1998 (3) TMI 8 - SC - Income Tax

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

Commissioner of Income-Tax Versus First Leasing Co. of India Ltd. & Shaan Finance (P.) Ltd.

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 - hire purchase agreement - machinery hired out to manufacturers - HELD THAT:- We have already set out the three requirements of section 32A(1) which entitle an assessee to claim investment allowance. One of the requirements is that the machinery must be wholly used for the purpose of such assessee's business. When the business of the assessee is leasing of such machines, the machines so leased out are being used for the purpose of the assessee's business. The income by way of hire charges which the assessee receives is also taxed as business income of the assessee. In the case of hire purchase agreements, the Department's Circular No. 9 of 1943 dated March 23, 1943, provides, inter alia, that where, under the terms of the agreement the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction should be regarded as one of hire purchase. In such cases, the periodical payments made by the hirer should, for tax purposes, be regarded as made up of (1) consideration for hire to be allowed as a deduction in the assessment and ; (2) payment on account of purchase to be treated as capital outlay, depreciation being allowed to the lessee on the initial value. In the case, however, of hire of machinery, the owner is entitled to depreciation. In this connection, a reference may also be made to K. L. Johar and Co. v. Deputy Commercial Tax Officer,[1964 (11) TMI 58 - SUPREME COURT], where this court, while examining a hire purchase agreement, pointed out that such an agreement has two elements ; (1) element of bailment, and (2) element of sale in the sense that it contemplates an eventual sale. In the absence of any element of sale in the present case, we do not see any reason for treating the agreement as 'transfer' or disallowing the grant of investment allowance, when the assessee complies with the requirements of section 32A. Section 32A is a beneficial provision in a taxing statute. Full effect, therefore, requires to be given to the language used in section 32A. As observed by this court in C. A. Abraham v. ITO [1960 (11) TMI 20 - SUPREME COURT], in interpreting a fiscal statute, the court cannot proceed to make good deficiencies if there be any ; the court must interpret the statute as it stands and in the case of doubt in a manner favourable to the taxpayer. 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. In the premises, the appeals are dismissed with costs. 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.