{"id":80278,"date":"1998-03-20T00:00:00","date_gmt":"1998-03-19T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-ms-shaan-finance-p-ltd-on-20-march-1998"},"modified":"2018-12-13T17:13:14","modified_gmt":"2018-12-13T11:43:14","slug":"commissioner-of-income-tax-vs-ms-shaan-finance-p-ltd-on-20-march-1998","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-ms-shaan-finance-p-ltd-on-20-march-1998","title":{"rendered":"Commissioner Of Income Tax, … vs M\/S. Shaan Finance (P) Ltd., … on 20 March, 1998"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Commissioner Of Income Tax, … vs M\/S. Shaan Finance (P) Ltd., … on 20 March, 1998<\/div>\n
Author: M S Manohar<\/div>\n
Bench: Sujata V.Manohar, D.P. Wadhwa<\/div>\n
           PETITIONER:\nCOMMISSIONER OF INCOME TAX, KARNATAKA, BANGALORE\n\n\tVs.\n\nRESPONDENT:\nM\/S. SHAAN FINANCE (P) LTD., BANGALORE\n\nDATE OF JUDGMENT:\t20\/03\/1998\n\nBENCH:\nSUJATA V.MANOHAR, D.P. WADHWA\n\n\n\n\nACT:\n\n\n\nHEADNOTE:\n\n\n\nJUDGMENT:\n<\/pre>\n
With C.A. No. 1646\/1994 and C.A. Nos 1692-1693\/1998 [Arising
\nout of S.L.P. (C) Nos. 3592-3593\/1997]
\n\t\t      J U D G M E N T
\nMrs. Sujata V. Manohar, J.\n<\/p>\n
     Delay condoned.\n<\/p>\n
     Leave granted.\n<\/p>\n
     These appeals  raise a  common question relating to the
\nassessees’ entitlement to investment allowance under Section
\n32A of\tIncome-tax Act,\t 1961. The  assessee  companies,  as
\ntheir names  suggest, are financial companies which purchase
\nmachinery and  hire out the machinery to manufacturers under
\nagreements of  hire. The  common question  in these  appeals
\nrelates to  the entitlement  of the  assessees to investment
\nallowance under Section 32A of the Income-tax Act, 1961. For
\nthe sake  of convenience, we are setting out the question as
\nframed in Civil Appeal Nos. 7077-78 of 1993. The question is
\nas follows:\n<\/p>\n
     “whether, on  the facts  and in the
\n     circumstances  of\t the  case,  the
\n     Tribunal was  right in holding that
\n     in respect of the machineries owned
\n     by\t the  assessee,\t but  leased  to
\n     third parties  and used by them for
\n     the  manufacture\tof  article   or
\n     thing,  investment\t  allowance  was
\n     allowable under sec. 32?”<\/p><\/blockquote>\n
     The assessees  are not  themselves manufacturers of any
\narticle or  thing. The machineries, however, which are owned
\nby them\t are hired  to different  persons for the purpose of
\ntheir  business\t  of  manufacturing.  In  respect  of  these
\nmachineries, assessees\tclaimed investment  allowance  under
\nSection 32A.  In all  these proceedings,  the concerned High
\nCourts, being  the High Courts of Karnataka and Madras, have
\nheld the assessees as entitled to investment allowance under
\nSection 32A.  Hence these appeals have been preferred before
\nus.\n<\/p>\n
     The relevant provisions of Section 32A are as follows:
\n     “32A. (1) In respect o a ship or an
\n     aircraft  or   machinery  or  plant
\n     specified in sub-section (2), which
\n     is owned  by the  assessee\t and  is
\n     wholly used for the purposes of the
\n     business carried  on by  him, there
\n     shall,  in\t  accordance  with   and
\n     subject to\t the provisions\t of this
\n     section, be allowed a deduction, in
\n     respect of\t the  previous\tyear  in
\n     which  the\t ship  or  aircraft  was
