Commissioner
of Income Tax, Karnataka, Bangalore Vs.
M/S. Shaan Finance (P) Ltd., Bangalore
[1998] INSC 172 (20
March 1998)
Sujata
V.Manohar, D.P. Wadhwa Mrs. Sujata V. Manohar, J.
ACT:
HEAD NOTE:
With
C.A. No. 1646/1994 and C.A. Nos 1692-1693/1998 [Arising out of S.L.P. (C) Nos.
3592-3593/1997]
Delay
condoned.
Leave
granted.
These
appeals raise a common question relating to the assessees' entitlement to
investment allowance under Section 32A of Income-tax Act, 1961. The assessee
companies, as their names suggest, are financial companies which purchase
machinery and hire out the machinery to manufacturers under agreements of hire.
The common question in these appeals relates to the entitlement of the assessees
to investment allowance under Section 32A of the Income-tax Act, 1961. For the
sake of convenience, we are setting out the question as framed in Civil Appeal
Nos. 7077-78 of 1993. The question is as follows:
"whether,
on the facts and in the circumstances of the case, the Tribunal was right in
holding that in respect of the machineries owned by the assessee, but leased to
third parties and used by them for the manufacture of article or thing,
investment allowance was allowable under sec. 32?" The assessees are not
themselves manufacturers of any article or thing. The machineries, however,
which are owned by them are hired to different persons for the purpose of their
business of manufacturing. In respect of these machineries, assessees claimed
investment allowance under Section 32A. In all these proceedings, the concerned
High Courts, being the High Courts of Karnataka and Madras, have held the assessees as
entitled to investment allowance under Section 32A. Hence these appeals have
been preferred before us.
The
relevant provisions of Section 32A are as follows:
"32A.
(1) In respect o 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
(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 31st 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." [Underlining ours]
Therefore,
in respect, inter alia, or plant and machinery for which an investment
allowance is claimed in any relevant previous year, an assessee must satisfy
the following conditions:
(1)
The machinery should be owned by the assessee.
(2) It
should be wholly used for the purposes of the business carried on by the assessee,
and
(3)
The machinery must come under any of the categories specified in sub-section
(2) of Section 32A.
Sub-section
(2) describes such machinery, plant as also ship or aircraft. Under sub-section
(2)(b)(iii) any new machinery or plant installed after 31st of March, 1976 in
any industrial undertaking for the purpose of manufacture or production of any
article or thing, not being an article or thing specified in the list in the
Eleventh Schedule is eligible for investment allowance. In the present case,
the machinery satisfies this description under Section 32A (2)(b)(iii). The
department, however, contends that investment allowance can be claimed by the assessee
only in a case where the aircraft should be acquired by an assessee which is
itself engaged in the business of operation of ships or aircraft. Under
sub-section (2) (b), however, any such express requirement that the assessee
must himself use the plant or machinery is absent. Section 32A(2)(b) merely
describes the new plant or machinery which is covered by Section 32A. The plant
or machinery is described with reference to its purpose. for example,
sub-section (2)(b)(i) prescribes "the purposes of business of generation
or distribution of electricity or any other form of power".
Sub-section
(2)(b)(ii) refers to small scale industrial undertakings which may use the
machinery for the business of manufacture or production of any article, and
sub-section (2)(b)(iii) refers to the business of construction, manufacture or
production of any article or thing other than that specified in the Eleventh
Schedule. Sub-section 2(b), therefore, refers to the uses to which the
machinery can be putt. It does not specify that the assessee himself should use
the machinery for these purposes. In the present case, the person to whom the
machinery is hired does use he machinery for specified purposes under Section 32A(2)(b)(iii).
that person, however, is not the owner of the machinery. The High Courts of
Karnataka an Madras have held that looking to the requirements specified in
Section 32A the assessees, in the present case, fulfil all the requirements of
that section, assessee is the owner of the machinery and also uses the
machinery himself. In other cases, investment allowance cannot be granted. We
have to examine this contention.
We
have already set out the three requirements of Section 32A(1) which entitle an
assess to claim investment allowance. On of the requirements is that the
machinery must be wholly used for the purpose of such assessee's business.
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.
