V.V.S. Rao

In this Referred Case the following two questions have been referred for the opinion of this Court by the Income Tax Appellate Tribunal, under Section 256(1) of the Income Tax Act, 1961 (the Act).

1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the assessee, who undertook job work, was entitled to investment allowance u/s.32A of the Income-tax Act?

2. Whether, on the facts and in the circumstances of the case, the ITAT was correct in law in holding that the assessee, who undertook job work by rendering services to others instead of actually manufacturing or producing any article or thing, was entitled to investment allowance under section 32A of the Income-tax Act?

The two questions can be appreciated by making a brief reference to the factual background of the matter. The respondent (assessee) is in the business of manufacturing forging products. They also undertake job work from Republic Forge and other companies. For the assessment years 1983-84 and 1984-85 in their returns of income, they claimed investment allowance under Section 32A of the Act. By an order dated 31.3.1986, the Income Tax Officer disallowed the investment allowance on the ground that they are not manufacturing any products and that they are engaging only in job works. In their appeal before the Commissioner of Income Tax (Appeals) the assessee was successful. The appellate authority relied on the decision of the Madras High Court in CIT v Perfect Liners (1983) 142 ITR 654 (Mad).The appeal was allowed observing that Section 32A of the Act does not confine the benefit only to the manufacturers. The Revenue was unsuccessful in their appeal before the Tribunal. The learned Tribunal relied on the case decided by the Special Bench and dismissed the appeals. Being aggrieved the Revenue sought reference of two questions, noticed hereinabove.

We have heard the Standing Counsel for Income-tax who submits that Section 32A(2)(ii) and (iii) of the Act contemplate that the investment allowance for the purpose of business of manufacture or production and the claim for job works cannot be allowed. Section 32A(1) of the Act with its two provisos and explanation as well as sub-section (2) read as under.

32A.Investment allowance (1) 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 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 :

Provided that in respect of a ship or an aircraft or machinery or plant specified in sub-section (8B), this sub-section shall have effect as if for the words “twenty-five per cent”, the words “twenty per cent” had been substituted :

Provided further that no deduction shall be allowed under this section in respect of—

(a)any machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest house ;

(b)any office appliances or road transport vehicles ;

(c)any ship, machinery or plant in respect of which the deduction by way of development rebate is allowable under Section 33 ; and

(d)any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year.

Explanation.—For the purposes of this sub-section, “actual cost” means the actual cost of the ship, aircraft, machinery or plant to the assessee as reduced by that part of such cost which has been met out of the amount released to the assessee under sub-section (6) of Section 32AB

(2) The ship or aircraft or machinery or plant referred to in sub-section (1) shall be the following, namely:—

(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,—

(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

(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 :

Provided that nothing contained in clauses (a) and (b) shall apply in relation to,—

(i)a new ship or new aircraft acquired, or

(ii)any new machinery or plant installed, after the 31st day of March, 1987 but before the 1st day of April, 1988, unless such ship or aircraft is acquired or such machinery or plant is installed in the circumstances specified in clause (a) of sub-section (8b) and the assessee furnishes evidence to the satisfaction of the Assessing Officer as specified in that clause ;

(c)any new machinery or plant installed after the 31st day of March, 1983, but before the 1st day of April, 1987], for the purposes of business of repairs to ocean-going vessels or other powered craft if the business is carried on by an Indian company and the business so carried on is for the time being approved for the purposes of this clause by the Central Government.

(Explanation is omitted as not relevant.)

As per Section 32A(1) of the Act, an assessee shall be allowed the deduction of a sum by way of investment allowance equal to 25% of the actual cost of a ship or aircraft or machinery or plant specified in sub-section (2). The second proviso enumerates four aspects in respect of which no deduction shall be allowed. These are: when the machinery or plant is installed in residential accommodation or guest house, in any office appliances or road transport vehicles, any ship or machinery in respect of which the deduction by way of development rebate is allowable under Section 33 of the Act, and any machinery or plant, the whole of the actual cost of which is allowed as a deduction in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year. Though sub-section (1) of Section 32A of the Act contemplates that the investment allowance in respect of the machinery or plant owned by an assessee wholly used for the purpose of business, it is subject to sub-section (2). Insofar as a small scale industrial undertaking is concerned, machinery or plant ought to have been used for the purpose of business or manufacture or production. Same is the case with any other industrial undertaking. If the legislation intended to deny investment allowance in respect of machinery or plant used for the job work by an assessee the same would have been found place in special proviso to sub-section (1) of Section 32A of the Act. Though Parliament took abundant care to exclude the four aspects in respect of which investment allowance cannot be claimed, the job work is absent therein. Therefore the plea cannot be accepted.

The above view is also supported by the decision of Madras High Court in Perfect Liners. It was a case involving the question whether an assessee engaged in the business of purchasing rough castings and supplying the same to the manufacturers of pump-sets, tractors, etc., after machining and polishing them in its factory, was entitled to higher development rebate under Section 33(1)(b)(B)(i) of the Act. Following the decision in CIT v M.R. Gopal (1965) 58 ITR 598 (Mad) Madras High Court held that the word “manufacture” is to be understood in wider sense and even if the assessee buys rough castings and sells them after polishing and machining, there is an element of manufacture involved.

In CIT v J.B. Kharwar & Sons (1987) 163 ITR 394 (Guj)Gujarat High Court dealing with a claim for relief under Section 80J of the Act held that an assessee doing the job work of process of dying and printing grey cloth would also be entitled for the relief thereunder as it would amount to manufacture. The relevant observations are as follows.

In Black's Law Dictionary, the meaning given to the word "manufacture" is the process or operation of making wares or any material produced by hand, by machinery or by other agency; anything made from raw materials by the hand, by machinery or by art. It also states that the production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine, would be "manufacture". When the assessee subjects grey cloth to the process of dyeing and printing, it makes or produces distinct article having a distinct use as distinguished from the grey cloth though grey cloth is still subsisting. As a result of the process to which grey cloth is subjected to, there is transformation of grey cloth into a new commodity commercially known as a distinct and separate commodity having its own character, use and name. Transformation of grey cloth to the extent that ir becomes a commercially different commodity is sufficient to hold that there is manufacture or production of article within the meaning of clause (iii) of sub-section (4) of section 80J of the Act. In our opinion, applying the test laid down by the Supreme Court in Empire Industries Limited, AIR 1986 SC 662; [1985] 20 ELT 179 and this court in Ajay Printery Private Limited [1965] 58 ITR 811 and keeping in mind the dictionary meaning of the word "manufacture", we have no hesitation in holding that when assessee subjects grey cloth, whether belonging to itself or its customers, to the process of dyeing and printing, it manufactures or produces an article which is distinct from grey cloth which is used as a raw material. It is immaterial whether the grey cloth which is subjected to process of dyeing and printing belongs to the assessee or anyone else. The activity which the assessee carries on is manufacturing activity irrespective of the fact whether the grey cloth belongs to it or to its customers.

Following the reasoning of Gujarat High Court in J.B. Kharwar,we answer the questions 1 and 2 in the affirmative against the Revenue and in favour of the assessee.

The Referred Case shall stand disposed of accordingly.