1996 (6) TMI 113 - AT - Income Tax

Court Rules on Revenue Appeal: Capital Subsidy Deduction Rejected, Salary Disallowance Allowed

The court rejected the revenue's appeal on deducting capital subsidy but allowed the appeal on disallowing salary under section 40A(2)(b), restoring the ... Assessing Officer, Assessment Year Issues Involved:1. Deduction of capital subsidy from the cost of assets for depreciation and investment allowance.2. Disallowance under section 40A(2)(b) regarding salary paid to a specified person.3. Classification of sterile room as plant and machinery for the purpose of investment allowance and depreciation.Detailed Analysis:1. Deduction of Capital Subsidy from the Cost of Assets for Depreciation and Investment Allowance:The first issue pertains to whether the capital subsidy received should be deducted from the cost of assets for the purpose of allowing depreciation and investment allowance under the Income-tax Act. The CIT(A) had directed the Assessing Officer not to deduct the capital subsidy from the cost of assets. The Departmental Representative conceded that this issue is covered in favor of the assessee by the decision of the Apex Court in the case of CIT v. P.J. Chemicals Ltd. [1994] 210 ITR 830/76 Taxman 611. Consequently, this ground of the revenue was rejected.2. Disallowance under Section 40A(2)(b) Regarding Salary Paid to a Specified Person:The second issue involves the disallowance of salary paid to Smt. Indira Garg, a specified person under section 40A(2)(b) of the Act. The Assessing Officer disallowed the entire salary of Rs. 21,000 paid to her, citing lack of qualification and proof of work rendered. The CIT(A) found that although she was a simple graduate without specialized training, a reasonable salary of Rs. 1,000 per month could be justified based on payments made to others for similar work. However, the Tribunal found that the assessee failed to provide any material evidence to prove that Smt. Indira Garg had rendered services to the company. The Tribunal concluded that the payment was for extra-commercial considerations and restored the order of the Assessing Officer, disallowing the entire salary.3. Classification of Sterile Room as Plant and Machinery:The third issue concerns whether the sterile room should be treated as part of plant and machinery for the purpose of investment allowance and depreciation. The assessee argued that the sterile room, essential for manufacturing Dextrose, should be classified as plant and machinery. The Assessing Officer and CIT(A) disagreed, treating the sterile room as part of the building. The Tribunal, however, observed that the sterile room was crucial for maintaining the sterile conditions required under the Drug Act and for the manufacturing process. The Tribunal referred to various judicial pronouncements, including the Supreme Court's decision in CIT v. Taj Mahal Hotel [1971] 82 ITR 44 (SC), which emphasized a broad interpretation of the term 'plant.' The Tribunal concluded that the sterile room was a tool of the assessee's business and should be treated as plant. Thus, the Tribunal vacated the orders of the revenue authorities and directed the Assessing Officer to treat the sterile room as plant and modify the assessment accordingly.Conclusion:- The appeal by the revenue regarding the deduction of capital subsidy was rejected.- The appeal by the revenue concerning the disallowance of salary under section 40A(2)(b) was allowed, restoring the Assessing Officer's order.- The appeal by the assessee to treat the sterile room as plant was allowed, directing the Assessing Officer to modify the assessment accordingly.