M/S.poompuhar Shipping Corporation Limited, 473, Anna Salai, Chennai-600 035 v. The Joint Commissioner Of Income Tax, Special Range Vi, Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 21.03.2006 CORAM: THE HONOURABLE MR.JUSTICE R.BALASUBRAMANIAN ANDTHE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) Nos.99 to 101 of 2002 M/s.Poompuhar Shipping Corporation Limited,473, Anna Salai,Chennai-600 035.....Appellant Vs. The Joint Commissioner of Income Tax,Special Range VI,Chennai..... Respondent Appeals under Section 260A of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, Madras 'C' Bench, inI.T.A. Nos.319, 320 & 321(Mds)/2001 dated 23.11.2001 for theassessment years 1986-87, 1987-88 and 1994-95. This petition sought to be presented to this Court to revisethe order of the Income Tax Appellate Tribunal “C” Bench, Chennai-34, ITA.No.319,320 and 321/MDS/2001 dated 23.11.2001 as against theorder of the Commissioner of Income Tax (Appeals) V, Chennai-34dated 31.1.2001 ITA.No.120,114 and 115/2000-2001 as against theorder of the Joint Commissioner of Income Tax, Special Range VI,Madras-34 dated 27.3.2000, G.I.No.9-P/86-87,87-88,94-95 as againstthe order of the Deputy Commissioner of Income Tax, Special Range,IV, Madras-34 dated 28.2.1989, GI.No.9-P86-87, 87-88, 94-95. For Appellant :Mr.V.Ramachandran, Senior Counsel for M/s.Anitha Sumanth For Respondent : Mrs.Pushya Sitaraman JUDGMENT P.P.S.JANARTHANA RAJA, J. The present appeals are filed under Section 260A of the IncomeTax Act, 1961 at the instance of the assessee against the orderpassed in I.T.A. Nos.319, 320 & 321(Mds)/2001 dated 23.11.2001 bythe Income Tax Appellate Tribunal, Madras 'C' Bench. These appealscame up before this Court and this Court admitted the appeals on26.02.2003 and formulated the following substantial questions oflaw:- "1. Whether a reserve created in the later yearswould be available for the utilisation even ifpurchases are made in the earlier years? 2. Whether on the facts and in the circumstancesof the case, the Tribunal is right in law inholding that the acquisition of the shipsM.V.TAMIL PERIYAR, M.V.TAMIL KAMARAJ and theDredger cannot be held to have satisfied therequirement of Section 32A, and the withdrawal ofinvestment allowance granted is justified? And 3. Whether on the facts and in the circumstancesof the case, the Tribunal is right in law in notconsidering the acquisition of the Dredger in1990 subsequent to the creation of the reserve asbeing sufficient compliance with the provisionsof Section 32A to the extent of its cost andwhether on the facts and in the circumstances ofthe case, the Appellant having acquired threeVessels subsequent to the acquisition of theVessel in respect of which investment allowancewas granted to it cannot be deemed to havecomplied with the requirement of Section 32A ofthe Income Tax Act and consequently, becomeeligible to the benefit of investment allowanceunder Section 32A of the Income Tax Act?"2.The facts leading to the above questions of law are as under: i)The relevant assessment years are 1986-87, 1987-88 and1994-95. The assessee is a company wholly owned by the Governmentof Tamil Nadu, engaged in the business of plying / chartering shipfacilities. Some of the ships are owned by it and others arechartered. The plying is mainly between internal ports of India. i)The relevant assessment years are 1986-87, 1987-88 and1994-95. The assessee is a company wholly owned by the Governmentof Tamil Nadu, engaged in the business of plying / chartering shipfacilities. Some of the ships are owned by it and others arechartered. The plying is mainly between internal ports of India. The chief commodity carried is coal which is taken from other portsand delivered to Tuticorin, mainly on behalf of Tamil NaduElectricity Board. During the year 1985-86, relevant to theassessment year 1986-87, the assessee company purchased, in August1985, a ship known as 'M.V.Tamil Anna' at a cost ofRs.32,75,67,973/-. The assessee claimed investment allowance ofRs.8,18,91,993/- for the assessment year 1986-87. During the yearended on 31[st] March 1987, the company purchased a ship known as'M.V.Tamil Periyar' on 30.09.1986 at a cost of Rs.39,63,80,428/- and'M.V.Tamil Kamaraj' at a cost of Rs.40,00,26,286/- in March 1997, asper the details given below:- ii)The total investment allowance to which the assesseecompany was entitled to in respect of the above two ships wasRs.21,49,12,516/-. In addition to the aforesaid three ships, theassessee company purchased Dredger on 20.08.1990 for a sum ofRs.87,98,435/-. The assessee company debited to the profit and lossaccount and credited to the investment allowance reserve account thefollowing amounts:- The Assessing Officer originally allowed the claim of the investmentallowance of the assessee company in the assessment years 1986-87,1987-88 and 1994-95, but subsequently he invoked the provisions ofSection 155 read with Section 154 and withdrew the investmentallowance granted earlier on the ground that the assessee companyhad not utilised the reserve for the acquisition of ships within theperiod of ten years. 3.Aggrieved by the order of the Assessing Officer, the theassessee company filed an appeal before the Commissioner of IncomeTax (Appeals). The Commissioner of Income Tax (Appeals) dismissedthe appeal and confirmed the order of the Assessing Officer.Aggrieved by the same, the appellant filed an appeal to the IncomeTax Appellate Tribunal. The Income Tax Appellate Tribunal confirmedthe order of the lower authority and dismissed the appeal filed bythe assessee. 