Income Tax Appellate Tribunal - Mumbai
Mazda Industries & Leasing Ltd. vs Deputy Commissioner Of Income-Tax on 8 April, 1996
Equivalent citations: [1997]61ITD235(MUM)
ORDER
M.V.R. Prasad, A.M.
1. This is an appeal by the assessee which is directed against the order of the CIT (Appeals)-I, Bombay dated 13-12-1989 for the assessment year 1986-87.
2. The assessee is a leasing company and derives income from letting on hire its plant and machinery. It also derives income from hire purchase transactions. Agreements were drawn up between the assessee as lessor or owner and the lessee or the hire purchaser. In both types of transaction the basic feature is the plant and machinery of the assessee is hired out to other parties. The CIT (Appeals) has observed that the distinguishing feature between these two types of transaction is that in the case of lease, the asset is returned by the lessee to the appellant at the end of the lease period whereas in the case of hire purchase, the hirer has the option to purchase the assets at the end of the hire-purchase period. During the previous year 1-7-1984 to 30-6-1985 relevant for the assessment year 1986-87, it is stated that there was only one hire purchase transaction and the rest were only leases.
3. The assessee claimed extra shift allowance of Rs. 11,87,166 in respect of the machinery given on lease basis and Rs. 66,572 in respect of the machinery given on hire purchase basis. It is claimed the parties who had taken these machineries on lease and on hire purchase basis had used them for extra shifts and the assessee also filed certificates from the concerned parties to this effect before the Assessing Officer. The Assessing Officer, however, rejected the claim on the ground that it is not possible to verify whether the plant and machinery in question were actually worked extra shift under rule 5 and item III(iv) of Appendix I to IT Rules. The CIT (Appeals) confirmed the disallowance on the ground that the claim for extra shift allowance has to be made by the concern in question and in the present case, it is the lessee who have worked extra shifts and not the assessee and therefore, the assessee is not entitled for extra shift allowance.
4. Before us, the learned counsel for the assessee pleaded that under the agreements with the lessees, there is no prohibition at all on the user of the concerned machinery for 24 hours and as the assessee-company is in the leasing business, it must be held that the assets are put to use in the business of the assessee and also that they are continuously put to use. It is also pleaded that at any rate, the concerned lessees have furnished the certificate of working triple shifts or double shifts, as the case may be and so there should be no bar against the grant of extra shift allowance.
5. The learned D.R., on the other hand, countered that the entire issue of granting certain benefits on the extra shift allowance, development rebate and investment allowance to assessees in the business of leasing requires to be re-examined in the light of the following decisions :-
Mahabir Cold Storage v. CIT [1991] 188 ITR 91/56 Taxman 42F (SC), CIT v. Northern India Iron & Steel Co. Ltd. [1995] 211 ITR 370 (Delhi) and Sri Leasing & Industrial Finance Co. Ltd. v. ITO [1989] 31 ITD 163 (Delhi).
6. In the present case, we are concerned with the grant of not only extra shift allowance but also investment allowance under section 32A of the IT Act as per the other grounds discussed hereinafter. The learned D.R. contended that in the light of the decision of the Apex Court and of the Delhi High Court (supra), the assessee is not entitled either for extra shift allowance or for investment allowance. We find that the above decisions support the contention of the learned D.R.
7. The relevant portion of the Rules under which extra shift allowance is granted, i.e., clause (iv) of Item III of Part I of the Depreciation Table in Old App. I, I.T. Rules is as follows :-
"(iv) Extra Shift depreciation allowance :
An extra allowance up to a maximum of an amount equal to one-half of the normal allowance shall be allowed where a concern claims such allowance on account of double shift working and establishes that it has worked double shift. An extra allowance up to a maximum of an amount equal to the normal allowance, instead of one-half of the normal allowance, shall be allowed where a concern claims such allowance on account of triple shift working and establishes that it has worked triple shift."
8. From the language of the above item, it is evident that extra shift allowance can be granted only to a concern which claims such allowance on account of working multiple shifts and establishes that it has worked multiple shifts. The contention of the learned counsel for the assessee is that the lessee concerns have given certificates of working multiple shifts and so it should be deemed that the assessee has also worked multiple shifts. In the alternative, it is pleaded that as the agreements with the lessees do not place any prohibition against the continuous user of the assets, it should be deemed that the assessee-concern has worked triple shifts. We find that the argument goes against the entire scheme of the IT Act. Under the scheme of the IT Act, the assessee is one whose income is being taxed and it is that assessee who is to prove its income and its claims on the basis of its records and its functioning. It cannot base its claim for any allowance or deduction like the extra shift allowance as in the present case on the basis of the records and functioning of altogether different parties like the lessees. The lessees are not before the Assessing Officer and they are not subject to scrutiny unless a proceeding is pending against them. So it appears to us incorrect to allow the claim for extra shift to the assessee on the basis of the functioning of its lessees.
