Income Tax Appellate Tribunal - Chennai
Beacon Rotork Controls Ltd. vs Dy. Cit on 25 May, 2001
Equivalent citations: [2003]86ITD275(CHENNAI)
ORDER
Per Shri N. Barathvaja Sankar, A.M. As these cross appeals, one by the assessee and the other by the revenue for the same assessment year 1990-91 in the case of the assessee M/s. Beacon Rotork Controls Ltd., Madras, arise out of the same appellate order, 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. Let us first take up the appeal of the revenue in ITA No. 1856 (Mad.)/1993. The grounds of the revenue read as under :
"The learned Commissioner (Appeals) has erred in holding that the provision for warranty claims amounting to Rs. 7,90,000 should be allowed as a deduction.
2. The learned Commissioner (Appeals) has failed to note that the earlier order relied on in the assessee's own case for the assessment year 1989-90 has not been accepted by the department and an appeal before Appellate Tribunal has been filed and is pending."
At the time of hearing, to short circuit the proceedings, the learned counsel for the assessee (even though this is an appeal by the revenue) placed on record a paper-book consisting of 24 pages covering both the appeals of the revenue and that of the assessee. Adverting to page Nos. 17 to 24 of the said compilation (more particularly para 8 of the order of the Tribunal at pages 21 and 22 of the paper-book) the learned counsel for the assessee submitted that the point at issue is now squarely governed by the said order of the Tribunal in favour of the assessee. The learned departmental representative also fairly admitted that the point at issue is now governed by the said decision of the Tribunal. After hearing both the sides and considering the facts and the materials on record including the decision of the Tribunal, cited supra, we are inclined to dismiss the revenue's appeal by following the earlier decision of the Tribunal. Thus the revenue's appeal is dismissed.
3. Now let us turn to the assessee's appeal in ITA No. 1793 (Mad.)/1993. Briefly stated, the facts of the case are that while framing the assessment under section 143(3) of the Income Tax Act the assessing officer observed that the assessee had purchased machinery (computer) for Rs. 34,85,062 under the hire purchase agreement. The assessee had not paid any hire charges so far against that purchase of machinery. As per the provisions of section 32AB the deduction is allowable to the assessee only when the amounts are utilised out of the income chargeable under the head profits and gains of business by the assessee in purchase of an eligible asset, whereas in the case of the assessee there is no utilisation of any amount towards the purchase of the aforesaid machinery, according to the assessing officer. The assessee's representative contended before the assessing officer that the deduction should be allowed to the assessee even though the payment for the same has not been made since the assessee was following the mercantile system of accounting. The arguments put forward by the assessee's representative did not stand to the reason because the very stipulation in the section 32AB of the Income Tax Act that the amount should be utilised meant that flow of money should have been out from the assessee in purchase of the machinery, as per the assessing officer. in the case of the assessee it had not utilised or paid any amount and as such the claim of the assessee was not sustainable, according to the assessing officer. Thus he disallowed the claim of the assessee. While disallowing the claim of the assessee under section 32AB in respect of the computer, under the same section the claims made in respect of components for test rig imported at Rs. 7,416 and jigs and patterns at Rs. 6,14,306 were also disallowed by the assessing officer, which were remitted back to the assessing officer for fresh consideration by the Commissioner (Appeals) and hence these two issues are not subject matter of appeal before the Tribunal. In effect the only point at issue awaiting the adjudication of the Tribunal is whether the assessee is eligible for investment deposit allowance under section 32AB in respect of the computers costing Rs. 34,85,062. This disallowance was confirmed by the Commissioner (Appeals) also on appeal by the assessee and hence the second appeal by the assessee before the Tribunal. The grounds of appeal of the assessee are :
"1. The Commissioner (Appeals) erred in confirming that deduction under section 32AB was not allowable in respect of' computer acquired on hire purchase during the year ended 31-3-1990.
2. He should have found that since the appellant is following the mercantile system of accounting and income has accrued under mercantile system, the profits should be considered as having been utilised towards the acquisition of the computer for the purpose of section 32AB when the liability has been incurred for purchase of the asset.
