2010 (7) TMI 208 - HC - Income Tax

Investment allowance - Whether on the facts and in the circumstances of the case, the Tribunal was right in law to hold that the assessee is entitled to investment allowance under section 32A subject to other conditions being satisfied? Held that - if the plant and machinery was mainly used for manufacturing of industrial spirit, the assessee would be entitled to the allowance. After remand by the Tribunal the Assessing Officer had gone into this exercise and had passed a freh assessment order specifically stating that the main activity of the assessee was to manufacture industrial spirit also known as ethylalcohol and rectified spirit. Thus, the assessee would be entitled to the investment allowance.

Summary

Issues Involved:
1. Eligibility for investment allowance under section 32A of the Income-tax Act.
2. Interpretation of the term "other alcoholic spirits" in the context of the Eleventh Schedule.
3. Application of sub-section (2A) of section 32A regarding partial use of machinery for disqualified purposes.

Detailed Analysis:

1. Eligibility for Investment Allowance under Section 32A:
The core issue is whether the assessee is entitled to investment allowance under section 32A of the Income-tax Act for plant and machinery used in its business. The Tribunal referred the question to the High Court for an opinion. The assessee claimed eligibility for the deduction under section 32A(2)(b)(iii), which provides for investment allowance for machinery or plant used in an industrial undertaking for business purposes, excluding items listed in the Eleventh Schedule. The Assessing Officer disallowed this claim, arguing that the assessee's production of rectified spirit and country spirit (IMFL) falls under item 1 of the Eleventh Schedule, which includes "Beer, wine, and other alcoholic spirits." The Commissioner of Income-tax (Appeals) upheld this decision. However, the Income-tax Appellate Tribunal allowed the investment allowance, leading to the current reference.

2. Interpretation of "Other Alcoholic Spirits":
The High Court needed to determine whether the term "other alcoholic spirits" in item 1 of the Eleventh Schedule includes industrial spirits. The assessee argued that "other alcoholic spirits" should be interpreted in the context of "beer and wine," which are meant for human consumption, applying the maxim noscitur a sociis. The court agreed with this interpretation, noting that industrial spirits are primarily used for manufacturing purposes and not for human consumption. Therefore, the Legislature did not intend to include industrial spirits in item 1 of the Eleventh Schedule. The court referenced the Punjab and Haryana High Court's judgment in CIT v. Sangrur Vanaspati Mills Ltd. [2009] 311 ITR 345, which supported this interpretation by applying the principle of noscitur a sociis to the term "soap" in entry 4 of the Eleventh Schedule.

3. Application of Sub-section (2A) of Section 32A:
The court also considered the situation where machinery is used for both manufacturing industrial spirits and IMFL. Section 32A allows investment allowance for machinery used for specified purposes, but disallows it for machinery used for purposes listed in the Eleventh Schedule. Sub-section (2A) of section 32A relaxes this bar, allowing investment allowance if the machinery is mainly used for non-disqualified purposes, even if it is partially used for disqualified purposes. The court noted that the Income-tax Appellate Tribunal correctly applied this provision, as the main purpose of the assessee's machinery was manufacturing industrial spirits. The Tribunal remanded the case to the Assessing Officer to determine if the machinery was mainly used for this purpose. Upon remand, the Assessing Officer confirmed that the assessee's main activity was manufacturing industrial spirits, thus entitling the assessee to the investment allowance.

Conclusion:
The High Court concluded that the Commissioner of Income-tax (Appeals) erred in denying the investment allowance based on the inclusion of industrial spirits in item 1 of the Eleventh Schedule. The Tribunal correctly held that the assessee was entitled to the allowance, as the machinery was mainly used for manufacturing industrial spirits. The court affirmed the Tribunal's decision, answering the reference in the affirmative, in favor of the assessee and against the Revenue.