9. The Rule clearly refers to a concern which claims extra shift allowance and the pre-requisite for it of establishing that it has worked multiple shifts. Simply, because the agreement with the lessees do not place any prohibition on the continuous user of the assets, it doesn't mean that the assessee-concern itself has worked multiple shifts. To our mind, this appears a far-fetched argument and at any rate, the decision of the Tribunal, Delhi Bench cited supra is against the assessee. We find no reason for not following that decision and reject the claim. The ground is dismissed.
10. The next ground is that the CIT (Appeals) erred in holding that the assessee is not entitled to investment allowance of Rs. 7,84,848.
11. The Assessing Officer rejected the claim on the ground that the assessee is not engaged in the business of manufacture or production of any article or thing within the meaning of section 32A of the IT Act and simply because the machineries were used by the lessees in manufacturing activity, the requirement of section 32A is not met. The CIT (Appeals) has given the details of the plant and machinery on which the investment allowance was claimed in para 12 of his order. He has, however, confirmed the action of the Assessing Officer on the ground that the learned author late Shri Sampath Iyengar in 7th Edition of the Book, Law of Income-tax mentioned that for the grant of investment allowance, the asset should be wholly used for the purposes of the class of business referred to in section 32A(2) and such a business has to be carried on by the assessee. He has also gone into certain other conditions like creation of the reserves and not transferring the assets for the specified period by the owner stipulated under the remaining sub-sections of section 32A and has come to the conclusion that the assessee is not entitled for the grant of investment allowance.
12. Before us, neither the learned counsel for the assessee nor the learned D.R. raised any dispute about the quantum of claim of investment allowance at Rs. 7,84,848 nor did they raised any dispute about the fact that the assessee is in the leasing business, nor about the fact that the relevant machineries were used in the manufacturing business of the lessees. The only dispute centered around the issue is whether the assessee is entitled for the investment allowance on the basis of the user of the relevant plant and machinery in the manufacturing business of the lessees and the hire purchasers. We have already referred to the decision of the Apex Court and the Delhi High Court on which the learned D.R. relied for the proposition that the assessee is not entitled for the benefits like extra shift allowance and investment allowance. The learned counsel for the assessee has cited the following decisions in support of his claims :
ACIT v. Nuchem Investment (P.) Ltd. [1993] 45 ITD 294 (Delhi), CIT v. Shaan Finance (P.) Ltd. [1993] 199 ITR 409 (Kar.), and CIT v. First Leasing Co. of India Ltd. [1995] 216 ITR 455/82 Taxman 536 (Mad.).
13. We find that neither the Hon'ble Madras High Court nor the Hon'ble Karnataka High Court had occasion to consider the decision of the Apex Court in the case of Mahabir Cold Storage (supra), whereas the Hon'ble Delhi High Court in the case of Northern India Iron & Steel Co. Ltd. (supra) based its decision on the judgment of the Apex Court. The Tribunal, Delhi Bench in the case of Nuchem Investments (P.) Ltd. (supra) considered the decision of the Supreme Court but it did not have the benefit of the decision of the Delhi High Court.
14. The Apex Court in the case of Mahabir Cold Storage (supra) was dealing with the issue of the claim for development rebate and in this context, it observed as follows :-
"The capital asset, namely, the ship, plant or machinery, should be owned by the assessee during the relevant accounting year and wholly used in the business carried on by the assessee during the previous year in question. There must exist unity of ownership and user in the business. The emphasis for entitlement to rebate accrues from the use of the machinery or the plant by the owner for the purpose of its business resulting in the manufacture of the goods or services. It is not the ownership of the goods or the resultant end product of the raw materials used that is relevant. The only relevant consideration is that, during the previous year or part of the relevant period, ownership of the assets shall remain with the assessee. Only the successor-in-interest of the business, in accordance with the provisions of the Act, so long as the twin requirements under section 33(1) are fulfilled, is entitled to the benefit. But, when the unity of ownership and use of the asset in the business are disrupted or a branch of an earlier business is taken over by a new firm which exists simultaneously with the other branches of the old business, the benefit of development rebate under section 33(1) does not extend to either firm. Take, for instance, a case where an assessee leases the asset to another person during the previous accounting year, the use of the plant and machinery is not for the business of the assessee for which the development allowances were accorded under section 33(1) since the machinery was not wholly used by the assessee for his/its business during the previous accounting year. Suppose the plant or machinery was used for a purpose other than the business of the assessee, then also the assessee is not eligible for development rebate, obviously for the reason that the plant or machinery was not used for the purpose of the business of the assessee in the previous accounting year or a portion thereof.
