TMI Blog2002 (8) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing or producing articles within the meaning of sections 80J and 80HH?" - - - - - Dated:- 26-8-2002 - Judge(s) : S. B. SINHA., A. K. SIKRI. JUDGMENT The judgment of the court was delivered by S.B. SINHA C.J. -The following questions at the instance of the assessee and/or the Revenue in respect of the assessment years specified hereinbelow have been referred by the Income-tax Appellate Tribunal, Delhi Bench "A", New Delhi (in short, "the Tribunal"), under section 256(1) of the Income-tax Act, 1961 (in short, "the said Act"), for the opinion of this court: I.T.R Nos. 86-88 of 1984 For the assessment year 1976-77: "(i) Whether, on the facts and in the circumstances of the case, the assessee-company was eligible for deduction under section 80J of the Income tax Act, 1961, and the assessee's undertaking could be held to be manufacturing or producing articles within the meaning of section 80J?" I.T.R. Nos. 315-318 of 1985 Assessment years 1979-80 and 1980-81 Assessee: "Whether, on the facts and in the circumstances of the case, the asses see-company was eligible for deduction under sections 80J and 80HH of the Act and the assessee's undertaking could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supply for local, municipal, State, Central authorities, Government Departments, railways, universities or for any other person, firms or companies. 2. To undertake the construction of every description and to erect, rebuild, enlarge, alter, pull down, improve, re-model existing works and to convert and appropriate land for roads, streets, squares, gardens, playgrounds and other conveniences. 3. To buy, purchase or otherwise acquire or construct multi-storey flats, houses, buildings, factories and other properties lease-hold or free-hold either on rent, lease or for any other consideration and to sell, let, mortgage, assign pledge, lease out or otherwise dispose of on instalment basis or under hire-purchase agreements or any other manner and generally to deal with the properties of the company that may be necessary or convenient for any of the objects of the company. 4. To act as consultants, advisers, architects, civil engineers, designers, town planners, valuers, surveyors and supervisers for all sorts of building activities and allied jobs and works, which may be usefully or conveniently combined by research, development, improvement with the business of the company." T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court on this question. (v) While the assessee-company is not entitled to investment allowance under section 32A for the assessment year 1977-78, the claim of the assessee has to be considered for the assessment year 1978-79 and the same has to be allowed provided all other conditions laid down in that section are satisfied," Before proceeding to deal with the questions involved in these references, we may notice some of the relevant provisions of the said Act, which read thus: "80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.--(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent. thereof. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:-- (i) it has begun or begins to manufacture or produce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year): Provided that in relation to the profits and gains derived by an assessee, being a company, from an industrial undertaking which begins to manufacture or produce articles or to operate its cold storage plant or plants after the 31st day of March, 1976, or from a ship which is first brought into use after that date, or from the business of a hotel which starts functioning after that date, the provisions of this sub-section shall have effect as if for the words 'six per cent.', the words 'seven and a half per cent.' had been substituted. (2) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts under the aforementioned provisions are being claimed by a company for an end-product, which would not be an activity of an industrial company, but it is another thing to say that such benefits are being claimed by a company not for its end-product, but for its intermediate products. Once it is held, learned counsel would contend, that the assessee-company is so entitled as it is an "industrial company", it would also be entitled to the investment allowance. Learned counsel would submit that the learned Tribunal committed a manifest error in relying upon a decision of the Gujarat High Court in Cellulose Products of India Ltd. v. CIT [1977] 110 ITR 151, wherein it was held that "article" should only mean the end-product and not the intermediate product. Sections 80HH, 80J and 32A, learned counsel would contend, claiming benefit in relation to the intermediate product will have a role to play. In support of the said contention, strong reliance has been placed on CIT v. Bhagat Construction Co. [2002] 253 ITR 177 (Delhi); CIT v. K.S. Venkataraman and Co. Pvt. Ltd. [2000] 243 ITR 314 (Mad); CIT v. K.S. Venkataraman and Co. [2000] 243 ITR 377 (Mad); CIT v. Coromandel Engineering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 385 (All). Learned counsel would contend that for the purpose of construction of the statutory provisions, the purpose of the said Act must be taken into consideration viz-a-vis the claim of the assessee. Mr. Ahuja, in reply, would submit that the questions of law may not arise out of the findings of the Assessing Officer, but out of the findings of fact by the Tribunal. Learned counsel reminded us that the said claim was made in the proceedings and in fact were allowed by the Commissioner of Income-tax (Appeals). The learned Tribunal considered a question as to whether, on the facts of the case, the assessee was engaged in manufacture or processing of goods and whether it can be held that it is so "mainly engaged". It had not been disputed before