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DIRECT TAXES CIRCULAR - Sec. 32

SECTION 32 l DEPRECIATION

[READ WITH RULE 5 AND PART I OF APPENDIX I 1 ]

229. Depreciation on assets acquired under the hire-purchase agreement - Conditions subject to which it is to be allowed

The following instructions are issued for dealing with cases in which an asset is being acquired under on what is known as hire-purchase agreement :

1. In every case of payment purporting to be for hire-purchase, production of the agreement under which the

payment is made should be insisted on.

2. Where the effect of an agreement is that the ownership of the subject is at once transferred to the lessee (e.g.,

where the lessor obtains a right to sue for arrear instalments but no right to recovery of the asset), the transaction should be regarded as one of purchase by instalments and no deduction in respect of “hire” should be made. Depreciation should be allowed to the lessee on the entire purchase price as per the agreement.

3. Where the terms of the agreement provide that 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 payments made by the hirer should for tax purposes be regarded as made up of :

a. Consideration for hire, to be allowed as a deduction in the assessment, and

b. payment on account of purchase to be treated as capital outlay, depreciation being allowed to the lessee on the initial value (i.e., the amount for which the hired subject would have been sold for cash at the date of agreement).

The allowance to be made in respect of hire should be the difference between the aggregate amount of the periodical payments under the agreement and the initial value (as described above), the amount of this allowance being spread evenly over the term of the agreement. If, however, the agreement was terminated either by the outright purchase of equipment or of its return to the owner, the deduction should cease as from the date of the termination.

An assessee claiming this deduction should be asked to furnish a certificate, from the vendor or other satisfactory evidence, of the initial value (as described above). Where no certificate or satisfactory evidence is forthcoming, the initial value should be arrived at by computing the present value of the amount payable under the agreement at an appropriate rate per centum; in doubtful cases the facts should be reported to the Board.

Circular : No. 9 [R. Dis. No. 27(4)-IT/43], dated 23-3-1943.

JUDICIAL ANALYSIS

EXPLAINED IN : Dy. CIT v. Nagarjuna Investment Trust Ltd. [1998] 65 ITD 17 (Hyd. - Trib.) (SB) with the observation that the Circular No. 9 dated 23-3-1943 mainly clarifies that depreciation on plant and machinery purchased on hire purchase system would be admissible to the hirer (lessee) and that the periodical payments made by the hirer should for tax purposes be regarded as made up of (i) consideration of hire (interest), and (ii) payment on account of purchase (principal component). It further mentions that allowance for interest/hire should be evenly spread over the term of the agreement for being allowed as deduction in the case of the hirer. The said circular does not give any guidelines relating to accrual of income in the hands of the financier. The said circular does not be interpreted to mean that an income which come within the ambit of charging section should not be charged to tax in the year of accrual of income because deduction by way of hire and depreciation in the hands of

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the hirer is to be allowed in a particular manner as clarified in the said circular. Moreover, the circular say that that interest should be evenly spread over the terms of the agreement. The interest income according to the SOD method had been spread over the term of the contract in such a manner that it evenly gave a uniform, constant and uniform rate of interest on the reducing balances of principal amount for the entire period of contract. In any case, the said circular cannot override the charging provisions of the Act.

See also CIT v. Shaw Finance (P.) Ltd. [1998] 97 Taxman 435 (SC).

230. Depreciation and Development rebate on plant and machinery purchased on hire-purchase system

Attention is drawn to the Board’s Circular No. 9 of 1943 (P/DI F. No. 27(4)/II/43), dated March 23,1943 (Sl. No. 229) clarifying that depreciation on plant and machinery purchased on hire purchase system would be admissible at the usual rates if the conditions stated therein were fulfilled. The Board, vide its letter F. No. 27(20)-IT/59, dated June 26, 1959 (See Annex) further clarified that the same basis should be followed for development rebate also.

2. It has now been brought to the notice of the Board that in view of objections raised by Revenue Audit in

certain cases some Income-tax Officers are not allowing depreciation and development rebate on machinery purchased on hire purchase system even though the conditions laid down in the aforesaid circular and letter are fulfilled.

3. I am directed to say that the Instructions contained in the circular and letter referred to above have not

been withdrawn by the Board and are still in force and as such, should continue to be followed. This may

please be brought to the notice of the officers working in your charge.

ANNEX

COPY OF LETTER F. NO. 27(20)-IT/59, DATED 26-6-1959 OF THE C.B.R.

Subject : Allowances in assessing income—Development rebate on the installation of machinery acquired on hire-purchase basis—Whether the assessee is entitled to.

In Circular No. 9 of 1943 the Board issued instructions regarding the grant of depreciation allowance for machinery acquired under hire-purchase agreement to the effect that depreciation should be allowed in the first year itself on the estimated full initial value of the asset (the balanced being taken as hire charges). The same basis may be followed for development rebate also, i.e., development rebate may be granted in the first year itself on the full initial value. No difficulty is likely to arise as a result of forfeiture of the asset to the “hirer” because the existing provisions enable Government to recover development rebate where the machinery is sold or otherwise transferred by the assessee.

Instruction : No. 1097, dated 19-9-1977. [Source : 193rd Report of Public Accounts Committee (1983-84) (Seventh Lok Sabha), pp. 50-54.]

JUDICIAL ANALYSIS

EXPLAINED IN - The above circular and letter were explained and applied in Addl. CIT v. General Industries Corporation [1985] 155 ITR 430 (Delhi), with the following observations :

The circulars of the Central Board of Direct Taxes only serve to overcome a greater difficulty in computing how the various allowances have to be given to the assessee. If the payments towards the hire- purchase are not treated as being capital payments, they will have to be allowed as revenue payments, because the payments are certainly for business purposes and yet, if they are not treated as capital

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payments, they will necessarily be amounts expended towards the carrying out of the business. On the other hand, if the property passes at the time of the last instalment, then the entire revenue payment will be transformed into a capital payment at that stage. To meet this obvious difficulty, the Central Board of Direct Taxes has issued circulars at various times directing that assets purchased on hire-purchase basis should be treated as belonging to the assessee. The various documents filed along with the statement of case show that this position has been continuing for a very long time. Circular No. 9, dated March 23, 1943, issued by the Central Board of Revenue directed that the periodical payments should be treated as (a) the consideration for hire to be allowed as a revenue deduction, and (b) a payment on account of purchase to be treated as a capital layout. It is also mentioned in that circular that depreciation should be allowed on the initial value, i.e., the amount for which the hired object could be purchased in cash on the date of the agreement. The same view was reiterated by the Central Board of Revenue in its circular dated June 26, 1959. The Central Board of Revenue again reiterated its instructions in November, 1962, and again on July 15, 1963. In the technical instructions of November, 1962, it is pointed out that if depreciation is not allowed to the user, the same cannot also be granted to the owner because he is not using the object for the business, i.e., the result would be that neither the owner nor the hirer would get the allowance. This document points out that it is the person who runs the business who should get the allowance and not the formal owner. As we see it, there is a real difficulty in determining who is to get the allowance and how much, which has been resolved by the circulars.

**

We have not referred to the other judgments cited on the interpretation of the provisions of the Act, but ”

have relied only on the circulars

**

**

(p. 433-434)

231. Estates growing tea, coffee, etc. - Basis for allocation of expenses on account of repairs, etc. - To be followed for assessment year 1966-67 onwards

See Circular No. 26-D(XLVIII-22), dated 10-10-1966, , Sl. No. 228.

1 232. Claim for depreciation - Department not to take benefit of assessee’s ignorance

Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessees on whom it is imposed by law, officers should—

(a)

draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;

(b)

freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.

Circular : No. 14(XL-35) of 1955, dated 11-4-1955 [Extracted from Chokshi Metal Refinery v. CIT [1977] 107 ITR 63 (Guj.)].

JUDICIAL ANALYSIS

EXPLAINED IN - This circular was explained in CIT v. Ahmedabad Kaiser-e-Hind Mills Co. Ltd. [1981] 128

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ITR 486 (Guj.), with the following observations :

“This is Circular No. 14(XI-35) of 1955 and is dated April 11, 1955. In view of this circular it is clear that for the purpose of the circular, what should be the guiding factor is whether the proceedings or other particulars before the ITO at the stage of original assessment disclosed any grounds for relief under section 2(5)(a)(iii) of the Finance Act of 1964 or of the Finance Act of 1965, even though no claim was made for that relief by the assessee at the stage of those proceedings before him. It is possible to argue that, to the extent to which the circular of 1955 speaks of proceedings or other particulars before the ITO as distinguished from the return and the assessment order which were spoken of by the Supreme Court in Rai Bahadur Hardutroy’s case [1967] 66 ITR 443, there is a deviation from the correct legal position. But it is now well-settled after the decision of the Supreme Court in Ellerman’s case [1971] 82 ITR 913, that even if there is a deviation on a point of law, so far as the circular of the Board is concerned, that circular will be binding on all officers concerned with the execution of the Act and they must carry out their duties in the light of the circular.

