PETITIONER: COMMISSIONER OF INCOME TAX, KARNATAKA, BANGALORE Vs. RESPONDENT: M/S. SHAAN FINANCE (P) LTD., BANGALORE DATE OF JUDGMENT: 20/03/1998 BENCH: SUJATA V.MANOHAR, D.P. WADHWA ACT: HEADNOTE: JUDGMENT:
With C.A. No. 1646/1994 and C.A. Nos 1692-1693/1998 [Arising
out of S.L.P. (C) Nos. 3592-3593/1997]
J U D G M E N T
Mrs. Sujata V. Manohar, J.
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.