\n     acquired or  the machinery or plant
\n     was  installed  or,  if  the  ship,
\n     aircraft,\tmachinery  or  plant  is
\n     first put to use in the immediately
\n     succeeding previous  year, then, in
\n     respect of that previous year, of a
\n     sum by way of investment allowance,
\n     equal to  twenty-five per\tcent, of
\n     the  actual   cost\t of   the  ship,
\n     aircraft, machinery or plant to the
\n     assessee:\n<\/p>\n
\t  Provided that ………..\n<\/p>\n
     (2)  The\tship  or   aircraft   or
\n     machinery or  plant referred  to in
\n     sub-section  (1)\t  shall\t be  the
\n     following, namely:-\n<\/p>\n
     (a) a  new\t ship  or  new\taircraft
\n     acquired  after  the  31st\t day  of
\n     March, 1976, by an assessee engaged
\n     in the  business  of  operation  of
\n     ships or aircraft;\n<\/p>\n
     (b)  any  new  machinery  or  plant
\n     installed after  the  31st\t day  of
\n     March, 1976 –<\/p>\n
\t  (i)  for   the   purposes   of
\n\t  business  of\t generation   or
\n\t  distribution of electricity or
\n\t  any other form of power; or\n<\/p>\n
\t  (ii)\t in    a   small   scale
\n\t  industrial undertaking for the
\n\t  purposes   of\t   business   of
\n\t  manufacture or  production  of
\n\t  any article or thing; or\n<\/p>\n
\t  (iii) in  any other industrial
\n\t  undertaking for  the\tpurposes
\n\t  of business  of  construction,
\n\t  manufacture or  production  of
\n\t  any article or thing not being
\n\t  an article  or thing specified
\n\t  in the  list in  the\tEleventh
\n\t  Schedule.”\n<\/p>\n
\t\t  [Underlining ours]
\n     Therefore,\t in   respect,\tinter  alia,  or  plant\t and
\nmachinery for  which an\t investment allowance  is claimed in
\nany relevant  previous year,  an assessee  must satisfy\t the
\nfollowing conditions:\n<\/p>\n
(1) The machinery should be owned by the assessee.
\n(2) It should be wholly used for the purposes of the
\n    business carried on by the assessee, and
\n(3) The machinery must come under any of the categories
\n    specified in sub-section (2) of Section 32A.
\n     Sub-section (2) describes such machinery, plant as also
\nship or\t aircraft. Under  sub-section  (2)(b)(iii)  any\t new
\nmachinery or  plant installed  after 31st  of March, 1976 in
\nany industrial undertaking for the purpose of manufacture or
\nproduction of  any article or thing, not being an article or
\nthing specified\t in the\t list in  the Eleventh\tSchedule  is
\neligible for  investment allowance. In the present case, the
\nmachinery  satisfies  this  description\t under\tSection\t 32A
\n(2)(b)(iii).  The   department,\t  however,   contends\tthat
\ninvestment allowance  can be claimed by the assessee only in
\na case\twhere the aircraft should be acquired by an assessee
\nwhich is  itself engaged  in the  business of  operation  of
\nships or  aircraft. Under  sub-section (2) (b), however, any
\nsuch express  requirement that the assessee must himself use
\nthe plant  or machinery\t is absent. Section 32A(2)(b) merely
\ndescribes the  new plant  or machinery\twhich is  covered by
\nSection 32A.  The  plant  or  machinery\t is  described\twith
\nreference to its purpose. for example, sub-section (2)(b)(i)
\nprescribes  “the  purposes  of\tbusiness  of  generation  or
\ndistribution of\t electricity or\t any other  form of  power”.
