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PETITIONER: COMMISSIONER OF INCOME TAX, KARNATAKA, BANGALORE

       Vs.

RESPONDENT: M/S. SHAAN FINANCE (P) LTD., BANGALORE

DATE OF JUDGMENT:       20/03/1998

BENCH: SUJATA V.MANOHAR, D.P. WADHWA

ACT:

HEADNOTE:

JUDGMENT: With C.A. No. 1646/1994 and C.A. Nos 1692-1693/1998 [Arising out of S.L.P. (C) Nos. 3592-3593/1997]                       J U D G M E N T Mrs. Sujata V. Manohar, J.      Delay condoned.      Leave granted.      These appeals  raise a  common question relating to the assessees’ entitlement to investment allowance under Section 32A of  Income-tax Act,  1961. The  assessee  companies,  as their names  suggest, are financial companies which purchase machinery and  hire out the machinery to manufacturers under agreements of  hire. The  common question  in these  appeals relates to  the entitlement  of the  assessees to investment allowance under Section 32A of the Income-tax Act, 1961. For the sake  of convenience, we are setting out the question as framed in Civil Appeal Nos. 7077-78 of 1993. The question is as follows:      "whether, on  the facts  and in the      circumstances  of   the  case,  the      Tribunal was  right in holding that      in respect of the machineries owned      by  the  assessee,  but  leased  to      third parties  and used by them for      the  manufacture   of  article   or      thing,  investment   allowance  was      allowable under sec. 32?"      The assessees  are not  themselves manufacturers of any article or  thing. The machineries, however, which are owned by them  are hired  to different  persons for the purpose of their  business   of  manufacturing.  In  respect  of  these machineries, assessees  claimed investment  allowance  under Section 32A.  In all  these proceedings,  the concerned High Courts, being  the High Courts of Karnataka and Madras, have held the assessees as entitled to investment allowance under Section 32A.  Hence these appeals have been preferred before us.      The relevant provisions of Section 32A are as follows:      "32A. (1) In respect o a ship or an      aircraft  or   machinery  or  plant      specified in sub-section (2), which

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    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:           Provided that ...........      (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."                   [Underlining ours]      Therefore,  in   respect,  inter  alia,  or  plant  and machinery for  which an  investment allowance  is claimed in any relevant  previous year,  an assessee  must satisfy  the following conditions: (1) The machinery should be owned by the assessee. (2) It should be wholly used for the purposes of the     business carried on by the assessee, and (3) The machinery must come under any of the categories     specified in sub-section (2) of Section 32A.      Sub-section (2) describes such machinery, plant as also ship or  aircraft. Under  sub-section  (2)(b)(iii)  any  new machinery or  plant installed  after 31st  of March, 1976 in any industrial undertaking for the purpose of manufacture or production of  any article or thing, not being an article or thing specified  in the  list in  the Eleventh  Schedule  is

