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Judgment
K. K. USHA, J. :
Cochin Bench of the Tribunal has referred for the opinion of this Court under s. 256(2) of the IT Act, 1961, the following question of law arising out of the order of the Tribunal dt. 23rd Feb., 1981 in ITA Nos. 788(Coch)/77-78 and 494(Coch)/78-79 :
"Whether the assessee is entitled to extra shift allowance in respect of electrical sub-station in the factory ?"
The reference relates to IT assessment for the years 1972-73, 1973-74 and 1974-75. The assessee is a public limited company, engaged in manufacturing calcium carbide by a method which involves passing of electricity through the mixture of limeshell and charcoal. For the asst. yrs. 1972-73, 1973-74 and 1974-75 originally the assessment proceedings were completed granting extra shift allowance to the assessee in respect of electrical substation. Pursuant to remarks made by the audit party, the assessments were reopened by the ITO under s. 147(b) rejecting the objection raised by the assessee to such proposal. The ITO completed the assessment withdrawing the relief granted by way of extra shift allowance in respect of electrical substation. Assessees appeals were allowed by the AAC granting extra shift allowance as claimed by the assessee for the asst. yr. 1974-75.
Department took up the matter in appeal before the Tribunal. By its order dt. 14th March, 1978, the Tribunal set aside the order of the AAC with a direction to decide the matter afresh after making a local inspection along with the ITO and then to decide the appeal. There was also a direction to the AAC to prepare a detailed note of local inspection about the machinery particularly about the disputed items with reference to the description of the machinery. He was also directed to refer in his report as to whether it is possible to treat it as a separate machinery which can be classified as electrical machinery as contended by the ITO or whether it is only a part of the general machinery and such other relevant material. The AAC was further directed to keep the report in his file and both sides were allowed to peruse the report. For the asst. yrs. 1972-73, 1973-74 and 1974-75 there were appeals by the Department which was remanded back to the AAC to be disposed of in the light of the direction given in the order for the asst. yr. 1974-75.
The AAC visited assessees factory along with the ITO personally inspected the machinery and a report was made taking the view that electrical sub-station forms an integral part of the assessees plant and machinery. On this basis, the appeals were disposed of in favour of the assessee. The AAC held that for the manufacture of calcium carbide, raw materials are limeshell, carbon and electricity, electricity was not a source of power alone, but was actually consumed for the manufacture of ultimate product and therefore the machinery for which ITO denied extra shift allowance are part and parcel of the general machinery of the assessee. He also held that the furnace used cannot work independently without the sub-station and the plants are completely interdependent for the purpose of assessees business. On this basis, the ITO was directed to give the extra shift allowance to the assessee in respect of the electrical sub-station also.
Aggrieved by the orders of the AAC, Department filed an appeal before the Tribunal. It was contended by the Department that the AAC ought to have found that under the IT Rules electrical machinery such a switch gear, transformers and other stationary plant and wiring has been specifically excluded from the scope of extra shift allowance and therefore the assessees claim should have been rejected. The Tribunal held that the electrical sub station is a separate unit answering the description in entry III of the Depreciation Schedule and there was no basis for the assessees claim that the electrical sub-station was an integral part of the calcium carbide plant. Tribunal disallowed the claim of the assessee for the extra unit allowance. Assessee filed OP 1228/82 and 1226/82 before this Court for compelling the Tribunal to refer the question regarding eligibility for extra shift allowance. By judgment dt. 20th Jan., 1985 this Court directed the Tribunal to refer the common question under s. 256(2) of the IT Act.
It is contended by the assessee that the Tribunal has committed an error in coming to the conclusion that the sub-station would come within the scope of the term electrical machinery in Column : 1 under cl. (iv) of Entry III of Pt. 1 of App. I to the IT Rules, 1962 for the purpose of rate of depreciation. According to the assessee, the enquiry should have been whether the substation forms a vital and inseparable part of the plant and machinery. The entire approach of the Tribunal was therefore misconceived. On the other hand, the Revenue contended that the substation would come under Entry (1), electrical machinery, switch gear, transformers and other stationary plant and wiring and fittings, electric lights and fan installation under cl. (iv) and not under the main Entry, machinery and plant (not being a ship) and it is therefore clear that the assessee is not entitled to extra shift allowance.
