Circular No. 109-Income Tax dated 20-3-1973

246. 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 :

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:

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 :

“(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 may to extra depreciation allowance under item III, sub-item (iii) of Part I of Appendix I.” (pp. 193-194)