Income Tax Appellate Tribunal - Delhi
Sagar International (P) Ltd. vs Income-Tax Officer on 31 July, 1991
ORDER
M.C. Agarwal, Judicial Member
1. This is an assessee's second appeal arising out of its assessment for the assessment year 1984-85. We have heard learned counsel for the assessee and the learned Departmental Representative.
2. During the year under consideration, the assessee claimed to have installed certain plant and machinery and claimed investment allowance in relation thereto. The Assessing Officer found that the said plant and machinery was not used in the year under consideration and he, therefore, declined to grant investment allowance for the assessment year 1984-85. The assessee appealed to the Commissioner of Income-tax (Appeals) who has upheld the Income-tax Officer's view.
3. Learned counsel for the assessee contended that, under Section 32A, investment allowance can be claimed either in the year in which the plant and machinery was installed or in the year in which it was used for the purposes of business. According to him, therefore, the assessee was entitled to investment allowance for the year under consideration since the plant and machinery had actually been installed in this year though the same was, admittedly, not used for the assessee's business in the year under consideration. The reason for not putting to use the plant and machinery was that the assessee was not granted electric connection in the relevant previous year and hence the plant and machinery could not be used. He placed reliance on a judgment of the Hon'ble High Court of Delhi in Capital Bus Service (P) Ltd. v. CIT [1980] 123 ITR 404, in which it was held that, where motor buses were kept ready for running on contract basis on temporary permits, they must be held to have been used for the purposes of business though they were not actually used. The Hon'ble High Court held that keeping the buses ready for use amounted to their use for business. The learned Departmental Representative, on the other hand, contended that none of the contentions raised by the assessee's counsel is tenable and that where installation and use fall in different previous years, investment allowance can be granted only, in the year in which the machinery is actually put to use.
4. Section 32A, which governs the grant of investment allowance, reads as under :
" 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 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 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."
5. A reading of the above provision would show that in a case where the plant and machinery is installed in one year but is put to use in the immediately succeeding previous year, then investment allowance will have to be granted in respect of that previous year, i.e., the immediately succeeding previous year. The use of the word " then " is important and clearly indicates that where the installation of the plant and machinery and its user are in different previous years then the investment allowance will be granted in respect of the succeeding previous year. Admittedly, in the present case, the machinery was not used in the previous year under consideration. Whether it was used in the immediately succeeding previous year or not has not been brought out on record. In the paper book, there is at page 4 a letter from the Delhi Electricity Supply Undertaking which states that the assessee's HT connection was energised on January 5, 1985. The assessee's accounting year is the financial year and this letter indicates that, even in the immediately following assessment year that would end on December 31, 1984, the assessee's business of manufacturing of iron and steel from scrap had not commenced.
6. The provisions of Sub-section (5) of Section 32A also need careful consideration. Sub-Section (5) deals with contingencies under which investment allowance granted earlier may be withdrawn. Those contingencies are (i) if the plant and machinery is sold or otherwise transferred before the expiry of 8 years ; (ii) if the assessee before the expiry of 10 years does not utilise the investment allowance reserve for the purposes specified in Clause (b) ; and (iii) if, before the expiry of 10 years, the assessee utilises the amount credited to the investment allowance reserve account for distribution of dividends, etc. Sub-Section (5), thus, does not contemplate withdrawal of investment allowance in a case where after installation of the plant and machinery, the assessee fails to use that machinery for the purposes of the concerned business. The omission to provide for withdrawal of investment allowance in case of non-user of the plant and machinery is not accidental. The provisions of Sub-section (5) show that actual user of the plant and machinery for the concerned business was contemplated as one of the conditions for the grant of investment allowance and that is the reason why the Legislature did not provide for withdrawal of investment allowance due to non-user of the machinery for specified purposes.
7. Reference could be made to two circulars of the Central Board of Direct Taxes. Circular No. 259 (see [1981] 131 ITR (St.) 70), dated July 11, 1979, deals with the creation of development rebate reserve under Section 34(3) and states that the relevant requirement will be considered to have been satisfied if the accumulated reserve is created in the year in which there is profit. This circular, therefore, does not relate to investment allowance admissible under Section 32A. Circular No. 324, dated February 3, 1982, reported in [1982] 135 ITR (St.) 4, 5, also deals with the subject of creation of reserve by tea companies under Section 32A. It does state that the allowance is permissible in the year of installation or the immediately succeeding year but that is a casual remark and not the considered opinion of the Board with reference to any fact. The Board was concerned with the question of creation of reserve and it is only to that extent that the Board can be said to have issued instructions regarding the interpretation of Section 32A. The Board was not concerned about the implications of " installation" and of non-user of the machinery in the previous year in which it was set up or in the succeeding year and hence that circular can confer no benefit on the assessee. Even otherwise, a circular of the Board cannot affect the true position of law (Shri Shubhlaxmi Mills Ltd. v. Addl. CIT [1989] 177 ITR 195 (SC)).
