TMI Blog2006 (6) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The learned DR has pointed out that the aforesaid position is factually incorrect as the value of machinery has been increasing from year-to-year. On consideration of facts, we are of the view that it was necessary for the assessee to use machinery for efficient production of its goods - Without the existence of the machinery, the assessee might have worked as a cottage industry, working its processes manually. However, that was not the intent of the assessee when the undertaking was set up, as it bought old and new machinery, which at the end of the relevant previous year amounted to Rs. 88,59,423 in value terms. Thus, the assessee intended to use mechanized process and that is why it bought old machinery from Sanjay Ghodawat, HUF also. This view is strengthened further by the fact that the assessee had purchased and installed machinery of the value of Rs. 11,67,282 when the production was started on 24-6-1994. Coming to the satisfaction of the condition of the ratio of the old machinery to total machinery, we have two decisions of Hon'ble Bombay High Court in the matter. The decision of the Court in the case of ADDITIONAL COMMISSIONER OF INCOME-TAX VERSUS SUESSIN TEX ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction under section 80-IA, although it had complied with the conditions laid down in the Act for claiming such deduction. 2. The facts of the case for the assessment year 1997-98 are that the assessee was engaged in the business of manufacturing pan-masala and gutka. The assessee filed a return declaring total income of Rs. 92,76,592/- on November 28, 1997. The return was revised on November 27, 1999, declaring total income of Rs. 65,10,350/-. The return was revised for claiming deduction under section 80-IA. The Assessing Officer examined the claim of the assessee. It was found that the assessee-company was incorporated on November 4, 1983. It was also registered as a small scale industry. The assessee had purchased old machinery in the first year. However, the percentage of the cost of old machinery to the cost of total machinery became less than 20 per cent. in the assessment year 1996-97. In the year under consideration, the ratio was 7 per cent. As the aforesaid ratio was more than the prescribed ratio in the first year of production of the assessee, it was required to state why the aforesaid deduction may not be denied. The assessee relied on a number of cases to the effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and must continue to be satisfied in the whole of the period during which claim under the aforesaid section is made. However, conditions of that section, mentioned in clauses (iii) and (iv), can even be met subsequently. Thus, he rejected the claim of the assessee. 4. Before us, learned counsel for the assessee referred to statement of facts filed along with the appeal. Paragraph 4 of the statement is reproduced below for the sake of ready reference : Particulars Old machinery Total machinery % of old Before production 0 567580 0% On day of production i.e., 24-6-1994 599702 1167282 51.37% 31-3-1995 599702 1923781 31.17% 31-3-1996 599702 4685996 12.79% 31-3-1997 599702 8859423 7.00% 5. It was pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the provisions of sub-section (7) show that under this sub-section it has been provided that the provisions of section 84 have, in relation to the industrial undertaking to be applied to the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles and to the four succeeding assessment years. A plain reading of this provision leads to the conclusion that in respect of each of the assessment years in question viz., the assessment year 1964-65 and the three succeeding assessment years, it has to be examined whether the provisions of section 84, including the provisions of sub-section (2) thereof are complied with. According to Mr. Joshi, even on this basis it could not be said that the conditions prescribed by clause (ii) in sub-section (2) of section 84 were complied with as the year of formation being only one, namely the year in which the unit begins to manufacture or produce articles, the unit must be regarded as formed in the year and whether it was a new industrial unit would have to be considered at that stage and any subsequent change would not make any difference, whereas according to Ms. Visanji, in each of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstrued so as to advance the objective and not to frustrate it. Learned counsel relied on the decision of the hon'ble Madras High Court in the case of CIT v. Gopal Plastics P. Ltd. [1995] 215 ITR 136, a case decided under section 80J of the Act. The hon'ble court pointed out that if the condition of ratio of old machinery to the total machinery is not satisfied in the first year of formation of the industrial unit, even then, the assessee is entitled to claim deduction in a subsequent year in the remaining period if that ratio is satisfied in such subsequent year. Learned counsel also referred to discussion on pages 149 and 159 of the decision. The observations of the Supreme Court were reproduced on page 151 to the effect that If a provision for checking abuse is found to have resulted in nullifying the very purpose of its enactment and the Legislature intervenes, then it can be assumed that the Legislature, having been satisfied of the failure of the purpose for which the provision was inserted, proceeded to cure the defect by suitably amending the provision or removing it. We have no manner of doubt that section 80J(4)(ii) has indicated such conditions which must be fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not formed with the old machinery and in the alternative the condition regarding satisfaction of the aforesaid ratios should be examined from year-to-year. 11. As against the aforesaid, the learned Departmental representative objected to a totally new case made out by learned counsel that the undertaking was not formed with the old machinery. It was pointed out that such an issue was not taken before any of the lower authorities. Notwithstanding the aforesaid, it was further pointed out that the aforesaid assertion of learned counsel is factually incorrect as the value of the machinery installed by the assessee has increased from year-to-year, rather in a geo-metrical progression. Therefore, it was argued that no credence can be given to this argument of learned counsel. Coming to the main issue, it was pointed out by him that sub-section (2) of section 80-IA contemplates conditions which are required to be fulfilled before the deduction can be allowed. Condition No. 2 is that it is not formed by transfer to a new business machinery or plant previously used for any purpose. It was her case that the language of this condition clearly refers to the first year of operation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hinery, we have two decisions of the hon ble Bombay High Court in the matter. The decision of the court in the case of Addl. CIT v. Suessin Textile Ball Bearings Ltd. [1987] 163 ITR 582 (Bom) is in favour of the Revenue. Relevant portion of the judgment is extracted below (page 584) : We find that the question raised before us is, to a large extent, covered by the decision of a Division Bench of this court in CIT v. Suessin Textiles Ball Bearing and Products (P.) Ltd. [1979] 118 ITR 45. This decision was rendered on a claim made by the same asses see as the one before us under section 15C of the Indian Income-tax Act, 1922, in respect of the assessment year 1961-62. The Division Bench took the view that for the purposes of section 15C(2)(i) of the Indian Income-tax Act, 1922, it is not necessary that the building transferred to the newly started undertaking must have been previously used by the assessee himself in any other business and that a building earlier used for business by a stranger is included in the mischief contemplated in the said clause. It was further held that the lease taken by the assessee of a portion of the building and a portion of the estate for setting u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, the assessee was not entitled to partial exemption claimed by it. Such a judgment cannot be said to be merely an observation. This judgment was referred to in the case of Vintage Cards and Creations [1996] 59 ITD 563 (Pune) and the hon ble Tribunal came to the conclusion that language of conditions Nos. 1 and 2 are explicit in the sense that they have to be looked from the point of view of the first year of production as the language is written in past tense. However, conditions Nos. 3 and 4 are written in the present tense and, therefore, satisfaction thereof has to be seen from year-to-year. On combined reading of the two judgments of the hon ble Bombay High Court in the case of Suessin Textile and the hon ble Income-tax Appellate Tribunal, Pune Bench, in the case of Vintage Cards and Creations [1996] 59 ITD 563, it is clear that condition No. 2 has to be seen from the point of view of the first year of formation of the company. In any case, we are faced with a dilemma whether to follow the earlier judgment of the hon ble High Court or the later judgment of the hon ble High Court. As both of these judgments were given by Division Benches consisting of two hon ble judges, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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