The Commissioner Of Income Tax, Patiala v. M/S Rieta Biscuit Co. (P) Ltd., Patiala

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITR No. 365 & 366 of 1995 (O&M)Date of decision: November 4, 2009 The Commissioner of Income Tax, Patiala ...Appellant Versus M/s Rieta Biscuit Co. (P) Ltd., Patiala ...Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOELHON'BLE MR. JUSTICE GURDEV SINGH Present: Ms. Urvashi Dhugga, Advocate, for the revenue.Mr. Animesh Sharma, Advocate, for the assessee. ORDER 1.Following questions of law have been referred for the opinionof this Court by the Income Tax Appellate Tribunal, Chandigarh, arising outof its order dated 4.10.1993 in I.T.A. Nos. 703 and 1313/Chandi/88 relatingto assessment years 1984-85 & 1985-86:- “1. Whether, on the facts and in the circumstances of the case,the Tribunal was right in law in allowing depreciation @40% under section 32 (1) (iv) on the workers' quartersconstructed by the assessee when the land had been leasedout to another concern and the asessee was not required tokeep any workers after leasing out its assets ?R.A. No. 289the Tribunal was right in law in allowing depreciation @40% under section 32 (1) (iv) on the workers' quartersconstructed by the assessee when the land had been leasedout to another concern and the asessee was not required tokeep any workers after leasing out its assets ?R.A. No. 289 the Tribunal was right in law in allowing investmentallowance on the plant and machinery leased out by theassessee to another concern ?” 2.The assessee company was in manufacturing business. Itacquired new machinery and leased out the same alongwith plant to anotherentity. The dispute before the Assessing Officer, which still survives, iswhether in respect of the claim for depreciation of cost of workers' quarterswas permissible when the said quarters were never used by the workers ofthe assessee, the same having been let out alongwith plant to another entity.Another question is whether investment in the machinery which was alsoleased out attracted investment allowance under Section 32A. TheAssessing Officer disallowed both the claims, while the CIT (A) and theTribunal upheld both the claims. 3.On the question of depreciation, the finding of the CIT (A) is asunder:- “...The concluding words of the paragraph “to ensure properand smooth working of the factory during the leave and licenceperiod” are significant and clearly indicate that the lessor hadcertain definite obligations towards the lessee and due to thedisturbed conditions in Punjab (as summarised in thesubmission of the counsel) and this obligation was dischargedby the appellant company by constructing the quarters forworkers and which quarters were lateron used by the workersof the appellant company itself, after the lease period was overin 1986...” The Tribunal affirmed the above view. ITR No. 365 & 366 of 1995 5.As regards investment allowance, the Tribunal followed itsearlier order dated 4.3.1993 in cross appeal of the assessee for theassessment year 1984-1985, which in turn relied upon earlier order dated21.7.1988 with regard to assessment year 1982-1983. Therein observationsare as under:- “...The learned counsel for the assessee has placed reliance onthe judgment of the Hon'ble Andhra Pradesh High Court in thecase of Vinod Bhargave 69 CTR (AP) 41 where under similarcircumstances development rebate was held to be allowable tothe owner of the lessor company. It was also urged that theprovisions regarding development rebate and investmentallowance under section 22A of the Act were in pari materia.Once the income from the leased out properties is held to bebusiness income, the necessary corolary is that investmentallowance u/s 32A should also be admissible as held by theHon'ble Andhra Pradesh High Court in its judgment referred toabove. We are, therefore, inclined to hold that the assessee isentitled to investment allowance u/s 32A...” 6.We have heard the learned counsel for the parties. Re: (1) 6.We have heard the learned counsel for the parties. Re: (1) 7.It has not been disputed by the learned counsel for the revenuethat the workers' quarters were let out as a part of the plant and income soderived was assessed as business income. The claim for depreciation, thus,had nexus with the business of the assessee. There is, thus, no error in theview taken by the CIT(A) and the Tribunal. The question is answeredagainst the revenue and in favour of the assessee. ITR No. 365 & 366 of 1995 Re: (2) 8.The assessee made investment in the machinery but did not usethe same for its business. Learned counsel for the revenue submitted thatthe investment allowance was not permissible when the machinery was notused for business purpose by the assessee. Reliance has been placed on thejudgment of Hon'ble Madras High Court in Commissioner of Income TaxVs. Sivananda Colour Works(1997) 142 CTR (Mad) 32 and judgment ofthe Hon'ble Supreme Court CIT Versus Narang Dairy Products (1996) 219ITR 478 9.On the other hand, learned counsel for the assessee submits thatthe machinery was let out as a part of the plant and the income so derivedwas treated as business income in which case the machinery will be treatedto be used for business of the assessee, as held by the Tribunal. Reliancehas been placed on the judgment of Andhra Pradesh High Court inCommissioner of Income Tax vs. Vinod Bhargava, (1988) 169 ITR 549(AP) which view has been reiterated by the Supreme Court inCommissioner of Income Tax v. Shaan Finance (P) Ltd. (1998) 231 ITR308. 