2012 (5) TMI 281 - HC - Income Tax

Investment allowance u/s 32A - Whether article or thing, viz., alcohol including rectified spirit and denatured spirit manufactured by the assessee-company do not come under the ambit of Eleventh Schedule of the I.T.Act, 1961? - held that - Respectfully following the reasoning in Sangrur Vanaspati Mills and Sraya Industries (2006 (11) TMI 197 (HC)) we hold that the assessee cannot be denied investment allowance. - Decided in favor of assessee.

Summary

Issues Involved:
1. Whether the alcohol including rectified spirit and denatured spirit manufactured by the assessee-company falls under the Eleventh Schedule of the Income Tax Act, 1961.
2. Whether the assessee-company is entitled to investment allowance under Section 32A of the Income Tax Act, 1961 for the assessment years 1985-86, 1986-87, and 1989-90, and also deduction under Section 32AB for the assessment year 1989-90.

Detailed Analysis:

Issue 1: Applicability of the Eleventh Schedule to Alcoholic Spirits
The central question was whether the manufactured alcohol, including rectified spirit and denatured spirit, falls under the Eleventh Schedule of the Income Tax Act, 1961. The ITAT had held that these products do not fall under the Eleventh Schedule, which disqualifies certain items from investment allowance. The Revenue argued that any kind of alcoholic spirits, including non-potable spirits, should be included under item 1 of the Eleventh Schedule, relying on the Finance Minister's speech and definitions in the Andhra Pradesh Excise Act, 1968, and the Andhra Pradesh Rectified Spirit Rules, 1971.

The Court applied principles of statutory interpretation, including Noscitur a Sociis and ejusdem generis, to construe the term "other alcoholic spirits" in the context of "beer" and "wine," which are potable. The Court concluded that the term "other alcoholic spirits" should be limited to those fit for human consumption, excluding industrial alcohol and rectified spirit. This interpretation was supported by the Finance Minister's speech and a CBDT circular clarifying that industrial alcohol is not covered by item 1 of the Eleventh Schedule.

Issue 2: Entitlement to Investment Allowance and Deduction Under Section 32A and 32AB
The assessee claimed investment allowance for machinery used in manufacturing rectified spirit, which was initially allowed by the Income Tax Officer but later revised by the Commissioner of Income Tax under Section 263 of the Act. The ITAT ruled in favor of the assessee, stating that rectified spirit and denatured spirit do not fall within the scope of item 1 of the Eleventh Schedule. The Court upheld this view, noting that the primary activity of the assessee was manufacturing non-potable rectified spirit and denatured spirit, and the incidental production of arrack under government compulsion did not disqualify them from claiming investment allowance.

The Court also referred to Section 32A(2A) of the Act, which allows investment allowance for machinery mainly used for manufacturing non-specified items, even if incidentally used for specified items. Thus, the assessee was entitled to investment allowance for machinery used in manufacturing rectified spirit, despite occasional production of arrack.

Conclusion:
The Court answered both questions in favor of the assessee and against the Revenue, affirming that the manufactured rectified spirit and denatured spirit do not fall under the Eleventh Schedule and that the assessee is entitled to investment allowance and deduction under Sections 32A and 32AB of the Income Tax Act for the relevant assessment years. The referred cases were disposed of accordingly, with no order as to costs.