Commissioner of Income-tax Vs. Mayur Laminators - Court Judgment

1. The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated March 10, 1983, in respect of the assessment years 1979-80 and 1980-81 :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that even if used and old machinery is purchased from the open market for the formation of an industrial undertaking it will not be a disqualification under Section 80J(4)(ii) of the Income-tax Act, 1961, for the purposes of deduction under Section 80J of the Act, 1961 ?'

2. The brief facts of the case are that the assessee is a registered firm and is a manufacturer of packing material particularly in bags of hessian cloth and D. W. tarpaulin mixed with bitumen, rayons, etc. During the course of assessment, it was found by the Income-tax Officer that the deduction which has been claimed under Section 80J(4) of the Income-tax Act, 1961, is not available to the assessee since the difference of the total cost of machinery is Rs. 1,62,275 and the old machinery for Rs. 57,066 have been purchased which exceeded the 20 per cent. of the limit prescribed under this section. It was also found by the Income-tax Officer that there should have been more than ten workers in the manufacturing process which condition is also not fulfilled as from the wage register it was found that during the month of January, 1978, to April, 1978, the number of workers employed on manufacturing process on all the working days was not 10 or more than 10. On both the points, the assessee was held not entitled to deduction under Section 80J of the Act.

3. In appeal before the Appellate Assistant Commissioner of Income-tax, it was found that in accordance with the Explanation appended to Sub-section (4) of Section 80J, it has been provided that any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose. In the present case, it was found that the machinery and plant have been used previously in India and, therefore, it has to be regarded as machinery and plant previously used and in accordance with the conditions laid down, since the percentage of the old machinery and plant used in the business exceeded 20 per cent., the assessee was not entitled for the relief. On the point of 10 or more than 10 workers, the Appellate Assistant Commissioner found that the average employment of workers per day, works out to 11.38 per cent. which shows that the requirements were substantially complied with and it was only on a few days, during the entire period of eight months that the number of workers was less than ten. On that basis, it was observed that the conditions of Section 80J(4)(iv) have been complied with.

4. Against this order of the Appellate Assistant Commissioner, the assessee challenged the matter before the Income-tax Appellate Tribunal and it was submitted that the old machinery were purchased from the open market and never formed part of the assessee's business before the commencement of the undertaking. The provisions of Clause (ii) to Subsection (4) of Section 80J, therefore, were not applicable. The Income-tax Appellate Tribunal came to the conclusion that the old Section 15C corresponds to Section 80J of the Act of 1961. The Revenue has to prove that the assessee transferred any machinery or plant of its old business to new business. The Tribunal also came to the conclusion that the Explanation 1 lays down that for the purposes of Clause (ii) to Sub-section (4) of Section 80J, any machinery or plant which was used outside India by the assessee is regarded as machinery or plant not previously used for the said purpose. Explanation 1 was interpreted to mean that if old machinery was brought to India from a foreign country and was not used by the assessee in a foreign country then that will not be regarded as machinery previously used for any purpose. On this analogy, if such machinery is imported to India and cannot be regarded as machinery previously used for any purpose, then on that basis if imported machinery was not used by the assessee in the foreign country then the machinery purchased from the open market which was not previously used by the assessee can be regarded as machinery, not previously used for any purpose. The aim of Section 80) was considered to promote the industrial growth and the contention of the assessee was allowed.

5. Learned counsel for the Revenue has submitted that the restrictions which have been placed by Sub-section (4) of Section 80J have to be considered on the basis of language used therein for the purpose of giving any deduction under this section. It is submitted that so far as Clause (i) is concerned, it has contemplated the forming of an undertaking by splitting up or the reconstruction of a business already in existence. It was not a case before the authority below and it was under Clause (ii) of Subsection (4) that it should not be formed as an industrial undertaking by the transfer to a new business of machinery or plant previously used for any purpose. Sub-clause (ii) of Sub-section (4) of Section 80J has been explained under Explanations 1 and 2 and since the assessee is not fulfilling the conditions of Clause (ii) of Sub-section (4) of Section 80J as explained in the Explanation, the assessee is not entitled to deduction.

6. We have considered over the matter. The provisions of Section 80J(4), Clause (ii), read as under :

'This section applies to any industrial undertaking which fulfils all the following conditions, namely :--....

