Holding

Section 32A(2)(b) refers only to the purposes to which the machinery may be put and does not require the assessee to use the machinery himself; therefore a finance company whose business is hiring out machinery is eligible for investment allowance.

Summary

M/s Shaan Finance (P) Ltd., a finance company, purchased new machinery and hired it out to manufacturers under hire agreements. The company claimed a 25% investment allowance under Section 32A of the Income Tax Act, 1961, but the Revenue rejected the claim. The Karnataka High Court allowed the claim, holding that the company satisfied the conditions of ownership, use for its business and the category of machinery. On appeal, the Supreme Court examined whether Section 32A(2)(b) requires the assessee to use the machinery himself, and whether the ratio in CIT v. Narang Dairy Products applied. The Court held that the provision merely describes the uses of the machinery and does not demand personal use; a finance company whose business is hiring out machinery is deemed to be using it for its business, and therefore eligible for the allowance. The Court distinguished Narang Dairy Products, noting that that case involved a hire‑purchase arrangement amounting to a transfer, unlike a simple hire. Consequently, the appeals were dismissed, upholding the High Court's decision.

Issues considered

Whether an assessee who owns machinery but does not use it personally, instead hires it out, satisfies the 'wholly used for the purposes of the business' requirement of Section 32A(1).
Whether the ratio in CIT v. Narang Dairy Products, which required the assessee to be the user of the machinery, is applicable to a simple hire arrangement.
Whether a hire agreement constitutes a transfer of machinery disqualifying the claim for investment allowance.

Legislation cited

Income Tax Act, 1961s. 32A

Subjects

investment allowanceSection 32Ahire agreementleasingfinance companytax deductioninterpretation of statutesbeneficial provisionbailmentbusiness income

Judgment

COMMISSIONER OF INCOME TAX, KARNATAKA. BANGALORE A
v.
M/S. SHA AN FINANCE (P.) LTD .. BANGALORE ETC.

MARCH 20, 1998

[MRS. SU.IATA V. MANOHAR AND D.P. WADHWA, JJ.] B

""""'
Income Tax Act, 1961-Section 32A-lnvestment allowance-Assessee,
finance company-Owner of machineries-leased out to manufacturers-
Whether eligible for investment allowance:'-Held, yes-Provision does not C
specifY user by assessee.

Section 32A(2}(b)-lncome derived by assessee--ln the business of
hiring machineries-Assessee held. to be considered as user of machinery for
business purposes.
D
Interpretation of statutes-Taxing statutes- Beneficial provision in a-
Full effect to be given to the /anguage--Held, court cannot make good the
deficiencies if any.

The Respondent-finance company was in the business of purchase of
certain machineries and hiring them for manufacturer under agreement of E
hire. The assessee claimed the benefit of investment allowance under Sec.
32A of the Income Tax Act, 1961. Their claims were rejected by the Revenue
and on challenge before the High Court, it was held that the assessees were
entitled to investment allowance.
F
t On appeal before this Court it was contended by the Appellant that
investment allowance can be claimed by the assessee only in a case where
the assessee is the owner of the machinery and also uses the machinery
himself and in other cases it cannot be granted, and that the observations
in CIT v. Narang Dairy Products, 219 ITR 478 wherein it was held that
availing the benefit of development rebate not only should the ownership of G
the plant and machinery be with the assessee but also its user by the
assessee for the purpose of his business, is applicable in the present case.

Dismissing the appeals, the Court

HELD: 1.1. Section 32A(2)(b) refers to the uses to which the machinery H
367
368 SUPRE~lE COURT REPORTS [ 1998] 2 S.C.R.

A can be put. It does not specify that the assessee himself should use the
machinery for these purposes. The conclusion and reasoning of the High
Courts that the assessee fulfil all the requirements of Section 32A is
correct. 1372-CI

1.2. Where the business of the assessee consists of hiring out
B machinery and/or where the income derived by the assessee from the hiring
of such machinery is business income, the assessee must be considered as
having used the machinery for the purposes of its business. 1374-FI

CIT'" Castle Rock Fisheries, 119971 10 SCC 770 and CIT v. Vinod
C Bhargava : 169 ITR 549, referred to.