\nSub-section (2)(b)(ii)\trefers\tto  small  scale  industrial
\nundertakings which may use the machinery for the business of
\nmanufacture or\tproduction of  any article,  and sub-section
\n(2)(b)(iii)  refers   to  the\tbusiness  of   construction,
\nmanufacture or production of any article or thing other than
\nthat specified\tin the\tEleventh Schedule. Sub-section 2(b),
\ntherefore, refers  to the uses to which the machinery can be
\nputt. It  does not  specify that the assessee himself should
\nuse the\t machinery for\tthese purposes. In the present case,
\nthe person  to whom  the machinery  is\thired  does  use  he
\nmachinery   for\t   specified\tpurposes    under    Section
\n32A(2)(b)(iii). that  person, however,\tis not\tthe owner of
\nthe machinery.\tThe High  Courts of Karnataka an Madras have
\nheld that  looking  to the requirements specified in Section
\n32A the\t assessees, in\tthe present  case,  fulfil  all\t the
\nrequirements of\t that section,\tassessee is the owner of the
\nmachinery and  also uses  the machinery\t himself.  In  other
\ncases, investment  allowance cannot  be granted.  We have to
\nexamine this contention.\n<\/p>\n
     We have  already set  out\tthe  three  requirements  of
\nSection 32A(1)\twhich entitle  an assess to claim investment
\nallowance. On of the requirements is that the machinery must
\nbe wholly  used for the purpose of such assessee’s business.
\nWhen the  business  of\tthe  assessee  is  leasing  of\tsuch
\nmachines, the  machines so leased out are being used for the
\npurpose of  the assessee’s  business. The  income by  way of
\nhire charges  which the\t assessee receives  is also taxed as
\nbusiness income of the assessee.\n<\/p>\n
     Sub-section (2) of Section 32A, however, requires to be
\nexamined to  see whether there is any provision in that sub-
\nsection which  requires that  the assessee should not merely
\nuse the\t machinery for\tthe purposes  of his  business,\t but
\nshould\thimself\t  use  the  machinery  for  the\t purpose  of
\nmanufacture or\tfor what  ever other purpose of machinery is
\ndesigned. Sub-section  (2) covers  all items  in respect  of
\nwhich investment  allowance can be granted. These items are,
\nship, aircraft\tor  machinery  or  plant  of  certain  kinds
\nspecified in that sub-section. In respect of a new ship or a
\nnew aircraft,  Section 32A(2)(a)  expressly prescribes\tthat
\nthe new\t ship or  the new aircraft  should be acquired by an
\nassessee  which\t  is  itself  engaged  in  the\tbusiness  of
\noperation of  ships or\taircraft. Under sub-section (2) (b),
\nhowever, any such express requirement that the assessee must
\nhimself use  the  plant\t or  machinery\tis  absent.  Section
\n32A(2)(b) merely  describes the new plant or machinery which
\nis covered  by\tSection\t 32A.  The  plant  or  machinery  is
\ndescribed with\treference to  its purpose. for example, sub-
\nsection (2)(b)(i)  prescribes “the  purposes of\t business of
\ngeneration or  distribution of electricity or any other form
\nof power”.  Sub-section (2)(b)(ii)  refers  to\tsmall  scale
\nindustrial undertakings\t which may use the machinery for the
\nbusiness of  manufacture or  production of  any article, and
\nsub-section  (2)(b)(iii)   refers   to\t the   business\t  of
\nconstruction, manufacture  or production  of any  article or
\nthing other  than that\tspecified in  the Eleventh Schedule.
