The Commissioner Of Income Tax vs M/S Sraya Industries P. Ltd.
2010 Latest Caselaw 3513 Del

                                      REPORTABLE

*                    IN THE HIGH COURT OF DELHI AT NEW DELHI

                                   {ITR No. 21 of 1991}

          %                                  Judgment Delivered On: July 28 ,2010

THE COMMISSIONER OF INCOME TAX                                   . . . APPELLANT
.
                                THROUGH:            Ms. Sonia Mathur, Advocate

                                      VERSUS

M/S SRAYA INDUSTRIES P. LTD.                                     . .RESPONDENT

                                THROUGH:           Mr.Krishnan, Advocate
CORAM:-

         HON'BLE MR. JUSTICE A.K. SIKRI
         HON'BLE MS. JUSTICE REVA KHETRAPAL

         1.          Whether Reporters of Local newspapers may be allowed
                     to see the Judgment?
         2.          To be referred to the Reporter or not?
         3.          Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J. (ORAL)

1. The following question is referred by the Tribunal for the opinion of

this Court:-

"Whether on the facts and in the circumstances of the case, the Tribunal was right in law to held that the assessee is entitled to investment allowance u/s 32A subject to other conditions being satisfied?"

This question is referred in the application of the revenue made

under Section 256 (1) of the Act.

2. The matter relates to the claim of investment allowance on plant and

machinery used by the assessee. The assessee had claimed that it was

eligible for the deduction under Section 32A (2) (b) (iii) of the Income Tax

Act which, inter alia, provides for investment allowance in respect of

machinery or plant owned by the assessee and wholly being used for the

purpose of the business carried on by him in any industrial undertaking

ITR No. 21 of 1991 and for the purpose of business of construction and manufacture or

production of any article or thing not being an article or thing specified in

the list in the Eleventh Schedule. Item 1 of the Eleventh Schedule reads as

under:-

"Beer, wine and other alcoholic spirits"

3. The assessee is dealing both in industrial spirits as well as items like

Indian Made Foreign Liquor (IMFL), Country liquor etc. As per the details

furnished by the assessee, the Assessing Officer confirmed that the sale of

denatured spirit during the year amounted to Rs. 68,76,322/- only whereas

in respect of rectified spirit and country spirit, the sale amounted to

Rs.61,29630/- and Rs. 6592665/- respectively. The Assessing Officer was of

the view that since the assessee was manufacturing rectified spirit and

country spirit i.e. IMFL, its case was fully covered by item 1 of Eleventh

Schedule and on that basis he disallowed the claim of the assessee for

investment allowance. The CIT (A) sustained the order of the Assessing

Officer. However, the Income Tax Appellate Tribunal, in further appeal

preferred by the assessee accepted the case of the assessee and directed that

the assessee be allowed investment allowance.

4. At this stage, we may take note of the rival contentions being

advanced by the parties before the authorities below and the manner in

which these were considered by the CIT (A) as well as ITAT. The case of

the revenue was that the moment the assessee starts manufacturing alcohol

which is for human consumption entry one of Eleventh Schedule would be

attracted and it would disqualify the assessee from claiming the investment

allowance in terms of Section 32A of the Act. As pointed out above, this

contention was accepted by the Assessing Officer. The case of the assessee

ITR No. 21 of 1991 on the other hand was that mere production of IMFL would not debar the

assessee from claiming the investment allowance. In order to attract the

disability, it was also necessary to show that the said production of IMFL

was the main activity of the assessee. To put it otherwise, the assessee

relied upon sub Section 2A of Section 32A of the Act. Its submission was

that deduction under sub-section (1) shall not to be denied in case

machinery or plant installed and used „mainly‟ for the purpose of the

business of construction, manufacture or production of any article or thing

not being an article or thing mentioned in Eleventh Schedule, by reason

only that such machinery or plant is also used for the business or

construction manufacture or production of any article or thing specified in

the said list. Thereafter, the CIT (A) went a step further. It was held by it

that even the industrial spirit manufactured by the assessee would come

within the ambit of entry 1 and that was a reason that CIT (A) maintained

the order of the Assessing Officer. The Income Tax Appellate Tribunal, on

the other hand, was of the opinion that since the main purpose for which

the machinery and plant installed by the assessee was utilized for

manufacturing of industrial spirit and this aspect was not disputed, the

assessee would be entitled to the investment allowance.

5. We have already reproduced above entry one which mentions "beer,

wine and other alcoholic spirits". The first aspect that would require

determination would be as to whether the manufacturing of industrial

spirit would come with the ambit of aforesaid item.

