Commissioner of Income Tax vs Travancore Mats and Mattings Co.

V.V. Kamat, J.—For the assessment year 1979-80, the question that is brought before us for answer in this reference is with regard to entitlement to weighted deduction which was already granted, but sought to be cancelled in exercise of the powers u/s 154 of the Income Tax Act, 1961. The question is as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee is entitled to weighted deduction u/s 35B(1A) of the Income Tax Act ?"

The assessee is a firm engaged in the manufacture as well as export of oil products. The initial assessment was completed and in regard thereto the assessee was granted deduction u/s 35B of the Act with regard to an amount of Rs. 1,43,410. The Income Tax Officer thereafter thought that the assessee was not a small scale industrial undertaking, or in other words, a small-scale exporter and consequently therefore grant of deduction was a mistake in the nature of an error apparent on the face of the record.

Action u/s 154 of the Act was initiated on the basis that the assessee will be entitled to deduction u/s 35B only if the assessee is a small-scale exporter or the holder of an export house certificate. In view of the provisions of Section 35B(1A) appearing to be inserted by the Finance Act, 1978, with effect from April 1, 1978, and consequently deleted with effect from April 1, 1980, by the Finance Act, 1979, there being no dispute that the said provision governs the situation with regard to the assessment year in question, the phrase "small-scale industrial undertaking" by virtue of Clause (d) of the Explanation to Section 35B(1A), is to carry the same meaning as to be found in Section 32A(2) (Explanation Clause (2)). Referring to the said provision of Section 32A, an industrial undertaking is to be understood to be deemed to be a small-scale industrial undertaking if the aggregate value of the machinery and plant installed on the last day of the previous year, for the purposes of the business of the undertaking, does not exceed Rs. 10 lakhs. It is in view of this statutory provision, the Income Tax Officer resorted to invoke the provisions of Section 154 of the Income Tax Act.

By the order dated January 29, 1986, the Income Tax Officer calculated the cost of plant and machinery after including transport vehicles amounting to Rs. 10,81,449 and passed a consequential order cancelling the deduction already granted u/s 35B of the Act.

The assessee took up the proceedings before the first appellate authority-the Commissioner of Income Tax (Appeals), Thiruvanantha-puram. The first appellate authority emphasised that the benefit u/s 35B was originally granted to the appellant in the belief and the satisfaction that the cost of plant and machinery utilised in the business was less than Rs. 10 lakhs. The first appellate authority has further emphasised that the Income Tax Officer exercised powers on the footing that the term "machinery and plant" will also include vehicles used by the tax payer for business and thereby included the cost of the two lorries amounting to Rs. 2,38,675. Before the first appellate authority, on behalf of the Revenue, reliance was placed on Section 43(3) of the Act to contend that "plant" includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession, to sustain the order of the Income Tax Officer. The first appellate authority considered the provisions of Section 35B(1A) of the Act requiring the adoption of the definition of small-scale industry to be found in Section 32A(2), Explanation, Clause (2), requiring the aggregate value of the machinery and plant installed not to exceed Rs. 10 lakhs. The first appellate authority took the view that the scheme of the section shuts out the grant of investment allowance to vehicles and in the process passingly referred to Section 32A(2) of the Act. It is observed that the Explanation appears in the setting of the grant of investment allowance and deals with a small-scale industrial undertaking that had been referred to earlier in the main Sub-section (2). The reasoning proceeds to state that the reference to machinery and plant in the Explanation could only be to those items of plant that are considered for the grant of investment allowance as the assets used in production and manufacturing process. The first appellate authority proceeded to reason out further that lorries are not utilised and in fact had been specifically barred from being considered u/s 32A in view of the reasoning stipulated in Explanation, Clause (2), thereof. The first appellate authority emphasised that the incorporation of Explanation, Clause (2) to Section 32A(2) of the Act in Section 35B(1A) is without any modification and therefore the position as a result thereof can only lead to the conclusion that those things that are specifically shut out otherwise, if thought to be included, it would amount to straining of the language used or resulting in misinterpretation of the section or the purpose of the relief. In the process of reaching conclusion as a consequence, the first appellate authority proceeded to cancel the order of the Income Tax Officer.