\nSub-section 2(b), therefore, refers to the uses to which the
\nmachinery can be putt. It does not specify that the assessee
\nhimself should\tuse the machinery for these purposes. In the
\npresent case, the person to whom the machinery is hired does
\nuse  he\t machinery  for\t specified  purposes  under  Section
\n32A(2)(b)(iii). that  person, however,\tis not\tthe owner of
\nthe machinery.\tThe High  Courts of Karnataka an Madras have
\nheld that  looking  to the requirements specified in Section
\n32A the\t assessees, in\tthe present  case,  fulfil  all\t the
\nrequirements of\t that section,\tassessee is the owner of the
\nmachinery and  also uses  the machinery\t himself.  In  other
\ncases, investment  allowance cannot  be granted.  We have to
\nexamine this contention.\n<\/p>\n
     We have  already set  out\tthe  three  requirements  of
\nSection 32A(1)\twhich  which  entitle  an  assess  to  claim
\ninvestment allowance.  On of  the requirements\tis that\t the
\nmachinery must\tbe wholly  used\t for  the  purpose  of\tsuch
\nassessee’s business.  When the\tbusiness of  the assessee is
\nleasing of  such machines,  the machines  so leased  out are
\nbeing used  for the  purpose of the assessee’s business. The
\nincome by way of hire charges which the assessee receives is
\nalso taxed as business income of the assessee.\n<\/p>\n
     Sub-section (2) of Section 32A, however, requires to be
\nexamined to  see whether there is any provision in that sub-
\nsection which  requires that  the assessee should not merely
\nuse the\t machinery for\tthe purposes  of his  business,\t but
\nshould\thimself\t  use  the  machinery  for  the\t purpose  of
\nmanufacture or\tfor what  ever other purpose of machinery is
\ndesigned. Sub-section  (2) covers  all items  in respect  of
\nwhich investment  allowance can be granted. These items are,
\nship, aircraft\tor  machinery  or  plant  of  certain  kinds
\nspecified in that sub-section. In respect of a new ship or a
\nnew aircraft,  Section 32A(2)(a)  expressly prescribes\tthat
\nthe new\t ship or  the new  aircraft should be acquired by an
\nassessee  which\t  is  itself  engaged  in  the\tbusiness  of
\noperation of  ships or\taircraft. Under sub-section (2) (b),
\nhowever, any such express requirement that the assessee must
\nhimself use  the  plant\t or  machinery\tis  absent.  Section
\n32A(2)(b) merely  describes the new plant or machinery which
\nis covered  by\tSection\t 32A.  The  plant  or  machinery  is
\ndescribed with\treference to  its purpose. for example, sub-
\nsection (2)(b)(i)  prescribes “the  purposes of\t business of
\ngeneration or  distribution of electricity or any other form
\nof power”.  Sub-section (2)(b)(ii)  refers  to\tsmall  scale
\nindustrial undertakings\t which may use the machinery for the
\nbusiness of  manufacture or  production of  any article, and
\nsub-section  (2)(b)(iii)   refers   to\t the   business\t  of
\nconstruction, manufacture  or production  of any  article or
\nthing other  than that\tspecified in  the Eleventh Schedule.
\nSub-section 2(b), therefore, refers to the uses to which the
\nmachinery can be putt. It does not specify that the assessee
\nhimself should\tuse the machinery for these purposes. In the
\npresent case, the person to whom the machinery is hired does
\nuse  he\t machinery  for\t specified  purposes  under  Section
\n32A(2)(b)(iii). That  person, however,\tis not\tthe owner of
\nthe machinery.\tThe High Courts of Karnataka and Madras have
\nheld that  looking  to the requirements specified in Section
\n32A the\t assessees, in\tthe present  case,  fulfil  all\t the
\nrequirements of\t that section,\tassessee is the owner of the
\nmachinery and  also uses  the machinery\t himself.  In  other
\ncases, investment  allowance cannot  be granted.  We have to
\nexamine this contention.\n<\/p>\n
     A similar\tview has  been taken  by the  Andhra Pradesh
\nHigh court  in the  case of  Commissioner of  Income-tax  v.
\nVinod Bhargave\t(169 ITR  549) where Jeevan Reddy, J. (as he
\nthen was)  held that where leasing of machinery is a mode of
\ncarrying on  business by  the assessee the assessee would be
\nentitled to development rebate. the court observed, (p.551):
\n” ….. Once it is held that leasing out of the machinery is
\none mode  of doing  business by\t the assessee and the income
\nderived from  leasing out  is treated  as business income it
\nwould be contradictory in terms to say that the machinery is
\nnot used wholly for the purposes of assessee’s business.”\n<\/p>\n
     The appellant-department,\thowever, relies upon certain
\nobservations of\t this Court in commissioner of Income-tax v.
