IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 26.04.2011 Coram : THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMAN and THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.955 of 2004 The Commissioner of Income Tax-I, Chennai. Appellant v. M/s Apollo Hospital Enterprises, 22, Greams Road, Chennai-6. Respondent Appeal filed under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal Madras 'B' Bench, in ITA No.1440/MDS/95 dated 20.04.2004. and against the order of the Commissioner of Income Tax (Appeals) IV, Madras dated 28.2.1995 made in Appeal No.ITA.113/92-93 and against the order of the Income Tax Department dated 27.3.1992 made in PAN/GIR.No.47-055- CY-5121 for the Assessment year 1989-1990. For Petitioner : Mr.K.Subramaniam For respondent : Mr.C.Manishankar JUDGMENT (Judgment of the Court was made by P.P.S.JANARTHANA RAJA,J.) The revenue has come on appeal as against the order of the Income Tax Appellate Tribunal, Madras "B" Bench, Chennai, made in ITA No.1440/MDS/95 dated 20.04.2004. 2. The above appeal was admitted on 02.12.2004 on the following question of law: "Whether on facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is entitled to investment allowance in respect of X-ray, ultra sound, angiography, gamma camera, stress analysis equipment etc.?" https://hcservices.ecourts.gov.in/hcservices/ 3.The assessee is a public limited company engaged in the business of running hospital. The assessment year is 1989-1990 and the corresponding accounting year ended on 31.03.1989. The assessee filed a return of income on 29.12.1989 showing total income of Rs.82,36,600/- as per Section 115J of the Act. Later the assessing officer made prima facie adjustment under Section 143(1) (a) of the Act and sent an intimation dated 30.06.1990 to the assessee. In the course of the assessment proceedings, notice under Section 143(2) of the Act was issued and the assessing officer completed the assessment as per the normal provision and made addition and disallowed the investment allowance claimed under Section 32A of the Act and in respect of 115J computation, there has been certain disallowances. The assessee claimed investment allowance to the extent of Rs.41,63,858/- in respect of the equipment such as x-ray machines, ultrasound scanner, angiography. Gamma camera, stress analysis equipment etc. The assessing officer was of the view that the hospital is not engaged in manufacture or production of any article or thing, which is a pre-requisite for grant of investment allowance. Aggrieved by that order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) allowed the claim of investment allowance in respect of the plant and machinery i.e., x-ray machines, ultrasound scanner, angiography, Gamma camera, stress analysis equipment etc., by following the assessee's own case relating to the assessment year 1986-1987. Aggrieved by that order, the revenue filed an appeal before the Income Tax Appellate Tribunal. The Income Tax appellate Tribunal held that the assessee is entitled to the investment allowance by following the decisions of Rajasthan High Court in the case of COMMISSIONER OF INCOME TAX V. TRINITY HOSPITAL reported in (1997) 225 ITR 178, Kerala High Court in the case of COMMISSIONER OF INCOME TAX V. UPASANA HOSPITAL reported in 225 ITR 845 and Gujarat High Court in the case of NATVARLAL AMBALAL DAVE V. COMMISSIONER OF INCOME TAX reported in (1997) 225 ITR 936. Aggrieved by that order, the Revenue filed the present appeal raising the above question of law. 4. The learned counsel appearing for the Revenue contended that the order passed by the Tribunal is wrong, illegal, without basis and justification. He further contended that the Tribunal erred in holding that the assessee is entitled to investment allowance on x- ray machine, ultra sound, angiography, Gamma camera and stress analysis equipment and it ought to have appreciated that unless and until the assessee engaged in the manufacture or production of any article or thing, the assessee is not entitled to investment allowance. Further it was vehemently contended that the assesee is not an industrial undertaking and also not engaged in the business of manufacture or production of any article or thing and the claim of investment allowance on the x-ray machines, ultra sound scanner, angiography, Gamma camera, stress analysis equipment etc., is not in https://hcservices.ecourts.gov.in/hcservices/ accordance with law. He further contended that Section 32-A of the Act is an incentive provision and it gives incentive only to industrial undertaking, engaging in manufacture or produce article or thing. In the present case, these machineries did not manufacture or produce any article