1 to 9. [These paras are not reproduced here as they involve minor issues.] 10. The remaining point is, whether the assessee is entitled to the investment allowance in respect of the plant and machinery installed during the accounting year. It is an admitted position that the assessee had installed plant and machinery of nearly Rs. 30 lakhs, factory equipments of Rs. 2.6 lakhs and electrical installation of Rs. 38,035. The investment allowance claimed thereon was Rs. 8,17,436.
There is no dispute that the necessary reserve has been created.
However, the ITO was of the opinion that the assessee will not be eligible for investment allowance as the assessee is manufacturing enamels and varnishes which fall under the Eleventh Schedule of the Income-tax Act, 1961 ('the Act'). The Commissioner (Appeals) agreed to with him. He held that the expression enamel, varnish, etc., appearing in item 26 in the Eleventh Schedule should be understood in the same way as understood by a common man. There would be no justification, according to him, for import a different meaning depending upon the user of such material. He pointed out that when the Act does not provide any guidelines for determining the nature of the products mentioned in the entries in a Schedule, the same has to be decided according to common notions. He held, therefore, that the claim of the assessee was rightly rejected.
11. Shri Khare, for the company, submitted that the assessee was manufacturing insulation chemical. Although this product is broadly called a varnish, it has no attributes of varnish as understood by a common man. It is merely an insulation chemical and it is only used in the electrical apparatus like coils, armature, tobacco and motors, etc.
Considered from the point of use to which it is put, he submitted that it should not be considered as varnish at all. He pointed out that the purpose of the items covered in item 26 of the Eleventh Schedule are either for decoration or for hiding or protection. The assessee's preparation does neither. It would be, therefore, a misnomer to treat it as a varnish. He referred to a decision of the Tribunal given in the assessee's own case for the assessment years 1964-65 to 1970-71. In this decision the Tribunal has held that the product of the assessee would be covered by items 7 and 24 of the Fifth Schedule of the Act i.e., in other words, it would be treated as a part of the electrical machinery. Shri Agarwala, for the department, referred to the findings of the Commissioner (Appeals) and submitted that the product has to be considered only as varnish. He then submitted that the purpose for which it is used is not at all material. He pointed out that all the products mentioned is not for the domestic use. Paints and enamels are also used for the industrial purposes, but on that ground it could not make any difference. He referred to the submissions that the varnish manufactured by the assessee is impregnating varnish and submitted that it would make no difference in the interpretation of the item in the Schedule. He pointed out that lacquer is also impregnating. Varnish also gets absorbed into the wood.
He, therefore, submitted that no interference is called for in the Commissioner (Appeals)'s order.
12. We have considered the submissions. Under Section 32A of the Act an assessee would be entitled to investment allowance in respect of machineries installed, the conditions are broadly that the assessee should be in the business of construction, manufacture or production of any of the articles not mentioned in the Eleventh Schedule. Item 26 of the Eleventh Schedule, before it was omitted with effect from 1-4-1982, read as follows : Pigments, colours, paints, enamels, varnishes, blacks and cellulose lacquers.
Now the Commissioner (Appeals) had considered the expression varnish in isolation and apart from the other items in item 26 as well as in isolation apart from the other items in the Eleventh Schedule. In our opinion, such an approach would not give a, proper interpretation of the item we are concerned with. The Eleventh Schedule was introduced in the Act with effect from 1-4-1978. It listed out certain articles or things which were ostensible luxury items. The Parliament in their wisdom thought that investment allowance should not be granted for the manufacture of these items. All the items in the Eleventh Schedule are primarily concerned with not industrial needs but maintenance of a higher standards of life. The main items like alcohol, spirits, tobacco, cosmetics and toilet preparation, etc., would bear this out.
It is in this context we should consider the articles in item 26.
13. The expression 'varnish' should also be read along with the other items in item 26. It would be seen that pigments, colours, paints, etc., from one common genera, i.e., articles used for decoration or protection. Now, where two or more words which are susceptible of analogous meaning are coupled together, noscitur a sociis. They are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general. Maxwell in The Interpretation of Statutes, Twelfth edition, has pointed out this principle at page 289. It has been pointed out at page 292 that the House of Lords had used this principle in the taxation case in IRC v.Frere 1965 AC 402. Therein the word 'interest' in the phrase 'interest, annuities or other annual payments' in the English Income-tax Act, 1852, was held to mean annual interest.
