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international Computers India Vs. Deputy Commissioner of - Court Judgment
LegalCrystal Citation legalcrystal.com/68862
Court Income Tax Appellate Tribunal ITAT Mumbai
Decided On Feb-18-1997
Reported in (1997)63ITD195(Mum.)
Appellant international Computers India
Respondent Deputy Commissioner of
1. the assessee, a limited company, carrying on the business of manufacture of computers, systems, equipment, etc., has filed the appeal aggrieved by the order of the commissioner of income-tax (appeals) [hereinafter referred to as cit (a)] on confirming claims & deductions that were rejected by the assessing officer in computing the income of the assessee under the income-tax act, 1961 (hereinafter referred to as the act) for the assessment year. the revenue too has come up in appeal objecting to the relief allowed by the cit (a) for the same assessment year. because, both the appeals arise from the same order of the cit (a) and for the same assessment year, the appeals are grouped together and are disposed of by a common order for the sake of convenience.2. the assessee company has.....
1. The assessee, a limited company, carrying on the business of manufacture of computers, systems, equipment, etc., has filed the appeal aggrieved by the order of the Commissioner of Income-tax (Appeals) [hereinafter referred to as CIT (A)] on confirming claims & deductions that were rejected by the Assessing Officer in computing the income of the assessee under the Income-tax Act, 1961 (hereinafter referred to as the Act) for the Assessment year. The revenue too has come up in appeal objecting to the relief allowed by the CIT (A) for the same assessment year. Because, both the appeals arise from the same order of the CIT (A) and for the same assessment year, the appeals are grouped together and are disposed of by a common order for the sake of convenience.
2. The assessee company has raised twenty-four grounds touching various issues but, during the hearing, it had conceded the following grounds as not being insisted upon. They are : ground no. 2 - claim that application software should be treated as revenue expenditure; ground no. 3 - expenditure on developing econometric programme; ground no. 4 - repairs on leased premises; ground no. 11 - restoration of claim of deduction under section 80J of the Act to the file of Assessing Officer; ground nos. 14 & 15 - additional depreciation on various computers, equipment, etc. and on computers at the various service centres; ground no. 16 - non-allowing on consumption of materials and components on notional basis ground no. 17 - non-allowing of deduction of redundant and obsolete spares, scrapped; ground no. 19 - non-allowing of sales tax penalty; ground no. 21 - addition to closing stock valuation on the ground that it was undervalued; ground no. 24 - non-allowing of surtax. These grounds of appeals are accordingly dismissed for not being insisted upon.
3. In ground no. 1, the assessee had claimed that the club subscription of Rs. 15,400 was allowable to it as revenue expenditure because, the jurisdictional High Court in Otis Elevator Co. (India) Ltd. v. CIT [1992] 195 ITR 682. Respectfully following the jurisdictional High Court in Otis Elevator Co. (India) Ltd.'s case (supra), we uphold this claim of the appellant company that it is revenue expenditure allowable as a deduction in computing the income from profits and gains from business or profession.
4. In ground no. 5, the assessee has raised its claim with reference to the provisions of section 37(3A) of the Act. The claim covered amounts that have been disallowed with reference to travelling expenses that included payment to hotels, driver's salary, rates and taxes of motor vehicles, reimbursement of expenses to employees for use of their owned vehicles for official duties, car lease rental, expenses on conferences and in the manner of working out the amount that is allowable and disallowable according to Rule 6D of the Income-tax Rules, 1962 (hereinafter referred to as the Rules). The disallowance has been made by the authorities by considering the classification of expenses made in section 37(3B) that is referred to in section 37(3A) of the Act, namely, running and maintenance of aircraft and motor cars and payment made to hotels and with reference to the limits prescribed in Rule 6D of the Rules from out of the travelling allowance granted to the employees sent on tour.
4.1 The plea raised on the issue of maintenance of motor cars was that, expenses such as driver's salary, rates and taxes on motor cars are allowable with reference to the provisions of sections 30 and 31 of the Act and in view of the ruling of the jurisdictional High Court in CIT v. Chase Bright Steel Ltd. (No. 1) [1989] 177 ITR 124/42 Taxman 142(Bom.) the claim of the assessee should be upheld. Reliance was also placed on the Tribunal decisions in R.K. Swamy Advertising Associates (P.) Ltd. v. IAC [1993] 44 ITD 99 and Dy. CIT v. Addison & Co. Ltd. [1995] 53 ITD 514. He conceded that on the taxi hire charges, the tribunal, in the case of assessee for an earlier assessment year, had upheld similar disallowance. He contended that, car lease is not the same as maintenance of motor cars and hence, no part of the car lease could be disallowed. On the issue of working out of the disallowance by applying Rule 60 of the Rules, he contended that, the Tribunal had been consistent in its view that, the travel during the year by an employee must be aggregated and then the rule should be applied. On the issue of reimbursement to employees for use by them of the car owned by them, it was strongly insisted that it could not be maintenance of motor car.
The departmental representatives supported the orders of the authorities below.
4.2 On the above issues, we express our views as under. On the issue of driver's salary and rates and taxes, because of the jurisdictional High Court in Chase Bright Steels Ltd.'s case (supra), we uphold the claim of the appellant company that they could not be disallowed with reference to sections 37(3A) of the Act for they are otherwise allowed with reference to sections 30 and 31 of the Act. On the issue of taxi hire charges being treated as maintenance of motor cars because, the Tribunal in the case of the assessee had held it as disallowable under section 37(3A), for the sake of consistency, we uphold the orders of the authorities below. On the issue of reimbursement to employees for using their cars for office duties, though there might appear to be some similarity with the hiring of taxis, because, there was no compulsion on the employees to use their motor cars for office duties, it could not be the same as hiring at the instance of the employer.
Accordingly, we are of the opinion that, the disallowance was wrong and we delete the same.
4.3 On the issue of conference expenses, the plea raised was that staff had participated on them and that it contained expenses on hire of hall, other facilities connected with the conferences that have nothing to do with any entertainment, disallowance was wrong. In our view, there is justification in the claim in so far as it is concerning hire of hall and facilities that go with it for holding of the conference and to this extent, we direct the Assessing Officer to exclude while working out the disallowance. Because, staff also participated in the conference, to that extent, it could be treated as welfare expenses and we hold that twenty-five per cent of the food expenses is on staff welfare account and the disallowance on food expenses is limited to seventy-five per cent only.
4.4 The issue of travelling allowance in addition to the above ground, the assessee has raised it as ground no. 6 as well and the following would cover both the grounds. On the issue of working out of disallowance by applying Rule 6D of the Rules, the Tribunal had been consistently applying the finding in S.V. Ghatalia v. ITO [1983] 4 ITD 583 according to which decision, the disallowance has to be aggregating the total travel by an employee in a year and then apply the limit of allowance and this is subject to the opinion of the jurisdictional High Court. However, the Andhra Pradesh High Court in CIT v. Coramandel Fertilizers Ltd. [1996] 220 ITR 298/86 Taxman 522 had upheld the manner of disallowance as has been made in the instant case. We are following the earlier decisions of the Mumbai Benches because, it is under reference with the jurisdictional High Court and direct the Assessing Officer to scrutinize the details of travelling filed by the assessee before him and limit the disallowance to that amount arrived at by aggregating the travel in a year by each employee.
5. The issue that has been raised is with reference to the amount disallowed by applying the provisions of section 80VV of the Act on the professional fees paid to Crawford Bailey & Co. and A.F. Ferguson & Co., treating part of it as incurred on representation before the authorities. On this issue after considering the facts on record, it is clear that the fees paid to Crawford Bailey & Co. being for consultation only, we delete the disallowance. However, the fees paid to A.F. Fergusan includes for consultation and on appearance and therefore, the estimation of that part concerning appearance was justified and we uphold the disallowance.
6. The issue raised in ground no. 8 is on the repairs and maintenance of Maker Tower Flat that got damaged on a fire accident. The flat was not insured against fire, etc. and the accident had occurred and the assessee had to incur expenses to restore the flat for its use of office. On this issue, after carefully considering the rival submissions and the facts on record, we are of the opinion that the restoration of the damaged flat due to fire, did not bring about any new asset and hence, expenses incurred on bringing back to life the damaged flat is undoubtedly revenue expenditure and the claim of the appellant company is accordingly upheld.7. The assessee company has challenged the manner of working out the disallowance of salary and perquisite with reference to section 40A(5) of the Act and what and how much of the amount could be construed as perquisite. The initial plea is that house rent allowance is specifically exempted under section 10(13A) of the Act in the hands of the employees in computing the income of the employee and that this has been so stated in section 40A(5) of the Act in Explanation 2 to that section. He referred to the provisions contained in sections 17(1) and 17(3) of the Act and specifically to the provision that stated of profits in lieu of salary as to include all payments other than payments covered by section 10(13A) of the Act. He conceded that the treatment on actual rent paid being treated as perquisite, it has been held against the assessee by Tribunal in the earlier years.
On the treatment of reimbursement of medical expenses, the counsel for the appellant company contended that it is not a perquisite. He further contended that the passing reference made by the Supreme Court in CIT v. Mafatlal Gangabhai & Co. (P.) Ltd. [1996] 219 ITR 644/85 Taxman 381 that reimbursement of medical expenses should be treated as salary could neither be treated as a finding or obiter dicta. He pleaded that on the proper manner of the rulings of the Supreme Court, reference is necessary to the Supreme Court in CIT v. Dhamodayam Co. [1977] 109 ITR 527, Rajeswar Prasad Misra v. State of West Bengal AIR 1965 SC 1087, H.H. Maharajidhiraja Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India AIR 1971 SC 530 and on the Gujarat High Court in CIT v. Chunilal Khushaldas [1974] 93 ITR 369. The connected issue of one-third of car expenses, driver's salary were not insisted upon. The last of the issue of expenses of leased flats was conceded as held against the assessee.
