TMI Blog1991 (12) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... imed by the assessee under section 80HH for the assessment year 1980-81. (5) Disallowance of travelling and vehicle running expenses for the assessment year 1980-81. (6) Additional ground taken by the assessee which was omitted in the regular grounds of appeal regarding disallowance of various expenses at different sites for the assessment year 1982-83, namely: (i) Guest expenses at Rammam Hydel Project amounting to Rs. 14,687; (ii) Transport expenses amounting to Rs. 952; (iii) Medical expenses amounting to Rs. 500 ; and (iv) Food and refreshments to customers and employees amounting to Rs. 12,460. 4. The following grounds have been taken by the revenue in its appeals: (1) The CIT (Appeals) erred in holding that the assessee is entitled to investment allowance on the new plant and machinery installed by it.This ground is common for all the Assessment years. (2) The CIT (Appeals) erred in holding that the steel shuttering equipments used in the construction business will come under building contractors machinery and hence entitled to higher rate of depreciation at 15 per cent. This ground is common for the assessment years 1980-81, 1981-82 and 1982-83. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment years and also the claim of the assessee under section 80HH for the assessment year 1980-81, since all these grounds are interconnected with each other. The Income-tax Officer levied higher rate of tax at 65% on the ground that the assessee is not an industrial company and on the ground that it is not an industrial undertaking and further it is not engaged in the manufacture or production of any article or thing as required under section 80J and disallowed the claim of deduction under section 80J and on the same ground disallowed the claim of the assessee under section 80HH. 7. On appeal, the learned counsel for the assessee contended that the assessee is a manufacturing company and hence it should be treated as an industrial company and only the lower rate of tax at 60% ought to have been levied on the assessed income. In support of the ground regarding 80J and 80HH deductions, the counsel contended that the assessee is an industrial undertaking which manufactures or produces articles as envisaged in section 80J and hence it is entitled to the deductions under sections 80J and 80HH. After hearing the learned counsel for the assessee, the CIT (Appeals) held that an 'indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh are also manufactured by the assessee and in the construction of industrial building complex steel and wooden doors and windows are manufactured. He further elaborated his argument by contending that the various steel items required for the works of the assessee are manufactured by the assessee itself in its own workshop. He contended that for concrete work the assessee was making slabs from cement and various other intermediary materials processed to make them into a concrete structure to support the tunnels. He contended that the assessee was obtaining big pieces of stones and was crushing them into various forms and sizes of boulders which were used in constructing tunnels and other projects. He, therefore, contended that since the assessee manufactures or produces various articles to be used in the construction activities of the assessee, it is entitled to claim deduction under section 80J and section 80HH. The learned counsel contended that besides the articles manufactured in the construction activities of the assessee, the assessee also manufactures articles which are independently sold and the assessee has received substantial amounts from the works under-taken by it in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he definition of 'industrial undertaking' is found in the sister legislation, viz., the Wealth -tax Act, in the Explanation to section 5(1)(xxxi), one need not look into the Industrial Disputes Act to find out the definition of 'industrial undertaking'. To controvert the argument of the learned counsel for the assessee that there is no definition given for industrial company in the accounting years relevant to the assessment years in question, he contended that the definition of 'industrial company' is found for the relevant assessment years in the Finance Act 1979 reported in 117 ITR 68 (Statutes), Finance Act (No. 2), 1980 reported in 124 ITR 67 (Statutes), Finance Act, 1981 reported in 129 ITR 81 (Statutes), and Finance Act, 1982 reported in 135 ITR 29 (Statutes). He contended that as per the definition found in the relevant Finance Acts, since the assessee is neither engaged in the business of generation or distribution of electricity or in the construction of ships nor in the manufacture or processing of goods or in mining, it is not an industrial company and is not entitled to the levy of tax at a lower rate. He further contended that since the assessee is not an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he definition have been described as 'activities'. We have to, therefore, find out whether the company in question is mainly engaged in one or the other activities mentioned therein. While in respect of generation or distribution of electricity or any other form of power the activity should be in the nature of business of such generation or distribution, in respect of other activities the word 'business' has not been used. Thus it appears that in respect of the other activities it is possible that the company may carry on any other business, but while doing so may be mainly engaged in one of the activities like manufacture or processing of goods. The Special Bench in the case of Hydle Constructions (P.) Ltd. has clearly brought out the different approaches made by the Bombay High Court in the case of CIT v. N.U.C.