14. Applying this principle, we are of opinion that each of the items found in item 26 colour the other and either restrict or expand its meaning. Now, pigments, colours and paints all have one common feature.
They are decorative. They are used for hiding any blemishes on the surface. The same is the case of blacks, cellulose lacquers. The expression varnish found in the item should be, therefore, restricted to that type of varnish which are used only for decoration or hiding surfaces. There are large number of products which come under the head 'varnish'. All these had been noticed by the Madhya Pradesh High Court in the case of Akhtar Abbas v. Asstt. Collector AIR 1961 MP 353. With reference to Thome's Dictionary of Applied Chemistry, the High Court pointed out that there are very many different types of varnishes made and, these include decorative varnishes for buildings, etc., with good durability on exterior exposure, varnish media for pigmentation into enamels, hard gloss paints and finishes for decorative and industrial purposes, varnish for electrical insulation for application to textiles-cloth and sleeving-varnish for impregnation and protection of electrical equipments, silver and gold varnishes for the outside of tinned iron containers, spirit varnishes and a wide variety of adhesive, varnish for sealing concrete, etc. Obviously, not all these varnishes could be considered as analogous to paints and pigments.
15. The principle noscitur a sociis require us to restrict the meaning of the word 'varnish' and hold that it will cover only such type of varnishes (out of many types mentioned in para 14), which will be analogous with the rest of the words, i.e., which will be analogous with pigments, colours and paints. Herein comes the requirement to which the varnish is put. We have mentioned that the varnish manufactured by the assessee can be used neither as a protection nor as a decoration. Its use is to increase the efficiency of the coils in motors, armatures, etc. Many of these coils when put to use rotate at a high speed. During such rotation, coils fend to fly away due to centrifugal force. The varnish gives them a cohesi-veness and binds them together, In such machine it is highly essential that there is no gap between the coils. This is also ensured by the application of varnish. It is an accepted position that the varnish is impregnating type. In other words, it gets absorbed in the inter-molecules space of the metal and does add to its conductivity and at the same time increase its efficiency in respect of electromagnetic field. None of these functions could ever be attributed to any of the other articles mentioned in item 26. So the varnish we are considering is a totally different genera. In fact the Tribunal while disposing of the appeals of the assessee for the assessment years 1964-65 to 1970-71 had given a rinding that it is a part of machineries for transmission of electricity like transformers, cables and transmission tower. It will be a misnomer to treat the product like ordinary varnish.
16. Shri Agarwala for the department had submitted that the fact that the varnish is used by industries is not relevant. What is relevant, according to him, is how it is prepared. He had pointed out that the preparation is the same like other varnishes, i.e., resinous matter dissolved in some solvent like alcohol. It could be used, according to him, for ordinary purposes also. Therefore, the fact that it is slightly modified to suit electrical appliances makes no difference. We are unable to accept this submission. After understanding the details of the preparation as well as the purpose for which it is used, we are unable to agree that the varnish prepared by the assessee is a substitute for ordinary varnish. It is a matter of fact that it is not used for the purpose other than the electrical goods. We find that practically the entire sales inland is to companies manufacturing electrical goods. These are also exported to USSR. But we understand the use to which it is put. In fact the products of Dr. Beck are associated in the market only with electrical installations.
17. Apart from that, we should also point out that in the definition of 'varnish' attempted by the Madhya Pradesh High Court in the case of Akhtar Abbas (supra), one of the ingredients is the use to which it is put. To quote : It would appear from the meaning of the word that it is a generic name given to a homogeneous solution of gums or resins in alcohol, linseed oil or the like which is coated on various articles for protective or decorative purposes. French Polish is only a species, being a homogeneous solution in alcohol with the result that the volatile solvent evaporates quickly. (p. 356) It will be seen from the above that the High Court had also highlighted the purpose for which the product is put to. If that condition, i.e., the purpose of the use to which the article is put is not satisfied, it cannot be treated as a varnish. We will, therefore, hold that the product manufactured by the assessee cannot be treated as varnish for the purpose of the Eleventh Schedule. The assessee is, therefore, entitled to investment allowance.
18 to 25. [These paras are not reproduced here as they involve minor issues.]