1998 (3) TMI 8 - SC - Income Tax

Investment allowance under section 32A - hire purchase agreement - machinery hired out to manufacturers - 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 - allowance is entitled to assessee

Summary

Issues Involved:
1. Entitlement to investment allowance under section 32A of the Income-tax Act, 1961.
2. Interpretation of the phrase "wholly used for the purposes of the business carried on by him" in section 32A.
3. Applicability of investment allowance to machinery leased out by financial companies.

Issue-wise Detailed Analysis:

1. Entitlement to Investment Allowance under Section 32A of the Income-tax Act, 1961:
The primary issue in these appeals revolves around whether financial companies that purchase machinery and lease it to manufacturers are entitled to claim investment allowance under section 32A of the Income-tax Act, 1961. The relevant question framed was: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in respect of the machinery 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 section 32A?" The High Courts of Karnataka and Madras had ruled in favor of the assessees, prompting the appeals.

2. Interpretation of the Phrase "Wholly Used for the Purposes of the Business Carried on by Him" in Section 32A:
Section 32A(1) stipulates that for an assessee to claim investment allowance, the machinery must be "wholly used for the purposes of the business carried on by him." The contention was whether this phrase necessitates the assessee to use the machinery themselves for manufacturing or if leasing the machinery out also qualifies. The judgment clarified that when the business of the assessee is leasing machinery, such machinery is considered used for the business purpose of the assessee. The income from hire charges is taxed as business income, satisfying the requirement under section 32A(1).

3. Applicability of Investment Allowance to Machinery Leased Out by Financial Companies:
The judgment examined section 32A(2) to determine if there was any requirement that the assessee must use the machinery themselves for manufacturing. It was found that section 32A(2)(b), which covers new machinery or plant installed for manufacturing purposes, does not specify that the assessee must directly use the machinery. The High Courts of Karnataka and Madras concluded that the assessees fulfilled all requirements of section 32A: ownership of the machinery, usage for the business purpose, and the machinery being of the specified type. The Supreme Court agreed with this reasoning, noting that the provisions of section 32A are similar to section 33, which dealt with development rebate.

The judgment also referenced past cases such as CIT v. Castleroch Fisheries and CIT v. Vinod Bhargava, which supported the view that leasing machinery qualifies as using it for business purposes. The court distinguished these cases from CIT v. Narang Dairy Products, where the machinery was let out with an option for outright purchase, which constituted a transfer.

Conclusion:
The Supreme Court upheld the decisions of the High Courts, affirming that financial companies leasing out machinery are entitled to investment allowance under section 32A. The appeals were dismissed with costs, emphasizing that section 32A's language should be interpreted favorably for the taxpayer, especially since it is a beneficial provision in a taxing statute.