Mercantile Credit Corporation Ltd. vs Commissioner of Income Tax Commissioner of Income Tax Vs Mercantile Credit Corporation Ltd.

Janarthanam, J.—Four questions of law had been referred to this court for its opinion. The questions are :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that cash allowances of medical reimbursement should be disallowed under the provisions of Section 40A(5) of the Income Tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amended rates of depreciation prescribed in Appendix I to the Income Tax Rules, 1962, would not be applicable for pending assessments as on April 2, 1983 ?

(3) Whether the Appellate Tribunal was correct in law in deleting the club subscription from the computation of disallowance u/s 40A(5) ?

(4) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee was entitled to investment allowance in respect of new machineries leased out ?"

Out of the four questions as stated above the first two questions came to be referred, at the instance of the assessee and questions Nos. (3) and (4) at the instance of the Revenue.

All these questions arise out of the Income Tax assessment of Mercantile Credit Corporation Ltd., the assessee herein. The assessment year is 1983-84 for the previous year ended on March 31, 1983. The assessee is a company which carries on business, inter alia, in leasing of machinery.

Arguments of Mr. K. Vaitheeswaran of Subbarayar Aiyar, Padmanabhan and Ramamani, learned counsel appearing for the assessee, and Mr. R. Sivaraman, learned counsel representing Mr. C.V. Rajan, learned junior standing counsel representing the Revenue, were heard.

We shall now enter into the arena of discussion in finding out answers to the questions as stated above in seratim.

Question No. (1) : Our attention had been drawn to the case of Commissioner of Income Tax, Bombay, etc. Vs. M/s. Mafatlal Gangabhai and Co. (P) Ltd., , in which an identical question like the one that is to say, question No. (1) arising for consideration in the instant case--arose for consideration before the Supreme Court, which, in turn, had the occasion to consider the question and find out an answer, by entering into a scintillating discussion.

The question posed in that case before the Supreme Court is available at the relevant paragraph at page 650 and it reads as under :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is correct in law in holding that the payment in cash of house rent allowance, conveyance allowance, medical reimbursement, etc., should not be treated as perquisite u/s 40A(5) of the Income Tax Act ?"

After elaborate discussion, the Supreme Court ultimately held that cash payments by an assessee to his/its employees do not fall within the ambit of Section 40(a)(v) or Section 40A(5)(a)(ii) of the Income Tax Act, 1961 (for short "the IT Act"), as the case may be.

In the face of the decision of the Supreme Court as above it goes without saying that the first question has to be answered against the Revenue, by stating that the cash payment towards medical reimbursement made by the assessee to its employees do not fall within the ambit of Section 40A(5) of the Income Tax Act and this question is answered accordingly.

Question No. 2 : Rule 5 of the Income Tax Rules, 1962 (for short "the I. T. Rules"), provides for depreciation. Sub-rule (1), Rule 5, which is relevant for our present purpose, reads as under :

"5. (1) Subject to the provisions of Sub-rule (2), the allowance under Clause (ii) of Sub-section (1) of Section 32 in respect of depreciation of any block of assets shall be calculated at the percentages specified in the second column of the Table in Appendix I to these rules on the written down value of such block of assets as are used for the purposes of the business or profession of the assessee at any time during'' the previous year."

Appendix I, Part I (III) is captioned as "Machinery and plant (not being a ship)". III(i) provides the general rate applicable to machinery and plant (not being a ship) for which no special rate has been prescribed under item (ii) therein below and the rate so prescribed is 10 per cent. This was the position, prior to the Income Tax (Fourth Amendment) Rules, 1983 (for short "the Amendment Rules").

Subsequent to the amendment rules coming into existence, which event happened on April 2, 1983, Appendix I, Part I(III)(i) had been amended in so far as it is relatable to rate changing it from ten per cent to fifteen per cent.

The amendment rules do not at all provide for retrospective operation of the rules and this aspect of the matter is of signal importance in deciding the tangle posed in the instant case. The rules under the Income Tax Act, are framed by the Board, of course, subject to the control of the Central Government, pursuant to the salient provision adumbrated u/s 295 of the Income Tax Act.