8. In the particular facts of this case, the installation of plant and machinery cannot be said to be complete. As is evident from the facts of the case, the plant and machinery was such that it could not be used without electricity and the assessee, admittedly, did not have any electricity connection for running the said plant and machinery. The absence of electricity has been stated to be the cause for not being able to use the plant and machinery in the previous year under consideration. Therefore, in our view, installation of plant and machinery cannot be said to be complete till it is linked with any electricity supply line so that it can be used at the will of the assessee. Since there was no electricity, it cannot be said that the machinery was kept ready for use in the assessee's business and the ratio of Capital Bus Service [1980] 123 ITR 404 (Delhi) also cannot be applied.
9. In our view, the word " installed " has to be interpreted with reference to the language of Section 32A. Section 32A requires that the machinery or plant" is wholly used for the purposes of business carried on by him" ; this means that, before the investment allowance can be granted, the assessee has to prove that the plant and machinery is wholly used for the purposes of the business carried on by him. In the present case, the business of manufacturing of iron and steel did not exist during the previous year under consideration and, as stated above, when it actually came into existence is also not known and, therefore, it is not established that the plant and machinery is wholly used for the purpose of the business carried on by the assessee. The situation may be different in a case in which the business contemplated in Section 32A(2)(b) is already in existence and some new plant and machinery is added. In that case, mere setting up of the plant and machinery so as to be ready for use at will may be sufficient but we have before us a case in which the assessee was in the process of setting up a business for the manufacture of iron and steel and, for that purpose, it set up a factory. The plant and machinery with which we are concerned was fixed in position but the factory could not be started for want of electricity which was not provided to the assessee even in the immediately succeeding year.
10. For the above reasons, we uphold the orders of the authorities below. The appeal is, accordingly, dismissed.
11. Per A. KALYANASUNDHARAM (Accountant Member). --I have had the benefit of going through the order of my learned brother, but I am not able to convince myself to the views expressed by him and I am, therefore, drawing my conclusions on the issue. My learned brother has expressed that Section 32A of the Act intended allowing of the investment allowance only when the machinery is actually used and since in the relevant previous year the machinery, though placed in position, but the electric connection not having been provided, the assessee could not use the machinery for its business of manufacture.
12. The claim is related to the investment allowance on the basis of the machinery being installed in the previous year relevant to the assessment year under appeal. The claim of the appellant is based on the fact that the installation of the machinery was completed, but the same could not be used, for the reason of electricity connection not being granted, though it had applied for the same. Admittedly, the electric connection was energized in January, 1985, and the assessee started its manufacturing operation in the previous year relevant to the assessment year 1985-86 (this has been so noted by the Assessing Officer in the assessment order'). The appellant is of the opinion that the absence of the electric connection has nothing to do with its claim of investment allowance, because the Act has specifically provided for the grant of the investment allowance either in the year of installation or in the year immediately succeeding the year of installation, in which year the machinery must have been put to use. According to the appellant, electricity is required for the operation of the machine, which is related to its usage and the Act does not envisage putting to use of the machine in the year of installation.
13. The short question in my humble view that needs to be examined and given finding of is whether the machinery could be said to have been installed when the electric connection remains to be provided or it could be said that the installation is complete only when the electric connection has been provided.
14. The term " installation" means apparatus placed in position for use, a placing in position for use (Chambers' Twentieth Century Dictionary, 1972 edition, page 679). Therefore, it is clear that placing of an apparatus or a machinery for use or to be used in the future indicates that the installation of the apparatus or the machinery is complete. The term " put to " has been defined as to apply, to add to, to connect with, to set to (Chambers' Twentieth Century Dictionary, 1972 edition, page 1096). The term " usage " has been defined in the same dictionary at page 1494 as use, act or mode of using, treatment and the term " use" has been defined as to put to some purpose, to make use of, etc. Therefore, it is clear that the Legislature when they had introduced the provision of allowing of the investment allowance either in the year of installation or in the immediately succeeding year, when it is first put to use, were very clear about the distinction between the two terms " installation" and " put to use" and they had envisaged situations of installation being in one year and the machinery being put to use in the immediately following year, thus providing that the benefit would be allowed in either of the two years.
