Bombay High Court
The Commissioner Of Income Tax vs M/S. Antifriction Bearings ... on 8 September, 2000
Equivalent citations: (2001)165CTR(BOM)126, [2000]246ITR295(BOM)
Author: S.H. Kapadia
Bench: S.H. Kapadia, J.N. Patel
JUDGMENT S.H. Kapadia, J.
1. Two questions of law have been raised by the department in this appeal under section 260A of the Income Tax Act for the Assessment Year 1989-90. They are as follows :
(a) Whether the A.O. was right in adding Rs. 29,410/- to the closing stock on account of Modvat credit?
(b) Whether the A.O. erred in disallowing the assesee's claim under section 32AB on Rs. 13.80.955/- in respect of advance for purchase of machinery?
2. In view of the Judgment of the Division Bench of this Court in Income Tax Appeal No. 191 of 2000 and Income Tax Appeal No. 3 of 1999 decided on 14.8.2000 the addition made to the closing stock on account of Modvat credit is ordered to be deleted. Accordingly, question No. 1 is answered in favour of the assesses and against the department. Accordingly, this appeal on question No. 1 is dismissed.
3. On question No. 2, the facts are as follows :
4. The assessce claimed the benefit of section 32AB in respect of purchase of plant and machinery for Rs. 85,89,784/-. These amounts included advances paid towards purchase of plant and machinery of Rs. 13,80,955/-. The A.O. found that under section 32AB advances against purchase of plannt and machinery cannot be considered as amount utilised as the said plant and machinery is not dispatched by the supplier on receipt of advances. He, therefore, concluded that there was no purchase. The A.O. came to the conclusion that there was a difference between advance and purchase. Hence, he disallowed the claim to the above extent. Being aggrieved, the assessee went in Appeal to the First Appellate Authority. The C.I.T. (Appeals) upheld the claim of deduction made by the assessee. He, however, clarified that as and when actual purchase is made the amount of Rs. 13,80,955/- which is allowed as an advance will be reduced from the actual amount of purchase in the subsequent year for the purposes of deduction under section 32AB. Being aggrieved, the matter was carried in appeal to the Tribunal, The Tribunal dismissed the appeal of the department. Hence, this appeal.
5. Mr. Desai, learned Senior Counsel for the department, contended that section 32AB deals with investment deposit account. He contended that in order to attract section 32AB(1)(b), the assessee was required to show that he has utilised an amount during the previous year out of the business income for the purchase of new machinery or plant. He contended that looking to the Scheme of section 32AB, giving of advance for purchase of new machinery or plant cannot result in utilisation. He contended that section 32AB emphasises that the business income of the previous year relevant to the Assessment Year 1989-90 should be shown to have been utilised for purchase of new machinery or plant. He contended that giving of advance cannot constitute utilisation. He, therefore, contended ' hat the A.O. was right in disallowing the claim of the assessee for deduction under section 32AB. Mrs. Visanji, learned counsel for the assessee on the other hand, contended that section 32AB was a substitute for section 32A under which machinery or plant was required to be acquired whereas, under section 32AB the said condition was relaxed and under section 32AB deductions were allowable if the assessee deposited requisite amount out of the income of the current year in an account maintained by the Development Bank or such amount is utilised towards purchase of machinery or plant. She referred to dictionary meanings of the expression "utilised". She contended that section 32AB emphasises acquisition of plant or machinery and not the mode of payment. She contended that deductions under section 32AB were out of income of the current year and utilisation of such income is the main test to attract section 32AB of the Act. She contended that, on facts, the Appellate Authorities have found that the assessee made advances towards purchase of plant and machinery out of the income of the current year. She clarified that the assessee has claimed deduction only to the extent of the advance. She contended that, on facts, the Tribunal found that there was a contract entered into by the assessee for purchase of plant and machinery. That, the machinery stood delivered to the assessee. Hence, she contended that the A.O. erred in disallowing the deduction. She also relied upon Board Circular No. 461 dated 9th July, 1986 issued under Finance Act, 1986 to show how section 32AB was a substitute for section 32A. She also invited our attention to the Investment Deposit Account Scheme formulated by the Central Government under section 32AB(1)(a). She also invited our attention to the guidelines issued by the Institute of Chartered Accountants in support of her case that advance towards purchase of plant and machinery amounted to utilisation.
