Commissioner of Income Tax vs Tamil Nadu Agro Industries Corporation

Ratnam, J.—These tax case references relating to the same assessee, though for different assessment years are dealt with together as a

common important question of law relating to the allowance of depreciation on a certain type of machinery arises for consideration. It will be

convenient, however, to refer to the facts and the question arising for decision in each of these references.

The assessee in T.C. Nos. 1188 to 1190 of 1980 is a company and the relevant assessment years are 1972-73 to 1974-75. In the course of

the assessment proceedings for those assessment years, the assessee had claimed 30% depreciation on drills and rigs owned and used by it in its

business which was initially allowed. Later, in the course of audit, it came to light that excess depreciation on the machinery had been allowed and

that led to the reopening of the assessments. In the course of the reassessment proceedings, the assessee maintained that it was entitled to

depreciation at 30% which however, was not accepted by the Income Tax Officer, who limited the rate of allowable depreciation to 10%, as

against 30%, originally claimed and allowed. On appeal by the assessee, the Appellate Assistant Commissioner confirmed the allowance of

depreciation at 10% against 30% claimed by the assessee, following his earlier order in I.T.A. No. 254/76-77 passed in respect of the same

assessee for the assessment year 1971-72, which forms the subject-matter of the second question referred in T.C. No. 1391 of 1980. On further

appeal by the assessee before the Tribunal, it purported to follow its earlier decision in I.T.A. No. 1096/Mad/77-78, which again is the subject-

matter of the second question referred in T.C. No. 1391 of 1980, to hold that the assessee is entitled to depreciation on the machinery at the rate

of 30% under item III-D(4) in the table of rates of admissible depreciation, occurring in Part I of Appendix I to the Income Tax Rules, 1962

(hereinafter referred to as ""the Rules""). u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), at the instance of the

Revenue, the following common question of law, for the assessment years 1972-73 to 1974-75, has been referred to this court for its opinion :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in allowing depreciation at 30% in respect of drills

and rigs used by the assessee against 10% allowed by the Income Tax Officer ?

In T.C. No. 1391 of 1980, the assessee is the same company, as in T.C. Nos. 1188 to 1190 of 1980, though the assessment year relevant to

this reference is 1971-72. In completing the assessment, the Income Tax Officer originally allowed depreciation on building and drilling machines,

as claimed by the assessee. On the audit party pointing out that excess depreciation had been allowed, the assessment was reopened. Even in the

course of the reassessment proceedings, the assessee claimed that depreciation on building and drilling machines should be allowed as before. The

Income Tax Officer, however, took the view that the assessee had not secured till to the building during the relevant accounting year and withdrew

the depreciation allowed earlier. In regard to the claim for depreciation on drilling machines, the Income Tax Officer took into account the fact that

the machinery used by the assessee was not of the type contemplated and falling under item III-D(4) in the table of rates of admissible depreciation

and allowed depreciation at the general rate of 10% and the excess relief granted was worked out and recouped in the reassessment. The appeal

by the assessee before the Appellate Assistant Commissioner was dismissed affirming the view taken by the Income Tax Officer. On further

appeal to the Tribunal, it followed its earlier decision in I.T.A. No. 998/Mds/76-77 (C Bench) with reference to the depreciation relating to the

building and upheld the claim of the assessee. Considering the claim of the assessee for depreciation in respect of drilling machines, the Tribunal

took the view that the drilling rigs would constitute ""earth moving machinery"" of the nature contemplated under item III-D(4) in the table of rates of

admissible depreciation in Part I of Appendix I to the Rules and held that the assessee was entitled to depreciation at 30% and of the Revenue, u/s

256(1) of the Act, the following two questions of law have been referred to this court, for its opinion :

(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that. As per the provisions of section 47

of the Indian Registration Act, the title over the transferred by Neyveli Lignite Corporation Ltd., passed on to the assessee on November 1, 1970,

and not on the date of registration in 1975 and, accordingly, the assessee was entitled to depreciation ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the drilling machines used by the

assessee should be treated as earth-moving machinery, falling under entry 4 of item III-D of Part I of Appendix I of the Income Tax Rules, 1962,

and, therefore, entitled to depreciation at 30% ?

We now proceed to consider the first question referred in T.C. No. 1391 of 1980. We find from para 2 of the order of the Tribunal that it had

upheld the claim of the assessee for depreciation on building on the strength of an order of the Tribunal in I.T.A. No. 998/Mds/76-77 (C. Bench)

in the assessee''s case in respect of the assessment year 1973-74. That decision of the Tribunal formed the subject-matter of a reference in

Commissioner of Income Tax Vs. Sivanandha Mills Limited, . On a consideration of the facts as well as the scope and applicability of section 47

of the Indian Registration Act, a Division Bench to which one of us (Ratnam J) was a party held that the assessee was not the legal owner of the

building during the accounting year relevant to the assessment year 1973-74 and was, therefore, not entitled to depreciation in respect of the

building in that year and further that the Tribunal was in error when it made available to the assessee the benefit of depreciation, as claimed by it, in

respect of the building not owned by it, though used by it, during the relevant accounting year. The same considerations and reasoning would apply

as it is undisputed that there is no change either in the factual or in the legal position in respect of the assessment year in question. We, therefore,

answer the first question referred in T.C. No. 1391 of 1980 in the negative and in favour of the Revenue.