The learned counsel for the assessee has argued that the words "other

alcoholic spirits" have to take colour from the preceding expression used in

the item namely "beer and wine". He submitted that "beer and wine" are

ITR No. 21 of 1991 meant for human consumption and, therefore, applying the maxim noscitur

a sociis, the expression "other alcoholic spirits" is to be interpreted. When

interpretation is given effect in this manner, it is only those alcoholic spirits

which are meant for the human consumption that would qualify to be

included in entry 1 of the 11th Schedule. To buttress this submission,

learned counsel relied upon the judgment of Punjab and Haryana High

Court in the case of Commissioner of Income-Tax Vs. Sangrur Vanaspati

Mills Ltd. 311 ITR 345.

6. We are in agreement with the aforesaid submissions of learned

counsel for the respondent. The assessee is manufacturing spirits as well as

IMFL spirits. The legislature, while adding entry 1 to Schedule 11th never

contemplated inclusion of industrial spirits. It is well known that industrial

spirits are mainly used for manufacturing purposes and are not meant for

human consumption. The intention cannot be to deny the investment

allowance when the machinery is used for said purpose. It is only when

the machinery is used for the alcohol which is consumed by the human

beings, the bar would be attracted. Reason presumably is that the

consumption of alcohol is not treated as good for health and, therefore, this

provision distinguishes grant of the investment allowance to such

industries which are manufacturing alcohol meant for human

consumption.

7. In Sangrur Vanaspati Mills Ltd. (supra), the Punjab and Haryana

High Court was concerned with the interpretation of word "soap"

mentioned in entry 4 of the 11th Schedule. Entire entry 4 is worded as

under:-

"4. Tooth paste, dental cream, tooth powder and soap..."

ITR No. 21 of 1991

8. The question which arose for our consideration in that case was as to

whether washing soap would be covered by the expression "soap"

occurring in entry 4. The High Court, going by the consideration, held that

that the word „soap‟ appears alongwith tooth paste, dental cream, tooth

powder, the intention was to include only that kind of soap which is meant

for human hygiene and, therefore, the expression "soap" in the concerned

provision would not include washing soap. The relevant discussion in the

said judgment is to the following effect:-

"We find substance in the contentions raised by counsel for the assessee as against the plea of counsel for the Revenue. The principle noscitur a sociis is well accepted principle for interpretation of entries in the taxing statute. Any commodity mentioned in any entry gets its colour from the commodities or things mentioned either before or after the particular item for the purpose of assigning the same a correct meaning. In the present case, the above principle is squarely applicable. In our view, the washing soap manufactured by the assessee will not fall under entry No.4 as it cannot be included in the term soap used in the entry alongwith other items mentioned therein, rather it fits in more under entry No.20 which stood deleted on April 1, 1982."

9. The second aspect which arises for consideration is what would be

the position in case the machinery is used for both in manufacture of

industrial spirits as well as IMFL, which is the case here. Section 32A

allows investment allowance where machinery or plant is used for the

purposes which are specified in sub Section 2 thereof. However, at the

same time, it also stipulates that where plant and machinery is used for the

purposes mentioned in the Schedule 11, such investment allowance would

not be admissible. In the present case, the plant and machinery is used for

manufacturing of IMFL which is one of the activities specified in item 1 of

Schedule 11th. At this juncture, one has to take note of sub Section 2A of

ITR No. 21 of 1991 Section 32A as it relaxes the bar contained in 11th Schedule to some extent.

It reads as under:-

"2A. The deduction under sub-section (1) shall not be denied in respect of any machinery or plant installed and used mainly 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, by reason only that such machinery or plant is also used for the purposes of business of construction, manufacture or production of any article or thing specified in the said list".

10. It is clear from the reading of the aforesaid provision that the

deduction admissible under sub Section (1) of Section 32A of the Act is not

to be denied in case plant and machinery is mainly used 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 11th Schedule. That

would mean that even if the machinery is partially used for manufacturing

of article or thing specified in the list in 11th Schedule, the investment

allowance shall still remain admissible and would not be denied if the

assessee is able to show that the said plant and machinery is primarily used

for the purposes specified in sub Section (2A) of Section 32A of the Act.

11. The judgment of Allahabad High Court in the Commissioner of

Income Tax & Anr. Vs Radico Khaitan Ltd., 274 ITR 354 would not be of

any assistance to the revenue. No doubt, the facts of that case suggest that

the assessee was engaged in manufacturing of industrial alcohol, IMFL,

country liquor, fertilizers etc. and the High Court held that the investment

allowance was not admissible in respect of the plant and machinery

installed for the purpose of manufacture of any of the items mentioned in

11th Schedule. However, at the same time, it suggests that it was limited to

the distillery unit which was dealing with the manufacturing of IMFL and

ITR No. 21 of 1991 country liquor only. The question with which we are concerned in the

present case did not arise for consideration and, therefore, was not

addressed at all namely; if the same machinery is used both for the purpose

of manufacturing of industrial alcohol as well as for manufacture of IMFL

and country liquor etc., whether on such plant or machinery, the

investment allowance would be admissible. When such a situation arises,

sub Section (2A) of Section 32A of the Act would be the governing

provision.