Sub-section (1) of Section 295 of the Income Tax Act provides that the Board may, subject to the control of the Central Government, by notification in the Gazette of India, make rules for the whole or any part of India for carrying out the purposes of this Act.

Sub-section (4) of Section 295 prescribes that the power to make rules conferred by this section shall include the power to give retrospective effect, from a date, not earlier than the date of commencement of this Act, to the rules or any of them and, unless the contrary is permitted (whether expressly or by necessary implication), no retrospective effect shall be given to any rule so as to prejudicially affect the interests of assessees.

The power to make rules with retrospective effect for the Board is there within the parameters prescribed in the said section. But, the power while enacting the amendment rules did not specifically provide for the increased rate of depreciation at fifteen per cent. operable retrospectively on and from a particular date. That being so, to contend that the amendment rules is to operate retrospectively to cover the case of the assessee, as relatable to the assessment year 1983-84, in the sense of the assessee getting the enhanced rate of depreciation at fifteen per cent. cannot at all be countenanced, inasmuch as the amended rules came into force from April 2, 1983. The amendment rules if at all, could be applicable to the assessment year 1984-85 relatable to the previous year ending from April 1, 1983, to March 31, 1984.

Worthwhile it is to refer to certain decisions of superior courts of jurisdiction to highlight this aspect of the matter.

In S.P. Jaiswal Estates Pvt. Ltd. Vs. Commissioner of Income Tax (No. 2), , what their Lordships of the Calcutta High Court said in the relevant paragraph at pages 313 and 314 is relevant for our present purpose and the same reads as under :

"In this case, we find that the Income Tax (Fourth Amendment) Rules, 1983, by which the higher rate of depreciation was laid down came into effect on April 2, 1983. The assessment year 1983-84 began on April 1, 1983. In other words, this new rule was not intended to be made applicable to the assessment year 1983-84. The rates of depreciation laid down in the Rules, in our view, are matters of substantive law. The new rates were intended to apply only from the assessment year 1984-85 since these were not in force on the first day of April, 1983, on which the assessment year 1983-84 began. In this view of the matter and agreeing with the view expressed by the Kerala High Court in Commissioner of Income Tax Vs. S.A. Wahab, we hold that the assessee is not entitled to the higher rate of depreciation as laid down in the Income Tax (Fourth Amendment) Rules, 1983, in the assessment year 1983-84. Such higher rates will be applicable only from the assessment year 1984-85 . . ."

In Commissioner of Income Tax Vs. S. Palaniswamy, , their Lordships of a Division Bench of this court respectfully agreed with the view taken by the Lordships of the Calcutta High Court in the case of S.P. Jaiswal Estates Pvt. Ltd. Vs. Commissioner of Income Tax (No. 2), .

For the reasons as above, the Tribunal was rather right in holding that the amended rates of depreciation prescribed in Appendix I to the Income Tax Rules, would not be applicable for pending assessment as on April 2, 1983, and this question is answered accordingly.

Question No. (3) : So far as the expenditure incurred by the assessee-company in relation to the payment of subscriptions made by it to various clubs on behalf of the employees, there is no material worth the name available to make it appear that the employees were directed to become members of various clubs for the purpose of the company''s business. Becoming a member of a club by the various employees of the company may be for the personal benefit of such employee or employees, in the sense of enjoying amenities and facilities provided by the club, either in the form of recreation or sports activities. That sort of membership may not be having any correlation to the legitimate needs of the company. In this view of the matter, we hold that the expenditure incurred by the assessee-company by payment of club subscriptions to various employees cannot fall within the permissible deduction prescribed u/s 40A(5) of the Income Tax Act. This question is answered accordingly.

Question No. (4): It is not as if this sort of a question did not arise anterior in point of time before superior courts of jurisdiction--High Court and Supreme Court--and the plain fact is that such a question came to be considered before a Division Bench of this court in the case of Commissioner of Income Tax Vs. First Leasing Co. of India Ltd. and others, , and by the Supreme Court in the case of Commissioner of Income Tax, Karnataka, Bangalore Vs. M/s. Shaan Finance (P) Ltd., Bangalore, .