3. Without prejudice to the above claim, the Commissioner (Appeals) should have directed the deduction of Rs. 1,51,452 being the amount paid during the year towards instalment of hire purchase in respect of machinery capitalised in the assessment year 1989-90 as that amount should be considered as 'utilised' and eligible for deduction under section 32AB."
The learned counsel for the assessee, Ms. B. Mala, Chartered Accountant, apart from relying on the grounds of appeal, contended, to say in brief that : The assessee was following mercantile system of accounting. Its income was charged on accrual basis; the computer was purchased and capitalised during the relevant period; and the appellant should be considered to have utilised the fund in respect of the purchase of the said computer for the purpose of section 32AB. Though payments were made later on, liability was created during the relevant period and creation of such liability for future payment should be treated as 'utilised' for the purpose of deduction under section 32AB. Section 32AB says that out of the profits the assessee should have utilised such sum either in depositing in account with IDBI before the expiry of six months from the end of the previous year or before furnishing the return of its income whichever is earlier or utilised any amount during the previous year for the purchase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account under clause (a). The section nowhere states that payment should be made in cash during the year under consideration. Only in case the assessee incurs a loss the assessee is not eligible for the claim of 32AB deduction. The Circular No. 9 of 1943.R.Dis. No. 27(4)-IT/43, dated 23-3-1943 while dealing with depreciation allowance on plant and machinery acquired on hire purchase agreement is also in favour of the assessee. In that Circular it is mentioned that payment on account of purchase, to be treated as capital outlay, depreciation being allowed to the lessee on the initial value (i.e., the amount for which the hired subject would have been sold for cash at the date of the agreement). In the case of Addl. CIT v. General Industries Corpn. (1985) 155 ITR 430 (Del) the Delhi High Court held that the assessee was entitled for depreciation in respect of the machinery purchased under the hire purchase agreement in conformity with the instructions contained in the above-said circular No. 9 and the other connected circulars. Following the same analogy for the purpose of section 32AB also the assessee is to be treated as eligible for investment deposit allowance in respect of the machinery purchased on hire purchase scheme.
4. On the other hand, the learned Departmental Representative vehemently countered, to say in brief, that the assessee had not paid any hire charges so far against the purchase of machinery (namely computers); that as per the provisions of section 32AB the deduction is allowable to the assessee only when the amounts are utilised out of the income chargeable under the head profits and gains of business of the assessee for the purchase of an eligible asset, whereas in the case of the assessee there is no utilisation of any amount for the purchase of the aforesaid machinery and that the very stipulation in section 32AB of the Act that the 'amount should be utilised means that the flow of money should have been from the assessee in the purchase of the machinery. He contended that in the case of the assessee it has not utilised or paid any sum and as such the claim of the assessee is not sustainable. A perusal of the provisions of section 32AB shows that the legislature placed emphasis on actual utilisation of the total income. There is no concept of 'deemed utilization', Further, the assessee had not become the owner of the computers as it had agreed to purchase the computers on hire purchase basis. (In this connection in page Nos. 3 and 4 of the paper-book, being the bilateral agreement between the assessee and the vendor may be seen) no sum out of the total income was utilised. The assessee has not paid any amount during the year under consideration towards purchase of the machinery on hire purchase. The phrase 'amount utilised' is to be read in conjunction with the word 'purchase' appearing in section 32AB. 'Purchase' is contra of 'sale'. For a valid sale there should be price paid or agreed to be paid. If the amount in not paid according to the hire purchase agreement, the vendor company can take back the asset as appearing from the bilateral agreement. As such there is no purchase of the computers as on a particular date and only the assessee was utilising it as a hirer. On completion of the payment towards hire charges as contemplated in the bilateral agreement the assessee would become the owner of the machinery. Thus the assessee was not the owner of the asset in the relevant previous year. In other words the assessee has not utilised any amount out of the profits and gains of business for the purchase of computers. The question of depreciation is different and it cannot be equated with the allowance under section 32AB.
