Commissioner of Income Tax vs Eastern Spg. Mills and Industries Ltd.

Ajit K. Sengupta, J.—In this reference u/s 256(1) of the income tax Act, 1961 (''the Act'') the Tribunal has referred the following question for opinion of this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to investment allowance u/s 32A of the income tax Act, 1961 on the plant and machinery leased out to Grasim Industries Ltd.?

The facts as found by the Tribunal are as follows:

The assessment years involved are 1986-87 and 1987-88. During the years, the assessee has income from trading activities at Bombay in the name of Bharat Trading International and from the knitting unit in the name of Bharat Trading International at Birlanagar, Gwalior and income from licence fee and interest, etc. In the order of assessment for the assessment year 1986-87, the Assessing Officer observed that the assessee received Rs. 84 lakhs as licence fee from Grasim Industries Ltd., Birlanagar, as per leave and licence agreement dated 26-7-1984 for the period from 1-4-1985 to 31-3-1986 and also additional licence fee on addition of plant and machinery pursuant to supplementary agreement dated 1-1-1986. The total receipt was Rs. 84,78,300 on account of the licence fee for the assessment year 1986-87.

The Assessing Officer considered the claim of investment allowance for the addition of plant and machinery and worked out the investment allowance for the above assessment year at Rs. 32,53,797.

For the assessment year 1986-87, the Assessing Officer applied the provisions of section 80VVA of the Act and allowed deduction only of Rs. 19,74,076 out of the said amount. In the following assessment year 1987-88 also, the Assessing Officer applied the provisions of section 80VVA and adjusted the balance of Rs. 12,79,721 including the investment allowance for the current year at Rs. 25,81,132.

The Commissioner called for the records for the above assessment years. Looking into the same it was found by him that the investment allowance had been wrongly allowed in the earlier year and as a result, higher amount of investment allowance was allowed to be carried forward. Since, the assessments completed by the Assessing Officer were erroneous and prejudicial to the interests of the revenue, he issued notice u/s 263 of the Act. Rejecting the explanations offered, he was of the view that the assessee has been wrongly given investment allowance on new plant and machinery which was leased to Grasim Industries Ltd. during the year. He, accordingly, set aside both the orders with direction to examine the facts once again keeping in view the observations and to recompute the income after withdrawing investment allowance wrongly allowed to the assessee. According to the Commissioner, the assessee in the case leased out the spinning unit situated at Vill. Pirgochha to Grasim Industries Ltd. by means of an agreement dated 26-7-1984 which came into effect from 27-7-1984. Subsequent to this agreement, the assessee further agreed to investment of further funds to modernise the leased out spinning unit. Accordingly, a supplemental agreement dated 1-1-1986 was entered into and the assessee agreed to bring into and install additional plant and machinery in the spinning unit to the extent of Rs. 4 crores and for which Grasim Industries Ltd. was to pay further licence fee at the rate of 19 per cent per annum of the value of the plant and machinery. The assessee, accordingly, installed the plant and machinery of the total worth of Rs. 1,30,15,185 in the previous year relevant to the assessment year 1986-87 and claimed investment allowance of Rs. 32,53,797. According to the Commissioner, the assessee in this case installed plant and machinery for the spinning unit which was leased out to another concern. In such a case, it cannot be said that the plant and machinery have been wholly and exclusively used for the purpose of business. According to him, it is not merely the leasing business which will entitle the assessee to investment allowance but there is a further condition to be satisfied that such utilisation of the plant and machinery should result either in the manufacture or production of articles. The Commissioner further held that by the mere ownership of plant and machinery the assessee is not entitled to claim that it is the actual user of the same. According to him, the requirement of the section stipulated that the plant and machinery should not only be used for the purpose of business but for the purpose of the business carried on by him. Since in this case, the spinning unit was not used by the assessee-company for the purpose of the business carried on by it but was given out on hire, he was of the view that the assessee could not be given the benefit of investment allowance u/s 32A of the Act. Distinguishing the decisions in the case of Commissioner of Income Tax Vs. Prem Chand Jute Mills Ltd., and Commissioner of Income Tax Vs. Vinod Bhargava, and the decision of the Special Bench in the case of (1985) 13 ITD 234 cited before him, the Commissioner came to the conclusion that the assessee was not entitled to investment allowance and, accordingly, directed the Assessing Officer to redo the assessments for the above two assessment years.