\nNarang Dairy  Products<\/a> (219  ITR 478)  where a\tBench of two
\njudges of  this Court  said in\tthe context  of\t development
\nrebate in  respect of  new machinery and plant that not only
\nshould the  ownership of the plant and machinery be with the
\nassessee but  also its\tuser by the assessee for the purpose
\nof his\tbusiness. The assessee before the Court in that case
\ncarried on  the business  of manufacture of mild powder. The
\nentire machinery for the purpose of his business was allowed
\ndevelopment rebate  in the assessment year 1965-66. However,
\nin August  1969 some  of the  machinery was  let out  by the
\nassessee for  a period\tof three  years with a provision for
\nrenewal or  for outright  purchase, to\ta third\t party. This
\nCourt said  that the  withdrawal of  development rebate\t was
\njustified since\t the  transaction  of  letting\tout  with  a
\nprovision for  outright purchase  amounted to  a transfer of
\nthe machinery  as defined in Section 2(47) of the Income-tax
\nAct, 1961.\n<\/p>\n
     The ratio of this decision would not apply to the cases
\nwhich are  before us.  In the  case of Narang Dairy products
\n(supra) this  Court has\t pointed out that when the machinery
\nwas let\t out by\t the assessee  to Hindustan lever Limited it
\ncannot admit  of any doubt that the machinery or plant could
\nnot and\t was not used by the assessee for the purpose of the
\nbusiness carried  on by\t him,  which  was  the\tbusiness  of
\nmanufacture of\tmilk powder.  Therefore, the  assessee could
\nnot be\tconsidered as  having used  the machines only of the
\npurpose of  his business.  Secondly, in\t the case  of Narang
\nDairy Products\t(Supra) the transaction was a transaction of
\nhire with  the right  of outright purchase. The Court was of
\nthe view  that the words “otherwise transferred” may be wide
\nenough to cover such a situation.\n<\/p>\n
     This Court\t also relied upon the decision of the Kerala
\nHigh Court in Blue Bay Fisheries (p) Ltd. v. Commissioner of
\nIncome-tax (166\t ITR 1) in the case of narang Dairy Products
\n(supra). In  the  case\tof  Blue  bay  Fisheries  also,\t the
\nassessee purchased  a trawler  for its business. The trawler
\nwas leased  to the transferee. under the agreement of lease,
\nat the\tend of ten months, the trawler was to be sold to the
\ntransferee. In\tterms of  the agreement,  the assessee\talso
\ntook steps to obtain the approval of the concerned authority
\nfor the\t sale of  the trawler.\tThe trawler was to remain in
\nthe  exclusive\t possession  of\t  the  transferee   and\t the
\ntransferee was\tallowed to  suitably alter the trawler so as
\nto make it a tug. The kerala  High Court said that the terms
\nof  the\t  agreement  showed  that  the\tright  to  exclusive
\npossession  and\t  enjoyment  of\t  the\ttrawler\t  had\tbeen
\ntransferred. The  transfer was\tpermanent and preparatory to
\nsale. Hence it amounted to transfer.\n<\/p>\n
     Neither of\t these cases deals with an agreement of hire
\nof machinery  in contradistinction  to an  agreement of hire
\npurchase. When\tthe machinery  is given on hire by the owner
\nto the\thirer on payment of hire charges, the income derived
\nby the\towner is business income. The owner is also entitled
\nto depreciation on the machinery so hired out. The hirer, on
\nthe other  hand, who pays hire charges, is entitled to claim
\nthese as revenue expenditure. The hirer has not acquired any
\nnew asset.  A transaction of hire is, therefore, of bailment
\nof the machinery. There is no extinguishment of any right of
\nthe owner  in the machinery. There is merely a licence given
\nto the\thirer to  use, for a temporary period, the machinery
\nso hired.  In the case of M\/S. Damodar Valley Corporation v.
