Income Tax Appellate Tribunal - Chennai
Poompuhar Shipping Corpn. Ltd. vs Jt. Cit on 23 November, 2001
Equivalent citations: [2003]85ITD564(CHENNAI)
ORDER
N. Barathvaja Sankar, A.M. These three appeals filed by the assessee-company M/s. Poompuhar Shipping Corporation Limited, Chennai, against the respective appellate orders of the Commissioner (Appeals)-V, Chennai, dated 31-1-2001, consist of identical grounds of appeal and hence the same were clubbed together, heard together and are being disposed of by this common and consolidated order for the sake of brevity and convenience.
2. The succinct facts of the case are that the assessee is a company wholly owned by the Government of Tamil Nadu, engaged in the business of plying/chartering ships/vessels. During the year 1985-86, relevant to the assessment year 1986-87 the appellant-company purchased in August, 1985 a ship known as M.V. Tamil Anna at a cost of Rs. 32,75,67,973. The appellant claimed an investment allowance of Rs. 8,18,91,993 for the assessment year 1986-87. During the year ended on 31-3-1987 the company purchased a ship known as M.V. Tamil Periyar on 30-9-1986 at a cost of Rs. 39,63,80,428 and M.V. Tamil Kamaraj at a cost of Rs. 40,00, 26, 286 in March, 1987 as per the details given below :
1.
M.V. Tamil Periyar cost Rs. 39,63,80,428
2. M.V. Tamil Kamaraj cost Rs. 40,00,26,286 Total Rs. 79,64,06,714 Add : Addition to cost because of exchange fluctuation Rs. 6,32,43,353 Rs. 85,96,50,067 The total investment allowance to which the assessee-company was entitled to in respect of the above two ships was Rs. 21,49,12,516. In addition to the aforesaid three ships the assessee-company purchased Dredger on 20-8-1990 for a sum of Rs. 87,98,435.
3.1 The appellant company debited to the profit and loss account and credited to the investment allowance reserve account the following amounts Sl. No. Assessment year Amount
1. 1986-87 Rs. 86,52,447
2. 1987-88 Rs. 1,43,295
3. 1992-93 Rs. 11,89,41,592
4. 1993-94 Rs. 8,58,75,046
5. 1994-95 Rs. 21,16,52,404 Total Rs. 42,52,64,784 The assessing officer originally allowed the claim of investment allowance of the assessee-company in the assessment years 1986-87, 1987-88 and 1994-95, but subsequently he invoked the provisions of section 155 read with section 154 and withdrew the investment allowance granted earlier on the ground that the appellant-company had not utilised the reserve for the acquisition of ships within the period of ten years.
4. Aggrieved by the above orders of the assessing officer the assessee-company took up the matter in appeal before the first appellate authority, who confirmed the orders of the assessing officer and dismissed the assessees appeals.
5. The assessee-company is still aggrieved and is on second appeal before us with this issue. At the time of hearing the learned counsel for the assessee Shri V. Ramachandran, senior advocate, strongly relied on the grounds of appeal raised before this Tribunal in the respective appeals and contended vehemently, to say in brief that : The investment allowance is granted under section 32A. The object of creation of a reserve and utilisation of an amount equal to the amount transferred to the reserve is to ensure that an asset is acquired and the amount is not utilised for any other purposes. The question as to whether a reserve should be created even when there is no profit came up for consideration before the Honble Supreme Court in the case of Shri Shubhlaxmi Mills Ltd. v. Addl. CIT (1989) 177 ITR 193 (SC), where the court held that the creation of a reserve is mandatory and consequently even where the assessee does not have sufficient profit, a reserve is liable to be credited in order to entitle the assessee to the benefit of investment allowance. The above decision explains the nature and object of the creation of the reserve. There is no requirement under the Act that the amount of reserve as created should be kept separately or apart. The creation of a reserve does not necessarily involve the earmarking of the funds separately. Even where a reserve is created, the funds can be utilised and the funds need not identified separately. The requirement of law is only that subsequent to the year in which the investment allowance is granted or the assessee is entitled to the investment allowance consequent on the acquisition of a new asset, the assessee should obtain any other specified asset of an amount equal in value to the extent of the reserve. The principles of accountancy is thus clear and does not require an identity between the amount transferred to reserve and funds utilised to acquire the new asset. The requirement of law is only that the assessee should acquire an asset on any date subsequent to the acquisition of the asset in respect of the investment allowance is claimed and the value of the asset so acquired should be equal to or in excess of the amount of reserve that the assessee is required to create under section 32A. Applying the above position it can be seen that the assessee has acquired four vessels in the following order :
1.