7.1 We shall deal with the submissions of the assessee that house rent allowance that are exempted by section 10(13A) of the Act are also so exempted for being included as perquisite within the meaning of section 40A(5) of the Act and for working out the disallowance under the said section. The counsel has referred to Explanation 2 to section 40A(5) and to the provisions contained in section 17(3) of the Act it becomes necessary to reproduce here to appreciate the submission of the assessee.
(a) "Salary" has the meaning assigned to it in clause (1) read with clause (3) of section 7 subject to the following modifications, namely :- (1) In the said clause (1), the word "perquisites" occurring in sub-clause (iv) and the whole of sub-clause (vii) shall be omitted; Section 17(3) - "profits in lieu of salary" includes -(1) *** *** *** (ii) any payment [other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11)......... or clause (13A) of section 10], due to or received by an assessee from an employer....; Section 10 - In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included - Section (13A) - any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent not exceeding four hundred rupees per month as may be prescribed having regard to the area or place in which such accommodation is situate and other relevant consideration.
Explanation - For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where - (a) the residential accommodation occupied by the assessee is owned by him, or (b) the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him; The submission of the assessee was that salary was not to include any payment on account by house rent allowance because, it has been so excluded from being considered as profits in lieu of salary and the same meaning is made applicable even under section 40A(5) by Explanation 2 to that section. The reading of the various sections does go to suggest that the plea advanced by the assessee is reasonable. We are of the view that while working out the salary or perquisite, in cases where employee is provided with house rent allowance, it has to be excluded from salary to the extent of Rs. 400 per month subject to the condition that the accommodation occupied by the employee is not owned by him or he has not actually paid the rent. We direct the Assessing Officer to carry out the above direction.
In so far as the actual rent paid by the assessee because, it has been so held as disallowable by the Tribunal, we will uphold the orders of the authorities below. On the consideration of one-third of salary of car driver, car expenses and the expenses on leased flat, because, the assessee had not insisted upon it, the disallowance are upheld.8. The assessee has also raised the issue of disallowance of remuneration paid to Directors with reference to section 40(c) of the Act in its ground no. 10. The issues are similar to those that were considered in the paragraph 7 above, namely, reimbursement of medical expenses, fair market value of flats given for their residence to be taken on notional basis and not with reference to actual expenditure and the value of car perquisite being taken at one-third of expenses and driver's salary. The arguments advanced were no different to what was addressed as discussed in paragraph 7 above and therefore, is not repeated once again.
Considering the Supreme Court in Mafatlal Gangabhai & Co.'s case (supra), the reimbursement of medical expenses are clearly salary and we uphold their inclusion as remuneration. On the issue of flats used for residence, perquisite value has to be worked out in the same manner as is calculated with reference to income from salary and we direct the Assessing Officer to carry out our direction. On the issue of car expenses and driver's salary, we approve the inclusion.
9. The issue of expenses on conferences, the disallowance made under section 37(3A) of the Act, as raised in ground no. 12 are the same as in ground no. 5, namely, the claim on hall hire, related facilities for holding the conferences and on food expenses part for staff participation. Our views on ground no. 5 above would equally apply to this ground as well.
10. The assessee has raised the issue of claim of terminal allowance on data processing equipment and computers which was allowed to the extent of Rs. 25,25,997 against the claim on Rs. 41,92,691. The plea raised was that the assessee had been following consistently the scrapping of equipment and computers without taking into account any scrap value and as and when the items are sold, full value was credited to the profits and loss account. Assessing Officer accepted the plea of the assessee that due consideration to the market conditions should be given but, was not convinced that the value could be taken at nil and therefore, estimated the scrap of the equipment manufactured in 1976-77 at 20% because, assessee had manufactured similar items in the year. He further held that the adjustment of the scrap value so estimated would be allowed in the year of sale of scrap. The CIT (A) upheld the order of the Assessing Officer and the reasons provided by him. The assessee had contended that it had been consistently following the practice of writing off the obsolete stores by relating to the market conditions and in the year in which they were sold, the full value of receipts on sale of obsolete stores as its profits and this was being accepted by the Tribunal. Because, the Tribunal had accepted this practice in the earlier years, for the sake of consistency, we uphold the claim of the appellant.
11. The appellant company in ground no. 20, had raised the issue of disallowance made with reference to section 43B of the Act. The items that are so disallowed include sales tax and excise duty. The disallowance of sales tax of Rs. 18,03,154 was not insisted upon and on that basis, this is treated as dismissed.
11.1 The excise duty element should not be made part of the closing stock, as agitated upon by the assessee was considered by the Special Bench of the Tribunal in ITO v. Food Specialities Ltd. [1994] 49 ITD 21. The Special Bench (supra) had considered extensively the concept of valuation of closing stock in the light of the provisions of section 43 B of the Act that allowed taxes, duty, etc., on actual payment with no relation to the year to which the taxes or duty related to. It was held that section 43B of the Act permitted deduction on actual payment basis and the duty, etc., that is allowed because of the said provision, and in order to fulfil the conditions of the said section, it is necessary to exclude the duty allowed from the value of closing stock.
Respectfully following the said special bench decision, we uphold the claim of the assessee that no part of the duty actually allowed with reference to section 43B of the Act, would form part of the value of closing stock.
11.2 The third limb of the issue is with reference to excess payments received from customers on account of sales tax. The appellant company had collected in excess from its customers sales tax to the tune of Rs. 10,71,577 of which, it has claimed that it had refunded to its customers by issuing credit notes to them of Rs. 7,31,577. The amount that was so collected of Rs. 10,71,577 because, it was not paid to the authorities, it was added to the income computed.
The plea advanced by the appellant was that the addition be restricted to the extent of difference between Rs. 10,71,577 and Rs. 7,31,577 and that to the extent of refund through credit notes, should be excluded.
There appears some justification on the plea of the appellant because, if an amount had collected in excess from the customers and on realization, the customers were so intimated by the credit notes, followed by actual payment. We accordingly direct the Assessing Officer to verify whether, the amount of Rs. 7,31,577 had been actually refunded to the customers by obtaining confirmations from the concerned customers and if so confirmed by the customers, the claim of exclusion from the income may be accepted. However, because, the balance of Rs. 3,40,000 is not paid to the authorities, the addition is justified and the same is upheld.12. The appellant in ground no. 23 has touched upon the claim of certain credit balances being treated as deemed income under section 41(1) of the Act. The department had treated the claim preferred on customers for out of pocket expenses of Rs. 5,58,480, cost of damages for damaged/defective paper from Rohtas Industries Ltd. of Rs. 2,56,416, and advance for repairs of Rs. 3,09,053, aggregating to Rs. 11,23,947 as deemed income under section 41(1) of the Act. The plea advanced by the assessee was that, none of the three items were ever claimed and allowed to it as deduction in computing income in any of the earlier years and therefore, treating it as deemed income with reference to section 41(1) of the Act was improper. Though, there appeared considerable merit in the argument advanced by the appellant but, because, the amount had been credited to the profit and loss account, suggesting that assessee had treated them as income, we are of the opinion that the action of the revenue has to be upheld which we do.
13. The assessee has raised the issue of investment allowance on (i) Data Processing Equipment on hire, (ii) Computers on hire, and (iii) Water coolers at factory. In addition it has claimed additional depreciation under section 32(1)(iia) of the Act on Data Processing Equipment and Computers on hire and on similar items in use for own use in its Customer Service Centres. It had also claimed additional depreciation on other assets installed and used in the Customer Service Centres.
13.1 The assessee had claimed investment allowance on the following items : 13.2 The Assessing Officer had noted in his order of assessment that though, the assessee had stated in its letter dated 12-8-1986 that the confirmation certificate of installation was enclosed along with its letter but, it was not so enclosed. He accordingly concluded that the basic condition for grant of investment allowance namely, the proof of installation and its use in the previous year was not satisfied. He refuted the claim of the appellant company on placing reliance on the decision of the Madras Bench of the Tribunal in First Leasing Co. of India Ltd. v. ITO [1982] 3 ITD 808 by observing that the department had not accepted the said decision. He, therefore, denied the claim of investment allowance on Data Processing Equipment and Computers that were leased out.
13.3 On the claim of investment allowance on plant and machinery used in the manufacture of computers, he observed that the claim stood rejected in the earlier years except in the assessment year 1983-84 in which the claim was accepted. He examined the claim with reference to Schedule 11 of the Act as to Computers are excluded or included from Data Processing Equipment. He noted the submissions of the assessee that computers are excluded from the list of Schedule 11 by Finance Act No. (2) of 1977 that read 'computers, including Central Processing Units and peripheral devices' and to the debate that took in the Lok Sabha as stated by the then Finance Minister. He observed that the issue was deliberated upon in the earlier years but, that the Finance Act, 1987 has expressly excluded computers from the 11th Schedule and if the contention of the assessee was to be accepted then, there was no need to bring in the change by Finance Act, 1987. He, therefore, rejected the claim of the assessee. On water coolers he rejected the claim with the observation that it does not qualify.
13.4 The CIT (A) had noted the submissions of the assessee that Data Processing Equipment and Computers that are manufactured by it need specially designed rooms for being installed and the installation is carried out under its supervision the moment its clients intimate it about the rooms being ready for the purpose. He also noted that the assessee had placed a few of the confirmations of the installation having been made at specially designed rooms constructed at the premises of its clients that included Indian Drugs & Pharmaceuticals Ltd., Punjab National Bank, Rail India Technical & Economic Services Ltd., BHEL, Binny Ltd., Syndicate Bank and W.S. Insulators (I) Ltd., to mention a few of them. He also noted the submissions of the assessee that the installation was made at the works of its clients as well. It was also noted that the assessee was one of the interveners before the Special Bench of the Tribunal that heard the issue of investment allowance on leased equipment by companies that are engaged in the business of leasing in ITO v. First Leasing Co. of India Ltd. [1985] 13 ITD 234. He concurred with the reasons of the Assessing Officer and rejected the claim.