Sub-section
(2) of Section 32A, however, requires to be examined to see whether there is
any provision in that sub- section which requires that the assessee should not
merely use the machinery for the purposes of his business, but should himself
use the machinery for the purpose of manufacture or for what ever other purpose
of machinery is designed. Sub-section (2) covers all items in respect of which
investment allowance can be granted. These items are, ship, aircraft or
machinery or plant of certain kinds specified in that sub-section. In respect
of a new ship or a new aircraft, Section 32A(2)(a) expressly prescribes that
the new ship or the new aircraft should be acquired by an assessee which is
itself engaged in the business of operation of ships or aircraft. Under
sub-section (2) (b), however, any such express requirement that the assessee
must himself use the plant or machinery is absent. Section 32A(2)(b) merely
describes the new plant or machinery which is covered by Section 32A. The plant
or machinery is described with reference to its purpose. for example, sub-
section (2)(b)(i) prescribes "the purposes of business of generation or
distribution of electricity or any other form of power". Sub-section
(2)(b)(ii) refers to small scale industrial undertakings which may use the
machinery for the business of manufacture or production of any article, and
sub-section (2)(b)(iii) refers to the business of construction, manufacture or
production of any article or thing other than that specified in the Eleventh
Schedule.
Sub-section
2(b), therefore, refers to the uses to which the machinery can be putt. It does
not specify that the assessee himself should use the machinery for these purposes.
In the present case, the person to whom the machinery is hired does use he
machinery for specified purposes under Section 32A(2)(b)(iii). that person,
however, is not the owner of the machinery. The High Courts of Karnataka an
Madras have held that looking to the requirements specified in Section 32A the assessees,
in the present case, fulfil all the requirements of that section, assessee is
the owner of the machinery and also uses the machinery himself. In other cases,
investment allowance cannot be granted. We have to examine this contention.
We
have already set out the three requirements of Section 32A(1) which which
entitle an assess to claim investment allowance. On of the requirements is that
the machinery must be wholly used for the purpose of such assessee's business.
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.
Sub-section
(2) of Section 32A, however, requires to be examined to see whether there is
any provision in that sub- section which requires that the assessee should not
merely use the machinery for the purposes of his business, but should himself
use the machinery for the purpose of manufacture or for what ever other purpose
of machinery is designed. Sub-section (2) covers all items in respect of which
investment allowance can be granted. These items are, ship, aircraft or machinery
or plant of certain kinds specified in that sub-section. In respect of a new
ship or a new aircraft, Section 32A(2)(a) expressly prescribes that the new
ship or the new aircraft should be acquired by an assessee which is itself
engaged in the business of operation of ships or aircraft. Under sub-section
(2) (b), however, any such express requirement that the assessee must himself
use the plant or machinery is absent. Section 32A(2)(b) merely describes the
new plant or machinery which is covered by Section 32A. The plant or machinery
is described with reference to its purpose. for example, sub- section (2)(b)(i)
prescribes "the purposes of business of generation or distribution of
electricity or any other form of power". Sub-section (2)(b)(ii) refers to
small scale industrial undertakings which may use the machinery for the
business of manufacture or production of any article, and sub-section
(2)(b)(iii) refers to the business of construction, manufacture or production
of any article or thing other than that specified in the Eleventh Schedule.
Sub-section
2(b), therefore, refers to the uses to which the machinery can be putt. It does
not specify that the assessee himself should use the machinery for these
purposes. In the present case, the person to whom the machinery is hired does
use he machinery for specified purposes under Section 32A(2)(b)(iii). That
person, however, is not the owner of the machinery. The High Courts of
Karnataka and Madras have held that looking to the requirements specified in Section
32A the assessees, in the present case, fulfil all the requirements of that
section, assessee is the owner of the machinery and also uses the machinery
himself. In other cases, investment allowance cannot be granted. We have to
examine this contention.
A
similar view has been taken by the Andhra Pradesh High court in the case of
Commissioner of Income-tax v. Vinod Bhargave (169 ITR 549) where Jeevan Reddy,
J. (as he then was) held that where leasing of machinery is a mode of carrying
on business by the assessee the assessee would be entitled to development
rebate. the court observed, (p.551):
"
..... Once it is held that leasing out of the machinery is one mode of doing
business by the assessee and the income derived from leasing out is treated as
business income it would be contradictory in terms to say that the machinery is
not used wholly for the purposes of assessee's business." The
appellant-department, however, relies upon certain observations of this Court
in commissioner of Income-tax v. Narang Dairy Products (219 ITR 478) where a
Bench of two judges of this Court said in the context of development rebate in
respect of new machinery and plant that not only should the ownership of the
plant and machinery be with the assessee but also its user by the assessee for
the purpose of his business. The assessee before the Court in that case carried
on the business of manufacture of mild powder. The entire machinery for the
purpose of his business was allowed development rebate in the assessment year
1965-66. However, in August 1969 some of the machinery was let out by the assessee
for a period of three years with a provision for renewal or for outright
purchase, to a third party. This Court said that the withdrawal of development
rebate was justified since the transaction of letting out with a provision for
outright purchase amounted to a transfer of the machinery as defined in Section
2(47) of the Income-tax Act, 1961.
