Income Tax Appellate Tribunal - Nagpur
C.P. Foundry Works vs Income-Tax Officer on 23 July, 1993
Equivalent citations: [1995]53ITD176(NAG)
ORDER
H.C. Shrivastava, Accountant Member
1. The appeal was filed late by three days. We have heard the parties and we condone the delay.
2. In the original return, the assessee had claimed an investment allowance of Rs. 10,463 on purchase of machinery of Rs. 41,858. Later on, it claimed deduction under Section 32AB of the Income-tax Act, 1961. While going through the accounts, the Assessing Officer found that the machinery worth of Rs. 27,302 was purchased by the assessee-firm and the payments were made out of the business profit. According to the Assessing Officer, the assessee was entitled to relief under Section 32AB on these machineries. It was also found that the assessee had sent an advance of Rs. 39,057 to National Small Enterprises for purchase of certain machinery but no machinery was received in the year. According to the assessee, this amount was utilised for sending an advance for purchase of the machinery and as such, the same would qualify for deduction under Section 32AB. According to the Assessing Officer, however, the use of the word 'utilised' presupposes the acquisition of the asset itself. As the machinery in question was not delivered within the year, no deduction under Section 32AB was found allowable to the extent of Rs. 39,057. As discussed above, he, however, allowed the deduction of Rs. 27,302 under Section 32AB of the Act.
3. When the matter was taken to the CIT(A), he agreed with the Assessing Officer. He held that the purchase can be completed only when the goods paid for are received. He held that the utilisation of an amount may be satisfied with the assessee having placed an order and having sent an advance to the seller of goods but the utilisation as related to the purchase of the goods is not complete unless the seller delivers the machinery. He held that the mere furnishing of the advance is only one part required under Section 32AB of Sub-clause (b). The requirement of the section, according to the CIT (A), is that the purchase must be complete and, therefore, the action of the Assessing Officer was justified. The assessee is in appeal before us.
4. The assessee's counsel submitted that there is no dispute that the assessee is an eligible assessee under this section and sent the advance to the seller from running business. It was also submitted that the assessee utilised this amount during the previous year for purchase of new machinery. The only dispute, according to the assessee's counsel, is as to whether the utilisation of the money for purchase of the machinery could be complete without the receipt of the machinery within the previous accounting period or not. It was submitted that there is nothing in the section which can enable the department to come to a conclusion that not only the amount should be paid for purchase of a certain machinery but the machinery itself should be received within the year concerned. It was submitted that whether the purchase is completed at later point of time or within the accounting period itself is not very relevant. The fact remains that the money is kept apart and is utilised for purchasing the machine within the time.
5. The Departmental Representative, however, relied upon the order of the CIT(A).
6. We have heard both the parties. Section 32AB relating to investment deposit account has been inserted by the Finance Act, 1986 with effect from 1 -4-1987. The introduction of this section was made with a view to do away with the distinction between the small and large companies. It was found that the investment allowance under Section 32AB had tended to favour the larger and more established enterprises, partly because such concerns could set off investment allowance against the profits of old established unit without waiting for profits from fresh investments. Section 32AB will be neutral as between small and large companies and will also insulate the timing of investment decisions from tax consideration. As per the Board's Circular, dated 9-7-1986, the claim under Section 32AB should be held to neutralise the bias in favour of the borrowing and needless capacity creation. Under this scheme, the benefit will be available if there are profits in the eligible business or profession. In sub-para (c) of para 17.3 of the circular dated 9-7-1986, it has been provided that the acquisition of ship, or a new air-craft or installation of plant and machinery, as the case may be, during the previous year is a condition precedent for availing of the benefit of the existing investment allowance, whereas the deduction under the new provisions of Section 32AB can be availed of even before the ship or air-craft is acquired or the plant and machinery has been installed by making a deposit with the designated development bank'. This sub-para (c) of para 17.3 has gone to the extent of providing that the benefit would be available to an assessee even if he does not acquire the plant and machinery. When the CBDT has given such an interpretation of the section for those assessees who choose to make a deposit with the development bank. We cannot see as to how this benefit would not be allowed to an assessee who sends an advance for purchase of a new machinery though the same is not acquired and installed during the previous accounting period. As discussed by the CBDT in their circular dated 9-7-1986, this enactment has been provided with a view to encourage all the assessees to make investment decisions not only on tax consideration but on other consideration as well.
7. The Institution of the Chartered Accountants vide their guidance note on audit under Section 32AB of the Income-tax Act, in para 6.6, has opined that it was not necessary that the specified machinery should be installed or put to use during the previous year. If an assessee has placed an order for purchase of specified machinery and has given an advance to the supplier, it can be said that the amount has been utilised for purchase of the said machinery. In our opinion, the concept of utilisation of the business profit for purchase has to be understood with reference to only payment made to the supplier and not with reference to the liability created for purchase, under the mercantile system of accounting. A question can be posed as to what would happen to a case where an assessee may give an advance while placing for order for machinery in one previous year but the supplier may refund the whole or part of the advance in the subsequent year because he is not able to supply the machinery or there is some sort of dispute between the parties. In our opinion, while the deduction under Section 32AB will be allowed in the year in which the advance for purchase of machinery is made, the amount refunded in the subsequent year on cancellation of the purchase order will be covered by the provisions of Section 32AB(7) and will be treated as income of the previous year in which the refund becomes due. It has to be remembered that in General Law, when every purchase order is placed and an advance is given, a right to obtain the specified machinery is created in favour of the person placing such order. This right will come to an end when the order is cancelled and this will be covered by the term in the section 'otherwise transferred'. We are, therefore, of the opinion that under the facts and circumstances of the case, the assessee is entitled to relief under Section 32AB of the Act on the entire sum of Rs. 66,359 and not only on Rs. 27,302.
9. In the result, the appeal of the assessee is allowed.