In view of this clear position regarding the effect of the circular, it is obvious that in the instant case it was incumbent on the ITO to advise the assessee before us to claim relief under section 2(5)(a)(iii) if the proceeding or any other particulars before him at the stage of the original assessment indicated that the assessee was entitled to such relief under the provisions of the relevant Finance Act, 1965, so far as the order under reference is concerned. This question in the light of this circular of 1955 has not been examined by the Tribunal. What applies to the obligation of the ITO would also apply to all officers of the department concerned with the execution of the Act. Therefore, so far as the controversy before us regarding the powers of the AAC is concerned, in the light of the facts before us and in the light of this circular, we decline to answer the question referred to us because the question before us becomes academic in view of this circular of 1955.” (p. 492)

REFERRED TO IN - Citing reference to the first para of the circular, the Tribunal observed as follows in ITO v. Cosmic Engg. Co. [1984] 20 TTJ (Ahd. - Trib.) 271 :

“ Incidentally,

first appellate authority to remove all the anomalies including the granting of the reliefs to the assessee even if ”

no claim was made while properly framing the assessments of income

we also would like to hold that even without the circular it is the duty of the ITO and also the

(p. 273)

APPLIED IN - The above circular was relied on in CIT v. Andhra Cotton Mills Ltd. [1997] 228 ITR 30 (AP), with the following observations :

“In the present case, admittedly, the assessee did not claim deduction of depreciation. The record does not disclose that any particulars in that regard were furnished by the assessee or that the Income-tax Officer asked for the particulars, whereupon the assessee furnished them as in Dasaprakash Bottling Co.’s case [1980] 122 ITR 9 (Mad.). Therefore, in view of sub-section (1) of section 34 and the circular of the Central Board of Revenue, the Income-tax Officer could not have allowed the deduction of depreciation.” (p. 34)

1 233. Claim for depreciation - Where required particulars have not been furnished

1. Numerous instances have come to the notice of the Board where assessee’s claim for depreciation duly shown in the return was not considered by the Income-tax Officer because books of account produced were not properly maintained and it was necessary to estimate profits by invoking the proviso to section 13 of the 1922 Act. The course generally followed in such cases was to estimate the net income. The decision of the appellate authorities in such cases that the mere fact that net profits had been estimated could not be a ground for saying that depreciation claimed in the returns had been duly “allowed” as provided under the Act. On the contrary, they held, that since no depreciation was actually allowed in the past years, the profit or loss under section 10(2)(vii) would be computed without making any deduction for depreciation for arriving at the written down value of the

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asset.

2. The Board considered that where it is proposed to estimate the profit and the prescribed particulars have

been furnished by the assessee, the depreciation allowance should be separately worked out. In all such cases, the gross profit should be estimated and the deductions and allowances including the depreciation allowance should be separately deducted from the gross profit. If it is considered that the net profit should be estimated, it should be estimated subject to the allowance for depreciation and the depreciation allowance should be deducted therefrom.

3. Even where best judgment is made, the above procedure should be adopted provided the required particulars

have been furnished by the assessee. In cases where required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the Income-tax Officer should estimate the income without allowing depreciation allowance. In such cases, the estimate of net profit would be naturally higher than otherwise and the fact that the estimate has been made without considering depreciation allowance may be clearly brought out in the assessment order. In such cases, the written down value of depreciable assets would continue to be the same as at the end of the preceding year as no depreciation would actually be allowed in the assessment year.

Circular : No. 29-D(XIX-14) [F. No. 45/239/65-ITJ], dated 31-8-1965.

JUDICIAL ANALYSIS

EXPLAINED IN - In Beco Engg. Co. Ltd. v. CIT [1984] 148 ITR 478 (Punj. & Har.), the above circular was explained with the following observations :

The Central Board of Revenue, in its Circular No. 29-D(XIX-14) of 1965, F. No. 45/239/65-ITJ, dated August 31, 1965, has provided that where the required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the ITO should estimate the income without allowing depreciation allowance. From the circular, it is evident that in case the assessee has not claimed depreciation allowance, he cannot be granted the same by the ITO. It has been settled by the Supreme Court in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198, that the circulars issued by the Department would be binding on it. From the language of the section, read with the circular, it is clear that in case an assessee has not claimed depreciation, the ITO cannot give the allowance of depreciation to him.” (pp. 481-482)

EXPLAINED IN - In CIT v. Friends Corporation [1989] 180 ITR 334 (Punj. & Har.), it was observed as under :

“There is no gainsaying that allowance for depreciation is a benefit available to the assessee to claim, but not one that can be thrust upon him against his wishes. At any rate, in order to claim depreciation, the assessee must furnish the requisite particulars as prescribed by the Income-tax Act and the Rules made thereunder. In the absence of such particulars, the assessee cannot avail of, nor indeed can he be held entitled to, depreciation. It would be pertinent in this behalf to advert to the judgment of this court. In Beco Engineering Co. Ltd. v. CIT [1984] 148 ITR 478, where a reference was made to Circular No. 29- D(XIX-14) of 1965, dated August 31, 1965, issued by the Central Board of Direct Taxes which provides that where the required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the Income-tax Officer should estimate the income without allowing depreciation allowance. Further, it was held that from the language of sections 32(1)(ii) and 34(1) read with the circular, it was clear that in case an assessee had not claimed depreciation, the Income-tax Officer could not give him depreciation allowance.” (p. 335)

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EXPLAINED IN - In CIT v. Arun Textile [1991] 192 ITR 700 (Guj.), it was observed as under :

In this context, we may also refer to the Circular of the Central Board of Revenue, 29-D(XIX-14) of 1965 (F. No. 45/239/65-ITJ, dated August 31, 1965), which directed that, ‘where the required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the Income-tax Officer should estimate the income without allowing depreciation allowance.’ Thus, as the assessee had not claimed depreciation allowance and had made clear its intention not to claim the same, no necessary particulars were furnished and it is obvious that the Income-tax Officer has no occasion to allow any deductions. It was not open to the Income-tax Officer to advert to the original returns for the purpose of allowing deductions which claim was expressly withdrawn by filing the revised returns.” (p. 706)

EXPLAINED IN - In CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd. [1989] 177 ITR 443 (Bom.), the above circular was explained with the following observations :

“Our attention was invited by counsel for the assessees to the judgment of the Gujarat High Court in Chokshi Metal Refinery v. CIT [1977] 107 ITR 63, 70, 71. Reference was there made to a circular of the Central Board of Revenue [Circular No. 14(XL-35) of 1955, dated April 11, 1955]. The circular required

officers of the Department ‘to assist a taxpayer in every reasonable way, particularly in the matter of

claiming and securing

with the assessees on whom it is imposed by law, officers should (a) draw their attention to any refunds or

reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or ’

other

by the assessee for a relief to which he was entitled and that the Income-tax Officer’s duty was only to advise him of it.

Although, therefore, the responsibility, for claiming refunds and relief rests

Counsel for the assessees rightly relied upon this judgment as saying that a claim had to be made

In the instant cases, therefore, the Income-tax Officer could certainly have advised the assessees of their right to claim depreciation but he could not have given them the allowance on his own.

In our view, to sum up on the first issue, the assessee has a choice to claim or not to claim a deduction on account of depreciation. If he chooses not to claim it, the Income-tax Officer is not entitled to allow a deduction on account of depreciation.” (p. 450)

APPROVED IN - The above circular was referred to and impliedly approved in CIT v. Bishambar Dayal & Co. [1994] 210 ITR 118 (All.), with the following observations :

The Income-tax Appellate Tribunal relied upon a circular of the Central Board of Direct Taxes No. 29D(XIX) of 1965, F. No. 45/239/65-ITC, dated March 31, 1965. Under this circular, the Board had issued instructions that where income is proposed to be computed by applying a net rate and the assessee has furnished the prescribed particulars for the claim in respect of depreciation, the depreciation should be allowed separately and deducted out of the gross profits. The order of the Income-tax Appellate Tribunal is in conformity with the circular issued by the Central Board of Direct Taxes. No provision of the Income-tax Act was brought to our notice which makes the claim to depreciation inadmissible where the income is computed by applying the flat rate. In our opinion, the order of the Income-tax Appellate Tribunal does not ”

give rise to any statable question of law

EXPLAINED IN - The above circular was explained in Chopra Bros. (India) (P.) Ltd. v. ITO [1993] 202 ITR 40 (Chd. - Trib.), in the following words :

(p. 120)

In the order of the learned Accountant Member, the entire circular of the Board was reproduced. I do not wish to reproduce the circular again, but the need to issue such circular arose because determination of income by estimating the net profit without mentioning anything about the allowance of depreciation led to several legal difficulties in assessing the profits arising on the sale of assets by applying the provisions of section 10(2)(vii) of the Indian Income-tax Act, 1922. The Board, therefore, considered that, where it was