or thing. Therefore, the assessee is not entitled to the investment allowance under Section 32-A of the Act and also relied on the decision of Bombay High Court in the case of INSIGHT DIAGNOSTIC AND ONCOLOGICAL RESEARCH INSTITUTE PRIVATE LIMITED V. DEPUTY COMMISSIONER OF INCOME TAX reported in (2003) 262 ITR 41 and also the decision of Delhi High Court in COMMISSIONER OF INCOME TAX V. DR.YOGENDAR SARMA reported in 311 ITR 372 and further contended that the Madras High Court in the assessee's own case in 300 ITR 167 while considering the scope of Section 72-A of the Act, held that the assessee is not industrial undertaking and hence the assessee is not entitled to investment allowance under Section 32A of the Act. He further contended that the assessee has not produced or manufactured any article or thing. Further the learned counsel relied on the decisions of Supreme Court in INDIAN HOTELS COMPANY LIMITED V. I.T.O ( 245 ITR 538); STERLING FOODS V. STATE OF KARNATAKA (1996) 3 SCC 469 and COMMISSIONER OF INCOME TAX V. VENKATESWARA HATCHERIES (P) LIMITED (237 ITR 174) to support his proposition. Further, it was contended that the Hospital provides only health care services and it cannot be said that the hospital manufactures or produces any article or thing and therefore, the order passed by the Tribunal is not in accordance with law and the same has to be set aside. 5. The learned counsel appearing for the assessee contended that the Commissioner of Income Tax (Appeals) allowed the claim of the assessee by following the assessee's own case relating to the assessment year 1986-1987 and as against the said order, the Revenue has not preferred any appeal and the said order for the assessment year 1986-1987 reached finality. He further contended that the other High Courts have considered other hospital cases and granted investment allowances on x-ray, ultrasound, ECG, ICCU scanners and the same are as follows: (1) COMMISSIONER OF INCOME TAX V. TRINITY HOSPITAL reported in (1997) 225 ITR 178 (Rajasthan High Court); (2) COMMISSIONER OF INCOME TAX V. UPASANA HOSPITAL reported in 225 ITR 845 and MAR GREGORIOUS MEMORIAL MUTHOOT MEDICAL CENTRE V. COMMISSIONER OF INCOME TAX reported in (2003) 261 ITR 443 (Kerala High Court); (3) COMMISSIONER OF INCOME TAX V. DR.M.L.AGARWALLA reported in (2002) 258 ITR 102 and COMMISSIONER OF INCOME TAX V. DOWN TOWN HOSPITAL PVT. LTD. Reported in (2004) 267 ITR 439 (Gauhati High Court); (4)NATVARLAL AMBALAL DAVE V. COMMISSIONER OF INCOME TAX reported in (1997) 225 ITR 936 (Gujarat High Court) (5) COMMISSIONER OF INCOME TAX V.DR.S.OHRI, PROP. OHRI MATERNITY HOSPITAL reported in (2007) 310 ITR 209 (Punjab https://hcservices.ecourts.gov.in/hcservices/ and Haryana High Court); and (6) COMMISSIONER OF INCOME TAX V. R.M.MALHOTRA, PROPRIETOR MALHOTRA NURSING AND MATERNITY HOME reported in (2006) 283 ITR 181 (Allahabad High Court). (7) COMMISSIONER OF INCOME TAX V. DR.SURENDER REDDY reported in 243 ITR 110 (Andhra Pradesh) (8)COMMISSIONER OF INCOME TAX V.DR.L.C.MITRA (1998) 234 ITR 805 (Patna) In the above cases, some assessees' are hospitals and others are individual assessees i.e., Doctors. The High Courts held that such hospitals and individual assessees are industrial undertakings/Small scale industries and also were of the view that they are engaged in manufacture or production of articles or thing. The learned counsel also contended that the Revenue has not filed any appeal as against those judgments. He further contended that the word "manufacture" and "production" should be given wider interpretation and relying on the decision of the Madras High Court in the case of COMMISSIONER OF INCOME TAX V. JAMAL PHOTO INDUSTRIES (I) P. LTD., reported in 289 ITR 209 and the decisions of Supreme Court in the case of INDIA CINE AGENCIES V. COMMISSIONER OF INCOME TAX reported in 308 ITR 098; and INCOME TAX OFFICER, UDAIPUR VS. ARIHANT TILES AND MARBLES PRIVATE LIMITED reported in (2010) 2 SCC 699, contended that the view taken by the Tribunal as well as the Commissioner of Income Tax (Appeals) is in conformity with law and the same has to be confirmed. 