Madras High Court
Commissioner Of Income Tax vs N. Venkatraman on 17 February, 2000
Equivalent citations: (2000)160CTR(MAD)192
Judgment N. V. Balasubramanian, J.
The question of law that arises in the reference at the instance of the Depaitment is whether the assessee is entitled to claim investment allowance in respect of the air compressor under section 32A of the Income Tax Act, 1961 (hereinafter to be referred to as "the Act") used by it for +the purpose of sand blasting in the computation of income for the assessment year 1983-84.
2. The aSsessee is a registered firm and the assessee clanned during the course of assessment proceedings for the assessment year 1983-84, investment allowance of a sum of Rs. 53,027 in respect of the air compressor installed by it. The case of the assessee was that the air compressor was used for the purpose of sand blaSting which is a scientific method of surface treatment of metal before appilying protective paints The Income Tax Officer rejected the claim on the ground that the assessee had merely used the air compressor for treatment of metal and the assessee had not produced or manufactured any thing or article as required under s. 32A of the Act and hence the assessee is not entitled to claim of investment allowance in the computation of its income.
3. The Commissioner (Appeals), on appeal on the basis of the certificates issued by technical persons found that sand blasting is a part of manufacturing process and it is a must for industrial painting and for surface treatment and he held that the assessee is entitled to investment allowance in respect of the machinery used for that purpose.
4. The Tribunal, on appeal preferred by the department relying upon the, affidavit filed by one of the partners of the assessee-firm and also the certificates issued by technical personnel held that sand blasting equipment is used in specialised type of painting process and the equipment is utilised by the assessee in the process by manufacture of two small-scale industries viz., Hydraulic Equipments, Ambattur, Madras and J.H. Industries (P) Ltd., Madras. The Tribunal, on the materials, came to the conclusion that the sand blasting is a highly sophisticated form of industrial painting and air compressor used by the assessee was required for the purpose of sand blasting process. The Tribunal also found that the products obtained by customer after the process of sand blasting are commercially more valuable than in its earlier state. The Tribunal held that all the conditions found in section 32A of the Act are satisfied, as the machinery was owned by the assessee and the same was used for the purpose of the assessee's business and it is not necessary that raw-materials for the manufacture or production of the articles or things should also be owned by the assessee and the fact that the assessee undertook job work was not fatal to its claim of investment allowance, provided all other conditions of section 32A of the Act are fulfilled. The Tribunal, therefore, held that the assessee is entitled to claim investment allowance in respect of the machinery used for sand blasting in the course of its business under section 32A of the Act.
5. Aggrieved by the order of the Tribunal, the Revenue obtained a statement of case and the following question of law has been referred to us for our consideration Whether, on the facts and in the circumstances of the case, the assessee is entitled to investment allowance of Rs. 52,027 in respect of the air compressor used by it for sand blasting in the computation of its business income for theassessment year 1983-84 under section 32A of the Income Tax Act, 1961.'
6. Mr. S.V. Subramanian, learned senior counsel for the department, submitted that in order to get investment allowance under section 32A of the Act, the assesSee should fulfil all conditions prescribed in section 32A of the Act, and his submission was that the assessee has not manufactured or produced any article and the. process done by the assessee did not amount to manufacture or production of any article or thing to make the assessee eligible claim investment allowance. According to the learned senior counsel, what the assessee did was only jol) work and the nature of the article has also not changed after the performance of sand blasting operation. Learned senior counsel relied upon the decision in CIT v. Perfect Liners (1983) 142 ITR 654 (Mad) . In his fairness, learned senior counsel also brought to our attention the decision of the Supreme Court in CIT v. Shaan Finance (P) Ltd. (1998) 146 CTR (SC) 110 : (199S) 231 ITR 308 (SC) . Learned senior counsel also relied upon the decision of Karnataka High Court in Hind Nippon Rural Industries v. CIT (1993) 201 ITR 581 (Kar) and submitted that chipping and sizing of granite do not amount to manufacture or production of goods and the assessee was not involved in manufacture or production of goods. He also brought to our attention the Memorandum explaining the provisions of Finance Bill, 1976, explaining the reasons for the introduction of investment allowance, and submitted that the assessee should instal a plant for the purpose of inanufacture or production of articles or things and since air compressor wv, riot utilised for the manufacture or production of articles or things, the assessen. is riot entitled to claim investment allowance. Learned senior counsel also referred to the decision of the Supreme Court in the case of M v. N.C. Budharaja & Co. (1993) 114 CTR (SC) 420 : (1993) 204 ITR 412 (SC) and submitted that all the requirements of section 32A of the Act are to be fully satisfied before the assessee could claim investment allowance.
