TMI Blog1983 (10) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of concession in the rate of tax under the Finance Act. However, the assessee's claim for being treated as an industrial undertaking under sections 80J and 80HH of the Act was accepted by the Commissioner (Appeals) in both the years. The Commissioner (Appeals) has further decided the question of investment allowance under section 32A of the Act and the manner of allowance of section 80J relief. The Division Bench which heard the matter was of the view that there were some conflicting opinions expressed on the issues involved in these appeals and, therefore, the matter should be heard by a Special Bench. It was in these circumstances that the Special Bench has been constituted by the President. Besides the assessee and the departmental representative, certain counsels of the intervenes have also been heard at great length. 2. The assessee-company had the following main objects as given in its memorandum of association : "A. The main objects to be pursued by the company on its incorporation are : 1.To carry on the business of contractors for construction of roads, buildings, houses, flats, factories, office, dams, canals, tanks, reservoirs, cyphons, bridges, hydel pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aja Co. [1980] 121 ITR 212 (Ori.) and National Planning Construction Ltd. v. CIT [1980] 122 ITR 197 (Cal.). The Commissioner (Appeals) also accepted the plea of the assessee regarding relief under section 80J. 4. In the assessment years 1977-78 and 1978-79, however, the same Commissioner (Appeals) held that the assessee-company could not be considered to be an industrial company and for this he relied upon the decision of the Bombay High Court in the case of CIT v. N. U. C. (P.) Ltd. [1980] 126 ITR 377. However, the other claims regarding sections 80J and 80HH were accepted by him. 5. We may now proceed to consider the two questions separately. On behalf of the interveners, arguments have been advanced by Shri A. K. Sen and Shri Harnam Shankar, advocates, only on the question of a construction company being considered as an industrial company. On behalf of the other interveners, namely, Shri Bansi Lal Bafna and others, arguments were advanced mainly with reference to the provisions under the Wealth-tax Act. 6. Under the scheme of the various Finance Acts, a concessional rate of tax is levied on an industrial company and that term is defined in the Finance Acts as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was further submitted that the assessee's case could not be covered under any other activity falling under the definition of 'industrial company'. 7. Continuing his arguments, it was submitted by the departmental representative that the fact that the assessee-company was generating its own electricity for the purposes of its construction work could not be covered under the definition as it cannot be held that the company was engaged in the business of generation or distribution of electricity. It was contended that while making a tunnel the assessee was neither manufacturing nor carrying on any processing of goods. The departmental representative strongly relied upon the decision of the Bombay High Court in the case of N. U. C. (P.) Ltd. In that case, the company was carrying on business of civil construction works and repairs of buildings. In the process of and for the purposes of construction and repairs it manufactured window and door-frames and concrete beams and slabs. The question arose whether such a company was an industrial company within the meaning of section 2(7)(d) of the Finance Act, 1966. It was held by the High Court that the definition in the Finance Act cover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Wealth-tax Act, 1957 ('the 1957 Act') where 'industrial company' means an undertaking engaged in the manufacture, production or processing of goods or articles or in mining or generation or distribution of electricity or any other form of power. It was pointed out that this definition was materially different from the definition of 'industrial company' as defined in the Finance Acts. It was pointed out that the definition in the Wealth-tax Act does not refer to 'construction of ships' and, thus the factors which were considered by the Bombay High Court were not considered by the Delhi High Court. It was also pointed out that the word 'mainly' was not used in the definition given in the Wealth-tax Act. 10. The departmental representative further pointed out that for finding out whether a company was mainly engaged in an activity one has to look to the business as a whole and in the case of the assessee it could not be held that be was carrying on business or manufacture or processing of goods. He pointed out that the Bombay High Court had not accepted the plea of the assessee-company in that case that although the company was engaged in the business of construction, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich it used in its construction work. The assessee had claimed that it was an 'industrial company' within the meaning of the Finance Act. According to the assessee, it was mainly engaged in processing and manufacturing concrete slabs as also in building constructions. According to the department, the activities of the assessee carried on in the course of construction of building would not constitute manufacturing or processing of goods. The Tribunal held against the assessee. The High Court, however, held that under the Explanation to the definition of the industrial company even cases of companies having more than one business has been covered and if 51 per cent of income is generated from manufacturing or processing of goods such company should be considered as 'industrial company'. For ascertainment of this fact, the High Court remanded the matter to the Tribunal. It was pointed out by the departmental representative that if the plea of the assessee was accepted then the question will still remain whether the assessee-company was mainly engaged in manufacturing or processing of goods. He suggested that in that situation the matter may be sent back to the lower authorities for as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al company and get concessional rate of tax. It was, therefore, clear that prior to this change such construction works were not covered under the definition of 'industrial company'. 