ORDER
V Dongzathang, Senior, V. P.
These appeals are filed by the assessee, a limited company and are instituted against the orders of the Commissioner Central-II, Chennai. The Commissioner had invoked his powers under section 263 of the Income Tax Act, 1961 (hereinafter referred to as the Act) and had withdrawn the extra-shift allowance granted by the assessing officer on the machinery’s that are leased by the assessee company to various lessees. The Commissioner applied the decision of the Tribunal in Shri Leasing & Industrial Finance Co. Ltd. v. Income Tax Officer (1989) 31 ITD 163 (Del-Trib) and held that the extra-shift allowance is permissible to a concern that has worked double or triple shifts and because the assessee does not satisfy this condition, he set aside the order of assessing officer. The appellant company is aggrieved by these order of the Commissioner and has challenged the said order both on legal validity and on merits.
2. The proposal for the formation of a Special Bench to resolve the controversy was mooted on the reasoning that the decision in Shri Leasing& Industrial Finance Co. Ltd.’s case (supra) required reconsideration. Honble President had constituted the Special Bench satisfied with the proposal to consider the question of allowability of extra-shift allowance to a leasing company on the machinery’s that are leased by it on the strength of the lessees running their factory or concern double or triple shift. The appeals were accordingly heard and we wish to place on record our appreciation to sincere efforts of the learned counsel for the appellant company Mr. Arvind Datar and the Senior Departmental Representative Mr. Ravi in rendering assistance to the Bench by placing lucid and coherent arguments.
3. The assessee contended before the Commissioner that it was justified to the claim of extra-shift allowance on the various machines it had leased to industrialists who had used the said machines in their production process and by they using it in their double and triple shift working the wear and tear of the machines had been considerable. The appellant company had also contended that section 32 of the Act, Rules 5 & 5AA of the Income Tax Rules, 1962, does not lay down any restriction or embargo on extra-shift allowance in respect of machinery’s as was found with reference to a hotel. The appellant company had also placed a comparison with a hire purchase or machinery with hire of machinery simpliciter. It was pleaded that the former though becomes the owner on payment of the last of the instalment is allowed the extra-shift allowance which is so permitted by the Circular of the Board and this is in recognition of the principle that at least one of them should be granted the said allowance. In the case of the latter, who is the owner, and has allowed the use of the machinery for productive purposes by the lessees, should be allowed the allowance because, the lessee also could not be granted the allowance for he is not the owner though he has used the same. Further contention was that the criteria or satisfaction of the condition for grant of investment allowance based on the user’s activity should be extended to the grant of extra-shift allowance because the same logic extends to this situation too.
3.1 The Commissioner in his leading order for the assessment year 1986-87, however, was not impressed with the contentions for he placed heavy reliance on the decision of the Tribunal (supra). He rejected the plea for the extra-shift allowance based on the multiple shift running of the lessee by reproducing the observation of the decision of the Tribunal (supra) where the conclusion was that depreciation is not measured with reference to the extent of use because there are machines that may be used for multiple shifts but not entitled to extra-shift allowance. He also rejected the plea of the use by the lessee and extend it to the assessee by reproducing that part of the order of the Tribunal (supra) that contained to the decisions including that of South India Viscose Ltd. v. CIT (1982) 135 ITR 206 (Mad) where the ruling was that the extra-shift allowance has to be measured in terms of the multiple shift working of the concern that refers to the actual user alone.
3.2 He also rejected the logic in granting of investment allowance on the lessee satisfying the condition laid down in section 32A of the Act to section 32 of the Act basing his conclusions on the decision of the Tribunal (supra). He distinguished the Circular of the Board by observing that it did not go into the aspect of the situation as the one in the instant case. In so far as the plea that in the case of hotel alone there is a specific mention that the owner and the user shall be the same he observed that, the Tribunal (supra) did not find this argument convincing. On the aspect of validity of revision, the order being erroneous and prejudicial to the interest of the revenue he observed that, the order may be prejudicial to the interest of the assessee but it is the department that would be placed in a worse position not only for the current year but for the years to follow too, if the untenable claim of the assessee is not reviewed.