Aggrieved by the said order, the assessee took up the matter in appeal before the Tribunal and, the Tribunal allowed the claim as follows:

We have carefully considered the rival submissions in the light of the material placed on the record. From the facts narrated above, it is not disputed that the assessee in this case is having business in the manufacture and sale of staples and synthetic blended yarn of various specifications and also other business in trading as well as in manufacture and sale of knitted fabrics. Due to adverse conditions in the demand and supply of staple and synthetic blended yarn resulting in recession in textile industry and also due to the increase in the cost of inputs and other adverse conditions, the assessee decided to give the said manufacturing unit to Grasim Industries Ltd. on leave and licence basis vide agreement dated 26-7-1984 which was further modified by the supplementary agreement dated 1st January, 1986. In terms of the agreement it is seen that the assessee has given out the right of exploitation of the said spinning mill on leave and licence basis for an initial period of three years which can be extended at the option of Grasim Industries Ltd. The ownership, command and control of the plant and machinery and the entire assets have to be taken over by the assessee on the termination of the agreement. Grasim Industries Ltd. was to produce the same items as done by the assessee, i.e., manufacture and sale of staples and synthetic blended yarn of various specifications. In such a case, we are of the view that the objections raised by the learned Commissioner are fully met by the Special Bench of the Tribunal in the case of ITO v. First Leasing Co. of India Ltd. [1985] 13 ITD 234. In that case, the Special Bench of the Tribunal considered the conditions stipulated in section 32A of the Act. In that case the machinery was owned by the assessee and the business of the assessee was leasing of machinery. The Special Bench interpreted the expression ''wholly used for purposes of the business'' used in section 32A(1) and held that it does not mean also that it should be exclusively used only for purposes of the business of the assessee. Therefore, it was held that the assessee fully satisfied the first three conditions, viz, ?

(a) that there should be a ship or aircraft or machinery and plant which is new and must be acquired after 31st March, 1976,

(b) it must be owned by the assessee, and

(c) it must be wholly used for the purpose of business carried on by the assessee. With regard to the further requirement that the machinery or plant must be installed for the purpose of business, the Special Bench further observed as follows:

The further requirement of the nature of the business which the assessee concerned should be carrying on has been specifically incorporated by the Legislature as far as ship or aircraft is concerned. Such a requirement is absent in respect of other machinery or plant and, therefore, on a plain reading of the provision one cannot spell any requirement that the assessee should itself carry on the industrial undertaking where the requisite articles or things are manufactured. Therefore, there is no requirement of section 32A(2) which would be violated if investment allowance is granted to an assessee which leases out machinery or plant provided the lessee uses such machinery or plant for purposes specified. Again the reference to the undertaking in section 32A(4) has to be construed harmoniously to make the section workable. When there is no bar according to the provisions of sections 32A(1) and 32A(2) to the grant of investment allowance to a leasing company, the term for the purposes of business of the undertaking used in section 32A(4) has to be construed as to mean the same type of business as entitled the assessee originally to the grant of investment allowance. Therefore, the use of the words ''the undertaking'' in section 32A(4) does not place any bar on the grant of investment allowance.

The Tribunal following the decision of the Special Bench of the Tribunal held that the assessee satisfied all the conditions for entitlement to investment allowance u/s 32A. The Tribunal also placed reliance upon the decision of this Court in Prem Chand Jute Mills Ltd.''s case (supra). Thus, the Tribunal arrived at the finding that the present assessee made a temporary arrangement for the exploitation of the commercial assets to tide over the adverse conditions in the form of recession and the constraints of increase in cost of production. Therefore, the agreement with Grasim Industries Ltd. was only a temporary arrangement. According to the Tribunal, the agreement shows that the arrangement is not even a lease in terms of its definition under the Transfer of Property Act, but only a leave and licence agreement for the exploitation of the spinning mill. For the initial period of three years renewable at the option of Grasim Industries Ltd., the ownership of the plant and machinery remained with the assessee; so did command and control of the machinery. The insurance of the plant and machinery is also to continue in the name of the assessee and the assets are to be taken over by the assessee on the termination of the agreement. In such situation as held by the Special Bench of the Tribunal in First Leasing Co. of India Ltd.''s case (supra), the investment allowance shall be available to the assessee. The Leave and Licence arrangement is just one mode of exploitation of the business assets and is as good as the running of the business by the assessee itself. The assessee is, thus, held to continue with the business through the Leave and Licence and, therefore, there has been use of the plant and machinery in the assessee''s business. Finally, the Tribunal set aside the revision order of the Commissioner for both the years.

It is in this factual background that the question as set out above has been referred to. We have heard the rival contentions, learned counsel of the parties reiterating the respective arguments canvassed before the Tribunal.

Section 32A provides that in respect of a ship and aircraft, or machinery or plant specified in sub-section (2), there shall be allowed a deduction by way of investment allowance provided the following conditions are satisfied:

(i) the plant or machinery shall be owned by the assessee;

(ii) such plant and machinery is wholly used for the purpose of the business carried on by the assessee; and

(iii) the machinery or plant must be such as are specified in section 32A(2).

Section 32A(2) lays down that the machinery or plant to which the investment allowance is to be applicable shall be the following:

(a) The new machinery or plant must be installed after 31-3-1976.

(b) Such machinery or plant which are installed must be for the purposes of the business of construction, manufacture, production of any article or thing not being an article or thing specified in the list in the 11th Schedule.

