Madras High Court
Commissioner Of Income-Tax vs First Leasing Co. Of India Ltd. And ... on 12 September, 1995
Equivalent citations: [1995]216ITR455(MAD)
JUDGMENT Abdul Hadi, J.
1. In all these tax case references under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), one common question is involved (apart from certain other questions in one or the other of the said cases) and hence they are heard together.
2. Of these, one alone, viz., Tax Case No. 786 of 1986, is by the assessee since the Tribunal below therein held against the assessee on the abovesaid question. The other five tax case references are by the Revenue. The Tribunal, in the respective orders therein, held against the Revenue on the abovesaid question.
3. Tax Cases Nos. 491 and 492 of 1986 arising out of the same order dated May 8, 1985, of the Tribunal, in the appeal by the Revenue as well as cross-objection by the assessee, relate to the assessment year 1977-78. The assessee herein is the same as in Tax Case No. 786 of 1986, which relates to the assessment year 1979-80 and arises out of the order dated October 31, 1983, of the Tribunal. Tax Case No. 1651 of 1986 relates to another assessee in relation to the assessment year 1980-81 and arises out of the order dated August 30, 1985, of the Tribunal. Tax Case No. 1242 of 1991 which relates to the assessment year 1983-84 and Tax Case No. 1243 of 1991 which relates to the assessment year 1984-85, both arise out of the order dated February 8, 1990, of the Tribunal. Both these later two cases relate to yet another assessee.
4. The abovesaid "common question" is about the investment allowance under section 32A of the Act, which is one of the deductions allowed in computing the "total income" chargeable to tax under the Act. The abovesaid allowance is given with effect from April 1, 1976, the said provision having been inserted in the Act by the Finance Act, 1976, and the said allowance has taken the place of development rebate allowance which was given earlier. The said allowance, under section 32A, is given, inter alia, in respect of plant and machinery. All the abovesaid assessees, who admittedly owned the plant or machinery in question, only hired out the same to another for being exploited by the latter. Therefore, the contention of the Revenue is that the assessee was not entitled to the said allowance, it having not exploited the said plant or machinery itself. On the other hand, the contention of the abovesaid assessees is that despite the abovesaid fact, each one of them was entitled to the allowance under the said section. In view of these rival contentions, the abovesaid question is whether the assessees were entitled to the abovesaid investment allowance under the abovesaid section in the abovesaid relevant assessment years in respect of the respective plant or machinery, which admittedly was owned by the respective assessees but hired out during the relevant previous years as stated above.
5. With reference to the said "common question" the sole question of law referred to us in Tax Case No. 786 of 1986 runs as follows : "Whether the Appellate Tribunal was right in holding that the assessee was not entitled to investment allowance under section 32A of the Act ?".
6. Likewise; in both Tax Cases Nos. 1242 and 1243 of 1991, the question of law referred to us, runs as follows :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee is entitled to investment allowance under section 32A on items of machinery and plant which have been leased out to others ?"
7. In Tax Case No. 1651 of 1986, the question of law referred to us runs as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to investment allowance under section 32A on the bulldozer purchased and hired to outsiders, even though the assessee's business was only hiring of compressors and bulldozers ?"
8. (With reference to this question, another question also has to be considered in the light of the arguments advanced, viz., whether in respect of the bulldozer, the assessee in the said case could claim the said allowance. This aspect would be considered after considering the abovereferred "common question").
9. In both Tax Cases Nos. 491 and 492 of 1986, actually speaking, two questions of law have been referred to us and the abovesaid "common question" involved is reflected only in the second of the abovesaid questions referred to us, which runs as follows :
"Whether the Appellate Tribunal was correct in law in holding that the assessee is entitled to investment allowance under section 32A and initial depreciation under section 32(1)(iv) of the Act on machinery leased out ?"
10. In the above question, reference to section 32(1)(iv) is not correct; it must read as section 32(1)(vi). The said provision refers to initial depreciation. As per learned counsel for the Revenue, the arguments advanced in respect of investment allowance would apply to the said initial depreciation also and the decision to be given in respect of investment allowance in regard to the actual question at issue would also equally apply to initial depreciation. Then, the first of the abovesaid two questions referred to us, runs as follows :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding and had valid materials to hold that the reopening of the assessment under section 147(b) of the Act was without jurisdiction and, therefore, invalid ?"