4. The learned counsel Mr. Datar had reiterated the same arguments as were advanced before the Commissioner and supplemented it by the recent ruling of the Supreme Court in CIT v. Shaan Finance (P) Ltd. (1998) 231 ITR 308 (SC) and of the Karnataka High Court in CIT v. Maharashtra Apex Corpn. Ltd. (1998) 234 ITR 484 (Karn). The Karnataka High Court (supra) had upheld the claim of the assessee for grant of extra-shift allowance to a company that carries on the activity of leasing of machines. The learned counsel also filed clippings from the Income Tax Ready Reckoner to drive home his point that the claim of the appellant company is justified. The learned counsel contended that the decision of the Karnataka High Court (supra) confirms that the view of the Commissioner could not be said to be only view and, therefore, he could not be said to have found any error in the order of assessing officer that was prejudicial to the interest of the revenue.
5. Mr. Ravi, Senior Departmental Representative supported the order of Commissioner and augmented his findings with another decision of the Tribunal in Mazda Industries & Leasing Ltd. v. Deputy CIT (1997) 61 ITD 235 (Mum-Trib). He referred to the ruling of the Apex Court in South India Viscose Ltd. v. CIT (1997) 227 ITR 286 (SC) and contended that the concern and the assessee have to be one and the same and not two different persons. He placed reliance on the ruling of the Apex Court in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) for appreciation of the distinction between charging sections and enabling and computation provisions of the Act. He also placed reliance on the ratio laid down by the Bombay High Court in CIT v. Smt. Godavaridevi Saraf (1978) 113 ITR 589 (Bom) for the proposition that the all authorities who are required to implement the Act must do in the spirit in which it was intended to.
6. Section 32(1) of the Act provides broad categories of items to which the said section would apply and proceeds to prescribe the two basic conditions, namely, that the asset in question must be owned followed by it being used for the purposes of business or profession. One such category is machinery or plant. It then states the depreciation shall be allowed as a deduction in the computation of the profit or gains from business or profession as a percentage of the actual cost or the written down value. It had extended additional depreciation in respect of new machines or plant that has been installed after the 31-3-1980 but before the 1-4-1985 and this is allowable to the extent of fifty per cent of the depreciation allowable on such machines or plant. This is contained in sub-section (iia) of section 32 of the Act and it reads, “where machinery or plant has been installed after the 31-3-1980 but before 1-4-1985, the assessee shall be entitled to 50 per cent of the depreciation excluding the extra-shift allowance for double or multiple working of the machinery or plant and the extra allowance in respect of machinery or plant installed in any premises used as a hotel in the previous year in which the machinery or plant was first put to use in the immediately succeeding previous year” (emphasishere italicised, in print supplied). Sub-section (iia) of section 32 of the Act that applies in connection with the new machine or plant and installed is not an issue in the instant case. But, the underlined words above, namely, “excluding the extra-shift allowance for double or multiple working of the machinery or plant”, seem to indicate that the extra-shift allowance is available to the machinery or plant that had worked for multiple shifts.
6.1 Sub-section (v) of section 32(1) of the Act refers to the building that is constructed after the 31-3-1967, owned by a company and used by it is as a hotel that is approved by the Central Government, on such building the company was allowable 25 per cent of the cost of erection or construction of the hotel building in the previous year of completion of the erection or construction or in the immediately succeeding previous when it is first put to use. The lawmakers have specifically included the term or words that the building must be owned by the company and used by such company as a hotel in this sub-section and had not used similar terms with reference to any other category of the assets that are entitled to the depreciation. Therefore, on the face of it there appears justification in the contention of the appellant that owner of the machinery or plant need not necessarily be the actual user of it.
6.2 Section 32 of the Act nowhere states the method of working or calculation of extra-shift working of the machine or plant but it relates to the allowing of depreciation at the rates as prescribed in Appendix I to the Income Tax Rules, 1962. This Appendix I list machinery or plant that are entitled to the extra-shift allowance and those that are not entitled to. The Tribunal in Shri Leasing & Industrial Finance Co. Ltd.s case (supra) had referred to these differences that existed in Appendix I and had observed that the depreciation is not related to the extent of use and that a machinery or plant even if used for a day is entitled to depreciation at the rates prescribed. To this extent there may not be any other opinion possible.