It is not in dispute that the assessee is carrying on the business in the manufacture and sale of staples and synthetic blended yarn. It is also not in dispute that due to adverse condition in the demand and supply of staples and synthetic blended yarn due to recession in textile industry and due to increase in the cost of inputs, the assessee gave the said manufacturing unit to Grasim Industry Limited on leave and licence basis for a term of three years. The question, therefore, arises whether by giving out the plant and machinery to the lessee for a temporary period, it can be said that the plant and machinery has been used for the purpose of the business and, therefore, is eligible for investment allowance.

Our attention has been drawn to a decision of this Court in Commissioner of Income Tax Vs. Hindusthan Aluminium Corporation Ltd., . There the Division Bench dealt with a similar case where the question of allowance of development rebate in respect of plant and machinery which were leased out to the different companies under a pooling arrangement came up for consideration. The condition for allowing the development rebate u/s 33(1) is similar to the condition under which investment allowance is allowable u/s 32A(1). In that case, the assessee claimed development rebate in respect of weather radar equipment owned by it. The equipment was purchased by the assessee. The assessee entered into a pooling arrangement with certain other companies for the use of the aeroplane. The other companies agreed to pay to the assessee higher charges amounting to Rs. 12,280 in respect of the user of the radar. The higher charges so received by the assessee were held to be income from business by the Tribunal, even though the ITO treated the said income as ''income from other sources''. On these facts, the Division Bench upheld the view of the Tribunal and sustained the claim for development rebate in respect of the weather radar equipment leased out to different companies.

There the Division Bench held that an asset might be exploited by the owner to its best advantage and he might do so either by using it himself or by letting it out to someone else. So long as an asset was used by the assessee for the purpose of the business carried on by it even though such asset was allowed to be used by others, it could not disentitle the assessee from claiming development rebate. The assessee had used the radar equipment to the extent possible for its own use. Instead of keeping it idle when the assessee was not using the same, the assessee allowed other companies to get the benefit and advantage of the radar equipment for some consideration. The yield of income through such asset was the profit of the business irrespective of the manner in which that asset was exploited by the assessee. The radar equipment, a commercial asset, was exploited by the assessee wholly for its business even though some benefit or advantage was extended to other companies for a consideration. Therefore, the assessee was entitled to claim development rebate u/s 33 of the Act in respect of the weather radar equipment.

Dr. Pal did not dispute that the requirement that the assessee should be carrying on the business for which the subject plant and machinery is to be allowed the investment allowance. But there is nothing in section 32A(2) which prohibits the grant of investment allowance to an assessee who leases out machinery or plant to a third party for use in business of manufacture of the permitted goods. The investment allowance is available even where they are leased out provided the lessee uses such machinery or plant for the purpose specified in the said section.

The Commissioner in his order u/s 263 has himself pointed out that in the present case it is not in dispute that the leasing out of plant and machinery was a business activity on the part of the assessee and the lease fee was rightly assessed as business income.

The Tribunal while reversing the decision of the Commissioner of income tax u/s 263 and upholding the claim of the assessee for the investment allowance u/s 32A held that leasing or giving the plant and machinery on leave and licence basis is one mode of exploitation of business, and, therefore, it amounts to running of the business by the assessee itself. In other words, the assessee runs the business by entering into a contract and on that basis exploited the plant and machinery. In that case, also it will amount to running of the business by the assessee.

In the present case, the machinery is owned by the assessee. By leasing out the machinery, the assessee was exploiting the commercial assets, viz., the machinery for the purpose of the business. The expression ''wholly'' used for the purpose of the business, in the context in which it appears u/s 32A(1), means that the asset an in its entirety must be used for the purpose of the business. So long as, an asset is used by the assessee for the purpose of the business carried on by the assessee, even though, such asset is allowed to be used by others, that cannot disentitle the assessee from claiming investment allowance.

A commercial asset which was acquired and used for the purpose of the business does not cease to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade. The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset in exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else.

It is relevant to note that the ownership, command and control of the plant and machinery and the entire assets have to be taken over by the assessee on the termination of the lease agreement. Grasim Industries Ltd., the lessee, was to produce the same items as done by the assessee, i.e., manufacture and sale of staples and synthetics blended yarn of various specifications. On this finding, the Tribunal has held that in such a case the plant and machinery was used for the purpose of the business and, therefore, the assessee is entitled to investment allowance u/s 32A.

It is also relevant that the income tax authority have themselves allowed depreciation on the plant and machinery. Such depreciation can be allowed only if the plant and machinery has been used for the purpose of the business. If the plant and machinery is allowed depreciation, such plant and machinery shall as well be entitled to investment allowance or development rebate as the requirement of both the allowances is that the plant and machinery shall be used for the purpose of the business.

For the reasons aforesaid, we answer the question in the affirmative and in favour of the assessee and against the revenue. There will be no order as to costs.

Chowdhury, J.

I agree.