Commissioner of Income Tax vs Indian Petrochemicals Corporation Ltd.

Harsha Devani, J.

The Income-tax Appellate Tribunal, Ahmedabad Bench "B" (hereinafter referred to as "the Tribunal") has referred the following question arising out of the order dated July 24, 1997, made in I.T.A. No. 3913/Ahd/1992 for the opinion of this court:

"Whether, on the facts and in the circumstances of the case and in the law, the Tribunal was right in allowing the investment allowance under section 32A of the Act in respect of plant and machinery installed from April 1, 1987, to March 31, 1988, in the assessment year 1989-90?"

The assessment year is 1989-90 and the corresponding accounting period is the year ended on March 31, 1989. The assessee, a Central Government public sector undertaking, in the computation of its income claimed deduction of Rs. 30,72,03,504 as investment allowance under section 32A of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), on machinery of Rs. 1,06,41,24,179 installed during the period from April 1, 1987, to March 31, 1988. The Assessing Officer at the time of assessment found that the assessee-company had already been allowed deduction under investment deposit account under section 32AB of the Act in the earlier years, that is, in the assessment years 1987-88 and 1988-89. According to the Assessing Officer, in the assessment year 1987-88 both the claims, that is, investment allowance under section 32A and investment deposit account under section 32AB were in operation, however, the assessee had consciously chosen to claim the benefit of investment deposit account under section 32AB for the assessment year 1987-88 and for the assessment year 1988-89 the scheme for investment allowance under section 32A was not in operation. The Assessing Officer was of the view that since the assessee had been allowed deduction under the scheme of investment deposit account under section 32AB of the Act for the assessment year 1988-89, it was not entitled to claim deduction under section 32A(8B) for the same assets. That since the assessee had already been allowed deduction to the extent of Rs. 26.97 crores under section 32AB of the Act in the assessment years 1987-88 and 1988-89, if the claim for investment allowance as made by the assessee for the assessment year 1988-89 were to be allowed in respect of assets which were installed during the previous year relevant to the assessment year 1988-89 and in respect of which deduction under section 32AB had already been allowed, it would amount to double deduction, that is, first under section 32AB and then under section 32A of the Act, which was never the intention of the Legislature. He, accordingly, disallowed the claim for investment allowance under section 32A of the Act in respect of machinery of Rs. 106.41 crores installed during the period April 1, 1987, to March 31, 1988.

Being aggrieved, the assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals), who held that the assessee was not entitled to claim investment allowance in respect of plant and machinery for which it had already claimed deduction under section 32AB in the year 1988-89 and, accordingly, rejected the said ground of appeal. The assessee carried the matter in further appeal before the Tribunal. By the impugned order, the Tribunal held that in terms of the proviso to clause (a) of sub-section (8B) of section 32A of the Act the assessee was entitled to claim deduction under section 32A(8B) of the Act for the assessment year 1989-90 and allowed the said ground of appeal.

Mr. K.M. Parikh, learned senior standing counsel for the appellant, submitted that the impugned order of the Tribunal is a non-reasoned and non-speaking one inasmuch as the Tribunal has not assigned any reasons for overruling the findings recorded by the Commissioner (Appeals) and the Assessing Officer. It was submitted that the respondent-assessee having already claimed deduction under the scheme of investment deposit account under section 32AB of the Act for the assessment years 1987-88 and 1988-89 in respect of the very same plant and machinery, it was not permissible for the assessee to claim investment allowance under section 32A(8B) of the Act as the same would amount to double deduction in respect of the same plant and machinery. The attention of the court was invited to the contents of the Central Board of Direct Taxes (CBDT) Circular No. 559, dated May 4, 1990, to submit that the same clearly provides that investment allowance could be claimed as an option to the deduction allowable under the Investment Deposit Account Scheme (section 32AB). It was submitted that under the circumstances since the benefit under section 32A(8B) of the Act was to be claimed as an option to the benefit under section 32AB of the Act the assessee was not entitled to deduction under section 32A(8B) of the Act in respect of plant and machinery on which deduction under section 32AB of the Act had already been claimed in the earlier years. It was, accordingly, urged that the impugned order not being in consonance with the above referred to provisions of the Act the question is required to be answered in favour of the Revenue and against the assessee.

