9911796707
TMI Blog1995 (11) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... the first petitioner has separate industrial undertakings registered as small scale industrial units ('SSI units'). On 25-3-1989, respondent No. 2 issued a circular purporting to club investments in all the SSI units set up by a common proprietor/partner/director and if such investment ex- ceeds Rs. 35 lakhs then all such units would be liable for deregistration. The first petitioner made two separate applications - one on 4-10-1990, for permanent registration of a separate small scale undertaking for electric motors and parts thereof ; the second on 8-10-1990, for provisional registration for cycle frames, forks handles, etc. It had also made an application on 22-2-1990, for reassessment of capacity of iron and steel for hand pumps, etc. 3. The first petitioner furnished the information in respect of its directors and informed that the investment ceiling had been complied with. Further, it stated that each of the undertakings was distinct from the other. The respondents, however, rejected all the applications lodged by the first petitioner, vide their separate orders of the same date, i.e., 27-11-1990. The rejection was based, inter alia, on the ground that the value of plant and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G.M., District Industries Centre, Ghaziabad, on 28-8-1985, issued a certificate of regis-tration as a SSI unit. Each of the undertakings of the first petitioner was treated as a distinct undertaking for the purpose of income-tax, sales tax, central taxes, P.F., E.S.I., and were manufacturing separate items/ products. These were separate legal entities. 5. The Ministry of Industry issued a notification under section 29B of the Industries (Development and Regulation) Act, 1951 ('the IDR Act') ex-plaining the applicability of certain provisions of the Act for specified undertakings, vide notification dated 16-2-1973. It also notified the criteria for constituting a small scale industry and its investment limit not exceeding Rs. 10 lakhs. From time to time the respondent had been revising this investment limit. Lastly it was revised and raised to Rs. 35 lakhs, vide order dated 18-3-1985, and vide notification dated 30-6-1988. A small scale industrial undertaking has been defined with reference to the investment ceiling of Rs. 35 lakhs. As the petitioner had already been running five SSI units, it applied on 22-2-1990, for reassessment and certification of consumption capacity of iro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y any other undertaking. Manufacturing of separate items not related to other industries is another criterion to be kept in mind but this is not the sole criterion. If this is treated as the sole criterion then it would mean that each of the petitioner's industrial undertakings can enjoy the investment ceiling in plant and machinery up to Rs. 35 lakhs even though controlled by a single undertaking. This is not the intention of the provisions of section 11B read with section 3(d) of the IDR Act. Each of the activities conducted in a separate factory of the first petitioner even though located at different places but being under single control has to be considered as one industrial undertaking. All the factories of the first petitioner are being run by the first petitioner and as such they all jointly qualified for being recognised or de-recognised as one small-scale industrial undertaking. Different factories located at the same or different postal addresses but having common directors or controlling directors, shall constitute one single industrial undertaking. Hence the applications of the first petitioner were rightly rejected. On the same lines is the defence set up by the thir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' means any undertaking pertaining to a scheduled industry carried on in one or more factories by any person or authority including Government;" Section 3(;) defines small-scale industrial undertaking : " 'small scale industrial undertaking' means an industrial undertaking which, in accordance with the requirements specified under sub-section (1) of section 11B, is entitled to be regarded as a small scale industrial undertaking for the purposes of this Act;" For an undertaking to be a small scale undertaking it should be an 'industrial undertaking' as defined under section 3(d) read with the definition of 'factory' in section 3(c). Thus, only those units employing less than 50/100 workers and operating with/without any power would attract the provisions of the Act. Other units are not subject to the regulatory provision relating to licensing under the Act. An undertaking must fulfil all the requirements that the Government may lay down under section 11B. 9. Section 11B was inserted by the Amendment Act, 1984, with the intention to lay down the statutory guidelines for determining what should constitute an ancillary small scale industrial undertaking. The Central Government issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Jaitley contended that reading section 11B with the notifications issued under section 29 read with section 3(d) by no stretch of imagination, the Central Government became empowered to club various industrial undertakings of the first petitioner on the basis of its directors being directors of another unit. In fact the Schedule to the Act is in relation to the items or products it manufactures and not as to who is the owner or having control of the industries, vis-a-vis, the directors or the partners. Nor could registration be denied on the basis of clubbing of investment of all the five units. The interest of one director in one company could be different from that in the other unit. This is not a relevant factor for registering or deregistering any small-scale industri- al unit. 11. Admittedly, the Central Government issued notifications as per the provisions of section 11B read with section 29B laying down the limit for the purposes of the fixed assets in plant and machinery to make an SSI unit claim exemption. Initially this limit/ceiling was not to exceed Rs. 20 lakhs, thereafter it was enhanced by the second notification issued on 31-8-1987, thereby raising the limit of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the use of the expressions 'industrial undertaking' and 'factory' appearing in section 3(d) and 3( j), Mr. Jaitley drew the conclusion that even if a company carries on business of different products, but if it requires its industrial undertaking to be a small-scale industrial under- taking it has to prove and establish that that unit is manufacturing a reserved product. The first petitioner's existing five undertakings and the two for which it applied for registration are manufacturing different products unrelated to each other. The directors or partners cannot own the company. Their association or non-association would not determine the character of the undertaking. Refuting the arguments of Mr. Joseph and Ms. Pinky Anand, Mr. Jaitley urged that a case of fraud cannot be built on these facts simply because some of the directors of one SSI unit of the first petitioner are directors or partners or proprietors or other SSI units manufacturing totally different and unrelated goods/items. A case of fraud would rest on the facts if one unit of the petitioner under the garb of separate registration but having the same ownership was manufactur- ing identical goods/items. But that is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he industrial undertaking is an essential restriction which in this case has been violated ; hence rejection. 