Commissioner of Income Tax vs U.P. Asbestos Ltd.

Rajes Kumar, J.—The present appeal u/s 260A of the IT Act (hereinafter referred to as ''the Act'') is directed against the order of the Tribunal, dt. 24th Aug., 2001 for the asst. yr. 1988-89. The aforesaid appeal has been admitted on the following questions:

Whether, the Hon''ble Tribunal was justified in holding that the assessee''s claim to the extent of Rs. 4,31,459 was allowable u/s 32AB, without appreciating the fact that para 17.3 of Circular No. 461 was only applicable when a deposit was made with a ''designated development bank'', and not otherwise?

Whether, the Hon''ble Tribunal was justified in following the decision of the Bombay High Court in the case of The Commissioner of Income Tax Vs. M/s. Antifriction Bearings Corporation Ltd., , without considering the full text of the Circular No. 461, thus leading to a question whether for purposes of interpretation of a provision, a circular has to be read in entirety, or only part portions thereof can be used to interpret a particular provision?

The brief facts of the case giving rise to the present revision are that the opposite party (hereinafter referred to as "assessee") claimed deduction u/s 32AB on investment of Rs. 24,95,914 out of which Us. 20,88,000 was deposited with IDBI on 15th June, 1988. The balance was claimed to be invested in the purchase of plant and machinery. On examination of the details furnished before the assessing authority, he found that the assessee had made some additions to plant and machinery, but the new plant and machinery was purchased for Rs. 8,854 only, whereas the assessee had claimed deduction for investment in plant and machinery to the tune of Rs. 4,31,459 and the amount of Rs. 8,854 was not included in the figure of Rs. 4,31,459.

After considering the version of the assessee, the assessing authority held that there was no purchase of plant and machinery by the assessee and as the assessee had not utilized the amount in purchase of new machinery and plant, the deduction was not allowable u/s 32AB. He also observed that even if the assessee might have acquired new plant and machinery in the subsequent year, it cannot be said that the assessee has utilized the amount in the purchase of plant and machinery in the previous year relevant to asst. yr. 1988-89. Thus, according to him, the deduction u/s 32AB cannot be allowed to the extent of plant and machinery, which were not purchased in this year. Thus, the AO held that only amount of Rs. 20,88,000 deposited by the assessee with IDBI, qualified for deduction of 20 per cent of the profit after depreciation, whichever is less.

In appeal, it was submitted before the learned CIT(A) by the assessee that even if the delivery of the plant and machinery was taken in subsequent year, the amount was utilized by making actual payment to the supplier in the year under consideration. The CIT(A), however, did not agree with the contentions raised before him. He upheld the action of the assessing authority. He, therefore, confirmed the action of the assessing authority and upheld the disallowance of Rs. 4,31,459.

Being aggrieved by the order of the CIT(A), assessee filed appeal before Tribunal. The Tribunal by the impugned order accepted the plea of the assessee and allowed the claim. Tribunal held as follows:

We have carefully considered the facts and circumstances relating to this issue, the case law to our attention was invited and the rival submissions. The legal position about the applicability of Section 32AB, stands settled in view of the decisions referred to by the learned Counsel for the assessee. In the case of (2001) 77 ITD 364 it was held that where the assessee had purchased machinery for use in operation theatre against which he paid advance during previous year and balance in the next year, when machinery was delivered, assessee''s claim for deduction was to be allowed. Pune Bench in the above case observed that Section 32AB(1)(b) lays down emphasis on utilization of amount for the purchase of machinery during the previous year rather than actual purchase of machinery, which can follow utilization of amounts. In view of this legal position, the finding of the CIT(A) is set aside. Hence that the claim of the assessee is to be allowed, if the assessee succeeds in showing that the amount in question was utilized by him by making payments for purchasing plant and machinery in the previous year relevant to the assessment year under consideration. However, the fact relating to such payments have to be ascertained. Hence while agreeing with the assessee, in principle, that the amount spent or paid for purchasing plant and machinery should be considered as utilized in view of the provisions contained u/s 32AB, we restore the matter to the AO to examine the details of such payments and to consider the claim of the assessee accordingly, as per law.

Heard Sri D.D. Chopra, learned standing counsel appearing on behalf of the Revenue and learned Counsel appearing on behalf of the assessee.

Section 32AB reads as follows:

Investment deposit account.-(1) Subject to the other provisions of this section, where an assessee, whose total income includes income chargeable to tax under the head ''Profits and gains of business or profession, has, out of such income,:

(a) deposited any amount in an account (hereafter in this section referred to as deposit account) maintained by him with the Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier; or

(b) utilised any amount during the previous year for the purchase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account under Clause (a),

in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the ''scheme'') to be framed by the Central Government, or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf by the Tea Board, the assessee shall be allowed a deduction such deduction being allowed before the loss, if any, brought forward from earlier years is set off u/s 72 of:

(i) a sum equal to the amount, or the aggregate of the amounts, so deposited and any amount so utilized; or

(ii) a sum equal to twenty per cent of the profits of business or profession as computed in the accounts of the assessee audited in accordance with sub-s. (5), whichever is less:

Only question for consideration is whether the money advanced for the purchases of plant and machinery amounts to utilization of the amount for the purchase of new machinery or plant as contemplated under Clause (b) of Section 32AB.

