Income Tax Appellate Tribunal - Jodhpur
Standard Metal Corporation vs Ito on 14 September, 2001
Equivalent citations: (2001)73TTJ(JODH)842
Order P.M. JAGTAP, A.M. Both these appeals, preferred by the assessee, against the common order of learned Commissioner (Appeals), Jodhpur, dated 15-10-1993, involve a common issue and as such the same are being disposed of by a common order for the sake of convenience.
2. The only issue arising out of these appeals relates to the disallowance of assessee's claim for investment allowance.
3. In this case the original assessments for assessment years 1979-80 and 1980-81 were completed under section 143(3) wherein the investment allowance amounting to Rs. 53,900 and Rs. 55,479 was allowed. The learned Commissioner, however, withdrew the same subsequently vide his order passed on 23-2-1987 under section 263. Against this order, the assessee preferred appeals before the Tribunal and after considering the rival submissions as well as the facts on record the Tribunal restored back the issue, to the file of the assessing officer for reconsideration with certain directions. Accordingly the assessments were completed by the assessing officer in the set aside proceedings vide his order, dated 30-11-1990, wherein the investment allowance claimed by the assessee for both the years under consideration was withdrawn for the following reasons given in his order :
(1) The assessee-firm has utilised the investment allowance reserve for distribution by way of profit as provided in section 32A(5)(c) of the Act.
(2) Section 32A(4) and section 32A(5) are mutually inclusive and not exclusive. The assessee-firm has no right to distribute the reserve by way of profit after acquiring the new plant and machinery. It is to comply with requirement of section 32A(5).
(3) The assessee-firm has not utilised the investment allowance reserve for acquiring new plant and machinery as the cost of such machinery and plant has been made after raising loan from Rajasthan Financial Corporation (hereinafter referred to as the RFC). From the balance sheet as on 31-12-1980, it is clear that the total additions in the building, plant and machinery are of the amount of Rs. 2,63,579 against a total loan of Rs. 2,82,629 raised from RFC.
The assessee carried this matter in the appeal before the learned Commissioner (Appeals), Jodhpur, who upheld the action of the assessing officer in not allowing the assessee's claim for investment allowance observing that the assessee has violated the conditions for maintaining the investment allowance by distributing the reserve among the partners and the same was not utilised for purchasing new plant and machinery. Aggrieved by the same, the assessee is in appeal before us.
4. The learned counsel for the assessee submitted before us that as per the scheme of investment allowance, the assessee has to create reserve to the extent of 75 per cent of the investment allowance to plough back the same in the business and subsequently the amount to that extent is required to be invested for acquiring the new plant and machinery within a period of 10 years from the year of grant of the investment allowance. He also submitted that the purpose of introducing this scheme was to encourage the growth and development in the industrial sector and for this purpose the requirement of creating the reserve as well as retaining the same in the business was provided for. He also submitted that the object of creating and maintaining the reserve was that the amount to the extent of such reserve is further utilised for acquiring new plant and machinery and after utilising the same for the desired object, there is no purpose of keeping such utilised reserve amount undistributed. He contended that it is also not the requirement of law that such reserve amount has to be kept invested in the earmarked securities or investment so that to reinvest it after encashing in the acquisition of new plant or machinery. According to him, the only requirement is that the reserve amount has to be kept utilised in the business until the required acquisition of assets is made and, therefore, the reserve amount is needed to be utilised in the business other than the restricted purposes only during the interregnum period, that is, from the year of grant of the investment allowance to the date of investment in new plant and machinery. Referring to the Circular No. 202, dated 5-7-1976, issued by Central Board of Direct Taxes, reported in (1976) 105 ITR (St) 17, he submitted that the investment allowance can be withdrawn in the case where the conditions of grant are not complied with and contended