7. Mr. G. Ashokpathy, learned counsel for the assessee, on the other hand, submitted that the conditions prescribed in section 32A are fully satisfied and the assessee is engaged in the manufacture or production of articles or things and it is not necessary that the ultimate product should be produced by the assessee. Learned counsel submitted that both the Commissioner (Appeals) and the Tribunal nave found that the air compressor was used for the manufacture and production of articles or things and the assessee was the owner of the air compressor and in the course of the assessee's business, the air compressor was used and, therefore, all the requirements of section 32A of the Act are fully satiSfied, Learned counsel for the assessee referred to the decision of the, Kainataka High Court in the case of CIT v. Mahant Oil Industries (P) Ltd. (1991) 98 CTR (Ker) 200 : (1992) 193 ITR 620 (Kar) and submitted that section 32A of the Act should receive a liberal construction to effectuate the basic idea behind the provision and the Karnataka High Court held that the assessee would be entitled to investment allowance on the storage tank installed by it for the purpose of its business of oil production. Learned counsel also submitted that the decision in CIT v. Perfect Liners (supra) actually supports the case of the assessee as the Tribunal had found that the process employed was essential for the manufacture of articles. Learned counsel for the assessee also referred to the decision of this Court in CIT v. First Leasing Co. of India Ltd, (1997) 140 CTR (Mad) 218 : (1995) 216 ITR 455 (Mad) and also decision of the Supreme Court in CIT v. Shaan Finance (P) Ltd. (supra) and submitted that the investment allowance is allowable in case where the assessee hired out its machinery during the course of its business of hiring and the case of the assessee stands in a strong footing as the assessee has utilised the machinery in the course of manufacture of the product.
8. We have carefully considered the submissions of the learned senior counsel for the department and the learned counsel for the assessee. The Supreme Court in CIT v. Shaan Finance (P) Ltd. (supra) has held the followings are preconditions which must be fulfilled for the grant of investment allowance under section 32A is claimed:
(1) The machinery should be owned by the assessee.
(2) It should be wholly used for the purpose of the business carried on by the assessee. (3) The machinery must come under any of the categories specified in sub-section (2) of section 32A.
Here there is no dispute that the air compressor is owned by the assessee. There is also no dispute that the air compressor is used wholly for the purpose of the business of the assessee and the article manufactured is not one of the, items which come under the enumerated categories found in section 32A of the Act which make it ineligible for the assessee to claim investment allowance.
9. The object of section 32A of the Act is to facilitate investment in priority industlies, and as observed by the Karnataka High Court in CIT v. Mahant Oil Industries (P) Ltd. (supra), it should receive a liberal construction to effectuate the object of the section and there are no reasons to restrict the meaning of the terms found in section 32A of the Act.
10. The Supreme Court in CIT v. Shaan Finance (P) Ltd. (supra) held that where the business of the assessee consists of hiring out machinery and where the income derived by the assessee by hiring of such machinery is business income of the assessee, it must be considered that the assessee had used the machinery for the purpose of its business. The Supreme Court also held that leasing or financing company which owns machinery and let out the machinery to third parties who used the machinery for manufacturing articles or things as specified in section 32A(2)(b)(iii) of the Act would be entitled to the investment allowance in respect of such machinery under section 32A of the Act.
