New Excelsior Theatre Pvt. Ltd. vs Commissioner of Income Tax

Mrs. Sujata Manohar, J.—The assessees, in the present case, are a private limited company. The relevant assessment year is 1975-76 for which the relevant previous year ended on March 31, 1975. The assessee-company was incorporated on September 27, 1974. It closed its first year of accounting on March 31, 1975. It made a claim for development rebate amounting to Rs. 2,20,885 in respect of machinery and furniture claimed to have been installed by it of the value of Rs. 15,12,593. The claim was made u/s 33(4) of the Income Tax Act, 1961, read with section 16(c) of the Finance Act, 1974. This claim has been disallowed by the Tribunal. Hence, at the instance of the assessees, the following question has been referred to us u/s 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the assessee''s claim of development rebate ?"

The relevant facts, as found by the Tribunal, are as follows : A partnership firm known as Empire Estates was the owner of a piece of land on which it was in the process of constructing a building-cum-cinema theatre along with a preview theatre and a restaurant. In respect of this project, Messrs. Empire Estates had placed an order for machinery and other equipment prior to December 1, 1973. The machinery so ordered consisted, inter alia, of a projector of the value of Rs. 8,75,000, an airconditioning plant and also chairs worth Rs. 4,28,400. Messrs. Empire Estates entered into an agreement of sale dated January 9, 1974, with Messrs. S. P. Builders under which it transferred, inter alia, the cinema theatre along with the pending contract of purchase of plant and machinery to Messrs. S. P. Builders. Messrs. S. P. Builders were also a partnership firm. The partners of Messrs. S. P. Builders, however, are distinct from the partners of Messrs. Empire Estates. The plant and machinery in question has been installed after May 31, 1974. The assessee-company was incorporated on September 27, 1974. Under the memorandum and articles of association of the assessee-company, one of the objects for which the assessee-company was incorporated, was to acquire and take over in any manner whatsoever the whole or any part of the right, title and interest of Messrs. S. P. Builders in the theatre known as Excelsior Cinema Building under the indenture of lease made between Messrs. Empire Estates as the lessors of the one part and Messrs. S. P. Builders of the other part together with the structures being erected, plant and machinery, furniture and fixtures and other fittings and to pay for the same either in cash or in shares of the company or partly in cash or partly in such shares. One of the partners of Messrs S. P. Builders is a signatory to the memorandum and articles of association. The other three partners of Messrs. S. P. Builders are not. Accordingly, under an agreement of December 6, 1974, Messrs. S. P. Builders transferred their right, title and interest in the said cinema building along with plant and machinery to the assessee-company. There is a subsequent letter dated December 12, 1974, under which Messrs. S. P. Builders have transferred certain loans, advances and deposits set out therein which had been received by Messrs. S. P. Builders for and on behalf of the assessee-company.

The assessee-company is claiming development rebate to be paid in respect of the plant and machinery so installed of which it became the owner pursuant to its agreement with Messrs. S. R. Builders.

In the context of these facts, it is necessary to examine the provisions relating to development rebate available to the assessees for the assessment year 1975-76 for which the accounting year ended on March 31, 1975. u/s 33(1) of the Income Tax Act, 1961, in respect of any new machinery or plant, inter alia, which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall be allowed a deduction, in respect of the previous year in which, inter alia, the machinery or plant was installed or, if the machinery or plant was first put to use in the immediately succeeding previous year, then, in respect of that previous year, a sum by way of development rebate as specified in that section. Sub-section (5) of section 33, however, provides that the Central Government may, by notification in the Official Gazette, direct that the deduction allowable under this section shall not be allowed in respect, inter alia, of machinery or plant installed after a date which may be specified in the notification, which may not be earlier than three years from the date of such notification.