6. Heard the learned counsel on either side and perused the documents available on record. The assessee claimed investment allowance in respect of X-ray, ultra sound, angiography, gamma camera and stress analysis equipment under Section 32A of the Income Tax Act. The said provision was introduced by the Finance Act, 1976 with effect from 01.04.1976. The said Section is akin with the provision under Section 33 of the Income Tax Act relating to the development rebate and the same was discontinued with effect from 1st June, 1974. The claim of investment allowance is on the lines of the development rebate scheme. The Section provides investment allowance equal to 25% of the actual costs of the ship, aircraft machinery and plant installed by the assessee. The relevant provision of Section 32A is as follows: "32A.Investment Allowance- (1) In respect of a ship or an aircraft or machinery or plant specified in sub- section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty- https://hcservices.ecourts.gov.in/hcservices/ five per cent. of the actual cost of the ship, aircraft, machinery or plant to the assessee : Provided that in respect of a ship or an aircraft or machinery or plant specified in sub-section (8B), this sub-section shall have effect as if for the words "twenty-five per cent", the words "twenty per cent" had been substituted : Provided further that no deduction shall be allowed under this section in respect of - (a) Any machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest-house; (b) Any office appliances or road transport vehicles; (c) Any ship, machinery or plant in respect of which the deduction by way of development rebate is allowable under section 33; and (d) Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year. Explanation : For the purposes of this sub-section, "actual cost" means the actual cost of the ship, aircraft, machinery or plant to the assessee as reduced by that part of such cost which has been met out of the amount released to the assessee under sub-section (6) of section 32AB. (2) The ship or aircraft or machinery or plant referred to in sub-section (1) shall be the following, namely :- (a) A new ship or new aircraft acquired after the 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft; (b) Any new machinery or plant installed after the 31st day of March, 1976 - (i) For the purposes of business of generation or distribution of electricity or any other form of power; or (ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing; or (iii) In any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule." It is clear from the above that in order to claim investment allowance, the assessee has to satisfy the following conditions. (a) The assessee should own the plant and machinery; (b) The same should be used wholly for the purpose of the business carried on by the assessee; https://hcservices.ecourts.gov.in/hcservices/ (c) The plant and machinery should come under any of the categories specified in sub section (2) of Section 32A. Section 32A specifically states that the new plant and machinery should be installed after 31st day of March, 1976 in any industrial undertaking for the purpose of business of manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh schedule. In the present case, there is no dispute regarding the above first two conditions since the assessee satisfied the same. The dispute involved in the present case is regarding the third condition stated above i.e., whether the hospital can be considered as an industrial undertaking and also engaged in manufacture or production of article or thing. Considering the controversy, it is necessary to take into consideration the functions, purposes and use of the said machinery/plant in the business activity of the hospital i.e., X-ray, ultra sound, angiography, gamma camera and stress analysis equipment and the details of the utilisation of the above said equipments are as follows: "1.Universal angiography with cardiovascular x-ray system: The system includes diagnostic imaging equipment wherein a catheter is inserted into an artery along with guide wires and a contrast agent is added to the blood to make the blood vessels visible on the x-ray images, x-ray machine produce pictures and data and gets exposed on the raw x-ray film when processed which helps in the diagnosis of the patient. These images may either be still images displayed on a monitor or film or moving images. From these images the radiologist or cardiologist can visualize stenosis (blockages or narrowing) insides the vessels which may be inhibiting the flow of blood and cause of pain. Applications include coronary angiography, neurovascular angiography and peripheral angiography for visualization of blockages in the coronary arteries, arteries/veins in the brain and arteries supplying blood to legs and feet respectively. Thus on raw films, images of various blood vessels are produced in order to diagnose blockages. The system can also be used for interventional therapuetic procedures like stenting, angioplasty, paceemaker implantation etc. 2.Computerised gamma camera system with nuclear film processing unit: A gamma camera is a complex imaging device consisting of a scintillating Nai crystal detector and photomultiplier tubes mounted on a gantry. A radio-active isotope is injected into the patient and scanned over the region of interest. This isotope travels to various organs and tissues in the body, the photons emitted by the isotope are detected by the crystal detector and its distribution and relative https://hcservices.ecourts.gov.in/hcservices/ concentration is reconstructed in the images produced through a computer system attached to the gamma camera. These images are produced on film and the resulting calculations obtained can predict the functional capacities of organs like heart, brain, liver, kidney, etc., which are useful in diagnosing the condition of the patient. 