High Court Of Allahabad : Lucknow Bench
CIT vs. Daljeet Tyres
Section 32A
Asst. Year 1989-90
Pradeep Kant & R.P. Yadav, JJ.
IT Appeal No. 59 of 1999
22nd September, 2005
JUDGMENT
By the court :
This appeal under s. 260A of the IT Act has been filed by the Revenue on the following question of law : “Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in upholding the findings of CIT(A) directing allowance of the assessee’s claim for investment allowance under s. 32A of the IT Act, 1961 at Rs. 3,79,285 on new machineries installed in the branch set for doing printing job on tin plates.”
2. The assessment year in question is 1989-90. The assessee-respondent feeling aggrieved by an order of assessment dt. 15th March, 1990, by means of which plea of the assessee that he was entitled to the investment allowance to the tune of Rs. 3,79,285.40, was rejected by the AO under s. 143(3) of the Act, filed an appeal and the CIT(A) vide his order dt. 30th April, 1992 allowed the said claim upsetting the findings recorded by the AO and the appeal preferred by the Revenue before the Tribunal against the order of the CIT(A) has been dismissed on 20th May, 1999. Feeling aggrieved by the aforesaid orders, the present appeal has been filed by the Revenue.
3. The facts relevant for the present controversy are that the assessee had maintained two sets of account under the relevant assessment years, wherein he carried on two businesses, namely, one that of tyres and the other of running an industry of printing on tin plates. The assessee had maintained two sets of account; one head office set styled M/s Daljeet Tyres and the other branch set styled M/s Satguru Metal Printers. The assessee claimed that his tin printing unit was an industry involved in manufacturing process and therefore, was entitled to the benefit of investment allowance, which he claimed at Rs. 3,79,285.40 in the return for which adequate reserve of Rs. 2,85,000 had also been credited in the books of account. The investment allowance was claimed under s. 32A of the Act.
The AO, by the following reasoning, rejected the claim of the assessee : “The assessee in branch set does the work of printing on tin plates. The new machineries installed in the branch set for doing printing job on the tin plates do not qualify the condition laid down in s. 32A(2) of IT Act, 1961 for grant of investment allowance as it nowhere refers to this printing of an article and the activities of the same are not for the purposes of business of generation or distribution of electricity or any other form of power and manufacture or production of any article or thing. The claim of deduction of investment allowance is rejected.”
4. The CIT(A), considering the reply of the assessee, in which he had narrated about the manufacturing process involved, came to the conclusion that the material so processed was capable of being sold in an acceptable form and, therefore, investment allowance on such plant and machinery used for such process was allowable. For reaching this finding he also relied upon the decision of the Tribunal, Bangalore Bench in the case of Krishna Associates vs. ITO in ITA No. 928/Bang/1985 for the asst. yr. 1984-85 [reported at (1987) 28 TTJ (Bang) 494— Ed.]. Reliance was also placed on the decision of Tribunal, Calcutta Bench ‘B’ in the case of Amiya Kumar Tarafdar vs. ITO in ITA No. 297/Cal/1984 for the asst. yr. 1980-81 [reported at (1986) 26 TTJ (Cal) 125—Ed.]. Thus, the CIT(A) allowed the investment allowance after holding that the assessee, by utilizing a plant and machinery to process such material, was engaged in the production of a thing. This view was upheld by the Tribunal also.
5. Relevant extract of s. 32A is being quoted below : “Investment allowance.—(1) In respect of a ship or an aircraft or machinery or plant specified in sub-s. (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-s. (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 :” In accordance with s. 32A, sub- s. (2)(b)(ii), the machinery or plant as specified under sub-s. (2)(b) has to be installed by the assessee and has to be used wholly for the purpose of business by the small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing.
The assessee’s claim was rejected by the assessing authority on the ground that new machinery installed in branch set for doing printing job on the tin plates, does not qualify the conditions laid down under s. 32(A)(2) for grant of investment allowance, as it nowhere refers to printing of articles and the activities of the same are not for the purposes of business of generation or distribution of electricity or any other form of power and manufacture or production of any article or thing. Investment allowance under s. 32A is available to a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing.
8. It has been strongly contended by the assessee that the plant and machinery was being used for printing tin plates and the process involved clearly established that the articles so produced were capable of being sold in an acceptable form in the market.
The assessee in his reply dt. 5th March, 1990, while explaining the process involved, stated as under : “The Satguru Metal Printers get the design made then negative and positive of the design is got made and then impression of this is taken on microfinished plate and this plate is put on the automatic offset printing machine and then tin sheets are printed and are sent through dryer for drying. This process is repeated for each colour to be printed.”
9. The case of Amiya Kumar Tarafdar vs. ITO (supra) of the Tribunal Bench ‘B’, which has been placed before us for supporting the claim of the assessee, was a case with respect to investment allowances in regard to the colour photo developing machine which accepted negatives, cut paper, fed it into different sizes and developed, printed and delivered final product in different colourful sizes and designs.