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eligible for  investment allowance. In the present case, the machinery  satisfies  this  description  under  Section  32A (2)(b)(iii).  The   department,   however,   contends   that investment allowance  can be claimed by the assessee only in a case  where the aircraft should be acquired by an assessee which is  itself engaged  in the  business of  operation  of ships or  aircraft. Under  sub-section (2) (b), however, any such express  requirement that the assessee must himself use the plant  or machinery  is absent. Section 32A(2)(b) merely describes the  new plant  or machinery  which is  covered by Section 32A.  The  plant  or  machinery  is  described  with reference to its purpose. for example, sub-section (2)(b)(i) prescribes  "the  purposes  of  business  of  generation  or distribution of  electricity or  any other  form of  power". Sub-section (2)(b)(ii)  refers  to  small  scale  industrial undertakings which may use the machinery for the business of manufacture or  production of  any article,  and sub-section (2)(b)(iii)  refers   to  the   business  of   construction, manufacture or production of any article or thing other than that specified  in the  Eleventh Schedule. Sub-section 2(b), therefore, refers  to the uses to which the machinery can be putt. It  does not  specify that the assessee himself should use the  machinery for  these purposes. In the present case, the person  to whom  the machinery  is  hired  does  use  he machinery   for    specified    purposes    under    Section 32A(2)(b)(iii). that  person, however,  is not  the owner of the machinery.  The High  Courts of Karnataka an Madras have held that  looking  to the requirements specified in Section 32A the  assessees, in  the present  case,  fulfil  all  the requirements of  that section,  assessee is the owner of the machinery and  also uses  the machinery  himself.  In  other cases, investment  allowance cannot  be granted.  We have to examine this contention.      We have  already set  out  the  three  requirements  of Section 32A(1)  which entitle  an assess to claim investment allowance. On of the requirements is that the machinery must be wholly  used for the purpose of such assessee’s business. When the  business  of  the  assessee  is  leasing  of  such machines, the  machines so leased out are being used for the purpose of  the assessee’s  business. The  income by  way of hire charges  which the  assessee receives  is also taxed as business income of the assessee.      Sub-section (2) of Section 32A, however, requires to be examined to  see whether there is any provision in that sub- section which  requires that  the assessee should not merely use the  machinery for  the purposes  of his  business,  but should  himself   use  the  machinery  for  the  purpose  of manufacture or  for what  ever other purpose of machinery is designed. Sub-section  (2) covers  all items  in respect  of which investment  allowance can be granted. These items are, ship, aircraft  or  machinery  or  plant  of  certain  kinds specified in that sub-section. In respect of a new ship or a new aircraft,  Section 32A(2)(a)  expressly prescribes  that the new  ship or  the new aircraft  should be acquired by an assessee  which   is  itself  engaged  in  the  business  of operation of  ships or  aircraft. Under sub-section (2) (b), however, any such express requirement that the assessee must himself use  the  plant  or  machinery  is  absent.  Section 32A(2)(b) merely  describes the new plant or machinery which is covered  by  Section  32A.  The  plant  or  machinery  is described with  reference to  its purpose. for example, sub- section (2)(b)(i)  prescribes "the  purposes of  business of generation or  distribution of electricity or any other form of power".  Sub-section (2)(b)(ii)  refers  to  small  scale industrial undertakings  which may use the machinery for the

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business of  manufacture or  production of  any article, and sub-section  (2)(b)(iii)   refers   to   the   business   of construction, manufacture  or production  of any  article or thing other  than that  specified in  the Eleventh Schedule. Sub-section 2(b), therefore, refers to the uses to which the machinery can be putt. It does not specify that the assessee himself should  use the machinery for these purposes. In the present case, the person to whom the machinery is hired does use  he  machinery  for  specified  purposes  under  Section 32A(2)(b)(iii). that  person, however,  is not  the owner of the machinery.  The High  Courts of Karnataka an Madras have held that  looking  to the requirements specified in Section 32A the  assessees, in  the present  case,  fulfil  all  the requirements of  that section,  assessee is the owner of the machinery and  also uses  the machinery  himself.  In  other cases, investment  allowance cannot  be granted.  We have to examine this contention.      We have  already set  out  the  three  requirements  of Section 32A(1)  which  which  entitle  an  assess  to  claim investment allowance.  On of  the requirements  is that  the machinery must  be wholly  used  for  the  purpose  of  such assessee’s business.  When the  business of  the assessee is leasing of  such machines,  the machines  so leased  out are being used  for the  purpose of the assessee’s business. The income by way of hire charges which the assessee receives is also taxed as business income of the assessee.      Sub-section (2) of Section 32A, however, requires to be examined to  see whether there is any provision in that sub- section which  requires that  the assessee should not merely use the  machinery for  the purposes  of his  business,  but should  himself   use  the  machinery  for  the  purpose  of manufacture or  for what  ever other purpose of machinery is designed. Sub-section  (2) covers  all items  in respect  of which investment  allowance can be granted. These items are, ship, aircraft  or  machinery  or  plant  of  certain  kinds specified in that sub-section. In respect of a new ship or a new aircraft,  Section 32A(2)(a)  expressly prescribes  that the new  ship or  the new  aircraft should be acquired by an assessee  which   is  itself  engaged  in  the  business  of operation of  ships or  aircraft. Under sub-section (2) (b), however, any such express requirement that the assessee must himself use  the  plant  or  machinery  is  absent.  Section 32A(2)(b) merely  describes the new plant or machinery which is covered  by  Section  32A.  The  plant  or  machinery  is described with  reference to  its purpose. for example, sub- section (2)(b)(i)  prescribes "the  purposes of  business of generation or  distribution of electricity or any other form of power".  Sub-section (2)(b)(ii)  refers  to  small  scale industrial undertakings  which may use the machinery for the business of  manufacture or  production of  any article, and sub-section  (2)(b)(iii)   refers   to   the   business   of construction, manufacture  or production  of any  article or thing other  than that  specified in  the Eleventh Schedule. Sub-section 2(b), therefore, refers to the uses to which the machinery can be putt. It does not specify that the assessee himself should  use the machinery for these purposes. In the present case, the person to whom the machinery is hired does use  he  machinery  for  specified  purposes  under  Section 32A(2)(b)(iii). That  person, however,  is not  the owner of the machinery.  The High Courts of Karnataka and Madras have held that  looking  to the requirements specified in Section 32A the  assessees, in  the present  case,  fulfil  all  the requirements of  that section,  assessee is the owner of the machinery and  also uses  the machinery  himself.  In  other cases, investment  allowance cannot  be granted.  We have to

