The Insight Diagnost... v. The Deputy Commissio..., Bombay High Court, Judgment, Law, casemine.com

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Case Number

Income Tax Appeal No. 247 of 2001

Judges

S.H Kapadia
J.P Devadhar, JJ.

Acts

INCOME TAX ACT
INDUSTRIAL DISPUTES ACT
section 32A(2)(b)(iii).

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Smart Summary

Factual and Procedural Background

The assessee is a company incorporated on 31.1.1989 to run a Diagnostic Centre in Mumbai. For the accounting year ending 31.3.1990 (assessment year 1990-1991) the assessee filed a return showing a loss of Rs. 44.90 lakhs. During that year the assessee purchased a C.T. Scan Machine at a cost of Rs. 83.89 lakhs and claimed investment allowance under section 32A of the Income Tax Act at the rate of 20% (Rs. 16.77 lakhs), after debiting the reserve under section 32A(4).

The assessment under section 143(3) dated 24.4.1992 allowed carry forward of unabsorbed depreciation (Rs. 26.90 lakhs) but disallowed the claim for investment allowance. The Commissioner (Appeals) reversed the assessing officer and directed allowance of the investment allowance, taking the view that the Diagnostic Centre was a business and that the data obtained from the C.T. Scan Machine amounted to manufacture/production of articles or things. The Department appealed to the Tribunal, which held that the Diagnostic Centre was not an Industrial Undertaking engaged in manufacture and allowed the appeal (i.e., disallowed the allowance). The assessee appealed to the High Court under section 260A of the Income Tax Act, raising three specific questions concerning entitlement to the investment allowance.

Legal Issues Presented

Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the appellant was not entitled to deduction of investment allowance of Rs. 16,77,837/- on the C.T. Scan Machine installed and used by the appellant during the year under consideration?
Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the diagnostic centre run by the appellant was not an industrial undertaking?
Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that generating reports from C.T. Scan Machine did not amount to manufacture or production of article or thing?

Arguments of the Parties

Appellant's Arguments

The activity of the assessee was a business activity (running a Diagnostic Centre).
The C.T. Scan Machine was used to X-ray internal parts of the human body and to locate diseases, and thus the Machine resulted in manufacturing or producing articles/things; taking the photographs was the main activity of the Machine.
The assessee relied on several High Court judgments supporting entitlement to investment allowance on similar machinery.
The assessee was recognised as a Small Scale Industrial Undertaking and, on that basis, contended entitlement to the deduction.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income Tax v. Shaan Finance Pvt. Ltd. . 231 I.T.R 308	Section 32A(1) pre-conditions: machinery/plant must be owned by the assessee, wholly used for business, and be new machinery installed in an Industrial Undertaking for the purpose of manufacture or production of articles or things.	The court relied on this authority to state the statutory pre-conditions and concluded that the requirement that the machinery be installed in an Industrial Undertaking for manufacture/production was not satisfied for the C.T. Scan Machine.
Natvarlal Ambalal Dave v. Commissioner of Income Tax	The expression "Industrial Undertaking" must be read in the context of the Income Tax Act to mean an activity primarily concerned with production of any article or thing.	The court invoked this principle to interpret "Industrial Undertaking" for the purposes of section 32A and to support the conclusion that a Diagnostic Centre is not such an undertaking when the activity is not production of articles/things.
Fariyas Hotels Pvt. Ltd. v. Commissioner Of Income-Tax . 211 I.T.R 390.	Test to attract section 32A: investment allowance is admissible only in respect of plant or machinery specified in section 32A(2); allowance is available only for machinery used for the purpose of manufacture of articles or things and not for machinery installed for business purposes not falling within section 32A(2).	The court applied this test and held that reports produced by the C.T. Scan Machine did not amount to manufacture or production of an article or thing; therefore the machinery did not meet the condition under section 32A(2).
Commissioner of Income Tax, Vidarbha, Nagpur v. Dr. P.K Thamaskar (H.U.F), Nagpur . Income Tax Reference No. 155 of 1984, decided on 20.10.1992	Held that X-ray films cannot be treated as manufactured articles or things under section 32A(2)(b)(iii); the exposed film is merely a medium for diagnosing ailments, has no independent commercial value, and the fee charged is for professional services rather than for the film as an article.	The court regarded this decision as applicable by analogy: the reports/films produced by diagnostic machinery (such as X-ray or C.T. Scan) are not manufactured articles and the charges are for services rendered, supporting denial of investment allowance.

Court's Reasoning and Analysis

The court examined the statutory prerequisites in section 32A. It identified three key conditions under section 32A(1): (i) the machinery or plant must be owned by the assessee; (ii) it must be wholly used for the purpose of the assessee's business; and (iii) it must be new machinery or plant installed in an Industrial Undertaking for the purpose of manufacture or production of articles or things.

