Bombay High Court
Commissioner Of Income-Tax vs Rensult Investment And Finance P. Ltd. on 10 June, 1998
Equivalent citations: [1998]233ITR172(BOM)
Author: Pratibha Upasani
Bench: Pratibha Upasani
JUDGMENT B.P. Saraf, J.
1. By this reference under Section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal ("the Tribunal") has referred the following question of law to this court for opinion at the instance of the Revenue :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the Commissioner of Income-tax (Appeals) holding that the assessee is entitled to investment allowance under Section 32A of the income-tax Act, 1961, even though the assessee is not engaged in the business of manufacture or production of any article or thing ?"
2. The assessee-company, Rensult Investment and Finance Pvt. Ltd., is engaged in the business of financing and leasing. In the previous year relevant to the assessment year 1985-86, it purchased certain machinery which was leased out to various parties. The assessee claimed investment allowance under Section 32A of the Income-tax Act, 1961 ("the Act"), in respect of machinery leased out by it. This claim of the assessee was rejected by the Income-tax Officer on the ground that the assessee-company was not carrying on any manufacturing activity and as such it was not entitled to investment allowance under Section 32A of the Act. On appeal by the assessee, the Commissioner of Income-tax (Appeals) reversed the above order of the Income-tax Officer as, in his opinion, investment allowance was allowable in respect of machinery or plant specified in Sub-section (2) of Section 32A of the Act, owned by the assessee and wholly used by the assessee for the purpose of business carried on by him. The Commissioner of Income-tax (Appeals), therefore, held that the assessee in this case was entitled to investment allowance under Section 32A in respect of the machinery owned by him but given on hire to different parties who installed the same and put them to use. The appeal of the Revenue against the above order was dismissed as the Tribunal was also of the opinion that for the purpose of claiming investment allowance under Section 32A of the Act, it was not necessary for the assessee to himself use the machinery for manufacture. According to the Tribunal, if the machinery owned by the assessee was leased out by him to others and business income was derived from such letting, he would be entitled to investment allowance. The Tribunal observed that Section 32A did not prohibit the assessee whose main business was financing and leasing from claiming investment allowance. Hence, this reference at the instance of the Revenue.
3. We have heard Mr. Khatri, learned counsel for the applicant, who submits that investment allowance under Section 32A of the Act can be claimed by the assessee only in a case where he himself uses the machinery for the purpose of business of construction, manufacture or production of any article or thing not being an article or thing specified in the list in the Eleventh Schedule. We have carefully considered the above submission. Section 32A of the Act, so far as is relevant, at the material time stood as under :
"32A. Investment allowance.--(1) In respect of a ship or an aircraft or machinery or plant specified in Sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this Section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty-five per cent, of the actual cost of the ship, aircraft, machinery or plant to the assessee :
Provided that no deduction shall be allowed under this section in respect of-
(a) any machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest-house ;
(b) any office appliances or road transport vehicles ;
(c) any ship, machinery or plant in respect of which the deduction by way of development rebate is allowable under Section 33 ; and
(d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head 'Profits and gains of business or profession' of any one previous year.
(2) The ship or aircraft or machinery or plant referred to in Sub-section (1) shall be the following, namely :--
(a) a new ship or new aircraft acquired after the 51st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft ;
(b) any new machinery or plant installed after the 31st day of March, 1976,-
(i) for the purposes of business of generation or distribution of electricity or any other form of power; or
(ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing ; or
(iii) in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule. . .
(5) Any allowance made under this section in respect of any ship, aircraft, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act-
(a) if the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed ; or
(b) if at any time before the expiry of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the assessee does not utilise the amount credited to the reserve account under Sub-section (4) for the purposes of acquiring a new ship or a new aircraft or new machinery or plant [other than machinery or plant of the nature referred to in Clauses (a), (b) and (d) of the proviso to Sub-section (1)] for the purposes of the business of the undertaking ; or
(c) if at any time before the expiry of the ten years aforesaid, the assessee utilises the amount credited to the reserve account under subsection (4) for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any assets outside India or for any other purpose which is not a purpose of the business of the undertaking, and the provisions of Sub-section (4A) of Section 155 shall apply accordingly :
Provided that nothing in Clause (a) shall apply-
(i) where the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee to the Government, a local authority, a corporation established by a Central, State or Provincial Act or a Government company as defined in Section 617 of the Companies Act, 1956 (1 of 1956) ; or
(ii) where the sale or transfer of the ship, aircraft, machinery or plant is made in connection with the amalgamation or succession, referred to in Sub-section (6) or Sub-section (7)."