At the relevant time, in exercise of this power u/s 33(5), the Central Government had issued a notification dated May 28, 1971 (see [1971] 81 ITR 45), under which it was notified that the deduction in respect of development rebate shall not be allowed, inter alia, in respect of machinery or plant installed after May 31, 1974. Therefore, as a result of this Notification, the machinery in question in the present case, which had been installed after May 31, 1974, would not have been entitled to any development rebate.

Under the Finance Act, 1974, however, the Government of India provided, by reason of section 16(c), for continuance of development rebate in certain cases. This appears to have been done in view of the representations made by entrepreneurs in several cases that they were not able to obtain timely delivery of machinery or plant for reasons beyond their control. (The reasons for incorporation of section 16(c) in the Finance Act, 1974, are set out in Circular No. 138 dated June 17, 1974, in paragraph 58). Section 16(c) reads as follows (see [1974] 94 ITR 46) :

"Section 16. Continuance of development rebate in certain cases. -

The notification of the Government of India in the Ministry of Finance Department of Revenue and Insurance) No. S. O. 2167, dated the 28th day of May, 1971, issued under sub-section (5) of section 33 of the Income Tax Act shall not apply in respect of -

(c) any machinery or plant (not being machinery or plant referred to in clause (b)) installed by any assessee after the 31st day of May, 1974, but before the 1st day of June, 1975, if the assessee furnishes evidence to the satisfaction of the Income Tax Officer that before the 1st day of December, 1973, he had purchased such machinery or plant or had entered into a contract for the purchase of such machinery of 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,

and accordingly the provisions of the Income Tax Act shall have effect in relation to such ship, machinery or plant, subject to the conditions specified in clauses (a), (b) and (c)."

Therefore, by reason of section 16(c), development rebate u/s 33 was continued beyond May 31, 1974, provided the following conditions were met : (i) the machinery or plant should have been installed by the assessee after May 31, 1974, but before June 1, 1975, and (ii) the assessee should furnish evidence to the satisfaction of the Income Tax Officer that before December 1, 1973, he had either purchased such machinery or plant or had placed a contract for the purchase of such machinery or plant with the manufacturer or owner of, or a dealer in, such machinery or plant. When the machinery or plant had been manufactured in an undertaking owned by the assessee, he had taken steps (or the manufacture of such machinery or plant.

Therefore, in the present case, we have to consider (1) whether the plant and machinery had been installed by the assessee-company before June 1, 1975, and (2) whether the assessee-company had either purchased or had entered into a contract for the purchase of such plant and machinery with the manufacturer or owner prior to December 1, 1973.

Taking the first condition first on the basis of the facts as found by the Tribunal, it is clear that the plant and machinery have been installed after May 31, 1974, but before June 1, 1975. There is no dispute on this factual aspect. It is, however, the contention of the Revenue that the machinery, in the present case, has not been installed by the assessee-company. The machinery was installed by Messrs. S. P. Builders prior to the incorporation of the assessee-company. It has been transferred thereafter by Messrs. S. P. Builders to the assessee-company. Mr. Jetley, learned advocate for the Revenue, has, therefore, submitted that the assessee-company not having installed the machinery in question, cannot claim the benefit of section 16(c) of the Finance Act, 1974.

Mrs. Patel, learned counsel for the assessee-company, was, however, submitted that section 16(c) should be liberally construed to include as the installing party not merely the assessee seeking development rebate, but also any assessee. So that even when the machinery has been installed by somebody else, if the assessee has become the owner of that machinery in the previous year in question and he is claiming development rebate for the first time on that machinery, such rebate should be granted to the assessee.

The submission of the assessee cannot be accepted looking to the specific language used in section 16(c) of the Finance Act, 1974. u/s 16(c) only in certain specific cases development rebate is continued. It is not as if there is a general extension of development rebate u/s 33 for a certain period. Unless the conditions set out in section 16(c) are met the assessee cannot get the benefit of development rebate which has been otherwise discontinued. Therefore, we will have to interpret the condition as we find it in section 16(c). Section 16(c) of the Finance Act covers "any machinery or plant installed by an assessee". This assessee clearly must be the one who is claiming the development rebate. The subsequent part of section 16(c) brings out this aspect clearly. It requires the assessee to furnish evidence that "he had purchased such machinery or plant or had entered into a contract for the purchase of any machinery or plant........." The acts of installation, purchase, etc., required to be done by the assessee claiming development rebate.

