact with the machinery before it was converted into crystallised sugar could not be said to be a corrosive chemical.
6. We can understand that the authorities declined to rely upon the expert's opinion because he was not produced for cross-examination. But neither the Income Tax Officer nor indeed the High Court were entitled to make statements on technical matters for which no basis had been laid on the record by either the Revenue or the assessee. If the High Court was of the view that further material was required, the appropriate course was to require the Tribunal to take further evidence and draw up a supplemental statement of case.
7. This apart, there appears to be some misunderstanding of what the said entry is intended to convey. Depreciation at a higher rate is allowed to machinery that comes into contact with corrosive chemicals. Corrosive chemicals corrode the machinery. They erode and by reason of such erosion, the life of the machinery is truncated. To compensate, depreciation is allowed at a higher rate. It is not intended that the machinery must come into contact with a pure corrosive chemical. It is enough that what passes through the machinery contains chemicals which are corrosive and which, therefore, have the effect of wearing it down.
8. In the instant case, with this understanding of the said entry in mind, the Tribunal shall take further evidence, giving both the assessee and the Revenue the opportunity of producing it and based thereon, shall decide whether the machinery for which the assessee claims depreciation at the higher rate is entitled to it. It shall then draw up a supplemental statement of case and the matter shall be reheard by the High Court, having regard to what is found by the Tribunal and to this judgment.
9. The appeals are allowed. The judgments and orders under appeal are set aside. The matters are remanded to the Tribunal to be proceeded with as set out hereinabove.
10. This order shall also govern Appeal No. 5671 of 1985 where reference to the question of law aforementioned was declined. Even in this matter, the Tribunal shall conduct a further enquiry as indicated above and draw up a supplemental statement of case and it shall then refer the question aforementioned to the High Court.
11. No order as to costs.
12. Learned counsel for the interveners submits that he is entitled to the same order as we have just passed. We cannot pass such an order in an intervention application. The only purpose of granting an intervention application is to entitle the intervener to address arguments in support of one or the other side. Having heard the arguments, we have decided in the assessee's favour. The interveners may take advantage of that order.
13. Order on the intervention application accordingly.
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