5. We have heard the rival submissions at length and considered in entirety the submissions of both the sides alongwith the facts and the materials on record including the compilation filed by the learned counsel for the assessee and the circulars referred to. The brief point at issue awaiting our adjudication is whether the phrase 'utilised any amount during the previous year for the purchase of....' would mean whether there should be flow of money from the assessee's income in the purchase of the machinery during the relevant year under consideration or it need not be. Now, there is no dispute about the fact that the assessee has been following mercantile system of accounting and it had created liability for payment of hire charges upto the relevant year ending even though during the year the assessee has not paid the amount to the vendor company. The only point at issue is whether the assessee is eligible for deduction under section 32AB if it has not parted with the money in payment to the vendor out of the income of the previous year in question even though it had created a liability in its account for the said payment. The learned Departmental Representative had been arguing that the assessee was not the owner of the asset because the provisions of the hire purchase agreement state that the assessee shall become the owner of the asset only on completion of the entire payment as envisaged in the said agreement and for the time being (during the relevant previous year) the assessee was only holding the asset in trust for the vendor subject to the right to the user of the same. As regards this argument of the learned Departmental Representative the learned counsel for the assessee was relying upon the circular No. 9 of 1943 in the context of the allowance of depreciation on machinery on hire purchase scheme. While deciding the issue in respect of allowability of depreciation and development rebate, akin to investment deposit account, on hire purchase scheme and following the circulars dated 26-6-1959 and 15-7-1963 the Hon'ble Delhi High Court in the case of General Industries Corpn. (supra) has held that depreciation and development rebate are to be allowed to the assessee on the machineries purchased on hire purchase scheme. In this regard the following paragraph appearing in the said decision of the Delhi High Court is more relevant :
"On a careful examination of the nature of the hire-purchase agreement, it can be said that though it is worded as a hiring agreement which matures into a sale, it can also be regarded as a sale on instalments. The property passes in such agreements on the payment of the last instalment. However, during the period of hire, the purchaser is also paying the price, so virtually it is a sale on instalments. The circulars of the Central Board of Direct Taxes only serve to overcome a greater difficulty in computing how the various allowances have to be given to the assessee. If the payments towards the hire-purchase are not treated as being capital payments, they will have to be allowed as revenue payments, because the payments are certainly for business purposes and yet, if they are not treated as capital payments, they will necessarily be amounts expended towards the carrying out of the business. On the other hand, if the property passes at the time of the last instalment, then the entire revenue payment will be transformed into a capital payment at that stage. To meet this obvious difficulty, the Central Board of Direct Taxes has issued circulars at various times directing that assets purchased on hire-purchase basis should be treated as belonging to the assessee. The various documents filed along with the statement of case show that this position has been continuing for a very long time. Circular No. 9, dated 23-3-1943, issued by the Central Board of revenue directed that the periodical payments should be treated as (a) the consideration for hire to be allowed as a revenue deduction, and (b),a payment on account of purchase to be treated as a capital layout. It is also mentioned in that circular that depreciation should be allowed on the initial value, ie., the amount for which the hired object could be purchased in cash on the date of the agreement. The same view was reiterated by the Central Board of revenue in its circular dated 26-6-1959. The Central Board of revenue again reiterated its instructions in November, 1962, and again on 15-7-1963. In the Technical instructions of November, 1962, it is pointed out that if depreciation is not allowed to the user, the same cannot also be granted to the owner because he is not using the object for the business, ie., the result would be that neither the owner nor the hirer would get the allowance. This document points out that it is the person who runs the business who should get the allowance and not the formal owner.
As we see it, there is a real difficulty in determining who is to get the allowance and how much, which has been resolved by the circulars.
The judgments of the Supreme Court relied upon by the Tribunal, Navnit Lal C. Jhaveri v. K.K. Sen Appellate Assistant Commissioner (1965) 56 ITR 198 and Ellerman Lines Ltd. v. CIT (1971) 82 ITR 913, indicate that the circulars issued by the Central Board of revenue are binding on the income-tax authorities. We agree with the Tribunal, following the Supreme Court's judgments, that the circulars are binding arid in this case the circulars resolve a real difficulty in assessing the actual income of the assessee. The problem is common to all businesses where machinery purchased on hire-purchase is involved. We, answer the first question referred to us in the affirmative, in favour of the assessee and against the department."
In view of the above decision of the Delhi High Court we are inclined to hold that the assessee is the owner for the purpose of claim of investment deposit under section 32AB.