1.3. The ratio in the case of Narang Dai1J' Produc/s is not applicable
in the present case. It does not deal with an agreement of hire of machinery
in contradistinction to an agreement of hire purchase. A transaction of hire
is, therefore, of bailment of the machinery. There is no extinguishment of
D any right of the owner in the machinery. There is merely a licence given to
the hirer to use, for a temporary period, the machinery so hired. 1375-01

CIT v. Narang Dairr Produc/s : 219 ITR 478 and Blue Bay Fisheries
(f'J lldv. CTT, 166 ITRI, distinguished.

E Mis Damodar Valley Corpn. v. The Stale of Bihar, AIR (1961) SC 440,
referred to.

2.1. In the absence of any element of sale in teh present case, there
is no reason for treating the agreements as "transfer" or disallowing the
grant of investment allowance, when the assessee complies with the
F requirements of Section 32A. 1376-CI

Mis K.L. Johar and Co. v. The Dr. CTO, Coimbatore Ill, AIR (1965) SC
I 082 at I 090, referred to.

3.1. Section 32A is a beneficial provision in a taxing statue. Full effect
G requires to be given to the language used in the Section. While interpreting
a fiscal statute, the Court cannot proceed to make good the deficiencies if
there is any. The Court must interpret the statute as it stands and in case
of doubt, in a manner favourable to the tax-payer. The language of Section
32A covers leasing or finance companies which give machinery on hire as
H in the present case. 1376-D-EI
,
C.l.T. v. SHAAN FINANCE (P.) LTD. [SUJATA V. MANOHAR. J.] 369

CA. Abraham v. I. TO. Kottayam & Anr, AIR (1961) SC 609 at 612, A
relied on.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 7077-78 of
1993 Etc.

From the Judgment and Order dated 4.11.92 of the Karnataka High Court 8
in l.T.R. Nos. 56 and 55 of 1990.

T.L.V. Iyer, (T.C. Sharma) and B.K. Prasad for the Appellant.

Ms. Janaki Ramachandran for the Respondent in C.A. Nos. 7077-78/93.

Arvind P. Datar, U.A. Rana, (S. Tripathi) and M/s. Gagrat & Co., for the
c
Respondent in C.A. No. 1692-93/98.

The Judgment of the Court was delivered by

MRS. SUJAT A Y. MANO HAR, J. Delay condoned. D
Leave granted.

These appeals raise a common question relating to the assessees'
entitlement to investment allowance under Section 32A of Income-tax Act,
1961. The assessee companies, as their names suggest, are financial companies E
which purchase machinery and hire out the machinery to manufacturers under
agreements of hire. The common question in these appeals relates to the
entitlement of the assessees to investment allowance under Section 32A of
the Income-tax Act, 1961. For the sake of convenience, we are setting out the
question as framed in Civil Appeal Nos. 7077-78of1993. The question is as
( follows: F

"whether, on the facts and in the circumstances of the case, the
Tribunal was right in holding that in respect of the machineries owned
by the assessee, but leased to third parties and used by them for the
manufacture of article or thing, investment allowance was allowable G
under sec. 32A"

The assessees are not themselves manufacturers of any article or thing.
The machineries, however, which are owned by them are hired to different
persons for the purpose of their business of manufacturing. In respect of
these machineries, assessees claimed investment allowance under Section H
370 SUPREME COURT REPORTS [1998] 2 S.C.R.

A 32A. In all these proceedings, the concerned High Courts, being the High
Courts of Karnataka and Madras. have held the assessees as entitled to
investment allowance under Section 32A. Hence these appeals have been
preferred before us.

The relevant provisions of Section 32A are as follows:
B
"32A. (I) In respect of a ship or an aircraft or machinery or plant
specified in sub-section (2). which is owned by the assessee and is
wholly used for the purposes of the business carried on 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
c 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
D the assessee:

Provided that .......... .

(2) The ship or aircraft or machinery or plant referred to in sub-section
(I) shall be the following, namely:-

E (a) a new ship or new aircraft acquired after the 31st day of March,
1976, by an assessee engaged in the business of operation of ships
or aircraft;

(b) any new machinery or plant installed after the 31st day of March,
1976-
F
(i) for the purposes of business of generation or distribution of
electricity or any other form of power; or
(ii) in a small scale industrial undertaking for the purposes of
business of manufacture or production of any article or thing;
or
G
(iii) in any other industrial undertaking for the purposes of business
of construction, manufacture or production of any article or
thing not being an article or thing specified in the list in the
Eleventh Schedule."

