Rajasthan High Court - Jaipur
Commissioner Of Income Tax vs Nakoda Metals on 9 May, 2006
Equivalent citations: (2006)204CTR(RAJ)514
JUDGMENT Rajesh Balia, J.
1. Heard learned Counsel for the parties.
2. This is an application under Section 256(2) of the IT Act, 1961 seeking that the order passed by the Tribunal, Jaipur Bench, Jaipur, on 20th May, 1998 in RA No. 56/Jp/1990 refusing to state the case and refer the following questions to this Court for its opinion by holding that these are not the questions of law, which arise out of its appellate order dt. 20th Jan., 1998, is erroneous:
1. Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in allowing the depreciation and investment allowance, when the commencement of production was not proved by the assessee ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in allowing wages and interest paid to RFC, which also include personal interest, when the commencement of production was not proved and the claim was otherwise also inadmissible ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in giving the finding that assessee had commenced commercial production during the year under consideration ?
3. The assessee had submitted a return of loss of Rs. 11,27,650 for asst. yr. 1988-89, in respect of his income of previous year relating to the assessment year ending on 31st Dec, 1987. The business of assessee was stated to be of manufacturing electrodes. For the purpose of said business, it acquired machinery during the relevant year and installed the same in the previous year in question. The assessee had claimed depreciation in terms of Section 32 of the IT Act as well as investment allowance under Section 32A in respect of cost of aforesaid machinery amounting to Rs. 7,70,862 and Rs. 3,97,620, respectively. The assessee has claimed that he has used machinery for production of electrodes during the previous year and had started commercial production on 1st Oct., 1987.
4. Other facts which are relevant for the present purposes and about which there is no dispute, are that the assessee acquired machinery in question on 29th Sept., 1987 and he has purchased raw material from M/s Indian Rare Arts Ltd. through invoice No. 605 dt. 15th Oct., 1987, for which the order was placed on 29th Sept., 1987, that is on the same date machines were acquired. The assessee has also shown the sale proceeds of his production at Rs. 1,62,200 vide invoice dt. 22nd Dec, 1987 issued to M/s Suppliers India, Jodhpur.
5. The AO did not dispute the acquisition and installation of the new machinery during the previous year at the cost disclosed by the assessee. He also did not dispute the sale amount stated in P&L a/c nor did he dispute placing of order for purchase of raw material. But he did not agree that the manufacturing activity started on 1st Oct., 1987, solely on the premise that the assessee could not on admitted facts have commenced commercial production on 1st Oct., 1987 and concluded that the machinery though acquired in September, 1987 and installed during previous year was not used at all in the previous year relating to assessment year. Hence, the assessee was neither entitled to depreciation under Section 32 nor to investment allowance under Section 32A because necessary precondition for claiming such allowance that the machinery must be used for the business of the assessee during the previous year had not been fulfilled. This finding was affirmed by the CIT(A) and disallowance of claim to deduction as depreciation and investment allowance on cost of newly installed machinery was affirmed.
6. However, the Tribunal did not agree with the aforesaid conclusion that the assessee has not used the machinery acquired and installed in the year 1987 during the previous year. The Tribunal reasoned that the acquisition of machinery and installation thereof is not in dispute. The fact of purchase of raw material in the year 1987 is also not in dispute. The assessee had sold its product on 21st Dec, 1987 for a sum of Rs. 1,62,200, which is the total turnover of the assessee. This amount of turnover is also not in dispute and ultimately assessment has been made by accepting the said figure. However, the AO did not agree that assessee had made any production and inferred that the assessee has sold raw material itself. The Tribunal found that the finding that assessee has not made any production is based only on presumption but then no material has been brought on record to show that assessee has not produced anything and sold raw material in market.
7. In the aforesaid circumstances, we are of the opinion that though the assessee may not have been able to prove that the commercial production started on 1st Oct., 1987, but it does not affect depreciation and investment allowance as otherwise condition for such allowance is established on the face of record. We may notice that commencement of commercial production by the assessee during the relevant previous year is not a condition for allowing deduction as investment allowance or depreciation. Therefore, putting emphasis on the commercial production as on 1st Oct., 1987 was wholly irrelevant for the purpose of considering claim of the assessee to depreciation on the machinery acquired and installed in the previous year for the purpose of his business and his claim for investment allowance on that basis.
8. Even from the order of CIT(A) it is clear that assessee has clearly stated that during these proceedings he has put the machine in use for two days to commence trial production. The production which came out was of substandard quality. Therefore, further production could not take place during that year.
The fact that machines were used for trial production during previous year was not disputed. This fact clearly establishes that machines installed during previous year were used for trial production and certain production did come out. Then in all probabilities that sale was of such sub-standard production in the market and since it required further adjustment in machines to get standardised production, further production was not taken. But the fact remains, whether machines were used for trial production or for commercial production, its use was for the purpose of assessee's business. Tribunal was also right to conclude that there was nothing on the record to suggest that assessee sold raw material itself.
9. From the undisputed facts that machines were acquired and installed during the previous year, that the assessee also acquired raw material soon after installation of machineries- and had sales of Rs. 1,62,200 in December, do provide the material on the basis of which one can reasonably infer that assessee who has acquired and installed machines and also acquired raw material, also used the same for the purpose of his business. Success or failure of venture is not the relevant consideration. It also can be reasonably inferred that assessee's contention about commencing commercial products on 1st Oct., 1987 may not be true but there is material to find that it was put to use for business only when it went into trial production, but when he did not get the standard product he did not take further production. This justified meager turnover. In these circumstances the findings reached by the Tribunal remain findings of fact based on relevant consideration. The whole burden of Revenue's contention is emphasis on showing date of commencement of commercial production, which was wholly irrelevant for the purpose of considering deduction on account of depreciation and investment allowance. What is needed is that, the machines must be used for assessee's business. Whether the assessee is able to successfully commence commercial production or commercial production is delayed on account of defect in trial production does not affect the allowability of deduction on account of depreciation and investment allowance if from the material on record, it can reasonably be inferred that machines were used for assessee's business during the relevant previous year. The user of machines for trial production, before giving full throttle is as much use of machines for the purpose of business.
10. The conclusion reached by the Tribunal that the assessee had used the machines in question during the previous year relevant to assessment year for his business is finding of fact. In view of the, aforesaid conclusion, we are not inclined to carry on further enquiry about the issue when installation of machinery during the previous year for the purpose of business of assessee itself amounts to user of the machine within the meaning of Section 32 or 32A.
11. Since all the questions depend on the answer of question whether the machinery acquired and installed during the previous assessment year was used for assessee's business, no question is required to be referred to this Court.
The Tribunal was not in error in refusing to make reference of the aforesaid questions to this Court for its opinion. Accordingly, this reference case is rejected.