13.5 On the plant and machinery used for the manufacture of computers including test equipment at the factory and at site and on jigs, tools, patterns, etc., the CIT (A) had noted that the submission of the assessee was the same as was made in assessment year 1981-82 and in the later years. The CIT (A) also had noted that in assessment year 1983-84 the Assessing Officer was convinced of the claim of investment allowance and allowed the deduction. He further noted the submission of the assessee that the law makers have only clarified the exempted item in 1987. He concluded that it was proper to follow his predecessor's view and directed Assessing Officer to allow investment allowance on these items. On water coolers he confirmed the order of Assessing Officer.
14. The assessee placed reliance on the detailed exposition of the Division Bench of the Tribunal in First Leasing Co. of India's case (supra), followed by the Special Bench decision in First Leasing Co. of India's case (supra) that has been approved by the Madras High Court that considered the issue on the basis of reference carried to the High Court under section 256(1) of the Act by the revenue in CIT v. First Leasing Co. of India Ltd. [1995] 216 ITR 455/87 Taxman 536, the Karnataka High Court decision that had upheld a similar claim in CIT v.Shaan Finance (P.) Ltd. [1993] 199 ITR 409/67 Taxman 213 and on few other decisions of the Tribunal. The Supreme Court decisions in Mahabir Cold Storage v. CIT [1991] 188 ITR 91 and CIT v. Narang Diary Products [1996] 219 ITR 478, was submitted was not applicable to the case because, both the decisions were considering the assessee having been allowed development rebate on machinery used by it in its manufacturing process which machinery were leased out and accordingly had held that the machinery was no longer used for the business for which it was allowed the development rebate and approved the withdrawal of the development rebate. It was also contended that the assessee in the two cases were not in the business of leasing.
14.1 The revenue however placed reliance on the decision of the Division Bench of the Tribunal in Dy. CIT v. Sonia International (P.) Ltd. [IT Appeal No. 1875 (Bom.) of 1990] for assessment year 1988-89 to which one of us was a party, that refused the claim of investment allowance on machinery owned by leasing companies and leased out in which the above two decisions of the Supreme Court were considered. The decision of another Division Bench of the Tribunal in Mazda Industries & Leasing Ltd. v. Dy. CIT was also relied upon where the decision of the Supreme Court in Mahabir Cold Storage's case (supra) was considered and the claim of investment allowance was rejected and had placed a copy of the same on our records. Our attention was also drawn to the decision of the Delhi High Court in CIT v. Northern India Iron & Steel Co. Ltd. [1995] 211 ITR 370.
14.2 We may observe that the issue is quite interesting and is revolving around the two decisions of the Supreme Court (supra) as to it settling the issue of leasing companies claim for investment allowance on plant and machinery owned by it, used by it for its business, the leased plant and machinery being used by lessees for manufacture, production of article or thing. Before we go into the issue considered by the two, Supreme Court, we feel the need of once again going over the concept of business of leasing companies as was deliberated upon by the earliest of the decision of the Division Bench in First Leasing Co. of India case (supra). We reproduce the provisions of section 32A of the Act : "Section 32A. investment Allowance. - (1) In respect of a ship or an aircraft or machinery or plant specified in sub-section (2), which is owned by the assessee and is wholly used for the purposes of the 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 first 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.
(2) The ship or aircraft or machinery or plant referred to in sub-section (1) shall be the following, namely :- (a) a new ship or new aircraft acquired after the 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft; (b) any new machinery or plant installed after the 31st day of March, 1976 : (i) for the purposes of business of generation or distribution of electricity or any other form of power; or (ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing; or (iii) in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule : (2A) 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, dyes 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.
(3) The deduction under sub-section (1) shall not be denied in respect of any machinery or plant installed and used mainly for the purpose of business of construction; manufacture or production any article or thing, not being an article or thing specified in the list in the Eleventh Schedule, by reason only that such machinery or plant is also used for the purposes of business of construction, manufacture or production of any article or thing specified in the said list.
(4) The deduction under sub-section (1) shall be allowed only if the Following conditions are fulfilled, namely :- (i) the particulars prescribed in this behalf have been furnished by the assessee in respect of the ship or aircraft or machinery or plant; (ii) an amount equal to seventy-five per cent of the investment allowance to be actually allowed is debited to the profit and loss account of any previous year in respect of which the deduction is to be allowed under sub-section (3) or any earlier previous year [being a previous year not earlier than the year in which the ship or aircraft was acquired or the machinery or plant was installed or the ship, aircraft, machinery or plant was first put to use] and credited to a reserve account (to be called the 'Investment Allowance Reserve Account') to be utilised - (a) For the purposes of acquiring, before the expiry of a period of ten years next following the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, a new ship or a new aircraft or new machinery or plant [other than machinery or plant of the nature referred to in clauses (a), (b) and (d) of the second proviso to sub-section (1)] for the purposes of the business of the undertaking; and (5) Any allowance made tinder this section in respect of any ship, aircraft, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act - (a) if the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed, or (b) if at any time before the expiry of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the assessee does not utilize the amount credited to the reserve account under sub-section (4) for the purposes of acquiring a new ship or a new aircraft or new machinery or plant [other than machinery or plant of the nature referred to in clauses (a), (b) and (d) of the second proviso to sub-section (1)] for the purposes of the business of the undertaking; or" 14.3 The reading of section 32A(1) of the Act indicates that investment allowance is intended to be allowed in computing the income from profits and gains from business or profession as a proportion of the actual cost of a ship or aircraft or machinery or plant that is owned by the assessee and is wholly used for the purposes of his business carried on by him. The said section states that the ship or aircraft or machinery or plant are the ones as are specified in sub-section (2) of section 32A of the Act. Sub-section (2) of section 32A of the Act states that the ship or aircraft or machinery or plant that has been referred to in sub-section (1) of section 32A of the Act and has described in clauses (a), (b) and (c) of the said section.
14.4 Clause (a) defines a new ship or new aircraft acquired after 31-3-1976 by an assessee engaged in the business of operation of ships or aircraft. Clause (b) defines any new machinery or plant installed after 31-3-1976, (i) for the purposes of business of generation or distribution of electricity or any other form of power, or (ii)....; or (iii) in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule.
14.5 The Division Bench of the Tribunal in First Leasing Co. of India Ltd.'s case (supra) considering the above provisions in paragraph 9 of the order had observed that the section 32A of the Act had laid down three basic conditions that need to be fulfilled for advancing the claim of investment allowance. The three conditions were (1) the machinery or plant must be owned; (2) such machinery or plant must be wholly used for the business carried on by the assessee; and (3) the machinery or plant must be used for the purposes of manufacture or production of any article or thing that is not part of the list specified in Schedule 11 to the Act. Insofar as the conditions no. (1) and (2) are concerned, they were found to be fulfilled because, the business was leasing for which the machinery or plant was owned and wholly used for that business. On the third condition, the distinction between ship or aircraft and machinery or plant as brought out by sub-section (2) of section 32A of the Act was considered. In the earlier paragraph, the provisions of clauses (a) and (b) of sub-section (2) of section 32A of the Act had been reproduced and had been highlighted. In clause (a) the requirement was that the ship or aircraft that was acquired by an assessee engaged in the business or operation of ships or aircraft but, in clause (b) the requirement' was that in regard to machinery or plant there is no such condition that the machinery acquired by an assessee engaged in the business of manufacture or production of any article or thing. It was accordingly observed that the law makers had clearly given two different descriptions to ship or aircraft and machinery or plant and it was concluded that because, the intention of the law makers had to be carried to its logical conclusion and on that basis, it was concluded that the expressions 'wholly used' and 'exclusively used' are two different expressions and so long as the provisions do not contain the words 'exclusively used', it would be wrong to hold that the expression 'wholly used' should be read as 'wholly and exclusively used'. On this basis it was concluded that the leased machinery or plant so long as it is used by the lessees fulfilling the condition laid down in sub-section (2) of section 32A of the Act by using it for the purposes of manufacture or production of any article or thing, the assessee the leasing company was to be held as fulfilling all of the basic conditions enumerated above.
14.6 On the aspect of installation, it was observed that the condition stood satisfied by the lessees having installed it. It was observed that because of the different treatment being intended by the law makers to ship or aircraft and machinery or plant in clauses (a) and (b) of sub-section (2) of section 32A of the Act, the insistence by the revenue that the machinery or plant must not only be owned but, should be wholly and exclusively used by the assessee and that too for the purposes of manufacture, etc., is unjustified. It was observed in this connection that if the view of the revenue had to be upheld, it would mean that neither the leasing company would be entitled to investment allowance for the reason that it did not use the machinery wholly and exclusively in the manufacture of any article or thing nor the lessee that has taken the machinery on lease would be entitled to investment allowance because, it is not the owner of the machinery or plant. It was in this connection the industrial policy of the Government was touched upon and the leasing business was found to be the appropriate in the industrialization without putting pressure on the entrepreneurs for finance and capital. It was accordingly observed that the propagation of leasing companies as a solution to the industrial needs of the country was well intended and because of the distinction given to ships or aircraft and machinery or plant, it was held that the owning of the machinery or plant and its use for purposes of manufacture or production of article or thing are not conditions that need to be satisfied by the same person one after the other but, if the conditions are satisfied on aggregate basis, by the lessor and lessee, it would be sufficient compliance of the section 32A of the Act.
14.7 The said Division Bench in the above decision had also considered the provisions contained in sub-section (5) of section 32A of the Act that contained the provisions for withdrawal of investment allowance.