H [Underlining ours]
C.l.l 1· SIL\A"J FINANCE(!'.) LTD. (SU.IATA V. ~1ANOllAR . .I.] 371

Therefore. in respect, inter alia. of plant and machinery for which an A
investment allowance is claimed in any relevant previous year, an assessee
must satisfy the following conditions:

(I) The machinery should be owned by the asscssee.

(2) It shou Id be 11 holly used for the purposes of the business earned on by
.. the assessee. and
B
~ The machinery must come under any of the categories specified in sub-
(3)
section (2) of Section 32A.

Sub-section (2) describes such machinery, plant as also ship or aircraft.
Under sub-section (2)(b)(iii) any new machinery or plant installed after 31st c
of March, 1976 in an~ industrial undertaking for the purpose of manufacture
or production of any article or thing. not being an article or thing specified
in the list in the Eleventh Schedule is eligible for investment allowance. In the
present case. the machinery satisfies this description under Section 32A
(2)(b)(iii). The department, however, contends that investment allowance can
-=-- ,(
be claimed by the assessee only in a case where the assessee is the owner
D
,
of the machinery and also uses the machinery himself. In other cases,
investment allowance cannot be granted. We have to examine this contention.

We have already set out the three requirements of Section 32A( I) which
entitle an assessee to claim investment allowance. One of the requirements E
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.
t F
Sub-section (2) of Section 32A, however, requires to be examined to see
'::!
whether there is any provision in that sub-section which requires that the
assessee should not merely use the machinery for the purposes of his business.
but should himself use the machinery for the purpose of manufacture or for
what ever other purpose the machinery is designed. Sub-section (2) covers
all items in respect of which investment allowance can be granted. These G
items are, ship. aircraft or machinery or plant of certain kinds specified in that
;...__
sub-section. In respect of a new ship or a new aircraft Section 32A(2)(a)
expressly prescribes that the new ship or the new aircraft should be acquired
by an assessee which is itself engaged in the business of operation of ships
or aircraft. Under sub-section (2) (b), however, any such express requirement H

-
372 SUPREME COURT REPORTS [ 1998] 2 S.C.R. I
A that the assessee must himself use the plant or machinery is absent. Section
32A(2)(b) merely describes the new plant or machinery which is covered by
Section 32A. The plant or machinery is described 11 ith refrrence to its purpose.
For example. sub-section (2)(b)(i) prescribes ··the purposes of business of
generation or distribution of electricity or any other form of power". Sub-
B section (2)(b)(ii) refers to small scale industrial undertakings which may use
the machinery for the business of manufacture or production of any article.
and sub-section (2)(b)(iii) refers to the business of construction, manufacture
or production of any article or thing other than that specified in the Eleventh
Schedule. Sub-section 2(b), therefore. refers to the uses to which the machinery
can be put. It does not specify that the assessee himself should use the
C machinery for these purposes. In the present case. the person to whom the
machinery is hired does use the machinery for spe.cified purposes under
Section 32A(2)(b)(iii). That person, however, is not the owner of the machinery.
The High Courts of Karnataka. and Madras have held that looking to the
requirements specified in Section 32A the assessees, in the present case, fulfil
all the requirements of that section, namely, (I) the machinery is owned by
D the assessee; (2) the machinery is used for the purpose of assessees business
and; (3) the machinery is as specified in sub-sectoin{2).