13. Admittedly, the notification issued under section 29B imposes two restrictions. The restriction of ownership and control is equally impor- tant along with the restriction of fixing the investment limit. Therefore, it would not be correct on the part of Mr. Jaitley to contend that the only criterion to look at the time of registration or continued registration is products/items produced or class of products. 14. Section 3(d ) defines an 'industrial undertaking'. The emphasis in this section is on a scheduled industry. A small-scale industrial undertaking must necessarily relate to a scheduled industry but that does not mean it has no nexus as to who will be controlling it. Therefore, the corporate shell of the company is a relevant factor but simply if one director happens to be a partner or director in another company that by itself does not indicate that this unit controls or owns the other. In this case so far as the investment limit is concerned, the rejection is not on that basis. The only ground taken for rejection is that the director of one company happens to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is also a director of another unit then it would not be eligible for exemption. Rather as discussed above the first notification dated 16-2-1973, clearly stipulates that the restrictions relevant for the purpose are (i) the investment in fixed assets should not exceed the limit fixed ; and (ii) that the said undertaking should not be a subsidiary or owned or controlled by any other undertaking. The word 'subsidiary', 'owned' or 'controlled' have not been defined. The dictionary meaning of the word 'subsidiary' is "serving, to assist or supplement, auxiliary (of a company) controlled by another, paid for by subsidy, hired by another nation, a subsidiary thing or person an accessory, a subsidiary, company." A reading of the dictionary mean- ing of 'subsidiary' shows that the other company which is a subsidiary of this company must serve its purpose or assist it or supplement it by controlling it. Merely because a director happens to be a director in another unit that would neither mean that the unit serves this unit nor would supplement its products. The word 'owned' is synonymous with 'owner' as specified in clause (f) of section 3 which reads as under : "( f) 'owner' in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than half of the total voting power of such company. Illustration (2) to section 4 of the Companies Act states that for the purposes of sub-section (1), the composition of a company's board of directors shall be deemed to be controlled by another company if, but only if, that other company by the exercise of some power exercisable by it at its discretion without the consent or concurrence of any other person, can appoint or remove the holders of all or a majority of the directorships; but for the purposes of this provision that other company shall be deemed to have power to appoint to a directorship with respect to which any of the following condi-tions is satisfied. Sub-section (3) of section 4 lays down the conditions in determining whether one company is a subsidi-ary of another- (a)any shares held or power exercisable by that other company in a fiduciary capacity shall be treated as not held or exercisable by it; (b)subject to the provisions of clauses (c) and (d) any shares held or power exercisable- (i)by any person as a nominee for that other company..., or (ii)by or by a nominee for, a subsidiary of that other company, not being a subsidiary which is concerned only in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be deregistered or registration be refused. This will create a position which is even not intended by the Legislature, but the respondent wants to achieve by administrative instructions. It is to remove such like difficulties that the Government of India issued a new notification dated 1-1-1993, clarifying the position. It is not disputed that the products which are manufactured by these existing five undertakings of the first petitioner are manufactur- ing different products and some are not producing any items but only deal with investments. Similarly by the two applications lodged the petitioner has sought registration of industrial undertakings intended to manufacture totally different products under different control and management. So far, there is no difficulty in appreciating the arguments of Mr. Jaitley. However, when he contends that corporate control is immaterial, to my mind, this argument is without merit. To determine that a company which is asking for registration is not a subsidiary of or owned or controlled by another undertaking it is necessary for the respondent to examine the corporate character of the company by lifting the veil. Therefore, the informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n fact based on evolving circumstances. The idea behind the object was to encourage small scale industries. Therefore, exemptions are granted but not to benefit big business houses. This is necessary for the purposes of ascertaining what is the character of ownership and what products it manufactures, the investment limit in plant and machinery. Hence, these are reasonable restrictions and so is the control and ownership of the company. 19. It cannot be said by reading and re-reading of the Act that for the grant of the benefit only the products manufactured by the industrial undertakings have to be noticed and nothing else. It must be understood clearly that if petitioner No. 1 or its SSI units are not controlled or owned by other units or undertakings and similarly the unit at Ghaziabad is not a subsidiary or controlled by any other undertaking then the respondents cannot reject the applications made by the first petitioner for grant of fresh registration or reassessment as the case may be. The respondent had to give a categorical finding in this regard. Having failed to do so the impugned three orders dated 27-11-1950, respectively, cannot be sustained. The same are quashed. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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