The court accepted the Tribunal's factual finding that the C.T. Scan Machine was installed in a Diagnostic Centre which was not an Industrial Undertaking for the purpose of manufacture. The court emphasized that the term "Industrial Undertaking" must be interpreted in the context of the Income Tax Act (not in the context of the Industrial Disputes Act) and therefore connotes an activity primarily concerned with production of articles or things. Applying that interpretation, and relying on authorities (including Natvarlal Ambalal Dave and the test stated in Fariyas Hotels), the court concluded that producing reports or images from diagnostic machinery does not amount to manufacture or production of an article or thing contemplated by section 32A(2).

The court drew a direct analogy to the holding in Commissioner of Income Tax, Vidarbha v. Dr. P.K. Thamaskar that X-ray films are not manufactured articles of commercial value but rather media for diagnostic service; the fee charged is for the professional service. Applying this reasoning to the present case, the court held that the outputs of the C.T. Scan Machine (reports/images) were similarly not manufactured articles and that the machine was ancillary to the Diagnostic Centre's service activity.

Because the statutory pre-condition that the machinery be installed in an Industrial Undertaking engaged in manufacture/production was not satisfied, the court concluded that the assessee was not entitled to claim investment allowance under section 32A.

Holding and Implications

Holding: The assessee's appeal is dismissed. The court answered the three questions raised in the appeal in the affirmative (i.e., in favour of the Department and against the assessee).

Implications: The direct consequence is that the assessee is not entitled to the claimed investment allowance of Rs. 16,77,837/- on the C.T. Scan Machine for the year under consideration. The court endorsed the Tribunal's factual finding that the Diagnostic Centre is not an Industrial Undertaking for the purposes of section 32A, and applied existing authority to hold that the outputs of diagnostic machinery do not constitute manufacture or production of an article or thing. The court made no order as to costs. The opinion does not purport to establish a new legal principle beyond applying established tests and precedents to the facts of this case.

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The Insight Diagnostic And Oncological Research Institute Pvt. Ltd. v. The Deputy Commissioner Of Income Tax, Special Range-I, Kolhapur

S.H Kapadia, J.:— The short question which arises for determination in this appeal is: whether the assessee was entitled to deduction of investment allowance on C.T Scan Machine installed and used by the assessee during the Accounting Year ending on 31.3.1990 relevant to the Assessment Year 1990-1991.

FACTS:

2. Assessee is a Company incorporated on 31.1.1989 Its main object was to run a Diagnostic Centre in Mumbai. The assessee filed its return of income for the year ending 31.3.1990 returning a loss of Rs. 44.90 lakhs. During the year, the assessee had bought C.T Scan Machine at the cost of Rs. 83.89 lakhs. In its computation of income, the assessee had claimed a deduction of investment allowance under section 32A of the Act at the rate of 20% amounting to Rs. 16.77 lakhs on the aforestated Machine after debiting the reserve as per section 32A(4) of the Act. The assessment was completed under section 143(3) of the Act vide order dated 24.4.1992 determining the loss on account of unabsorbed depreciation at Rs. 26.90 lakhs which was allowed to be carried forward to the subsequent years but disallowing the claim of investment allowance under section 32A of the Act. Being aggrieved by the Order of Assessment, the matter was carried in appeal to the Commissioner (Appeals) who took the view that the Diagnostic Centre was a business and the data obtained from C.T Scan Machine amounted to manufacture/production of articles or things.

3. Accordingly, the Commissioner (Appeals) directed A.O to allow the investment allowance to the assessee. Being aggrieved, the Department carried the matter in appeal to the Tribunal which took the view that the assessee was not an Industrial Undertaking engaged in manufacture of any article or thing. Accordingly, the Tribunal allowed the appeal. Being aggrieved, the assessee has come by way of appeal under section 260A of the Income Tax Act with the following questions:—

“(a) Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the appellant was not entitled to deduction of investment allowance of Rs. 16,77,837/- on the C.T Scan Machine installed and used by the appellant during the year under consideration?

(b) Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the diagnostic centre run by the appellant was not in industrial undertaking?

(c) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that generating reports from C.T Scan Machine did not amount to manufacture or production of article or thing?”

ARGUMENTS:

4. Mr. Pramod Vaidya, learned Advocate for the assessee submitted that the activity of the assessee was a business activity. That, the C.T Scan Machine was used to X-ray internal parts of the human body and to locate the diseases and, therefore, the C.T Scan Machine resulted in manufacturing or producing articles/things. That, taking the photographs was the main activity of the Machine. He relied upon several Judgments of the various High Courts in support of his contention that the assessee was entitled to deduction of investment allowance of Rs. 16.77 lakhs on C.T Scan Machine installed and used by the assessee during the year in question. He contended that the assessee was recognised as a Small Scale Industrial Undertaking and in the circumstances it was entitled to deduction of investment allowance.

