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TMI Blog2003 (12) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had taken an induction furnace on lease from M/s. Industrial Progressive (India) Ltd. This furnace was supplied and installed by M/s. Electrotherm Machines (India) Pvt. Ltd. The first lease agreement was dated2-1-1988. The lease was in respect of induction furnace and also transformer and OCB for generator of induction melting furnace and other assembly of Electrotherm Marketing Pvt. Ltd. worth Rs. 5,65,000 and HTOCB 250 MVA 400 Amp. worth Rs. 56,000. All the machineries were installed by M/s. Electrotherm Machines (India) Pvt. Ltd. in June 1988. On14-12-1988a supplementary lease schedule was agreed in which it was mentioned that the assessee had agreed to purchase the transformer and Crompton HTOCB at the original cost price of Rs. 6,21,000. 4. In its computation filed along with the return the assessee had shown investment allowance reserve at R. 17,63,355. In the statement of income the assessee claimed deduction of Rs. 16,64,406 under section 32 AB of the Income-tax Act, 1961 (hereinafter referred to as the "Act"). In support of its claim audit report was filed. As per para 13 of the audit report it was submitted that deduction at Rs. 16,64,406 was permissible as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 'new' machinery. Since deduction under section 32AB requires utilization of income for purchase of new machinery or plant, the assessee cannot get the deduction under section 32AB of the Act in respect of purchase of Transformer and OCB amounting to Rs. 6,21,000. 7.2 In view of the above, no deduction under section 32AB can be granted to the assessee in regard to the purchase of transformer and OCB amounting to Rs. 6,21,000. However the other plants and machineries mentioned in Annexure-III which comes to Rs. 6,22,660 would qualify for the amounts utilized for the purchase of new machinery and plant for the purposes of section 32AB of the Act." 8. On the issue relating to item (b) i.e., Rs. 2,54,449, the reasons for rejecting the claim of the assessee are incorporated by the Assessing Officer in paras 5.4 to 5.6 of his order which are as under: "5.4 Unlike investment allowance under section 32A of the Act, section 32AB does not allow deduction in respect of installation charges of parts of machineries used for that purposes. It only provides for deduction in respect of amount utilized out of the income of the assessee for purchase of new plant or machinery. Therefore, no de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had not purchased these items of plant and machinery and had only fabricated the same, provisions of section 32AB(1) were not applicable as the amounts utilised for purchasing items as per Annexures 2 and 4 to the assessment order, could not be said to be for the purchase of plant or machinery. Regarding the sum of Rs. 6,21,000 being the cost of transformer for generator and Cromption H.T. OCB, the learned CIT(A) rejected the claim by observing that the plant machinery which was purchased by the assessee vide bill dated 14-12-1988 was taken by it on lease and was existing before the date of purchase and had also been used. He, therefore, held that the Assessing Officer was justified in negating the claim under section 32AB in respect of the said machinery purchased by the assessee on14-12-1988to the tune of Rs. 6,21,000. Thus, the action of the Assessing Officer in disallowing the claim of the assessee in respect of all the three items, mentioned as (a), (b) (c) above, was confirmed by the learned CIT(A). 12. The assessee has filed appeal to challenge the findings of the learned CIT(A) by taking five specific grounds against the sustenance of disallowance under section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer nor the learned CIT(A) was justified to attribute or to assign a different meaning to the equipments for the purposes of denying deduction of investment allowance. The emphatic submission of the learned counsel for the assessee, therefore, was that the equipments/items included in Annexures 2,3 and 4 referred to above, were very much covered within the definition of plant and machinery and, therefore, deduction was allowable in respect of these items. 16. In support, the learned counsel placed on the following decision: (i) Dy. CIT v. Vindhya Telelinks Ltd. [1997] 63 ITD 127 (Jab.); (ii) Asstt. CIT v. Dr. V.M. Iyer [2001] 77 ITD 364 (Pune) (SMC); (iii) MP Laxman v. Agrl. ITO [1986] 157 ITR 1 (Kar.) and (iv) CIT v. Antifriction Bearings Corpn. Ltd. [2000] 246 ITR 295 (Bom.). 17. He also sought support from the following orders of the Tribunal: (a) Road Master Industries v. ITO (IT Appeal No. 637 (Chd.) of 1990, dated11-7-1995]; (b) Dy. CIT v. Groz Beckert Asia Ltd [IT Appeal No. 152 (Chd.) of 1992, dated12-7-1996]; (c) Brytax Auto Ltd (P.) Ltd. v. Dy. CIT [IT Appeal No. 7476 (Delhi) of 1992, dated12-2-1998; and (d) Lloyd Industries (I) Ltd. v. Dy. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egetable Products Ltd [1973] 88 ITR 192 (SC); CIT v. Madho Pd. Jatia [1976] 105 ITR 179 (SC) relevant at 183; UnionofIndiav. Onkar S. Kanwar [2002] 258 ITR 761 (SC). 21. We have carefully considered the entire relevant material including the ratio of decisions cited at the Bar. 22. The controversy to be decided in the context of the question referred for the consideration of the Special Bench is as to whether the claim of the assessee under section 32AB is allowable on purchase of new machinery or plant or on the parts of machinery utilized for fabrication of the machinery etc. at the premises of the assessee. A consequential corollary to the main issue is as to whether the language used in section 32AB is plain or clear and if not, does it require application of literal rule of construction or a liberal approach in considering the said provision. 