Investment allowance

The assessee, a public limited company engaged in the manufacturing and sale of jelly filled telephone cables, claimed a deduction under s 32AB of Rs. 1,61,62,646 on the ground that it had utilised the said amount for the purchase of machinery. The AO observed that a sum of Rs. 15,55,875 was paid by the assessee as an advance towards the purchase of plant and machinery but the amount of advance cannot be said to be an amount utilised for the purchase of plant and machinery and accordingly disallowed the aforesaid amount. In an appeal, the CIT(A) allowed the appeal of the assessee and directed the AO to include the said amount while computing the deduction claimed. The Tribunal also confirmed the order of the CIT(A), stating that the advance paid for the purchase of machinery during the assessment year was in fact part payment against the price of the machinery and therefore, it was an amount utilised for the purchase of machinery. Thereafter, the department filed an application before the Tribunal under s 256 for referring the question for the opinion of this Court. The assessee contended that after 1985–1986, a new provision s 32AB was introduced in the statute book with effect from 1 April 1987, which provided that if an assessee for the purchase of machinery deposits the amount by way of earnest money or as an advance for the purchase of machinery, such amount shall be treated as an investment deposit and assessee is entitled for a deduction of the said amount.

The issue is whether the amount given in advance for the purchase of plant and machinery amounts to utilisation in the year the advance was given for the purpose of claiming a deduction under s 32AB.

After 1 April 1987, the Parliament inserted s 32AB in the Income-tax Act, it meets out the contingency where the assessee deposits any amount for the purchase of any new machinery, then the assessee was allowed a deduction of the amount. The language used in s 32AB is very specific, which provides that such an amount must have been utilised for the purchase of any new machinery. When the statute itself provides for such, which is entirely different from the provision as contained in s 32A, the natural inference is that the intention of the Legislature was to meet out such a situation when such an amount was not invested for the purchase of a plant but it was deposited with the manufacturer for the purchase of new machinery.

Amount given as advance for the purchase of plant and machinery is considered to be utilised in the year in which such advance was given, for the purpose of claiming deduction under s 32AB as held by MPHC in CIT v Vindhya Telelinks Ltd — In favour of: The Assessee ; ITR No. 192/1997

Decided on: 22 Febuary 2011