(P.) Ltd. [1980] 126 ITR 377 , on the one hand and the Delhi High Court in the case of National Projects Construction Corporation Ltd. v. CWT [1969] 74 ITR 465 and the Calcutta High Court in the case of National Planning Construction Ltd. v. CIT [1980] 122 ITR 197 on the other hand. The Special Bench has ultimately followed the decision of the Delhi High Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee's principal activities. From the aforesaid discussion, it would be clear that if the company is mainly engaged in the manufacture or processing of goods, it is an 'industrial company' entitled to the lower rate of tax. We will now examine this aspect with reference to the various activities of the assessee-company. The various manufacturing activities carried on by the assessee are given in para 5 above. From the details of the work furnished by the assessee it is seen that the assessee does fabrication of feel in its own workshop for the same to be embedded in concrete as inserts, manufactures steel structures for being used as supporters in the underground power houses, manufactures concrete columns measuring 250 to 300 feet high in the construction of bridges where several materials are mixed in a particular proportion to make it reinforced concrete and for concrete works, the assessee makes slabs from cement and various other intermediary materials which are processed to make them into a concrete structure to support the tunnels, again big pieces of stones are crushed and obtain boulders of various forms and sizes which are used in the construction of tunnels and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the assessee received the price of the articles which are independent of the main activity of the assessee. The mere fact that the cost of such articles is claimed in the monthly running bill will not, in our opinion, change the character of the manufacturing activity of the assessee, inasmuch as, the proforma of the running account bill contains only the nature of the work done and the specification of the work executed by a contractor. The assessee-company has manufactured the following articles for being entitled to claim the relief under sections 80J and 80HH: (1) Permanent steel supports Steel supports are manufactured as they are required for supporting the roofs of the power house cavern and butterfly valve chambers. At the first look it appears that the end product in this case is ultimately a power house, but if we examine the original contract the assessee was required to undertake only the construction of underground power house. During excavation, when it was found that the entire rock strata was highly jointed and sheared which resulted in frequent loose rock falls, the assessee was asked to manufacture steel supports which was not there in the original contract. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring columns footings, walls, beams, slabs, rafts and equipment foundations. The total amount as per the bill for the above work is Rs. 32,33,724.08, as can be seen in Annexure E - items I (a) to (e). Besides the above, the assessee manufactured anchor bolts in its own workshop. The assessee has been paid separately for these anchor bolts as can be seen from item No. 3 of annexure E. The total amount claimed was Rs. 5,99,061.56. It is, therefore, clear that though the assessee is a contractor it has manufactured articles which it is not required to manufacture under the contract and received payments separately for the same. Since the end product in all the aforesaid cases being articles, we are of the opinion that the assessee has manufactured articles and is, therefore, entitled to claim the relief under sections 80J and 80HH. The relief claimed by the assessee is, therefore, allowed. 12. The assessee's counsel, further relying upon the decision of the Orissa High Court in the case of Belpahar Refractories Ltd. , contended before us that this is a case where res judicata applies since the Income-tax Officer has allowed the deduction claimed by the assessee under section 80J fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is in appeal before us. 14. The learned counsel for the assessee drew our attention to the provision 35B(1)(b,)(iv), according to which the assessee would be entitled to weighted deduction on the expenditure, incurred by the assessee wholly and exclusively on the maintenance outside India of a branch office or agency for the promotion of sale outside India of such goods, services or facilities. He, therefore, contended that since the maintenance of the office by the assessee in Bhutan is for the sale of services in Bhutan by the assessee it is entitled to weighted deduction under section 35B. He then relying upon the proviso in section 35B(1)(b) (vii) contended that the travelling expenses claimed by the assessee in Bhutan is also eligible for deduction under the aforesaid proviso as the expenses are incurred for travelling in Bhutan for the promotion of sale, services or facilities. He also relied upon the decision of the Madras High Court in C.R. Narayana Rao's case in support of his contention. The learned departmental representative, on the other hand, supported the orders of the lower authorities. 