\nThe State  of Bihar  (AIR<\/a> 1961\tSC 440), this Court examined
\nthe contract  under which  the machinery  and equipment\t was
\nsupplied by the Corporation to the contractors. The question
\nwas whether it was a mere contract of hiring  or a sale or a
\nhire purchase.\tThe Court  said (p.445): “It is well-settled
\nthat a\tmere contract  of hiring, without more, is a species
\nof the contract of hiring, without more, it a species of the
\ncontract of  bailment, which  does not create a title in the
\nbailee.\t But   the  law\t  of  hire  purchase  has  undergone
\nconsiderable development  during the  last half a century or
\nmore and has introduced a number of variations, thus leading
\nto categories,\tand it\tbecomes a question of some nicety as
\nto which  category a particular contract between the parties
\ncomes under.”  We need\tnot dwell  on the niceties of a hire
\npurchase contract  between the\tparties of  a hire  purchase
\ncontract since\twe are concerned only with contracts of hire
\nsimpliciter.\n<\/p>\n
     In\t the   case  of\t  hire\tpurchase   agreements,\t the
\ndepartment’s Circular No.9 of 1943 dated 23rd of March, 1943
\nprovides, inter\t alia, that  where under  the terms  of\t the
\nagreement the equipment shall eventually become the property
\nof the\thirer or  confer on  the hirer an option to purchase
\nthe equipment,\tthe transaction should be regarded as one of
\nhire purchase.\tIn such\t cases, the periodical payments made
\nby the\thirer should,  for tax purposes, be regarded as made
\nup of  (1)  consideration  for\thire  to  be  allowed  as  a
\ndeduction in  the assessment  and; (2) payment on account of
\npurchase to be treated as capital outlet, depreciation being
\nallowed to  the lessee\ton the\tinitial value.\tIn the case,
\nhowever, of  hire of  machinery, the  owner is\tentitled  to
\ndepreciation.\n<\/p>\n
     In this  connection ,  a reference\t may also be made to
\nM\/s. K.L.  Johar  and  Co.  V.\tThe  Deputy  Commercial\t Tax
\nOfficer, Coimbatore  III (AIR<\/a>  1965 SC 1082 at p.1090) where
\nthis Court,  while  examining  a  hire\tpurchase  agreement,
\npointed out  that such\tan agreement  has two  elements; (1)
\nelement of  bailment, and  (2) element\tof sale in the sense
\nthat it contemplates an eventual sale. In the absence of any
\nelement of sale in the present case we do not see any reason
\nfor treating  the agreement as “transfer” or disallowing the
\ngrant of  investment allowance,\t when the  assessee complies
\nwith the  requirements of  Section 32A.\t Section  32A  is  a
\nbeneficial provision  in  a  taxing  statute.  Full  effect,
\ntherefore, requires  to be  given to  the language  used  in
\nSection 32A.  As observed  by this  Court in C.A. Abraham V.
\nIncome-tax Officer,  Kottayam &\t Anr. (AIR<\/a> 1961 SC 609 at p.\n<\/p>\n
612), in  interpreting a  fiscal statute,  the Court  cannot
\nproceed to  make good  the deficiencies if there be any. The
\nCourt must interpret the statute as it stands and in case of
\ndoubt, in  a manner  favourable to  the\t tax-payer.  In\t the
\npresent case,  the language of Section 32A covers leasing or
\nfinance companies which give the machinery on hire as in the
\npresent case.\n<\/p>\n
     In the premises, the appeals are dismissed with costs.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Commissioner Of Income Tax, … vs M\/S. Shaan Finance (P) Ltd., … on 20 March, 1998 Author: M S Manohar Bench: Sujata V.Manohar, D.P. Wadhwa 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: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-80278","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nCommissioner Of Income Tax, ... vs M\/S. 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