The
ratio of this decision would not apply to the cases which are before us. In the
case of Narang Dairy products (supra) this Court has pointed out that when the
machinery was let out by the assessee to Hindustan lever Limited it cannot
admit of any doubt that the machinery or plant could not and was not used by
the assessee for the purpose of the business carried on by him, which was the
business of manufacture of milk powder. Therefore, the assessee could not be
considered as having used the machines only of the purpose of his business.
Secondly, in the case of Narang Dairy Products (Supra) the transaction was a
transaction of hire with the right of outright purchase. The Court was of the
view that the words "otherwise transferred" may be wide enough to
cover such a situation.
This
Court also relied upon the decision of the Kerala High Court in Blue Bay
Fisheries (p) Ltd. v. Commissioner of Income-tax (166 ITR 1) in the case of narang
Dairy Products (supra). In the case of Blue bay Fisheries also, the assessee
purchased a trawler for its business. The trawler was leased to the transferee.
under the agreement of lease, at the end of ten months, the trawler was to be
sold to the transferee. In terms of the agreement, the assessee also took steps
to obtain the approval of the concerned authority for the sale of the trawler.
The trawler was to remain in the exclusive possession of the transferee and the
transferee was allowed to suitably alter the trawler so as to make it a tug.
The kerala High Court said that the terms of the agreement showed that the
right to exclusive possession and enjoyment of the trawler had been
transferred. The transfer was permanent and preparatory to sale. Hence it
amounted to transfer.
Neither
of these cases deals with an agreement of hire of machinery in
contradistinction to an agreement of hire purchase. 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.
In the
case of M/S. Damodar Valley Corporation v. The State of Bihar (AIR 1961 SC 440), this Court examined the contract
under which the machinery and equipment was supplied by the Corporation to the
contractors. The question was whether it was a mere contract of hiring or a
sale or a hire purchase. The Court said (p.445): "It is well-settled that
a mere contract of hiring, without more, is a species of the contract of
hiring, without more, it a species of the contract of bailment, which does not
create a title in the bailee. But the law of hire purchase has undergone
considerable development during the last half a century or more and has
introduced a number of variations, thus leading to categories, and it becomes a
question of some nicety as to which category a particular contract between the
parties comes under." We need not dwell on the niceties of a hire purchase
contract between the parties of a hire purchase contract since we are concerned
only with contracts of hire simpliciter.
In the
case of hire purchase agreements, the department's Circular No.9 of 1943 dated
23rd of March, 1943 provides, inter alia, that where under the terms of the
agreement the equipment shall eventually become the property of the hirer or
confer on the hirer an option to purchase the equipment, the transaction should
be regarded as one of hire purchase. In such cases, the periodical payments
made by the hirer should, for tax purposes, be regarded as made up of
(1) consideration
for hire to be allowed as a deduction in the assessment and;
(2) payment
on account of purchase to be treated as capital outlet, depreciation being
allowed to the lessee on the initial value. In the case, however, of hire of
machinery, the owner is entitled to depreciation.
In
this connection , a reference may also be made to M/s. K.L. Johar and Co. V.
The Deputy Commercial Tax Officer, Coimbatore III (AIR 1965 SC 1082 at p.1090)
where this Court, while examining a hire purchase agreement, pointed out that
such an agreement has two elements;
(1) element
of bailment, and
(2) element
of sale in the sense that it contemplates an eventual sale.
In the
absence of any element of sale in the present case we do not see any reason for
treating the agreement as "transfer" or disallowing the grant of
investment allowance, when the assessee complies with the requirements of
Section 32A. Section 32A is a beneficial provision in a taxing statute. Full
effect, therefore, requires to be given to the language used in Section 32A. As
observed by this Court in C.A. Abraham
V. Income-tax Officer, Kottayam & Anr. (AIR 1961 SC 609 at p.612), in
interpreting a fiscal statute, the Court cannot proceed to make good the
deficiencies if there be any. The Court must interpret the statute as it stands
and in case of doubt, in a manner favourable to the tax-payer. In the present
case, the language of Section 32A covers leasing or finance companies which
give the machinery on hire as in the present case.
In the
premises, the appeals are dismissed with costs.
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