Delhi High Court
Commissioner Of Income Tax vs Anil Kumar Bishnoi [Along With Itr Nos. ... on 12 October, 2007
Equivalent citations: (2007)213CTR(DEL)49
Author: S. Muralidhar
Bench: Madan B. Lokur, S. Muralidhar
JUDGMENT S. Muralidhar, J.
1. These are 12 references relating to various Assessment Years raising similar questions. Since the parties are agreed that the lead matter is ITR No. 75 of 1986 and that a decision in that reference would govern the rest of the references, we propose to deal with ITR No. 75 of 1986 in detail.
2. Relevant for the Assessment Year 1979-80, the following question of law has been referred to us by the Income Tax Appellate Tribunal, Bench A, New Delhi ('Tribunal') under Section 256(1) of the Income Tax Act, 1961 (Act):
Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the assessed was entitled to investment allowance under Section 32A of the I.T. Act.
3. The assessed, who started a business in the name and style of M/s. Complete Dewatering Systems with effect from July 1, 1977, claimed that he is engaged in two distinct activities, for each of which he claimed investment allowance under Section 32A of the Act. The first activity was the running of an industrial undertaking engaged in the business of construction. The assessed claimed to have participated in the business of construction by dewatering the land i.e. pumping out water from the ground water table so that the work of excavation of the land there under could take place in completely dry conditions. According to the assessed dewatering is integral to the construction activity and for this purposes he used his own equipments on the site. The second activity was the manufacture of the dewatering equipment itself. The assessed claimed that he purchased different component parts and assembled them at the site on which the dewatering was to take place. Unless so assembled the dewatering equipment could not be used.
4. During the previous year relevant to the Assessment Year in question, the assessed secured a works contract from the Engineering Construction Corporation Limited ('ECCL') for carrying out dewatering at one of its construction sites. The ECCL was awarded a contract by the Government of Tamil Nadu through the Tamil Nadu Electricity Board for construction of a thermal power at Tuticorin. In turn the ECCL sub-contracted the incidental works of which the work of dewatering was awarded to the assessed. The contract envisaged the assessed having to take to the site in question his own plant and machinery and also engage his own labour.
5. According to Section 32A of the Act, investment allowance is admissible in respect of plant and machinery owned by the assessed and installed after March 31, 1976 in an industrial undertaking for the purposes of the business of construction, manufacture, production of any article or thing not being an article or thing specified in the list in the XI Schedule to the Act. For the Assessment Year in question, the assessed claimed a total investment allowance of Rs. 2,67,750.32, which was worked out in the following manner. For the manufacturing activity, the assessed prepared a separate manufacturing-cum- trading account. In this he showed that although he did not sell any completed dewatering equipment during the year, he used materials worth Rs. 16,394/-. On this he claimed investment allowance at the rate of 25% which worked out to Rs. 4,098.59 As regards the dewatering equipment used for the purposes of the works contract at Tuticorin, the assessed debited the entire cost of Rs. 10,54,606.94 under a separate head "Dewatering Equipment". The investment allowance claimed at the rate of 25% on this worked out to Rs. 2,63,651.73.
6. The Assessing Officer ('AO') disallowed the claim of investment allowance on both activities. According to the AO assembling of the components and parts at the site of construction did not have the attribute of manufacture of dewatering equipment. Further, the AO held that the assessed did not run an industrial undertaking in which he had installed plant and machinery for the purposes of construction of an article or thing.
7. In the appeal filed by the assessed, the Commissioner of Income Tax (Appeals) ['CIT(A)'] held that as regards the activity of manufacture of dewatering equipment, the assessed had indeed assembled accessories worth Rs. 16,394/- and was therefore entitled to investment allowance on such sum at the rate of 25%. However, as regards the second activity, the CIT (A) held that although dewatering may be one of the integrated activities of construction, such activity in itself did not result "into any end product of any article or thing, nor such activity by itself would constitute a business of construction." Thus, while allowing the claim of investment allowance to the extent of Rs. 4,098/- on the machinery used in the manufacture of dewatering equipment, the CIT(A) negatived the larger claim of investment allowance on the dewatering equipment of a value of Rs. 10.54 lakhs used in the construction by ECCL of the plant at Tuticorin.
