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TMI Blog2002 (8) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... es see-company was eligible for deduction under sections 80J and 80HH of the Act and the assessee's undertaking could be held to be manufacturing or producing articles within the meaning of sections 80J and 80HH for the assessment years in question? Department: Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in directing the Income-tax Officer to consider the assessee's claim for investment allowance for the assessment years in question, for being allowed provided all other conditions laid down in that section were satisfied? I.T.R. No. 28 of 1988 Assessment year 1981-82: (i) Whether, on the facts and in the circumstances of the case, the assessee-company was eligible for deduction under sections 80J and 80HH of the Income-tax Act, 1961, and the assessee's undertaking could be held to be manufacturing or producing articles within the meaning of sections 80J and 80HH for the assessment years in question? (ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in directing the Income-tax Officer to consider the assessee's claim for investment allowance for the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly or conveniently combined by research, development, improvement with the business of the company." The assessee undertakes contract, inter alia, for construction of tunnels, powerhouses and dams. It claimed deduction under section 80J of the said Act. It also raised a claim that it should be treated as an "industrial company" and, thus, should be held to be entitled to a lower rate of tax. The said claims of the assessee, however, were not acceded to by the Assessing Officer. The said claims relate to the assessment years 1976-77 to 1978-79. However, during the subsequent years, the assessee had also claimed relief under section 80HH of the said Act. The said claim of the assessee although initially was not accepted by the Assessing Officer, the same was done by the Commissioner of Income-tax (in short, "the CIT(A)"). The assessee further claimed relief under section 32A of the said Act. At this juncture, we may notice that as regards the assessee's claims for being treated as an "industrial company", the learned Tribunal directed the concerned authorities to ascertain the basis of the claim as to whether the assessee is an "industrial company" or not. The learned Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the following conditions, namely:-- (i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970, but before the 1st day of April, 1990, in any backward area; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area: Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose in any backward area; (iv) it 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. Explanation.--... (4) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of each of the ten assessment years beginning with the assessment year relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e previous year in which the industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning (such assessment year being hereafter, in this section, referred to as the initial assessment year) and each of the four assessment years immediately succeeding the initial assessment year:..." 32A. Investment allowance.--... Explanation.--... (2) an industrial undertaking shall be deemed to be a small-scale industrial undertaking, if the aggregate value of the machinery and plant (other than tools, jigs, dies and moulds) installed, as on the last day of the previous year, for the purposes of the business of the undertaking does not exceed,-- (i) in a case where the previous year ends before the 1st day of August, 1980, ten lakh rupees; (ii) in a case where the previous year ends after the 31st day of July, 1980, but before the 18th day of March, 1985, twenty lakh rupees; and (iii) in a case where the previous year ends after the 17th day of March, 1985, thirty-five lakh rupees, and for this purpose the value of any machinery or plant shall be, (a) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man and Co. [2000] 243 ITR 377 (Mad); CIT v. Coromandel Engineering Co. Ltd. [2002] 257 ITR 792 (Mad). He would submit that construction companies, thus, are also entitled to the benefit of the aforementioned provisions in relation to the intermediate product. As regards construction of section 32A of the said Act, learned counsel would submit that the same being a beneficent provision it should be construed liberally. Manufacturing activity, contends learned counsel, would not depend on the end-products, but there are instances where even a slight change in the identity of the original product has been held to come within the purview of the manufacturing activity. The end-product, learned counsel would contend, is a test, which should not be applied in a case of this nature. Mr. Jolly, learned counsel appearing on behalf of the Revenue, however, would submit that the jurisdiction of this court under section 256 of the said Act is very limited. Learned counsel would take us through the order passed by the Assessing Officer and would submit that no such claim was raised by the assessee before the Assessing Officer. According to learned counsel, the assessee ought to have claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a predominant one. It proceeded to consider the matter from the balance-sheet of the assessee with a view to ascertain its activities. According to the learned Tribunal, although the Tribunal rejected the contention of the assessee that its activities come under the other heads of the definition as well, it observed: "The only part of the definition under which the activities of the company have to be considered are the 'manufacture or processing of goods'. For this purpose, we would send back the case to the Assessing Officer to determine the extent of activity by looking to the nature of activities in each year separately. If the predominant activity is of such nature that it will come under manufacture or processing of goods, the benefit should be given to the company. In the alternative if various types of activities are found to be there, the Explanation to the 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 accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egins 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 the various provisos and Explanation. The conditions which are important for our purpose are conditions numbers (iii) and (iv). These conditions are that the