TMI Blog1998 (3) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... to the entitlement of the assessees to investment allowance under section 32A of the Income-tax Act, 1961. For the sake of convenience, we are setting out the question as framed in Civil Appeals Nos. 7077-78 of 1993. The question is as follows (see [1993] 199 ITR 409, 411): "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in respect of the machinery owned by the assessee, but leased to third parties and used by them for the manufacture of article or thing, investment allowance was allowable under section 32A ?" The assessees are not themselves manufacturers of any article or thing. The machinery, however, which is owned by them is hired to different persons for the purpose of their business of manufacturing. In respect of these machinery, the assessees claimed investment allowance under section 32A. In all these proceedings, the concerned High Courts, being the High Courts of Karnataka and Madras, have held the assessees entitled to investment allowance under section 32A. Hence, these appeals have been preferred before us. The relevant provisions of section 32A are as follows : "32A. (1) In respect of a ship or an aircraf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 32A(2)(b)(iii). The Department, however, contends that investment allowance can be claimed by the assessee only in a case where the assessee is the owner of the machinery and also uses the machinery himself. In other cases, investment allowance cannot be granted. We have to examine this contention. We have already set out the three requirements of section 32A(1) which entitle an assessee to claim investment allowance. One of the requirements is that the machinery must be wholly used for the purpose of such assessee's business. When the business of the assessee is leasing of such machines, the machines so leased out are being used for the purpose of the assessee's business. The income by way of hire charges which the assessee receives is also taxed as business income of the assessee. Sub-section (2) of section 32A, however, requires to be examined to see whether there is any provision in that sub-section which requires that the assessee should not merely use the machinery for the purposes of his business, but should himself use the machinery for the purpose of manufacture or for whatever other purpose the machinery is designed. Sub-section (2) covers all items in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A circular of the Department being Circular No. 202, dated 5th of July, 1976, which explained the provisions of the Finance Act, 1976, pertaining to direct taxes, refers to investment allowance in paragraph 23.1. It is stated that the new scheme of investment allowance is broadly on the lines of the development rebate scheme that was discontinued earlier. (Paragraph 23.2) : whereas development rebate was allowed at varying rates, investment allowance will be admissible at the uniform rate of 25 per cent only. Describing the provisions of section 32A(2), the circular states that new ships and new aircraft acquired after the 31st of March, 1976, by taxpayers engaged in the business of operation of ships or aircraft will be eligible. It says, "It should be noted that new ships and aircraft will qualify for investment allowance only in the hands of taxpayers carrying on the business of operating ships or aircraft and the allowance will not be available in respect of ships or aircraft acquired by other taxpayers." In respect of new machinery or plant installed after 31st of March, 1976, however, the circular does not prescribe any such condition of the assessee himself carrying on the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its business. A similar view has been taken by the Andhra Pradesh High Court in the case of CIT v. Vinod Bhargava [1988] 169 ITR 549, where Jeevan Reddy J. (as he then was), held that where leasing of machinery is a mode of carrying on business by the assessee, the assessee would be entitled to development rebate. The court observed : ". . . Once it is held that leasing out of the machinery is one mode of doing business by the assessee and the income derived from leasing out is treated as business income it would be contradictory in terms to say that the machinery is not used wholly for the purposes of assessee's business." The appellant-Department, however, relies upon certain observations of this court in CIT v. Narang Dairy Products [1996] 219 ITR 478, where a Bench of two judges of this court said in the context of development rebate in respect of new machinery and plant that not only should the ownership of the plant and machinery be with the assessee but also its user by the assessee for the purpose of his business. The assessee before the court in that case carried on the business of manufacture of milk powder. The entire machinery for the purpose of his business was all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the machinery is given on hire by the owner to the hirer on payment of hire charges, the income derived by the owner is business income. The owner is also entitled to depreciation on the machinery so hired out. The hirer, on the other hand, who pays hire charges, is entitled to claim these as revenue expenditure. The hirer has not acquired any new asset. A transaction of hire is, therefore, of bailment of the machinery. There is no extinguishment of any right of the owner in the machinery. There is merely a licence given to the hirer to use, for a temporary period, the machinery so hired. In the case of Damodar Valley Corporation v. State of Bihar [1961] 12 STC 102 ; AIR 1961 SC 440, 445, this court examined the contract under which the machinery and equipment was supplied by the Corporation to the contractors. The question was whether it was a mere contract of hiring or a sale or a hire purchase. The court said : "It is well-settled that a mere contract of hiring, without more, is a species of the contract of bailment, which does not create a title in the bailee, but the law of hire purchase has undergone considerable development during the last half a century or more and has int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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