That takes us on to a consideration of the common question T.C. Nos. 1188 to 1190 of 1980 and the second question in T.C. No. 1391 of

1980, earlier set out. The machinery owned and used by the assessee during the relevant assessment years for drilling borewells for agricultural

purposes was drilling machinery. Initially, in the course of the assessment proceedings, the assessee claimed and secured depreciation at the rate of

30% on the footing that the drilling machinery owned and used by the assessee in drilling borewells fell within entry 4 in item III-D in the table of

rates of admissible depreciation under Part I of Appendix I to the Rules. However, later, when it was pointed out by the audit that excess

depreciation had been allowed, in the reassessment proceedings, the depreciation was confined to 10%, i.e., the ordinary rate. It is not in dispute

that, if the drilling machinery owned and used by the assessee does not fall within entry 4 in item III-D of the table of rates of admissible

depreciation, then, the depreciation property allowable is only 10%. Therefore, the claim of the assessee for higher depreciation at 30% would

depend upon whether the machinery owned and used by the assessee is of the nature contemplated by entry 4 in item III-D referred to above and

used for purposes indicated therein. It would be appropriate at this stage to make a reference to the relevant entry, which reads as follows :

III-D. - (4) Earth moving machinery employed in heavy construction works, such as dams, tunnels, canals, etc., (N.E.S.A.)

From the words occurring in the aforesaid entry, it is seen that the words employed not only describe the machinery as ""earth-moving

machinery"", but also clearly indicate the nature of the user of the ""earth-moving machinery"" as those used or employed in heavy construction words

such as dams, tunnels, canals. Any machinery employed for removing earth from a place, be it on the surface of the earth or by burrowing a hole

into the bowels of the earth, would fall within the expression ""earth-moving machinery."" That, however, is not the only requirement to be fulfilled in

order to fall within the entry. What has been further contemplated is earth-moving machinery of the kind used or employed in the excavation of

earth in large quantities and on a massive scale, as is necessary in the case of construction of works like dams, tunnels, canals, etc. To interpret the

entry as taking in not only ""earth-moving machinery"" for purposes of excavating earth in large and massive quantities as in the construction of dams,

canals and tunnels, but also for small operation in earth-moving generally may lead to startling results. Even a spade used for breaking the ground

and turning the soil and excavating earth on a small scale, could, in that sense, be included within the scope of earth-moving machinery. That such

earth-moving contraptions were not in contemplation at all in the entry referred to above is clearly brought out by the words employed with

reference to the user of the earth-moving machinery, viz., in heavy construction works such as dams, tunnels, canals, etc. In other words, the

machinery, in order to fall within the entry, should not only be earth-moving machinery, but of such a nature as is used or employed in heavy

construction works, such as dams, tunnels, canals, etc. By the use of drilling machinery owned and used by the assessee, it may be that earth was

moved, if not at the surface of the earth, at least from out of the bowels of the earth, in the process of drilling borewells for agriculatural purposes.

Even so, the drilling machinery cannot, by any means, be considered to be of such a nature as is employed or used in heavy construction works

such as dams, tunnels, canals. Where drilling tools or drilling machines are contemplated as eligible for higher depreciation (30%), a specific

provision has been made, as could be seen from entry 7 with reference to drilling tools of mineral oil concerns. This also indicates that the dirlling

machinery used by the assessee for drilling borewells has not been contemplated at all as qualifying for higher depreciation. In order, therefore, to

fall within the entry referred to earlier, the earth-moving machnery must be of such a nature as isoridnarily employed in heavy construction works,

where there is need for excavation of earth in very large quantities for the purpose of building dams, tunnels, canals, etc., To satisfy the

requirements of the entry referred to earlier, it would not be sufficient, if the drilling machinery fell within the description of ""earth-moving

machinery"", but it would also be necessary that it should be of such a nature and kind as is employed in the construction of works involving the

excavation of earth in large quantities like dams, tunnels, canals and, as in this case, the drilling machinery owned and used by the assessee had

been used only for the purpose of digging borewells, it follows that though, in a sense, the drilling machinery may be called ""earth-moving

machinery"", Such machinery cannot be regarded as of such a nature as employed in heavy construction works, as contemplated by the entry.

A brief reference to the reasoning of the Tribunal to conclude that the machinery in this case would fall within entry III-D(4) may now be made.