that the assessee in the present case having complied with the basic conditions of creating the reserve and utilising the same for purchase of new plant and machinery, there was no reason for the authorities below to disallow the investment allowance claimed by the assessee. He also contended that the combined and conjoint reading of both the sub-sections 32A(4) and 32A(5) in a harmonious manner indicates that after the utilisation of the amount of reserve for investment in plant and machinery, the assessee is free to use the said reserve even for the prohibitive purposes. According to him, as soon as the investment is made, the funds to that extent of reserve amount automatically get ploughed back and remain invested in the business so long as the assets newly acquired are retained in the business. In this regard he contended that in the present case the assessee has not even utilised the reserve amount for such prohibitive use and the mere transfer of the reserve amount to the capital of the partners after acquiring new plant and machinery cannot be regarded as used for the prohibitive purposes. He also submitted that the amount of reserve transferred to the partners' capital accounts of the assessee-firm was not withdrawn by the partners and the same was retained in the business. In support of his contentions, he placed reliance on the following case-laws :
(i) Pradeep Kumar Chelaram Arora v. ITO (1992) 43 ITD 50 (Ahd) ;
(ii) Asstt. CIT v. Shree Shantinath Silk Mills (1994) 49 ITD 341 (Ahd);
(iii) ITO v. Patel Mfrs. (1995) 80 Taxman 324 (Ahd);
(iv) ITO v. Pratik Prints (1991) 40 TTJ (Ahd) 173;
(v) CIT v. Hemantpat Singhania (HUF) (1991) 188 ITR 618 (All);
(vi) CIT v. Karam Chand Prem Chand Ltd. (1994) 208 ITR 561 (Guj);
(vii) CIT v. Sobhana Silk Mills (1992) 196 ITR 775 (Bom);
(viii) CIT v. Ganges Mfg Co. Ltd. (1982) 133 ITR 404 (Cal) ;
(ix) Hunsur Plywood Works Ltd. v. CIT (1998) 229 ITR 112 (SC);
(x) CIT v. S. Balasubramanian (1998) 230 1TR 934 (SC);
(xi) CIT v. Karam Chand Prem Chand (P) Ltd. (1993) 200 ITR 281 (Guj);
(xii) 112 Taxation 288 (Guj);
(xiii) 113 Taxation 404 (Guj);
(xiv) CBDT & Ors. v. Oberoi Hotel (India) (P) Ltd. (1998) 231 ITR 148 (SC); and
(xv) Broach Co-op. Cotton Sales Ginning & Pressing Society Ltd. v. CIT (1989) 177 ITR 418 (SC).
5. The learned Departmental Representative on the other hand, submitted that the assessee has clearly violated the condition laid down in section 32A(5)(c) and, therefore, the investment allowance granted has rightly been withdrawn by the assessing officer under section 155(4) of the Act. He further submitted that the investment allowance was duly allowed to the assessee in assessment years 1978-79 and 1979-80 in respect of investment made in the new plant and machinery. He contended that the transfer of the investment allowance reserve created in both these years to the partners' capital accounts by the assessee in the previous year relevant to assessment year 1981-82 amounted to distribution of profit and, therefore, the investment allowance reserve allowed in assessment years 1978-79 and 1979-80 was rightly withdrawn as per the specific provisions of section 32A(5)(c) read with section 155(4). He further contended that even in the Board's circular, referred by the learned counsel for the assessee, there is a specific restriction that the amount of investment allowance reserve shall not be utilised by the assessee for distribution as dividend/profit. Referring to p. 3 of the assessing officer's order he submitted that the assessee, in fact, made the investment in new plant and machinery in the calendar year 1980, i.e., assessment year 1981-82 out of loan availed from RFC and not out of the investment allowance reserve as specified in section 32A(5)(b). Explaining further he pointed out from the relevant balance sheet of the assessee for assessment year 1991-92 (placed at p. 38 of assessee's paper book) that the assessee raised a loan amount of Rs. 2,82,629 in the calendar year 1980, whereas the cost of new assets acquired during the said year amounted to Rs. 2,63,579 only. He, therefore, contended that the figures given in the balance sheet of the assessee for the relevant year clearly show that it was the loan availed for RFC which stood utilised for purchase of new plant and machinery and not the investment allowance reserve which was transferred to partners' capital accounts. As regards the various case laws cited by the learned counsel for the assessee he submitted that the same are distinguishable on facts inasmuch as in none of the cited cases, the new plant and machinery was purchased out of the borrowed funds.