15. We have carefully considered the facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt years 1978-79 and 1979-80, rule of res judicata applies to the facts of this case in view of the ratio laid down by the Orissa High Court in the case of Belpahar Refractories Ltd. Inasmuch as, we do not find anything on record to show that the decision taken by the Income-tax Officer earlier is arbitrary or perverse or arrived at without due enquiry it is patently clear that the effect of revising the earlier decision has caused injustice to the assessee. 16. The next ground taken by the assessee is regarding travelling and vehicle running expenses disallowed by the Income-tax Officer. The assessee has claimed a sum of Rs. 8,30,923 on travelling expenses and a sum of Rs. 57,291.42 towards vehicle running expenses for the assessment year 1980-81. The Income-tax Officer has disallowed on estimate Rs. 20,000 out of travelling expenses claimed by the assessee for want of details under Rule 6D. He also disallowed Rs. 7,500 on the ground that the same relates to personal use of the car by the directors. On appeal, the CIT(Appeals) confirmed the disallowances made by the Income-tax Officer. Before us, the learned counsel for the assessee reiterated the contentions made before the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for the business purposes of the assessee, the same may be allowed in full. The learned departmental representative, on the other hand, supported the orders of the lower authorities. 20. We have carefully considered the rival submissions. It cannot be said that the entire amount spent by the assessee was to provide food and lodging to the employees and for persons who go there for supervision. At least a portion of the amount should have been spent on visitors also. Estimating 1/3rd of the expenditure incurred by the assessee for visitors the same is sustained and the Income-tax Officer is directed to allow the balance amount out of the claim of Rs. 14,687. 21. The next ground taken by the assessee for this year is the disallowance of the expenditure of Rs. 12,460 incurred by the assessee on food and refreshments to customers and employees. The Income-tax Officer disallowed a sum of Rs. 12,460 under the head 'staff welfare expenses' as according to him under this head guest house expenses are shown on various dates. The Income-tax Officer concluded that this expenditure is incurred by the assessee purely on entertaining the guests, but not for the staff of the company. On ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken in Bhutan which is the main aim of the assessee, a huge factory has been set up at the work site for the execution of the work and that is simple evidence to show that manufacturing activities are being carried on in the process of contract work. The counsel also relied upon the decision of the Bombay High Court in Pressure Piling Co. (India) P. Ltd.'s case to drive home the point that there is manufacturing activity in the course of the execution of contract work. After hearing the learned counsel for the assessee, the CIT (Appeals) held that the assessee is entitled to investment allowance on the ground that the assessee is an industrial undertaking engaged in the construction work. As against this order of the CIT(Appeals), the revenue is in appeal before us. 26. The main thrust of the argument of the learned departmental representative is that the assessee is not an industrial company as defined in the relevant Finance Acts and since it is not 'an industrial undertaking it is not entitled to investment allowance as claimed by it. He, therefore, supported the order of the Income-tax Officer. 27. Before us the learned counsel for the assessee has more or less repeated the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich are used in the construction business come under Building contractor's machinery shown at Item No.III(B)(4) - Appendix I, Part I of the Income-tax Rules, 1962. As against this order of the CIT (Appeals), the revenue is in appeal before us. 30. The learned departmental representative supported the order of the Income-tax Officer; whereas the learned counsel for the assessee. relied on the order of the CIT (Appeals). 31. We have carefully considered the rival submissions. We are fully satisfied that steel shuttering equipments which are used in the construction business come under Building contractor's machinery shown at Item No. III(B)(4) - Appendix I, Part I of the IT Rules, 1962. We, therefore, fully agree with the orders passed by the CIT (Appeals) in allowing depreciation at 15% in stead of at 10% lowed by Income-tax Officer. 