14. Concluding his arguments on this point, the departmental representative submitted that the assessee was bound to rely on the decision of the Orissa High Court in the case of N. C. Budharaja Co. but he pointed out that the judgment of the Orissa High Court was pronounced while interpreting the provisions of section 80HH of the Act. He further pointed out that their Lordships of the Orissa High Court have wrongly considered the Industrial Disputes Act, 1947, for determining the nature of an industrial undertaking for the purposes of section 80HH. In that case, the assessee-company constructed a dam and for that various materials were brought to the site and new product in the shape of dam was created. The High Court further held that there was no warrant for the submission of the revenue that a dam could not be an 'article'. It was, therefore, contended that this decision of the Orissa High Court should not be followed for the purposes of deciding whether the assessee was an industrial company or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing activity was of a very small proportion as compared to the total activity of the company. In the end he submitted that the principles laid down by the Delhi High Court should be applied and the construction company should also be considered as industrial company. 16. Further arguments on behalf of the interveners of Arvind Construction Co. (P.) Ltd. was advanced by Shri Harnam Shankar. He also strongly relied on the decision of the Delhi High Court and submitted that the construction company should be treated as engaged in the activity of manufacturing and processing of goods. Making a reference to the facts of the case which he was representing, the learned counsel drew our attention to the detailed letters written to the IAC where activities of the company were enumerated. He further submitted that in all the cases on major construction companies there was substantial activity involving manufacture as well as processing of goods. He pointed out that if such companies are covered under one of the limbs of the definition of industrial company, the claim of such companies could not be denied on the ground that there was no mention of construction of building while a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continuous hole which was to be made into a tunnel by utilising several concrete materials and steel structures. He also submitted that the assessee-company was not using any sub-contractor for carrying on its works. The assessee-company was having its own generators for generating electricity which was being utilised in its various construction works. Thus, according to him, one of the activities contemplated in the definition of industrial company was directly present in the case of the assessee. It was further submitted that in using the dynamite for making a large hole in the hills for the rocks, the assessee was engaged in an activity which was very much like 'mining'. Further, it was submitted that for the purposes of the construction of tunnels, the assessee needed various steel items which were being fabricated by the assessee in its own workshops. For concrete works, the assessee was making slabs from cement and various other materials like 'bajari', 'rori' and 'cement' were processed to make them into a concrete structure to support the tunnels. The assessee was obtaining big pieces of stones and was crushing them into various forms and sizes of boulders which were utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal had held that the main business of the company was construction of dams and barrages and the activity of manufacturing or processing of goods was merely incidental for the purposes of carrying out its main work. The benefit had, therefore, been denied to the assessee. When, however, the matter went before the High Court it was held that though the activity of manufacturing and processing of goods might be termed 'a feeding activity', the proportion that the assessee's manufacturing activity assumed made it one of the assessee's principal activities. The High Court further held that an undertaking engaged in the manufacture of goods for its own use may, therefore, actually qualify for the exemption. The High Court had held that the word 'engage' employed continuity of action and meant devoting attention or employing oneself predominantly. The manufacturing or processing of goods should not be a mere casual employment and the extent of activity would be a relevant factor for determining whether the company was engaged in such activity. It was submitted by the learned counsel for the assessee that the language used in the relevant provisions of the Wealth-tax Act was almost th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of 'industrial company'. 24. The learned counsel for the assessee further contended that it would be a narrow construction to hold that all the construction activities were excluded because the construction of ships has been specifically mentioned. He pointed out that the construction of ships was a specific activity which the Government wanted to encourage and, therefore, it has been specifically mentioned. However, the assessee claimed to be covered under the definition, as its activities entitled it to be taken as 'industrial company'. 25. The learned counsel for the assessee further contended that whereas some of the activities of the assessee-company would come under 'manufacture', the other activities would certainly be covered under 'processing of goods'. It was submitted by him that even a work of repair would involve mainly processing of goods. He pointed out that 'processing of goods' has been given a very wide meaning by the Courts and activities like crushing of stones, processing of cotton, retreading of tyres, running of a cold storage and rice or dal husking has been considered as processing of goods. The learned counsel further submitted that the amendment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he departmental representative further referred to the paper book of the intervener, Arvind Construction Co. (P.) Ltd., wherein the Tribunal had held that the company was an 'industrial company'. He submitted that though the High Court had not allowed any reference under section 256(2) of the Act, the department's special leave petition had been