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proposed to estimate the profit and where the prescribed particulars were furnished by the assessee, the depreciation allowance should be separately worked out. In all such cases, the gross profit should be estimated and the deductions and allowances including depreciation allowance should be separately deducted from the profit so that the net profit can be arrived at. If it is considered that the net profit should be estimated, it should be estimated subject to allowance of depreciation and the depreciation allowance should be deducted therefrom. This was what was contained in paragraph 2 of the circular. The circular is, therefore, very categorical and unambiguous and directs the Assessing Officers to work out the depreciation separately even in cases where the net profit is to be estimated. I do not, therefore, see how the learned Commissioner (Appeals) could bring himself to say that the circular is inapplicable. The reasoning given by him is rather strange. In paragraph 3 of the circular, the Board has gone a step further and said that even when a best judgment assessment was made, the procedure mentioned above should be scrupulously followed. This is another reason why I am astonished at the way in which the circular of the Central Board of Direct Taxes was, if I may use the expression, deliberately and with a conscious design sidetracked. Beneficial circulars and benevolent circulars should receive the highest respect and consideration at the hands of the Assessing Officers, particularly, at the level of the Commissioner (Appeals) because that was the policy of the Central Board of Direct Taxes, which means the Government. They are not supposed to go against the intention of the Government in implementing laws. They must advance the course of justice by extending the benefits. There is no room for personal predilections in implementing the fiscal laws. The spirit more than the letter should receive the highest consideration. I am, therefore, of the opinion that both the Income-tax Officer and the Commissioner (Appeals) have erred in appreciating the circular and in not ”

applying it

(pp. 56-57) [Emphasis supplied]

EXPLAINED IN - CIT v. Jain Construction Co. [2000] 110 Taxman 156 (Raj.) in following words :

“It appears that the Board felt it necessary to issue the aforesaid circular for determination of income by estimating the net profit without mentioning anything about the allowance of depreciation, which led to several legal difficulties arising on the sale of assets by applying the provisions of section 10(2)(vii). The Board, therefore, considered that where it is proposed to estimate the profit and the prescribed particulars have been furnished by the assessee, the depreciation allowance should be separately worked out. In all such cases, the gross profit should be estimated and the deductions and allowances including the depreciation allowance should be separately deducted from the gross profit so that the net profit can be arrived at. If it is considered that the net profit should be estimated, it should be estimated subject to the allowance of depreciation and the depreciation allowance should be deducted therefrom.” (pp. 163-165)

234. Finance Lease Agreements - Effect of publication of Accounting Standards on allowability of depreciation

1. Under the Income-tax Act in all leasing transactions, the owner of the asset is entitled to the depreciation if the

same is used in the business, under section 32 of the Income-tax Act. The ownership of the asset is determined

by the terms of contract between the lessor and the lessee.

2. The Central Board of Direct Taxes vide Instruction No. 1978 dated 31st December, 1999 [F.No. 225/190/98/IT(A-II)] has laid down the line of investigation in such cases. In cases where assets are factually non-existent, having been created by hawala transaction, the question of allowance of depreciation does not arise. In cases of sale and lease-back of assets without any alteration in the situation of assets and its working, the denial of depreciation claimed has to be considered keeping in view the principle laid down by the Supreme Court in the case of McDowell & Co. Limited.

3. It has come to the notice of the Board that the New Accounting Standard on ‘Leases’ issued by the Institute of

Chartered Accountants of India require capitalization of the asset by the lessees in financial lease transaction. By

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itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act.

Circular : No. 2/2001, dated 9-2-2001.

235. Fans, air-conditioners, refrigerators, etc., provided by the employer at the residence of

employees - Whether should be considered to have been used wholly for the purpose of employer’s business and full depreciation be allowed

1. Attention is invited to the Board’s letter No. F. 10/97/63-IT(A-I), dated 29-2-1964, addressed to the Commissioner of Income-tax, in which instructions were issued, inter alia, that development rebate should not be allowed on air-conditioners and fans given by an employer for the personal use of the employees or directors at their residence, on the ground that the said plant and machinery were not wholly used for the purpose of the assessee’s business.

2. The question has been re-examined by the Board recently in the light of the Board’s letter F. No. 9/26/IT/60,

dated 21-3-1960 in which it was clarified that quarters built by the employers for the accommodation of their employees must be regarded as buildings used for the purpose of the business and depreciation allowed thereon, where the occupation by the employees of the property owned by the employer is subservient to and necessary for the purpose of their duties. It is considered that what applies to buildings applies also to the fans, air- conditioners and refrigerators fitted to those buildings, as those are amenities which virtually form part of such buildings.

3. On reconsideration, therefore, the Board have decided, in supersession of the instructions issued in their letter

dated 29-2-1964 that fans, air-conditioners, refrigerators, etc., provided by the employer at the residence

of the employees, should be considered to have been used wholly for the purpose of the employer’s business and full depreciation as may be admissible in accordance with the rules, should be allowed in the assessment of the employer. Where such assets have been installed on or before March 31, 1965, development rebate may also be allowed in respect of these assets, if the rebate is otherwise admissible.

Letter : F. No. 10/14/66-IT(A-I), dated 12-12-1966.

236. Depreciation - Extra shift allowance - Implications of the word ‘concern’ used in the rules

It was pointed out that the extra-shift allowance for depreciation was being denied on the ground that the word ‘concern’ appearing in the Rules means the whole concern in contradiction to any one shop or shops of the industrial concern.

The Committee was informed that instructions had already been issued to the Commissioner of Income-tax that the double or triple shift allowance should be granted only in respect of that machinery which had actually worked double or triple shift in a concern, and not in respect of all the machinery in the concern.

As a corollary, for the purposes of extra shift allowance it is not necessary that all the machinery in the concern should work extra shift, but where some of the machinery or plant works extra shift, the depreciation in that regard will be admissible in respect of that machinery or plant.

Source : Relevant extracts from the Official Minutes of 19th Meeting of the Direct Taxes Advisory Committee held at Calcutta on 5-11-1966.

JUDICIAL ANALYSIS

EXPLAINED IN - The above clarification was explained in Mohta Industries Ltd. v. IAC [1984] 8 ITD 14 (Delhi), in the following words :

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“ The

concern but have worked some of the shops of that particular concern. Even the letter of 5-11-1966 cannot

be understood to refer to specific items of machinery which have worked double shift or triple shift

CBDT’s clarification of 5-11-1966 is only to help those assessees who have not worked the entire

” (p.

19)

237. Days of compulsory closure due to power cut - Whether they are to be excluded from the

number of working days for the purposes of normal depreciation and extra shift depreciation

A suggestion was recently made that the days of compulsory closure of factories brought about by power cut should not be excluded from the number of working days determined for the purposes of normal depreciation and of extra depreciation for additional shift working. The Board have carefully considered the request and are pleased to direct that, for the purposes of calculating the normal depreciation allowance, the days of compulsory closure attributable to power cut should not be excluded from the number of working days. In the case of double or triple shift allowance, however, the Board have decided that, since this allowance is really meant to cover the actual extra wear and tear resulting from the additional shifts, the days on which the machinery remains completely idle cannot be taken into account in computing the extra shift allowance.

Circular : No. 43(XIX-4)-D of 1952 [F. No. 27(35)-IT/52], dated 17-11-1952.

238. Calculation of depreciation - Extra shift allowance in respect of plant and machinery

The Board have decided that where a concern has worked double shift or triple shift, extra shift allowance will be allowed in respect of the entire plant and machinery used by the concern without making any attempt to determine the number of days on which each machine actually worked double or triple shift during the relevant previous year.

Letter : No. 10/83/69-IT(A-II), dated 28-9-1970 cited in Mohta Industries Ltd. v. IAC [1984] 8 ITD 14 (Delhi) at p. 18]

JUDICIAL ANALYSIS

EXPLAINED IN - In CIT v. J.K. Cotton Spg. & Wvg. Mills Co. Ltd. [1991] 188 ITR 80 (All.), the above letter was explained with the following observations :

“A reading of the circular shows that it does no more than reiterate the language employed in column 3 of Part I of Appendix I to the Rules at Serial No. III. Just as column 3 says that ‘the calculation of extra allowance for double shift working and for triple shift working shall be made separately in the proportion which the number of days for which the concern worked double shift or triple shift, as the case may be, bears to the normal number of working days throughout the previous year’, the circular also says that ‘where a concern has worked double shift or triple shift, extra shift allowance will be in respect of the entire plant or machinery used by the concern without making any attempt to determine the number of days on which each machine actually worked double or triple shift during the relevant previous year’. Notwithstanding the slight variation in the language, we are of the opinion that the Board does not purport to say anything different or inconsistent with what the Rules provided. In fact, no such intention can be attributed to the Board. The power conferred upon the Board to issue instructions and directions by section 119 is for the proper working of the Act. It cannot be presumed that the Board has issued any circular which runs counter to, or is inconsistent with, the provisions of the Act or the Rules. Unless the language is quite implicit, we shall not presume so.” (pp. 83-84)

See also CIT v. Punalur Paper Mills Ltd. [1988] 170 ITR 37 (Ker.).