We are inclined to agree with this reasoning of the High Com1s of
Karnataka and Madras.
E The provisions relating to investment allowance are akin to the
provisions under section 33 of Income-tax Act, 1961 relating to development
rebate which was discontinued with effect from I st of April, 1974 by a
Notification issued by the Central Government. Form Ist of April, 1976,
however, Section 32A was introduced in the Income-tax Act, 1961 granting
F investment allowance under Fina11ce Act. 1976. A circular of the department
being circular No. 202 dated 5th of July, 1976, which explained the provisions
of the Finance Act, 1976, pa11aining to direct taxes, refers to investment
allowance in paragraph 23.1. It is stated that the new scheme of investment
allowance is broadly on the lines of development rebate scheme that was
G discontinued earlier. (Paragraph 23.2). Whereas development rebate was allowed
at verying rates, investment allowance will be admissible at the uniform rate
of 25% only. Decribing the provisions of Section 32A(2). the circular states
that new ships and new aircraft acquired atier 3 lst of March. 1976 by the tax
payers engaged in the business of operation of ships or aircraft will be
eligible. It says; "It should be noted that new ships and aircraft will qualify
H for investment allowance only in the hands of tax payers carrying on the
C.l.T. v. SHAAN FINANCE (P.) LTD. [SU.IA TA V. MANOHAR, J.] 373
business of operating ships or aircraft and the allowance will not be available A
in respect of ships or aircraft acquired by other tax payers." In respect of new
machinery or plaint installed after 3 I st of March, 1976, however, the circular
does not prescribe any such condition of the assessee himself carrying on
the business of manufacturing. The circular brings out the difference between
section 32A(2)(a) and Section 32A(2)(b ).
B
Since the provisions of Section 33 dealing with development rebate are
similar to the provissions of Section 32A, it is necessary to look at cases
dealing with the grant of development rebate under Section 33. In the case
of Commissioner of Income-tax, Kerala-11 v. Castlerock Fisheries, ( 126 !TR
382), the Kerala High Court considered the case of an assessee which C
temporarily let out its cold storage plant to a sister concern. The income
derived by such letting was assessed by the Income-tax officer in the hands
of the assessee as business income of the assessee for the relevant acounting
years. The assessee claimed development rebate in respect of the cold storage
plant. The High Court said that it was accepted by the department that in
letting out the plant and machinery, the assessee was still doing business and D
the hire charges which it had received, had been assessed as business income
of the assessee. Hence the assessee had complied with all conditions for the
grant of development rebate including the condition that the assessee had
used the machinery for the purposes of its business. The High Court said that
it must, therefore, necessarily be assumed that the conditions laid down in E
Section 33(I)(a) that the machinery or plant is wholly used for the purposes
of the business carried on by the assessee, is duly satisfied and the assessee
is entitled to development rebate. In appeal before this Court, a Bench of three
judges of this Court upheld the decision of the Kerala High Court in the
above case in Commissioner of Income-tax v. Castle Rock Fisheries, (1997]
IO SCC 770. This Court also held that since the department has proceeded F
on the explicit basis that despite the fact that the plant had been temporarily
let out by the assessee to a sister concern, the plant and mechinery was
nevertheless being used by the assessee for its business purpose by treating
the income derived by the assessee by the such letting out as business
income of the assessee, the development rebate must be considered as having G
been rightly granted. Therefore, where the business of the assessee consists
of hiring out machinery and/or where the income derived by the assessee
from the hiring of such machinery is business income, the assessee must be
considered as having used the machinery for the purpose of its business.

A similar view has been taken by the Andhra Pradesh High court in the H
374 SUPREME COURT REPORTS [1998] 2 S.C.R.

A case of Commissioner ofIncome-tax v. Vi nod Bhargave, (169 ITR 549) where
Jeevan Reddy, J. (as he then was) held that where leasing of machinery is a
mode of carrying on business by the assessee the assessee would be entitled
to development rebate. The court observed, (p.551 ): " ..... Once it is held that
leasing out of the machinery is one mode of doing business by the assessee
and the income derived from leasing out is treated as business income it
B would be contradictory in terms to say that the machinery is not used wholly
for the purposes of assessee's business."

The appellant-department, however, relies upon certain observations of
this Court in Commissioner of Income-tax v. Narang DailJ1 Products, (219 !TR
C 478) where a Bench of two judges of this Court said in the context of
development rebate in respect of new machinery and plant that not only
should the ownership of the plant and machinery be with the assessee but
also its user by the assessee for the purpose of his business. The assessee
before the Court in that case carried on the business of manufacture of milk
powder. The entire machinery for the purpose of his business was allowed
D development rebate in the assessment year 1965-66. However, in August 1969
some of the machinery was let out by the assessee for a period of three years
with a provision for renewal or for outright purchase, to a third party. This
Court said that the withdrawal of development rebate was justified since the
transaction of letting out with a provision for outright purchase amounted to
E a transfer of the machinery as defined in Section 2(47) of the Income-tax Act,
1961.