8. The further appeal by the assessed was allowed by the Tribunal by its order dated January 15, 1985. The Tribunal examined the entire process undertaken by the assessed to execute the dewatering work, and concluded that it is not perhaps possible to say that this is not an industrial undertaking engaged in business of construction. It then proceeded to hold that it is not necessary that the business of construction must be carried on by the assessed himself and that even if the machinery is hired out to a firm of contractors, the requirements of Section 32A were satisfied. For this proposition the Tribunal relied on the decision of the Madras Bench of the Tribunal in First Leasing Co. of India Ltd. v. CIT 3 ITD 808. It further held that the words for the purposes of business of construction, manufacture or production of any article or thing in Section 32A(2)(b)(iii) of the Act embraced even the activity undertaken by the assessed which was participating in the construction work and that it was not necessary that the assessed should itself undertake the business of construction. Thereafter, the Revenue applied to the Tribunal under Section 256(1) of the Act and the question set out in para 1 was referred for our opinion.
9. Ms. Rashmi Chopra, learned Senior Standing Counsel for the Revenue, clarified at the outset that the Revenue was not assailing the grant of investment allowance on the machinery of the value of Rs. 16,394/- used in the assembling of dewatering equipment. She, however, submits that the assessed's claim of investment allowance on the dewatering equipment of the value of Rs. 10.54 lakh used in the construction work was inadmissible and that the case is entirely covered in favor of the Revenue and against the assessed by the judgment of the Supreme Court in Commissioner of Income Tax v. N.C. Budharaja . According to her the Supreme Court has categorically ruled that the word 'construction' used in Section 32A did not comprehend the construction of a dam, a bridge, a canal or a road but it had to be read in the context of construction, production or manufacture of an 'article' or 'thing.' Admittedly the assessed here was not involved in the construction of any article or thing. Where even to a person undertaking the activity of construction no investment allowance would be admissible, even less would it be admissible to a person, like the assessed, who claims to be participating in such construction activity. She further points out that the Supreme Court reiterated its decision in Budharaja in the subsequent decision in Builders Association of India v. Union of India and Ors. . She accordingly submits that the Tribunal erred in holding that the assessed was entitled to claim investment allowance on the dewatering equipment used in the construction work.
10. Appearing for the assessed, Mr. D.N.Sawhney, learned Advocate, after taking us through the exhaustive decision of the Tribunal which is under challenge, made three main submissions. First, he says that the activity of the assessed is covered by the plain language of Section 32A(2)(b)(iii) which is for the purposes of the business of construction of an article or thing. He lays emphasis on these words and submits that since the Tribunal has found as a fact that the dewatering activity is integral to the activity of construction of the article or thing, and that the assessed has participated in such activity, the claim for investment allowance is admissible. Second, he submits that the decision in Budharaja does not dilute his claim because his claim is also based on the activity of construction of an "article" or 'thing.' He explains that by this he means that the water which is extracted in the process of dewatering is the 'article' or 'thing' contemplated by Section 32A. Thirdly, Mr. Sawhney submits that in any event after the decision of the Supreme Court in CIT v. Shaan Finance (P) Ltd. , it is settled that the claim of investment allowance will not be denied to an owner of a plant or machinery, even though it may not be used in the assessed's own business, as long as it is used in the business of manufacture or production of an article or thing by someone else. He accordingly submits that the Tribunal was justified in allowing the Assesse's claim on the basis of the decision of the Madras Bench of the Tribunal in First Leasing Co. of India Ltd. which has been affirmed by the High Court and by the Supreme Court in Shaan Finance.
11. Before dealing with the first submission on behalf of the Revenue based on the decision in Budharaja, it is necessary to examine Section 32A and in particular Sub-section (2)(b)(iii) thereof under which the assessed bases his claim for investment allowance. Section 32A reads as under:
Investment allowance 32A(1) In respect of a ship or an aircraft or machinery or plant specified in Sub-section (2), which is owned by the assessed 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 or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum byway of investment allowance equal to twenty-five per cent of the actual cost of the ship, aircraft, machinery or plant to the assessed:
[Provided....