15. The investment allowance was substituted in place of development rebate, but, the initial preamble or starting paragraphs in the two Sections contained identical phrases, i.e., allowing of development rebate either in the year of installation or in the immediately succeeding year, when it is put to use. The term " installed" came to be examined by several courts and the general consensus was that it meant to place an apparatus in position for use. The true test for finding out whether the machinery has been installed or not, is to see whether it has been so placed in position, which would ensure its usage, i.e., it should be ready for operation. The judicial opinion has been rather uniform in so far as the claim of the investment allowance being granted only in the year when the installation could be said to be complete, though the installation may take more than one year. The authority on this point is CIT v. Saurashtra Wire-healds Mfg. Co. P. Ltd. [1968] 67 ITR 524 of the Gujarat High Court in which case the installation of the machineries took two years and the assessee had claimed the development rebate in the second year of purchase in which year the installation was completed. The court Ruled that it is the date of completion of the installation which would be determinative of the year when development rebate may be claimed. Therefore, it could be deduced that it was never the intention of the Legislature to combine the two circumstances into one, i.e., installation and putting to use as co-existent, for the grant of the investment allowance.
16. Having come this far, the question that now remains for consideration is whether the installation could be said to be complete in the absence of electric connection. It may be observed that the assessee intended to manufacture S.S. Flats with the help of the machinery which it had installed, but the electric connection alone remained. In other words, the machinery has been placed in position for start of the production and the moment the electric connection is made available, the machinery would start its operation of manufacture. The electric connection is required for operation of the machines with which the S.S. Flats would be produced. Therefore, the impediment in the manufacture of S.S. Flats is the non-availability of electricity, which is clearly indicative of the fact that, but for the availability of the electric connection, all other actions have been completed in so far as the machineries operation or it being put to use. Thus it could be safely concluded that electricity is required for putting the machinery to use and in its absence, the machinery could be said to be completely installed because electricity has no role to play in the installation of the machinery.
17. Section 32A also contains the phrase " wholly used for the purpose of the business". As observed earlier, it is not necessary that in the year of installation, the machinery should have been put to use and that too wholly for the purpose of the business. The term " wholly " has been derived by the courts to mean in entirety i.e., no part of the machinery is used for non-business purposes. It has been observed earlier that use of the machinery may follow the year of installation and if so, how can the machinery be said to be used for the purposes of the business, and that too wholly, in the year of installation when the machinery has been merely placed in position and is readied for operation which was to follow ? The, Madras High Court had occasion to consider this question of use of the machineries in CIT v. Vayithri Plantations Ltd. [1981] 128 ITR 675. It was Ruled that the term " user" includes both the active and the passive user. It was also Ruled that "any forced idleness like strike, etc., cannot disentitle the assessee from getting the benefit of development rebate on the ground of non-user."
18. Therefore, the machinery having been completely installed in the previous year, and the Act envisaging its being put to use subsequently and not necessarily in the year of installation itself, the claim of grant of investment allowance in the assessment year under appeal is fully justified. I therefore, allow the same.
ORDER OF REFERENCE TO THIRD MEMBER
19. In the above-noted appeal we, the Members of ' D' Bench have differed on the question whether the disputed plant and machinery could be said to have been installed in the previous year relevant to the assessment year 1984-85 within the meaning of Section 32A of the Income-tax Act, 1961. We, therefore, state the following point of difference to the Hon'ble President of the Appellate Tribunal under Section 255(4) :
" Whether, on the facts and in the circumstances of this case, the plant and machinery can, for the purpose of grant of investment allowance under Section 32A, be said to have been installed in the previous year relevant to the assessment year 1984-85 ?"
ORDER OF THIRD MEMBER G. Krishnamurthy, President
20. The Members constituting Delhi Bench " D " differed on the question whether the disputed plant and machinery could be said to have been installed in the previous year relevant to the assessment year 1984-85 within the meaning of Section 32A of the Income-tax Act, 1961. They formulated their point of difference in the following words and referred it to the President under Section 255(4) of the Income-tax Act, for the nomination of a Third Member ;
"Whether, on the facts and in the circumstances of this case, the plant and machinery can, for the purposes of grant of investment allowance under Section 32A, be said to have been installed in the previous year relevant to the assessment year 1984-85 ? "
21. That is how the matter has come before me as a Third Member.
22. The assessee, a limited company, engaged in the purchase of scrap and converting it into flats and selling them claimed investment allowance on a machinery said to have been installed at a cost of Rs. 18,93,995. The accounting year for the assessment year under appeal is the calendar year ending on December 31,1983. The Income tax Officer disallowed the claim of the assessee on the ground that the machinery was not used either in the year under appeal or in the immediately succeeding previous year which are the conditions precedent for the grant of investment allowance. According to the Income-tax Officer, this machinery was used only for some time in the year 1985 which was far removed by two years from the end of the previous year to which this appeal related and, therefore, the assessee forfeited the right to claim investment allowance.