This conclusion of the first appellate authority has been endorsed by the Income Tax Appellate Tribunal, Cochin Bench, when the proceedings were taken up by the Revenue.

The Appellate Tribunal has posed the question for consideration in the following manner :

" The question that arises for our consideration is whether the Commissioner of Income Tax (Appeals) was justified in granting weighted deduction u/s 35B(1A) by cancelling the rectification order u/s 154 of the Act holding that the cost of the assets used in the production of the articles would be more than Rs. 10 lakhs."

The Tribunal has also emphasised that admittedly if the value of the lorries was deducted originally, the cost of the machinery used in the production of the article will be less than Rs. 10 lakhs.

The Tribunal then proceeded to consider Explanation Clause (2) to Section 32A to find out that the section is specific to the extent that the intention of the Legislature floats on the surface of the language. It is available from the language of the said Explanation that the value of the machinery and the plant is to be understood to be (other than that of tools, jigs, dies and moulds) installed, as not exceeding Rs. 10 lakhs for granting weighted deduction. Understanding the language of Explanation Clause (2) to Section 32A of the Act as incorporated in Section 35B(1A) of the Act, the Tribunal emphasised on the exceptions in regard to tools, jigs, moulds, etc., as a pointer to the restricted meaning of the term "plant and machinery". With this reasoning, the decision of the first appellate authority received endorsement from the Tribunal. The situation brought the proceedings before us at the instance of the Revenue.

At the outset learned senior tax counsel sought to urge the basic position that it is not possible to proceed on the assumption that the assessee is an industrial undertaking. Learned counsel placed reliance on the observations of the Income Tax Officer in the order dated January 29, 1986, in pursuance of Section 154 of the Act, to the effect that the assessee, even otherwise, cannot be considered as an industrial undertaking because the assessee purchased goods and exported them without any manufacturing activity, but only after clipping, stencilling, etc., which does not amount to manufacture.

Apart from the fact that this contention is totally conspicuous by its absence and any whisper in regard thereto, before the three authorities, the admitted and established facts stare in the face of the record. There is no dispute that the original assessment was completed on June 28, 1982, and in regard thereto deduction u/s 35B was granted on a sum of Rs. 1,43,417. This must be on the accepted position even by the Revenue that deduction was granted on the basis of compliance with the statutory provisions in regard thereto, the consequence being that as far as the Revenue is concerned, that the assessee was an industrial undertaking was never in question. In addition thereto, even in an action u/s 154 of the Income Tax Act, as would be available from the text of the order itself (annexure "A" dated January 29, 1986), the proceedings were sought to be reopened only on the solitary position that the assessee would be entitled for deduction u/s 35B only if the assessee is a small-scale exporter or holder of an export house certificate. The order is more than specific when it refers to the notice dated September 4, 1985, as a notice u/s 154 of the Act for rectifying the mistake in granting deduction u/s 35B only on the ground that the assessee could not be understood as a small-scale exporter. Learned senior tax counsel cannot be heard to contend in such a situation under the above accepted position on the basis of which the proceedings subsequently travelled right upto this court.

Learned senior tax counsel strenuously submitted that the term "plant and machinery" even statutorily includes vehicles used for the purpose of business or profession, which position is totally ignored in the context. Learned senior tax counsel placed reliance on the provisions of section 43(3) of the Act, It cannot be said that the said statutory provision was not relied upon. We have already referred to its reference in the order of the first appellate authority.

We will take up the position for consideration to find out as to whether "plant" includes vehicles on the basis of the statutory provisions of Section 43(3) of the Act.

Section 43(3) is reproduced as follows :

" 43. In sections 28 - 41 and in this section, unless the context otherwise requires--. . .

(3) ''plant'' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession ;"

In other words, the statutory language speaks of the definition of "plant" subject to the control that in the relevant section (section 35B in this context), the said meaning would be relevant only in a situation that the context is not otherwise. In the process of application of the statutory '' provisions of Section 43(3) of the Act, the phrase "unless the context otherwise requires" cannot be ignored. It is only when the context does not require otherwise, the said definition or meaning u/s 43(3) could be resorted to.