On the other hand, Mr. J.P. Shah, learned counsel appearing on behalf of respondent-assessee, invited the attention of the court to the provisions of sub-section (8B) of section 32A of the Act to submit that the same nowhere provides that in case where deduction has already been claimed in earlier years in respect of such plant and machinery as described in the said sub-section, the investment allowance under section 32A of the Act was not allowable in the assessment year 1989-90. It was submitted that while the assessee had claimed deduction under section 32AB of the Act for the assessment years 1987-88 and 1988-89, such a deduction had not been claimed in respect of the plant and machinery in the year under consideration. That the figures of Rs. 39.55 crores and Rs. 11.80 crores, respectively, for the assessment years 1987-88 and 1988-89 clearly show that the assessee had already invested the amount available under section 32AB of the Act towards the purchase of machinery in the respective years. It was submitted that under the scheme of the Act in the assessment year 1987-88 the assessee could claim either investment allowance under section 32A or deduction under section 32AB of the Act for investment deposit account. Both these schemes were based on different criteria. The assessee, therefore, claimed deduction under section 32AB of the Act which was calculated at 20 per cent of the profit for that year. The condition required to be fulfilled for the purpose was either to invest that part of the income in an account with the Development Bank or to utilise such amount for purchase of new machinery or plant. It was submitted that since the assessee had invested money in purchase of machinery, it did not deposit the amount with the Development Bank. According to the learned counsel, utilisation of money in purchase of machinery or depositing such amount with the Development Bank was only a condition for claiming deduction under section 32AB of the Act and it had nothing to do with the installation and use of the plant and machinery.

4.1 It was further submitted that the provisions of section 32A(8B) of the Act was brought in with a view to benefit those assessees who had agreed to purchase a substantial amount of machinery before June 12, 1986, and who could not take the benefit of investment allowance thereon because of the change in the provision from the assessment year 1988-89 and, therefore, the same cannot make the assessee worse off. It was contended that as per the provisions of section 32A(1) and section 32A(8B) of the Act the assessee was entitled to claim investment allowance in the assessment year 1988-89 in respect of plant and machinery installed in the accounting years 1987-88 and 1988-89 and that denial of any part of such deduction would amount to denial of the benefit provided under law, especially when there is no provision in the Act for withdrawing the deduction of allowance under section 32AB in the assessment year 1988-89 while granting the deduction under section 32A(8B) of the Act in respect of plant and machinery installed during 1987-88, if the same was ordered or purchased before June 12, 1986. The attention of the court was drawn to the Explanation to sub-section (1) of section 32AB of the Act to point out that reduction is to be made from the actual cost of plant and machinery installed, for that part of such cost which has been met out of the amount released under section 32AB(6), that is, from the Development Bank deposit. It was argued that under section 32A(8B) of the Act the assessee is entitled to investment allowance on the assets which have been installed during the previous year relevant to the assessment year 1988-89 and that such claim does not amount to double deduction. It was contended that the assessee-company has satisfied all the conditions as laid down under section 32A(8B) of the Act and is, thus, entitled to investment allowance even on those assets which have been installed during the previous year relevant to the assessment year 1988-89, though investment on those assets had been made in the earlier years. It was, accordingly, urged that the impugned order passed by the Tribunal, being just, legal and proper does not warrant interference by this court.

The Tribunal in the impugned order, after recording the facts of the case and the rival contentions, has recorded its findings thus:

"9. We heard ''the assessee''s counsel and the Departmental representative. We have also gone through Circular No. 559, dated May 4, 1990, issued by the Central Board of Direct Taxes. We have also gone through the provisions of the proviso to clause (a) of sub-section (8B) of section 32A. As per this proviso, the assessee is entitled to claim the above deduction in the assessment year 1989-90. The claim has been made in the assessment year 1989-90. The other conditions have been satisfied. Thus, we are of the opinion that the claim of the assessee that it is entitled to deduction so claimed to be allowed. The same is directed to be allowed."