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examine this contention.      A similar  view has  been taken  by the  Andhra Pradesh High court  in the  case of  Commissioner of  Income-tax  v. Vinod Bhargave  (169 ITR  549) where Jeevan Reddy, J. (as he then was)  held that where leasing of machinery is a mode of carrying on  business by  the assessee the assessee would be entitled to development rebate. the court observed, (p.551): " ..... Once it is held that leasing out of the machinery is one mode  of doing  business by  the assessee and the income derived from  leasing out  is treated  as business income it would be contradictory in terms to say that the machinery is not used wholly for the purposes of assessee’s business."      The appellant-department,  however, relies upon certain observations of  this Court in commissioner of Income-tax v. Narang Dairy  Products (219  ITR 478)  where a  Bench of two judges of  this Court  said in  the context  of  development rebate in  respect of  new machinery and plant that not only should the  ownership of the plant and machinery be with the assessee but  also its  user by the assessee for the purpose of his  business. The assessee before the Court in that case carried on  the business  of manufacture of mild powder. The entire machinery for the purpose of his business was allowed development rebate  in the assessment year 1965-66. However, in August  1969 some  of the  machinery was  let out  by the assessee for  a period  of three  years with a provision for renewal or  for outright  purchase, to  a third  party. This Court said  that the  withdrawal of  development rebate  was justified since  the  transaction  of  letting  out  with  a provision for  outright purchase  amounted to  a transfer of the machinery  as defined in Section 2(47) of the Income-tax Act, 1961.      The ratio of this decision would not apply to the cases which are  before us.  In the  case of Narang Dairy products (supra) this  Court has  pointed out that when the machinery was let  out by  the assessee  to Hindustan lever Limited it cannot admit  of any doubt that the machinery or plant could not and  was not used by the assessee for the purpose of the business carried  on by  him,  which  was  the  business  of manufacture of  milk powder.  Therefore, the  assessee could not be  considered as  having used  the machines only of the purpose of  his business.  Secondly, in  the case  of Narang Dairy Products  (Supra) the transaction was a transaction of hire with  the right  of outright purchase. The Court was of the view  that the words "otherwise transferred" may be wide enough to cover such a situation.      This Court  also relied upon the decision of the Kerala High Court in Blue Bay Fisheries (p) Ltd. v. Commissioner of Income-tax (166  ITR 1) in the case of narang Dairy Products (supra). In  the  case  of  Blue  bay  Fisheries  also,  the assessee purchased  a trawler  for its business. The trawler was leased  to the transferee. under the agreement of lease, at the  end of ten months, the trawler was to be sold to the transferee. In  terms of  the agreement,  the assessee  also took steps to obtain the approval of the concerned authority for the  sale of  the trawler.  The trawler was to remain in the  exclusive   possession  of   the  transferee   and  the transferee was  allowed to  suitably alter the trawler so as to make it a tug. The kerala  High Court said that the terms of  the   agreement  showed  that  the  right  to  exclusive possession  and   enjoyment  of   the   trawler   had   been transferred. The  transfer was  permanent and preparatory to sale. Hence it amounted to transfer.      Neither of  these cases deals with an agreement of hire of machinery  in contradistinction  to an  agreement of hire purchase. When  the machinery  is given on hire by the owner