industrial undertaking manufactures or produces articles and has begun to manufacture or produce articles within the specified period. Clause (iv) also lays down certain other conditions with reference to manufacture or production of articles. Deduction under section 80J also starts after the undertaking starts manufacturing or producing articles. Thus, the whole emphasis in section 80J is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the undertaking itself. That will be an intermediate product. However, it cannot result in the conclusion that the undertaking is manufacturing articles for which it has come into existence. If such intermediate article was to be taken into consideration there will be no end to the confusion for computation or grant of relief. In fact, section 80J does not contemplate such a meaning. It has, therefore, to be held that the assessee-company in its undertaking for the construction of tunnels or dams is not manufacturing or producing articles so as to enable it to get deduction under section 80J of the Income-tax Act. The same position will apply to the claim of the assessee under section 80HH of the Income-tax Act. The language there is also similar to the language used in section 80J." As regards the claim of the assessee in terms of section 32A of the said Act, it noticed that whereas investment allowance was allowable if machinery installed is used for the purpose of construction, manufacture or production of any one or more articles or things specified in the list in the Ninth Schedule the law was changed in the assessment year 1978-79. It held: "44. In the assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertaking 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 or what was the article which this particular undertaking was intended to manufacture or produce." Section 80HH of the said Act provides for deduction in respect of profits and gains from newly established industrial undertakings in backwards areas subject to fulfilment of the conditions specified therein. The authorities had not come to the conclusion that the assessee does not fulfil the said conditions, as in view of its decision the said question did not arise for consideration. The learned Tribunal, as noticed hereinbefore, proceeded on the basis that the end product of the assessee would not be an article. Article would, inter alia, mean a particular object or substance, a material thing or a class of things, material or tangible object (see Black's Law Dictionary, 7th edition, page 111). Nobody manufactures a dam or a tunnel. A dam or tunnel is constructed, but the question, which arose for consideration, was although a tun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building. The decisions of the Bombay High Court in CIT v. N.U.C. Private Ltd. [1980] 126 ITR 377 and in CIT v. Shah Construction Co. Ltd. [1983] 142 ITR 696, relied upon by Sri Murthy, are no doubt not decisions rendered under section 80HH or under section 84 they arose under the relevant Finance Acts, the question being whether the assessees were industrial companies-but they do contain observations which tend to support the stand of the Revenue. It may be that the respondent is himself manufacturing some of the articles like gates, windows and doors which go into the construction of a dam but that makes little difference to the principle. The petitioner is not claiming the deduction provided by section 80HH on the value of the said manufactured articles but on the total value of the dam as such. In such a situation, it is immaterial whether the manufactured articles which go into the construction of a dam are manufactured by him or purchased by him from another person. We need not express any opinion on the question what would be the position if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ex court in N.C. Budharaja and Co.'s case [1993] 204 ITR 412 was merely followed and no other law has been laid down therein. In Bhagat Construction Co. Pvt. Ltd.'s case [1998] 232 ITR 722 (Delhi), the facts of the matter were as follows: "The assessee is a private limited company. For the assessment year 1985-86, the assessee derived income from construction of the Bokaro Steel Plant. It was also doing contract work for the DDA. The nature of the work executed by the assessee was as under: (1) Earth work; (2) Masonry work; (3) Concrete work; (4) Wood work; (5) Flooring work; (6) Finishing work; and (7) Miscellaneous items." Following the decision of Minocha Brothers P. Ltd.'s case [1986] 160 ITR 134 (Delhi), it was held: "In our opinion the main business of the assessee shall have to be determined. Whether it was a construction business and any step involved in that construction business was only ancillary to the construction activity of the assessee or production of any goods was itself the main business activity of the assessee ? An assessee may be engaged in the activity of building work as a contractor and in the process of completing that work some manufacture may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment with sand and laying of bricks one after the other or the manufacturing of doors and windows out of timber could not be said to be processing of goods. The said question is not of much relevance in the instant case. In CIT v. Vishal Builders P. Ltd. [2002] 254 ITR 55, this Bench merely held that a builder of commercial flats was not an industrial company and was, therefore, not entitled to be taxed at the lower rates. The questions, which arose for consideration in these matters again did not fall for consideration therein. We may in the aforementioned backdrop notice several other decisions, which had been relied on by Mr. Ahuja. In K.S. Venkataraman and Co. Pvt. Ltd.'s case [2000] 243 ITR 314, a Division Bench of the Madras High Court considered the effect of the decision in Minocha Brothers P. Ltd.'s case [1993] 204 ITR 628 (SC) as also in N. C. Budharaja and Co.'s case [1993] 204 ITR 412 (SC) and held: "Having gone through the order of the Commissioner, we are not satisfied that his finding was rendered after considering the evidence which was required to be considered for recording such finding. The Commissioner has not given any reason for his holding that the works l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e co-operation between the labourer and the employer. It must be systematic. The industrial undertaking must be engaged in bringing into existence articles or things by a process of manufacture, and if these tests are met, an industrial undertaking can be recognised