1996.

(a) Income-tax---

----Investment allowance---Condition precedent---User of machinery by assessee himself for purposes of his business---Machinery purchased for purposes of business leased out ---Assessee not doing business of lease of machinery---Investment allowance not allowable---Indian Income Tax Act, 1961, S.32-A.

(b) Income-tax---

----Business---Business income---Machinery purchased for purposes of business leased out---Income from lease assessable as business income-- Indian Income Tax Act, 1961, S.28.

In the previous year corresponding to the assessment year 1978-79, the assessee purchased certain machinery for its business. But the machinery was, in fact, let out to another firm under a deed, dated February 24, 1977, on a monthly rent of Rs.4,000 for a mutually agreed period with an option for either party to terminate it with six months' notice. The assessee claimed investment allowance in respect of the machinery but the Income-tax Officer rejected the claim. The Commissioner of Income-tax (Appeals) granted the allowance. The Tribunal found that the assessee was only exploiting the machinery as commercial assets and the income derived from the lease did not cease to be part of the income from business. Consequently, the order of the Commissioner of Income-tax (Appeals) granting investment allowance under section 32-A of the Income Tax Act, 1961. was confirmed. On a reference:

Held, (i) that the Tribunal was correct in assessing the lease income under the head "Income from business";

CEPT v. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC) fol.

(ii) that as the assessee was not doing business in hiring and leasing of machinery and inasmuch as the assessee had not wholly used the machinery for the purpose of the business carried on by it and since the business done by the lessee could not be considered to be that of the assessee, even though the lease income was assessable under the head "Business income", the assessee was not entitled to investment allowance under section 32-A of the Act.

Ajodhya Prasad Tara Chand Khekra v. CIT (1967) 66 ITR 576 (All.); CIT v. First Leasing Co. of India Ltd. (1995) 216 ITR 455 (Mad.) and CIT v. Shan Finance (P.) Ltd. (1993) 199 ITR 409 (Kar.) distinguished.

Watkins Mayor (Agrico) (P Ltd. v. CIT (1979) 17 ITR 202 (P&H) ref.

S.V. Subramaniam for the Commissioner,

R. Janakiraman for the Assessee

JUDGMENT

THANIKKACHALAM, J.---In compliance with the order of this Court, dated October 27, 1981, the Tribunal referred the following two questions for the opinion of this Court under section 256(2) of the Income Tax Act,. 1961:

"(1) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the assessee was entitled to investment allowance under section 32-A of the Income Tax Act, 1961, in respect of new machinery acquired and leased out by the assessee to a sister concern ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was exploiting the newly purchased machinery only as commercial assets and the income derived under the lease did not, therefore, cease to be part of the income from business ?"

The assessee was a firm having a factory for bleaching and dyeing. In the previous year ended October 20, 1977, corresponding, to the assessment year 1978-79, the assessee purchased certain machinery for its business. But the machinery was in fact let out to another firm under a deed, dated February 24, 1977, on monthly rent of Rs.4,000 for a mutually agreed period with an option for either party to terminate it with six months notice. The assessee claimed investment allowance under section 32-A of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), in respect of cost of machinery. The Income-tax Officer disallowed the claim. But, the Commissioner of Income-tax (Appeals) concluded that the income derived under lease was also income from business and, therefore, the assessee was entitled to investment allowance. Aggrieved, the Department filed appeal before the Appellate Tribunal. The Appellate Tribunal found that there was no indication of an intention to permanently part with the machine or go out of business. Therefore, the Appellate Tribunal found that the assessee was only exploiting the machinery as commercial assets and the income derived from the lease did not cease to be part of the income from business. Consequently, the order of the Commissioner of Income-tax (Appeals) granting investment allowance under section 32-A of the Act was confirmed.