The ratio of this decision would not apply to the cases which are before
us. In the case of Narang Dai1y products (supra) this Court has pointed out
that when the machinery was let out by the assessee to Hindustan lever
F Limited it cannot admit of any doubt that the machinery or plant could not
and was not used by the assessee for the purpose of the business carried
on by him, which was the business of manufacture of milk powder. Therefore,
the assessee could not be considered as having used the machines only of
the purpose of his business. Secondly, in the case of Narang Daily Products
G (Supra) the transaction was a transaction of hire with the right of outright
purchase. The Court was of the view that the words "otherwise transferred"
may be wide enough to cover such a situation.

This Court also relied upon the decision of the Kera/a High Court in
Blue Bay Fisheries (p) Ltd. v. Commissioner of Income-tax, (166 ITR 1) in the
H case of Narang Dairy Products (supra). In the case of Blue Bay Fisheries

-..
C.I. T. v. SHAAN FINANCE (I'.) LTD. [SU.IATA V. MANOHAR . .I] 375

also, the assessee purchased a trawler for its business. The traw !er was leased A
to the transferee. Under the agreemenl of lease, at the end of ten months, the
trawler was to be sold to the transferee. In terms of the agreement, the
assessee also took steps to obtain the approval of the concerned authority
for the sale of the trawler. The trawler was to remain in the exclusive possession
of the transferee and the transferee was allowed to suitably alter the trawler B
so as to make it a tug. The Kerala High Court said that the terms of the
agreement showed that the right to exclusive possession and enjoyment of
the trawler had been transferred. The transfer was permanent and preparatory
to sale. Hence it amounted to transfer.

Neither of these cases deals with an agreement of hire of machinery in C
contradistinction to an agreement of hire purchase. When the machinery is
given on hire by the owner to the hirer on payment of hire charges, the
income derived by the owner is business income. The owner is also entitled
to depreciation on the machinery so hired out. The hirer, on the other hand,
who pays hire charges, is entitled to claim these as revenue expenditure. The
hirer has not acquired any new asset. A transaction of hire is, therefore, of D
baiiment of the machinery. There is no extinguishment of any right of the
owner in the machinery. There is merely a licence given to the hirer to use,
for a temporary period, the machinery so hired. In the case of MIS. Damodar
Valley Corporation v. The State of Bihar, AIR (1961) SC 440, this Court
examined the contract under which the machinery and equipment was supplied E
by the Corporation to the contractors. The question was whether it was a
mere contract of hiring or a sale or a hire purchase. The Court said (p.445 ):
"It is we Ii-settled that a mere con.tract of hiring, without more, is a species of
the contract of hiring, without more, it a species of the contract of bailment,
which does not create a title in the bailee. But the law of hire purchase has
t: undergone considerable development during the last half a century or more F
and has introduced a number of variations, thus leading to categories, and
it becomes a question of some nicety as to which category a particular
contract between the parties comes under." We need not dwell on che niceties
of a hire purchase contract between the parties of a hire purchase contract
since we are concerned only with contracts of hire simpliciter.
G
In the case of hire purchase agreements, the· department's Circular No.9
of 1943 dated 23rd of March, 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 H
376 SUPREME COURT REPORTS [1998] 2 S.C.R.

A periodical payments made by the hirer should, for tax purposes, be regarded
as made up of (I) consideration for hire to be allowed as a deduction in the
assessment and; (2) payment on account of purchase to be treated as capital
outlet, depreciation being allowed to the lessee on the initial value. In the
case, however, of hire of machinery, the owner is entitled to depreciation.

B In this connection , a reference may also be made to Mis. K.L. Johar
and Co. v. The Deputy Commercial Tax Officer, Coimbatore III AIR, (1965)
SC I 082 at p. I 090 where this Court, while examining a hire purchase agreement,
pointed out that such an agreement has two elements; (I) element of bailment,
and (2) element of sale in the sense that it contemplates an eventual sale. In
C 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. Income-tax Officer, Kottayam
D & Anr., AIR (1961) SC 609 at p. 612, in interpreting a fiscal statute, the Court
cannot proceed to make good the deficiencies if there be any. The Court must
interpret the statute as it stands and in case of doubt, in a manner favourable
to the tax-payer. In the present case, the language of Section 32A covers
leasing or finance companies which give the machinery on hire as in the
E present case.

In the premises, the appeals are dismissed with costs.

V.M. Appelas dismissed.

•