6. We have considered the rival submissions and also perused the relevant material on record. We have also carefully gone through the judgments on which reliance was placed by the learned counsel for the assessee. It is observed that the investment allowance granted initially to the assessee was subsequently withdrawn for the assessee's failure in complying with the conditions precedent for earning and retaining the investment allowance as contemplated by sub-clauses (b) and (c) of sub-section (5) of section 32A. It is, therefore, relevant to consider and interpret the provisions of section 32A(5)(b) and (c) which are reproduced below :
"(5) Any allowance made under this section in respect of any ship, aircraft, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act,
(a) ****** ****** ******
(b) if at any time before the expiry of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the assessee does not utilise the amount credited to the reserve account under sub-section (4) for the purposes of acquiring a new ship or a new aircraft or new machinery or plant (other than machinery or plant of the nature referred to in clauses (a), (b) and (d) of the second proviso to sub-section (1) for the purposes of the business of the undertaking., or
(c) If at any time before the expiry of the ten years aforesaid, the assessee utilise the amount credited to the reserve account under sub-section (4) for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any assets outside India or for any other purpose which is not a purpose of the business of the undertaking."
7. It appears that the provisions relating to investment allowance were introduced in the statute for giving incentive to businessmen to develop their business by creating enough viability with the assessee for putting new technology in business by acquiring new assets with the assistance of reserve funds created as a result of allowing deduction in addition to the depreciation. Obvious as it is, the investment allowance is granted to the assessee to provide incentive for industrial expansion and the purpose of providing such allowance is to offer incentive to the assessee for growth and development.
8. It is a settled position of law that the expression used in taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative animation. Moreover, the tax laws have to be interpreted reasonably and in consonance with justice adopting purposive approach and the contextual meaning has to be ascertained and accordingly given effect to. In the case of CIT v. Gwalior Rayon & Silk Mfg, Co. Ltd. (1992) 196 ITR 149 (SC) the Hon'ble Supreme Court has held that the provisions of fiscal statute should be construed harmoniously with the legislative object and a provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee. In the case of Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC) the Hon'ble Apex Court has held that a provision in a taxing statute granting incentive for promoting growth and development should be construed liberally and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it. Keeping conscious awareness of this legislative spirit and considering the purpose and object of scheme of investment allowance, we now proceed further to consider the issue of compliance or otherwise of the conditions precedent as contemplated in clauses (b) and (c) of sub-section (5) of section 32A by the assessee in the case on hand.
9. As per the provisions of section 32A(4) the assessee is required to set apart an amount equal to 75 per cent of the investment allowance that would be allowed to him in a particular year of assessment as a reserve by debiting the equal amount to the profit and loss account before the accounts of the relevant year are finally drawn up and by crediting the corresponding amount to a special account called investment allowance reserve. It is worthwhile to note here that the said reserve is created merely by passing an accounting entry with two-fold purposes. The first purpose is to ensure that the said amount is retained for utilisation for any of the permissible business purposes and also to restrict the utilisation of the same for any prohibited purposes like distribution by way of dividend or distribution of profit. It is pertinent to note here that the said reserve is not a cash reserve and there is no requirement to earmark the funds to the extent of amount kept in reserve but the only requirement is that the same is retained for utilisation for the permissible business purposes. Secondly, the requirement of maintaining such reserve for a period of 10 years, it appears, is to monitor the utilisation of the amount to the extent of reserve for acquiring new plant and machinery as envisaged in sub-clause (b) of sub-section (5) of section 32A. It is thus clear that the creation of reserve neither results into creation of cash amount nor separate funds to that extent are earmarked separately for utilising the same for the purpose of acquiring new plant and machinery. The only outcome of creation of such reserve is that the amount to that extent remains in the business of the assessee putting restriction on utilisation of the same for any prohibited purposes like distribution by way of dividend or distribution of profit. In the circumstances, if the reserve amount remains locked up in the business and the assessee avails credit facilities from bank or from any third party for acquiring new plant and machinery, we are of the opinion that such acquisition deserves to be treated as utilisation of the reserve amount, so far as the reserve amount remains utilised for the business purposes. In such a situation, the entire fund flow position of the assessee's business is required to be appreciated to ascertain the fact of utilisation of the reserve amount and if the assessee chooses to replace/rearrange the funds by availing credit facilities from bank/third parties instead of withdrawing the amount of reserve locked up in the business for acquiring new plant and machinery, we are of the view that such replacement/rearrangement of funds cannot be construed as the non-utilisation of the reserve amount for acquiring new assets simply for the lack of nexus between the reserve amount and the purchase of new assets. In the instant case, the reserve amount having been retained by the assessee in the business, the requirement of keeping the said amount utilised for the purpose of business was entirely complied with, and this being the position, we are of the view that there was no justification on the part of the authorities below to assume that the new assets were acquired by the assessee from the borrowed funds and not from the investment allowance reserve. Thus, the first objection of the revenue that the investment allowance reserve was not utilised by the assessee for acquiring new plant and machinery and actually the cost of such machinery and plant was met by raising loan from RFC, in our opinion, is not well-founded and thus is liable to be overruled.