RELIED ON IN - This Letter was relied on in ITO v. Alagappa Cotton Mills [1980] 10 TTJ 191 (Mad. -

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Trib.), with the following observations :

The Board’s Circular No. F. 10/83/69-IT (A-II) dated 28-9-1970 has authorised the extra shift allowance on the basis of the working of the concern. It is the duty of the ITO to follow the direction of the Board. The instruction, which in this case incorporates a more liberal and practical interpretations of the provisions relating to extra shift allowance, was binding on the ITO. The Supreme Court in the case of

Ellerman Lines Ltd. v. CIT followed its own earlier decision in Navnit Lal C. Javeri v. K.K. Sen, wherein it was held that the directions given in a circular had to be followed by the ITO even when they ”

deviated from the provisions of the Act to the benefit of the taxpayer

(p. 192)

APPLIED IN - This Letter was referred to and applied in ITO v. Sri Varadaraja Textiles (P.) Ltd. [1984] 9 ITD 469 (Mad. - Trib.), with the following observations :

Originally, the depreciation for the machinery was to be computed only with regard to the actual number of days for which the machinery worked. Later, the rules have been amended to provide that depreciation should be granted in respect of machinery which have been used at any time in the previous year. Yet, the Direct Tax Advisory Committee was informed that the intention was to grant extra shift allowance only in respect of that machinery which actually worked extra shift and not in respect of all the machinery in the concern (Minutes of the 19th Meeting of the Direct Tax Advisory Committee held on 5- 11-1963). But, later, the CBDT issued the following circular [vide CBDT’s letter No. 10/83/69-IT (A-II), dated 28-9-1970—CBDT Bulletin XVI/II/93, p. 139]:

** This made it amply clear that the Government has no intention to compute extra shift allowance with regard to each individual machinery having already decided to simplify the calculation with reference to the working of the concern especially when depreciation itself is granted for the entire year without reference to the actual number of days of the working of the individual machinery. In this situation, it is not clear why the ITO framed an assessment contrary to the current instructions.”

**

**

EXPLAINED IN - This letter was explained and applied in IAC v. Lakshmi Machine Works Ltd. [1988] 24 ITD 511 (Mad. - Trib.), with the following observations :

“The contention of the revenue is that the extra shift allowance should be computed with reference to each individual machine and not with reference to the working of the concern as such even though that is the procedure laid down by the circular of the CBDT No. F. 10/83/8/IT (A-II), dated 28-9-1970. According to the revenue, there is a decision of the Madras High Court in South India Viscose Ltd. v. CIT [1982]

135 ITR 206 stating that extra shift allowance should be computed only with reference to the working of

each machinery and therefore the circular could not be given effect to. The revenue also relied on the decision of the Delhi High Court in Geep Industrial Syndicate Ltd. v. CBDT [1987] 166 ITR 88 to say that where there is a decision of the High Court the circular need not be applied. But this argument of the revenue overlooks two facets of a circular. The first is as a contemporaneous exposition of the law, i.e., how the department itself understood the effect of a provision of the Act and on this aspect no doubt the

exposition of the law by the High Court would make the circular redundant. But the other aspect is with reference to the concession granted by the CBDT against the rigour of the statute either to grant relief or to simplify the procedure. This kind of a circular would be binding on the revenue. This dichotomy and the effects thereof have been adumbrated by the Supreme Court in the case of K.P. Varghese v. ITO [1981]

131 ITR 597. In view of this exposition, we find here the other aspect, viz., the simplification of the

procedure and the beneficial consequence thereof which was brought about by the circular and which has been applied in all such cases which have come before the Tribunal. We also find that the revenue has not pressed the question in the references with regard to the binding nature of this particular circular itself. It is

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pertinent to note that the CBDT has issued fresh instruction No. 1605 in F. No. 202/27/84-IT(A-II) dated 26-2-1985 stating that the decisions of the Courts having been rendered without reference to the earlier circular, the extra shift allowance will continue to be computed with reference to the working of the concern ”

APPLIED IN - This Letter was applied in CIT v. Transpek Industry (P.) Ltd. [1992] 194 ITR 581 (Guj.), with the following observations :

“It is not necessary for us to examine in detail the various contentions raised on behalf of the Revenue and the assessee since the main question regarding extra shift allowance is directly covered by the decision of the Central Board of Direct Taxes (‘the Board’ for short) contained in its letter No. 10/83/69-IT(A-II), dated September 28, 1970, that where a concern had worked double shift or triple shift, extra shift allowance should be allowed in respect of the entire plant and machinery used by the concern without making any attempt to determine the number of days on which each machine actually worked double or triple shift ”

during the relevant assessment year

EXPLAINED IN - This Letter was explained in Hindustan Machine Tools Ltd. v. CIT [1992] 197 ITR 18 (Kar.), in the following words :

as such as before in spite of the decisions

(pp. 512-513)

(p. 583)

“It will be seen that the question which we are required to answer is : are the drawings and designs entitled to extra shift allowance in accordance with or under the said circular. The said circular says that where a concern has worked double or triple shifts, extra shift allowance shall be allowed in respect of the entire plant and machinery used by the concern and no attempt need be made to determine the number of days on which each machine actually worked multiple shifts during the relevant previous year. Upon a plain reading of the said circular, it is patent that drawings and designs which, admittedly, are plant are entitled to extra shift allowance if it is shown that the assessee’s concern had worked multiple shifts and it is not necessary to determine whether the drawings and designs themselves had actually been employed in the working of the multiple shifts.

Our attention was drawn by Mr. Kumar, learned counsel for the assessee, to the judgment of the Kerala High Court in CIT v. Punalur Paper Mills Ltd. [1988] 170 ITR 37. The said circular was considered there and the High Court held that no error had been committed by the Income-tax Officer in the assessment order passed by him in the matter of allowing extra shift allowance in respect of the entire machinery of the assessee in terms of the said circular without determining which machinery had worked and when. The judgment said that it was too late in the day for the Revenue to contend that the said circular would not bind it or that it should not be given effect to if it went beyond or deviated from the terms of the statute. A circular issued by the Board could relax the rigour of the law, but it could not impose any burden upon a taxpayer.

Having regard to the frame of the question, we are not required to determine the effect of a circular issued by the Board and cannot take note of an argument advanced on behalf of the Revenue in terms similar to that repelled by the Kerala High Court.” (p. 20)

EXPLAINED IN - This letter was explained in Godavari Sugar Mills Ltd. v. CIT [1994] 208 ITR 801 (Bom.), in the following words :

The letter of the Board dated September 28, 1970, merely provides that where a concern has worked double shift, extra-shift allowance will be allowed in respect of the entire plant and machinery ‘used by the concern’ without making any attempt to determine the number of days on which each machine actually worked double or triple shift during the relevant previous year. Evidently, this letter is confined to ‘a concern’. It does not apply to all concerns belonging to a particular assessee. In the instant case, evidently, the two sugar factories, though belonging to the same assessee, are two independent concerns. The above

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letter of the Board, therefore, has no application.” (p. 806)

APPLIED IN - This letter was referred to and applied in Shivalik Hatcheries (P.) Ltd. v. DCIT [1995] 54 ITD 550 (Chd. - Trib.), with the following observations :

“11. We have considered the rival contentions and we are of the view that in the light of the Board’s circular, ESA has to be allowed on concern basis and not on the number of days each plant worked double shift or triple shift. Therefore, in the light of Board’s circular, ESA has to be allowed as allowable on the poultry shed as well as on fencing, water-tank and well in the assessment years 1983-84, 1984-85 and 1985-86.” (p. 556)

239. Calculation of depreciation for extra shift working of plant and machinery under section 32

The Board had laid down in their letter No. 10 / 83 / 69-IT (A-II), dated September 28,1970 (Sl. No. 237), 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 March 20,1973 (Sl. No. 246), 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”. Except machinery or plant against which the letters NESA appear and those listed under clause (iv) of Item III in Part I of the Schedule, the balance of the machinery or plant of the concern would be entitled to extra shift allowance.

The Revenue Audit has been raising objections (on the basis of decisions of the Allahabad, Calcutta and Madras High Courts) where the Assessing Officers had allowed extra shift on the basis of the working of the concern as a whole instead of the working of individual plant and machinery.

The instructions issued earlier have been considered again by the Board. In exercise of the powers conferred by section 119(1) of the Income-tax Act, 1961, the Central Board of Direct Taxes, being of the opinion that it is expedient for the proper administration of these provisions, directs 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 or 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 worked in a factory is cumbersome, the existing instructions and the present clarification are aimed at simplifying the calculation of extra shift allowance.

Instruction : No. 1605, dated 26-5-1985 [Extracted from Sriram Bearings Ltd. v. CIT [1993] 199 ITR 579 (Cal.)/Tirpur Textiles (P.) Ltd. v. CIT [1998] 98 Taxman 180 (Mad.)].