32. In the result, the appeals filed by the revenue are dismissed. Per Shri A. Satyanarayana (Accountant Member)--- 33. I have gone through the order of my learned brother. But I am unable to agree. with his conclusions about the assessee's claims under sections 80J and 80HH. 34. The activities of the assessee included construction work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a hydel project to substantiate his abovesaid claim. So this statement of the assessee cannot be taken for granted as true. But the papers filed by the assessee, namely, the running account bill for the months of October and November 1986 in respect of the work relating to the Power House, Chukha Hydel Project goes against the assessee's above said assertions. In the said running account bill the steel supports were shown as item 3-III(a), Rock Bolts were shown as item No. 7-VIII and steel reinforcements were shown as item No. 5-VI. The work as mentioned in the said Running Account. Bill consisted of underground power house, two numbers inclined pressure shafts, drainage gallery, butterfly valve chambers and ancillary work, power cable tunnel and control-cable-cum-ventilation tunnel. The running account bill is made with reference to agreement No. PHD/1/79. As the assessee has claimed payments in respect of steel supports, rock bolts and steel reinforcements as items of the underground power house it has to be taken that those steel supports, rock bolts etc. formed an integral part of the underground power house only. These steel supports, rock bolts etc. cannot be taken as indepen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, 1961 from the appeals arising out of an order passed by the Cochin Bench in the above case. The point of difference of opinion referred to me is: "Whether, on the facts and in the circumstances of the case, the assessee has manufactured articles or things independent of the main contract to claim the benefit under sections 80J and 80HH?" 2. The assessee is a company doing business in engineering contracts. It has during the year several contracts and manufacturing activities at various sites, one of which is at Chukha Hydel Project, with which I am concerned in this matter. In Chukha Hydel Project, an underground power house was to be built with 2 nos. Horizontal Pressure Shafts, Butterfly Valve Chamber, Tail Race Tunnel, Cable and other connected tunnels. The roof of Underground Power House is supported by Heavy Steel Supports manufacturing in the assessee's own workshops. The entire aggregate required for the concreting was also manufactured with the crushers and sand processing plants at site owned by the assessee. One of the issues that arose for consideration before the Bench was whether the assessee is an industrial company eligible for low rate of tax and anoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articles, which it was not required to manufacture under the original contract and since they are all independent of the main contract and being end products in themselves, the assessee had manufactured articles and, therefore, entitled to the claim under section 80J as well as under section 80HH. 3. But the learned Accountant Member took a totally different view. According to him the activities of the assessee included construction work of the largest underground power house in Asia, that the assignment consisted of construction of connected tunnelling systems, inclined pressure shafts etc. The argument that impressed the learned Judicial Member was that the extra work enumerated by him in his order was not included in the original contract but according to the learned Accountant Member the copy of the original tender was never filed nor the copy of the original agreement to substantiate this claim. He, therefore, doubted the claim of the assessee and its acceptance by the learned Judicial Member as correct. According to him the running account bill for the months of October, November 1986 did not support this assertion. Since these running bills claimed payments in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of by the Supreme Court in the case of CIT v. Cellulose Products of India Ltd. [1991] 192 ITR 155. Therefore the principle laid down in Hydel Constructions (P.) Ltd. is no more a good law and that should not have been followed. Since the assessee was manufacturing intermediate products as admitted by both the Members, the assessee is entitled to the relief under sections 80J and 80HH according to the law now enunciated by the Supreme Court in Cellulose Products of India Ltd.'s case though the products manufactured by the assessee were not end products. According to the Supreme Court the assessee must manufacture some article not necessarily the end product. That the assessee has done in this case and that was admitted by both the Members. 6. The learned Departmental Representative, on the other hand, contended that the Supreme Court decision was not applicable to the facts of this case. The Supreme Court decision turned on the fact whether the pulp manufactured by that company was marketable or not and since the pulp was found to be marketable by itself and since the Memorandum of Association of that company permitted the manufacture of pulp, which was independently marketable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the industrial undertaking must "begin to manufacture or produce articles ...... .. ." I have not reproduced here the other parts of sub-section (2) because they are not relevant for my present purpose. To be able to obtain the relief under section 80J, the industrial undertaking must manufacture or produce articles. What sort of articles are required to be produced had come for consideration before the Gujarat High Court in the case of Cellulose Products of India Ltd. In this case an industrial licence was granted to the assessee-company by the Central Government for the manufacture of CMC. The company installed a cellulose plant for the manufacture of cellulose pulp, which in its turn was utilised as a raw material for the manufacture of CMC. On 18-3-1961 the production of cellulose pulp in