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.'

7. Explanations 1 and 2 read thus :

Explanation 1.--For the purposes of Clause (ii) of this Sub-section, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled,namely : --

(a) such machinery or plant was not, at any time, previous to the date of the installation by the assessee, used in India ;

(b) such machinery or plant is imported into India from anycountry outside India ; and

(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the Indian Income-tax Act, 1922 (11 of 1922), or this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.

Explanation 2.--Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery orplant or part so transferred does not exceed twenty per cent. of the total value of the machinery or plant used in the business, then, for the purposes of Clause (ii) of this Sub-section, the condition specified therein shall be deemed to have been complied with and the total value of the machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking.'

8. From the bare perusal of the Explanations, it is evident that Explanation 1 refers to use of machinery by any person other than the assessee outside India. Clause (a) of the Explanation mentions that such machinery or plant was not, at any time, previous to the date of the installation by the assessee used in India and Clause (b) mentions that such machinery or plant is imported into India from any country outside India. This section contemplates that the machinery might have been used outside India, but has not been put to use in India before it was imported into India on the date of installation by the assessee. Explanation 2 refers to another condition, namely, that machinery or plant referred to in Clause (ii) of subsection (4) would be entitled to deduction if the value of the machinery or plant or parts transferred does not exceed 20 per cent. of the total value of machinery. So far as Explanation 2 is concerned, it is only on the interpretation of Explanation 1 that we have to consider as to whether the interpretation which was placed by the Income-tax Tribunal is correct or not.

9. Under Explanation 1, the machinery which has been used outside India is eligible for deduction if it was not used in India before installation by the assessee and such old plant or machinery has been imported from outside the country. The view which the Income-tax Tribunal has taken is not in accordance with law. Clause (a) or (b) does not contemplate that the old machinery brought in India from the foreign country would be used by the assessee in the foreign country and then it will not be regarded as machinery previously used for any purpose. What is contemplated by Clauses (a) and (b) of Explanation 1 is that the said machinery could have been used for any purpose by any person other than the assessee outside India. If the said machinery is used in India by the assessee or has been put to use before installation by any other person as in the present case old machinery which were imported from outside India were used in India, it cannot be said that the said machinery was not used in India or was not put to use before installation. Machinery installed in a new industrial undertaking should not have been previously used in India in connection with any business. This court in KanhiyalalRameshwar Das v. CIT has taken the view that under Explanation 2, Section 80J(4), all old and used machinery irrespective of as to who has used such machinery previously and from which source it was acquired is not entitled for deduction. The words 'by the assessee himself' cannot be read after the word 'purpose' in the said section.

10. Circular No. 40, dated December 3, 1962, of the Central Board of Direct Taxes has provided that machinery or plant should not have been used in India previously at any time or for any purpose and it should not have also been previously used abroad at any time for any purpose by a person assessed in India, the Explanation added by the Finance Act, 1975, has given statutory force to the circular with the additional condition that no deduction on account of depreciation in respect of such machinery or plant should have been allowed or allowable in the computation of total income of any person for any period prior to the installation of the machinery or plant by the assessee. This condition has also to be proved by the assessee and, therefore, the analogy that the Tribunal has drawn that the imported old plant and machinery if not used by the assessee earlier before installation is entitled for deduction is not correct.

11. The burden is on the assessee when a deduction is claimed by him to prove that he is entitled to the said deduction. The object of Section 80J may be for industrial growth, but the relief can be given only when the assessee falls within the four corners of law. On an interpretation which is not supported by law, the scope of this section cannot be enlarged. The assessee cannot be entitled to the relief in accordance with this section and if the assessee does not fall within the purview of the exemption, then for the purpose of beneficent legislation, the extended meaning cannot be given. In these circumstances, we are of the view that the assessee has failed to prove that the conditions which have been contemplated under Clauses (a) and (b) of Explanations 1 and 2 of Clause (4) of Section 80) has been complied with. Therefore, the Tribunal was not justified in holding that if used and old machinery is purchased from the open market for the formation of an industrial undertaking it will not be a disqualification under Section 80J(4)(ii) of the Income-tax Act, 1961, for the purpose of deduction under Section 80J of the Act.

12. Consequently, the reference is accordingly answered in favour of the Revenue and against the assessee. No order as to costs.