1998 (3) TMI 8 - SC - Income Tax

Leasing and finance businesses get investment allowance under Section 32A when machinery is wholly used in business

SC held that an assessee operating a leasing/finance business is entitled to investment allowance under Section 32A where machinery is wholly used in that ... Investment allowance under section 32A - ownership and wholly used for purposes of business - leasing/hire as mode of carrying on business - distinction between hire and hire-purchase/transfer - development rebate analogy - beneficial construction of fiscal statuteInvestment allowance under section 32A - ownership and wholly used for purposes of business - leasing/hire as mode of carrying on business - distinction between hire and hire-purchase/transfer - Entitlement of assessees which own machinery and hire it out to third parties to claim investment allowance under section 32A. - HELD THAT: - Section 32A requires that the ship, aircraft, machinery or plant be (1) owned by the assessee, (2) wholly used for the purposes of the business carried on by him, and (3) fall within the categories described in sub-section (2). Where the assessee's business is leasing/hiring out machinery, the machinery so leased is being used for the purposes of the assessee's business and the hire receipts are assessable as business income. Sub-section (2)(b) describes the kinds of machinery by reference to the purposes for which such machinery may be used but does not impose an additional requirement that the assessee himself must personally operate the machinery for manufacture or other specified activities. Distinguishing hire (bailment) from hire-purchase (which may effect a transfer or eventual sale), the court held that pure hire agreements do not extinguish the owner's rights and therefore do not deprive the owner of the use of the machinery for the purposes of his business. Authorities on development rebate under section 33 and the explanatory departmental circular were considered and found to support treating leasing as a mode of carrying on business for purposes of allowance. Where, however, the contract contains elements of transfer (for example, an agreement for outright sale or hire with option to purchase amounting to transfer), different principles apply; those cases are distinguishable. Applying these principles, the assessees who owned machinery and leased it out on hire satisfied the conditions of section 32A and were entitled to claim investment allowance.Assessees owning machinery and letting it out on hire are entitled to investment allowance under section 32A where the arrangement is a hire (bailment) and the machinery is wholly used for the purposes of the assessees' business.Final Conclusion: Appeals dismissed; the High Courts were right in holding that finance/leasing companies which own machinery and give it on hire, where such hire is the mode of carrying on their business and does not amount to transfer, are entitled to investment allowance under section 32A. 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 32ARs.' 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.