11. Regarding this first question, learned counsel for the Revenue submits that if the abovesaid "common question" is answered in favour of the assessee, there may not be any necessity to answer this first question and so saying he deferred his arguments on the said first question till our decision is given on the abovereferred common question. However, we may, at this stage itself state that, since in view of the reasons given below, we are going to decide in favour of the assessee on the abovesaid common question, there is no necessity to answer the abovereferred first question and the said first question has to be returned unanswered.
12. Let us now deal with the abovesaid "common question" first. The material portions of the said section 32A of the Act run as follows :
"32A. (1) In respect of a ship or an aircraft or machinery or plant specified in sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed .... of a sum by way of investment allowance equal to twenty-five per cent. of the actual cost of the ship, aircraft, machinery or plant to the assessee ....
(2) The ship or aircraft or machinery or plant referred to in sub-section (1) shall be the following, namely :-
(a) a new ship or new aircraft acquired after the 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft;
(b) any new machinery or plant installed after the 31st day of March, 1976, - ....
(iii) in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule :
(Note : This Eleventh Schedule contains non-priority articles or things) .....
(4) The deduction under sub-section (1) shall be allowed only if the following conditions are fulfilled, namely :- ....
(ii) an amount equal to seventy-five per cent. of the investment allowance to be actually allowed is debited to the profit and loss account ..... and credited to a reserve account .... to be utilised -
(a) for the purposes of acquiring, before the expiry of a period of ten years next following the previous year in which .... the machinery or plant was installed, a .... new machinery or plant .... for the purposes of the business of the undertaking; and ....
(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) if the .... machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years, from the end of the previous year in which it was acquired or installed; or ...."
Thus, the main conditions to be satisfied as per section 32A(1) and (2) are :
(1) the subject-matter is to be owned by the assessee;
(2) is wholly used for the purpose of business of the assessee; and (3) the subject-matter should come under any of the enumerated categories of section 32A(2).
13. That the plant or machinery in the present case is owned by the assessee is not disputed.
14. As regards the second condition, the assessee is wholly using it for the purpose of his/its business which consists of leasing it to other parties. Sub-section (1) or (2) of section 32A does not require anywhere that the plant and machinery must be installed and used by the assessee himself for the manufacture or production of priority articles.
15. Wherever the Legislature intended that the assessee should itself be engaged in the particular business, it has so provided. This would be evident from the language of sub-section (2) (a) of section 32A which specifically requires that the assessee, in order to claim investment allowance in respect of ships or aircraft, must be "engaged in the business of operation of ships or aircraft". The fact that such a qualification does not appear in sub-section (1) or sub-section (2) (b) (iii) of section 32A shows that in order to claim investment allowance for machinery or plant, the assessee need not by himself have the industrial undertaking engaged in the business of manufacture or production of articles not specified in the Eleventh Schedule. Further, even in section 32A(4), which provides for keeping a reserve, as a condition for securing the deduction, we do not find any phraseology to accept the contention of the Revenue.
16. The object of all interpretation is to discover the intention of Parliament but the intention of Parliament must be deduced from the language used. Where the language is plain and admits of only one meaning, the task of interpretation can hardly be said to arise. If the interpretation sought to be placed by the Revenue were to be accepted, then neither the assessee which hired out the plant or machinery nor the hirer would be entitled to investment allowance. (The hirer will not be entitled to investment allowance because it does; not own the plant or machinery). Such an interpretation must be avoided because it will defeat the very purpose of enactment of section 32A. The object of the enactment can also be seen from the Budget Speech of the Finance Minister for the year 1976-77, while introducing section 32A. The relevant portion of the speech is as follows :
"The present scheme of investment allowance will facilitate investment in priority industries and reduce the dependence of the corporate sector on public financial institutions." (Vide [1976] 102 ITR (St.) 95).