Before, us, learned senior standing counsel appearing for the Department, submitted that the Tribunal was not correct in granting investment allowance, as the business of the assessee was not hiring out or leasing out the machinery. Learned counsel pointed out that unless the assessee used the machinery for the business carried on by it, it is not possible to grant investment allowance under section 32-A of the Act. According to learned counsel, simply because the income earned by the assessee by leasing out the machinery temporarily is assessed under the head "Profit from business" it would not go to show that the assessee is entitled to investment allowance under section 32-A of the Act. Since the assessee is doing business in bleaching and dyeing and since the machinery were not used for the purpose of that business, it was submitted, that the assessee cannot claim investment allowance under section 32-A of the Act. Therefore, it was submitted that because of the fact that the assessee was exploiting the machinery purchased by leasing out the same temporarily to a sister concern, the rent realised by the assessee, assessable under the head "Business income" by itself would not permit the assessee to claim investment allowance on the machinery installed.

On the other hand, learned counsel appearing for the assessee submitted that even though the business of the assessee was bleaching and dyeing since the newly purchased machinery could not be exploited by the assessee, the same was let out to a sister concern for a temporary period. In view of the decision rendered in CEPT v. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC), the assessee should be considered as exploiting the machinery in its own business, even though the machinery was let out to a sister concern and the income therefrom is assessable under the head "Business income". When the use of the machinery by the sister concern (lessee) is considered to be use for the business of the assessee, the assessee is entitled to investment allowance under section 32-A of the Act. In order to support his contention that the assessee is entitled to investment allowance under section 32-A of the Act, even though the newly purchased machinery was let out for a temporary purpose, learned counsel for the assessee relied upon the decision in CIT v. First Leasing Co. of India Ltd. (1995) 216 ITR 455 (Mad.); CIT v. Shaan Finance (P.) Ltd. (1993) 199 ITR 409 (Kar.) and in Ajodhya Prasad Tara Chand Khekra v. CIT (1967) 66 ITR 576 (All.). According to learned counsel for the assessee when the machinery cannot be exploited or used for a particular kind of business, and if the assessee used or exploited the machinery by letting out the same for a temporary period then also it should be considered as use of the machinery for the business of its own. Finally, it was submitted that the assessee was only exploiting the machinery as commercial assets and the income derived under the lease did not cease to be part of the income from business carried on by the assessee. For these reasons learned counsel submitted that there is no infirmity in the order passed by the Tribunal in granting investment allowance under section 32-A of the Act.

We have heard learned senior standing counsel appearing for the Department as well as learned counsel appearing for the assessee. The point for consideration is whether the assessee is entitled to investment allowance under section 32-A of the Act, while the assessee temporarily let out the machinery purchased to a sister concern when the business of the assessee is not hiring or leasing out machinery. Under a lease deed, dated February 24, 1977, machinery were let out to the sister concern on a monthly rent of Rs.4,000. The business of the assessee is bleaching and dyeing. According to the assessee, the machinery was let out only for a temporary period, since the assessee could not accommodate those machinery at that time. It is the case of the assessee that the intention of the assessee was to exploit the machinery purchased by it in its own business and since it could not accommodate the said machinery at that time, it was let out temporarily.

Section 32-A(1) of the Act states that in respect of a shop or an aircraft or machinery or plant specified in subsection (2), which is owned by the assessee and is wholly used for the purposes of the business carried by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty-five per cent. of the actual cost of the ship, aircraft, machinery or plant to the assessee.

Therefore, in order to avail of the investment allowance under section 32-A of the Act, the assessee, who acquired the new machinery should instal it or first put it to use in the immediately succeeding previous yes. The machinery should be wholly used for the purpose of the business died on by the assessee itself. According to the facts arising in the present case, the machinery was acquired by the assessee and it was not wholly used for the purpose of the business carried on by it. The machinery was let out and income was earned. Since the assessee could not accommodate the newly purchased machinery, for the time being it was let out. Since the intention of the assessee was to exploit the machinery, after the lease period was over, it cannot be said that the lease income earned is not business income.

In the case of CEPT v. Shri Lakhsmi Silk Mills Ltd. (1951) 20 ITR 451, the Supreme Court held as under (headnote):

"If a commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is the income of the business, but it cannot be said that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade. The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. The view that in order to constitute business income the commercial asset must at the time it was let out be in a condition to be used as a commercial asset by the assessee himself is not correct."