By virtue of the provisions contained under s. 32, an assessee is entitled to deduction for all machinery, plant etc., owned by the assessee and used for the purpose of its business or profession at specific percentages as prescribed. Rule 5 of the IT Rules, 1962 provides that the allowance in respect of depreciation of buildings, machinery, plant or furniture etc., shall be calculated at the percentages specified in the second column of Table in Pt. I of App. I to the Rules. In Part I, III(i), it is provided that general rate applicable to machinery and plant (not being a ship) for which no special rate has been prescribed under item (ii) shall be 10%. Under item (iv), provision is made for extra shift depreciation allowance for an amount equal to one-half of the normal allowance, where a concern claims such allowance on account of double shift work and establishes that it has worked double shift. It is also provided that extra shift allowance shall not be allowed in respect of an item of machinery or plant which has been specifically excepted by inscription of the letters "N. E. S. A." (meaning "No Extra Shift Allowance") against it in sub-item (ii) and also in respect of the items of machinery and plant specifically referred under the item and for which general rate of depreciation of 10% applies. In this list, item No. 1 is shown as, "Electrical machinery - Switchgear and instruments, transformers and other stationary plant and wiring and fittings of electric light and fan installations".
The question arising for consideration in this case is whether the sub-station would come under the excepted category of electrical machinery or whether it is the integrated part of main plant and machinery of the manufacturing unit of the assessee. As mentioned earlier, after the first order of the Tribunal remanding the matter, the AAC inspected the plant of the assessee along with ITO. The view taken by the AAC after his inspection as reflected in the order dt. 30th June, 1978, reads as follows :
"The appellant is correct in the argument that the electrical sub-station, the electronic controls and the weighing apparatus are part and parcel of the plant. Since the reaction producing calcium carbide takes place only at the proper temperature, the electrical substation involved in the electrical thermal process is the very heart of the plant. The Unit cannot work independently of the same. The entire unit is depending upon it. It cannot therefore be said that the plant can work extra shift without the substation. For these reasons, on facts, I hold the appellant is entitled to extra shift allowance as claimed."
The assessee had produced before the Tribunal a report by the Area Leader and Head of Division of Electrothermics & Metallurgy and the Project Manager, Calcium Silicide & Calcium Carbide Projects, Central Electrochemical Research Institute (Council of Scientific and Industrial Research). A portion of the above report has been quoted in paragraph 10 of the order of the Tribunal. The full text of the report was made available to us at the time of hearing. It reads as follows :
"The process of manufacturing calcium carbide involves a reaction between lime and carbon under the influence of electric are to form calcium carbide. Different carbonaceous materials could be used for the reduction of lime with carbon at these high temperatures in the electric arc. Solderberg self-banking electrodes have been advantageously employed in the place of pre-baked electrodes.
A consumption of 3000 to 3500 kwh. of electric energy per ton of calcium carbide produced occurs when lime is used. When lime stone/lime shells or coral lime stone is employed in the place of lime, the electric energy consumption in the production of calcium carbide gets stepped up to 4500 to 5500 kwh depending upon the furnace operating conditions. This is because the decomposition of calcium carbonate to calcium oxide is an endothermic reaction, i.e. absorbing considerable amounts of heat for this purpose and the heat is to be supplied by electricity only, when calcium carbonate source is fed in the place of calcium oxide.
The integrated electrical machinery consists of stepping down from the electricity transmission line of the Electricity Board from 110/66 KV to 11 KV by suitable transformers and switchgears and further utilising the same by furnace transformer to bring from 11 KV i.e. from 11000V to 130V. Hence from the transmission line of the Electricity Board upto stepping to 130V and connecting the furnace is an integrated electrical equipment system which forms part of the arc furnace itself.
We are, therefore, of the opinion that all electrical equipments like current transformers, potential transformers, switchgears, busbars etc., of power intensive calcium carbide industry form an integral part of the total plant and machinery as good as the furnace itself. It also takes into account the raw material feed systems, packing system etc. Electricity is utilised as a reaction agent/raw material to supply necessary heat very advantageously inside the arc furnace. It is not utilised as a motive agent in this calcium carbide industry. It is not possible to produce calcium carbide by any other process economically and also without using all the electrical equipments already indicated."
Calcium carbide is the most important compound of calcium. It was by an accident in the year 1892, T. L. Wilson happened to produce calcium carbide. It was recorded that while he was attempting to prepare metallic calcium from lime and tar in an electric furnace at Spray, N. C., the produce obtained being not calcium, was thrown into a nearby stream and it was found liberating great quantities of combustible gas. The first factory for the production of calcium carbide was built at Niagara Falls in 1896.