6.1 Now coming to the issue on hand whether actual payments should have been there during the previous year out of the income of the assessee (even though liability has been created by making provision in the accounts) for claiming deduction under section 32AB, we find that there is a direct decision on this issue rendered by the Ahmedabad Bench B of the Tribunal in the case of Dy. CIT v. Gujarat Instrument Ltd. (1998) 66 ITD 413. In that case, the assessee, in the return of income for the assessment year 1990-91 claimed investment deposit benefit under section 32AB on purchase of plant and machineries made during the year under consideration. The assessing officer rejected the relief claim in respect of the cost of some of the machineries on the ground that payments thereof were made after expiry of the relevant accounting year. On appeal the Commissioner (Appeals) held that since the delivery was taken before the end of the accounting year, the assessee-company could be said to have utilised the amount for purchase of new machinery or plant as required by section 32AB and, therefore, he allowed the assessee-company full benefit of the relief. However, on appeal by the revenue the Tribunal held as under :
"For availing the benefit under section 32AB the assessee has two options, either it can deposit the amount in an account referred to as deposit account with the Development bank before the expiry of 6 months from the end of the previous year or before furnishing the return of income whichever is earlier, or utilised the amount during the previous year for the purchase of any new ship, machinery, etc. Thus, specific period has been prescribed for utilising the amount for purchase of new ship, new aircraft or new machinery, etc. It is true that the amount for purchasing new ships, aircrafts, machineries, etc. should be utilised during the previous year. However, according to clause 9 of the Investment Deposit Account Scheme, 1986 notified by the Central Government, any amount out of such income without depositing the same under clause (a) of section 32AB(1) may be utilised for the purpose of purchase of new ship or new aircraft or new machinery for the purposes of business and profession carried on by the depositor. No such restriction has been imposed in the scheme that the assessee has to make actual payment of the cost of the machinery during the previous year in question. The scheme only provides if the assessee does not select to deposit in a deposit account maintained with Development Bank it may utilise the amount of income for the purchase of new ship, aircraft or new machineries, etc., for the purpose of the business or profession carried on by the assessee.
In the instant case, the machineries were purchased during the previous year and the assessee received delivery of the machines during the previous year. The only grievance of the revenue was that actual payments for the purchases were made beyond the previous year. Considering the plain reading of the section along with the Investment Deposit Account Scheme, the legislature did not intend to restrict the meaning of the language in such way as being interpreted by the revenue. The only consideration which was required under section 32AB(1)(b) was that the assessee had to utilise the income for purchase of new machineries and plant during the previous year. The Board's Circular No. 550, dated 1-1-1990 on the scope and effect of the amendments made in section 32AB by the Finance Act, 1989 was relevant.
Moreover, for the purpose of depositing in the investment deposit account, the legislature has prescribed a fixed period and that too upto six months from the end of the previous year or upto the furnishing of return whichever is earlier. Therefore it could not be assumed that in the second provision the legislature had intended to restrict the provision so that the assessee had to make actual payment of the cost of the machineries during the previous year for the purpose of availing deduction under section 32AB.
Considering the entire circumstances of the case, the finding recorded by the first appellate authority was upheld."
6.2 In the instant case on hand the facts are more or less the same, in the sense that in the case dealt with by the Ahmedabad Bench of the Tribunal it was the purchase of machineries for which payments were made later on, whereas in the case on hand before us it is purchase of machinery on hire purchase scheme. But the crux of the issue is whether section 32AB deduction can be claimed where machineries were purchased and delivery of machines taken by the assessee-company during the previous year but actual payments were made beyond the previous year and in such circumstances whether the assessee could be said to have utilised the amount for the purchase of the new machinery during the previous year. On similar facts the Ahmedabad Bench-B of the Tribunal has decided the issue in favour of the assessee by holding that in such circumstances as narrated above the assessee is eligible for deduction under section 32AB of the Income Tax Act, 1961.
6.3 Following the decision of the Ahmedabad Bench-B of the Tribunal, as extracted above, we are inclined to hold in the instant case on hand that the assessee is eligible for deduction under section 32AB, even though it has not during the relevant previous year, parted with the money in payment to the vendor out of the income of the previous year in question although it had created the liability in its accounts for the said payment. Thus the assessee's appeal is allowed.
7. In the result the revenue's appeal is dismissed and the assessee's appeal is allowed.