admitted by the Hon'ble Supreme Court and the matter was still pending at that stage. It was, therefore, contended that the decision of the Delhi High Court was being disputed and the matter has not yet been finally decided. According to the departmental representative, 'construction' was a separate segment of activity and the Legislature has provided that only construction of ships would get the benefit and, therefore, it was not necessary to go to other segment of activity like manufacturing or processing of goods. In the end, he submitted that amendments made in 1983 could not be considered to be merely clarificatory as the change has been made only for the purposes of advance tax and is, therefore, applicable only to the assessment year 1984-85. The object was to enlarge the scope and not to merely clarify the position which was already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication excludes from the definition a company which is engaged in the construction of anything other than ships. According to the Hon'ble High Court, the business of the company could not be divided into parts and making of door and window or concrete beams or slabs being in the process of construction and requirements of the building could not entitle the assessee for being treated as an 'industrial company'. According to the Hon'ble High Court if there was a manufacturing activity or processing of goods in the course of carrying out the construction work it cannot be held that the company is engaged in the manufacture or processing of goods. Thus, their Lordships were first influenced by the inclusion of 'construction of ships' which according to them excluded other construction activities and at the same time they declined to consider the activities in which the company was engaged, if ultimately the company was to use the goods produced in the construction work. This approach has become further clarified in the case of Shah Construction Co. Ltd. That was also a case of construction company and the question was whether the company was mainly engaged in the manufacture or proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Delhi High Court in the case of National Projects Construction Corporation Ltd. We have briefly mentioned the facts and the judgment earlier in the order. The High Court was considering the scope of 'industrial undertaking' as used in section 45(d) of the 1957 Act. 'Industrial undertaking' was defined to mean an undertaking engaged in the manufacture, production or processing of goods or articles or in mining or generation or distribution of electricity or in any other form of power. The WTO had not allowed exemption as according to him, the company was not engaged in the manufacture, production or processing of goods or articles. The Tribunal had held that as the manufacturing or processing of goods was incidental and carried on with the object of fulfilling the main activity of the company, the manufacturer did not qualify for the exemption under section 45(d). It was further held by the Tribunal that the company was really engaged in the construction of dams or barrages and engaged itself in the activity of producing and processing of goods or articles and quarrying stones only incidentally for the purpose of carrying out its main works and, therefore, it could not be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company is mainly engaged in the manufacturing or processing of goods, the benefit should not be denied to the company only on the ground that it is a construction company which has the object of constructing tunnels, bridges and other such civil works. It is true that by the amendment made in 1983, the definition of industrial company has been changed to include 'execution of project' as one of the activities and project includes construction works as well as assembly or installation of any machinery or plant. Thus, this activity as such has come to be included in the definition only after this amendment. In other words, a company engaged in construction of a building, road, dam, bridge or other structures would get the benefit under the Finance Act, 1983, even if they do not involve the company in manufacturing or processing of goods to a substantial extent. However, our conclusion remains that a construction company like the assessee can get benefit of a lower rate of taxation if on facts it can be established that it is mainly engaged in the manufacture or processing of goods, even if such activity is a feeding activity for the construction work. 32. Now the question which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition should be applied and the extent of income from such manufacturing and processing of goods should be worked out, if necessary, on cost accountancy basis. This will determine whether the company is mainly engaged in the activity of manufacture and processing of goods. The first ground is disposed of accordingly. 33. The next ground in the departmental appeals relates to the disallowance of assessee's claim under section 80J. In the assessment years 1977-78 and 1978-79, the ground in the departmental appeals also challenges the allowances of relief under section 80HH. In the assessee's appeal also there is a ground regarding relief under section 80J and it relates to the direction of the Commissioner (Appeals) that the deduction under section 80J should be worked out in accordance with the provisions of the amended law in this regard with retrospective effect. 34. According to the ITO, the assessee was not entitled to deduction under section 80J for the same reasons as it was not eligible for concession as an industrial company. No separate reasons were given for that. The Commissioner (Appeals) had also followed the same line and as he was allowing the assessee's clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an article or goods and it would not be correct to say that the assessee was manufacturing or producing tunnels which are goods or 'articles'. 