12. We are supported in our view from the Circular No. 229 dated 9th

August, 1977 issued by the CBDT explaining the amendment in Section 32A

of the Act by the Finance Act, 1977. The relevant portion of the said

Circular reads as under:-

"The Finance (No.2) Act, 1977, has substituted sub- clauses (ii) and(iii) of clause (b) of section 32A (2) referred to above by two new sub-clauses. Under the new provision s, investment allowance will be allowed in respect of new machinery or plant installed for the purposes of business of construction, manufacture or production of all articles or things, except certain articles or things of low priority specified in the list in the new Eleventh Schedule inserted in the Income-Tax Act by section 28 of the Finance (No.2) Act, 1977. The list of articles or things contained in the new Eleventh Schedule is giving in Annexure II* to this circular. The disqualification arising from the installation of machinery or plant for the purposes of business of manufacture or production of any article or thing specified in the list in the Eleventh Schedule will, however, not apply in respect of machinery or plant installed in small-scale industrial undertakings, and such machinery or plant will be eligible for investment allowance even though it used for purposes of business of manufacture or production of any article or thing specified in the said list.

13.2 Under new sub-section(8A) inserted in section 32A, the Central Government has been empowered to delete, by notification in the Official Gazette, any article or thing from the list of articles or things

ITR No. 21 of 1991 specified in the new Eleventh Schedule, if it considers necessary or expedient so to do.

13.3. Sometimes, a machinery or plant installed and used mainly for the purposes of business of construction, manufacture or production of any article or thing not specified in the list in the new Eleventh Schedule may have been partly used for the purposes of business of manufacture or production of any article or thing specified in the said list. As investment allowance is not intended to be denied in such cases, a new sub-section (2A) has been inserted in Section 32A to provide that investment allowance will not be denied by reason only that machinery or plant installed and used mainly for the purposes of business of construction, manufacture or production of any article or thing not specified in the list in the Eleventh Schedule is also used for the purposes of business of manufacture or production of any article or thing specified in the said list."

13. In view of the aforesaid, we are of the opinion that the CIT (A) was

not correct when he denied the investment allowance on the ground that

even when industrial spirit is manufactured by the assessee, the case would

come within the ambit of entry 1 of Schedule 11. The Income Tax

Appellate Tribunal has rightly held that if the plant and machinery is

mainly used for manufacturing of industrial spirit, the assessee would be

entitled to the allowance. The Tribunal, replying upon this interpretation,

allowed the investment allowance to the assessee by observing that the

assessee was mainly engaged in industrial spirit and it was not disputed.

However, there is no discussion in the entire judgment to show that how

the assessee was mainly engaged in manufacturing of industrial spirit.

Such findings have to be arrived at. The Assessing Officer had not dealt

with this aspect. The CIT (A) also refused to deal with this aspect. Though,

detailed arguments were advanced by the assessee in support of its

submission that it was mainly manufacturing industrial spirit.

ITR No. 21 of 1991

14. In any case, we also find from the order of the Tribunal that the

Tribunal had sent back the case to the Assessing Officer with the direction

to give the investment allowance to the assessee "subject to other

conditions being satisfied" and to determine the admissible claim under

Section 32A in respect of plant and machinery installed by the assessee. In

such circumstances, while remitting back the case to the Assessing Officer,

the Tribunal should have left it for the Assessing Officer to determine as to

whether the plant and machinery is mainly used for manufacturing of

industrial spirit or not. However, it may not be necessary to give this

direction, inasmuch as, we are informed that after the case was remanded

back to the Assessing Officer, the Assessing Officer has gone into this

exercise and has passed afresh assessment order. We have given a copy of

that order and perusal thereof would demonstrate that the Assessing

Officer has specifically stated that the main activity of the assessee is to

manufacture industrial spirit which is also known as ethyl alcohol and

rectified spirit. Thus, when the Assessing Officer, after examining the

matter, has arrived at the conclusion that the main activity of the assessee is

manufacturing of industrial spirit, it is clear that the assessee would be

entitled to the investment allowance. On that basis, the Assessing Officer

has also worked out investment allowance afresh to which the assessee is

entitled to.

15. Accordingly, we answer the reference in affirmative i.e. in favour of

the assessee and against the revenue.

(A.K. SIKRI) JUDGE

(REVA KHETRAPAL) JUDGE JULY 28, 2010/skb

ITR No. 21 of 1991