As can be seen from the impugned order, the same is rather cryptic and no reasons have been assigned by the Tribunal for overturning the findings recorded by the Commissioner (Appeals) while allowing the ground of appeal. However, since the question relates to the assessment year 1989-90, instead of referring the matter back to the Tribunal for assigning reasons in support of its conclusions, this court has thought it fit to examine the facts of the case in the light of the relevant statutory provisions and render its opinion accordingly.

For the purpose of appreciating the controversy in issue it would be necessary to refer to the background facts for inserting section 32A of the Act as appearing in the Central Board of Direct Taxes Circular No. 559 , dated May 4, 1990.

Section 32A of the Act was inserted by the Finance Act, 1976, with effect from April 1, 1976, that is, for and from the assessment year 1976-77. It was decided in the year 1986 to discontinue the deduction for investment allowance and substitute it by the new provisions of investment deposit account, where the deduction was linked with the profit of the concern. Accordingly, under the provisions of sub-section (8) of the section, a Notification No. G.S.R. 870(E), dated June 12, 19861, was issued which discontinued the deduction for investment allowance in respect of a ship or aircraft acquired or any machinery or plant installed after March 31, 1987. The Finance Act, 1986, inserted, with effect from April 1, 1987, a new section 32AB in the Income-tax Act, 1961, to allow deduction on account of investment deposit account (i.e., deposit in an account with the Development Bank) subject to a maximum of 20 per cent of the profits of the eligible business or profession. It was, however, felt that the withdrawal of investment allowance, with effect from April 1, 1987, created an adverse situation for entrepreneurs, who were not able to get the benefit of section 32AB for the reasons of absence or inadequacy of profit in the year of investment. The Government, therefore, decided to reintroduce investment allowance in respect to new ship or aircraft acquired or new machinery or plant installed after March 31, 1988. The investment allowance could be claimed as an option to the deduction allowable under the investment deposit account scheme (section 32AB) and was to be allowed on the same lines as was being allowed earlier prior to its withdrawal, with the modification that the admissible deduction would be 20 per cent, of the cost of the new asset as against 25 per cent, allowed earlier. Since the investment allowance had been withdrawn earlier in respect of new ship or aircraft acquired or new machinery or plant installed after March 31, 1987, and it was being revived in respect of such assets acquired or installed after March 31, 1988, the result was that assessees would not have been eligible to claim investment allowance in respect of these assets acquired or installed during the period April 1,1987 to March 31, 1988. It was felt that the short notice given for withdrawal of investment allowance, vide Notification dated June 12, 1986, had caused hardship in cases where the assessees had taken steps to acquire such assets prior to the date of their notification (i.e., June 12, 1986) but were not able to obtain timely delivery of these assets from the foreign or Indian manufacturers or dealers for reasons beyond their control, so that these could be acquired or installed only after March 31, 1987. These assessees would have been denied the benefit of deduction for not fault of theirs. It was, therefore, decided to make provisions to allow investment allowance to such assessees also. In order to implement the decision for reintroducing of investment allowance, the Amending Act, 1989, has also made amendments of section 32A whereby a new sub-section (8B) has been substituted in the section to provide that notwithstanding anything contained in sub-section (8) or Notification No. G.S.R. 870(E), dated June 12, 1986, issued thereunder, the provisions of the section shall apply in respect of the assets enumerated thereunder. Since there would be cases where a portion of the cost of the new asset may be financed by way of withdrawal from the deposits made with the Development Bank under the Investment Deposit Account Scheme, on which deduction under section 32AB had already been claimed by the assessee, it was necessary to provide that investment allowance would not be allowed again on such portion. An Explanation, therefore, came to be inserted in sub-section (1) of the section to provide that for the purposes of investment allowance, "actual cost" shall mean the actual cost of the ship, aircraft, machinery or plant to the assessee as reduced by that part of such cost which has been met out of the amount released to the assessee from the Development. Bank in accordance with the provisions of section 32AB(6) of the Act.