23. When the matter came up in appeal before the Commissioner of Income-tax (Appeals), it was pointed out to him that though the erection of the machinery was complete in all respects, the assessee could not get electricity connection and, though it could not run the machinery, yet the requirements of Section 32A were satisfied, and the assessee was entitled to the claim. Reliance for this view was placed on the decisions in CIT v. Vayithri Plantations Ltd. [1981] 128 ITR 675 (Mad), Capital Bus Service (P) Ltd. v. CIT [1980] 123 ITR 404 (Delhi) and CIT v. Mir Mohammad Ali [1964] 53 ITR 165 (SC). The Commissioner of Income-tax did not agree with the assessee's contention. Relying upon the language used in Section 32A and a decision of the Hon'ble Madhya Pradesh High Court in the case of CIT v, Jiwaji Rao Sugar Co. Ltd. [1969] 71 ITR 319, he held that, since the machinery was not used in the year under appeal, the assessee was not eligible to claim the investment allowance on the machinery. By implication, he held that, even though the machinery was erected and was kept ready for use, if it was not used for any reason, which amounted to non-user of the machinery, thus disentitling the assessee from claiming investment allowance. Thus, user of the machinery even for a part of the accounting year, according to him, is absolutely essential.
24. Then the matter came before the Tribunal. The learned Judicial Member agreed with the view of the Department. He held that the machinery was still in the process of being set up. His view was that though the plant and machinery was fixed in position, the factory could not be said to have used the machinery because electric connection was not given. According to him, user of the machinery was implicit in the process of installation, and installation of machinery was not complete till it was used and it was not used for lack of electric connection. But the learned Accountant Member had taken the opposite view. According to him, it was not necessary to combine the two circumstances, namely, installation and putting to use of the machinery into one integrated whole as coexistent for the grant of investment allowance. The learned Accountant Member further held that when the machinery was made ready for use, but could not be used for want of electric connection, it could not be said that the machinery was not installed, and that amounts to putting it to passive user though not active user. According to him, the decision of the Madras High Court in the case of CIT v. Vayithri Plantations Ltd. [1981] 128 ITR 675, which propounded this theory of passive user also coming within the purview of the word " user " governed the case. These are in the main the salient features of the difference of opinion and the background of the case in which I have to operate.
25. I have heard carefully the arguments addressed to me by both counsel. Before I proceed to express my view on the subject, I wish to make a reference to Section 32A of the Income-tax Act, under which this claim was preferred :
" 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 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 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."
26. An analysis of the Section would show that, for the entitlement of the claim for investment allowance, the following ingredients are absolutely necessary ;
(i) The machinery or plant must be one specified in Sub-section (2) of Section 32A.
(ii) It must be owned by the assessee.
(iii) It must be wholly used for the purpose of the business carried on by the assessee.
27. If these essential ingredients are present, then the Section proceeds to lay down the previous years in which the allowance is to be made. That is first in respect of the previous year in which the machinery or plant was installed or, secondly, if the machinery or plant is first put to use in the immediately succeeding previous year, then in respect of that previous year. In other words, the Legislature intended the allowance of the investment allowance to be given either in the previous year in which the plant or machinery was installed though not used, or in the previous year when it was first put to use, provided it is the immediately succeeding previous year. It is now accepted that, in the present case, the machinery was not used in the previous year under consideration whatever may be the reason for non-user. It is also an admitted fact that even in the immediately succeeding previous year, the machinery was not brought to use because, according to the learned Judicial Member's order, the electricity connection was given only on January 5, 1985. In other words, till the electric connection was given, the machinery was not used.
