1996 (2) TMI 37 - HC - Income Tax

Summary

Issues:
1. Entitlement to investment allowance under section 32A of the Income-tax Act, 1961 for machinery leased out to a sister concern.
2. Classification of income derived from leasing machinery as part of business income.

Analysis:
The case involved the assessment of whether the assessee, a firm engaged in bleaching and dyeing business, was entitled to investment allowance under section 32A of the Income-tax Act, 1961 for machinery leased out to a sister concern. The Tribunal referred two questions to the court for opinion. The Appellate Tribunal initially granted the investment allowance, considering that the machinery was exploited as commercial assets and the lease income was part of business income. The Department challenged this decision.

The Department argued that investment allowance cannot be granted if the machinery is not used for the assessee's business directly. They contended that the temporary lease of machinery does not entitle the assessee to claim investment allowance under section 32A. Conversely, the assessee's counsel argued that the machinery was let out temporarily due to space constraints, and the income from leasing should be considered as business income.

The court analyzed the provisions of section 32A, which require the new machinery to be wholly used for the assessee's business to qualify for investment allowance. Referring to the Supreme Court case of CEPT v. Shri Lakshmi Silk Mills Ltd., the court emphasized that income from commercial assets, even when leased out temporarily, can be considered business income. However, this does not automatically entitle the assessee to investment allowance if the machinery was not wholly used for the business.

The court distinguished previous decisions where investment allowance was granted for businesses primarily involved in hiring and leasing machinery. In this case, since the business was bleaching and dyeing, not hiring and leasing machinery, the conditions for investment allowance under section 32A were not met. Therefore, the court answered the first question in the negative, favoring the Department.

Regarding the second question on the classification of lease income as business income, the court upheld the Tribunal's decision, citing the CEPT case and other precedents. The court affirmed that the income derived from exploiting machinery as commercial assets could be assessed under the head "Income from business." Thus, the court answered the second question in the affirmative, against the Department. No costs were awarded in the judgment.