the learned Tribunal that manufacture of steel structure, concrete slab and other activities of either manufacture or processing of goods are invariably undertaken by the construction company. The Tribunal, therefore, held that the assessee-company is engaged in the manufacture or processing of goods. It, however, raised a question whether such engagement can be considered to be a predominant one. It proceeded to consider the matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourselves for deciding where a construction company is an industrial undertaking. The word 'industrial undertaking' is not defined in the section itself and one has to take the general meaning as used at the other places and if necessary in other laws. Construction work has the possibility of becoming an industrial undertaking depending on the nature of the work done and the extent to which the undertaking uses men and machines. A construction company of the magnitude of the assessee can be said to be an industrial undertaking but the question does not end there. Section 80J does not apply to all industrial undertakings. It only applies to an industrial undertaking, which fulfils all the conditions laid down in section 80J(4). The conditions as given in section 80J(4) are as under: (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 oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80J the question would arise as to when such undertaking starts being eligible for the relief under section 80J. A company may start making slabs in one year and the other small structural components in another year and may ultimately construct the dam in the third year. If the ultimate product is to be considered the undertaking could not be eligible in the first two years and in the third year when the ultimate product comes into existence, it is found that it is not an article, as it is an immovable property. We are not inclined to take the view that the making of tunnel or dam can also be considered as a manufacture of articles. While we do so, we respectfully depart from the decision of the Orissa High Court in the case of N.C. Budharaja [1980] 121 ITR 212. Section 80J has to be considered as a whole and when we look to its requirements, we find that an undertaking like the assessee cannot get the benefit under section 80J as it stands. In the course of making of dams or tunnels the assessee may acquire various raw materials and may process them to construct the dam. In that process it is likely that some components are manufactured by the undertaking itself. That will be an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts of India Ltd.'s case [1977] 110 ITR 151 (Guj), it was held: "It is obvious on a plain reading of section 84 that the articles which are referred to in clause (iii) of sub-section (2) are the end-product or the final product for the manufacture of which the undertaking has been set up and since the same words, namely, 'manufacture or produce articles', are with a slight variation occurring in section 84(7)(i), the same meaning of 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 84(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 prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (a) of sub-section (2) lays down a qualification to the effect that the assessee should be engaged in the business of operation of ships or aircraft; no such qualification has been laid down in clause (b) thereof. Sub-clause (iii) of clause (b) of section 32A(2) refers to any other industrial undertaking for the purpose of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule. The said provision refers to construction and not to a construction company. It categorically refers to manufacture or production. Having regard to the aforementioned proposition of law, we may notice a decision of the apex court in N.C. Budharaja and Co.'s case [1993] 204 ITR 412. Therein the question, which arose for consideration of the apex court, was as to whether the construction of a dam to store water can be characterised and would amount to manufacturing or producing of article or articles, as the case may be. It was held: "The expressions 'manufacture' and 'produce' are normally associated with movables-articles and goods, big and small-but they are never employed to denote the construction acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y one or more of the aforesaid activities included in its total income of the previous year (as computed before making any deduction under Chapter VI-A of the said Act) is not less than 51 per cent. of the total income. The said question has also not been gone into by the authorities in the instant case. Therein, a Division Bench of this court was dealing with a contention as to whether manufacture of doors, windows, etc., used for the purpose of construction of a building would entitle the assessee for the benefit of lower rate of tax. It was held that the real activity of the assessee is to construct a building, which is not processing or manufacturing of goods. The court accepted that such a provision should receive an interpretation favourable to the assessee, but observed that a transitory or evanescent product like an R.C.C. block or a door is only a step towards making the whole building. Yet again in the instant case, the question as to whether the assessee herein had been manufacturing the said products regularly or not had not been answered. In Builders Associations of India v. Union of India [1994] 209 ITR 877 (SC), the decision of the apex court in N.C. Budharaja and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the part of the activity generated an income for the purpose of section 80HH The business activities were conducted as a whole and it is almost impossible as accepted by learned counsel for the assessee to decipher one of the activities for the purpose of finding