FINDINGS:

5. Investment allowance is granted under section 32a. sub-section (1) requires that the machinery or plant should be owned by the assessee and it should be wholly used for the purpose of the business carried on by the assessee and that such machinery or plant should be the machinery or plant specified in sub-section (2) i.e it should be new machinery or plant installed in an Industrial Undertaking for the purposes of the business of manufacture or production of articles or things (see Commissioner of Income Tax v. Shaan Finance Pvt. Ltd. . 231 I.T.R 308. The question which arises for determination in this appeal is: whether the above pre-conditions to attract section 32A are satisfied in this case? On facts, the Tribunal has found that the C.T Scan Machine has been installed in a Diagnostic Centre which is not an Industrial Undertaking and, therefore, the assessee was not entitled to deduction of investment allowance. It has been argued on behalf of the assessee that the Diagnostic Centre is the business activity and, therefore, it is an Industrial Undertaking. Hence, assessee was entitled to claim deduction Under section 32A of the Act. We do not find any merit in this argument. Firstly, as stated above, sub-section (1) of section 32a requires that the plant or machinery should be owned by the assessee; that it should be used for the purpose of business carried on by the assessee and that such plant or machinery should be installed in an Industrial Undertaking for the purpose of business of manufacture or production of an article or thing. It is this last pre-condition which is not fulfilled in this case. The C.T Scan Machine is installed in a Diagnostic Centre. That Diagnostic Centre is not an Industrial Undertaking for the purpose of business of manufacture. In this connection, one must read the expression “Industrial Undertaking” in the context of Income Tax Act and not in the context of the Industrial Disputes Act and, if so read, it is clear that the activity should be of production of any article or thing and any activity which primarily concerns production of any article or thing would fall in the category of Industrial Undertaking [see Natvarlal Ambalal Dave v. Commissioner of Income Tax. In the present case, the Tribunal has found on facts that the C.T Scan Machine was a part of Diagnostic Centre. That, the C.T Scan Machine played an ancillary role in the working of the Diagnostic Centre. We do not see any reason to interfere with this finding of fact. The important point, however, which we would like to emphasize is that under section 32A, the machinery or plant should be installed in an Industrial Undertaking for the purpose of business of manufacture or production of articles/things. In the present case, since C.T Scan Machine is installed in a Diagnostic Centre, one of the pre-conditions to attract section 32A is not satisfied. Hence, the assessee was not entitled to deduction of investment allowance on C.T Scan Machine installed and used by the assessee during the year under consideration. In the case of Fariyas Hotels Pvt. Ltd. v. Commissioner Of Income-Tax. . 211 I.T.R 390., the Bombay High Court has laid down a test to attract section 32A of the Income Tax Act. In that Judgment, it has been held that deduction on account of investment allowance is admissible only in respect of plant or machinery specified in section 32A(2). That, investment allowance is available only in respect of machinery which is used for the purpose of manufacture of articles or things and it is not available in respect of machinery installed for the purpose of business of the assessee which does not fall within the specification contained in section 32A(2). In the present case the reports of patients coming out from C.T Scan Machine did not amount to manufacture or production of article or thing and, therefore, one of the basic tests laid down in 231 I.T.R 308 is not satisfied. In the case of Commissioner of Income Tax, Vidarbha, Nagpur v. Dr. P.K Thamaskar (H.U.F), Nagpur . Income Tax Reference No. 155 of 1984, decided on 20.10.1992, vide it has been held that X-ray films cannot be treated as manufactured articles or things as contemplated by section 32A(2)(b)(iii). That, the exposed film is not an article or thing having any commercial value. That, it is only a media for the purposes of knowing the ailments in the human body. That, the fees charged is not the price of the exposed film but it is charged for services rendered. That, essentially, the price paid was for rendering professional service. In the circumstances, it was held by the Bombay High Court that X-ray films cannot be treated as a manufactured article or thing under section 32A(2)(b)(iii). In our view, the said Judgment applies to the facts of the present case. Secondly, the C.T Scan Machine was installed in a Diagnostic Centre run by the assessee which Centre was not an Industrial Undertaking and, therefore, the test laid down by the Bombay High Court in the case of Fariyas Hotels Pvt. Ltd. (supra) is not satisfied.

6. Accordingly, we answer all the above three questions in the affirmative i.e in favour of the Department and against the assessee.

7. Accordingly, assessee's appeal stands dismissed with no order as to costs.

The Insight Diagnost... v. The Deputy Commissio...