23. Before taking up the main controversy for consideration and adjudication, we want to make it clear that as stated by the Assessing Officer in paras 7.1 and 7.2 of his order, referred to above and as observed by learned CIT(A) also, the two items worth Rs. 6,21,000 being generator and Crompton HT OBC were already taken by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account under clause (a), in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) to be framed by the Central Government, or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf by the Tea Board, the assessee shall be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 72) of- (i) A sum equal to the amount, or the aggregate of the amounts, so deposited and any amount so utilized or (ii) A sum equal to twenty per cent of the profits of business or profession as computed in the accounts of the assessee audited in accordance with sub-section (5), Whichever is less." 27. The provisions of section 32AB relating to investment deposit account were inserted by Finance Act, 1986 w.e.f. 1-4-1987 relevant for assessment year 1987-88. In the budget speech in 158 ITR (St.) 4, the Hon'ble Finance Minister had explained the object behind this new provision. Para 95 of the said speech, which clarifies the object, is as under: "95. I would be brief in setting out my proposals for dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rger and more established enterprises, partly because such concerns could set off investment allowance against profits of old established unit without waiting for profits from fresh investments. The new scheme i.e., investment deposit account scheme was made applicable to all existing types of the assessee as also to the other assessees who install new machinery or plant and in an industrial undertaking for the purpose of business. 31. From the above it is clear that the main object behind introduction of this beneficial provision, was for promoting industrial growth by encouraging setting up of new industry or by making investment in new machineries or plants for ensuring better and higher production and thus to encourage a more productive use of capital. 32. The main contention of the learned DR was that the term "new machinery" should be literally construed and if the entire machinery has not been purchased from the market by the assessee, he should not be entitled for deduction under section 32AB. The learned D.R. sought support for such interpretation from the decision of Delhi Bench of the ITAT in the case of Toshi Auto Industries (P.) Ltd. v. Dy. CIT for assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in the light of the object sought to be achieved. In our view, therefore, the terms 'utilization, 'purchase' and 'new machinery' appearing in section 32AB are to be liberally construed as literal construction of these terms may frustrate the very purpose behind this provision. We may justify our approach by making reference to some decisions on the subject. 34. It is well-settled that taxing statute requires to be strictly construed that there are qualifications attached to the rule of strict construction and a purposive construction or contextual construction has to be preferred if strict construction leads to absurd or unintended results. In fact legislative intention is gathered to avoid absurdity and such approach is applicable in interpreting a taxing statute as held in the case of Hindustan Petroleum Corpn. Ltd. v. CCE 1995 (3) Scale 1, 8, 9. Thus, the shift from literal to purposive construction has not left taxing statutes untouched leaving them "as some island of literal interpretation", ad observed in the case of IRC v. Mc. Guckian (1997) 3 All ER 817. In the case Administrator, Municipal Corpn. v. Dattatraya Dahankar AIR 1992 SC 1846; and in the case of Oxford Univ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y constitute building. The Hon'ble Supreme Court held that roads are covered within the definition of building and depreciation is admissible on the capital expenditure incurred thereon as building. About the drain also, it was held that they are integral part of the building for convenient enjoyment of the factory and therefore depreciation was available in the same manner on expenditure incurred in laying drains. Regarding the rule of construction, the following observations were made by the Hon'ble Supreme Court: "It is settled law that the expressions used in a taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative, intention. It is equally settled law that, if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect to the legislative intention. Nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The contextual meaning has to be ascertained and given effect to. A provision for deduction, exemption or relief should be construed reasonably and in favour of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian Income-tax Act, 1922 as extra depreciation. Since extra depreciation was allowable on the machinery, the ITO refused the claim. The ITAT referred the following question to the Hon'ble High Court - "Whether extra depreciation is admissible tinder the provisions of section 10(2)(via) of the Income-tax Act, in respect of a diesel oil engine fitted to a motor vehicle in replacement of the existing engine?" TheHon'ble Apex Court, after referring to the decision of Privy Council in the case of Corporation of Calcutta v. Chairman,Cossipore ChitporeMunicipality[1932] ILR 49 Cal. 190, and other decisions held that a diesel engine by itself may undoubtedly be used in a business other than that of a transport operator. According toHon'ble Courta self contained unit of the machinery may be used for the purpose of business. After considering the definition of "Plant and machinery", theHon'ble Courtheld that the assessee was entitled to deduction of extra depreciation allowance under the second paragraph of clause (vi) and clause (via) of the Act. Thus, diesel engine replaced in the motor bus was held to be a machinery. 42. In the case of Cochin Co. v. CIT [1968] 67 ITR 199 (SC) the que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er view was taken in this case also. 44. The issue relating to construction of the term "eligible business", occurring in section 32AB came before the Hon'ble Kerala High Court in the case of CIT v. Apollo Tyres Ltd. [1999] 237 ITR 706. In this case also theHon'ble Courtaccepted the broader view after taking into consideration the purpose and object being the provisions contained under section 32AB. The relevant part of the observations of theHon'ble Courtis as under: "A reading of section 32AB and the Circular No. 461 datedJuly 9, 1986makes it clear that the benefit of the said section will be available to all business income derived from whatever source other than those mentioned in sub-clauses (a) and (b) of clause (i) of sub-section (2) of the said direction. Sub-section (1) of section 32AB itself contemplates that the total income of an assessee may consist of other incomes also. When it comes to the deduction part, such a distinction is not made. The deduction available under the said sub-section is an amount equal to twenty per cent of profits of the eligible business. So what is required for filing the quantum of deduction is to find out the profits of eligible business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. 