the cellulose plant was started. On 15-6-1961 the company started production of CMC. For the assessment year 1966-67, for which the previous year was the financial year 1965-66, the company claimed deduction from its total income under section 84 of the Income-tax Act, 1961, which is a predecessor of section 80J. The Income-tax Officer held that as production of cellulose pulp had start ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious raw materials and might process them to construct the dams. In that process, it was likely that some components were manufactured by the undertaking itself, which would be only intermediary products. It could not result in the conclusion that the undertaking was manufacturing articles for which it had come into existence. If each intermediate article was to be taken into consideration, there would be no end to the confusion of computation or grant of relief. Now this decision of the Gujarat High Court was appealed against by the Commissioner of Income-tax to the Supreme Court. The Supreme Court in Cellulose Products of India Ltd.'s case reversed the judgment of the Gujarat High Court by pointing out that the finding of the Tribunal that the production of cellulose pulp during the month of March 1961 was not a trial production and that the cellulose pulp manufactured was a finished product, which was a marketable commodity and though it was true that cellulose pulp constituted raw material for the manufacture of CMC, it was even by itself a finished marketable commodity. The fact that the industrial licence granted to the respondent was for the manufacture of CMC and not cellul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue, whether the tunnel, power house or a dam is or is not an article was not decided by the Supreme Court. If we apply the principle laid down by the Supreme Court, the test of marketability becomes prominent and if that test is applied neither the end product is marketable nor any of the items mentioned in the order of the learned Judicial Member is marketable. Since for the grant of relief under section 80J marketability has now been laid as a test, that test cannot be said to have been satisfied in the case of manufacture or fabrication of these items nor even the end product. Notwithstanding the reversal of the judgment of the Gujarat High Court by the Supreme Court which was relied upon by the Special Bench of the Tribunal in the case of Hydle Construction (P.) Ltd. , still the ratio of that decision in my view applies to the facts of this case. That apart the terms of the grant of the contract under the tender do envisage the fabrication of the items mentioned by the learned Judicial Member in his order. Had the fabrication of these items was not envisaged, there would have been a separate calling of tenders or authorising in writing the assessee company to fabricate them an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This decision also though not directly on the point, supports the view taken by the Special Bench of the Tribunal in the case of Hydle Constructions (P.) Ltd. 12. It is no doubt true that the Delhi High Court in an earlier decision in the case of National Projects Construction Corpn. Ltd. . While dealing with reference under the Wealth-tax Act had to consider a similar question and it was held that an assessee, who is engaged in the manufacture or production or processing of goods or articles within the Explanation to section 45(d) of the Wealth-tax Act, 1957 could be said to be engaged in the manufacture or processing of goods, though not from a commercial point of view because there was no requirement in the section that the things manufactured should be sent to the market for sale or solely engaged in the manufacture. An undertaking engaged in the manufacture of goods for its own use may also qualify for the exemption. This decision does not advance the case of the assessee in view of the subsequent decision of the Delhi High Court in the case of Minocha Bros. (P.) Ltd. and the distinct difference in the language of section 45(d) of the Wealth-tax Act for the purpose of gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecial Bench of the Tribunal in the case of Hydle Constructions (P.) Ltd. , is not the correct enunciation of law. I have already mentioned above how inspite of the reversal by the Supreme Court of the decision of the Gujarat High Court, the principle laid down by the Special Bench of the Tribunal still applies to the facts of the case of a contractor, who are building, bridges, power houses etc. This argument, therefore, does not help the assessee's case. 14. I may also mention that the issue whether the assessee is entitled to the grant of relief or not in a way becomes academic if there is no income liable to tax because under Chapter VIA, the relief to be granted is available only when there is gross total income and not otherwise and as it appeared to me there does not appear to be a gross total income to the assessee. In any way this is a matter to be examined by the regular Bench, before whom this matter will now go back to decide the appeals according to the majority view, although this was not a point referred to me as a point of difference of opinion. 15. Having considered all the aspects of the case and the case law cited before me and the facts of the case, I am of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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