4. From a plain reading of the above section, it is clear that in order to get the benefit of investment allowance in respect of any machinery or plant, the assessee must prove that machinery was owned by him and that it was wholly used for the purposes of the business carried on by him. The assessee must also satisfy that the machinery or plant was installed in any industrial undertaking for the purpose of manufacture or production as specified in Sub-section (2) of Section 32A. In the instant case, there is no dispute about the fact that the machinery in respect of which investment allowance is claimed was owned by the assessee. So far as the user of the machinery for the purposes of the business of the assessee is concerned, the uncontroverted factual position in this case is that the business of the assessee was leasing of such machinery. That being so, the machinery so leased out has to be regarded as being used for the purposes of the business of the assessee. Moreover, the income received by the assessee by way of hire charges has also been assessed to tax as business income of the assessee. This leaves us with the last requirement of the use to which the machinery should be put. There is no dispute that this requirement also has to be satisfied in order to get the benefit of investment allowance. The controversy is whether it is sufficient for the purpose of Section 32A that the machinery is put to the specified uses or the assessee himself should use the machinery for that purpose.
5. An identical controversy came up for consideration before the Supreme Court in CIT v. Shaan Finance P. Ltd. . In that case also, the assessee itself was not manufacturing any articles or things. The machinery owned by it was hired to different persons for the purposes of their business of manufacturing. In respect of such machinery, the assessee claimed investment allowance under Section 32A. The Karnataka High Court held (see [1993] 199 ITR 409) that the assessee was entitled to investment allowance under Section 32A. The Revenue preferred an appeal before the Supreme Court. The contention of the Revenue before the Supreme Court was that investment allowance could be claimed by the assessee only in a case where he was the owner of the machinery and used the machinery himself. In other cases, investment allowance could not be granted. The Supreme Court, on a perusal of the provisions of Section 32A of the Act, decided against the Revenue and held that where the business of the assessee consisted of hiring out machinery and where income derived by him from the hiring of such machinery was his business income, he must be considered as having used the machinery for the purposes of its business. It was observed (page 312) :
"When the business of the assessee is leasing of such machines, the machines so leased out are being used for the purpose of the assessee's business. The income by way of hire charges which the assessee receives is also taxed as business income of the assessee."
6. The legal position was summed up that (headnote) :
"Where the business of the assessee consists of hiring out machinery and/or where the income derived by the assessee from the hiring of such machinery is business income, the assessee must be considered as having used the machinery for the purposes of its business."
7. The Supreme Court, however, made a distinction between hiring of machinery and an agreement of hire purchase and explained the contracts of hire simpliciter in contradistinction to an agreement of hire purchase as follows (page 316) :
"When the machinery is given on hire by the owner to the hirer on payment of hire charges, the income derived by the owner is business income. The owner is also entitled to depreciation on the machinery so hired out. The hirer, on the other hand, who pays hire charges, is entitled to claim these as revenue expenditure. The hirer has not acquired any new asset. A transaction of hire is, therefore, of bailment of the machinery. There is no extinguishment of any right of the owner in the machinery. There is merely a licence given to the hirer to use, for a temporary period, the machinery so hired."
8. It was held by the Supreme Court that Section 32A covers leasing or finance companies which give machinery on hire as in the case before them (supra).
9. Referring to Sub-section (2) of Section 32A of the Act, it was observed that this sub-section only describes the machinery in respect of which investment allowance can be granted. It was pointed out that under subsection (2)(b) of Section 32A of the Act there was no express requirement that the assessee must use the plant and machinery. It was held (page 313) :
"Sub-section (2)(b), therefore, refers to the uses to which the machinery can be put. It does not specify that the assessee himself should use the machinery for these purposes."
10. In the case before us, in the statement of case, it is stated that the assessee is engaged in the business of financing and leasing. There is nothing to show the nature of financing and leasing--whether it was a case of hiring simpliciter or leasing simpliciter or hire purchase or any other form of transfer. In such a situation, it is difficult to answer the question referred to us one way or the other. We, therefore, remit that matter to the Tribunal to decide the controversy afresh in the light of the decision of the Supreme Court in CIT v. Shaan Finance P. Ltd. [1998] 231 ITR 308.
11. The reference is disposed of accordingly with no order as to costs,