Provided [further]....
Explanation. - xxx.
(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 assessed engaged in the business of operation of ships or aircraft;
(b) any new machinery or plant installed after the 31st day of March 1976,-
(i) for the purposes of business of generation or distribution of electricity or any other form of power; or
(ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing; or
(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
12. In order to claim investment allowance at the rate of 25% of the actual cost of the plant or machinery in terms of Section 32A(2)(b)(iii), the assessed in the instant case was required to demonstrate the following:
(a) that the assessed owns the machinery or plant in question;
(b) that such plant or machinery is installed after March 31, 1976 in an industrial undertaking [other than a small-scale industrial undertaking covered by Section 32A(2)(b)(ii)];
(c) that such plant or machinery is installed for the purposes of business of construction, manufacture or production of any article or thing ; and
(d) that such plant and machinery is wholly used for the purposes of the business carried on by the assessed.
13. The assessed succeeded before the CIT (A) and the Tribunal in showing that it owned the machinery in question, that is the dewatering equipment. The CIT (A) however did not agree that such machinery had been installed in "an industrial undertaking" or that such machinery had been used in the production of any article or thing. Therefore the question of examining whether such use was for the business of the assessed did not arise as far as the CIT (A) was concerned. The Tribunal however viewed the assembling of the machinery on the construction site to produce the dewatering equipment as "an industrial undertaking" of the assessed. Therefore it held that factor (b) above stood satisfied. It must be remembered that at the time the Tribunal gave its decision the decision in Budharaja had not been rendered. Therefore, on the basis of the law as explained by the High Court till then, the Tribunal focussed its attention on the expression for the purposes of the business of construction.
It found that although it was ECCL which was engaged in the business of construction, the assessed had nevertheless owned the machinery which had been used for such purpose. Therefore it held that factor (c) was also satisfied. As regards factor (d) the Tribunal likened the assessed using its dewatering equipment at the construction site of the ECCL to the transaction of lease or hire. Basing its opinion on the decision of the Madras Bench of the Tribunal in First Leasing Co. of India Ltd., it held that the equipment had been used wholly for such business of the assessed.
14. Till the decision in Budharaja it was thought, even by the Government of India, that the benefit of investment allowance under Section 32A was available to the 'business of construction'. In other words, if the plant and machinery was used in construction of buildings, roads, bridges and so on, a construction company which was awarded such works and also was the owner of such plant and machinery would be allowed to claim investment allowance. However, Budharaja changed all that. This decision by a two-Judge Bench of the Supreme Court gave an entirely different meaning to the words 'the purposes of business of construction, manufacture or production of any article or thing' used in Section 32A(2)(b)(iii). The Court was not prepared to read the words business of construction separately but only conjoint with 'manufacture or production of any article or thing.' In other words, one had to read it as construction of an article or thing where the focus was on the end product, namely the article or thing; and the word "construction" merely referred to the process of bringing about such article or thing. Consequently, the 'business' activity contemplated was the bringing about the article or thing and the words 'construction', 'manufacture' or 'production' only referred to the choice of processes for bringing about the end product of any article or thing. The words for the purposes of therefore referred to the business just described.
15. It will be noticed that Budharaja is a fairly lengthy decision involving different types of cases, which the Court divided into groups. The second group of cases pertained to Section 32A and the discussion on this aspect begins at ITR page 429 where the Supreme Court refers to the decision of the Karnataka High Court in Shankar Construction Co. v. CIT . The Supreme Court examined the legislative history of the provision and concluded (ITR, page 434) that Section 32A(2)(b)(iii) does not comprehend within its ambit construction of a dam, a bridge, a building, a road, a canal or other similar constructions. On this interpretation, in effect, those in the 'business of construction' would be ineligible to claim the benefit of investment allowance.
16. In Builders Association of India v. Union of India and Ors. , a valiant attempt was made by the construction industry to persuade the Supreme Court to reconsider its view. Mr. N.A. Palkhivala, Senior Advocate, attempted to convince the Supreme Court, albeit unsuccessfully, that the word 'construction' denoted the 'business of construction' and ought not to be read with article or thing. He pointed out that the opinion of the Union Law Ministry, as conveyed in Parliament, and a circular issued by the Central Board of Direct Taxes (CBDT) was that the construction industry would be able to avail of the benefit of investment allowance under Section 32A and that an earlier in decision of the Supreme Court in Commissioner of Income Tax v. Bhageeratha Engg. Limited had taken a view contrary to what was held in Budharaja.
