By TIOL News Service

NEW DELHI, FEB 06, 2014: THE facts of the case are: the respondent- assessee is a public limited company which had established a new unit for manufacturing and sale of C.R. Strips. The assessee had applied for grant of eligibility certificate under Section 4-A of the Uttar Pradesh Trade Tax Act, 1948. The assessee was issued the said certificate on the original fixed capital investment of Rs.542.28 /- lacs for a period of six years with effect from 07.03.1990. Later, the assessee had sought for exemption under diversification, modernization/expansion programme on total fixed capital investment including additional fixed capital investment to the extent of Rs.7378.68 /-lac. The Divisional Level Committee allowed the investment of Rs.5511.98 /-lac for the purposes of computing the benefit of exemption and disallowed exemption on certain items by order dated 23.12.1995.

Being aggrieved by the aforesaid, the assessee filed an appeal before the Uttar Pradesh Tribunal, Trade Tax, Lucknow . The Tribunal had allowed the claim of the assessee as follows:

"(a) Only the Additional Fixed Capital Investment, which has been made by the appellant in expansion/modernization/ diversification of its Industrial Unit shall qualify for granting exemption from Trade Tax.

(b) The investment made on construction of Temple, Canteen, Time Office and Check Post, amounting to Rs.15 ,11,000 /- has been wrongly disallowed by the Divisional Level Committee, Meerut and this amount should be included in the Fixed Capital Investment for the purpose of granting exemption from Trade Tax.

(c) The investment made on Transformer/ CVT , Exhaust Fan, and investment in obtaining study report etc., a total of Rs.60 ,92,252.17 should also be included in the Fixed Capital Investment.

(d) The preoperative expenses amounting to Rs.7 ,56,30,000 /- should also be included in the Additional Fixed Capital Investment for granting benefit of exemption from Trade Tax, to the appellant."

Aggrieved by the aforesaid order of the Tribunal, the Revenue preferred a Trade Tax Revision before the High Court which was partly allowed. The High Court has concluded that while investment made pertaining to the temple and cost of Rs.25 ,000 /- incurred on account of study report are not allowable for the purposes of calculation of additional fixed capital income; the expenditure incurred by the assessee for installation of transformer/ CVT is allowable for the purposes of Section 4-A of the Act and constitutes part of additional fixed capital income and the amount of Rs.7,56,30,000 /- which is payment made to financial institution as interest on loan taken by the assessee for construction of the unit would form an essential part of additional fixed capital income and hence is allowable.

Aggrieved by the aforesaid judgment and order of the High Court, the Revenue is before the Supreme Court in this appeal.

The following two questions of law would arise for consideration and decision in this appeal:

i) Whether preoperative expenses in the form of payment of interest towards the advance loan taken from the financial institution would form part of additional fixed capital investment ( FCI )?

ii) Whether the transformer/ C.V.T . installed for regulating voltage for running of the machinery in the factory premises would fall within the meaning of the expression "fixed capital investment"?

After carefully considering the submissions made by both the counsel, Supreme Court observed,

We are of the considered view that insofar as the first legal issue raised and canvassed before us by the Revenue is squarely covered by the observations made by this Court in Kajaria Ceramics Ltd and therefore, the first question of law requires to be answered in favour of the revenue and against the assessee . Accordingly, that portion of the order wherein the High Court had granted relief to the assessee requires to be set aside.

Insofar as the second issue is concerned, we have to notice the proviso to explanation (4) of Section 4-A of the Act. Explanation (4) speaks of "fixed capital investment" to mean "investment in land and building and such plant, machinery, equipment apparatus, components, moulds , dyes, jigs and fixtures as have not been used or acquired for use in any other factory or workshop in India". The said proviso need not be noticed by us for the purpose of disposal of this appeal.

Sub-clause (b) of explanation (4) of Section 4-A, is as under:

" for the purposes of determining value of plants including captive power plant, machinery, equipment, apparatus, components, moulds , dyes, jigs and fixtures only the following shall be taken into account:

(i) investment , whether by means of purchase, hire or lease in such plant, equipment, apparatus, components and machinery as is necessary for the establishment or running of the factory or workshop;"

In the present case, it is the stand of the assessee that in order to control the fluctuation of the electrical energy for running the factory the assessee has purchased the transformer and therefore, the transformer would certainly fall within the meaning of the expression "plant and equipment" essential for effective functioning of the factory.

It is not in dispute that the appellant has purchased the aforesaid machinery. The said machinery is used by the respondent for the purpose of controlling the fluctuation in the supply of electrical energy to the machinery/equipment installed in the factory premises. Sub-clause (i) of explanation 4(b) of Section 4-A speaks of investment made on machinery/ apparatus, components etc. for establishment or running of the factory would fall within the meaning of the expression "fixed capital investment". If that is so, the investment that is made by the assessee would certainly fall within sub- clause (i) of explanation (4)(b) of Section 4-A of the Act. In that view of the matter, we cannot take exception to the judgment and order passed by the High Court where the High Court has appropriately considered the issue and granted relief to the assessee /respondent.

In view of the above, the Supreme Court allowed this appeal in part and set aside the judgment and order passed by the High Court insofar as the relief that is granted to the respondent in payment of interest. Supreme Court confirmed the judgment and order passed by the High Court insofar as the purchase of the transformer for erection in the business premises for running of the machinery.

(See 2014-TIOL-10-SC-MISC)