36. The departmental representative submitted that the decision of the Orissa High Court in the case of N. C. Budharaja Co. was against the department. In that case, the High Court was considering the meaning of 'industrial undertaking' as used in section 80HH. There also, the assessee-firm was undertaking the construction of an irrigation project. The Commissioner in a proceeding under section 263 of the Act had held that the assessee was not manufacturing or producing articles and, therefore, it was not eligible for deduction under section 80HH. The Tribunal had referred to the various industrial activities in the course of the business of the assessee. Though those activities were merely processing of goods they also came near 'manufacture', and articles finally produced had considerable commercial value. The High Court held that as the assessee had undertaken manufacture of certain materials which is ultimately utilised in the construction of dam and had worked for ultimate production of a dam it was clear that the assessee was pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning of the section. The departmental representative also derived support from the decision of the Bombay High Court in the case of Pressure Piling Co. (India) (P.) Ltd. In that case it was held that the pile has independent existence and is an article. It was further held that the fact that the piles were made at the site did not mean that the assessee was not producing them. The High Court had also held that it was not necessary that all articles must necessarily have the quality or the possibility of being sold and purchased across the counter and that they must necessarily be transportable in order to be classified as an article. The High Court has observed that the pile was like a pillar and had their an independent existence. In the present case, however, the intermediate goods had no independent existence and they could not be held to be manufacturing or producing articles. He also pointed out that the High Court observed that before superstructure was constructed, a pile was an independent product as such. In the present case, however, in making a tunnel, the assessee was not producing any independent article and ultimately what was being produced was an immovable property. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence ; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose ; (iii) it manufactures or produces articles, or operates one or more cold storage plant or plants, in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of thirty-three years next following the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking ; (iv) in a case where the industrial undertaking manufactures or produces articles, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power :" We do not proceed to consider various provisos and Explanations. The conditions which are important for our purpose are condition numbers (iii) and (iv). Those conditions are that the industrial undertaking manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he word 'article' should be given to the word in that clause also in view of the well known principle of interpretation that when the same words are used in the same section of the same statute, as far as possible the same meaning should be given to the same word in both the places. The words in section 4(7)(i) are 'begins to manufacture or produce articles'. If the qualifying clause (iii) in sub-section (2) 'manufactures or produces articles . . . in any part of India' means only manufactures or produces articles which are the final product of the undertaking or the end-product of the undertaking, then there is no reason to assign any other meaning to the word 'articles' when section 84(7)(i) speaks of the undertaking beginning to manufacture or produce 'articles'. This is as it appears to us on a plain reading of the section. Therefore, it is necessary for us to examine the materials on record to ascertain as to why was this industrial undertaking set up what was the article which this particular undertaking was intended to manufacture or produce." Giving the above meaning it would be seen that in the case of the assessee the end-product is a tunnel or a power house or a dam. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of relief under section 80J. In view of our findings above, the assessee would not be entitled to a deduction under section 80J and, therefore, the question of computation will not arise. However, as the ground has been taken in the assessment years 1977-78 and 1978-79, we proceed to consider it. The Commissioner (Appeals) has directed that the computation should be made in accordance with the provisions of section 80J as amended retrospectively by the Finance (No. 2) Act, 1980. The only submission of the learned counsel was that the direction should also refer to the ultimate decision of the Supreme Court about the retrospective operation of section 80J. After considering the submission, we would direct that if it becomes necessary to compute the relief under section 80J then the decision of the Supreme Court is bound to be taken into consideration by the ITO. In fact, such a direction is implied as the law to be applied is as per the statute and also as interpreted by the Supreme Court. We will leave this matter at that. 43. This now leaves us with the grounds taken by the department for the assessment years 1977-78 and 1978-79 regarding investment allowance under section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 32A. Subject to the above clarification the direction of the Commissioner (Appeals) insofar as it relates to the assessment year 1978-79 will stand while his direction in the assessment year 1977-78 will be vacated. 45. We would like to summarise our findings on the various points raised in these appeals : 1. The assessee-company having as its main business carrying out of civil construction works like tunnels, power houses, etc., can be treated as an industrial company if on facts it is found that the company is engaged in manufacture or processing of goods. 2. In order to find out whether the company was mainly engaged in the activity of manufacture or processing of goods, the income-tax authorities have been directed to ascertain the relevant facts and come to a conclusion on consideration of all the materials and also having regard to the Explanation to the definition of 'industrial company' as given in the Finance Act. 3. The assessee-company which is engaged in constructing tunnels, dams, power houses, etc., is not eligible for deduction under section 80J or 80HH as the construction undertakings cannot be held to be manufacturing or producing articles within th ..... 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