The Tribunal held as under : “Investment allowance is available to a small-scale industrial undertaking established for manufacture or production of any article or thing. The assessee, being registered as a small-scale industry with the State Government, was printing and developing various articles from the negatives inserted in the imported machine. The final product was something different from the negative or the white paper which was inserted in the machine, and it was coming in different sizes. Therefore, if the operation of the machine was taken into consideration along with the final product, it would be clear that the assessee was manufacturing an article with the machine…” The Tribunal thus allowed the claim of investment allowance under s. 32A.
10. In the case of Asstt. CIT vs. Soni Photo Films (P) Ltd. (1999) 64 TTJ (Del)(SB) 682 : (1998) 67 ITD 81 (Del)(SB), the assessee was engaged in the business of developing and printing of photographs. The assessee filed his IT return for the first year of business along with audited balance sheets and P&L a/c showing ‘loss’ income, and claimed investment allowance on purchase of photographic apparatus. The AO disallowed the investment allowance on the ground that activity of assessee did not involve manufacture or production of an article or thing and also because the assessee had failed to create statutory reserve which was sine qua non for claiming investment allowance. The CIT(A) held that in the absence of any statutory reserve the assessee could not be allowed investment allowance during the year, but in a subsequent year, if the assessee would be able to create a statutory reserve, it would become entitled to grant of investment allowance. On Revenue’s appeal, the Division Bench of the Tribunal accepted the Revenue’s arguments and understood the activity of the assessee as working or developing of photographs which is normal connotation, not termed as manufacturing of photographs. Since the several Benches of the Tribunal had held contrary views, the Division Bench referred the matter to the Full Bench. Emphasis has been placed on the following observations of the Special Bench of the Tribunal : “….Therefore, a negative photograph is not the same thing as an empty film roll and it is quite a distinct and different thing than what is fitted into the camera. One is not concerned whether the photo thus supplied to the customer is a sale of an article or thing. The question whether it is a sale or whether it is a service contract is not at all relevant for purposes of examining whether the assessee is entitled to investment allowance under s. 32A or not. What is relevant is whether there is any manufacture or processing involved in the activity carried on by the assessee or in taking photo developing into a positive film, colouring it and handing it over to the customer. This makes all the difference. The Revenue’s contention was not tenable that simply because the assessee was engaged in the production of taking films, developing the films into positive films and running a colour photo lab by itself did not earn him the investment allowance within the meaning of s. 32A since his business activity did not amount to either manufacture or production of an article or a thing.” Further reliance has been placed on the following observations : “It is not necessary that the original article or material should have lost its identity completely. All that is important is whether what is emerged as a result of operations is a different commercial commodity having its own name, identity, character or end-use. In the instant case, applying the test, the negative vacant film roll fitted or kept in or fitted into the camera is a quite different and distinct article than the photograph which can be taken on the negative film. Nobody calls the photo as equal to a negative film. The negative film loses its identity completely and the photo is quite a different commercial commodity having its own identity, character and end- use. Therefore, what is involved while taking a photograph by a photographer is manufacture…..”
The case of Asstt. CIT vs. Kohli Bros. Colour Lab (P) Ltd., decided by Tribunal, Allahabad Bench ‘A’, Allahabad for the asst. yr. 1986-87 on 17th March, 1999 is also placed before us, where it was the case of the Revenue that photographic apparatus and goods being articles or things listed in the Eleventh Schedule, the assessee is not entitled to investment allowance under s. 32A of the IT Act on the imported computerized colour process machine. The Tribunal accepted the finding recorded by the CIT(A), which said that the appellant was not correct in holding that the appellant was engaged in the business of manufacture of any of the items as specified in Sch. XI and that the appellant was not manufacturing any photographic apparatus or equipment and relying upon the judgment of Calcutta Bench ‘B’ in the case of Amiya Kumar Tarafdar (supra) referred to above, the assessee was granted the investment allowance.
In the case of CIT vs. Professional Information Systems & Management (2005) 195 CTR (Guj) 14 : (2005) 274 ITR 242 (Guj), the question arose as to whether data processing through computer amounts to production of article or thing, and that whether the assessee was eligible for investment allowance on the cost of computer under s. 32A. In this case the assessee was engaged in the business of providing computer services to various concerns and received income by way of service charges for such activity. During the year under consideration the assessee-company purchased computer and claimed investment allowance on the same under s. 32A of the Act. The AO rejected the claim of the assessee but in appeal his plea was accepted and it was found that the assessee was engaged in the business of manufacturing and providing, ‘data systems’ after using the processing machines and thus it was engaged in the business of manufacturing of articles or things and that the computer is a ‘plant’. This order was upheld by the Tribunal, against which the matter went to the High Court in reference. The Gujarat High Court, after taking into consideration a large number of judgments of different Courts and after analysing the entire case law, held as under : “… that the test for determination as to whether the machinery/apparatus can be termed as a plant or not would primarily depend upon the function to which the said machinery/apparatus is put, regardless of the location where the machinery/apparatus is situated. This is over and above the test of the end- product being an entirely different commercial commodity vis-a-vis the input. Therefore, in the case of computer system or data processing system, the inputs which are fed in are entirely different, in a different form with different indicators. As against that, the end-product, viz., balance sheets, various accounts, statements, analysis, etc. which emerge by way of printouts are distinct and different from the inputs, inasmuch as what comes out is having different connotation and use. Thus, the activity of data processing through the use of computers is one which would amount to business of manufacture or production of articles or things and the unit which undertakes such computer services for other concerns would be an industrial undertaking.”