28. Now, reverting to the ingredients, before we fix the previous year in which the investment allowance can be allowed, it has to be shown that the machinery was used for the purpose of the business carried on by the assessee. Thus user of the machinery for the purpose of the business carried on by the assessee is an essential requirement for the grant of investment allowance. The machinery was definitely used from January 5, 1985, onwards though that date fell outside the previous year for the assessment year under appeal as also the next previous assessment year. That user is undoubtedly the user of the machinery in the assessee's business. That requirement is thus satisfied. Now, the question is whether the machinery could be said to have been installed in the year under appeal, though not used in that year. In this year, the erection of the machinery was complete. There was no disagreement or dispute about that fact. As the Section shows, if the machinery was used for the purpose of the business, the year in which the investment allowance is to be allowed is either the previous year in which the machinery was installed or the previous year in which the machinery is first put to use provided it is the immediately succeeding previous year. The phrase " in the immediately succeeding previous year" denotes the previous year succeeding immediately the previous year in which the machinery was installed. In one of the two previous years, the investment allowance has to be given but it cannot be denied. Suppose the machinery was installed and thereafter some problems arise, and the user was postponed, then the claim cannot be disallowed on the ground that the machinery, though installed, was not used in the immediately succeeding previous year. Thus, the investment allowance can be allowed in the year of installation, which means that installation does not take within its meaning " user " also. While the user of machinery pre-supposes installation, the installation does not mean that it should be used, except that the machinery should be kept ready for use. If, as argued for the Department, installation means and takes in user also, then there is no necessity to provide that the investment allowance could be allowed in the next succeeding previous year when it was first put to use. This alternate provision to allow the claim in the year in which it was first put to use must suggest that installation of machinery means only keeping the machinery all set and fit for use. Since the Section categorically states that investment allowance can be allowed either in the year of installation or in the previous year in which the machinery or plant was first put to use, it is clear to me that " installation " does not mean that the machinery was used. But the question is whether installation is complete without electric connection. Electric connection is always in the realm of user, i.e., starting the machinery to function. Take an example. If an air-conditioner is installed in a factory or an office, it does not start functioning until the current is supplied. But that is not to say that air-conditioner was not installed. A lathe, for example, in a factory. A lathe is fixed and made ready for use. No sooner electric connection is provided, it starts functioning. Thus, function is different from and precedes installation and the work of installation is said to be complete when the machinery is made ready for use.
29. The word " installed " has received judicial interpretation in several cases and thus its meaning is no more " res Integra ". " Installed " means nothing more than being set up in the proper place and condition anterior to use. The provision made for the alternative requirement in the Section, as said earlier, shows that the Legislature realised that it is not always possible for the machinery to be used in the year of installation. The commentary on the word " installed " in Sampatk Iyengar's Law of Income Tax, eighth edition, at page 1716, reads as under :
" In the initial stages, when development rebate was introduced, the Department was inclined to place a strict construction on this expression. Its stand was that the meaning of the word 'installed' should be taken to be fixing an apparatus in position' and that the allowance should be restricted to machinery or plant which was capable of being affixed or fixed to a position. The courts, however, did not accept this contention and took the view that the word ' installed ' did not necessarily mean ' fixed in position' but was also used in the sense to induct or induce or placing an apparatus in position for service or use. This view was approved by the Supreme Court in CIT v. Mir Mohammad Ali [1964] 53 ITR 165. This would show that the expression ' installation' only means keeping the machinery in absolute readiness for use and not necessarily used."
30. In this case, there is no disagreement between the learned Members that the machinery was not put in absolute readiness for use. The learned Judicial Member took the view that unless electric connection was given, the machinery cannot be said to have been installed. This view impliedly takes in the concept of user also. Since user is excluded from the expression ' installation' and since the machinery was installed and was kept ready for use, the mere absence of electric connection cannot, in the circumstances, be said to mean that the machinery was not installed. In other words, it cannot be said that the machinery was installed only when electric connection was provided even though every thing else prior to the giving of electric connection was admittedly completed. It is, therefore, difficult to agree with the view that the installation of plant and machinery, though kept ready for use was not complete, till it was linked with electric supply. It is also not possible to agree that the requirement of Section 32A that : " plant and machinery is wholly used for the purposes of the business carried on by him" means that, before the investment allowance could be granted, the assessee had to prove that the plant and machinery was wholly used for the purpose of the business carried on by him. Actually speaking, the assessee had a turnover of Rs. 12 crores and, therefore, it cannot be said that the assessee was not in the business.
31. I am, therefore, inclined to agree with the view that the machinery was installed in the year under appeal even though electric connection was not given and that electric connection was not necessary to complete the installation and that electric connection was necessary only for the purpose of user which is not the same thing as saying that the machinery was installed.
32. The matter will now go before the regular Bench for a decision according to the majority opinion.