TMI Blog1988 (4) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... gistered as M/s Dalmia Agencies engaged in mining china clay silicon sand, granite stones. It was also manufacturing and selling Asbestos Cement pipes at Dalmiapuram and was also processing the China clay and Silica Sand at Rajmahal inBihar. It was also exporting the granite stones after its mining. In the accounting year under appeal the total income from this activity of manufacture or mining as per profit and loss account came to Rs. 5,11,192 after allowing deduction of Rs. 20,282 under s. 80-HH of the IT Act. In other words, the income was Rs. 5,31,484 from its manufacturing activities. There was an unabsorbed depreciation and carry forward loss relating to the asst. yrs. 1976-77 to 1979-80 of much more than the income shown and out of that a sum of Rs. 5,11,192 was set off so as to bring the income from manufacturing activities to nil. Besides this income from manufacturing activities, the assessee has also income from other sources, which amounted to Rs. 2,16,230. After allowing claim under s. 80-M of Rs. 1,28,730, the income from other sources stood at Rs. 86,492. The assessee company did not declare any dividend. The ITO therefore gave a notice to the assessee under s. 104 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in s. 104 was defined as the total income computed in accordance with the provisions of this Act before making any deduction under Chapter VI-A, which meant that the gross total income as computed after giving effect to the provisions of the IT Act must be taken into consideration and so done the gross total income computed was only an amount of Rs. 2,16,230 which consisted only income from other sources and not any income from manufacturing activities. On the question of inadequacy of profits the Commissioner(A) held that the general reserves of the assesses company was as high as Rs. 25 lakhs and the company could not therefore complain that it had no profits much less inadequate profits. 4. The point raised before us was, as was done earlier before the authorities below, as to whether the assessee company could be regarded as a company engaged in the manufacture or processing of goods or in mining. At this stage it is necessary to notice what s. 104 provided. Sub-s. (1) of s. 104 provided that where the ITO is satisfied that in respect of any previous year the profits and. gains distributed as dividends by any company within the 12 months immediately following the expiry o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company could be said to be carrying on business consisting mainly in the manufacture or processing of goods or mining. As we have mentioned earlier the authorities below have consistently taken the view that since the income from manufacturing activities was reduced to nil by process of set off of the carried forward loss and unabsorbed depreciation, the total income of the assessee could not be said to include the income from manufacturing activities and therefore the gross total income of the assessee company did not consist of any income from that activity. 5. The learned counsel for the assessee first argued that the Explanation does not apply. For this purpose he relied upon the observations made at page 35 of Law of Income-tax by Sampat Iyengar, Seventh Edition, where principles of construction of Statutes were discussed. The learned authors have pointed out that an Explanation can in no case enlarge the scope of the section to which it was appended. Ordinarily the purpose of an Explanation is to limit the scope of the main section. An Explanation is quite different in nature from a proviso; the latter excludes, excepts and restricts while the former explains clarifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be a company whose activity consists mainly of manufacturing and processing and once that results, it becomes an investment company liable to be taxed at 50 per cent. He also relied upon the existence of huge reserves to disprove the theory that inadequacy of profits could not be the reason not to declare any dividends 7. To our mind it is not necessary to us to deal with the purpose of an Explanation as much as to find out whether the Explanation applies or not. In our view it cannot be said that we can read s. 104 without the Explanation to understand its meaning and purport, its scope and ambit and its applicability to the facts of the case. One thing is true, namely, that the assessee company is incorporated as a manufacturing company and not as an investment company. The income from investments arose because of the investment of its surplus funds, which was not the main activity of the assessee company. The main activity of the assessee company resulted in a profit of Rs. 5,11,192. That amount was not brought to tax because of the set off of losses. When gross total income definition provided that income as computed in accordance with the provisions of this Act before ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture or processing of goods or for mining or for construction of ships or generation and distribution of electricity, still they would not be entitled to get out of the reach of s. 104 if the income from the main activity of manufacture does not produce income and income was derived only from the other activity of investment. In other words the legislature appears to have contemplated that the company engaged in the construction of ships or in the manufacture or processing of goods or mining etc. would also be having income from other sources and as it would be un-wise to force those companies to declare dividends out of their profits, thereby depleting them of their resources, an exception is provided that those companies need not declare the dividends as provided for in s. 104(1) so that they may be able to plough back their profits, which is also very essential in the improvement of the industrial climate of the company. But if those companies happened to have income from other sources more than the income from manufacturing activities, then the exception would not be applicable. That was the object with which the Explanation was enacted. If this is the object of enacting of sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atisfied is 25 per cent and not 50 per cent treating the company as an investment company. 9. It is also possible to argue that the expression "included in the gross total income" is a process of computation of income and even though it may result eventually in loss, the fact that the income was processed and included in the total income could not be lost sight of, and if the gross total income in that manner included the income from manufacturing activities, and if that income happens to be more than 51 per cent, the company would be out of the reach of s. 104. This argument may not be tenable for the reason that the income from each head has to be separately computed and the result of such a computation must be such as being available to be included in the total income. Therefore the mere fact that the profit and loss account of a company discloses a profit does not mean that the requirements of Explanation are satisfied nor are we satisfied with the argument that the Explanation added to s. (4) was not applicable. As we have already mentioned, we cannot read s. 104 without the Explanation as Explanation is as much substantive part as any other part of that section. 10. As re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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