out whether any profit is relatable thereto." Yet again the question raised in these references had not been gone into. In Lucky Minmat Pvt. Ltd.'s case [2000] 245 ITR 830 (SC), it was observed: "We have been shown the statements of case in the present matter as also in the matter of Best Chem and Limestone Industries Pvt. Ltd.'s case [1994] 210 ITR 883 (Raj) and are satisfied that the Tribunal has found as aforestated. There was, therefore, clearly a distinction on the facts. The conversion into lime and lime dust or concrete by stone crushers could legitimately be considered to be a manufacturing process while the mere mining of limestone and marble and cutting the same before it was sold in the market could not be so considered." In Vaish Brothers and Co.'s case [2001] 247 ITR 385, a Division Bench of the Allahabad High Court, however, observed that mere preparation of mortar by mixing cement with sand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . A composite undertaking which is an industrial undertaking in one part and non-industrial undertaking in another part does not by that reason cease to be capable of being regarded as an industrial undertaking to the limited extent of its claim for the benefits under the Act, in relation to the activity which can properly be regarded as a manufacturing activity carried on by such an undertaking. Section 32A of the Act, which confers the benefit of investment allowance is a provision, which is obviously meant to encourage industries to install new plant and machinery where such plant and machinery is utilised for the manufacture or process of articles and goods. The ownership of the industry is not the material factor. It is the bringing into existence of a manufactured article with the aid of plant and machinery that is material. Such manufacturing activity is required to be carried out by an industrial undertaking. The two things are interconnected. An undertaking wherein that activity of manufacturing takes place is an industry, if it meets the well known tests for determining the existence of an industry. The activity should be an organised activity and there should be co-ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, it was possible to compute the profits on the basis of the transfer of limestone to the final stages at the market price. The decision of the Division Bench of this court in Dalmia Cement's case [2002] 253 ITR 725 is, therefore, distinguishable on the facts. Keeping in view the decision of the apex court in the case of Tata Iron and Steel Co. Ltd. v. State of Bihar [1963] 48 ITR 123 (SC) and the decision of the other High Courts following the same, we are of the opinion that the Division Bench of this court in Dalmia Cement's case [2002] 253 ITR 725 cannot be considered to have constituted a precedent. We may notice that in the case of Regional Manager v. Pawan Kumar Dubey, AIR 1976 SC 1766, the apex court has clearly held that: 'It is the rule deducible from the application of law to the facts and circumstances of a case which constitutes its ratio decidendi and not some conclusion based upon facts which may appear to be similar. One additional or different fact can make a world of difference between conclusions in two cases even when the same principles are applied in each case to similar facts'." The question as to whether companies, which undertake such composite busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd was described as a pile, it was an article for the purpose of section 84(2)(iii), since it was brought into being by a special process of production. Therefore, the assessee was engaged in the 'manufacture or production' of articles within the meaning of section 84(2)(iii) and was entitled to relief under the section." In the instant case, the assessee does not claim benefit in respect of the entire profit earned by it, but is only asking for the relief to the extent to which it would have otherwise been entitled to, had it been held to be an "industrial company" for the purpose of manufacture of the intermediate products, which it is required to manufacture for the purpose of utilisation thereof in construction of dams and tunnels, etc. It was, in our considered opinion, obligatory on the part of the Department to go into the said question. Such questions were specifically raised by the assessee before the Commissioner of Income-tax (Appeals) as also before the Tribunal, but the same has not been considered in their proper perspective. We may also notice that in Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195, the apex court while dealing with the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old business. These products may be consumed by the assessee in his old business or may be sold in the open market. One thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced and at least a minimum of ten persons with the aid of power and a minimum of twenty persons without the aid of power have been employed. Such a new industrially recognisable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer of any assets of the old business to the new undertaking, which takes place when there is reconstruction of the old business. For the purpose of section 15C the industrial units set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of section 15C the new undertaking must be formed by reconstruction of the old business. Now, in the instant case, there is no formation of any industrial undertaking out of the existing business since that can take place only when the assets of the old business are transferred substantially to the new undertaking. There is no such transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of section 80J of the Act do not envisage that separate accounts should be submitted in respect of the new unit and it was also not necessary that separate accounts should be