JUDICIAL ANALYSIS

EXPLAINED IN - In Sriram Bearings Ltd. v. CIT [1993] 199 ITR 579 (Cal.), it was observed that the Board’s circular or instructions contrary to the interpretation of the rule made by the court cannot bind the court. However, a benevolent circular issued by the Board, not on the basis of construction of the rule contrary to the decisions of the court but to mitigate any hardship on the application of statutory provisions as interpreted by the court even if it deviated from the statutory provision, may be issued, which would be binding on the income-tax authorities. It appears to us that in the instruction dated February 26, 1985, the Central Board of Direct Taxes, after taking note of several decisions of different High Courts, have directed the tax authorities to grant extra shift allowance for plant and machinery with reference to the working of a factory situated at a place and not with reference to the number of days its plant and machinery had worked. It has been clarified that as such a

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determination of the number of days each plant and machinery has worked in a factory is cumbersome, instructions are being issued to simplify the calculation of extra shift allowance. It is for the tax authorities to follow this instruction as the intention is to simplify the calculation of the extra shift allowance. This instruction was issued only on February 26, 1985, long after the decision of the Tribunal in the instant case. It also appears that this instruction will be effective prospectively.

REFERRED TO IN - In South India Viscose Ltd. v. CIT [1997] 93 Taxman 371, the Supreme Court referred to the aforesaid Instruction, as well as Letter dated 28-9-1970 (Sl. No. 208) and Circular No. 109 dated 20-3- 1973 (Sl. No. 218), and observed :

We do not consider it necessary to go into the question whether the circulars/instructions issued by the Board referred to above can be taken into consideration for the purpose of construing the provisions of rule 5 and Appendix I to the Rules because the circulars/instructions referred-to-above are in consonance with the construction placed by us on the said provisions.” (pp. 383-384)

COMMENTED UPON - The above instruction was commented upon in ACIT v. J.K. Cotton & Spg. Wvg. Mill Co. Ltd. [1997] 62 ITD 151 (All. - Trib.), with the following observations :

“17. In the case before us C.B.D.T. Instruction No. 1605, dated 26-2-1985 detracts from or overrides the provisions of law is held by three High Courts (see the case relied upon by the learned departmental representative), which includes two decisions of the jurisdictional High Court in the cases of Raza Sugar Co. (supra) and Kundan Sugar Mills (supra). We respectfully follow the judgment of the Hon’ble Supreme Court in the case of Kerala Financial Corpn. (supra) and hold that the C.B.D.T. Instruction cannot be binding on the income-tax authorities and the decision of the jurisdictional High Court in the above two cases must be followed. It is accordingly held that E.S.A. should be worked out in respect of each machinery depending on number of shift worked by such machinery and not on the basis of the concern as a whole. The departmental ground of appeal in this regard is allowed.” (pp. 158-159)

240. Depreciation rates prescribed in Part I of Appendix I to Income-tax Rules - Sixth

Amendment

Rules, 1969

amending Appendix

to rationalise

rate

structure

and simplify

calculations

Final rules to amend the provisions in the Income-tax Rules, 1962, relating to the rates of depreciation allowances and connected matters, have been notified by the Government of India, Ministry of Finance (Central Board of Direct Taxes), in the Gazette of India, Extraordinary, dated 29-12-1969. These rules have been formulated after considering public comments and suggestions on the draft rules published earlier on the same subject.

The scheme of simplification effected through the present amendments, essentially consists in classifying machinery and plant under seven broad categories of useful lives, with the rates of depreciation of 5 per cent, 10 per cent, 15 per cent, 20 per cent, 30 per cent, 40 per cent and 100 per cent, in replacement of the pre-existing seventeen different rates ranging from 25 per cent to 100 per cent.

Under the new scheme, the general and residuary rates of depreciation in respect of machinery and plant will be 10 per cent, which would be applicable to all item of machinery and plant not coming under the lower specific rate of 5 per cent or any of the higher specific rates of 15 per cent, 20 per cent, 30 per cent, 40 per cent and 100 per cent. Item of machinery and plant which have a useful life of one or two years, and for which earlier rules did not prescribe any specific rate of depreciation but provided for deduction of only the cost of renewal thereof have been classified under the rate category of 100 per cent. This means that the actual cost of such machinery and plant will be deductible as depreciation allowance for the year in which they are first brought into use. This is apart from the provision in the Income-tax Act under which the whole of the actual cost of any machinery or plant costing up to Rs. 750 is deductible by way of depreciation allowance for the year in which such machinery or plant is first put to use by the assessee for the purpose of his business or

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profession. This latter provision applies also in respect of machinery and plant for which the rate of depreciation under the rules is less than 100 per cent.

Another important change brought about through the amendment is that depreciation would be allowed for the full year, even in respect of assets which had been used only for a short period during the year. Modification has also been effected in regard to the calculation of extra shift allowance for multiple shift working of plant and machinery. The extra shift allowance will continue to be allowed in proportion to the number of days of multiple shift working to the “normal working period”, and will be limited to 50 per cent of the normal allowance for double shift working and to an amount equal to the normal allowance for triple shift working. “Normal working period”, for this purpose, will be taken to be equal to the number of days which the concern worked at least one shift during the year, subject to a maximum of 180 days in the case of a seasonal factory and 240 days in the case of any other factory, instead of the standard figure of 300 days under the earlier rules.

The rules also provide for the grant of extra depreciation allowance of an amount equal to 50 per cent of the normal allowance in respect of machinery and plant installed in an approved hotel run by an Indian company. This measure is designed to encourage the setting up of hotels of the required standard necessary for attracting tourists.

The new rates and method for calculating depreciation allowance will apply from the assessment year 1970-71, that is, with reference to income of the financial year 1969-70 or other accounting year corresponding to it.

Press Note: Dated 13-1-1970, issued by the Ministry of Finance.

241. Motor vans - Rate of depreciation prescribed in Part I of Appendix I to Income-tax Rules

1. The Board had an occasion to consider the rate at which depreciation should be allowed in respect of “Motor

vans” as no specific rate has been provided for them under Appendix I to the Income-tax Rules, 1962.

2. The Board consider that as “Motor vans” are more akin to “Motor lorries” and “Motor buses” than to “Motor

cars”, depreciation on “Motor vans” may be allowed at the rate applicable to “Motor lorries” and “Motor buses” which is 30 per cent as per item No. III (ii)-D(9) of Appendix I.

Circular : No. 315 [F. No. 202/89/79-IT(A-II)], dated 24-9-1981.

JUDICIAL ANALYSIS

RELIED ON IN - The above circular was relied on in D.S. Construction (P.) Ltd. v. ITO [1987] 29 TTJ (Delhi-Trib.) 22, with the following observations :

“4. Having considered the facts of the case we are of the view that as far as the case of motor vans is

considered it would not be fair not to act on the distinction between the motor vans and the motor cars

made by CBDT in the above noted

.” (p. 23)

See also ITO v. Kohinoor Flour Mills Ltd. [1991] 94 CTR (Ahd. - Trib.) 186.

242. Three-wheelers like tempos and auto-rickshaws - Rate of depreciation prescribed in Part I

of Appendix I to Income-tax Rules

Three-wheelers like “tempo” and “auto-rickshaw” fall in the category of item III(ii)-C(7) of Appendix I to the Income-tax Rules, 1962 and are entitled to depreciation at 20 per cent. In cases, however, these vehicles are used for plying on hire, they would fall under item III(ii)-D(9) and would be entitled to depreciation at 30 per cent.

Instruction : No. 347 [F. No. 202/47/71-IT(A-II)], dated 23-11-1971.

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243.

Fork lift trucks - Rate of depreciation prescribed in Part I of Appendix I to Income-tax

Rules

Fork lift trucks would be classified under item III(ii)-D(9) of Appendix I to the Income-tax Rules, 1962 and would be entitled to depreciation at the rate of 30 per cent.

Instruction : No. 617 [F. No. 201/41/72-IT(A-II)], dated 13-9-1973. 1

244. Whether, for deriving benefit of higher depreciation, motor lorries must be hired out to

some other person or whether user of same in assessee’s business of transportation of goods on hire would suffice

1. Under sub-item 2(ii) of Item III of Appendix I to the Income-tax Rules, 1962, higher rate of depreciation is

admissible on motor buses, motor lorries and motor taxis used in a business of running them on hire. A question has been raised as to whether, for deriving the benefit of higher depreciation, motor lorries must be hired out to some other person or whether the user of the same in the assessee’s business of transportation of goods on hire would suffice.

2. In Board’s Circular No. 609, dated 29-7-1991 (Sl. No. 244) it was clarified that where a tour operator

or travel agent uses motor buses or motor taxis owned by him in providing transportation services to tourists, higher rate of depreciation would be allowed on such vehicles. It is further clarified that higher depreciation will also be admissible on motor lorries used in the assessee’s business of transportation of

goods on hire. The higher rate of depreciation, however, will not apply if the motor buses, motor lorries, etc., are used in some other non-hiring business of the assessee.

Circular : No. 652, dated 14-6-1993.

245. Allowance of depreciation on motor vehicles owned and used by tour operators and travel

agents in the business of running these vehicles on hire for tourists

1. The second proviso to section 32(1)(ii) of the Income-tax Act, 1961, which disallows depreciation on foreign

motor cars, is reproduced below :—

“Provided further that no deduction shall be allowed under this clause in respect of any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975, and is used otherwise than in a business of running it on hire for tourists.”