4.The learned counsel appearing for the assessee submittedthat the investment allowance is granted under Section 32A. Theobject of creation of a reserve and utilisation of an amount equalto the amount transferred to the reserve is to ensure that an assetis acquired and the amount is not utilised for any other purposes.The learned counsel further submitted that the creation of thereserve is only a mere book entry. The requirement of law is onlythat subsequent to the year in which the investment allowance isgranted or the assessee is entitled to the investment allowanceconsequent on the acquisition of a new asset, the assessee shouldobtain any other specified asset of an amount equal in value to theextent of the reserve. There is no requirement that there should bean identity between the amount transferred to reserve and fundsutilised to acquire the new asset. The only requirement is that theassessee should acquire an asset on any date subsequent to theacquisition of the asset in respect of which the investmentallowance is claimed and the value of the asset so acquired shouldbe equal to or in excess of the amount of reserve that the assesseeis required to create under Section 32A. Applying the above, itcould be seen that the assessee had acquired four Vessels in thefollowing order:1. 'M.V. Tamil Anna' ...02.08.19852. 'M.V. Tamil Periyar' ...30.09.19863. 'M.V. Tamil Kamaraj' ...08.01.19874. Dredger ...20.08.1990 It would be noted that the cost of the vessel 'M.V. Tamil Periyar'covers the amount of investment allowance that was created inrespect of the ship 'M.V. Tamil Anna'. The investment allowancegranted in the case of 'M.V. Tamil Anna' is a sum ofRs.8,18,91,973/- and the reserve was only 75% thereof. The cost ofthe ship 'M.V. Tamil Periyar' was Rs.39,63,80,428/- without takinginto account the addition to the cost on account of exchangefluctuation. In respect of the ship 'M.V.Tamil Periyar', theinvestment allowance was approximately Rs.10 Crores and the reservewas 75% thereof while the cost of 'M.V. Tamil Kamaraj', acquired in January 1987, was Rs.40,00,26,286/-. Further it was argued thatSection 32A is an beneficial and incentive provision and hence, theCourt must interpret liberally and he relied on the Supreme Courtjudgment reported in 196 ITR 188 in the case of Bajaj Tempo Ltd. Vs.C.I.T. 5.The learned counsel for the Department submitted that theacquisition of the ships could not be held to have been made byutilising the investment allowance reserves which came to be createdmuch later. The creation of investment allowance reserve thus beinga much later occurrence, rules out the possibility of these reserveshaving been utilised for the ships at an earlier stage. Hence, theutilisation of reserve could not have preceded the creation ofreserve itself. 6.We heard both the counsel. The details regarding thevalue of the asset as well as creation of reserve are as under:- In the present case, the investment allowance reserves were createdmuch later to the date of acquisition of the new ships and it couldnot be said that these ships were purchased out of the reserve fund,which was created much later. No doubt the beneficial provision ofSection 32A is to be interpreted and applied liberally, but any suchinterpretation or liberality could not go beyond the provisions ofthe Section itself. While allowing an incentive the section is tobe liberally interpreted, but at the same time if the conditionsspecified in the incentive section are not fulfilled, whilewithdrawing the benefit already allowed, the assessee cannot expectany further concession. According to Section 32A, the firstoccurrence should be the purchase of eligible asset followed by thecreation of investment allowance reserve at a specified percentageof the cost of the ship. The next step would be the utilisation ofthe investment allowance reserve in the purchase of new eligibleasset within a specified period of ten years next following theprevious year in which the ship was acquired. In the present case,the assessee had purchased the new ships ('M.V. Tamil Periyar' and'M.V. Tamil Kamaraj') well before the creation of the investmentallowance reserve in respect of the original ship, namely, 'M.V.Tamil Anna'. 7.The argument of the learned counsel for the assessee thatthe purchases of the Vessels 'M.V.Tamil Periyar' and 'M.V. TamilKamaraj' during the year 1986-87 are to be treated as out of theinvestment allowance reserve created much later, appears to beputting the cart before the horse. No doubt the investment allowancereserve created need not be earmarked and kept apart to be utilisedonly in the purchase of the new ship but can be utilised for thepurposes of the business as specified in the section itself. Itdoes not mean that the assessee can claim without creating thereserve, that it had utilised the reserve in the acquisition of newship, much before the creation of such reserve itself. The otherargument of the counsel for the appellant that the requirement oflaw is only that the assessee should acquire an asset (new asset) onany date subsequent to the acquisition of the asset (original ship)in respect of which the investment