At this juncture it may be pertinent to refer to the provisions of sub-section (8B) of section 32A of the Act which to the extent the same are relevant for the present purpose read thus:

"(8B) Notwithstanding anything contained in sub-section (8) or the notification of the Government of India in the Ministry of Finance (Department of Revenue) No. G.S.R. 870(E), dated the June 12, 1986, issued thereunder, the provisions of this section shall apply in respect of,--

(ii) any new machinery or plant installed after the 31st day of March, 1987, but before the 1st day of April, 1988, if the assessee furnishes evidence to the satisfaction of the Assessing Officer that before the 12th day of June, 1986, he had purchased such machinery or plant or had entered into a contract for the purchase of such machinery or plant with the manufacturer or owner of, or a dealer in, such machinery or plant, or had, where such machinery or plant has been manufactured in an undertaking owned by the assessee, taken steps for the manufacture of such machinery or plant:

Provided that nothing contained in sub-section (1) shall entitle the assessee to claim deduction in respect of a ship or aircraft or machinery or plant referred to in this clause in any previous year except the previous year relevant to the assessment year commencing on the 1st day of April, 1989;

(b) a new ship or new aircraft acquired or any new machinery or plant installed after the 31st day of March, 1988, but before such date as the Central Government, if it considers necessary or expedient so to do, may, by notification in the Official Gazette, specify in this behalf."

On a plain reading of the above provision it is abundantly clear that by virtue thereof the benefit of investment allowance has been extended to the plant and machinery installed after March 31, 1987, but before April 1, 1988, subject to the condition that such plant and machinery should have been purchased or a contract for purchase of such plant and machinery should have been entered into before June 12, 1986. The said sub-section does not say that in case where the benefit of section 32AB of the Act has been claimed in the previous year, the assessee shall not be entitled to the benefit thereof.

It may be noted that upon the reintroduction of the scheme of investment allowance under section 32A of the Act sub-section (8C) came to be inserted in section 32A and sub-section (10) came to be inserted in section 32AB of the Act, which read thus:

"Section 32A

(8C) Subject to the provisions of clause (ii) of sub-section (3), where a deduction has been allowed to an assessee under sub-section (1) in any assessment year, no deduction shall be allowed to the assessee under section 32AB in the said assessment year (hereinafter referred to as the initial assessment year) and a block of further period of four years beginning with the assessment year immediately succeeding the initial assessment year.

Section 32AB

(10) Where a deduction has been allowed to an assessee under this section in any assessment year, no deduction shall be allowed to the assessee under sub-section (1) of section 32A in the said assessment year (hereinafter referred to as the initial assessment year) and a block of further period of four years beginning with the assessment year immediately succeeding the initial assessment year."

At this stage, it may be germane to refer to the effect and scope of the above provisions as has been elaborated in the Departmental Circular No. 559, dated May 4, 1990 (see [1990] 184 ITR (St.) 91, 98):

"6.5 Amendment of section 32AB relating to deduction under the investment deposit account scheme.--The old provisions of sub-section (10) of section 32AB provided that no deduction shall be allowed under this section in the case of an assessee who had claimed deduction allowable under section 33AB in respect of the tea development account. Since the Finance Act, 1987, had amended section 33AB to provide that deduction under that section would be allowable only for the assessment years 1986-87 and 1987-88, the said provisions of sub-section (10) of section 32AB were no longer necessary and were to be deleted.

6.6 Further, since the Amending Act, 1989, has amended section 32A to reintroduce investment allowance, as discussed in the preceding paras, and has substituted a new sub-section (8C) in that section to provide that deduction for investment allowance will be an option to the deduction for investment deposit account scheme under section 32AB and the option, once exercised, would be valid for five assessment years, it was necessary that a corresponding provision should be made in section 32AB also. Therefore, the old sub-section (10) has been substituted by a new sub-section, which now contains provisions similar to those of sub-section (8C) of section 32A. The new sub-section (10) provides that where a deduction under the investment deposit account scheme under section 32AB has been allowed to the assessee for any assessment year (called as the initial assessment year), no deduction shall be allowed to him in respect of investment allowance under section 32A in the said initial assessment year and a block of further period of four years beginning with the assessment year immediately succeeding the initial assessment year.