M.V. Tamil Anna 2-8-1985
2. M.V. Tamil Periyar 30-9-1986
3. M.V. Tamil Kamanaj 8-1-1987
4. Dredger 20-8-1990.
6.1 It would be noted that the cost of the vessel M.V. Tamil Periyar covers the amount of investment allowance that is created in respect of the ship M.V. Tamil Anna. The investment allowance granted in the case of M.V. Tamil Anna is a sum of Rs. 8,18,91,973 and the reserve is only 75 per cent thereof. The cost of the ship M.V. Tamil Periyar is Rs. 39,63,80,428 without taking into account the addition to the cost on account of exchange fluctuation.
6.2 In respect of the ship M.V. Tamil Periyar the investment allowance is approximately Rs. 10 crores and the reserve is 75 per cent thereof while the cost of M.V. Tamil Kamaraj acquired in January 1987 is Rs. 40,00,26,286.
6.3 In addition, the appellant has acquired a dredger on 20-8-1990 for Rs. 87,98,435. Hence the cost of the vessels acquired by the appellant after each earlier acquisition of vessel in respect of which investment allowance is granted would far exceed the investment allowance reserve. Consequently the requirement of the statute is satisfied in the instant cases.
6.4 Your further attention may be invited to the particulars of the debit to the profit and loss account and the credit to the investment reserve which is referred to above. This is extracted in the order under section 155 for the assessment year 1987--88. It may also be seen therefrom that the investment allowance granted for the years 1986-87 and 1987-88 is far below the value of the ship acquired in 1987. Similarly the investment allowance debited in respect of the years 1992-93 to 1994-95 is fully covered by the value of the aforesaid two ships M.V. Tamil, Periyar and M.V. Tamil Kamaraj.
6.5 The courts have clearly held that a beneficial provision like section 32A has to be interpreted and applied liberally. The perusal of the objects with which the above provision is introduced would clearly show that the objective is to ensure that the investment allowance granted is used for rehabilitation of assets. This objective is fully satisfied in the instant case. The requirement of law is that in respect of which investment allowance is granted to the extent of the amount that is required to be transferred to the reserve the assessee should require new assets. This requirement is also satisfied in the instant case. Kind attention is invited to the following decisions of the Supreme Court where the court has field that a beneficial provision should be interpreted in a liberal manner.
6.6 The decision of the Supreme Court in Garden Silk Wvg. Factory v. CIT (1991) 189 ITR 512 (SC); CIT v. Mangalore Chemicals & Fertilizers Ltd. (1991) 191 ITR 156 (Karn) and Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC). In the above cases the Supreme Court categorically held that a provision granting incentive should be liberally considered.
6.7 In view of the above legal and factual position it is submitted that the withdrawal of the investment allowance for the aforesaid three assessment years is not justified.
7. On the other hand, the learned Departmental Representative Shri A.K. Nigam, Commissioner (Income Tax Appellate Tribunal), strongly supported the orders of the revenue authorities and contended, to say in brief, that : The assessing officer, in his revision orders dated 27-3-2000 (for the assessment years 1986-87 and 1987-88) has brought out the details of investment allowance reserve created by the assessee for the years following which the deductions under section 32A were allowed for the three assessment years relevant for the consideration of the Tribunal. The appellant contends that the investment allowance reserve created by it should be held to have been utilised for the acquisition of the ships, namely, M.V. Tamil Anna(in the year 1985-86) and M.V. Tamil Periyar (in the year 1986-87). The assessing officer has brought out the facts in his revision orders so as to show that the acquisition of these ships cannot be held to have been made by utilising the investment allowance reserves, which came to be created (to the extent of specified percentage) much later. The creation of investment allowance reserve thus being a much later occurrence rules out the possibility of these reserves having been utilised for the ships at an earlier stage. Obviously, the utilisation of reserve could not have preceded the creation of reserve itself.
8.1 The appellant seeks to interpret that the acquisition of ships in the previous years 1985-86 and 1986-87 (relevant to the assessment years 1986-87 and 1987-88 respectively) has to be treated as representing utilisation of the investment allowance reserve, admittedly created later. No such deemed utilisation of reserves, having a retrospective application, is envisaged in the provisions. Besides, the provisions require the utilisation of reserve for acquisition, within the immediately following ten years, of new eligible asset (ships in the instant case) and not the eligible asset (i.e., ship) due to acquisition of which the assessee becomes entitled (subject to the conditions prescribed) for a deduction under section 32A. The benefit of deduction hinges on two conditions, as stipulated under section 32A(4)(ii) :
(i) Having acquired the eligible asset initially an investment allowance reserve of the specified percentage has to be created, and
(ii) the investment allowance reserve so created is utilised for acquisition of new eligible asset within a period of immediately following ten years.
