Industrial Cables (India) Ltd. vs Commissioner of Income Tax

Following question of law has been referred for opinion of this Court by the Tribunal, Chandigarh Bench, Chandigarh, arising out of its order dt.

28th July, 1995 in ITA No. 636 of 1990, in respect of asst. yr. 1988-89:

Whether, on the facts and circumstances of the case, the Tribunal was right in law in coming to the conclusion that the debt raised from the bank

for the purchase of plant and machinery, which remained unpaid during the accounting period, was not to be taken into account for purposes of

allowing deduction u/s 32AB of the IT Act to the assessee ?

Facts noticed in the statement of case are that the assessee claimed deduction of Rs. 67,19,890 on account of additions made to plant and

machinery during the year under consideration. The AO disallowed a part of the amount on the ground that the same was invested by raising loans.

Deduction was allowed only to the extent of assessee''s own funds. The AO noticed that the assessee had repaid a part of loan during the year

which was also allowed as the assessee''s own funds. This view has been affirmed by the Tribunal. Contention of the Revenue that Section

32AB(1) of the IT Act, 1961 (for short, ''the Act'') did not permit deduction in respect of investment made in the purchase of plant and machinery

from the borrowed funds, was upheld.

We have heard learned Counsel for the parties.

Learned Counsel for the assessee submits that view taken by the Tribunal is not a correct view. There was no requirement of utilising the amount

for purchase of new machinery out of the profits of the assessee during the year. Only requirement was of utilising the amount during the year out of

profits which may be available or out of loans which may be later repaid. The object of allowing deduction is to encourage investment. Reliance

has been placed on judgments of Bombay High Court in The Commissioner of Income Tax Vs. M/s. Antifriction Bearings Corporation Ltd., and

Commissioner of Income Tax Vs. International Data Management Ltd., .

Relevant provisions of Section 32AB of the Act are extracted below:

32AB(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 utilised; or

(ii) a sum equal to twenty per cent of the profits of eligible business or profession as computed in the accounts of the assessee audited in

accordance with Sub-section (5),

whichever is less:

Provided that where such assessee is a firm, or any AOP or any BOI, the deduction under this section shall not be allowed in the computation of

the income of any partner, or as the case may be, any member of such firm, AOP or BOI....

A plain reading of the provision of Section 32AB(1) shows that the deposit of the amount with development bank or utilization for the purchase

of any new ship, aircraft, machinery or plant has to be out of the income chargeable to tax under the head ''Profits and gains of business or

profession''. The object of the provision is to grant benefit on the investments made out of the income generated during the year and not on

investments made by raising loans. Only possible conclusion is that the investment has to be from the income of the current year. Section does not

visualise or postulate a position where the benefit under this provision can be availed of today even of the income which the assessee may or may

not earn in future years. There is no denying the fact that every year is independent and has to be assessed independently. In case, deduction is

allowed in the manner suggested by the assessee, that would amount to distortion in the determination of income for the current year and will not

be in consonance with the scheme of taxation and grant of benefits.

In Antifriction Bearings Corporation Ltd.''s case (supra), claim for deduction was in respect of advance for purchase of machinery out of profits

of the year and it was held that payment of advance amounted to utilisation in accordance with the said provision, even if the assessee did not

become owner of the machinery during the year. The issue involved in the said judgment is different. To the extent of income utilised during the

year, the assessee has been given the benefit. In the said judgment, it has not been held that benefit will be available even if the amount invested

was borrowed.

In International Data Management Ltd.''s case (supra), the assessee manufactured a machine and transferred the same to its own business and

claimed deduction u/s 32AB of the Act. Objection was that this did not amount to utilisation of income during the year. It was held that there was

no requirement that Section 32AB of the Act was to be attracted only if the amount was spent out of current year''s profit. We are of the view that

the question involved in the present case was not gone into in the said case.

In view of our above discussion, we are of the view that provisions of Section 32AB of the Act are for deduction out of income generated

during the year. The same will not be available unless income during the year is utilised for the purpose. Investment made out of borrowed funds

will not be utilisation of income during the year and qualify for deduction u/s 32AB of the Act.

The question referred, thus, is answered against the assessee and in favour of the Revenue.