1981 (9) TMI 171 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of investment allowance under section 32A(1) of the Income-tax Act, 1961.
2. Determination of whether the appellant qualifies as a small-scale industrial undertaking under section 32A(2)(b)(ii).
3. Classification of specific machinery items as tools under section 32A(2).

Issue-Wise Detailed Analysis:

1. Disallowance of Investment Allowance under Section 32A(1):
The appellant, a private limited company engaged in the manufacture of rubber belting, claimed an investment allowance under section 32A(1) of the Income-tax Act, 1961, for additions to plant and machinery worth Rs. 1,31,456 during the previous year. The claim was based on the assertion that the company was a small-scale industrial undertaking as per section 32A(2)(b)(ii). The appellant argued that the value of two items, "tensile tester" and "humidity control cabinet," amounting to Rs. 56,180, should be excluded from the total plant and machinery value of Rs. 10,29,524, reducing it to Rs. 9,73,344, thus qualifying for the investment allowance.

2. Determination of Small-Scale Industrial Undertaking:
The Income Tax Officer (ITO) rejected the appellant's claim, maintaining that the "tensile tester" and "humidity control cabinet" were part of the plant and machinery as per the company's balance sheet. The Commissioner (Appeals) upheld this decision, noting that the aggregate value of plant and machinery, including items like air-conditioning plant, cars, typewriters, etc., amounted to Rs. 1,89,257. This inclusion pushed the total value beyond the Rs. 10 lakh threshold, disqualifying the appellant as a small-scale industrial undertaking. The Commissioner (Appeals) emphasized that section 32A(2) defines a small-scale industrial undertaking based on the aggregate value of machinery and plant, excluding only tools, jigs, dies, and moulds.

3. Classification of Specific Machinery Items as Tools:
The appellant contended that the "tensile tester," "humidity control cabinet," and "lathes" should be classified as tools under section 32A(2), thus excluded from the plant and machinery valuation. However, the Commissioner (Appeals) found that even if these items were excluded, the inclusion of other machinery items would still exceed the Rs. 10 lakh limit. The Commissioner (Appeals) initially accepted the appellant's classification of these items as tools but ultimately found it irrelevant to the final valuation.

In the appeal, the appellant's counsel argued that only machinery and plant used in actual manufacturing should be considered for the Rs. 10 lakh ceiling, excluding ancillary equipment. The revenue's representative countered that the entire plant and machinery used for business purposes should be included, as per section 32A(2) and its Explanation.

The Tribunal held that the term "for the purposes of business" in section 32A(2) includes all machinery and plant used in the business, not just those directly involved in manufacturing. This interpretation aligns with the Supreme Court's view in CIT v. Malayalam Plantations Ltd., which stated that "for the purposes of business" encompasses a wide range of business activities beyond mere profit-earning operations.

The Tribunal also disagreed with the Commissioner (Appeals) on excluding the "tensile tester," "humidity control cabinet," and "lathes" as tools. It noted that these items do not fit the typical definition of short-lived, ancillary tools needing frequent replacement. The Tribunal reversed the Commissioner (Appeals)'s findings on this point, including these items in the plant and machinery valuation.

Conclusion:
The Tribunal confirmed the order of the Commissioner (Appeals) rejecting the appellant's claim for investment allowance under section 32A(1), as the appellant did not qualify as a small-scale industrial undertaking. The appeal was dismissed, and the Tribunal did not address other conditions for the investment allowance due to the primary disqualification.