10. As regards the other objection of the revenue that the assessee has utilised the amount of investment allowance reserve for distribution by way of profits, in contravention of the conditions laid down in clause (c) of sub-section (5) of section 32A, it is observed that the Ahmedabad Bench of Tribunal had an occasion to consider the similar issue in the case of Asstt. CIT v. Sri Shantilal Silk Mills (supra) wherein it has been held that when the assessee has duly complied with the condition of purchasing new plant and machinery within the prescribed time, any transfer of investment allowance reserve to partners' capital accounts after purchase of the new machinery would not result in withdrawal of investment allowance. Explaining further, the Tribunal observed that harmonious construction of the prohibitive sub-clauses (b) and (c) of section 32A(5) clearly indicates that the provisions of law require the assessee to utilise the amount for purchase of new plant and machinery at any time before the expiry of 10 years and in case the assessee cannot utilise the amount for purchase of new plant and machinery within the prescribed period of 10 years, the assessee for that block of 10 years period should not utilise the same for distribution by way of dividends or profits. In the present case, as discussed earlier, the assessee had spent much more amount than the investment allowance reserve for purchase of new plant and machinery and, therefore, the very purpose of the investment allowance reserve was exhausted immediately in the previous year relevant to assessment year 1981-82. Consequently, it was open to the assessee to deal with the investment allowance reserve which in fact had become a free reserve.
11. As regards the objection of the assessing officer that the assessee should have reflected the utilisation in its books of account by debiting the investment allowance reserve and by crediting the investment allowance utilisation reserve by an amount equivalent to the purchase price of new machinery, we are of the opinion that once the amount was utilised by the assessee for the purchase of new plant and machinery and the very purpose of the investment allowance reserve got exhausted accordingly, the manner and method of accounting entries hardly makes any difference and thus there was no justification in assessing officers action to withdraw the investment allowance originally granted in the years under consideration.
12. Before us, the learned counsel for the assessee has submitted that even after the transfer of investment allowance reserve to the partners' capital accounts, the same was not withdrawn by the partners and the amount of reserve so credited in their capital accounts remained in the business. In this regard it is observed that neither the assessing officer nor the learned Departmental Representative has disputed this factual position and this being so, we are of the opinion that the transferring of the amount of investment allowance reserve to the capital accounts of the partners merely by making book entries by itself cannot be construed as utilisation of the investment allowance reserve for distribution by way of profits especially when the said amount was allowed to be retained in the business by the partners.
13. As such considering all the facts and circumstances of the case and in view of the aforesaid discussion, we are of the opinion that the conditions precedent as contemplated by section 32A(5)(b) and (c) were satisfied by the assessee for not only earning the investment allowance but also for retaining the same and there was no reason for the revenue to fall back upon section 155(4A) to withdraw the same. In that view of the matter we hold that the learned Commissioner (Appeals) was not justified in upholding the assessing officer's action in withdrawing the investment allowance. His impugned order on this issue is, therefore, reversed and the assessing officer is directed to grant the investment allowance to the assessee for both the years under consideration.
14. In the result, these appeals of the assessee are allowed.