Calcium carbide is prepared from quicklime and carbon at 2000PoP to 2200PoP C."The source of carbon is usually coke, anthracite, or petroleum coke. Coke is most widely used. It should be compact and have a low ash content, a low ignition point, and high electrical resistivity, so that the bulk of the furnace charge will be highly resistant to the flow of energy. Thus the energy is concentrated, resulting in a more rapid and complete reaction.... The furnace consists of a steel shell with the side walls lined with ordinary firebrick and the bottom covered with carbon blocks or anthracite to withstand the extremely not, alkaline conditions. Most of the larger furnaces use three-phase electric current and have suspended in the shell three vertical electrodes. Improvements include the "closed" furnace, where almost all the carbon monoxide from the reaction is collected and utilized, and Solderberg continuous self-baking electrodes, which permit larger-capacity furnaces than the old prebaked electrodes..... The lime and coke are charged continuously with intermittent or continuous tapping of the liquid produce directly into cast-iron chill pots of about 5 tons capacity each." [See Chemical Process Industries by R. Norris Shreve, Late Professor Emeritus of Chemical Engineering, Purdue University and Joseph A. Brink, JR., Consulting Chemical Engineer, Professor and Chairman of Chemical Engineering, Washington State University, Fourth Edition (International Student Edition), pages 242-243].
From the above, it is clear that electricity is not used as a power to work the plant and machinery, but, it is used as a raw material in the very process itself. It is not a case where electricity can be substituted in this process by any other source of energy. Reliance was placed by the learned counsel appearing on behalf of the assessee on the following decisions in support of his contention that even if electric sub-station can be brought under the Entry Electrical machinery in the schedule in the nature of the manufacturing process carried on by the assessee, electrical sub-station must be treated as an integral part of the main plant and machinery, CIT vs. New India Sugar Mills Ltd. (1992) 105 CTR (Cal) 246 and Commissioner of Income Tax Vs. Electrosteel Castings Ltd., . In (1981) 24 CTR (Ori) 81, the question that came up for consideration before the High Court of Calcutta was whether the assessee was entitled to extra shift allowance in respect of transformer, pumping set and the tube well inside the factory. The ITO had taken the view that pumping set and tube well on which extra shift depreciation allowance was claimed will come under hydraulic work and therefore no extra shift allowance is allowable. So also, since transformer is included as item 1 in App. I Entry III(iv) as Electrical Machinery Switch gear and instruments transformers etc., no extra shift allowance can be claimed on these items also. The High Court affirmed the finding of the Tribunal that the above-mentioned items cannot be looked at as separate items for the purpose of extra shift allowance, but they are part of the plant itself. So also, in Commissioner of Income Tax Vs. Electrosteel Castings Ltd., , a Division Bench of the High Court of Orissa constituted of Chief Justice R. N. Misra as his Lordship then was, and Justice J. K. Mohanty held that the sanitary and water supply installations inside a factory does not come under the head Hydraulic works, Pipelines and Sluices exempted from grant of extra shift depreciation allowance. It was held that sanitary and water supply installations installed in a factory of the assessee manufacturing steel castings, cannot be treated as separate machinery to come under exempted item, hydraulic works, pipelines and sluices. Similar view was taken by the Supreme Court in Commissioner of Income Tax, Andhra Pradesh Vs. Taj Mahal Hotel, Secunderabad, . It was held that sanitary fittings etc., in the bath room in a hotel will come within the definition of the word plant under s. 10(2)(vib) r/w s. 10(2)(5) of Indian IT Act, 1922.
In the order of the Tribunal, reference is made to the decision in Commissioner of Income Tax, Tamil Nadu-IV Vs. M.S. Sahadevan, . We do not find that this decision has any relevance in deciding the question involved in the present case. What was considered there was whether a particular machinery is electrical machinery or not. It was held that an electrical machinery is one inbuilt into it is the electric motor which forms a vital and inseparable part of the machinery. What we are concerned in this case is whether the electric sub-station is part of the main plant and machinery of the factory. In order to find out whether a particular machinery is part of the main plant, the enquiry which has to be made is as to what operation the apparatus performs in the assessees business. This is the view taken by a Division Bench of the Gujarat High Court in Commissioner of Income Tax, Gujarat-II Vs. Elecon Engineering Co. Ltd., . The report regarding the process involved in calcium carbide manufacturing shows that electricity is used as raw material and therefore sub-station is an integral part of the main plant.
Learned counsel for the Revenue raised an objection that even if this Court comes to a conclusion that the electric sub-station is part of the main plant, this Court will not interfere with the finding of the Tribunal as it is a finding of fact. We find no merit in this contention. What is required in this case is interpretation of the entries in the Schedule and the effect of one on the other. A question involving such interpretation cannot be termed as a pure question of fact.
We therefore hold that the electrical sub-station attached to the Travancore Electro Chemical Industries Ltd., is part of its main plant and machinery and it cannot be treated as an item coming under cl. (iv) of Entry III of Pt. I Appx. I disentitling the assessee to claim extra shift allowance. The question referred is therefore answered in the affirmative in favour of the assessee and against the Revenue. There will be no order as to costs.