In T.C. No. 1391 of 1980, the Tribunal, in the course of its order, had given three reasons to hold that the drilling machinery would fall within the

entry three reasons to hold that the drilling machinery would fall within the entry extracted earlier. The first is that the machinery was built by the

heavy machine-building plant of the Heavy Engineering Corporation Ltd., ranchi. The fact that the machinery had been fabricated by the Heavy

Engineering Corportation Ltd., has no relevance whatever in considering the question whether the drilling machinery of the assessee would fall

within the entry. We fail to see how the fabrication of the drilling machinery by the Heavy Engineering Corporation Ltd., would make the machinery

earth-moving machinery employed in heavy construction works"", as found in the entry. The second reason is that the machinery, viz., drilling

machinery, is used for earth-moving. This may be so. However, even from the words in the entry, it is abundantly clear that every kind of ""earth-

moving machinery"" is not at all within its contemplaation. It has already been pointed out that the entry contemplates and takes in only ""earth-

moving machinery"" used in excavation of earth in large quantities for purposes of construction of major works, like dams, canals, tunnels and the

mere circumstance that the machinery could be utilised for ""earth-moving"", without being employed or capable of being used in heavy construction

works of the nature referred to earlier, would not suffice to bring such machinery within the scope of the entry. The third reason given by the

Tribunal is that the use of the word ""etc.,"" towards the end of the entry indicates that machinery of similar nature would also be covered under that

entry. The collocation of the words in the entry, particularly the word ""etc.,"" at the end, would appear to us to indicate that by the use of that word,

what was contemplated was other construction works like dams, tunnels, canals and that had no reference whatever to machinery. In other words,

after illustrating the nature of the heavy construction works like dams, tunnels, canals contemplated by the entry, the word ""etc.,"" has been used

only to denote and take in other similar heavy construction works like what had already been enumerated and which had been omitted to be

mentioned and that had no connection whatever with the machinery at all. We are, therefore, unable to apprectiate the reasoning of the Tribunal

that, by the use of the word ""etc.,"" earth-moving machinery of similar nature had been contemplated. We may, in this connection, usefully refer to

the rule of construction to be adopted in such cases, as pointed out by the Supreme Court in Siddeshwari Cotton Mills (P) Ltd. Vs. Union of India

(UOI) and Another, , relied on by learned counsel for the Revenue. There, the question arose whether the process of ""plain calendering"" to which

cotton fabric was subjected would not fall under ""any other process"" within the meaning of section 2(f)(v) of the Central Excises and Salt Act,

1944 (hereinafter referred to as the ""Central Excises Act"" for short), which included bleaching, mercerising, dyeing, printing, water-proofing,

rubberising, shrink-proofing, organdie processing, or any other process or any one or more of those processes. The Appellate Tribunal did not

accept the contention that though ""calendering"" might be a ""process"", it is not any ""process"" that satisfies the requirement of ""any other process

occurring in section 2(f)(v) of the Central Excises Act, and that only those processes that partake of the same common characteristic of and belong

to the same genus as the processes such as bleaching, mercerising, dyeing, printing water-proofing, rubberising, shrink-proofing or organdie-

processing occuring in section 2(f)(v) were alone contemplated and held that it was unnecessary for the process of ""calendering"" to be a ""process

belonging to the same genus as those enumerated in section 2(f)(v) of the Central Excises Act to take the cotton fabric out of the exemption and

even if the process did not partake of the characteristic of other processes specifically enumerated, the cotton fabric would be taken out of the

exemption. This interpretation of the Tribunal was found to be faulty and erroneous by the Supreme Court and it was pointed out that the words

any other process"" in section 2(f)(v) of the Central Excises Act, though they otherwise had wide import, must share the characteristic of being

limited by one preceding expressions and that the principle underlying this approach to construction is that the subsequent general words were

intended only to guard against some accidental omission in the objects of the kind mentioned earlier and were not intended to extend to objects of

a wholly different kind. Ultimately, the Supreme Court pointed out that the words ""any other process"" must share one or other of the incidents of

bleaching, mercerising, dyeing, printing, water-proofing, rubbersing, shrink-proofing, organdie processing, which impart a change of a lasting

character to the fabric by either the addition of some chemical into the fabric or otherwise. Viewed in the light of the principle laid down by the

Supreme Court in the decision referred to above, it follows that the use of the word ""etc.,"" in the entry referred to already, was certainly not

intended to extend to earth-moving machinery which was totally different from that used in major construction works like dams, tunnels, canals and

the addition of the subsequent word ""etc.,"" was intended to include accidental or inadvertent ommissions in the construction work of the kind

mentioned earlier, viz., dams, tunnels canals, and not to extend to earth-moving machinery. We are, therefore, unable to accept the reasoning of

the Tribunal for holding that the drilling machinery owned and used by the assessee would fall within entry 4 of item III-D of Part I to Appendix I

to the Rules enabling the assessee to claim depreciation at 30% and not at 10%, as allowed. Though learned counsel for the assessee placed

strong reliance on the decision in Commissioner of Income Tax Vs. Super Drillers, , we find that that decision does not, in any manner, advance

the case of the assessee, for the question had been approached by the court as one of fact. We, therefore, answer the common question referred

in T.C. Nos. 1188 to 1190 of 1980 and the second question in T.C. No. 1391 of 1980 in the negative and in favour of the Revenue. There will

be, however, no order as to costs.