15. The Delhi High Court was also dealing with the issue of development rebate and in this context, the Court observed as follows :-
"Admittedly, the machinery in respect of which the rebate is claimed under section 33 of the Act, was purchased by the assessee and installed in the leased factory, after the grant of the lease. Learned counsel for the assessee contended that if the income derived by the assessee after the lease, is its business income, it follows that the said income was derived by using the machinery owned by the assessee. This was also the view taken by the Appellate Tribunal.
We cannot agree. To attract section 33 of the Income-tax Act, 1961 at least two conditions should be satisfied - (i) the machinery or plant in question should be owned by the assessee; and (ii) it is wholly used for the purposes of the business carried on by him.
In the instant case, the machinery was leased; the lessee had control over the use of the machinery; the assessee had no control over its user. The machinery, as a fact, was used by the lessee. By the mere lease of the machinery, even if it is to be assumed as a mode of 'using' the machinery to derive the business income, it cannot be held that the machinery was wholly used for the business of the lessee. The machinery was also used for the business of the assessee. It may be that the concept of wholly used is not the same as 'exclusively used'. But it conveys the meaning of 'exhaustive user' of the machinery, as by the assessee. This is possible only when the assessee has control over the user. The term 'wholly used for the business' is referable to the manner of its user. The meaning of the word 'user' cannot be confined to the actual derivation of a financial benefit, it includes a proper control over the machinery in the matter of its utilisation, running 'repairing, replacement, etc.' The question need not detail us longer, in view of the observations of the Supreme Court in Mahabir Cold Storage v. CIT [1991] 188 ITR 91."
16. We find that the Hon'ble Madras High Court in the case of First Leasing Co. of India Ltd. (supra), has held that a legislative provision granting incentive for promoting growth and development should be construed liberally and it has found that sub-section (1) or (2) of section 32A does not require anywhere that the plant and machinery must be installed and used by the assessee himself for the manufacture or production of priority articles. Wherever the Legislature intended that the assessee itself/himself should engage in the particular business, it has so provided. This is evident from the language of sub-section (2)(a) of section 32A which specifically requires that the assessee in order to claim investment allowance in respect of ships or air-crafts must be engaged in the business of operation of ships or air-crafts.
17. Similarly, the Hon'ble Karnataka High Court in the case of Shaan Finance (P.) Ltd. (supra), has analysed the language in section 32A(1) and (2) relating to investment allowance and of section 33 relating to development rebate and has come to the conclusion that for the grant of investment allowance under the provisions of section 32A(2)(b), the only requirement is that the machinery owner by the assessee should have been used by some one in the manufacturing process in contradistinction to the language used in section 32A(2)(a) which refers to ship or new aircraft acquired by an assessee who is himself to be engaged in the business of operation of ship or air-craft. In the case of new machinery or plant no such requirement is stated in clause (b) of section 32A(2). Further, in the two sub-clauses of section 33, there is a specific reference to the assessee's business premises where the machinery is to be installed. So, it has found that the investment allowance can be granted to an assessee in the leasing business even though the machinery is installed in the premises of a lessee, who is carrying on a manufacturing process. The Tribunal, Delhi Bench also found that the language of section 32A is not pari materia with the language of section 33 and so, it has come to the conclusion that even if development rebate cannot be granted in the light of the decision of the Apex Court cited supra, an assessee in the leasing business can claim investment allowance under section 32A so long as the machinery is utilised for manufacture or production of an article or thing within the meaning of section 32A(2)(b).
18. We find that the claim for investment allowance by the assessee is supported by the above-mentioned decisions. However, except for the decision of the Delhi Bench of the Tribunal in the case of Nuchem Investments (P.) Ltd. (supra) there is no other decision which has taken into account the observations of the Apex Court in the context of the grant of development rebate and has decided the issue. Even this decision of the Tribunal did not have the benefit of the decision of the Delhi High Court cited supra which based its conclusion on the ratio of the decision of the Apex Court.
19. We also find that the ratio of the decision of the Bombay High Court in the case of Vita P. Ltd. v. CIT [1995] 211 ITR 557 is against the grant of investment allowance in a case where the assets are leased out. In this case, a manufacturing company leased out its assets for monthly royalty and claimed that it has conducted its manufacturing activity through its lessee and so, it should be taxed at the concessional rate applicable to an industrial company. The claim was negatived by the Hon'ble Bombay High Court and in this context, it observed as follows :-
"The assessee-company in this case claims to be engaged in the manufacture or processing of goods. The Tribunal did not accept the above contention of the assessee and held that the assessee having parted with the entire apparatus required for the manufacturing of goods for a period of five years from March 1972, and being in receipt of a monthly royalty of consideration for the same irrespective of the fact whether the lessee manufactured or processed any goods or not, it cannot be said that it was 'engaged' in the manufacture or processing of goods. We find ourselves in agreement with the above conclusion of the Tribunal.