17. However, the Supreme Court declined to reconsider the view expressed by it in Budharaja. It held in Builders Association of India that (ITR, p.885):
We are not persuaded to take a different view than the one taken in the said decision. We are of the considered view that the word 'construction' occurring in the said Sub-clause cannot be dissociated from the following words "manufacture or production of any article or thing not being an article or thing specified in the list in the Eleventh Schedule". The context and the structure of the Sub-clause does not permit such dissociation of the word "construction" from the following words. If that were the intention of the Parliament, it would have employed appropriate words to dissociate the word "construction" from the following words. There are none. The absence of any such words clearly and conclusively militates against the contention of Shri Palkhivala. As explained in the said judgment, the word "construction" was retained in the new Sub-clause (iii) because the ships continue to be within the purview of present Sub-clause (iii) as they were within the purview of farmer Sub-clause (ii). It is not necessary to repeat the reasoning in Budharaja and Co.'s case over again.
Further, it held that the opinions expressed by the Law Ministry or the CBDT did not bind the Supreme Court. It distinguished the decision in Bhageeratha Engg.
Limited on the ground that the Revenue there did not challenge the finding that the assessed had used the machinery in the business of construction. Further, Bhageeratha Engg. dealt with a set of facts which did not involve the interpretation of the words construction, manufacture or production of any article or thing. No other decision of a larger Bench of the Supreme Court taking a view contrary to Budharaja has been brought to our notice. It continues to be the binding decision on the point.
18. In our considered view, the learned Counsel for the Revenue is right in her submission that Budharaja covers the case on hand in favor of the Revenue and against the assessed. On the facts pleaded by the assessed throughout, namely that it either engaged in construction activity itself or participated in such activity undertaken by the ECCL, the inescapable conclusion, on an application of the dictum in Budharaja, is that the assessed is disentitled to claim investment allowance on the dewatering equipment used in the construction by ECCL of the thermal power plant at Tuticorin.
19. The second submission of Mr. Sawhney that the 'thing' or 'article' which is produced or 'constructed' is the water that is extracted by the use of the dewatering equipment has only to be stated to be rejected. The assessed admittedly uses the equipment on land (or earth) that is not dewatered and the use of the equipment is expected to render such land de-watered. Land, an immovable property, cannot as explained in Budharaja fall within the ambit of 'thing' or 'article' as they are used Section 32A(2)(b)(iii). For the same reason we do not find the decision in Commissioner of Income Tax v. Sesa Goa Ltd. to be of relevance since in that case what was extracted after use of the machinery on land was iron ore, which is certainly a 'thing.'
20. The decision in Shaan Finance turned on a different set of facts. The main distinguishing feature is that, as the question framed for consideration there indicates, there was no dispute that the machinery was used by companies "engaged in the manufacture of an article or thing". Not one of them was a construction company, and if any of them was, the earlier decision in Budharaja would have negated their claim. Secondly, the companies claiming investment allowance were leasing companies and for the purposes of Sub-section (1) of Section 32A the equipment was 'wholly' used for such business of leasing. The assessed's case here was not that he was giving the equipment on lease or hire to ECCL. The Tribunal appears to have travelled beyond the pleaded facts in coming to such a conclusion. In any event, it was never the assessed's case that ECCL was producing any article or thing. On the facts pleaded ECCL was constructing a thermal power plant. Clearly, on these facts, Budharaja would knock out any claim of investment allowance. The third submission of the learned Counsel for the assessed does not merit acceptance.
21. We accordingly hold that, the assessed is not entitled to claim investment allowance on the dewatering equipment of the value of Rs. 10.54 lakh used in the construction work undertaken by ECCL. The question of law is answered in the negative, that is in favor of the Revenue and against the assessed.
22. The Reference is disposed of accordingly. Separate consequential orders are passed accordingly in each of the connected reference petitions.