6.7 Combined effect of the provisions of section 32A(8C) and section 32AB(10).--Since the investment allowance (section 32A) has been reintroduced as an alternative to the investment deposit account scheme (section 32AB), the combined effect of the provisions of sub-section (8C) of section 32A and sub-section (10) of section 32AB is that if the assessee exercises option to claim either of them in an assessment year (called as the initial assessment year), he will have to stick to that allowance for the said initial assessment year and a block of four subsequent assessment years. Thus, once the assessee avails of the claim under section 32A in the assessment year 1989-90 (which will become the initial assessment year for claim under section 32A), he will have to continue claiming the same allowance in the block of next four assessment years, i.e., assessment years 1990-91 to 1993-94. During these five assessment years (i.e., the assessment years 1989-90 to 1993-94) he cannot claim deduction under section 32AB, for which he can opt only in the assessment year 1994-95. If the assessee opts for the deduction under section 32AB in the assessment year 1994-95, that will become the initial assessment year for claim under section 32AB and then the assessee would have to stick to this claim in the block of next four years, i.e., the assessment years 1995-96 to 1998-99. During these five assessment years (i.e., the assessment years 1994-95 to 1998-99) he cannot claim deduction under section 32A, for which he can opt again only in the assessment year 1999-2000 and so on.

6.8 It may be clarified that the period of five assessment years (including the initial assessment year) during which the assessee is debarred from switching over to the other option is counted from the initial assessment year only and not from any assessment year comprised in the block of four assessment years immediately succeeding the initial assessment year. Thus, in the example given in the preceding para, the assessee can switch over to deduction under section 32AB in the assessment year 1994-95 (counting the block for claim under section 32A from the initial assessment year 1989-90) notwithstanding that the assessee had claimed deduction under section 32A up to assessment year 1993-94. In case of an option for claiming deduction under section 32A is exercised by the assessee for the first time during the assessment year 1990-91, that will become the initial assessment year for claim under section 32A and in that case the assessee would be able to switch over to the claim under section 32AB from the assessment year 1995-96, notwithstanding that the assessee had claimed deduction under section 32A up to the assessment year 1994-95.

6.9 The first initial assessment year for the purposes of exercising the option between sections 32A and 32AB.--Doubts have been raised as to which will be the first initial assessment year for the purposes of exercising the option between the investment allowance (section 32A) and investment deposit account scheme (section 32AB) and in view of the fact that section 32AB has been in force since the assessment year 1987-88, whether an assessee, who had claimed deduction under section 32AB during the assessment year 1987-88 or assessment year 1988-89, could exercise an option to claim deduction under section 32A in the assessment year 1989-90. In this connection, it may be clarified that since investment allowance (section 32A) has been reintroduced with effect from the assessment year 1989-90 and an option between section 32A and section 32AB has been made available for the first time from the assessment year 1989-90 only, the assessment year 1989-90 shall be the first initial assessment year for the purposes of exercising the options between the two sections. Thus an assessee, who had claimed deduction under section 32AB during the assessment year 1987-88 or the assessment year 1988-89, can exercise the option for claiming deduction either under section 32A or under section 32AB in the assessment year 1989-90. Where any such option is exercised in the assessment year 1989-90, that will be the initial assessment year for the claim for which option is exercised."

Thus, according to the Central Board of Direct Taxes, the combined effect of sub-section (8C) of section 32A and sub-section (10) of section 32AB of the Act is that if the assessee exercises option to claim the benefit under either of them in the assessment year (called as the initial assessment year), he will have to stick to that allowance for the said initial assessment year and a block of four subsequent assessment years. Thus, once the assessee avails of the claim under section 32A in the assessment year 1989-90 (which will become the initial assessment year for claim under section 32A), he will have to continue claiming the same allowance in the block of next four assessment years i.e., the assessment years 1990-91 to 1993-94. During these five assessment years (i.e., the assessment years 1989-90 to 1993-94) he cannot claim deduction under section 32AB, for which he can opt only in the assessment year 1994-95. Since investment allowance (section 32A) has been reintroduced with effect from the assessment year 1989-90 and an option between section 32A and section 32AB has been made available for the first time from the assessment year 1989-90 only, the assessment year 1989-90 shall be the first initial assessment year for the purposes of exercising the options between the two sections. Thus, an assessee, who had claimed the deduction under section 32AB during the assessment year 1987-88 or the assessment year 1988-89, can exercise the option for claiming the deduction either under section 32A or under section 32AB in the assessment year 1989-90. Where any such option is exercised in the assessment year 1989-90, that will be the initial assessment year for the claim for which the option is exercised.