** ** ** A company engaged in the manufacture of goods would continue to be an industrial company even if it manufactures or processes goods for a third party for remuneration or consideration, if the income therefrom is not less than 51 per cent of its total income. But it would cease to be an industrial company if it suspends or stops the manufacturing activity and hands over the manufacturing apparatus to some third person for use in the manufacture or processing of goods. In that event, it cannot claim to be itself engaged in the manufacture or processing of goods. It can no longer be termed a manufacturer because a manufacturer is a person by whom or under whose direction or control the goods are manufactured or processed. It is, therefore, essential that the assessee itself is engaged in the manufacture or processing of goods."
We find that the ratio of the above decision of the jurisdictional High Court is against the claim of the assessee for grant of investment allowance.
20. We also find that all the decisions cited by the learned counsel for the assessee in support of his claim have analysed the language of sections 32A(2)(a), 32A(2)(b), 33(1)(b)(B)(ii) and 33(1)(b)(B)(iii) whereas it appears that the ratio of the Apex Court cited supra proceeded on the basis whether the plant and machinery in question was wholly used for the business of the assessee or not. The words "wholly used" figure both in sections 32A(1) and 33(1)(a). To this extent, both the sections are pari materia. Both development rebate and investment allowance are granted only when the assets are owned by the assessee and they are wholly used for the purposes of the business carried on by the assessee. The Apex Court found that in a leasing business, there is a separation of ownership and user in the business. This view is also affirmed by the Hon'ble Delhi High Court as is evident from the observations of the two courts are reproduced by us hereinbefore. An analogous view is also taken by the Bombay High Court in the case cited supra.
21. We also find that for the grant of depreciation under section 32, the requirement is slightly diluted. In section 32(1), the word that figures is only "used" and not "wholly used". So, it appears that the grant of depreciation may stand on a different footing from the grant of investment allowance and development rebate. However, that question does not arise in this case as the department has already granted depreciation.
22. For the grant of investment allowance certain conditions are to be fulfilled like under section 32A(2), the plant and machinery have to be installed in an industrial undertaking for the purposes of business of manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule. The condition about the manufacture of an article specified in the Eleventh Schedule is relaxed in respect of a small scale industrial undertaking and the small scale industrial undertaking is defined in clause 2 of Explanation to section 32A(2) in terms of the aggregate value of the plant and machinery. It appears that it is against the scheme of the IT Act to examine the applicability of these conditions in terms of the business of the lessee whereas investment allowance is claimed and has to be allowed or disallowed to the lessor.
23. We also find that where a benefit is allowed to a leasing business, a specific mention is made as in the definition of "eligible business" before its omission by Finance Act, 1989 w.e.f. 1-4-1991 in clause (i) of sub-section (2) of section 32AB. The definition read as follows :-
"(i) 'eligible business or profession' shall mean business or profession, other than -
(a) the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule carried on by an industrial undertaking which is not a small-scale industrial undertaking as defined in section 80HHA,
(b) the business of leasing or hiring of machinery or plant to an industrial undertaking other than a small-scale industrial undertaking as defined in section 80HHA, engaged in the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule."
24. It appears that there was no need for sub-clause (b) in clause (i) of section 32AB(2) if the leasing business was also entitled for relief under section 32AB. The very fact that the Legislature sought to make a separate provision in respect of the leasing business under section 32AB and no such provision is made under section 32A indicates that the assessee is not entitled for the grant of investment allowance on the ground that the leased out plant and machinery are installed in the manufacturing business of the lessee.
25. For the above reasons, respectfully following the decision of the Apex Court, Delhi High Court and the jurisdictional High Court, we find ourselves constrained to disallow the claim for the grant of investment allowance notwithstanding the case law cited by the learned counsel for the assessee in favour of the grant of his claim. This ground is dismissed.
26. The last ground is that there is no liability for interest under section 217 and the CIT (Appeals) erred in confirming the interest levied of Rs. 4,05,562.
27. We are of the view that the assessee should not have taken for granted the grant of extra shift allowance and at least to this extent, it appears that interest is leviable under section 217. Accordingly, we dismiss this ground but interest is to be calculated with reference to the finally assessed income.
28. In the result, the appeal is dismissed.