8.2 In the event of the investment allowance reserve is not utilised for acquisition of a new eligible asset, within the time frame prescribed, the benefit of deduction if already allowed shall have to be withdrawn as per the provisions of section 32A(5) (a), (b) and (c). Here again it needs to be emphasised that all the situations stipulated in clauses (a), (b) and (c) of section 32A(5) do not have to take place. Occurrence of any one of the situations shall disentitle the assessee from the benefit of deduction and shall thereby warrant withdrawal of deduction. This perception is further reinforced by the provisions of section 155(4A)(b). The benefit of deduction which flows from the statute could be derived only by a strict adherence to the conditions stipulated in the provisions. As the appellant in the instant case failed to fulfil the requisite conditions prescribed in this behalf the withdrawal of investment allowance was absolutely justified. The orders of the lower authorities on the issue, therefore, need to be upheld.
9. We have heard the rival submissions and considered the facts and the materials on record including the impugned orders and the case laws relied upon by the learned counsel for the assessee. On a careful perusal of the facts and the materials in the light of the rival submissions, it can be seen that the crux of the issue awaiting our adjudication is whether the investment allowance reserve created much later to the date of acquisition of new ship (other than the original ship in respect of which investment allowance reserve has been created) can be said to have been utilised for acquisition of the news ship (other than the original ship with respect to which the investment allowance reserve was created). No doubt a beneficial provision like section 32A is to be interpreted and applied liberally, but any such interpretation or liberality cannot go beyond the provisions of the section itself. While allowing an incentive the section is to be liberally interpreted, but at the same time if the conditions specified in the incentive section are not fulfilled, while withdrawing the benefit already allowed the assessee cannot expect any further concession or liberality. According to section 32A, as rightly contended by the learned Departmental Representative the first occurrence should be the purchase of eligible asset (original ship in this case) followed by (or simultaneously) the creation of investment allowance reserve at a specified percentage of the cost of the ship. The next step would be the utilisation of the investment allowance reserve in the purchase of new eligible asset (new ship) within the specified period of ten years next following the previous year in which the ship (original ship) was acquired. In this case on hand the assessee has purchased the new ships (M.V. Tamil Periyar and M.V. Tamil Kamaraj) well before the creation of the investment allowance reserve in respect of the original ship (M.V. Tamil Anna). The argument of the learned counsel for the assessee that the purchases of the vessels M.V. Tamil Periyar and M.V. Tamil Kamaraj (during the year 1986-87) are to be treated as out of the investment allowance reserve created much later, appears to be putting the cart before the horse. No doubt, the investment allowance reserve created need not be earmarked and kept apart to be utilised only in the purchase of the new ship but can be utilised for the purposes of the business as specified in the section itself. It does not mean that the assessee can claim, even without creating the reserve, that it had utilised the reserve in the acquisition of new ship, much before the creation of such reserve itself. The learned counsel for the assessee has argued that the requirement. of law is only that the assessee should acquire an asset (new ship) on any date subsequent to the acquisition of the asset (original ship) in respect of which the investment allowance is claimed and the value of the asset so acquired (new ship) should be equal to or in excess of the amount of reserve that the assessee is required to create under section 32A (with respect to the original ship). However, we are unable to accept this argument of the learned counsel for the assessee for the simple reason that in section 32A itself it is stated under sub-section (4)(a) as follows :
"Investment allowance reserve account to be utilised for the purpose of acquiring, before the expiry of a period of ten years next following the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, a new ship or new machinery or plant (other than machinery or plant of the nature referred to in clauses (a), (b) and (a) of the second proviso to sub-section (1) for the purposes of the business of the undertaking."
Even though section 32A permits creation of reserve in subsequent years due to insufficiency of profit for creation of reserve, it is nowhere stated in the section that the reserve can be created in respect of original ship, subsequent to the acquisition of the new ships in satisfaction of the utilisation of reserve in respect of the original ship purchased. Section 32AB (Investment deposit account) permits the assessee to utilise the profits of the year for the purchase of the eligible asset in the same year itself, although it permits the assessee even to deposit such amount with IDBI to be eligible for deduction under section 32AB. But we do not find anything in section 32A permitting the assessee to purchase a new asset in satisfaction of the utilisation of the reserve created in respect of an originally purchased asset even without creating such reserve in respect of the original asset purchased.