10.We have considered the rival contentions.11.As held by the Hon'ble Supreme Court in Shaan Finance11.As held by the Hon'ble Supreme Court in Shaan Finance (supra), there are three requirements for attracting Section 32 A:- (i)the machinery should be owned by the assessee; (ii)it should be wholly used for the purposes of business by the assessee; and the assessee; and (iii)it must be covered by one of the categories specified under sub section (2) of Section 32A. under sub section (2) of Section 32A. such a situation use of machinery can be treated to be for the purpose ofassessee's business. No doubt in Shaan Finance (P) Ltd., the business of theassessee was leasing out the machinery. Notwithstanding the saiddifference, the principle will be attracted to the present case when lease ofthe machinery is part of the plant and income has been treated to be businessincome. It is not a case where investment in machinery is made only forleasing out. Investment is for business of the assessee but the machineryalongwith plant has been leased out by the assessee and the said leasing outhas been accepted as incidental to the business of the assessee. Income soderived has been treated as business income. 13.Reference may also be made to the judgment in VinodBhargava (supra), wherein it was held that leasing out of machinery is amode of carrying of business, therefore, development rebate was admissible.Judgment in Narang Dairy Products was distinguished in Shaan Finance(supra), by observing that therein the leasing out was for the purpose of sale.In Commissioner of Income Tax v. Maharashtra Apex Corporation Ltd.(1998) 234 ITR 484, the Karnataka High Court dealt with the said questionand observed as under:- “...In our opinion, the section should be construed in thecontext of modern times and having regard to various modes ofbusiness currently adopted by the businessman. Giving plantand machinery on lease or hire is one of the recognized modesof doing business. Even in the present case, the income earnedby the assessee by hiring plant and machinery has beenassessed under the head “Income from business” and not under“Income from other sources”. Therefore, we are constrained to hold that the assessee is entitled to the investment allowance asclaimed by him and approved by the Tribunal.” “...In our opinion, the section should be construed in thecontext of modern times and having regard to various modes ofbusiness currently adopted by the businessman. Giving plantand machinery on lease or hire is one of the recognized modesof doing business. Even in the present case, the income earnedby the assessee by hiring plant and machinery has beenassessed under the head “Income from business” and not under“Income from other sources”. Therefore, we are constrained to hold that the assessee is entitled to the investment allowance asclaimed by him and approved by the Tribunal.” Appeal against the said judgment was dismissed by the Hon'bleSupreme Court in Commissioner of Income-Tax v. Maharashtra ApexCorporation Ltd.(2002) 254 ITR 98. 14.Learned counsel for the revenue, however, submits that inSivananda Colour Works (supra), different view was taken by the MadrasHigh Court. Therein machinery was leased out to a sister concern. It washeld that since the use of the machinery was not for the purpose of thebusiness of the assessee, the assessee was not entitled to investmentallowance. 15.We are of the view that once three conditions of owning amachinery, use for the purpose of business of the assessee and the nature ofmachinery being of the specified category are fulfilled, Section 32A will beattracted. The question whether use of the machinery was for the purpose ofbusiness of the assessee, will have to be gone into from case to case and thefact that assessee did not use the machinery itself, was not a conclusive forinvoking the provision, so long as machinery could be held to have beenused for the purpose of the business of the assessee. Where business of theassessee is of leasing, even according to the learned counsel for the revenuethere will be no difficulty in view of judgment in Shaan Finance. Where theincome so derived is assessed as business income, in our view, the sameprinciple will apply. In Sivananda Colour Works (supra), the findingrecorded was that leasing was not for the business of the assessee. The saidjudgment is distinguishable on that ground. 16.Accordingly, the questions referred are answered against the revenue and in favour of the assessee. 17.Reference is disposed of accordingly. (ADARSH KUMAR GOEL) JUDGE November 4, 2009 prem (GURDEV SINGH ) JUDGE