This was so considered with reference to the lease indicating the machinery or plant being given over to another as a transfer with reference to the expression 'otherwise transferred'. It was observed that the lessor by giving on lease the machinery or plant had merely permitted its use by the lessee and had not given any other right in the property of machinery or plant. It was also observed with reference to the lease agreement that it did not provide any right for the lessee to purchase the machinery or plant on the expiry of the lease period and though, the lessee was to keep the machinery or plant insured, the claimant under the policy of insurance was the lessor only. It was accordingly observed that though, the machinery or plant was handed over to the lessee for use, it did not involve any transfer of any sort as is suggested by sub-section (5) of section 32A of the Act.
14.8 In the Special Bench in First Leasing Co. of India Ltd.'s case (supra) was again confronted with the identical issue of investment allowance on machinery or plant leased out by the leasing company. The observations were on identical lines as of the Division Bench. The reference sought by the revenue was accepted and the statement of the case was forwarded to the Madras High Court and this decision is First Leasing Co. of India Ltd.'s case (supra). The questions that were considered and the conclusion in that connection are reproduced below for the sake of facility : "With reference to the said 'common question' the sole question of law referred to us in Tax Case No. 786 of 1986 runs as follows : 'Whether the Appellate Tribunal was right in holding that the assessee was not entitled to investment allowance under section 32A of the Act ?' 'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee is entitled to investment allowance under section 32A on items of machinery and plant which have been leased out to others ?' 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to investment allowance under section 32A on the bulldozer purchased and hired to outsiders, even though the assessee's business was only hiring of compressors and bulldozers ?' 'Whether the Appellate Tribunal was correct in law in holding that the assessee is entitled to investment allowance under section 32A and initial depreciation under section 32(1)(iv) of the Act on machinery leased out' ?" In the above question, reference to section 32(1)(iv) is not correct; it must read as section 32(1)(vi). The said provision refers to initial depreciation. As per learned counsel for the Revenue, the arguments advanced in respect of investment allowance would apply to the said initial depreciation also and the decision to be given in respect of investment allowance in regard to the actual question at issue would also equally apply to initial depreciation.
Thus, the main conditions to be satisfied as per section 32A(1) and (2) are : (3) the subject-matter should come under any of the enumerated categories of section 32A(2).
That the plant or machinery in the present case is owned by the assessee is not disputed. As regards the second condition, the assessee is wholly using it for the purpose of his/its business which consists of leasing it to other parties. 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 should itself be engaged 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 strips or aircraft, must be 'engaged in the business of operation of ships or aircraft'.
The fact that such a qualification does not appear in sub-section (1) or sub-Section (2)(b)(iii) of section 32A shows that in order to claim investment allowance for machinery or plant, the assessee need not by himself have the industrial undertaking engaged in the business of manufacture or production of articles not specified in the Eleventh Schedule. Further, even in section 32A(4), which provides for keeping a reserve, as a condition for securing the deduction, we do not find any phraseology to accept the contention of the Revenue.
The object of all interpretation is to discover the intention of Parliament but the intention of Parliament must be deducted from the language used. Where the language is plain and admits of only one meaning, the task of interpretation can hardly be said to arise. If the interpretation sought to be placed by the Revenue were to be accepted, then neither the assessee which hired out the plant or machinery nor the hirer would be entitled to investment allowance. (The hirer will not be entitled to investment allowance because it does not own the plant or machinery) Such an interpretation must be avoided because it will defeat the very purpose of enactment of section 32A. The object of the enactment can also be seen from the Budget Speech of the Finance Minister for the year 1976-77, while introducing section 32A. The relevant portion of the speech is as follows : "The present scheme of investment allowance will facilitate investment in priority industries and reduce the dependence of the corporate sector on public financial institutions." [Vide [1976] 102 ITR (St.) 95].
So, one object of the introduction of section 32A is to facilitate the investment in priority industries. This object will be fulfilled whether the assessee himself makes use of the plant or machinery in question or the hirer. Further, if a person who has enough funds, acquires plant or machinery and hires it out to a person who may not have enough funds at his command, the necessity of the latter person to seek necessary funds from public financial institutions for acquiring the plant or machinery himself may not arise and to that extent the dependence on such institutions is reduced. In this way the second object also is satisfied.
We may also point out that an identical question arose in Shaan Finance (P.) Ltd.'s case (supra) and the said court has also upheld that investment allowance can be claimed by a person similarly placed as the present assessee. According to the said decision, the only requirement under section 32A(2)(b) is that the plant or machinery owned by the assessee should have been used by someone in the manner stated the said sub-clause. It has also been held therein, in the context of the abovesaid expression 'wholly used' finding place in both sections 33 and 32A that the term 'wholly' means 'entirely' and not 'exclusively' and that the machinery in its entirety may be used by its owner and it is possible for another also to use it. In this connection, the said decision also relied on similar observation of this Court in CIT v.Pandyan Bank Ltd. [1969] 71 ITR 707 (Mad).
It must be noted that even if this investment allowance is allowed to a person who simply hires out the plant or machinery, the abovesaid objects will be fulfilled since it is also likely that he will hire out the plant or machinery at a lower rent as he is going to get this allowance in computing his total income of his leasing business.
Any legislative provision is to be construed in the light of the purpose with which it has been introduced. This principle of purposive interpretation has been adopted in so many decisions of the Supreme Court like CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. [1992] 196 ITR 149/62 Taxman 471, Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480. In particular, we may point out that in Bajaj Tempo Ltd.'s case (supra), it has been held that a provision in the statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it.
As already indicated, the present investment allowance has replaced the former development rebate allowance provided under section 33 of the Act. That section 33 gave the said development rebate allowance in respect of machinery or plant "owned by the assessee" and wholly used for the purposes of the business carried on by him. In that context, several decisions have held that the said allowance under section 33 of the Act could be given even to an assessee, who only hires out the abovesaid plant and machinery in the course of business of leasing. We may point out one of them, viz., Ajodhya Prasad Tara Chand Khekra v.CIT [1967] 66 ITR 576 (All.). In that case the court held that for kolhus (sugarcane crushing machine) such development rebate could be allowed. In that context, the relevant observation is as follows : "The kolhus on which development rebate is claimed once were admittedly let out and were, therefore, wholly used for the assessee's business which consisted of hiring out of such kolhus.
The assessee was neither a crusher of sugarcane nor was that his business, and, therefore, kolhus could not have been used by him for that purpose. His business was wholly that of hiring out of kolhus.
The 50 new kolhus year in fact hired out, and, therefore, they were used wholly for the purpose of the assessee's business. The fact that the person who hired the kolhus also made use of them would not make the kolhus any the less used wholly for the purpose of the assessee's business." (p. 570) 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 - vide CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC).
Referring to the third main condition enumerated above (which also has to be satisfied for claiming the abovesaid allowance under section 32A), which provides that the said allowance is given in respect of the machinery or plant 'installed' in any other industrial undertaking i.e., other than the small-scale industrial undertaking) for purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule, the abovesaid Karnataka decision in Shaan Finance (P.) Ltd.'s case (supra) also observes as follows : "The term 'installed' is found in several sub-sections of section 32A, but that does not aid the construction because, in the main sub-section, i.e., section 32A(1), both the terms, 'used' and 'installed' are referred to in relation to the subject-matter.
However, we find some clue as to the Legislature's intention, by comparing section 32A(2B) with section 33(1)(b)(B)(ii) and (iii). In the latter two sub-clauses (of section 33), there is a specific reference to the assessee's business premises where the machinery is to be installed." (p. 415) In other words, 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 it is an asset or the said machinery or plant is 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. That is why, the said Karnataka decision in Shaan Finance (P.) Ltd.'s case (supra), concludes by saying thus : "The benefit is given with reference to the actual user of the machinery, though the benefit may go to a person who does not exploit the machinery himself for manufacturing or producing any article. Such a situation is not entirely unknown in the field of taxation. If the object behind section 32A is understood as to encourage industrial activities and investment in capital goods to facilitate industrial developments, the provision would certainly bear the meaning we have attributed to it." (p. 416) Learned counsel for the Revenue also relies on section 32A, sub-section (5)(a), and contends that since the plant or machinery in the present cases has been leased out by the assessee, it is hit by the abovesaid provision in view of the fact that the terms "otherwise transferred" found therein would include such lease. So, according to him, the said allowance "shall be deemed to have been wrongly made". But, we are unable to accept this contention also. First of all, even on the footing that the term "otherwise transferred" would include such "leases" as given in the present cases, the said provision will not disentitle the assessee herein from securing investment allowance, since the said provision only speaks of "machinery or plant transferred by the assessee" at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed.
In all the present cases, admittedly, the leases were only during the previous year in which the plant or machinery was acquired and not in the above referred to eight-year period beginning from the end of the previous year.
Further, learned counsel for the assessees points out that the Tribunal itself has found that the abovesaid "lease" transaction by the assessees will not actually come under the terms "otherwise transferred" found in section 32A, sub-section (5), taking into account the definition of the term "transfer" under section 2, clause (47), of the Act. The Special Bench of the Tribunal which decided Income-tax Appeal No. 1951 of 1983 out of whose order arose the abovesaid Tax Case Nos. 491 and 492 of 1986, has held in its impugned order dated May 8, 1985, thus : "A perusal of the hire agreement shows that the ownership of the assets, which are leased out, vests only in the assessee. We are unable to hold, therefore, that there is extinguishment of any right when the assets are hired out, and only the benefit of user is obtained by the person who takes out the assets on hire. The assets cannot, therefore, be considered on being hired out though the expression 'lease' is used in the agreement, as having been otherwise transferred. The provisions of section 32A(5) are also not attracted merely because the assets are leased out and no mistake would have been committed in granting investment allowance." So, according to the said counsel, we cannot normally go beyond the abovesaid factual finding that there was no extinguishment of any right of the assessees, when the plant or machinery in question was hired out. There is force in this argument also. No doubt, a copy of the "lease agreement" entered into by one of the assessees, viz., Sundaram Finance Limited, was produced before us wherein we also find the following passage as one of the terms of the "lease deed" : "The lessee acknowledges. . . . . . . . that it holds the equipment as a mere bailee of the lessor and that it shall not have any property right, title or interest in the equipment or any part thereof and shall at all times, protect and defend as bailee/licensee of the equipment...." 14.9 We shall now bring out from the decision of the Delhi High Court in Northern India Iron & Steel Co. Ltd.'s case (supra), the facts and the conclusion thereof because it has been relied upon heavily by the revenue as the answer to the issue raised by the appellant company.