46. In view of the above ratio of Circulars to which reference has been made by the parties before us are to be considered for avoiding undue hardship to the assessee in view of the decision of Hon'ble Supreme Court of India in the case of UCO Bank. 47. The language and terminology used in section 32AB itself has been interpreted by various courts and a purposive or contextual approach has been taken. 48. In the case of Dy. CIT v. Vindhya Telelinks Ltd. [1997] 63 ITD 127 (Jab.), the assessee company had claimed deduction under section 32AB in respect of the amount spent on the purchase of plant and machinery which included the amount of Rs. 15,55,875 paid by the assessee as advance towards acquisition of the machinery. The contention of the Revenue was that the amount paid as advance could not be said to be amount utilised for the purpose of purchase of the plant and machinery. The Bench did not accept this interpretation placed by the Revenue and held that if an advance is given for purchase of machinery during the year, the advance is for part payment towards the cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the year in which the advance is effected, the assessee will be denied deduction on the ground that it is non-utilisation and if the balance amount is paid in the subsequent year, the assessee will be denied deduction on the ground that it has not come out of the income of the current year. Similarly, if under a contract, the assessee is required to pay the purchase price in instalments it could still be utilisation, it cannot be said that because consideration has been paid in instalments, there was no utilization. If payment by instalment under the terms of contract constitute utilisation, then equally, payment of advance would also constitute utilisation for the purposes of section 32AB of the Act." 51. In view of the ratio of the above decisions, it is clear that the courts have adopted a purposive and contextual interpretation in relation to various words used in the newly added provisions contained under section 32AB and not a literal approach as the same was not found to be correct approach for carrying out the object behind the new legislation. In the light of the above approach if we construe the word "new machinery" in literal sense and understand this term to mean pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in the two provisions but for the various circulars issued by the CBDT to explain the salient features of the new scheme it is quite evident that the object of the provision was to encourage a more productive use of capital. Thus section 32AB is beneficial provision incorporated to encourage investment in machinery as per scheme of the Central Govt. As per the well settled proposition, the provision is entitled to a liberal construction and not to a very technical view of the matter. It is true that the work used in the context of new plant and machinery is 'purchase' which in its ordinary meaning would imply acquisition of something for money from a third party but in the concise of Oxford Dictionary, apart from the two meanings "buy, acquire", one more meaning given to the word 'purchase' is 'procure'. In fact, in some of its circulars, the Board itself have used the word "acquire" new plant or machinery. We are of the considered opinion that in so far as the provisions of section 32AB are concerned, no distinction can be made between a new plant and machinery purchased as such from a third party and the plant and machinery fabricated by the assessee itself. Accordingly, we ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observation of the Bench are as under: "In an assessee manufactures a machine itself and transfers the same at cost to its business of manufacture and claims that it has purchased the machinery, it is entitled to relief under section 32AB(1)(b) of the Income-tax Act, 1961. If an assessee, by making necessary arrangements for purchase from outside, is entitled to claim deduction under section 32AB, then there is no reason why an assessee which manufactures the machine itself and transfers the same at cost to its business of manufacture cannot claim the same relief. There is no restriction under section 32AB that the amount should be spent only from current year's profit. Section 32AB only stipulates that the amount should be spent out of income which is chargeable to tax." 54. Thus we are fully fortified by the above decisions in adopting liberal construction of the provisions of section 32AB and in discarding the literal construction adopted in the case of Toshi Auto Industries (P.) Ltd. 55. It may be pointed out that no other authority has been brought to our notice against the decision of Hon'ble Bombay High Court in the above case and since there is no direct decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inery or plant function independently either after joining with the existing plant or independently. The use of such machinery or plant, nonetheless, has to be seen in each case by examination of relevant facts and it has to be ascertained as to whether by such addition the capacity or output of the original machine has increased or not and as to for effecting what end, such arrangement was made. 57.3 In view of the above, it is clear that the deduction under section 32AB is allowable if the income of the year under consideration is utilized for purchasing the plant or machinery for making addition or expansion in the existing plant or machinery. Hence, issue No. II is decided in affirmative. 58. However, it may be clarified that the installation of the machinery and various equipments required for such installation form part of the machinery installed. The assessee also capitalizes the amount spent on installation of the new machinery as part of it and includes the same in the cost of the machinery. On this basis, the equipments used in the installations have to be treated as plant and therefore on the investment on such 'plant' deduction under section 32AB is to be allowed. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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