In the logical process this situation brings us to consider the relevant statutory provisions of Section 32A because we have already stated that the meaning of "small-scale industrial undertaking" as is required for consideration of the provisions of Section 35B of the Act is to be appreciated on the basis of incorporation thereof by Section 35B(1A) of the Act as stated above already.

In our judgment, in the event of our coming to the conclusion that the context requires us to take resort to Section 43(3) of the Act, it would not be possible to understand the term "plant" as including vehicles in the context of the situation. We would consider the position hereinafter.

Section 32A deals with the situation of investment allowance relating to a ship or an aircraft or machinery or plant owned by the assessee and is wholly used for the purposes of the business carried on by him. If we consider the intrinsic contents of Section 32A, we receive the necessary aid in the process of understanding the legislative intent. The statutory provision of Section 32A(1) as a proviso dealing with the situation that no deduction could be allowed and such aspects are specified in the said proviso. Clause (b) to the said proviso clearly specifies that with regard to any office appliances or road transport vehicles, no deduction is to be allowed. Reading the said statutory provision under consideration, it would be found that the authority is required to ascertain the actual cost in regard to which investment allowance is to be granted and in regard thereto road transport vehicles are specifically taken out as stated above.

There is yet another facet providing aid in the process of understanding the situation as to what should be understood to be plant or machinery in the context, Section 32A(2) of the Act particularises what is meant by ship or aircraft or machinery or plant that is referred to in Sub-section (1) and requires that the new machinery or plant installed after March 31, 1976, satisfy certain conditions. One of these conditions is that such installation has to be in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing.

The above statutory provision has an Explanation creating a deeming provision with regard to an industrial undertaking to be understood to be a small-scale industrial undertaking. This is by Clause (2) to the said Explanation to Section 32A(2) of the Act. It would not be out of place to reproduce the said Explanation which is as follows :

" An industrial undertaking shall be deemed to be a small-scale industrial undertaking, if the aggregate value of the machinery and plant (other than tools, jigs, dies and moulds) installed, as on the last day of the previous year, for the purposes of the business of the undertaking does not exceed ten lakh rupees ; and for this purpose the value of any machinery or plant shall be, -

(a) in the case of any machinery or plant owned by the assessee, the actual cost thereof to the assessee ; and

(b) in the case of any machinery or plant hired by the assessee, the actual cost thereof as in the case of the owner of such machinery or plant."

Reading the above statutory provision it would have to be appreciated that the machinery and plant is required to be understood to have been installed and it is with regard to the machinery and plant installed, that the value should not exceed Rs. 10 lakhs. Apart from this requirement of installation, there is one more vital aspect in the context. For the purpose of this provision, the machinery and plant has been made more specific by the words appearing in the bracket. Reading the words in the bracket (other than tools, jigs, dies and moulds), we are not left without realising the importance of specifying what should be machinery and plant and the importance of its installation, when the statutory provision is specific to exclude tools, jigs, dies and moulds.

In our judgment, reading the above statutory provisions, what is to be understood as plant and machinery has been specifically made clear by the legislative language itself.

In our judgment, this is not a situation in regard to which the resort to Section 43(3) would be necessary at all because what is to be understood with reference to machinery and plant is available in the language of the statutory provision itself abundantly enough. Apart therefrom, even the statutory provision of Section 43 of the Act would become useful only on the satisfaction that the context otherwise requires, creating difficulty in understanding the terms of which definitions are given in Section 43of the Act. In our judgment, resort to the provisions of Section 43 of the Act is only permissible as contingent on the requirement of the situation governed by the phrase "unless the context otherwise requires". As we have stated hereinbefore, the plain language provides abundantly to know as to what the machinery and plant is to be understood in the context of the statutory provisions of Section 32A as well as Section 35B. Therefore, it is not possible to accept the submission of learned senior tax counsel.

For all the above reasons, we answer the question in the affirmative, against the Revenue and in favour of the assessee.

A copy of this judgment under the seal of the court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench, as required by law.