At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following questions to this Court under section 256(1) of the Income-tax Act, 1961, in a proceeding for the assessment year 1971-72 : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the lease money of Rs. 8,80,000 received by the assessee during the assessment year 1971-72 was assessable under section 28 of the Income-tax Act, 1961, as 'income from business' (2) Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that the assessee-company was entitled to development rebate on new machinery installed during the accounting period relevant to the assessment year 1971-72 which was leased out ?" The facts of the cases as noted by the High Court are reproduced below : "The assessee-company owned a factory in Faridabad; wherein it had installed machinery, etc. for manufacturing various items of iron and steel including heavy castings. The accounting year of the assessee-company ends every year on March 31. It started manufacturing operations for the first time on December 28, 1968.
The manufacturing was done by the company up to May 31, 1970.
Thereafter, it was decided by the aforesaid company that it should lease out the factory building, machinery, etc., to a sister concern to begin with for a period of one year. The circumstances under which and the terms and conditions on which the aforesaid properties were leased were contained in the lease deed dated June 1, 1970. In terms of the said lease deed, the company had mortgaged its building and plant, etc., to Messrs Haryana State Financial Corporation for a sum of Rs. 12 lakhs whereon it had to pay interest at 9 1/2 per cent, besides it had various other creditors to whom it had to pay interest at 10 to 15 per cent. The assessee also needed more finance to the tune of Rs. 15 lakhs to meet the cost of furnace and rolling mills already ordered for being set up in the existing premises.
Messrs Northern India Finance Co., a partnership firm, agreed to advance to the assessee the aforesaid finance. For these 'economic reasons, and for the betterment of the company's prospects', it was decided by the shareholders of the company in the meeting held on March 30, 1970, that instead of running the above mills itself, it should give on lease the furnace and the rolling mills presently installed and the furnace and rolling mills to be installed to the lessee firm on, inter alia, the following terms and conditions stated in the lease deed dated June 1, 1970 : (i) That the original lease of the deed would be for one year. But the option was given to the lessees to seek extension of the period by exercising such option through a communication before the expiry of the original terms of the lease.
(ii) That the lease money, payable from 1st day of June 1970 to 30th day of September, 1970, would be Rs. 40,000 and thereafter it would be increased to Rs. 1,20,000 per month with effect from October 1, 1970, on the second furnace and rolling mills being set up.
(iii) That the stock-in-trade, raw material and semi-finished goods would be delivered by the lessor to the lessee on such price as may be agreed upon between the parties.
(iv) That the lessor had entered into certain contracts with the Railways in respect of which the lessees would undertake to manufacture and supply the same to the Railways at reates agreed upon by the lessees and the Railways and on such supplies by the lessor to the Railways, the lessor would be entitled to a commission at the rate of ten per cent only on the amount of the bills.
(v) The lessor company had placed certain orders for the purchase of the raw material. It was agreed between the lessor and the lessee that all such supplies from today, i.e., June 1, 1970, will be accepted by the lessees on the same terms and conditions as if these orders placed by the lessees." The aforesaid lease was continued from year to year and the last date up to which the lease was agreed to be extended was December 31, 1975.
On October 6, 1975, the lessees again wrote to the lessor to extend the lease up to August 31, 1976, and, accordingly, the following resolution was passed on October 29, 1975, by the assessee-company : "Resolved that the lease period of the factory building, plant and machinery be and is hereby extended by another term of eight months, i.e., from January 1, 1976 to August 31. 1976, on the existing terms and conditions and the lessee, Messrs Northern India Finance Company, be informed accordingly." "In no case any further extensions will be allowed as, time to time, extension was allowed only in view of the pendency of execution of contract of Beas Purchase Organisation." The assessee had tendered for supplying heavy castings and other machinery to Beas Project Works some time in 1973 and the tender of the assessee-company was accepted in October 1973. The assessee placed an order for manufacturing the said heavy castings with the lessee firm which manufactured the same in the factory premises of the assessee-company and it was in this connection that the lease was being extended after 1973 in favour of the lessees with a view to enable them to manufacture the aforesaid heavy castings so that the lessor could supply them to the Beas Project Authorities. In terms of the lease deed, the assessee received the sum of Rs. 8,80,000 during the accounting period relevant to the assessment year 1971-72 from the lessees as lease rent. Before the Income-tax Officer, the assessee claimed that the said rent was assessable as business income and not as income from other sources. In addition, the assessee's further claim was that it should be allowed development rebate on the new machinery valued at Rs. 19,92,365 which was installed during the previous year and leased out to Messrs Northern India Finance Co. (P.) Ltd. The Income-tax Officer did not accept the assessee's claim and treated the income from lease rent as income from other sources. As a consequence of his above finding, he declined to allow development rebate to the assessee. The Appellate Assistant Commissioner held that the income of the assessee was business income falling under section 28 of the Act and not to be assessed under section 56 as "from other sources". For the same reason, he granted the assessee relief of development rebate also. The Appellate Tribunal also upheld the assessee's claim on both counts. It held that the commercial assets of the company were temporarily let out to the lessee and, therefore, the income derived by the assessee from this lease was its business income. The development rebate was also held as allowable.
The Appellate Tribunal has given a finding (which is prima facie a finding of fact) that the assessee cannot be held as having ceased its business of manufacturing iron and steel goods, heavy castings, etc., and of selling the same, it had temporarily suspended its activity of manufacturing the goods directly, in view of its financial situation, the supply made by the assessee to Beas Project itself shows that it continued in its business; temporarily it had changed its mode of doing the business. The commercial assets of the assessee continued to belong to it, which were leased to earn income.
While we are in agreement with this conclusion, it is also necessary to point out that the stock-in-trade, etc., sold to the lessee, as on the date of the lease deed was an inevitable consequence of the lease and from that it cannot be inferred that the assessee had decided to close its business. The fact that the machineries were installed even after the lease, is a factor indicative of the assessee's intention to take up manufacturing activity in the near future.
Admittedly, the machinery in respect of which the rebate is claimed under section 33 of the Act, was purchased by the assessee and installed in the leased factory, after the grant of the lease. Learned counsel for the assessee contended that if the income derived by the assessee after the lease, is its business income, it follows that the said income was derived by using the machinery owned by the assessee.
This was also the view taken by the Appellate Tribunal.
We cannot agree. To attract section 33 of the Income-tax Act, 1961, at least two conditions should be satisfied - (i) the machinery or plant in question should be owned by the assessee; and (ii) it is wholly used for the purposes of the business carried on by him.
In the instant case, the machinery was leased, the lessee had control over the use of the machinery, the assessee had no control over its user. The machinery, as a fact, was used by the lessee. By the mere lease of the machinery, even if it is to be assumed as a mode of "using" the machinery to derive the business income, it cannot be held that the machinery was wholly used for the business of the lessee. The machinery was also used for the business of the assessee. It may be that the concept of wholly used is not the same as "exclusively used".
But it conveys the meaning of "exhaustive user" of the machinery, as by the assessee. This is possible only when the assessee has control over the user. The term "wholly used for the business" is referable to the manner of its user. The meaning of the word "user" cannot be continued to the actual derivation of a financial benefit, it includes a proper control over the machinery in the matter of its utilisation, running, repairing, replacement, etc.
The question need not detain us longer, in view of the observations of the Supreme Court in Mahabir Cold Storage's case (supra). At page 96, the Court held : "The capital asset, namely, the ship, plant or machinery, should be owned by the assessee during the relevant accounting year and wholly used in the business carried on by the assessee during the previous year in question.
There must exist unity of ownership and user in the business. The emphasis for entitlement to rebate accrues from the use of the machinery or the plant by the owner for the purpose of its business resulting in the manufacture of the goods or services. It is not the ownership of the goods or the resultant end-product of the raw materials used that is relevant. The only relevant consideration is that, during the previous year or part of the relevant period, ownership of the asset shall remain with the assessee. Only the successor in interest of the business, in accordance with the provisions of the Act, so long as the twin requirements under section 33(1) are fulfilled, is entitled to the benefit. But when the unity of ownership and use of the asset in the business are disrupted or a branch of an earlier business is taken over by a new firm which exists simultaneously with the other branches of the old business, the benefit of development rebate under section 33(1) does not extend to either firm.
Take, for instance, a case where an assessee leases the asset to another person during the previous accounting year, the use of the plant and machinery is not for the business of the assessee for which development allowances were accorded under section 33(1) since the machinery was not wholly used by the assessee for his/its business during the previous accounting year. Suppose the plant or machinery was used for a purpose other than the business of the assessee, then also the assessee is not eligible for development rebate, obviously for the reason that the plant or machinery was not used for the purpose of the business of the assessee in the previous accounting year or a portion thereof." The idea is neatly summed up (if we can say so with respect to the learned judges) when the court said, "There must exist unity of ownership and user in the business".