Mr. Jetley has drawn our attention to a decision of the Madras High Court in the case of Lakshmi Paper Industries Vs. Commissioner of Income Tax, , where the Madras High Court, in the context of development rebate, considered the expression "assessee" appearing in section 34(3)(a) of the Income Tax Act and negatived a similar argument advanced before it and held that the expression "assessee" must be construed as the assessee who claims the development rebate and in whose favour the development rebate is to be allowed. It cannot be read as "any assessee".

In this connection, an alternative argument has been advanced by the assessee to the effect that Messrs. S. P. Builders were promoters of the assessee-company and hence plant and machinery installed by Messrs. S. P. Builders must be considered as installed on behalf of the assessee-company or by the assessee-company itself. In this connection, the Tribunal examined the relevant facts and came to the conclusion that no material was produced before it which would enable the Tribunal to accept the contention that Messrs. S. P. Builders were the promoters of the assessee-company. These are essentially findings of fact and we cannot go behind these findings. We may, however, note the following facts in this connection. Although the memorandum and articles of association of the assessee set out that one of the objects for which the assessee-company was incorporated was to obtain by transfer from Messrs. S. P. Builders, the said theatre as well as its plant and machinery, the memorandum is signed by two persons only, one of whom was a partner of Messrs. S. P. Builders. Messrs. S. P. Builders were a partnership firm consisting of four partners. There is no material to show that this firm of four partners acted as promoters of the assessee-company.

Halsbury''s Laws of England, Fourth edition, Volume 7, in paragraph 34, discusses the meaning of the term "promoter". It is stated therein that the term "promoter" is not defined in the English Companies Act, 1948, except in connection with the liability for statements in prospectus or offer for sale. The same is the position in our Companies Act where section 62 provides for similar liability of a promoter in respect of statements made in the prospectus. It is further stated in Halsbury, Vol. 7, in paragraph 34, that the term "promoter" is not a term of law, but of business. It is a short and convenient way of designating those who set in motion the machinery by which the Companies Act, 1948, enables them to create an incorporated company. It involves the idea of exertion for the purpose of getting up and starting a company, or what is called "floating" it, and also the idea of some duty towards the company imposed by, or arising from, the position which the so-called promoter assumes towards it. In paragraph 36, this position is further made clear and it is stated that persons do not become promoters immediately upon purchasing a property, although they shortly afterwards sell it at a profit to a company subsequently formed to buy it, if at the time of the contract they have taken no steps to form the company, and even though the price is agreed to be paid partly in shares of a company which the purchasers propose to form. There are no facts in the present case which would show that Messrs. S. P. Builders acted in any manner as such promoters. None of the agreements which are on the record before us indicate that Messrs. S. P. Builders had floated the assessee-company or had set in motion the machinery by which the assessee-company was incorporated or that they had purchased the plant and machinery in question while acting as such promoters with the intention of transferring it to the assessee-company. The mere fact that one of the partners of Messrs. S. P. Builders is also a signatory to the memorandum and articles of association of the assessee-company is not sufficient for the purpose of establishing that Messrs. S. P. Builders were the promoters of the assessee-company.