2.1 The intention behind this provision is to discourage use of foreign cars for the purposes of business or profession. However, in order to promote tourism industry, an exception has been made in the case of foreign motor cars used in a business of running them on hire for tourists, on which full depreciation is allowable.

2.2 Where tour operators or travel agents use certain foreign motor cars, owned by them, for providing transportation services to tourists, depreciation should be allowed on these cars. The position will not change even where such transportation services are provided as a part of package tour for tourists, which may include a number of other services like boarding and lodging, service of guides, etc. A tourist, who opts for a package tour, agrees to pay for a number of services including use of car provided to him by the tour operator or travel agent. Thus, it can be said that the car has been taken by him on hire from such tour operator or travel agent. Therefore, depreciation on foreign motor cars, owned by him and used for providing transportation services to tourists, whether in a package tour or otherwise, should be allowed.

3. Further, under sub-item (2)(ii) of item III of Appendix I to the Income-tax Rules, 1962, a higher rate of

depreciation, namely, 40 per cent is allowed on motor buses, motor lorries and motor taxis used in a business of running them on hire. Therefore, where a tour operator or travel agent uses such vehicles, owned by him, in providing transportation services to the tourists, higher rate of depreciation should be allowed on such vehicles. It

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is clarified that “motor vans” are akin to “motor lorries” or “motor buses” and, therefore, higher rate of depreciation will be allowed on motor vans also, if they are used for providing transport services to tourists. Circular : No. 609, dated 29-7-1991 as amended by Circular No. 622, dated 6-1-1992.

JUDICIAL ANALYSIS

EXPLAINED IN - The above circular was explained in Sita World Travel (I) (P.) Ltd. v. IAC [1993] 45 ITD 623 (Delhi - Trib.), in the following words :

“We are unable to agree with the stand of the revenue that the C.B.D.T. circular is not applicable to the instant case. It clearly states that when a tourist, who opts for a package tour agrees to pay for a number of services including use of car provided to him by the tour operator or travel agent, it could be said that the car has been taken by him on hire from such tour operator or travel agent and that therefore, depreciation on foreign motor car owned by him and used for providing transportation services to tourists, whether in a package tour or otherwise, should be allowed. It also further adds that where a tour operator or travel agent uses such vehicles owned by him in providing transportation services to the tourists, higher rate of depreciation should be allowed on such vehicles. No appreciable argument has been advanced by the Revenue as to how the C.B.D.T. circular is not applicable to the facts of the instant case. The intention behind the legislative provision is only to discourage use of foreign cars for the purpose of business or profession, but in order to provide the tourism industry, an exception has been made in the case of foreign motor cars used in a business of running them on hire for tourists, as in the instant case, on which full depreciation is allowable. Hence as is evident from the circular, this enables the assessee to have his claim fully allowed in regard to depreciation.” (p. 626)

APPROVED IN - The above circular was referred to with approval in ABC India Ltd. v. Dy. CIT [1996] 217 ITR 255 (Gauhati), with the following observations :

it is made clear that the circular dated July 29, 1991 and circular dated June 14, 1993 (see Sl. No. 214), shall be binding on the income-tax authority, but whether the petitioner will be entitled to the benefit of the circulars will have to be decided by the authority as and when the same is agitated before the authority.” (pp. 268-269)

246. Animal-driven vehicles maintained for business purposes - Rate of depreciation - General rate to be applied

The Board has decided that animal-driven vehicles used for purposes of a business, profession or vocation will be eligible for depreciation allowance at the general rate of 7 per cent, and that in the event of their not being wholly used for the purposes of the business, profession or vocation, the allowance will be restricted, under section 10(3) of the 1922 Act [corresponding to section 38(2) of the 1961 Act], to such proportion of the amount which would have been allowable if the vehicles had been wholly so used.

No depreciation is, however, admissible on animals used for these vehicles, though in such cases the allowance contemplated in section 10(2)(viii) of the 1922 Act [corresponding to section 36(1)(vi) of the 1961 Act] will be available. Circular : No. 19 [R. Dis. No. 23(31)-IT/43], dated 12-5-1943.

247. Normal depreciation/Extra shift depreciation allowance up to 1969-70/from 1970-71 in the case of seasonal factories/concerns/approved hotels - Item III(iii)/(iv) of Part I of Appendix I to Income-tax Rules

The correct legal position regarding depreciation and extra shift allowance is clarified as under :

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NORMAL DEPRECIATION UP TO 1969-70 - Non-seasonal factory was entitled to no depreciation unless it worked for more than 30 days, 50 per cent if it worked for more than 30 days, and 100 per cent depreciation if it worked for 180 days or more. A seasonal factory was entitled to full depreciation if it worked during all the working seasons of the previous year. If it did not, depreciation allowance was admissible with reference to the period of user set forth above. NORMAL DEPRECIATION FROM 1970-71 - Normal depreciation is fully admissible for a seasonal as well as a non-seasonal factory if it worked at any time during the previous year irrespective of the period of actual user.

EXTRA SHIFT ALLOWANCE UP TO 1969-70 - The allowance was in addition to the normal allowance of depreciation. It could be allowed only when the assessee had claimed and proved to the satisfaction of the Income-tax Officer that a concern, for which the allowance was claimed, had actually worked double or triple shifts, as the case might be. No such extra allowance for multiple shift was admissible in respect of machinery or plant against which the letters “NESA” appeared in the depreciation schedule. The normal working days for which a factory had to work to get extra shift allowance was 300 for seasonal as well as non-seasonal factories. The extra shift depreciation allowance was allowable in the proportion which the number of days for which the factory actually worked double shift, or as the case may be, triple shift, bore to “the normal number of working days throughout the previous year”, the norm of which was fixed at 300 days for a seasonal as well as non-seasonal factory. EXTRA SHIFT ALLOWANCE FROM 1970-71 - The position relating to the extra depreciation allowance in respect of double/triple shifts, as applicable from the assessment year 1970-71 onwards, is clarified below :

1. The allowance is in addition to the normal allowance of depreciation.

2. It can be allowed only when the assessee has claimed and proved to the satisfaction of the Income-tax Officer

that a concern, for which the allowance is claimed, has actually worked double or triple shift, as the case may be.

3. No such extra allowance for multiple shift is admissible in respect of (a) machinery or plant, against which the

letters “NESA” appear in the depreciation schedule, (b) the machinery and plant of the categories specified at sub-items (1) to (10) under clause (iv) of item III relating to “Machinery and plant (not being a ship)”, in the revised rate schedule of depreciation such as locomotives, boilers, railway sidings, etc.

4. The said allowance is calculated separately for the period for which the concern has actually worked double

shift only and the periods for which it has worked triple shift, expressed in terms of the proportion which such period bears to the “normal number of working days during the previous year”. For this purpose, the norm of “normal number of working days during the previous year” has been fixed :

a. in the case a seasonal factory or concern, at 180 days, or the number of days on which the factory or concern actually worked during the previous year, whichever is greater; and

b. in the case of non-seasonal factory or concern, at 240 days, or the number of days for which the factory or the concern actually worked during the previous year, whichever is greater.

5. The formulae for calculating the extra shift depreciation allowance in regard to a factory or concern,

whether seasonal or non-seasonal, which has worked double shift or triple shift for any period during the previous year, may be stated as follows:

Double shift

Number of days during the previous year for

which a

factory or

concern actually

worked

double shift

 

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One-half of the normal depreciation allowance

Triple shift

×

Full amount of the normal depreciation allowance ×

“Normal number of working days in the

previous year”

Number of days during the previous year for which a factory or concern has actually worked triple shift

“Normal number of working days “in the

previous year” To illustrate the calculation of extra shift depreciation allowance in accordance with the formulae mentioned in the preceding paragraph, where a non-seasonal concern, which has worked 270 days during the previous year, out of which it worked triple shift for 135 days and double shift for another 90 days, the extra shift, depreciation allowance for triple shift working will be :

135/270, i.e., one-half of the normal depreciation allowance and for double shift working the extra depreciation allowance will be:

90/270, i.e., one-third of one-half of the normal depreciation allowance. In this case, if the full amount of normal depreciation allowance is Rs. 9,000, the extra shift depreciation allowance for triple shift working will be 9,000 × 135/270, i.e., Rs. 4,500; and the depreciation allowance for double shift working will be one-third of (9,000 × ½), i.e., Rs. 1,500. EXTRA DEPRECIATION ALLOWANCE FOR APPROVED HOTELS FOR THE ASSESSMENT YEAR 1970-71 AND SUBSEQUENT YEARS - Machinery and plant installed in a hotel does not qualify for the extra shift depreciation allowance but is entitled to an extra allowance under Item III(iii) [of Part I of Appendix I to the Income-tax Rules]. The provisions relating to the grant of extra depreciation allowance aforesaid are as follows :

1. The machinery or plant must be owned and installed by the assessee, being an Indian company, in the premises

used by it as a hotel.

2. Such hotel must be approved, for the time being, by the Central Government for the purpose of grant of

development rebate in respect of new machinery or plant at the higher rate specified in section 33(1)(ii).