14.10 The decision of the Delhi High Court (supra) is no parallel to the decisions of Madras High Court and the Karnataka High Court in Shaan Finance (P.) Ltd.'s case (supra) that was considered by the Madras High. Court (supra) because, in the case before Delhi High Court (supra) the assessee was not engaged in the business of leasing but, was engaged in the business of manufacture but, because, it had the financial crunch it was compelled to lease out its factory and the machines installed therein. The observation of the Court "Take, for instance, a case where an assessee leases the asset to another person during the previous accounting year, the use of the plant and machinery is not for the business of the assessee for which the development allowances were accorded under section 33(1) since the machinery was not wholly used by the assessee for his/its business during the previous accounting year", is clearly indicative of the fact that these were so stated because in the stated case, though, ownership was not disturbed but, the purpose for which the machinery was acquired, namely manufacture but, it being leased out were not alike but two different things. Therefore, the Delhi High Court's decision could not be applied to the case of companies that are engaged in the business of leasing of machinery, plant and the like.
14.11 Now we shall take up the case of Mahabir Cold Storage's case (supra) that was considered by the Supreme Court. The Court considered the following questions : "Whether, on the facts and in the circumstances of the case, the order of the Tribunal allowing the unabsorbed development rebate in respect of the plant and machinery not installed by the assessee under section 33(1) of the Income-tax Act, 1961, was legal and proper ?" "Whether, on the facts and circumstances of the case, the order of the Tribunal holding that the conditions under section 33(1) of the Income-tax Act are satisfied, is legal and proper ?" The appellant-assessee is a registered partnership firm under a deed executed and registered on November 10, 1958, between Prayagchand Periwal and Hanumanmal Periwal and Messrs Periwal and Co. P. Ltd. having its business at Purnea in Bihar State. It derives income from the business of cold storage. Messrs. Prayagchand Hanumanmal a partnership firm, consists of Prayagchand and Hanumanmal Periwal with 50 per cent share each and started its business with its head office at Calcutta and a branch office at Purnea. It started functioning with effect from May 3, 1956. The branch office at Purnea carried on the business in the name and style of Shri Mahabir Cold Storage. The partners had taken a loan from Periwal and Co. P. Ltd. for erection of a cold storage plant and for its running capital later, the company was taken as a partner for better management and financial assistance.
Prayagchand and Hanumanmal each has 25 per cent and Periwal and Co. P.Ltd. has the remaining 50 per cent share in the profits of the newly constituted partnership, Messrs Mahabir Cold Storage, at Purnea. The new partnership also obtained registration under the Indian Income-tax filed voluntary returns and it was separately assessed for the assessment year 1960-61 and thereafter.
In the assessment year 1959-60 Messrs Prayagchand Hanumanmal installed machinery of the value of Rs. 5,80,055 in Shri Mahabir Cold Storage.
For one reason or the other, development rebate on the capital asset, namely the machinery, was not claimed till the assessment year 1962-63 in which year the appellant claimed development rebate. The Income-tax Officer and on appeal the Appellate Assistant Commissioner disallowed the claim on the finding that the new firm had neither inherited the claim as a transferee, or did it amount to a succession. But on second appeal, the Tribunal held in favour of the appellant with the following finding (at p. 689 of 100 ITR) : "it is no doubt true that the machinery was installed by Messrs Prayagchand Hanumanmal but the firm has been reconstituted with the three partners under the name and style of Messrs Mahabir Cold Storage, the appellant herein. The firm's legal personality will survive its reconstitution. Reconstitution of the firm does not bring into existence a different legal entity, nor can it be stated that the original identity of the firm is lost as a result of reconstitution. The business as a unit continued unbroken and it was only the interest of the partners that came to be altered as a result of the reconstitution of the firm. Since the appellant firm is none other than the old firm of Messrs Prayagchand Hanumanmal with a change in the constitution and the continuity of the business remained intact, we have no hesitation in coming to the conclusion that the appellant is the owner of the plant and machinery installed in the assessment year 1959-60." The crucial question, therefore, is whether the appellant is the owner of the machinery and plant in the relevant assessment year 1962-63.
Acquisition of ownership is a condition precedent for availing of the development rebate under section 33(1) of the Act. It is now fairly clear from the statement of facts that the old and the new partnership firms are separately registered under the Act and the old one was doing its business at Calcutta and the new one at Purnea. They have been separately assessed as independent assessable entities. Only the new firm was reconstituted consisting of the two partners of the old firm, Messrs Prayagchand Hanumanmal and Periwal and Co. (P.) Ltd. Prayagchand and Hanumanmal individually are entitled to 25 per cent share each of the profits in the appellant firm and Periwal and Co. (P.) Ltd. has 50 per cent share of profit. Under the Indian Partnership Act, 1932, the partnership firm registered thereunder is neither a person nor a legal entity. It is merely a collective name for the individual members of the partnership. A firm as such cannot be a partner in another firm though its partners may be partners in the other firm in their individual capacity. Either under the repealed Act or the Act a firm is liable to be separately assessed to tax as well as all its partners in their capacity as individuals if they have taxable income, the appellant is separately registered under section 26A of the 1822 Act and assessed to tax from the assessment year 1960-61 and onwards. There is no reconstitution of the original firm, Prayagchand Hanumanmal, inducting Periwal and Co. (P.) Ltd. as its partner thus, it is not a successor-in-interest of the old firm as per the provisions of the Act.
The question then is whether the assessee is entitled to development rebate under section 33(1) of the Act (under section 10(2)(vib) of the repealed Act.) Section 33(1) gives right to development rebate only to the owner who has acquired the ship or installed the machinery or plant, the necessary implication is that the assessee who claims development rebate should continue to remain to be the owner of the ship or plant or machinery during the relevant previous assessment year/years and the relevant previous assessment year or the succeeding assessment years carried forward up to eight years and not thereafter.
14.12 The reading of the above findings of the Supreme Court clearly goes to show that their Lordships were confronted with a situation where the assessee which had installed the machinery on which it was entitled to development rebate and the assessee that claimed the benefit of carry forward of development rebate were not one and same but two different persons and it was on that fact the Apex Court had come to hold that carry forward of development rebate was not permissible. The observation of the Delhi High Court (supra) and of the Supreme Court in Mahabir Cold Storage's case (supra) of unity between ownership and use of the machinery was for the purpose of ensuring that the owner continues to be the owner of the machinery from the time of acquisition and installation and till the expiry of the eight assessment years. This case considered by the Supreme Court is, therefore, inapplicable to the facts of the instant case before us because, the decision was not concerning companies that carry on leasing business and in the light of the Madras High Court decision (supra), there is considerable difference between the provisions of development rebate and investment allowance. In addition the requirement of ship or aircraft acquired by the assessee engaged in the business of operation of ships or aircraft was exclusive to ships or aircraft and in the absence of any similar requirement in the case of machinery or plant acquired by an assessee, as observed by the Madras High Court (supra), it would be wrong to hold that unity of ownership and use was intended by the law makers.
14.13 At this point, we may observe that the law makers were quite aware of an assessee may have some machinery that is taken on hire and this is clear from the reading of Explanation 2(iii)(a) & (b) to section 32A(2) of the Act which provides the manner of determining a concern as a small scale industrial undertaking on the basis of its investment on machinery and plant by stating that in the case of any machinery or plant hired by the assessee, the actual cost thereof as in the care of the owner of such machinery or plant. This explanation in our opinion gives an indication that the law makers were aware of the various entrepreneurs may add to their production capacity machinery or plant by taking them on lease or hire and because, the law makers had provided a separate category of entrepreneurs called 'small scale industrial undertaking' wanted to ensure that these entrepreneurs are not placed in that category merely on the strength of their owned machinery and plant, if they happen to use machinery or plant that are taken on lease. This will also make it clear that the person who takes on lease or hire any machinery or plant would not be allowed investment allowance on such machinery or plant because they do not own it though, the persons may be carrying on manufacture or production of any article or thing. This also goes to show that it is not necessary to own any machinery to be classified as an industrial undertaking for there have been number of instances that a person is treated as an industrial undertaking on the strength that he supervises the manufacturing operation. However, for purposes of claim of investment allowance, it is necessary that the machinery or plant is used in the manufacture or production of article or thing, the machinery or plant is owned and used by the person who owns it in his business. It is for this reason that the Madras High Court had observed that the claim of deduction should be appreciated in its true concept and construed liberally as otherwise, neither the leasing company which is the owner of the machinery or plant would be allowed any investment allowance because, it did not actually use it in the business of manufacture nor the lessee who though, may use the machinery or plant in the manufacture but, because, it being not the owner thereof, would be allowed any deduction for investment allowance, which is not the proper implementation of the provision of the section.
14.14 The Supreme Court in Narang Dairy Products' case (supra) was considering a situation where the assessee who was initially carrying on the business of dairy products, who was allowed development rebate on certain machinery or plant that was used in that manufacturing operation, before the expiry of eight years, had sold some of the machinery and some it had given on lease to a limited company. It was considering the question of withdrawal of development rebate on the basis that the use for which the machinery was put to based on which it was allowed development rebate was not continued and whether, such continued use was intended by the section in a situation as arose in that case. The question as was considered and the facts as noted by it and the conclusions thereof are reproduced for the sake of facility, in that sequence : "Whether the Tribunal was in law justified in holding that the amendment order made by the ITO was not sustainable to the extent to which it purported to withdraw development rebate admissible to the assessee in respect of that part of the machinery/plant which was the subject matter of the hiring agreement dated 27th August 1969." The facts of this case are in a narrow compass. The respondent-assessee is a registered firm. It carried on the business of manufacture of "milk powder". We are concerned herein with the assessment year 1965-66. For the said year, the ITO by order dated 29th June, 1968, allowed development rebate for the entire machinery and plant owned by the assessee and used for the said business in the sum of Rs. 1,00,093.