The assessees have relied upon a letter dated October 6, 1979, addressed by Messrs. S. P. Builders to the Commissioner of Income Tax (Appeals) under which they have confirmed that as the promoters of Messrs. New Excelsior Theatre Private Limited (incorporated on September 27, 1974), they had made payments aggregating to Rs. 3 lakhs in the month of November, 1973, by way of earnest money to Messrs. Empire Estates in connection with the transaction of taking over the right, title and interest of Messrs Empire Estates in the New Excelsior Cinema Building as also the benefit of various transactions and contracts entered into by Messrs. Empire Estates regarding the theatre equipment, etc. This is a letter written much after the event, at the time when the appeal of the assessees was pending before the Commissioner of Income Tax (Appeals). It is signed by only one partner the same partner who is a signatory to the memorandum and articles of association of the assessee-company. The Tribunal has not accepted this evidence as sufficient for establishing that Messrs. S. P. Builders were the promoters of the assessee-company. We do not see why this finding of fact should not be binding on us. The terms of the various agreements are before us. In none of the agreements is there any reference to Messrs. S. P. Builders acting as promoters for the assessee-company. We cannot go behind the facts as found by the Tribunal. And in view of the finding of the Tribunal that Messrs. S. P. Builders were not the promoters of the assessee-company, it is not possible for us to equate the machinery which was purchased and installed by Messrs. S. P. Builders as machinery installed by the assessee-company, which company was incorporated after the machinery was installed and which took over the plant and machinery from Messrs. S. P. Builders under an agreement of December 6, 1974.

This bring us to the second condition which the assessee must fulfil u/s 16(c) of the Finance Act, 1974, namely, that before December 1, 1973, the assessee should have either purchased such machinery or plant or should have entered into a contract for such purchase. In the present case, undoubtedly, the contract for purchase was entered into prior to December 1, 1973. But from the facts as found by the Tribunal, this contract was entered into by Messrs. Empire Estates. In a revised statement of facts, the assessee claimed that the contract for purchase was entered into by Messrs. Empire Estates and Messrs. S. P. Builders. The Tribunal has, however, found that only Messrs. Empire Estates had entered into such contract prior to December 1, 1973. Messrs. S. P. Builders claim to have paid earnest money amounting to Rs. 3 lakhs prior to December 1, 1973, to Messrs. Empire Estates. This, however, is not sufficient for the purpose of holding that the contract for purchase of plant and machinery was entered into by both Empire Estates and S. F. Builders. In any event, section 16(c) expressly requires that such a contract should have been entered into by the assessee. Neither Empire Estates nor S. P. Builders can be considered as the assessee-company. As set out earlier, S. P. Builders are not the promoters of the assessee-company. Empire Estates is admittedly a wholly distinct entity. Therefore, in any event, the assessee-company cannot be considered as having entered into a contract for the purchase of plant and machinery prior to December 1, 1973.

We have already negatived the contentions of the assessees to the effect that for the purpose of section 16(c), it is enough if such an agreement or contract has been entered into by any assessee, so long as the assessee who is claiming the development rebate is the owner of the plant and machinery in the previous year for which development rebate is claimed. The assessees have relied upon a judgment of the Gujarat High Court in the case of Commissioner of Income Tax, Gujarat Vs. Saurashtra Wire-healds Manufacturing Co. Pte. Ltd., , where the Gujarat High Court considered the provisions of section 10(2) (via) and (vib). Looking to the language of that section, the Gujarat High Court said that it was not necessary that to qualify for additional depreciation the machinery should have been installed by the assessee himself. All that was necessary was that the plant or machinery must have been new when installed. The concept of installation having been made by the assessee cannot be read by necessary implication in the words "new" or "which is wholly used for the purposes of the business carried on by the assessee". In other words, in the section before the Gujarat High Court, there was no express requirement that the machinery should have been installed by the assessee himself. The Revenue sought to read this into this section by implication. This was negatived by the Gujarat High Court. Section 16(c) of the Finance Act, 1974, however, has an express requirement that the machinery or plant should be installed by the assessee. In view of this express requirement, we cannot import the ratio of the judgment of the Gujarat High Court into this section.

In the premises, the question which is before us is answered in the affirmative and in favour of the Revenue.

In the circumstances of the case, there will be no order as to costs.