Hyderabad Deccan Cigarettes Factory vs Commissioner of Income Tax A.P.

S.V. Maruthi, J.

1.The following three questions were referred by the Tribunal for the opinion of this Court.

"1. Whether the value of the motor vehicles should be taken as part of the value of plant and machinery for purposes of determining the industrial undertaking to be a small scale industrial undertaking within the meaning of Section 32-A(2)(b)(ii) ?

Whether the definition of (plant) given in Section 43(3) of the Act should be applied even while determining the value of an industrial undertaking as a small scale industrial undertaking u/s 32-A(2)(b)(ii) of the IT Act ?

Whether in the facts and circumstances of this case, the assessee is a small scale industrial undertaking and if so, is it entitled to investment allowance ?"

The facts in brief are as follows:

The assessee carries on the business of manufacture of cigarettes. It claimed investment allowance u/s 32-A. Since the cigarettes manufactured fall under the items specified in the 11th Schedule to the Income Tax Act, the assessee was not entitled to investment allowance u/s 32-A(2)(b)(iii) of the Act. However, it was claimed that the assessee would be entitled to investment allowance in view of sub-section (2) (b) (ii) of Section 32-A, as the plant and machinery'' were installed in a small scale industrial undertaking and their value is only Rs.18,63,008/-. The Income Tax Officer found that the assessee has failed to include the value of the motor cars amounting to Rs.2,15,617/-andifthat is included, the value of the plant and machinery would be Rs.20,78,626/-; and since this is above Rs.20 lakhs the assessee cannot be treated as a small scale industrial undertaking and investment allowance cannot be allowed. Holding as above, the Income Tax Officer disallowed the claim. On appeal, the Commissioner of Income Tax upheld the disallowance. On a further appeal, the Tribunal held that in view of the definition of � plant as per Section 43(3), motor cars have to be considered as plant for the purpose of Explanation (2) to Section 32-A, and therefore, the Income Tax Officer as well as the Commissioner of Income Tax are justified in disallowing the claim of the assessee. At the instance of the assessee, the questions set out in the earlier paragraph are referred for the opinion of this Court.

To consider the claim of the assessee, it is necessary to examine the relevant provisions of Section 32-A of the Income Tax Act, 1961 existed at the relevant time, which reads as follows:

"32-A. (l)In respect of a ship or an aircraft or machinery or plant specified in subsection (2), which is owned by the assessee and is wholly used for the purposes of 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 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 no deduction shall be allowed under this Section in respect of-

(a) xx xx xx

(b) any office appliances or road transport vehicles

(c) xx xx xx

(d) xx xx xx

(2) The ship or aircraft or machinery or plant referred to in sub-section (1) shall be the following, namely:

(a) xx xx xx xx

(b) any new machinery or plant installed after the 31st day of March, 1976,--

(i)xx xx xx xx

(ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing: or

(iii) xx xx xx xx

Explanation ;~For the purposes of this sub-section and sub-sections (2B) and (4),--

(1) XX XX XX XX

(2) 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) xx xx xx xx

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

From a reading of Section 32-A, it is evident that twenty-five per cent of the actual cost of the ship, aircraft, machinery or plant installed is allowed as deduction by way of investment allowance to the assesses. Under Clause (b) of the proviso to subsection (1) of Section 32-A, no deduction is permitted in respect of road transport vehicles. In other words, the investment allowance is allowed as deduction at 25% of the actual cost of the ship or aircraft acquired or the machinery or plant installed. An assessee is not entitled for the deduction at 25% of the actual cost of the road transport vehicles under Clause (b) of the proviso to sub-section (1) of Section 32-A.

Sub-section (2) of Section 32-A provides that the ship or aircraft or machinery or plant referred to in sub-section (1) shall be any new machinery or plant installed after the 31st day of March, 1976 in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing. We are not referring the other provisions which are not relevant for the purpose of disposing of this case. Under Explanation (2), a small-scale industrial undertaking is defined. We have already extracted the definition of the industrial undertaking. From a reading of sub-section (2), it is clear that the investment allowance is allowed in respect of a plant installed after 31st day of March, 1976 in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing. An industrial undertaking is a small-scale industrial undertaking, if the aggregate value of the machinery and plant (other than tools, jigs, dies and moulds) installed, does not exceed Rs.20 lakhs. In other words, if the aggregate value of the machinery and plant excluding the value of tools, jigs, dies and moulds installed, does not exceed Rs.20 lakhs, the said small -scale industrial undertaking is entitled for investment allowance u/s 32-A.

The question, therefore, is whether the assessee is a small scale industrial undertaking ?

The authorities below held that in view of the definition of plant u/s 43(3) of the Act, the motor cars are to be included in the value of the plant: if so included, the value of the industrial undertaking exceeds Rs.20 lakhs; therefore, it is not entitled for the investment allowance u/s 32-A. We are of the view that (he interpretation placed by the authorities below is not in accordance with the provisions of the Act for the following reason:

At this stage, is is necessary to refer to the definition of ''plant'' contained in Section 43(3) (as it stood at the relevant time), which provides that in Sections 28 - 41 and in this Section, unless the context otherwise requires, "plant'''' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession.

From a reading of Section 43(3), unless (lie context otherwise, requires, the expression "plant" includes vehicles also. In other words, if there is a separate definition of the plant other than the definition covered by Section 43(3), the definition of plant u/s 43(3) has no application. We have already pointed out in the earlier paragraph that Explanation (2) to sub-section (2) of Section 32-A defines a small-scale industrial undertaking. It defines a small scale undertaking as an industrial undertaking whose aggregate value of the machinery and plant (other than tools jigs, dies and moulds) installed docs not exceed Rs.20 lakhs. In other words, an industrial undertaking, whose aggregate value of the machinery and plant installed other than those items excluded, does not exceed Rs.20 lakhs, is a small scale industrial undertaking. Since there is an independent definition in the context of defining a small-scale industrial undertaking, Section 43(3) is not applicable to the definition of a small-scale industrial undertaking. If Section 43(3) defining plant including vehicles is not applicable, the value of the vehicles cannot be added to the value of the plant and machinery installed excluding those items mentioned in the said explanation. Therefore, we are of the view that the assesses is a small-scale industrial undertaking within the meaning of Explanation (2) to Section 32-A(2)(b)(ii) of the Income Tax Act. If the assessee is a small scale industrial undertaking, it is entitled for the investment allowance u/s 32-A.

The authorities relied upon by the learned Counsel for the petitioner and the learned Counsel for the Revenue are not relevant in our view, and hence, we are not referring to those judgments.

In the light of the above, we answer the 1st question in the negative and in favour of the assessee, the 2nd question in the negative and in favour of the assessee and the 3rd question in the affirmative. and in favour of the assessee. The reference is answered accordingly.