6. Section 32AB was introduced to replace investment allowance under section 32A by a new Scheme of Investment Deposit Account. This was one of the measures introduced by way of corporate tax reform. Pursuant to the said change, the modality of allowing deduction for encouraging investments in a new plant and machinery came to be introduced. Hence, it is clear that section 32AB was a substitute for section 32AB. The new Scheme was made applicable to all existing types of assessees as also to professionals and leasing companies which have not leased out machinery to industrial undertakings. In other words, deduction was made admissible to all assessees who carried on eligible business as per section 32AB(2). However, the benefits under Investment Deposit Account Scheme were made available only if there are profits in the eligible business. The Board Circular dated 9th July, 1986, referred to above, clarified that deposits with Development Bank or purchases of new machinery or plant should be out of income chargeable to tax under the head "Profits and gains of business". Accordingly, such profits were required to be computed for the current year. The utilisation towards purchase, therefore, should be out of the income of the current year. It should be out of the income from eligible business or profession. There is also a reason for this pre-condition. The benefit of investment allowance is related to cost of plant and machinery irrespective of how It is financed. This created a distortion in the profitability of companies. Therefore, under the Investment Deposit Account Scheme envisaged by section 32AB, deduction is admissible only if the deposit is made or plant and machinery is acquired out of income chargeable to tax under the head "Profits and gains of business". Therefore, to get the benefit under section 32AB, the purchase should be out of Income from eligible business or profession. If the above difference between section 32A and 32AB is kept in mind, it is clear that under section 32AB it is not necessary that the assessee should become the owner of specified machinery or that the machinery should be installed or put to use during the previous year. If the assessee has placed an order for purchase and has given an advance to the supplier then the amount has been utilised for the purchase of the machinery. The delivery of the machinery may be taken in a subsequent year. If we accept the department's contention then the Scheme of Section 32AB will fail. The advance is required to have a nexus with the income of the current year. If an assessee gives advance for purchase of machinery from the current year's income, he cannot be denied the benefit of section 32AB on the ground that advance is not utilisation because in the year in which advance is effected, the assessee will be denied deduction on the ground that it is non-utilisation and if the balance amount is paid in the subsequent year, the assessee will be denied deduction on the ground that it has not come out of the income of the current year. Similarly, if in a given case, under the contract, the assessee is required to pay the purchase price in instalments it could still be utilisation. It cannot be said that because consideration has been paid in instalments, there was no utilisation. On the other hand, if payment by instalment under the terms of contract constituted utilisation then, equally, payment of advance would also constitute utilisation for the purposes of section 32AB of the Income Tax Act. Hence, concept of utilisation of the amount for purchase has to be understood with reference to actual payment made to the supplier from time to time and not with reference to the liability created for the purchase. It is for this reason that the Legislature has used the word "purchase" in section 32AB as against the word "acquired" in section 32A. The two words have different connotations. An asset can be acquired by purchasing raw materials followed by fabrication of the asset whereas, the term "purchase" implies purchase of an asset. Use of an asset purchased is not necessary for claiming deduction under section 32AB. This position has been clarified vide para 17.3 of the Board Circular dated 9th July, 1986 in which it has been once again clarified that acquisition of ship, or installation of plant or machinery during the previous year is a condition precedent for availing Hie benefit of investment allowance whereas, deduction under section 32AB can be availed of even before the ship is acquired or plant and machinery is installed. Therefore, we cannot see as to how the benefit under section 32AB would not be allowed to an assessee who sends an advance for purchase of new machinery. In the circumstances, section 32AB(l)(b) is applicable to the facts of this case and the assessee was entitled to claim benefit of the said section.
7. Accordingly, the appeal is dismissed with no order as to costs.
8. C.C. expedited.