6.3 We feel that it is necessary to appreciate the relevance of the term `concern’ contained in Appendix I where it prescribes the manner or the method of calculation of extra-shift allowance based on the multiple shifts working of the concern. Here again it is noticed that when it comes to the calculation of extra-shift allowance of a hotel with reference to the machinery or plant used by it, the emphasis is on the company not only owning the building but it must use the building as a hotel. Similar emphasis is not found when it comes to the calculation of extra-shift allowance of machinery or plant installed in any other concern. This gives us a feeling that the lawmakers for obvious reasons felt that emphasis should not be so laid down in case of machinery or plant that are used by concerns which are not a hotel. We shall reproduce the two provisions as contained in the Appendix I.
(iii) Extra allowance of depreciation for approved hotels :
An extra allowance of depreciation of an amount equal to one half of the normal allowance shall be allowed in the case of machinery or plant installed by an assessee, being an Indian company, in premises used by it as a hotel where such hotel is for the first time approved by the Central Government for purposes of deduction of section 33 of the Act.
ExplanationFor the purposes of this sub-item and sub-item (iv) normal allowance’ means the amount of depreciation allowance (other than the extra depreciation allowance under this sub-item or the extra-shift depreciation allowance under sub-item (iv)) which is allowable under rule 5.
(iv) Extra-shift depreciation allowance :
An extra allowance upto maximum of an amount equal to onehealf the normal depreciation allowance shall be allowed where a concern claims such allowance on account of double shift working and establishes that it has worked double shift. An extra allowance upto a maximum of an amount equal to the normal allowance, instead of one-half of the normal allowance shall be allowed where a concern claims such allowance on account of triple shift working and establishes that it has worked triple shift.
The calculations of the extra allowance for double shift working and triple shift working shall be made separately in proportion of the number of days for which the concern worked double shift or triple shift, as the case may be, bears to the normal working days during the previous year. For this purpose, the normal number of working days during the previous year shall be deemed to be
(a) in the case of a seasonal factory or concern, the number of days on which the factory or concern actually worked during the previous year or 180 days, whichever is greater;
(b) in any other case, the number of days on which the factory or concern actually worked during the previous year or 240 days, whichever is greater.
6.4 The above calculation method indicates that the extra-shift depreciation is allowable to machinery or plant based on the double or triple shift working of the factory or concern where it is installed and used for productive purposes. When it comes to allowing of normal depreciation or the additional depreciation in respect of machinery or plant, it is related either to the actual cost or the written down value only which figure is directly referable, and it being depended upon the use for the purposes of the business, there was no need of relating the same to the working of the factory or the concern. Because, the lawmakers felt that extra depreciation should be allowed on machinery or plant for its greater wear and tear due to the multiple shift working, they had formulated it with reference to the working of the factory or the concern as the easiest and simple method that would avoid unnecessary litigation that may result if it is related to the working of each machinery or plant. It also gives us the feeling that this was so evolved on the recognition of the production processes where sonic machinery may have to be kept running continuously while some may be used for double shifts and some used for single shifts only based on the appreciation of the fact that the process by one machine may have to undergo further processes on other machines for maintaining the production at its optimum level and not all machinery are required to work continuously. The Tribunal in Shri Leasing & Industrial Finance Co. Ltd.s case (supra) had not considered this concept that is the very basis for the working of any factory or concern and which is the base of the industrial activity.