A part of the machinery was subsequently sold. The machinery that was left entitling the assessee to the development rebate for the said year was determined at of Rs. 85,222. This machinery was let out by the assessee on 27th August, 1969 to M/s. Hindustan Lever Ltd. for a period of three years with a provision for further renewal of the agreement or for outright purchase. In the circumstances, the ITO, by an amendment order dated 30th March, 1970, withdrew the development rebate of Rs. 1,00,093. The appeal filed by the assessee was dismissed by the AAC. In further appeal before the Tribunal, it was contended that there was no "sale" or "transfer" within the meaning of section 34(3)(b) of the Act, permitting withdrawal of the development rebate of Rs. 1,00,093, granted earlier and in this view the amendment order passed by the ITO was improper and unjustified. The Tribunal followed its earlier decision rendered for the assessment year 1970-71 and held that no transfer was involved by the lease agreement and so section 34(3)(b) of the Act was not attracted.
It is common ground that for the year 1965-66 the assessee was allowed development rebate for the entire machinery and plant owned and used by it for the purpose of business in the sum of Rs. 1,00,093. Later, a part of the machinery was sold. The assessee became entitled to development rebate only in the sum of Rs. 85,222. It is common ground that the machinery was let out by the assessee on 27th August, 1969 to M/s. Hindustan Lever Ltd. for a period of three years with the provision for further renewal of the agreement or for outright purchase. The sole question that arises for consideration is, whether in the circumstances, section 34(3)(b) of the Income-tax Act is attracted enabling the ITO to pass the amendment order as he did, dated 30th March, 1970, withdrawing the development rebate of Rs. 1,00,093 Dr. Gauri Shankar, senior counsel appearing for the appellant, submitted that by entering the lease transaction the assessee has "otherwise transferred" the machinery or plant before the expiry of eight years from the end of the previous year in which it was acquired and installed and so the allowance made under section 33 of the Act, in respect of the machinery or plant should be deemed to have been wrongly made for the purpose of the Act.
In this case, the machinery or plant was not sold. Admittedly, the machinery was let out by the assessee to M/s. Hindustan Lever Ltd. on 27th August, 1969, within a period of eight years from the end of the previous year in which it was acquired. The only question is whether it can be said that the machinery or plant was "otherwise transferred" by the assessee to any person. Under section 33(1)(a) the development rebate is allowed in respect of the new machinery and plant which is owned by the assessee and is wholly used for the purpose of business carried on by him. When the machinery was let out by the assessee to M/s. Hindustan Lever Ltd., it cannot admit of any doubt, that the said machinery or plant could not and was not used by the assessee for the purpose of business carried on by him. It is not only the ownership of the plant or machinery, but also is its exclusive user by the assessee for the purpose of his business, that is essential to enable the assessee to get the development rebate under section 33(1)(a). In cases where an assessee disables himself from such continued exclusive user of the plant or machinery for the purpose of his business for the specified period, the consequences specified in section 34(3)(b) will follow, provided the machinery or plant is "otherwise transferred". It is true that there is no sale; nor is there any complete extinguishment of the right of the assessee in the machinery or plant by the grant of lease; but the exclusive possession and enjoyment of the machinery or plant by the assessee no longer exists or survives. Such right to exclusive possession and enjoyment vests in the lessee and it is a case where the machinery or plant is "otherwise transferred" to the lessee.
It is a case were the machinery or plant is "otherwise transferred" by the assessee to any person before the expiry of eight years from the end of the previous year in which it was acquired. Even assuming that the transaction may not be a "transfer" as defined under section 2(47) of the Act, in our view, the definition section is an inclusive one and does not exclude the contextual or the ordinary meaning of the word "transfer". There are different shades of meaning to the word "transfer", viz., "to make over possession of to another", 'a delivery of title or property from one person to another", "to displace from one surface to another", "removal", "hand over", "make over possession of property to another", "change", "displace", etc. The words "otherwise transferred" occurring in section 34(3)(6) should bear an appropriate meaning, in the context of the main provision, section 33(1)(a) of the Act. Section 34(3)(b) is closely linked to section 33(1)(a) of the Act.
Keeping in view the purpose, for which the relief by way of development rebate is afforded under section 33(1)(a) of the Act, in cases where the machinery or plant is not wholly used by the assessee for the purpose of business carried on by him, for the specified period, and such user is given other to another, it can be safely stated that the machinery or plant is "otherwise transferred" by the assessee to another person. In the above view of the matter, we are of the view, that the withdrawal of the development rebate by the ITO in the amendment order dated 30th March, 1970 by relying on section 34(3)(b) of the Act is justified. We are broadly in agreement with the decision of the Kerala High Court reported in Blue Bay Fisheries (P.) Ltd. v.CIT [1987] 166 ITR 1/31 Taxman 293 (Coch.) in the interpretation of the crucial words occurring in section 34(3)(b) of the Act, "otherwise transferred". We set aside the decision of the Allahabad High Court and also of the Tribunal and answer the question formulated by the Revenue under section 256(1) of the Act in the negative, in favour of the Revenue and against the assessee.
14.15 We may once again reproduce the observations of the Madras High Court (supra) where the distinction between the provisions of development rebate and investment allowance on the concept of the owner of the machinery, use of the machinery by the owner thereof for the business, the machinery being installed at a place other than that of the premises of the owner and used for manufacturing article or thing were clearly brought out - In other words, 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 it is an asset or the said machinery or plant is 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. That is why the said Karnataka decision in Shaan Finance (P.) Ltd.'s case (supra) concludes by saying thus (at page 416) : "The benefit is given with reference to the actual user of the machinery, though the benefit may go to a person who does not exploit the machinery himself for manufacturing or producing any article. Such a situation is not entirely unknown in the field of taxation. If the object behind section 32A is understood as to encourage industrial activities and investment in capital goods to facilitate industrial developments, the provision would certainly bear the meaning we have attributed to it." Learned counsel for the Revenue also relies on section 32A, sub-section (5)(a), and contends that since the plant or machinery in the present cases has been leased out by the assessee, it is hit by the abovesaid provision in view of the fact that the terms "otherwise transferred" found therein would include such lease. So, according to him, the said allowance "shall be deemed to have been wrongly made". But, we are unable to accept this contention also. First of all, even on the footing that the term "otherwise transferred" would include such "leases" as given in the present cases, the said provision will not disentitle the assessees herein from securing investment allowance, since the said provision only speaks of "machinery or plant transferred by the assessees" at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed.
14.16 In all the present cases, admittedly, the leases were only during the previous year in which the plant or machinery was acquired and not as observed by the Supreme Court decisions and the Delhi High Court decision (supra) before the expiry of eight years from the end of the previous year in which it was acquired or installed. The Supreme Court decisions and the Delhi High Court decision (supra) being made with reference to the provisions concerning development rebate which has been found to be very different from the provisions of investment allowance by the Madras High Court (supra), the conclusions, therein cannot be imported as such into cases that concern with leasing companies. In the Tribunal decision in Mazda Leasing's case (supra), copy of which was Provided by the revenue, was impressed by the expression 'lease' considered by the Supreme Court decision in Mahabir Cold Storage's case (supra) and the specific distinction between the provisions of development rebate and investment allowance as brought out by the Madras High Court (supra) was not considered. For the aforesaid reasons, we are of the opinion that companies that are engaged in the business of leasing of machinery or plant are entitled to investment allowance on those machinery or plant that are owned by it, used by it for its business and the lessee satisfies the condition of the machinery or plant being used in the manufacture or production of any article or thing not being the one listed in the 11th Schedule to the Act.
14.17 Before parting with this legal issue, we may observe that the law makers had recognised that the assets may be owned and hired by an assessee and such assessee would be entitled to depreciation on the only condition that it carries on the business of hiring. For example, taxis on hire are entitled to higher depreciation. This also goes to show that it is sufficient compliance that the asset is owned by the assessee and is used by it in its business of hiring or leasing. If we proceed on the basis that the hiring leads to otherwise transferred then, on every occasion a person hires a taxi, it must be deemed to have been transferred to the hirer and the owner thereof would be deprived of having absolute right over it, and that it is also not used by him. The provision of higher depreciation rate for taxis on hire clearly goes to show that the law makers had clearly appreciated that the assessee may be the owner but, by merely letting it out or leasing it, does not lose any right over it provided that, he does the act of letting or leasing as his business activity. The concept of leasing has been it appears was developed on this reasoning also apart from the observation as was made at the time of introduction of section 32A of the Act, "The present scheme of investment allowance will facilitate investment in priority industries and reduce the dependence of the corporate sector on public financial institutions." 14.18 In the instant case the appellant had manufactured Data Processing Equipment, Computers and had given them on lease to various lessees under specific lease agreement that allowed the lessees the right to use them during the period of lease. The installation was to be made on a site that was required to be prepared by the lessees after the assessee carries out testing of the site. The lessees are also directed to use the equipment for a specific purpose that was so indicated by the assessee. The lessees are to pay installation charges, rental charges, maintenance charges, etc., and are prevented from assigning the equipment without the consent of the lessor and on the expiry of the lease, the equipment would be taken back by the lessor.
The installation charges are payable as indicated in the agreement and 80% of the installation charges is payable the moment the assessee indicates the time it would take for despatch of the equipment from its works and balance of 10% payable on completion of installation.
14.19 The Assessing Officer and the CIT(A) had laid emphasis on certificate being produced indicating the place of installation and the fact of actual installation and this could be conveniently counter-checked with the income from installation accounted for by the assessee. Because, the lessor would pay 80% on receipt of advice about the date on which the equipment would be despatched and the balance 10% on actual installation, the list of equipment that has been so installed could be easily co-related with the income so shown. We may observe that the insistence on actual installation with the lessee was held as unwarraned by the Special Bench of the Tribunal (supra) that was approved by the Madras High Court (supra).