According to learned counsel for the assessee, since the income earned by way of letting out the machinery temporarily could be assessed as income from business and the business done by the lessee should be considered as the business done by the assessee. Therefore, it should be considered that the machinery purchased would have been wholly used for the purpose of the business carried on by the assessee. This argument was advanced on the basis of the decision in CEPT v. Lakhsmi Silk Mills Ltd. (1951) 20 ITR 451 (SC). The decision rendered in CEPT v. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC) can be extended only for the purpose of treating the lease income obtained for a temporary period as business income when the assessee could not use the machinery in its business. It cannot be further extended to state that it would satisfy the conditions prescribed in section 32-A of the Act, so as to enable the assessee to say that the newly purchased machinery was utilised wholly for the purpose of the business carried on by the assessee and, therefore, entitled to investment allowance.

In order to support the submission that the assessee is also entitled to get investment allowance under section 32-A of the Act, reliance was placed upon the decision in CIT v. First Leasing Co. of India Ltd. (1995) 216 ITR 455 (Mad.). According to the facts arising in that case the business of the assessee was hiring and letting out the machinery. Thus, in the course of its doing business in letting out the machinery, the assessee earned lease income. On these facts, the assessee claimed investment allowance under section 32-A of the Act. Since the business of the assessee is hiring and letting out machinery, this Court held that income earned by the assessee should be assessed under the head "Business" and the installation and the use of the machinery by the lessee would be deemed to have been installed and used by the assessee. Under these circumstances, investment allowance under section 32-A was granted to the assessee therein.

So also, the Karnataka High Court in the case of CIT v. Shaan Finance (P.) Ltd. (1993) 199 ITR 409, while considering the provisions of section 32-A of the Act on the facts that the business of the assessee was hiring and leasing machinery, held that the assessee was entitled to investment allowance. So also, the Allahabad High Court in the case of Ajodhya Prasad Tara Chand Khekra v. CIT (1967) 66 ITR 576 came to the same conclusion, since the business of the assessee in the said case was letting out the machinery. But, according to the facts arising in the present case, the assessee was doing business in bleaching and dyeing. The business of the assessee was not hiring and letting out machinery as in the facts arising in the above said decisions cited supra. Therefore, these decisions are distinguishable on facts.

In Watkins Mayor (Agrico) (P.) Ltd. v. CIT (1979) 117 ITR 202, the Punjab and Haryana High Court held as under (headnote):

"that the mere fact that there was a clause in the memorandum of a association of the assessee-company that the company could hire out the machinery did not mean that it actually carried on business of letting on hire the machinery or that every machinery purchased by the assessee-company was for the purpose of hiring out the same. The intention of the assessee-company at the time of purchase of the machinery was the basic important thing and the intention was to be known from the circumstances of each case prevailing at the relevant time. In the instant case, the dominant intention of the assessee-company at the time of purchasing the machinery was to use it for manufacturing discs for tractors and not to let it on hire. for the machinery was purchased for giving practical shape to the plan of the assessee-company to start manufacturing blades, etc., and since it could not instal the machinery due to paucity of space and they were lying idle, it let the machinery on hire to another company. Since the assessee's intention was not to let the machinery on hire to third parties, it cannot be held that the machinery purchased was meant for the purpose of hiring out the same to third parties or that the machinery had been let on hire as a business activity. Therefore, the Tribunal was right in not allowing development rebate on the machinery."

Therefore, inasmuch as the assessee was not doing business in hiring and leasing the machinery and inasmuch as the assessee has not wholly used the machinery for the purpose of the business carried on by it and since the business done by the lessee cannot be considered to be that of the assess and further even though the lease income is assessable under the head "Business income" the assessee is not entitled to ask for investment allowance under section 32-A of the Act, since the conditions prescribed therein were not satisfied. In that view of the matter, we answer question No. l referred to us in the negative and in favour of the Department.

In so far as question No.2 is concerned, it relates to whether the income earned by the assess by exploiting the newly purchased machinery as commercial assets can be assessed under the head "Income from business. In view of the decisions cited supra, particularly the decision of the Supreme Court in CEPT v. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451, we hold that the Tribunal was correct in assessing the lease income under the head "Income from business". Therefore, we answer question No.2 in the affirmative and against the Department. There will be no order as to costs.

M.B.A./1603/FCReference answered.