Ganapathy Engineering Manufacturing P. Ltd. vs Commissioner of Income Tax

N.V. Balasubramanian, J.—An interesting question of law on the interpretation of the Explanation to Section 35B of the Income Tax Act,

1961 (hereinafter to be referred to as ""the Act""), defining the expression, ""small-scale industrial undertaking"" arises on the facts of the case.

The Income Tax Officer while completing the assessment for the assessment year 1979-80 granted weighted deduction of a sum of Rs. 90,873

under the provisions of Section 35B of the Act. The Commissioner perused the records of assessment of the assessee and he was of the prima

facie opinion that the assessee was not eligible for weighted deduction u/s 35B of the Act. According to the Commissioner, the assessee was not a

holder of an export house certificate and the assessee was also not a ""small scale exporter"". After hearing the assessee, the Commissioner found

that the plant and machinery installed in the assessee''s premises on the last day of the previous year, viz., March 31, 1979, were as under :

Name of the machinery Gross block as at 31-3-1979

Rs.

Plant and machinery 7,19,894

Electric equipments 90,304

Library 4,735

Patterns 5,776

Generators 1,72,234

Tractors 10,600

Furnace 258

10,03,801

There is no dispute that the assessee was not a holder of an export house certificate. The Commissioner held that the assessee is not a small-

scale industrial undertaking as its aggregate value of the machinery and plant installed on the last day of the previous year exceeded ten lakh

rupees. The Commissioner, therefore, held that as the assessee cannot be treated as a small-scale industrial undertaking the weighted deduction u/s

35B of the Act was not available to the assessee. The Commissioner, therefore, directed the Income Tax Officer to withdraw the weighted

deduction and complete the assessment.

The assessee preferred an appeal before the Income Tax Appellate Tribunal against the order of the Commissioner. Before the Tribunal, there

was a dispute whether the library, patterns, generators and tractors can be regarded as plant and machinery for the purpose of the Explanation to

Section 35B of the Act. The Tribunal held that the patterns are plant of the industrial undertaking and generators are parts of the plant and they

cannot be excluded. The view of the Appellate Tribunal was that only four items, namely, tools, jigs, dies and moulds have been excluded from the

Explanation to Sub-section (2) of Section 32A of the Act and all other items of machinery and plant should be considered and, therefore, the

generator is not excluded. The Tribunal also held that the tractors were installed and the value of the tractors was liable to be included in the

aggregate value of the assets. The Tribunal, therefore, held that the assessee was not a small-scale industrial undertaking within the meaning of

Clause (2) of the Explanation to Section 32A(2) of the Act and in this view of the matter, upheld the order of the Commissioner of Income Tax.

The assessee aggrieved by the order of the Appellate Tribunal sought for a reference and the Tribunal has stated a case and referred the

following question of law for our consideration :

Whether the Tribunal was right in holding that the tractors, generators and patterns are to be included as forming part of plant and machinery in

computing the total investment in the undertaking and that, therefore, the assessee is not a small-scale exporter for the purpose of Section 35B of

the Income Tax Act, 1961 ?

The question, as we have already indicated, is purely a question of law. Section 35B of the Act grants export markets development allowance.

In Section 35B of the Act, Sub-section (1A) was introduced by the Finance Act, 1978, with effect from April 1, 1978, and that sub-section was

subsequently deleted by the Finance Act, 1979, with effect from April 1, 1980. Section 35B(1A) was in operation during the assessment year

1979-80 the year under consideration. Section 35B(1A) of the Act prohibits the grant of weighted deduction and it also engrafts an exception if

the assessee is a small-scale exporter or a holder of export house certificate engaged in the business of export of goods. The expression, ""small-

scale exporter"" is defined in the Explanation to Section 35B(1A) of the Act to mean a person who exports goods manufactured or produced in any

small-scale industrial undertaking or undertakings owned by him, provided that such person does not own any industrial undertaking which is not a

small-scale industrial undertaking. The expression, ""small-scale industrial undertaking"" is defined in Clause (d) of the Explanation which reads as

under :

''Small-scale industrial undertaking'' has the meaning assigned to it in Clause (2) of the Explanation below Sub-section (2) of Section 32A.

Clause (2) of the Explanation to Section 32A(2) of the Act defines the expression, ""small-scale industrial undertaking"" as under :

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,-

---

(i) in a case where the previous year ends before the 1st day of August, 1980, ten lakh rupees ;

(ii) in a case where the previous year ends after the 31st day of July, 1980, but before the 18th day of March, 1985, twenty lakh rupees ; and

(iii) in a case where the previous year ends after the 17th day of March, 1985, thirty-five 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.

The assessee admittedly is not the holder of an export house certificate and the claim of the assessee is that it is a small-scale exporter. The

Commissioner has not held that the assessee had not complied with the other requirements of the Explanation to Section 35B(1A) of the Act. The

Commissioner held that the aggregate value of the machinery or plant exceeded ten lakh rupees and so, the assessee was not a small-scale

exporter. There is dispute with reference to four items noticed as the machinery, namely, library, patterns, generators and tractors, and it is obvious

that if the value of any one of the items is excluded from the aggregate value of the plant and machinery, then the assessee would be regarded as a

small-scale exporter. There is no dispute that the goods exported were manufactured in the industrial undertaking owned by the assessee and the

only question is whether the undertaking can be regarded as a small-scale industrial undertaking.

The Tribunal held that only four items, namely, tools, jigs, dies and moulds, should be excluded in computing the aggregate value of the

machinery and plant and all other machinery and plant should be taken into account in determining whether the value exceeded ten lakh rupees.