So, one object of the introduction of section 32A is to facilitate the investment in priority industries. This object will be fulfilled whether the assessee himself makes use of the plant or machinery in question or the hirer. Further, if a person who has enough funds, acquires plant or machinery and hires it out to a person who may not have enough funds at his command, the necessity of the latter person to seek necessary funds from public financial institutions for acquiring the plant or machinery himself may not arise and to that extent the dependence on such institutions is reduced. In this way the second object also is satisfied.
We may also point out that an identical question arose in CIT v. Shaan Finance (P.) Ltd. [1993] 199 ITR 409 (Kar) and the said court has also upheld that investment allowance can be claimed by a person similarly placed as the present assessees. According to the said decision, the only requirement under section 32A(2)(b) is that the plant or machinery owned by the assessee should have been used by someone in the manner stated in the said sub-clause. It has also been held therein, in the context of the abovesaid expression "wholly used" finding place in both sections 33 and 32A that the term "wholly" means "entirely" and not "exclusively" and that the machinery in its entirety may be used by its owner and it is possible for another also to use it. In this connection, the said decision also relied on similar observation of this court in CIT v. Pandyan Bank Ltd. [1969] 71 ITR 707 (Mad).
17. In CIT v. Eastern Spinning Mills and Industries Ltd. [1995] 125 Taxation 353, the Calcutta High Court also held that the abovesaid investment allowance could be granted to an assessee even when he, the owner of the plant or machinery in question, leases it out to another person. No doubt, in that case the assessee's sole business was not such leasing out of plant or machinery, but, its business was actually manufacture and sale of staple and synthetic blended yarn, etc., but, due to adverse conditions the assessee decided to give the plant and machinery used by it in the abovesaid manufacture, to a third party on leave and licence basis, whereby the said third party got the right of exploitation of the said plant and machinery, for an initial period of three years which could be extended. Taking into account the abovesaid special feature in the Calcutta case, learned counsel for the Revenue seeks to argue that the said Calcutta decision turned on its facts and it cannot be applied to the present cases where the sole business of the assessee is only leasing out the plant or machinery. But, we do not think any such distinction could be made. In either case the principle is the same, it being that section 32A does not disentitle such lessor or licensor of plant or machinery from claiming the said allowance.
18. It must be noted that even if this investment allowance is allowed to a person who simply hires out the plant or machinery, the abovesaid objects will be fulfilled since it is also likely that he will hire out the plant or machinery at a lower rent as he is going to get this allowance in computing his total income of his leasing business.
19. Any legislative provision is to be construed in the light of the purpose with which it has been introduced. This principle of purposive interpretation has been adopted in so many decisions of the Supreme Court like CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. [1992] 196 ITR 149; Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188. In particular, we may point out that in Bajaj Tempo Ltd. v. CIT , it has been held that a provision in the statute granting incentives 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.
20. As already indicated, the present investment allowance - has replaced the former development rebate allowance provided under section 33 of the Act. That section 33 gave the said development rebate allowance in respect of machinery or plant "owned by the assessee" and wholly used for the purposes of the business carried on by him. In that context, several decisions have held that the said allowance under section 33 of the Act could be given even to an assessee, who only hires out the abovesaid plant and machinery in the course of business of leasing. We may point out one of them, viz., Ajodhya Prasad Tara Chand Khekra v. CIT [1967] 66 ITR 576 (All). In that case the court held that for kolhus (sugarcane crushing machine) such development rebate could be allowed. In that context, the relevant observation is as follows (at page 579) :
"The kolhus on which development rebate is claimed once were admittedly let out and were, therefore, wholly used for the assessee's business which consisted of hiring out of such kolhus. The assessee was neither a crusher of sugarcane nor was that his business, and, therefore, kolhus could not have been used by him for that purpose. His business was wholly that of hiring out of kolhus. The 50 new kolhus were in fact hired out, and, therefore, they were used wholly for the purpose of the assessee's business. The fact that the person who hired the kolhus also made use of them would not make the kolhus any the less used wholly for the purpose of the assessee's business."
21. It is also settled law that giving plant or machinery on licence or hire is one of the recognised modes of doing business, as much as the use of the asset by the assessee himself for the purpose of manufacture or production (vide CEPT v. Shri Lakshmi Silk Mills Ltd. .