10.1 section 155(4A) reads as under :
"Where an allowance by way of investment allowance has been made wholly or partly to an assessee in respect of a ship or an aircraft or any machinery or plant in any assessment year under section 32A and subsequently
(a) * * ** **
(b) 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) of section 32A 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 (c) of the second proviso to sub-section (1) of section 32A) for the purpose of the business of the undertaking.
(c) ** ** ** the investment allowance originally allowed shall be deemed to have been wrongly allowed and the assessing officer may, notwithstanding anything contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the profit of four years specified in sub-section (7) of that section being reckoned."
A combined reading of sections 32A, 155(4A) and 154 would clearly show that if an assessee fails to utilise the investment allowance reserve created against the purchase of an original ship within a period of ten years from the year of purchase of the original ship in purchase of a new ship the assessee is entitled to lose the benefit given under section 32A originally. If the intention of the legislature is otherwise (i.e., in line with the learned counsels contention), the legislature need not have engrafted section 32(4)(a) and section 155(4A) in the statute book.
10.2 In this case on hand the assessee has not purchased a new ship after the creation of the reserve in respect of the ship originally purchased. On the other hand, even before the creation of the reserve in respect of the original ship purchased has been completed (spread over the various assessment years), the assessee company has acquired new ships and is trying to link those purchases to the subsequent creation of the reserve (in respect of the old ship).
10.3. The learned first appellate authority in the appellate order dated 31-1-2001 for the assessment year 1986-87 at page 3 has observed as under :
"In this connection a reference is invited to page 1157 of Income Tax Law by Chaturvedi and Patisaria (Vol. I 1991 edition) where the conditions regarding the investment allowance reserve are discussed as under :
The amount in such reserve (investment allowance reserve) must be utilised for the purpose of acquiring within the next following ten years, a new eligible asset for the purpose of business of the undertaking itself. (Section 32A(4)(ii)), From the above it is clear that the amount from the investment allowance reserve should be utilised for the purpose of a new ship within the next following 10 years after the reserve is created. In this case, the reserves are created only in this subsequent assessment year and since the two ships were purchased in the assessment year 1987-88 itself the said purchases cannot be considered as utilisation of the reserve.
Another reference is also drawn to page No. 1163 of Income Tax Law by Sri Chaturvedi & Pithisaria (Vol. I 1992 edition) where dealing with the distinction between development rebate and investment allowance the following observation has been made viz., :
As regards condition No. V the important point of distinction is that the amount credited to the investment allowance reserve is necessarily required to be ploughed back and utilised for acquiring before the expiry of the period of 10 years next following another eligible asset.
From this observation also it is to be construed that the amount to be utilised is only out of the amount credited to investment allowance reserve and hence if any purchase precedes the deposit into the reserve that cannot be considered as utilisation of the reserve.
From the foregoing observations and on the facts pertaining to the case of the assessee-company it is obvious that the investment allowance reserve created with reference to the acquisition of the ship M.V. Tamil Anna during the previous year relevant to the assessment year 1986-87 has not been utilised for acquisition of another eligible asset within 10 years next following the financial year 1985-86. In the above circumstances the assessee-company is not entitled for their investment allowance claim amounting to Rs. 8,18,91,993 relating to the assessment year 1986-87 and accordingly the same is withdrawn under the provisions of section 154 read with section 155(4A) of Income Tax Act."
For the same reasons the Commissioner (Appeals) for the assessment years 1987-88 and 1994-95 withdrew the investment allowance granted to the assessee earlier in respect of those assessment years.
10.4 In the light of the above discussion we find force in the contention of the learned Departmental Representative that the acquisition of the ships M.V. Tamil Periyar and M.V. Tamil Kamaraj cannot be held to have been made by utilising the investment allowance reserve which came to be created much later. A non existence reserve cannot be said to have been utilised. In other words, the utilisation of reserve could not have preceded the creation of reserve itself. Hence we do not find any infirmity in the orders of the revenue authorities and as such we are inclined to uphold the orders of the first appellate authority in all these years as regards the withdrawal of the benefit given under section 32A by invoking the provisions of sectionl54 read with section 155(4A) of the Income Tax Act.
11-12. (These paras are not reproduced here as they involve minor issues)