allowance is claimed and thevalue of the asset so acquired (new ship) should be equal to or inexcess of the amount of reserve that the assessee is required tocreate under Section 32A (in respect of the original ship). Thesearguments could not be accepted in view of Section 32A (4)(a), whichreads as follows: "Investment allowance reserve account to beutilised -for the purpose of acquiring, before the expiry of a period of ten years next following theprevious year in which the ship or aircraft wasacquired or the machinery or plant wasinstalled, a new ship or new machinery or plant(other than machinery or plant of the naturereferred to in clauses(a), (b) and (d) of thesecond proviso to sub-section (1)) for thepurposes of the business of the undertaking. Eventhough Section 32A permits creation of reserve in subsequentyears due to insufficiency of profit for creation of reserve, it isnowhere stated in the section that the reserve can be created inrespect of original ship, subsequent to the acquisition of the newships in satisfaction of the utilisation of reserve in respect ofthe original ship purchased. Also, from a reading of the abovesection, it is clear that the investment reserve amount is to beutilised for the purpose of acquiring new ship. In this case, theships were acquired before creation of the reserve. Hence, there isa violation of the above provision of law. Also, we do not findanything in Section 32A permitting the assessee to purchase a newasset in satisfaction of the utilisation of the reserve created inrespect of an originally purchased asset even without creating suchreserve in respect of the original asset purchased. A combinedreading of Sections 32A, 155(4A) and 154 will clearly show that ifan assessee fails to utilise the investment allowance reservecreated against the purchase of an original ship within a period often years from the year of purchase of the original ship in purchaseof a new ship, the assessee is entitled to lose the benefit givenunder Section 32A originally. In the present case, the assessee hadnot purchased the new ship after the creation of the reserve inrespect of the ship originally purchased. On the other hand, evenbefore the creation of the reserve, in respect of the original ship,purchase had been completed (spread over the various assessmentyears). The assessee company had acquired new ships and is tryingto link those purchases to the subsequent creation of the reserve,in respect of the old ship. 8.In the light of the above reasoning, we are of the viewthat the acquisition of the ships 'M.V. Tamil Periyar' and 'M.V.Tamil Kamaraj' could not be held to have been made by utilising theinvestment allowance reserve which came to be created much later. Anon existent reserve could not be said to have been utilised. Inother words, the utilisation of reserve could not have preceded thecreation of reserve itself. Therefore, we find no error orinfirmity in the order of the Tribunal and hence we hold that theorders of the lower authority in all these years as regards thewithdrawal of the benefit given under Section 32A by invoking the provisions of Section 154 read with Section 155(4A) of the IncomeTax Act is in accordance with law. In view of the above reasoning,we answer the Question No.1 in favour of the Revenue, against theassessee. Now we take up Question No.3. In respect of QuestionNo.3, it was fairly stated by the counsel for the Revenue that theDredger was purchased in August 1990 for a sum of Rs.87.98 lakhs andthe same was purchased only out of the reserves created in the years1986-87 and 1987-88, of Rs.86,52,000/- and Rs.1,43,000/-respectively. Hence, the said Dredger was purchased out of thereserve already created in these years. Hence the assessee isentitled to investment allowance to that extent. Hence, we areanswering Question No.3 in favour of the assessee, against theRevenue. Now we take up Question No.2. The second question dealswith two parts. The first part is with regard to the ships, M.V.Tamil Periyar and M.V.Tamil Kamaraj and the second part is withregard to the Dredger. In respect of the first part of the secondquestion, we are of the view that the authorities below are right inwithdrawal of investment allowance granted in respect of M.V.TamilPeriyar and M.V.Tamil Kamaraj. Also we have considered the same indetail while answering Question No.1. Hence we answer the firstpart of the second question in favour of the Revenue and against theassessee. With regard to the second part of the second question, wehave already considered the same in detail while answering QuestionNo.3 and hence, we answer the second part of the second question infavour of the assessee and against the Revenue. No costs. km Sd/Asst.Registrar /true copy/ Sub Asst.Registrar To 1.The Assistant RegistrarIncome Tax Appellate TribunalMadras “C” BenchIII Floor, Rajaji BhavanBesant NagarChennai-600 090. 2.The Secretary, Central Board of Commercial TaxesNew Delhi. 3.The CommissionerIncome Tax (Appeals)V121, Mahatma Gandhi RoadChennai-34. 4.The Deputy Comissioner (Appeals) of Income Tax and CommissionerIncome Tax (Appeals)VChennai-600 034.5.The Joint CommissionerIncome Tax Special Range VIChennai-34.6.The Deputy CommissionerIncome TaxSpecial Range VIChennai-34.+ three ccs to M/S.Anitha Sumanth, Advocate Sr.No.13683.MS (CO)RSM/17.4.2006 Tax Case (Appeal) Nos.99 to 101 of 2002