22. Referring to the third main condition enumerated above (which also has to be satisfied for claiming the abovesaid allowance under section 32A), which provides that the said allowance is given in respect of the machinery or plant "installed" in any other industrial undertaking (i.e., other than the small-scale industrial undertaking) for purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule, the abovesaid Karnataka decision (see CIT v. Shaan Finance (P.) Ltd. [1993] 199 ITR 409) also observes as follows (at page 415) :
"The term 'installed' is found in several sub-sections of section 32A; but that does not aid the construction because, in the main sub-section; i.e., section 32A(1), both the terms, 'used' and 'installed' are referred to in relation to the subject-matter.
However, we find some clue as to the Legislature's intention, by comparing section 32A(2B) with section 33(1)(b)(B) (ii) and (iii). In the latter two sub-clauses (of section 33), there is a specific reference to the assessee's business premises where the machinery is to be installed."
23. In other words, while the relevant provisions in section 33 provide that machinery or plant should be installed by the assessee in the premises used by it, or it is an asset or the said machinery or plant is an asset relating to the business carried on by the assessee, as the case may be, section 32A(2B) does not have any such stipulation. That is why the said Karnataka decision CIT v. Shaan Finance (P.) Ltd. [1993] 199 ITR 409, concludes by saying thus (at page 416) :
"The benefit is given with reference to the actual user of the machinery, though the benefit may go to a person who does not exploit the machinery himself for manufacturing or producing any article. Such a situation is not entirely unknown in the field of taxation. If the object behind section 32A is understood as to encourage industrial activities and investment in capital goods to facilitate industrial developments, the provision would certainly bear the meaning we have attributed to it."
24. Learned counsel for the Revenue also relies on section 32A, sub-section (5) (a), and contends that since the plant or machinery in the present cases has been leased out by the assessee, it is hit by the abovesaid provision in view of the fact that the terms "otherwise transferred" found therein would include such lease. So, according to him, the said allowance "shall be deemed to have been wrongly made". But, we are unable to accept this contention also. First of all, even on the footing that the term "otherwise transferred" would include such "leases" as given in the present cases, the said provision will not disentitle the assessees herein from securing investment allowance, since the said provision only speaks of "machinery or plant transferred by the assessees" at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed". In all the present cases, admittedly, the leases were only during the previous year in which the plant or machinery was acquired and not in the abovereferred to eight year period beginning from the end of the previous year.
25. Further learned counsel for the assessees points out that the Tribunal itself has found that the abovesaid "lease" transaction by the assessees will not actually come under the terms "otherwise transferred" found in section 32A, sub-section (5), taking into account the definition of the term "transfer" under section 2, clause (47), of the Act. The Special Bench of the Tribunal which decided Income-tax Appeal No. 1951 of 1983 out of whose order arose the abovesaid Tax Cases Nos. 491 and 492 of 1986, has held in its impugned order dated May 8, 1985, thus :
"A perusal of the hire agreement shows that the ownership of the assets, which are leased out, vests only in the assessee. We are unable to hold, therefore, that there is extinguishment of any right when the assets are hired out, and only the benefit of user is obtained by the person who takes out the assets on hire. The assets cannot, therefore, be considered on being hired out though the expression 'lease' is used in the agreement, as having been otherwise transferred. The provisions of section 32A(5) are also not attracted merely because the assets are leased out and no mistake would have been committed in granting investment allowance."
26. So, according to the said counsel, we cannot normally go beyond the abovesaid factual finding that there was no extinguishment of any right of the assessees, when the plant or machinery in question was hired out. There is force in this argument also. No doubt, a copy of the "lease agreement" entered into by one of the assessees, viz., Sundaram Finance Limited, was produced before us wherein we also find the following passage as one of the terms of the "lease deed" :
"The lessee acknowledges .... that it holds the equipment as a mere bailee of the lessor and that it shall not have any property right, title or interest in the equipment or any part thereof and shall at all times, protect and defend as bailee/licensee of the equipment ...."