3. The extra depreciation allowance aforesaid is in an amount equal to one-half of the normal depreciation

allowance in respect of the entire machinery and plant installed in the hotel, irrespective of the period of its actual user during the previous year.

4. The extra depreciation allowance in the case of an approved hotel run by an Indian company is allowable in

addition to the normal depreciation allowance.

Circular : No. 109 [F. No. 202/21/71-IT(A-II)], dated 20-3-1973.

JUDICIAL ANALYSIS

EXPLAINED IN - The above circular was explained and applied in Hindustan Machine Tools Ltd. v. CIT [1992] 197 ITR 18 (Kar.), with the following observations :

“On behalf of the Revenue, emphasis was laid upon a departmental circular No. 109 issued on March 20, 1973. It summarises the position about allowance of normal depreciation and extra shift allowance from year to year. In regard to extra shift allowance from 1970-71, the position is stated to be this :

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“(1) The allowance is in addition to the normal allowance of depreciation.

(2) It can be allowed only when the assessee has claimed and proved to the satisfaction of the Income- tax Officer that a concern, for which the allowance is claimed, has actually worked double or triple shift, as the case may be.

(3) No such extra allowance for multiple shift is admissible in respect of—

(a) machinery or plant against which the letters ‘NESA’ appear in the depreciation Schedule

This departmental circular reiterates that what is relevant is that a concern has worked double or triple shift and that is what the assessee has to prove.

On behalf of the Revenue, Mr. H. Raghavendra Rao drew our attention to a judgment of the Madras High Court in South India Viscose Ltd. v. CIT [1982] 135 ITR 206, where this departmental circular was referred to and it was held that the word ‘concern’ had been used in the circular only to show that the Income-tax Officer was obliged to allow extra shift depreciation allowance if the assessee made a claim therefor ; except for the use of this word, the court did not find that the departmental circular gave any kind of ‘global allowance’ on all the machinery purchased by the assessee and set up in its business. The Income- tax Officer, the court held, was required to apply his mind to examine which machinery owned by the assessee had been used in the extra shift. So long as the particular machinery had worked the extra shift in the relevant year for the specific period, it would be eligible for extra shift allowance on the basis of the number of days, provided the words “NESA” did not apply thereto.

For the purpose of this reference, we are concerned only with the terms of the said Circular No. 109, dated March 20, 1973. It is that circular which is referred to specifically in the question. Upon an interpretation of that circular, we are left in no doubt about the answer to the question.

Our attention was also drawn by Mr. Raghavendra Rao to a short note stating that the Supreme Court had dismissed a special leave petition against the judgment of the Allahabad High Court in Juggilal Kamlapat Spinning and Weaving Mills Co. Ltd. v. CIT [1992] 193 ITR (St.) 25, where the High Court had held, on

a reference, that extra shift allowance should be restricted only to the particular items of machinery worked and to the number of days worked. We have no means of knowing what the assessment order was in regard to which the reference had been made to the Allahabad High Court, whether the said circular dated March 20, 1973, had been brought to the attention of the court and what the questions were that were posed to the court.” (pp. 21-22)

EXPLAINED IN - The above circular was explained in CIT v. Meghdoot Hotels (P.) Ltd. [1996] 220 ITR 190 (All.), in the following words :

“The Central Board of Direct Taxes elucidating the scope of item III, sub-item (iii), of Part I Appendix I, issued Circular No. 109, dated March 20, 1973. The Board clarified in the said circular as under :

‘Machinery and plant installed in a hotel does not qualify for the extra-shift depreciation allowance but is entitled to an extra allowance under item III(iii) of Part I of Appendix I of the Income-tax Rules.’

**

From the aforesaid circular, it is manifest that the Board clarified the scope of item III, sub-item (iii), of Part

I of Appendix I fully. From the Board’s circular and the statutory position it is clear that extra-shift

depreciation allowance is not allowable to approved hotels in addition to extra depreciation allowance and that approved hotels are entitled to extra depreciation allowance under item III, sub-item (iii) of Part I of Appendix I.” (pp. 193-194)

**

**

248. Allowance of actual cost of machinery or plant not exceeding specified value as revenue

deduction in terms of first proviso 1 to clause (ii) of sub-section (1) - Whether to be made

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irrespective of old or new machinery or plant

I am directed to refer to your letter, dated 21-6-1968 [Annex], on the above subject and to say that the position, stated in your letter dated 27-9-1967 is, broadly speaking, correct. If the point has arisen in any particular case, you may make a reference with the full facts to the Commissioner of Income-tax concerned for a ruling.

As regards the suggestion for an amendment of the law, the same has been noted for consideration at the appropriate time.

Letter : No. 10/47/68-IT(A-II), dated 17-7-1968.

ANNEX - LETTER DATED 21-6-1968 REFERRED TO IN CLARIFICATION

It has been provided by the Finance Act, 1966, that the actual cost of any machinery or plant which does not exceed Rs. 750 will be straightaway deducted as a revenue expenses, effective for the assessment year 1966-67 onwards. In this respect, the following two clarifications are solicited :

There does not seem to be any statutory requirement that the machinery or plant should be new and it thus follows that it will be available on all such valued machineries and plants whether old or new. On a summary reading of section 33, I have not come across any of the consequential amendment made, if any, which should have been normally made operative from the assessment year 1966-67 to refuse development rebate under section 33 to such new machinery or plant which fall under the above proviso. It thus follows that the development rebate will also be entitled to the assessee on such of the new machinery or plant purchased and installed in any of the assessment year 1966-67 and onwards. Rigidly speaking, the intention of the development rebate under section 33 is to provide an additional and accelerated depreciation to the industry as an incentive for the rapid industrial development. But when the new proviso to section 32(2) allows the entire cost of such machinery and plant below Rs. 750 then there does not seem to be much justification for continuing the said development rebate provision as well as to which, in my opinion, the assessee seems to be legally entitled so long as the consequential amendment is not made in the corresponding section 33 itself. I will be highly obliged if the above positions are duly clarified to me at your earliest possible convenience.

249. Terminal allowance under clause (iii) 1 of sub-section (1) - Whether assessee is required to again write off amount equal to terminal allowance

1. Section 32(1)(iii) provides for deduction, in the case of any building, machinery, plant or furniture which is

sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), of the amount by which the monies payable in respect of such building, machinery, plant or

furniture, together with the amount of scrap value, if any, falls short of the written down value thereof. This deduction is to be allowed only if such deficiency is actually written off in the books of the assessee.

2. The Board have examined the question whether in a case where provision for depreciation had been made in

the books of account in excess of the depreciation admissible under the Income-tax Rules and consequently, the amount written off in the year in which the asset was sold, discarded, etc., is less than the deduction to be allowed under section 32(1)(iii), the amount actually written off only should be allowed or whether the amount arrived at on the basis of the written down value as per income-tax records should be allowed. The Board is of the view that so long as the assessee has been allowed depreciation as permissible under the Income-tax Rules, the assessee should not be required to again write off an amount equal to the terminal allowance he is entitled to under the provisions of section 32(1)(iii) and deduction as permissible under the said section may be allowed.

Circular : No. 212 [F. No. 202/84/75-IT(A-II)], dated 26-2-1977.

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250. Machinery or plant discarded - Computation of written down value of discarded machinery

or plant not practicable - Whether terminal allowance under clause (iii) 1 of sub-section (1) is to be given

Where it was not practicable to compute the written down value of discarded machinery or plant, no allowance should be given under section 10(2)(vii) of the 1922 Act, nor should any gain contemplated be calculated or added but the sale proceeds of the discarded machinery or plant should be deducted from the aggregate written down value of the entire machinery and plant.

Circular : No. 27(19)-11/39, dated 21-8-1940, extracted from CIT v. Bengal Jute Mill Co. Ltd. (No.

1). [1987] 165 ITR 631 (Cal.) 1 .

251. Approval of Central Government required claiming initial depreciation on new buildings by

a hotel

See Circular No. 383, dated 22-6-1984, under section 80J.

252. Guidelines for issue of certificate for depreciation allowance under rule 5(2) of the Income-

tax Rules as substituted by the Third Amendment Rules, 1987, w.e.f. 1-4-1987

PREAMBLE - Government is providing various incentives and support for the development and promotion of indigenous technology towards technological self-reliance and reducing dependence on foreign technology inputs. There are several incentives to encourage the use of indigenous technology and to commercialise it. The Government has now, inter alia, notified still an additional incentive and relief to the users of know-how developed in the country, in the shape of depreciation allowance at the higher rate of 50 per cent. The depreciation is available in respect of machinery and plant installed in the accounting years relevant to the assessment year 1988-89 and subsequent assessment years for manufacture/production of goods based on indigenous technology.

COMMENCEMENT DATE - The scheme of depreciation allowance at the rate of 50 per cent came into force with effect from 2-4-1987.

CONDITIONS TO BE SATISFIED - The conditions which are to be satisfied for availing of this allowance are :

(a)

The article should be manufactured by using technology or the know-how developed in :—

(i)

a laboratory owned or financed by Govermnent

(ii)

a laboratory owned by a public sector company or

(iii) a University

(iv) any institution recognised in this behalf by the prescribed authority.