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to the  hirer on payment of hire charges, the income derived by the  owner is business income. The owner is also entitled to depreciation on the machinery so hired out. The hirer, on the other  hand, who pays hire charges, is entitled to claim these as revenue expenditure. The hirer has not acquired any new asset.  A transaction of hire is, therefore, of bailment of the machinery. There is no extinguishment of any right of the owner  in the machinery. There is merely a licence given to the  hirer to  use, for a temporary period, the machinery so hired.  In the case of M/S. Damodar Valley Corporation v. The State  of Bihar  (AIR 1961  SC 440), this Court examined the contract  under which  the machinery  and equipment  was supplied by the Corporation to the contractors. The question was whether it was a mere contract of hiring  or a sale or a hire purchase.  The Court  said (p.445): "It is well-settled that a  mere contract  of hiring, without more, is a species of the contract of hiring, without more, it a species of the contract of  bailment, which  does not create a title in the bailee.  But   the  law   of  hire  purchase  has  undergone considerable development  during the  last half a century or more and has introduced a number of variations, thus leading to categories,  and it  becomes a question of some nicety as to which  category a particular contract between the parties comes under."  We need  not dwell  on the niceties of a hire purchase contract  between the  parties of  a hire  purchase contract since  we are concerned only with contracts of hire simpliciter.      In  the   case  of   hire  purchase   agreements,   the department’s Circular No.9 of 1943 dated 23rd of March, 1943 provides, inter  alia, that  where under  the terms  of  the agreement the equipment shall eventually become the property of the  hirer or  confer on  the hirer an option to purchase the equipment,  the transaction should be regarded as one of hire purchase.  In such  cases, the periodical payments made by the  hirer should,  for tax purposes, be regarded as made up of  (1)  consideration  for  hire  to  be  allowed  as  a deduction in  the assessment  and; (2) payment on account of purchase to be treated as capital outlet, depreciation being allowed to  the lessee  on the  initial value.  In the case, however, of  hire of  machinery, the  owner is  entitled  to depreciation.      In this  connection ,  a reference  may also be made to M/s. K.L.  Johar  and  Co.  V.  The  Deputy  Commercial  Tax Officer, Coimbatore  III (AIR  1965 SC 1082 at p.1090) where this Court,  while  examining  a  hire  purchase  agreement, pointed out  that such  an agreement  has two  elements; (1) element of  bailment, and  (2) element  of sale in the sense that it contemplates an eventual sale. In the absence of any element of sale in the present case we do not see any reason for treating  the agreement as "transfer" or disallowing the grant of  investment allowance,  when the  assessee complies with the  requirements of  Section 32A.  Section  32A  is  a beneficial provision  in  a  taxing  statute.  Full  effect, therefore, requires  to be  given to  the language  used  in Section 32A.  As observed  by this  Court in C.A. Abraham V. Income-tax Officer,  Kottayam &  Anr. (AIR 1961 SC 609 at p. 612), in  interpreting a  fiscal statute,  the Court  cannot proceed to  make good  the deficiencies if there be any. The Court must interpret the statute as it stands and in case of doubt, in  a manner  favourable to  the  tax-payer.  In  the present case,  the language of Section 32A covers leasing or finance companies which give the machinery on hire as in the present case.      In the premises, the appeals are dismissed with costs.

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