27. No doubt, learned counsel for the Revenue drew our attention to Blue Bay Fisheries (P.) Ltd. v. CIT , but that turned on its own facts. There, a trawler was leased out and the court held that the agreement between the parties indicated that the transaction was a lease of the trawler in favour of the transferee and that for a period of ten months, the trawler was to remain in the exclusive possession of the transferee, and at the end of the period it was to be sold to it. We do not think that the said decision would apply to the facts of the present case.
28. Then, we now come to the aspect referred to in paragraph 4B above, in relation to the question referred to us in Tax Case No. 1651 of 1986, viz., whether in respect of the bulldozer, the assessee therein could claim the abovesaid allowance. According to learned counsel for the Revenue, relying on the terminology used in section 32A(2)(b)(iii), a bulldozer cannot be considered as "machinery or plant installed .... in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing ...." In this connection, the decision in CIT v. N. C. Budharaja and Co. [1993] 204 ITR 412 (SC) is relied on. According to the above decision of the Supreme Court, the word "article and thing" are used interchangeably in the said provision and those words in the above context in which they are used, cannot comprehend or take within their ambit a dam, a bridge, a building, a road, a canal and so on. The Supreme Court so held that the assessee in that case was not entitled to the allowance under section 32A. Therefore, in view of this Supreme Court decision and also Builders' Association of India v. Union of India which also reiterated the same principle, it has to be held that the assessee in this Tax Case No. 1651 of 1986 is not entitled to the abovesaid investment allowance under section 32A in relation to its hiring of the bulldozer.
29. But, learned counsel for the assessee in this case argues that the abovesaid question does not at all arise out of the Tribunal's order dated August 30, 1985, in Income-tax Appeal No. 2554 of 1984 out of which Tax Case No. 1651 of 1986 has arisen and hence this court is not called upon to decide the question whether in respect of the bulldozer, the abovesaid investment allowance could be claimed.
30. No doubt, we find in the abovesaid Tribunal's order that the only discussion is virtually only the following :
"After due consideration and in view of the decision of the Tribunal in the case of Abcoy and the Special Bench decision in the case of First Leasing Co., cited supra ([1985] 13 ITD 234 (Mad)), we uphold the order of the Commissioner (Appeals)."
31. So it follows that the Tribunal has not actually considered the abovesaid question whether with reference to bulldozers as such, the abovesaid investment allowance could be claimed. But, as pointed out by learned counsel for the Revenue, in Vr, G. Rm. Adaikkappa Chettiar v. CIT [1920] 78 ITR 285 (Mad) at page 297, relying on CIT v. Scindia Steam Navigation Co. Ltd. , inter alia, it has been held that when a question of law is raised before the Tribunal, but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it and is, therefore, one arising out of its order. In this case, the question of law whether the allowance under section 32A could be granted to the assessee was squarely before the Tribunal, but, the Tribunal did not actually consider one aspect of it in the light of one of the statutory conditions prescribed in section 32A(2) (b) (iii) of the Act, in relation to the bulldozer hired out by the assessee. So, as per the abovesaid decision of the Supreme Court that aspect must be deemed to have been dealt with by the Tribunal and, therefore, it is one arising out of its order.
32. The net result is, in Tax Cases Nos. 491 and 492 of 1986 the second question referred to us both in relation to investment allowance under section 32A as well as initial depreciation under section 32(1)(vi) is answered in the affirmative and against the Revenue. In so far as the first question referred to us in both the said tax cases is concerned, in view of what is stated in paragraph 7 (at page 460) above, it is held that there is no necessity to answer this first question and the said first question is returned unanswered accordingly.
33. In so far as Tax Case No. 786 of 1986 is concerned, the question referred to us is answered in the negative and against the Revenue.
34. In so far as Tax Case No. 1651 of 1986 is concerned, taking into account only the abovereferred to subsidiary question, whether with reference to the bulldozer the assessee is entitled to the allowance under section 32A, the question referred to us is answered in favour of the Revenue.
35. In so far as Tax Cases Nos. 1242 and 1243 of 1991 are concerned, the question referred to us is answered in the affirmative and against the Revenue. No costs.