In the aforesaid backdrop, what emerges is that upon reintroduction of the scheme of investment allowance under section 32A of the Act the intention of the Legislature was to grant the benefit thereunder in respect of plant and machinery installed after 1988 as also to plant and machinery installed during the period April 1, 1987, to March 31, 1988. However, with a view to take care of a situation whereby the cost of such machinery had been met with out of the amount released to the assessee from the Development Bank, an Explanation came to be introduced below sub-section (1) of the section which provides that for the purposes of investment allowance, "actual cost" shall mean the actual cost of the ship, aircraft, machinery or plant to the assessee as reduced by that part of such cost which has been met out of the amount released to the assessee from the Development Bank in accordance with the provisions of section 32AB(6) of the Act. Thus, to the extent of the benefit derived under section 32AB of the Act such amount stands reduced from the actual cost of the plant and machinery, and as such, the question of double deduction would not arise. Besides, as noticed hereinabove, sub-section (8C) of section 32A corresponds to sub-section (10) of section 32AB of the Act. On a combined reading of the said provisions it is clear that an assessee can have the benefit of either of the provisions and not both. If a deduction has been allowed to an assessee under sub-section (1) of section 32A of the Act such assessee shall not be entitled to claim the benefit of section 32AB of the Act in the said assessment year, which is referred to as the initial year and a block of further period of four years and vice versa. Since investment allowance has been reintroduced from the assessment year 1989-90 and option between section 32A and section 32AB has been provided for the first time in this assessment year, where any such option is exercised in the assessment year 1989-90, that will be the initial assessment year for the claim for which option is exercised. Giving any other meaning to the provision would make the reintroduction of investment allowance from the assessment year 1989-90 redundant because if the initial year when the benefit under section 32AB came to be claimed is taken to be the initial assessment year, having regard to the fact that section 32AB has been inserted only with effect from April 1, 1987, an assessee having availed of the benefit thereunder would not be in a position to claim the benefit of investment allowance till the entire period of five years from the date when such benefit had been availed of, which is not the intention of the Legislature. As is apparent on a plain reading of sub-section (8B) of section 32A of the Act the provisions of that section have been made applicable to any new machinery or plant installed after March 31, 1987, but before April 1, 1988, if the assessee furnishes evidence to the satisfaction of the Assessing Officer that he had, before June 12, 1986, entered into a contract for the purchase of such plant or machinery with the manufacturer or owner of, or a dealer in, such machinery or plant, or had, where such machinery or plant has been manufactured in an undertaking owned by the assessee, taken steps for the manufacture of such machinery or plant. Thus, the intention of the Legislature clearly was to give the benefit of investment allowance in respect of plant or machinery installed during the period March 31, 1987, to April 1, 1988. If the contention of the appellant-Revenue were to be accepted, the provisions of sub-section (8B) of section 32A would be rendered nugatory and the very purpose of introducing the sub-section would be frustrated. Moreover, having regard to the fact that an assessee cannot claim the benefit of both investment allowance and investment deposit account in the same assessment year, the question of double deduction would not arise. Thus, sub-section (8B) of section 32A of the Act clearly envisages allowance of investment allowance under section 32AB of the Act in respect of plant and machinery installed from April 1, 1987, to March 31, 1988, in the assessment year 1989-90 and, hence, no infirmity can be found in the order of the Tribunal in allowing investment allowance under section 32A of the Act in respect of plant and machinery installed from April 1, 1987, to March 31, 1988. The question referred stands answered accordingly, that is, in favour of the assessee and against the Revenue. The reference stands disposed of accordingly.

1See [1986] 160 ITR (St.) 55