6.5 The Central Board of Direct Taxes (hereinafter referred to as Board) was seized of the matter and it was of the opinion that it was expedient for the proper administration of the provisions of section 32 of the Act to issue certain directions and instructions. In its letter No. 10/83/69/IT(A.II) dated 28-9-1970 the Board laid down that extra-shift allowance will be allowed in respect of the entire plant and machinery used by a concern which has worked extra-shift, without making any attempt to determine the number of days on which each machinery or plant actually worked extra-shift during the relevant previous year. In Circular No. 109 dated 20-3-1973 it was mentioned that the said allowance should be calculated for the period for which the concern has actually worked extra-shift expressed in terms of the proportion which such period bears to the normal number of working days during the previous year. After the decisions of the Allahabad High Court in Kundan Sugar Mills v. CIT (1977) 106 ITR 704 (All), of the Calcutta High Court in Anantapur Textiles Ltd. v. CIT (1979) 116 ITR 851 (Cal) and of the Madras High Court in South India Viscose Ltd.’s case (supra), the Board reconsidered its above instructions. It was reiterated that the grant of extra-shift allowance for plant and machinery be calculated with reference to the working of a factory situated at a place and not with reference to the number of days each machinery and plant has worked. Where a concern has more than one factory, the extra-shift allowance will be regulated for each factory in the above manner. As the determination of the number of days each machinery or plant has worked in a factory is cumbersome, the existing instructions and the present clarification are aimed at simplifying the calculation of extra-shift allowance. This clarification was issued vide instructions No. 1605 of 26-2-1985. In that view of the matter and considering that the instructions of the Board are binding on the revenue authorities working under it, it cannot be said that there is any error in the order of the assessing officer, which is prejudicial to the interest of the revenue in the extra-shift allowance granted to the assessee.
6.6 With regard to the concept of granting depreciation on hire purchase, the Board considered this issue and by the Circular No. 9 of 1943 dated 23-3-1943, it was provided that in case of hire purchase agreements where under the terms of the agreement the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment the transaction should be regarded as one of hire purchase. In such cases the periodical payment made by the hirer should for tax purposes be regarded as made up of (1) consideration for hire to be allowed as a deduction in the assessment and (2) payment on account of purchase to be treated as capital outlay, depreciation being allowed to the lessee on the initial value. In the case, however, of hire of machinery, it was provided that the owner is entitled to depreciation.
The Hon’ble Supreme Court in Shaan Finance (P) Ltd.’s case (supra) considered the question of allowability of investment allowance in the case of assessee doing business of leasing machinery to manufacturers and it was field that when the owner gives machinery on hire to the hirer on payment of hire charges, the income derived by the owner is business income. The hirer on the other hand who pays hire charges is entitled to claim this as revenue expenditure. The hirer has not acquired any new asset. A transaction of hire is, therefore, bailment of the machinery. There is no extinguishment of any right of the owner of the machinery. There is merely a licence given to the hirer to use, for temporary period, the machinery so hired. In such a case, there is no element of sale and there is no reason for treating such agreement as transfer for disallowing investment allowance. In the light of the above, it was held that where the business of the assessee consists of hiring out machinery and/or where the income derived by the assessee from the hiring of such machinery is business income, the assessee must be considered as having used the machinery for the purpose of its business.
6.7 The Karnataka High Court in Maharashtra Apex Corpn. Ltd.s case (supra) considered the specific issue regarding grant of extra-shift allowance in a case where the assessee used machinery in double shift in one of the lessees concern. It held that section 32(ii) of the Act provides that in respect of the depreciation of machinery, plant, etc., owned by the assessee and used for the purposes of business or profession certain deduction will be admissible. The basic requirement for claiming this deduction is the same as for claiming the investment allowance. Where the assessee has given his plant and machinery on lease, he would be entitled to extra-shift allowance.
6.8 From the ratio of the above decision of the Hon’ble Supreme Court, it is seen that where an assessee leased out its machinery to manufacturers, the assessee continues to be the owner of the machinery and the said machinery was used for the purpose of its business. It is, therefore, entitled to depreciation as well as investment allowance. This aspect is not denied by the Commissioner himself as the assessing officer allowed depreciation on these machineries given on the hire by the assessee.
6.9. With regard to the extra-shift allowance, the entitlement continues to the machineries and as long as the assessee owns the machineries even under the hire agreement, it will be entitled to the depreciation. If that machinery worked in a concern which worked double or triple shift, it will continue to be entitled to the extra-shift allowance as held by the Karnataka High Court in Maharashtra Apex Corpn. Ltd.s case (supra). There is, therefore, no infirmity in the order of the assessing officer and the same cannot be said to an error prejudicial to the interest of the revenue, in the light of the circulars /instructions of the Board and the decision of the Supreme Court in Shaan Finance (P) Ltd.’s case (supra). Even if it is to be held that the view taken by the Commissioner is a possible view, even then that shall not give jurisdiction to the Commissioner to exercise his power under section 263 of the Act. We hold accordingly and cancel the order of the Commissioner.
In the result we allow the appeals.