In the case of Commissioner of Income Tax Vs. First Leasing Co. of India Ltd. and others, , the Division Bench of this court said that u/s 32A of the Income Tax Act, the present investment allowance has replaced the former development rebate allowance provided u/s 33 thereof. The main conditions to be satisfied u/s 32A(1) and (2) are ;

(1) The subject-matter is to be owned by the assessee ;

(2) It is to be wholly used for the purpose of business of the assessee ; and

(3) The subject-matter should come under any of the enumerated categories of Section 32A(2).

Sub-section (1) or (2) of Section 32A does not require anywhere that the plant and machinery must be installed and used by the assessee himself for the manufacture or production of priority articles. Wherever the Legislature intended that the assessee itself should engage in the particular business, it has so provided. This would be evident from the language of Sub-section (2)(a) of Section 32A which specifically requires that the assessee, in order to claim investment allowance in respect of ships or aircraft, must be engaged in the business of operation of ships or aircraft.

Even in Section 32A(4), which provides for keeping a reserve, as a condition for securing the deduction, there is no phraseology indicating that the machinery or plant should have been used by the assessee himself. It is also settled law that giving plant or machinery on licence or hire is one of the recognised modes of doing business as much as the use of the asset by the assessee himself for the purpose of manufacture or production.

While the relevant provisions in Section 33 provide that machinery or plant should be installed by the assessee in the premises used by it, or that the said machinery or plant should be an asset relating to the business carried on by the assessee, as the case may be, Section 32A(2B) does not have any such stipulation. Further, the object of facilitating investment in priority industries will be fulfilled whether the assessee himself makes use of the plant or machinery in question or the hirer.

What their Lordships of the Supreme Court said in the case of Commissioner of Income Tax, Karnataka, Bangalore Vs. M/s. Shaan Finance (P) Ltd., Bangalore, , in paragraphs 9 and 10 (at pages 312 and 313) is relevant for the present purpose, which got reflected as under :

"Sub-section (2) of Section 32A, however, requires to be examined to see whether there is any provision in that sub-section which requires that the assessee should not merely use the machinery for the purposes of his business, but should himself use the machinery for the purpose of manufacture or for whatever other purpose the machinery is designed. Sub-section (2) covers all items in respect of which investment allowance can be granted.

These items are ship, aircraft or machinery or plant of certain kinds specified in that sub-section. In respect of a new ship or a new aircraft, Section 32A(2)(a) expressly prescribes that the new ship or the new aircraft should be acquired by an assessee which is itself engaged in the business of operation of ships or aircraft. Under Sub-section (2)(b), however, any such express requirement that the assessee must himself use the plant or machinery is absent. Section 32A(2)(b) merely describes the new plant or machinery which is covered by Section 32A. The plant or machinery is described with reference to its purpose. For example, Sub-section (2)(b)(i) prescribe ''the purposes of business of generation or distribution of electricity or any other form of power''. Sub-section (2)(b)(ii) refers to small-scale industrial undertakings which may use the machinery for the business of manufacture or production of any article, and Sub-section (2)(b)(iii) refers to the business of construction, manufacture or production of any article or thing other than that specified in the Eleventh Schedule. Sub-section (2)(b), therefore, refers to the uses to which the machinery can be put. It does not specify that the assessee himself should use the machinery for these purposes. In the present case, the person to whom the machinery is hired does use the machinery for specified purposes u/s 32A(2)(b)(iii). That person, however, is not the owner of the machinery. The High Courts of Karnataka and Madras have held that looking to the requirements specified in Section 32A, the assessees, in the present case, fulfil all the requirements of that section, namely, (1) the machinery is owned by the assessee ; (2) the machinery is used for the purpose of the assessees'' business and ; (3) the machinery is as specified in Sub-section (2).

We are inclined to agree with this reasoning of the High Courts of Karnataka and Madras."

In the face of the decisions as above one emerging from a Division Bench of this court and another from the apex court, it goes without saying that the Appellate Tribunal was right in holding that the assessee was entitled to investment allowance in respect of new machinery leased out and this question is answered accordingly.

These tax cases (reference) are thus disposed of. There shall, however, be no order as to costs, on the facts and in the circumstances of the cases.