maintained. However, in the present case, separate accounts in the ledger had been kept by the assessee in respect of the new unit on the basis of which, according to him, profits have been determined." The same principle was reiterated by the Patna High Court in CIT v. Hindusthan Malleables and Forgings Ltd. [1991] 191 ITR 70. Therein relying upon the decision of the Supreme Court in Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195, it was held: "It has been held by the Supreme Court at page 206 of the Report that, in order to be entitled to the benefit of deduction in question, the following facts have to be established by the assessee, namely, (i) investment of substantial fresh capital in the industrial undertaking set up, (ii) employment of requisite labour therein, (iii) manufacture or production of article in the said undertaking, (iv) earning of profits clearly attributable to the said new undertaking and (v) above all, a separate and distinct: identity of the industrial un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying on manufacturing activities. In this view of the matter, we need not go into the other decisions cited by learned counsel for the Revenue." Yet again Quadri J. in CIT v. Elemech Industrial Constructions [1998] 229 ITR 503 (AP), followed the aforesaid decision in Beehive Engineering Co.'s case [1996] 221 ITR 561 (AP) stating: "For the purposes of section 2(7)(c) of the Finance Act, 1978, a Division Bench of this court, of which one of us, i.e., Syed Shah Mohd. Quadri J., was a member, in CIT v. Beehive Engineering Co. and Allied Industries (P.) Ltd. [1996] 221 ITR 561, considered whether the assessee-company therein, which was purchasing angles, joints and channels, cutting them into required sizes and welding the pieces to manufacture trusses, would fall within the meaning of industrial company. The Bench opined that it was an industrial company. Following the said opinion, in this case also, the activities carried on by the assessee-company cannot but be held to be the activities of an industrial company." The applicability of the end-product test has been considered by the apex court in CIT v. Cellulose Products of India Ltd. [1991] 192 ITR 155. Therein reversing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd particularly of CMC, cellulose pulp and other chemical products'. Manufacture of cellulose pulp was thus indeed one of the objects of the company. The question involved had to be considered in this background and the Tribunal having done so and recorded the finding of fact referred to above, the High Court obviously committed an error in holding that manufacture of cellulose pulp during March, 1961, was of no consequence and that the first year of production would be the assessment year 1962-63 when CMC was actually manufactured. The decision of the Madras High Court relied on by learned counsel for the respondent reported in Madras Machine Tools Manufacturers Ltd. v. CIT [1975] 98 ITR 119, in view of what has been observed above on the facts of the instant case, does not advance the case of the respondent any further than the reasons recorded in the judgment under appeal." Having regard to the fact the question as to whether the assessee is an "industrial company" or not itself has been directed to be determined by the Assessing Officer by the learned Tribunal, we are of the opinion that the matter requires fresh consideration at the hands of the Tribunal again. The decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements of that section, namely, (1) the machinery is owned by the assessee; (2) the machinery is used for the purpose of the assessees' business and; (3) the machinery is as specified in sub-section (2). We are inclined to agree with this reasoning of the High Courts of Karnataka and Madras." Yet again in relation to development rebate in CIT v. Rambal Pvt. Ltd. [1997] 227 ITR 409 (SC), it has been held: "According to section 33(1)(a) development rebate is allowable if the assessee uses the machinery wholly for the purpose of the business carried on by him. It is not in dispute that in the present case, and as has been found by the Tribunal, the items, which are manufactured by the respondent are wholly for the purpose of its business. Therefore, one of the conditions stipulated by sub-section (1)(a) of section 33 stands satisfied. Clause (b) deals with the rate at which the development rebate is to be allowed. It, inter alia, provides that in the case of machinery or plant which is installed for the purposes of manufacture or production of any one or more of the articles specified in the list in the Fifth Schedule and that machinery has been installed before April 1, 1970 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestions, cannot be accepted as the same arise out of the order of the Tribunal. We may further notice that despite the aforementioned decisions, in I.T.C. No. 5 of 1998--Hydel Construction Pvt. Ltd. v. CIT decided on August 14, 1998, Lahoti J. formulated the following questions: "(A) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in disallowing the deduction claimed by the petitioner-company under section 32A of the Act? (B) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in disallowing the deduction claimed by the petitioner-company under section 80HH of the Act? (C) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in disallowing the deduction claimed by the petitioner-company under section 80J of the Act?" Yet again a Division Bench of this court comprising Pasayat J., as his Lordship then was, in I.T.R. Nos. 246-247 of 1982 (CIT v. Bhagat Construction Co. [2002] 253 ITR 177) decided on July 16, 2001, remitted the matter back to the Tribunal stating: "Learned counsel for the Revenue placed reliance on a decision of this court in Bhagat Con ..... 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