(b) The right to use the technology (including any process) or other know-how to manufacture or produce such products has been acquired by the taxpayer from the owner of such laboratory or any person deriving title from such owner.

(c) The taxpayer furnishes a certificate from the Secretary, Department of Scientific and Industrial Research along with return of income that such article or thing is manufactured or produced by using technology (including any process) or the know-how has been developed in any of the institutions referred to at (b) above.

(d) The machinery or plant is not used for the manufacture or production of specified article listed in Appendix 1.

DEFINITION - (a) “Laboratory financed by the Government” means a laboratory owned by anybody [including a society registered under the Societies Registration Act, 1860 (21 of 1860)] and financed wholly or mainly by

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the Government;

(b) “public sector company” means any corporation established by or under any Central, State or Provincial Act

or a Government Company as defined in section 617 of the Companies Act, 1956 (1 of 1956);

(c) “university” means a University established or incorporated by or under a Central, State or Provincial Act and

includes an institution declared under section 3 of the University Grants Commission Act, 1956 (3 of 1956), to be

a University for the purpose of that Act; and

(d) “institution” means an institution having adequate infrastructural facilities to undertake research, design and

development and approved in this behalf by the prescribed authority.

CONDITIONS FOR ISSUE OF CERTIFICATE - (i) This certificate is intended only for the purposes of depreciation @ 50 per cent on plant and machinery installed after1-4-1987 and is subject to the provisions of section 32.

(ii) The plant and machinery certified will be treated as a block of assets qualifying for depreciation at the rate of

50 per cent of written down value.

(iii) This is subject to the assessee complying with the conditions laid down in section 32 of the Income-tax Act,

and rule 5(2) of the Income-tax Rules as modified, vide Ministry of Finance Notification No. 133/342/86-TPL, dated 1-4-1987 [the Income-tax (Third Amendment) Rules, 1987].

(iv) In respect of the plant and machinery, the assessee would, as desired furnish to the income-tax authorities the

particulars required for admissibility of the exact amount of the claim.

(v) In case the particulars furnished by the assessee regarding the technology/know-how, plant and machinery,

the date of installation, value, etc., are found to be incorrect, the certificate will be cancelled and penal action as provided under the Income-tax Act will be taken against the assessee.

(vi)

This certificate is also subject to the conditions that—

(a)

the right to use the technology/know-how (including any process) has been acquired by the laboratory owned/financed by Government or owned by public sector company or recognised institution or any person deriving title from such owner.

(b)

the plant and machinery is not used for the purposes of business of manufacture or production of any article or thing specified in the list in the Eleventh Schedule to the Income-tax Act.

(vii) This certificate is valid for a period of three years from the date of issue.

(viii) In all future correspondence, the number indicated on the certificate should be quoted.

PROCEDURAL AND OTHER MATTERS - Applications for depreciation allowance may be made to the prescribed authority in the Department of Scientific and Industrial Research, Ministry of Science and Technology, New Mehrauli Road, New Delhi-110016. The applications are to be made in 4 sets.

FORM

Depreciation allowance - Application for grant of certificate under rule 5(2) of the Income-tax Rules

Part I

1.

(a)

Name of applicant

(b)

Addresses of

(i)

Registered office

(ii)

R & D laboratory

(iii)

Factory

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2.

(a)

In case of existing industrial undertakings, whether there is any foreign, financial or technical collaboration

(b)

If so, give details such as, the product/services covered, name and country of the foreign colla-borator, date and period of collaboration (a copy of the agreement may be enclosed)

(c)

Whether you come within the purview of the Foreign Exchange Regulation Act, 1973.

3.

(a)

Item of manufacture for which depreciation on plant and machinery is applied

(b)

Date

from

which

item

at

3(a)

is

commercially

 

produced.

 

4.

Other products manufactured by the company

5.

Is the item in 3(a) above for import substitution? Please give details of imports into the country during the last two years.

6.

Date of installation of new plant or machinery for which depreciation allowance is being claimed.

7.

Have you obtained an industrial licence for the manufacture of item at 3(a). Please indicate No. and date with a copy (not applicable for small scale units under delicensed sector)?

8.

(a)

Specify the details (such as, specifications, quantity produced) of article in “3(a)” above

(b)

Selling cost per unit/unit quantity

 

(c)

Names of major customers

 

(d)

Is it for your captive use.

9.

Names of manufacturers producing similar items.

10.

Whether the machinery/plant is used for the manufacture or production of articles mentioned in the Eleventh Schedule and referred to in rule 5(2) of Income-tax Rules (list enclosed).

11.

Enclose a copy of the annual report of the company wherein investment on plant and machinery for production of item at 3(a) were mentioned. Technical information

 

Part II

1.

Name and address of laboratory, university/institution,

whose technology has been adopted. Give details (like the period during which research work was carried out in the laboratory, fees paid for development, details of your association during the proposed development) Give a detailed chronological note on the development of

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technology

3. Whether the laboratory/institution is :

(i)

Owned or financed by Government, or

 

(ii)

Owned by public sector company, or

(iii)

Is

it laboratory of the University, or

(iv)

Is

approved

by Government.

Give

details

of

approval

4. Whether the right to use technology/process/ know-how is acquired by the applicant from:

(a)

Owner of the laboratory referred to in the above column

(b)

Any other agency deriving title from the owner

(c)

Was the technology patented and, if so, whether commercialised under the patent

(d)

A

copy of the agreement with R & D laboratory/

institution for transfer of technology and material in support of its actual implementation, may be enclosed

(e)

Did you utilize services of any consultancy organisation, if so, give details

5. Do you have your own R & D Laboratory?

(i)

If yes, are you recognised by the Ministry of Science and Technology (Department of Scientific and Industrial Research)

(ii)

If

not, whether you propose to establish your R &

D

Laboratory

6. Nature of technology

(a)

Indicate whether it is :

(i) new product, or

(ii) improved product, or

(iii)

new process, or

(iv)

improved process

(b)

Is

it basic to the manufacture or production

7. Give details of engineering assistance/services rendered by the laboratory to utilise the know-how commercially

8. Are you aware of this technology development in any other country

If

comparison in a separate note

yes,

give

details

including

techno-economic

9. What is the superiority in technology/product as compared to existing products, if any.

10. Total investment - Indicate accounting and assessment year regarding investment made

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DIRECT TAXES CIRCULAR - Sec. 32

(a)

Plant

(b)

Total value of capital equipment used (i) Imported (ii) Indigenous

 

(c)

Break-up

of

the

above

item-wise

viz.,

component/equipment purchased/imported

Item

Name of

Date of

Date of

Cost (c.i.f.

Description

supplier

placing order

installation

value in case

 

(date of

of imported

supply)

equipment)

(1)

(2)

(d) Details of installation—

(3)

(4)

(5)

Agency which

Period of work

Cost

completed the

installation

from

to

job

(1)

(2)

(3)

(4)

11. Percentage of imported components and raw materials for the manufacture of item 3(a) - Part I.

12. Have you enclosed colour photographs of the plant and machinery installed ?

13. Any other information you consider relevant for admissibility of depreciation allowance.

Place

Signature

Date

Designation

NB. : Four copies of the application are to be submitted on A-4 size paper, addressed to the Secretary, Ministry of Science and Technology, Department of Scientific and Industrial Research, Technology Bhavan, New Mehrauli Road, New Delhi - 110 016.

LIST OF ITEMS ON WHICH DEPRECIATION @ 50 PER CENT NOT ADMISSIBLE

The Eleventh Schedule referred to in rule 5(2) of the Income-tax Rules :

1. Beer, wine and other alcoholic spirits.

2. Tobacco and tobacco preparations, such as cigars and cheroots, cigarettes, biris, smoking mixtures for pipes and cigarettes, chewing tobacco and snuff.

3. Cosmetics and toilet preparations.

4. Tooth paste, dental cream, tooth powder and soap.

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5. Aerated waters in the manufacture of which blended flavouring concentrates in any form are used.

Explanation.—“Blended flavouring concentrates” shall include, and shall be deemed always to have included, synthetic essences in any form.

6. Confectionery and chocolates.

7. Gramophones, including record-players and gramophone records.

8. [***]

9. [Projectors]

10. Photographic apparatus and goods.

11-21.

[***]

22. Office machines and apparatus, such as typewriters, calculating machines, cash registering machines, cheque writing machines, intercom machines and teleprinters.

Explanation.—The expression “office machines and apparatus” includes all machines and apparatus used in offices, shops, factories, workshops, educational institutions, railway stations, hotels and restaurants for doing office work and for data processing (not being computers within the meaning of section 32AB).

23. Steel furniture, whether made partly or wholly of steel.

24. Safes, strong boxes, cash and deed boxes and strong room doors.

25. Latex from sponge and polyurethane foam.

26. [***]

27. Crown corks, or other fittings of cork, rubber, polyethylene or any other material.

28. Pilfer-proof caps for packaging or other fittings of cork, rubber, polyethylene or any other material.

29. [***]

Source : PIB Press Release Published in [1988] 169 ITR (St.) 3.