C.I.T. PATIALA vs. M/S RIETA BISCUTS CO.

Following questions of law have been referred for the opinion of this Court by the Income Tax Appellate Tribunal, Chandigarh, arising out of its order dated 4.10.1993 in I.T.A. Nos. 703 and 1313/Chandi/88 relating to 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' quarters constructed by the assessee when the land had been leased out to another concern and the asessee was not required to keep any workers after leasing out its assets ? R.A. No. 289

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing investment allowance on the plant and machinery leased out by the assessee to another concern ?”

The assessee company was in manufacturing business. It acquired new machinery and leased out the same alongwith plant to another entity. The dispute before the Assessing Officer, which still survives, is whether in respect of the claim for depreciation of cost of workers' quarters was permissible when the said quarters were never used by the workers of the assessee, the same having been let out alongwith plant to another entity. Another question is whether investment in the machinery which was also leased out attracted investment allowance under Section 32A. The Assessing Officer disallowed both the claims, while the CIT (A) and the Tribunal upheld both the claims.

On the question of depreciation, the finding of the CIT (A) is as under:- “...The concluding words of the paragraph “to ensure proper and smooth working of the factory during the leave and licence period” are significant and clearly indicate that the lessor had certain definite obligations towards the lessee and due to the disturbed conditions in Punjab (as summarised in the submission of the counsel) and this obligation was discharged by the appellant company by constructing the quarters for workers and which quarters were lateron used by the workers of the appellant company itself, after the lease period was over in 1986...”

The Tribunal affirmed the above view.

As regards investment allowance, the Tribunal followed its earlier order dated 4.3.1993 in cross appeal of the assessee for the assessment year 1984-1985, which in turn relied upon earlier order dated 21.7.1988 with regard to assessment year 1982-1983. Therein observations are as under:- “...The learned counsel for the assessee has placed reliance on the judgment of the Hon'ble Andhra Pradesh High Court in the case of Vinod Bhargave 69 CTR (AP) 41 where under similar circumstances development rebate was held to be allowable to the owner of the lessor company. It was also urged that the provisions regarding development rebate and investment allowance under section 22A of the Act were in pari materia. Once the income from the leased out properties is held to be business income, the necessary corolary is that investment allowance u/s 32A should also be admissible as held by the Hon'ble Andhra Pradesh High Court in its judgment referred to above. We are, therefore, inclined to hold that the assessee is entitled to investment allowance u/s 32A...”

We have heard the learned counsel for the parties. Re: (1)

It has not been disputed by the learned counsel for the revenue that the workers' quarters were let out as a part of the plant and income so derived was assessed as business income. The claim for depreciation, thus, had nexus with the business of the assessee. There is, thus, no error in the view taken by the CIT(A) and the Tribunal. The question is answered against the revenue and in favour of the assessee.

The assessee made investment in the machinery but did not use the same for its business. Learned counsel for the revenue submitted that the investment allowance was not permissible when the machinery was not used for business purpose by the assessee. Reliance has been placed on the judgment of Hon'ble Madras High Court in Commissioner of Income Tax Vs. Sivananda Colour Works (1997) 142 CTR (Mad) 32 and judgment of the Hon'ble Supreme Court CIT Versus Narang Dairy Products (1996) 219 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 (iii) it must be covered by one of the categories specified under sub section (2) of Section 32A.

Where machinery is leased out, it was observed that even in such a situation use of machinery can be treated to be for the purpose of assessee's business. No doubt in Shaan Finance (P) Ltd., the business of the assessee was leasing out the machinery. Notwithstanding the said difference, the principle will be attracted to the present case when lease of the machinery is part of the plant and income has been treated to be business income. It is not a case where investment in machinery is made only for leasing out. Investment is for business of the assessee but the machinery alongwith plant has been leased out by the assessee and the said leasing out has been accepted as incidental to the business of the assessee. Income so derived has been treated as business income.

Reference may also be made to the judgment in Vinod Bhargava (supra), wherein it was held that leasing out of machinery is a mode 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 question and observed as under:- “...In our opinion, the section should be construed in the context of modern times and having regard to various modes of business currently adopted by the businessman. Giving plant and machinery on lease or hire is one of the recognized modes of doing business. Even in the present case, the income earned by the assessee by hiring plant and machinery has been assessed 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 as claimed by him and approved by the Tribunal.” Appeal against the said judgment was dismissed by the Hon'ble Supreme Court in Commissioner of Income-Tax v. Maharashtra Apex Corporation Ltd. (2002) 254 ITR 98. 14. Learned counsel for the revenue, however, submits that in Sivananda Colour Works (supra), different view was taken by the Madras High Court. Therein machinery was leased out to a sister concern. It was held that since the use of the machinery was not for the purpose of the business of the assessee, the assessee was not entitled to investment allowance.

We are of the view that once three conditions of owning a machinery, use for the purpose of business of the assessee and the nature of machinery being of the specified category are fulfilled, Section 32A will be attracted. The question whether use of the machinery was for the purpose of business of the assessee, will have to be gone into from case to case and the fact that assessee did not use the machinery itself, was not a conclusive for invoking the provision, so long as machinery could be held to have been used for the purpose of the business of the assessee. Where business of the assessee is of leasing, even according to the learned counsel for the revenue there will be no difficulty in view of judgment in Shaan Finance. Where the income so derived is assessed as business income, in our view, the same principle will apply. In Sivananda Colour Works (supra), the finding recorded was that leasing was not for the business of the assessee. The said judgment is distinguishable on that ground.

Accordingly, the questions referred are answered against the revenue and in favour of the assessee.

Reference is disposed of accordingly.