The Court thus concluded that the assessee-company which provides computer services to other concerns was an industrial undertaking engaged in the business of manufacture or production and was thus eligible for investment allowance under s. 32A of the Act on the cost of computer.
13. The apex Court in the case of CIT vs. Shaan Finance (P) Ltd. (1998) 146 CTR (SC) 110 : (1998) 3 SCC 605, had an occasion to consider the meaning, import and scope of s. 32A. In the said case the claim of investment allowance was made by the assessees, which were financial companies. They were not themselves manufacturers of any article or thing. They purchased machinery and hired out the same to manufacturers under agreements of hire. The hirer-manufacturer in turn used the machinery for the purposes specified in s. 32A(2)(b)(iii). The agreement of hire did not involve any element of sale. The High Courts of Karnataka and Madras held the respondent-assessees to be entitled to investment allowance under s. 32A of the Act. The plea of the appellant- Revenue that investment allowance can be claimed by the assessee only in a case where the assessee is the owner of the machinery and also uses the machinery himself and not otherwise, was rejected by the Supreme Court. The Court extracted the following conditions from s. 32A to be satisfied for having the benefit of investment allowance, namely, in respect of plant and machinery for which an investment allowance is claimed in any relevant previous year : (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 s. 32A(2).
After considering the aforesaid three conditions, the Court allowed the claim of the financial companies of investment allowance. The Court held that if the requirements of s. 32A are fulfilled, namely, the machinery is owned by the assessee, the machinery is used for the purpose of the assessee’s business and the machinery is as specified in sub-s. (2), the assessee would be entitled to the investment allowance under s. 32A. The Court also considered the provisions relating to investment allowance as against the provisions of s. 33 of the IT Act, 1961 and held as under : “The provisions relating to investment allowance are akin to the provisions under s. 33 of the IT Act, 1961 relating to development rebate which was discontinued w.e.f. 1st April, 1974 by a notification issued by the Central Government. From 1st April, 1976, however, s. 32A was introduced in the IT Act, 1961 granting investment allowance under the Finance Act, 1976. A circular of the Department being Circular No. 202 dt. 5th July, 1976, which explained the provisions of the Finance Act, 1976, pertaining to direct taxes, refers to investment allowance in para 23.1. It is stated that the new scheme of investment allowance is broadly on the lines of development rebate scheme that was discontinued earlier (para 23.2). Whereas development rebate was allowed at varying rates, investment allowance will be admissible at the uniform rate of 25 per cent only. Describing the provisions of s. 32A(2), the circular states that new ships and new aircraft acquired after 31st March, 1976 by the taxpayers engaged in the business of operation of ships or aircraft will be eligible. It says : ‘It should be noted that new ships and aircraft will qualify for investment allowance only in the hands of taxpayers carrying on the business of operating ships or aircrafts and the allowance will not be available in respect of ships or aircraft acquired by other taxpayers.’ In respect of new machinery or plant installed after 31st March, 1976, however, the circular does not prescribe any such condition of the assessee himself carrying on the business of manufacturing. The circular thus clearly brings out the difference between s. 32A(2)(a) and s. 32A (2)(b).”
14. The Allahabad High Court in the case of Singh Engg. Works (P) Ltd. vs. CIT 1978 CTR (All) 201 : (1979) 119 ITR 891 (All), while considering the deductions under s. 80-I of the IT Act, which have since been omitted by Finance Act, 1972, w.e.f. 1st April, 1973, laid down that the broad distinction between manufacture and production is that manufacture brings into existence of a new product, a product which is of a different chemical composition or whose integral structure is different from the raw materials. Production, as distinguished from manufacture, is nothing except bringing into existence a product after processing the raw materials in a manner which may not change the inherent quality or chemical composition of the raw material and, therefore, if iron bars and rods manufactured or produced by the assessee are covered by Entry 1, the source of the raw material is entirely irrelevant and immaterial. Therefore, the assessee cannot be denied relief under s. 80-I of the Act in respect of the turnover of iron rods and bars manufactured or produced from billets purchased from outside. The assessee in this case, is a small-scale undertaking, a fact which is not disputed and it qualifies all three conditions given under s. 32A, explicitly set in, in the case of Shaan Finance (P) Ltd. (supra).
In view of various authorities referred to above, it cannot be disputed that the assessee was entitled for the investment allowance for the plant and machinery which was installed after the prescribed date and was being used for business, wherein by the process of manufacture printed and colour tin sheets were produced, which were capable of being sold in the market in acceptable form. We thus do not find any illegality in the order passed by the CIT(A) and the view of the Tribunal.
The appeal has no force and is dismissed.
[Citation : 287 ITR 344]