3.Ultramark 6C color flow imaging system (ultra sound): The ultrasound imaging system uses transducers which produce ultrasound waves generally in the range of 1 to 10MHz frequency. These waves are directed at different organs and tissues in the patient and the reflected waves from boundaries of soft tissue, air or bone are picked up by the transducer and processed to form images on a display screen or film. The ultrasound scanner/ultra sonographic machine is an instrument with a monitor and the computer. As the ultrasound waves do not involve any harmful radiation like x-rays, they are more useful in gynecological examinations and pre-child birth checkups apart from Doppler color blood flow studies in the heart and other arteries. Different transducers are used for imaging heart, abdomen and other body parts. Thus using the ultrasound system, images are produced on film which enables diagnosis of various diseases in these organs/tissues. The system can also be used for obtaining biopsy samples under ultrasound image guidance. 4.Quinton 3000 stress analysis system with ECG recordings output: The stress test system helps a doctor find out how well the heart can handle work of the body. The patient is asked to walk on a treadmill at a slow speed at first and later at a higher speed with the treadmill tilted. This simulates the work of walking up a small hill. The heart rate, blood pressure and ECG recordings produced are continuously monitored and print out of the images/recordings/wages taken are helpful in the analysis of diagnosis of coronary artery disease, predict risk of dangerous heart related conditions like heart attack and diagnose heart related causes of symptoms like chest pain and shortness of breath." From a reading of the above details, the machinery i.e. X-ray, gamma camera system, ultra sound and ECG produces following things:- (a) Images of the internal organs of the patients are produced on the monitor; (b)Prints and graphs record the pulses of various organs. Therefore, the authorities below came to the conclusion that the assessee is engaged in manufacture or production of articles or things as stated above. https://hcservices.ecourts.gov.in/hcservices/ 7. Much of medical know how today is based on discoveries about basic workings of the human body. Technical know how enables a Doctor new ways of studying, diagnosing and treating human diseases. It is no doubt that medical instruments provide a basic knowledge to diagnose and treat diseases and enable doctors to study how disease progress in human bodies and compare how biological process works in healthy body. Speed and technology are improving human life and they are also much more powerful and much accurate than those of early days. It lifts the veil and discloses something which has been unseen or dimly seen. We cannot ignore the progress of scientific and technical knowledge. Modern hospital runs with all the technical facilities. The above mentioned instruments installed in the assessee's premises certainly produce 'things' as contemplated in the Section 32A of the Act. The issue involved now is not res integra. In respect of other hospital cases, the various High Courts have considered the scope of Section 32A of the Act and held that they are entitled to deduction under Section 32A of the Act. Eight High Courts have taken a view that the hospital is entitled to deduction and they are Rajasthan, Kerala, Gujarat, Gauhathi, Punjab and Haryana, Andhra pradesh, Patna and Allahabad. Only "Delhi" and "Bombay" High Courts have taken a contrary view. 8.The only argument advanced by the learned Standing counsel for the Revenue is that 'hospital' is not an industrial undertaking and also the same does not produce or manufacture any article or thing. The hospitals are only rendering service. Various High Courts in India considered the cases of hospitals as well as individual doctors and came to the conclusion that the hospital and the individual doctors carried on business activities and hence, they are entitled to investment allowance under Section 32A