The Division Bench of Bombay High Court in the case of The Commissioner of Income Tax Vs. M/s. Antifriction Bearings Corporation Ltd., held that the payment of advance amount for the purchase of plant and machinery amounts to utilization in the year in which the advance was made and the deduction u/s 32AB is admissible.

The Division Bench of the Bombay High Court held as follows:

Section 32AB was introduced to replace investment allowance u/s 32A by a new scheme of investment deposit account. This was one of the measures introduced by way of corporate tax reform. Pursuant to the said change, the modality of allowing deduction for encouraging investments in new plant and machinery came to be introduced. Hence, it is clear that Section 32AB was a substitute for Section 32A. The new scheme was made applicable to all existing types of assessees as also to professionals and leasing companies which have not leased out machinery to industrial undertakings. In other words, the deduction was made admissible to all assessees who carried on eligible business as per Section 32AB(2). However, the benefits under the investment deposit account scheme were made available only if there are profits in the eligible business. The Board''s Circular dt. 9th July, 1986, referred to above, clarified that deposits with the development bank or purchases of new machinery or plant should be out of income chargeable to tax under the head ''Profits and gains of business. Accordingly, such profits were required to be computed for the current year. The utilisation towards purchase, therefore, should be out of the income of the current year. It should be out of the income from eligible business or profession. There is also a reason for this precondition. The benefit of investment allowance is related to cost of plant and machinery irrespective of how it is financed. This created a distortion in the profitability of companies. Therefore, under the investment deposit account scheme envisaged by Section 32AB, deduction is admissible only if the deposit is made or plant and machinery is acquired out of income chargeable to tax under the head ''Profits and gains of business. Therefore, to get the benefit u/s 32AB, the purchase should be out of income from eligible business or profession. If the above difference between Sections 32A and 32AB is kept in mind, it is clear that u/s 32AB it is not necessary that the assessee should become the owner of specified machinery or that the machinery should be installed or put to use during the previous year. If the assessee has placed an order for purchase and has given an advance to the supplier then the amount has been utilised for the purchase of the machinery. The delivery of the machinery may be taken in a subsequent year. If we accept the Department''s contention then the scheme of Section 32AB will fail. The advance is required to have a nexus with the income of the current year. If an assessee gives an advance for purchase of machinery from the current year''s income, he cannot be denied the benefit of Section 32AB on the ground that the advance is not utilisation because in the year in which the advance is effected, the assessee will be denied deduction on the ground that it is non-utilisation and if the balance amount is paid in the subsequent year, the assessee will be denied deduction on the ground that it has not come out of the income of the current year. Similarly, if in a given case, under the contract, the assessee is required to pay the purchase price in instalments it could still be utilisation. It cannot be said that because the consideration has been paid in instalments, there was no utilisation. On the other hand, if payment by instalments under the terms of contract constitutes utilisation then, equally, payment of the advance would also constitute utilisation for the purposes of Section 32AB of the IT Act. Hence, the concept of utilisation of the amount for purchase has to be understood with reference to actual payment made to the supplier from time to time and not with reference to the liability created for the purchase. It is for this reason that the legislature has used the word ''purchase'' in Section 32AB as against the word ''acquired'' in Section 32A. The two words have difference connotations. An asset can be acquired by purchasing raw materials followed by fabrication of the asset whereas, the term ''purchase'' implies purchase of an asset. Use of an asset purchased is not necessary for claiming deduction u/s 32AB. This position has been clarified vide para 17.3 of the Board''s Circular dt. 9th July, 1986, in which it has been once again clarified that acquisition of ship, or installation of plant or machinery during the previous year is a condition precedent for availing of the benefit of investment allowance whereas, deduction u/s 32AB can be availed of even before the ship is acquired or plant and machinery is installed. Therefore, we cannot see as to how the benefit u/s 32AB would not be allowed to an assessee who sends an advance for purchase of new machinery. In the circumstances, Section 32AB(1)(b) is applicable to the facts of this case and the assessee was entitled to claim benefit of the said section.

Learned standing counsel is not able to show any decision to the contrary. We respectfully agree with the view taken by the Division Bench of the Bombay High Court and it is accordingly held that the amount given in advance for the purchase of plant and machinery amounts to utilisation of amount in the year advance was given for the purpose of Clause (b) of Section 32AB.

In view of the above, the question referred is answered in favour of the assessee and against the Revenue. In the circumstances, the appeal is dismissed.