The same contention was also urged by learned counsel for the Revenue before us by stating that Section 35B(1A) of the Act refers to Clause (2)

of the Explanation to Section 32A(2) of the Act and all the machinery and plant belonging to the assessee, except the four items expressly referred

to in the Explanation to Section 32A(2) of the Act should be taken into account and the value of the machinery or plant on which investment

allowance is not allowable should also figure in the total value of the machinery or plant to determine whether the undertaking is a small-scale

industrial undertaking or not. We are not able to accept the contention of learned counsel for the Revenue. Under the scheme of investment

allowance u/s 32A of the Act, investment allowance is not allowed, inter alia, on any office appliance or any road transport vehicle and other items

of machinery or plant expressly mentioned in Section 32A. When Clause (2) of the Explanation below Section 32A(2) refers to the machinery or

plant, it refers to the machinery or plant on which investment allowance is allowable under the Act. Once certain machinery or plant go out and are

not eligible for the grant of investment allowance, the reference to plant and machinery in the Explanation to Section 32A would refer to the other

items of plant and machinery, eligible for investment allowance. In our opinion, the Explanation to Section 32A(2) of the Act has to be read in the

scheme and setting of the grant of investment allowance and it cannot be construed de hors the scheme or the context in which the said Explanation

appears. In our view, the Explanation to Section 32A(2) would refer only to those plant and machinery on which investment allowance is allowable

and in the context of the Explanation, it can only mean those machinery or plant which are eligible for the grant of investment allowance and used

for the purpose of business of manufacture or production of the article and things. Further, the exclusion of certain items like tools, jigs, dies and

moulds in the Explanation to Section 32A(2) also gives a clue that the machinery or plant should be of such a nature on which investment

allowance is granted. That apart, the term ""installed"" in the said Explanation also gives an indication that the machinery or plant should be installed

and they must be of the nature, on which investment allowance is allowable u/s 32A of the Act. In other words, in our opinion, the Explanation

excludes from its scope and ambit certain machinery or plant on which investment allowance is not allowed under the proviso to Section 32A of

the Act and it is only with reference to other machinery or plant which are installed other than tools, jigs, dies and moulds, the aggregate value has

to be determined to decide the question whether the industrial undertaking can be regarded as a small-scale industrial undertaking or not. We are

of the view that the Explanation cannot be read in isolation or de hors the scheme of the grant of investment allowance. The Explanation has to be

read in the setting in which it appears and in the context of the Explanation, we are of the opinion that those items on which investment allowance is

not allowed should be altogether excluded to determine the aggregate value of the plant and machinery for the purpose of deciding the controversy

whether an undertaking can be regarded as a small-scale industrial undertaking or not. Further, it is not possible to pick out only Clause (2) of the

Explanation to Section 32A(2) and engraft the same as a part of Section 35B of the Act. The Legislature has referred to the small-scale industrial

undertaking in the context of Section 32A of the Act and the reading of the Explanation in isolation of the other provisions of Section 32A would

distort the meaning and would defeat the object of encouraging export by small-scale exporters. Consequently, the view of the Appellate Tribunal

that only the value of tools, jigs, dies and moulds should alone be excluded from the computation of the total value of machinery or plant is not

sustainable.

The Bombay High Court in the case of Commissioner of Income Tax Vs. Reunion Engineering Co. (P) Ltd, and the Kerala High Court in the

case of Commissioner of Income Tax Vs. Travancore Mats and Mattings Co., have taken the same view. Though the decision of the Bombay

High Court is with reference to Explanation (3) to Section 32(1)(vi) of the Act, the reasoning of the Bombay High Court that the Explanation

appended to the section has no independent existence and there must be a conjoint reading of the Explanation along with the main provision and if

so read, the expression, ""machinery and plant"" would exclude office appliances and road transport vehicles would equally apply to the provisions

of Section 32A(2) of the Act. The situation present in the instant case did arise before the Kerala High Court and the Kerala High Court also has

taken a view that under the definition of small-scale industrial undertaking, recourse to Section 43(3) would not be necessary and the expression,

machinery and plant"" has to be understood in the context of the statutory provisions of Section 32A and Section 35B of the Act. We are in

complete agreement with the views expressed by the Bombay High Court as well as the Kerala High Court. The Tribunal, however, has not

determined whether any of the four items, namely, library, patterns, generators and tractors, would fall within the scope of the proviso to Section

32A(1) of the Act. Though learned counsel for the assessee would contend that the tractor is a road transport vehicle, in the absence of any finding

by the Appellate Tribunal on the question, we are of the view that the Tribunal should go into the question whether any of the items would fall

within the proviso to Section 32A(1) of the Act and if any of the items falls within the proviso to Section 32A(1), its value should be excluded from

the total aggregate value of the machinery or plant.

In the view we have taken, it is not necessary to consider the decision of this court in the case of Sundaram Motors Private Ltd. and Others

Vs. Commissioner of Income Tax, Madras, , wherein the expression, ""installed"" was construed by this court. So also, we are not concerned with

the decisions of the Supreme Court in the case of Scientific Engineering House (P) Ltd. Vs. Commissioner of Income Tax, Andhra Pradesh, and in

the case of CIT v. Elecon Engineering Co. Ltd., (1987) 166 ITR 66 (SC) , wherein the expression ""plant"" was construed to mean drawings and

patterns. We hold that the view of the Tribunal that only four items, viz., tools, dies, jigs and moulds, should be excluded is not sustainable in law.

The question of law referred to us does not bring out the real question and we reframe the question as under :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is not a small-scale industrial

undertaking within the meaning of Clause (2) of the Explanation below Sub-section (2) of Section 32A of the Income Tax Act, 1961 ?

In the view we have taken, we are not answering the question of law as reframed by us, but we return the reference unanswered coupled with

a direction that the Tribunal should hear the appeal in the light of the directions stated above. The assessee is entitled to costs of a sum of Rs.

1,000.