of the Act. 9.The Madras High Court, in the case of COMMISSIONER OF INCOME TAX V. DR.V.K.RAMACHANDRAN reported in (1981) 128 ITR 727, has considered the scope of development rebate under Section 33 of the Act and held that a medical practitioner is entitled to development rebate under Section 33 of the Income Tax Act on X-ray machine. In that case, the assessee was a medical practitioner. The issue before the Court was whether the assessee was indulging in a commercial activity for the purpose of claiming development rebate or not. The Court held that the assessee has been carrying on the business as a commercial activity. Further the Court considered the principles enunciated in the Apex Court judgments in BANGALORE WATER SUPPLY AND SEWERAGE BOARD V. A.RAJAPPA (AIR 1978 Supreme Court 548); S.MOHAN LAL V. R.KONDIAH (AIR 1979 Supreme Court 1132) and also this Court's judgment in DR.P.VADAMALAYAN V.COMMISSIONER OF INCOME TAX (1969) 74 ITR 94 and held as follows: "We are in respectful agreement with each one of these passages. It is in the light of this legal position that we have to consider the facts of the present case. https://hcservices.ecourts.gov.in/hcservices/ The AAC has pointed out the nature of the activity carried on by the assessee. He has pointed out also the total receipts and the receipts from the X-ray pictures. He has also referred to the expenditure involved in the purchase of X-ray films, chemicals, salary and bonus to technicians and electricity charges. The way in which this activity is carried on is in no way different from a non-qualified person carrying on a radiological institute. The mere circumstance that a professional person has, as an adjunct to his professional activities, such an institute does not disable him from running it as a commercial venture and earning income therefrom. For instance, a medical practitioner can have a medical shop in which medicine are sold not only to his patients, but also to others who come and ask for them. In such a case, it cannot be gainsaid that he was carrying on a trade as such. In this case there is no finding that the persons who came and took x-ray photographs were only the assessee's own patients and that he carried on the activity of X-ray photography in a manner restricted as an aid for diagnosis of his own cases. Just as an unqualified person could carry on such a radiological institute and have the benefit of development rebate, similarly a professional person who carries on such an institute as a commercial activity would be entitled to development rebate The Tribunal has in the present case, given a finding that the assessee has been carrying on the business as a commercial activity. In view of this and in the light of the above reasoning, we would answer the first question in the affirmative and in favour of the assessee." From a reading of the above principles, it is clear that when professional person, who carries such an institute as a commercial activity, he would be entitled to development rebate. The said judgment is considered by other High Courts in the case of hospitals as well as the individual Doctors and allowed investment allowance under Section 32A of the Act on the ground that the hospitals are considered to be industrial undertakings and also the technical instruments installed in the hospitals are engaged in manufacture or production of any article or thing. Now let us go to the case laws, which were decided in favour of the assessee. 10.The Rajasthan High Court, in the case of COMMISSIONER OF INCOME TAX V. TRINITY HOSPITAL reported in (1997) 225 ITR 178, has considered the scope of 32A of the Act. The assessee in that case is a hospital. The machinery installed in the hospital premises are (i) X-ray machine; (ii) Ultra sound scanner/ultra sonographic machine; (iii) a foetal monitor and (iv) air conditioning equipment. The Rajasthan High Court has taken a view that the assessee is a small scale industrial undertaking and that the hospital is engaged https://hcservices.ecourts.gov.in/hcservices/ for the purpose of manufacture or production of article or thing as provided under Section 32A(2)(b)(ii) of the Act by following the judgment of this Court in the case of DR.V.K.RAMACHANDRAN((1981) 128 ITR 727) and held as follows: "The provisions have been made in the Act to give incentive to the entrepreneurs to instal machinery/ plant to increase production. As it is a beneficial legislation, a liberal interpretation, which advances the purpose and object of the Act, should be given to these provisions and as these words "manufacture", "production", "article" and "things" have not been defined in the Act, they must be given the plain and simple meaning in