14.20 In our opinion because, the assessee has satisfied two of the three basic conditions of section 32A of the Act namely, ownership and use of the equipment for its business of leasing and the last of the condition namely, that the machinery or plant is used for production of any article or thing not specified in Schedule 11 to the Act only remains to be verified. This aspect was not examined at all by the lower authorities because, they had stopped with the aspect of certificate of installation not being produced and therefore, we have only to direct the Assessing Officer to satisfy himself that the equipment, computers given on hire or lease were used by the lessees for the purpose of manufacture or production of any article or thing not specified in Schedule 11 to the Act.
14.21 The above observation is made without any prejudice to the issue of Data Processing Equipment and Computers are not eligible for investment allowance because, they are covered by Schedule 11 to the Act, which we shall now deal with in the ensuing lines. Item 22 of Schedule 11 reads - "Office machines and apparatus such as typewriters, calcula-ting machines, cash registering machines, cheque writing machines, intercom machines and teleprinters - Explanation - The expression 'office machines and apparatus' includes all machines and apparatus used in offices, shops, factories, workshops, educational institutions, railway stations, hotels and restaurants for doing office work and for data processing and for transmission and reception of messages". The amendment that was made with effect from 1987 was with reference to the words "for data processing and for transmission and reception of messages" and in its place "for data processing (not being computers within the meaning of section 32AB)". The Assessing Officer and CIT(A) were of the opinion that Data Processing Equipment and Computers are covered by the above item 22 of the Schedule 11 to the Act and therefore, held that the assessee was not entitled on these two machinery.
14.22 In our opinion the lower authorities were not justified to put a blanket refusal by holding that Data Processing Equipment and Computers are part of the list contained in item 22 of Schedule 11 to the Act because, the emphasis is on such machines and apparatus that are used in doing office work. Merely because, the assessee produces data Processing Equipment, it does not necessarily fall into the category of data processing used for office work. In the recent past where heavy emphasis had been computerized manufacture and production, including total control of all manufacturing operation, the Data Processing Equipment not only process information but, uses that information for giving suitable direction and assistance in the various manufacturing processes and their control. We may observe that the jurisdictional High Court in CIT v. I.B.M. World Trade Corpn. [1981] 130 ITR 739/8 Taxman 98 (Bom.) had categorically held that Data Processing Equipment are not office appliances and this had been followed repeatedly in few other case as well. For the above reasons we are of the view that item 22 of Schedule 11 to the Act was concerned with office appliances and that it does not include Data Processing Equipment and Computers.
14.23 The above observation on Data Processing Equipment and Computers would equally apply to the Plant and Machinery utilised for 2904/101 Computers, jigs, tools and patterns. This is the cross issue raised by the revenue in its appeal and this stands disposed of as above. However in so far as the test equipment at factory may be used and assist in the manufacturing process but, the test equipment at site has nothing to do with production but, is intended to pinpoint the error or problem area in the equipment, etc., and is not eligible for investment allowance. To this extent the cross issue of the revenue would be deemed partly allowed on test equipment at site. Water cooler too has no use in the production process though, it may provide cool water to the employees in the works and hence, is not entitled to investment allowance.
15. The first of the issue is the payment of insurance premium under the Collective personal account policy that was disallowed by the Assessing Officer but, allowed by the CIT(A). Considering the fact that the issue stands allowed by the Tribunal for the assessment year 1980-81, and the reference was also rejected, for the sake of consistency, we would uphold the order of CIT(A).
16. The issue as raised in ground No. 3 is objection to the deduction allowed on the expenditure incurred on the maintenance of a garden within the factory premises. Because, the garden was within the factory, maintaining it as property of the assessee, in our opinion that the CIT(A) was justified in deleting the disallowance and we accordingly uphold his order on this point.
17. The issue as raised in ground No. 4 is with reference to the amount 'disallowable because of the provisions contained in section 37(3A) of the Act. The expenses on advertisement, repairs and insurance of cars, depreciation on cars and rent of garage. Because, the jurisdictional High Court in Chase Bright Steel Ltd.'s case (supra) had held that expenses that are allowed with reference to sections 30, 31 and 32 of the Act cannot be disallowed with reference to section 37(3A) of the Act, we uphold the order of CIT(A).
18. The issue in ground No. 5 is with reference to the provisions of sections 40(c) and 40A(5) of the Act, the expenses on car and driver's salary and this has been dealt with in the appeal of the assessee and our observation earlier, are equally applicable to this issue.
19. The issue of the direction of CIT(A) that rent of guest house and depreciation on assets used in the guest house of Rs. 2,01,971 and Rs. 17,101 respectively, should be excluded while working the disallowance by applying the provisions of section 37(4) of the Act. On this issue, the Division Bench of the jurisdictional High Court in Chase Bright Steel Ltd.'s case (supra), Century Spg. & Mfg. Co. Ltd. v. CIT [1991] 189 ITR 660 had held that guest house expenses and depreciation once allowed with reference to sections 30, 31 and 32 of the Act, could not be considered for disallowance with reference to sections 37(1), 37(3) and 37(4) of the Act. However, another Division Bench of the jurisdictional High Court in CIT v. Ocean Carriers (P.) Ltd. [1995] 211 ITR 357/80 Taxman 42 and in Raja Bahadur Motilal Poona Mills Ltd. v.CIT [1995] 212 ITR 175, had considered the guest house expenses and depreciation on assets in the guest house with reference to section 37(4) of the Act and had held that the section specifically permits disallowance. But, while coming to the conclusion, the earlier decisions in Chase Bright Steel Ltd.'s case (supra) and Century Spg. & Mfg. Co. Ltd.'s case (supra) were neither cited nor were considered in the latter decisions in Ocean Carriers (P.) Ltd.'s case (supra) and Raja Bahadur Motilal Puna Mills Ltd.'s case (supra).
19.1 Because, decision of one Division Bench could not be held to have overruled another Division Bench of either the same High Court or another High Court and further for the reason that the latter two decisions have not referred to the earlier two decisions on identical issue, to hold that the latter decisions would hold the field, in our opinion may not apply in the circumstances enumerated earlier. Further, because, there are two views on the subject available though, of the same High Court, in the light of the Supreme Court in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192, the view that is favourable to the subject is to be adopted, we apply the rulings in Chase Bright Steel Ltd.'s case (supra) that stands confirmed in Century Spg. & Mfg. Co.
Ltd.'s case (supra). Accordingly, the claim preferred by the assessee is upheld and that the rent of guest house and depreciation on assets of the guest house that is allowed under sections 30 and 32 of the Act, could not be considered for disallowance under section 37(4) of the Act.
20. The issue of expenses that are considered with reference to section 80VV of the Act, out of fees paid to M/s. Crawford Bailey & Co., Price Waterhouse & Co., Mr. N.A. Palkhiwala, Mr. S.E. Dastur and A.F.Fergusan & Co. of Rs. 12,750, Rs. 41,921, Rs. 3,600, Rs. 5,250 and Rs. 14,500 respectively, which after considering the facts and the order of CIT(A), we are of the view that the order of CIT(A) does not call for any interference.
21. The revenue is agitated by the direction of the CIT(A) in working out the disallowance with reference to the provisions of section 40A(5) of the Act. CIT(A) had held that contributions made to hospital and nursing home, repairs to flats owned by the company, club subscription, accident insurance premium should be excluded in evaluation of perquisites for disallowance. He also held that the car expenses to the tune of one-third and driver's salary should be disallowed.
21.1 On the above issues, we are of the view that the amount contributed to hospital and nursing home did not inure any benefit to the employees and therefore, it was rightly excluded by the CIT(A) from being considered as perquisites. The repairs to company owned flats, in view of the jurisdictional High Court decision in Lubrizol India Ltd. v. CIT [1991] 187 ITR 25, we reverse the order of the CIT(A) and restore that of the Assessing Officer. On the payment of personal accident insurance premium, the matter is restored to the fire of Assessing Officer to verify whether, the beneficiary under the policy is the company or the employee. In the event of the beneficiary being the company, there is no element of perquisite involved, however, if the beneficiary is the employee then, element of perquisite is embedded and is includible as perquisite. Assessing Officer shall carry out the necessary examination with policies issued by the Insurance company and include the element of perquisite only when the beneficiary happens to be the employee and not otherwise. On the element of car expenses and driver's salary being considered to the extent of one-third, while dealing with the claim of the appellant on identical issue in its appeal, the action of the CIT(A) in restricting to one-third had been upheld and accordingly, the claim of the revenue is rejected.
22. The issue of computation of remuneration with reference to section 40(c) of the Act and this issue has been considered while dealing with the issues raised by the appellant in its appeal, and for the reasons contained therein, we decline to interfere.
23. The revenue has objected to the CIT(A) allowing the payment of bonus to those employees who are not entitled under the Payment of Bonus Act. In the light of the jurisdictional High Court in Voltas Ltd. v. CIT [1994] 207 ITR 47, we would uphold the order of CIT(A).
24. The issue that has been raised as ground No. 12 is with reference to the directions of the CIT(A) on the portion of Excise & Customs Duty that he directed to be included in the value of closing stock. The direction was that because, the closing stock would include the element of excise & customs duty that would become opening stock of the following year and at that time, the revenue should not disallow that part of the closing stock to the extent of excise & customs duty by invoking section 43B of the Act. The assessee had raised the issue of closing stock should not include any part of excise & customs duty that was paid in the year even if, the stock of which it was paid, still remains unsold. This was considered in paragraph 11 earlier and the contention of the assessee was accepted. Because, the direction of the CIT(A) was so issued on the alternative plea raised by the appellant which, in view of the above conclusion in paragraph 11 above, is infructuous. This issue is decided accordingly.
25. In ground No. 14, the grievance is on the direction of the CIT(A) to rework the interest on section 215 of the Act which, in our opinion, being reasonable, does not call for any interference.
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