11. In our view, the above decision of the Supreme Court would apply to the facts of the case as air compressor is used by the assessee itself in the manufacture or production of articles. It is seen that on the basis of the materials produced before the Tribunal, the air compressor was utilised by the assessee in the specialised type of painting process and the sand blasting is an essential process in the manufacture of various components and parts of machineries, structurals, etc. and various small-scale industrial manufacturers who manufactured machine part components require sand blasting air compressor to be installed in their premises for the purpose of sand blasting in the process of manufacturing of their products, and they utilised the machinery for the manufacture or production of articles or things. The Tribunal after noticing several functions of sand blasting process as observed in the literature issued by British Paints, came to the conclusion that sand blasting is a highly sophisticated form of industrial painting and the tools required for sand blastingaie air compressor, hoses, nozzles, abrasives etc. It is also found that the air compressor was installed by the assessee and used as a part of the process of manufacture of articles or things of customers and the process of sand blasting was carried out by the assessee. Therefore, we hold that the ultimate product that came out as a result of the manufacture or production process need not belong to the assessee and yet, the claim of the assessee for investment allowance cannot be denied on the ground that the air compressor was used during some intermediary process leading to the ultimate manufacture or production of articles or things. We are of the view that the grant of investment allowance is not confined to the machinery from which final manufactured article comes out, and the allowance would be available to the penultimate machinery or any other machinery employed in the prior stage of manufacture or production of the final article as well. The machinery in question might have been used in the intermediary stage of production of articles, yet where the part played is essential by a machinery in the continuous process of manufacture or production of articles, we are of the view that the investment allowance would be available to such machinery involved in the intermediary process. If the view of the learned senior counsel for the revenue is accepted, it will lead to a situation that many of the machinery employed in intermediary stages in the manufacture or production of the articles or things may become ineligible to claim investment allowance and the said construction would defeat the very object of introduction of section 32A of the Act. We hold that so long as the machinery is used for the purpose of manufacture and production of articles or things, at any stage, either intermediary or final, if all the requirements under section 32A are satisfied, the assessee would be entitled to claim allowance.
12. We hold that the case of the assessee stands on a better footing than the case before the Supreme Court in CIT v. Shaan Finance (P) Ltd. (supra) where machinery was leased out by the assessee in the course of its business of hiring and the machinery was utilised for the manufacture of articles or things by the lessee or hirer and it was held by the Supreme Court that the assessee would he entitled to investment allowance in respect of the machinery hired by it. We, hold that the ratio of the abovesaid decision of the Supreme Court equally apply to the facts of the case as the machinery was installed and used hy the assessee for the purpose of manufacture or production of articles or things.
13. This case can also be examined from another angle, that is, from the point of eligibility of the claim of manufacturer who owned and installed air compressor and used the same for the production of ultimate article and in that contigency, the claim of investment allowance by the owner of article ruight not have met serious resistance from the Revenue because the machinery used in an intermediary process and not in the ultimate process. We hold all machineries employed in the manufacture or production of articles or things are eligible to get investment allowance and the investment allowance is not confined to the machinery which brings out the final products or articles or things. It was found that sand blasting is an essential process in the manufacture or production of articles or things and after the sand blasting, the product that came out had higher value and more utility than the value or utility of the article or thing just before the employment of sand blasting process.
14. in so tar as, the decision relied upon by the learned senior counsel for the revenue in CIT v. Perfect Liners (supra) is concerned, we are of the view thal, the decision far from supporting the case of the Revenue, supports the case of the assessee. In that case, the assessee bought rough castings, polished them and supplied them to other manufacturing concerns and the question arose whether the assessee would be entitled to higher development rebate. This court held that the expression, "manufacture" should be given a wide meaning and after lie rough castings was polished, the product became a new product which was utilised as a component in industries and the assessee was entitled to claim higher development rebate. We hold that the ratio of the decision of the Court in Perfect Liner's case (supra) would apply to the facts of the case and sand blasting process was found to be an essential part in the manufacture nil aiticies.
15. Learned seionr counsel for the Revenue also referred to the Memorancum explaining the provisions of the Finance Bill, 1976; and we have carefully gone through the same. As already held by us, the provisions of section 32A of the Act have to be interpreted in a beneficial manner keeping in view of the object of the provision that it was introduced to promote industrialisation in this country.
16. In so far as the decision of the Supreme Court in CIT v. H.C. Budharaja Co. (supra) relied upon by the learned senior counsel for the Revenue is concerned, the Supreme Court in that case examined the scope of expression 'articles or things' in section 32A of the Act. There is no dispute that ultimate pioduct that comes out of the manufacture or production should be an article or thing. But, the issue locussed here is different and the decision of the Supreme Court in N.C. Budharaja's case (supra) on which heavy reliance was placed hy the learned senior counsel for the Revenue does not help the department in any way.
17. We. hold that all the requirements of section 32A of the Act are wholly satisfied; is the owner of the machinery; it used it for the purpose of the business carried on by the assesseel. the air compressor does not come in the negative list enumerated in section 32A of the Act; and it is employed in the intermediate stage of manufacture or production of articles or things. Since all the pre conditions for the grant of investment allowance are satisfied, we find no infirmity in the order of the Tribunal in holding that the assessee is entitled to claim investinent allowance in respect of the air compressor used by it for sand blasting Accordingly, we answer the question of law in the affirmative, against the Revenue and in favour of the assessee. The assessee is entitled to cost, of a surn of Rs. 1,000.