as being in existence. The fact that the owner of that undertaking is also engaged in other activity, which cannot be regarded as an industrial activity, would not disentitle the undertaking or the owner thereof from claiming the benefits provided under section 32A(2) of the Act, if all other conditions as set out in that section are met by the assessee. As the matter has not been examined with reference to the question as to whether the plant or machinery installed for which the investment allowance had been claimed were used in the manufacture of other goods or articles, we consider it just and proper to remand the matter to the Assessing Officer for fresh consideration and examination of the assessee's claim. The Assessing Officer shall give due opportunity to the assessee and after scrutinising the materials produced, if he is satisfied that the machinery or plant is in fact used in the manufacture of articles or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of manufacturing and construction are entitled to the benefits of the aforementioned provisions in the light of the decisions relied upon by Mr. Ahuja, being essentially a question of fact had not been considered by the Tribunal. It, as noticed hereinbefore, mainly proceeded on the basis of the end-product doctrine. We may further notice that a Division Bench of the Bombay High Court in CIT v. Pressure Piling Co. (India) P. Ltd. [1980] 126 ITR 333 held: "The essence of a manufacturing process is the conversion of raw material into entirely a new commodity or a new thing. The place or the side where the manufacturing process or the process of production of something is carried out is not relevant for determining whether the product produced or manufactured is an article. The mere fact that an article is manufactured or brought into being at the site itself would not be material for determining whether the thing produced or manufactured is an article. It is not necessary that an article should be manufactured in a factory alone. It is also not necessary that all articles must necessarily have the quality or the possibility of being sold and purchased across the counter or th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 15C of the Indian Income-tax Act, 1922, relied upon the decision of the apex court in Tata Iron and Steel Co. Ltd. v. State of Bihar [1963] 48 ITR 123, and held that even though the manufactured products of the new industrial undertakings were merely used in the assessee's other business of manufacturing of boilers, machinery, plant, wagons, etc., the element of profit was there and the extent of the same could be ascertained as the assessee was maintaining separate books of account. It was further held: "It is clear that the principal business of the assessee is heavy engineering in the course of which it manufactures boilers, wagons, etc. If an industrial undertaking produces certain machines or parts which are, by themselves, identifiable units being marketable commodities and the undertaking can exist even after the cessation of the principal business of the assessee, it cannot be anything but a new and separate industrial undertaking to qualify for appropriate exemption under section 15C. The principal business of the assessee can be carried on even if the said two additional undertakings cease to function. Again, the converse is also true. The fact that the articles pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets in the two cases with which we are concerned." The apex court observed: "As in the instant case, once the new industrial undertakings are separate and independent production units in the sense that the commodities produced or the results achieved are commercially tangible products and the undertakings can be carried on separately without complete absorption and losing their identity in the old business, they are not to be treated as being formed by reconstruction of the old business." In CIT v. Hind Lamps Ltd. [1991] 190 ITR 553, a Division Bench of the Allahabad High Court, of which B. P. Jeevan Reddy J. (as his Lordship then was), was a member, observed: "The object of section 80J is to encourage new industrial undertakings by providing that a certain part of the income should be exempted from tax. This exemption is made available for a certain number of years from the commencement of the working of the new industrial undertaking. The section states that, where any profit and gain is derived from any industrial undertaking, that portion of it to the extent of 6 per cent. of the capital employed in the undertaking shall be exempted from tax. The words 'profits and gains d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated earlier, in the present case, the Tribunal has recorded findings of facts in respect of each of the prerequisites as laid down by the Supreme Court in the abovereferred case and, as such, the assessee is clearly entitled to the benefits of section 80J of the Act." Yet again in CIT v. Beehive Engineering Co. and Allied Industries (P.) Ltd. [1996] 221 ITR 561 (AP), Syed Shah Mohammed Quadri J. (as his Lordship then was), speaking for a Division Bench of the Andhra Pradesh High Court, upon referring to the interpretation of the term "industrial company", as given in clause (c) of sub-section (7) of section 2 of the Finance Act of 1978, held: "From the above extract, two things are clear, viz., (i) that for a company to be an 'industrial company' within the meaning of the abovesaid provision, it is enough if the company is carrying on manufacturing of goods, and (ii) that the application of the Explanation would arise only in a case where the company is not mainly an industrial company; in such a case if the income of that company from manufacture of goods exceeds 51 per cent. it would be treated as industrial company. In the instant case, having regard to the findings of fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arat High Court in Cellulose Products of India Ltd. [1977] 110 ITR 151, the apex court observed: "Having given our anxious consideration to the respective submissions made by learned counsel for the parties, we are inclined to agree with the contention of learned counsel for the appellant that the High Court, on the facts and in the circumstances of the instant case, committed an error in interfering with the conclusion of the Tribunal. It is settled law that a High Court hearing a reference under the Act does not exercise any appellate or revisional or supervisory jurisdiction over the Tribunal and that it acts purely in an advisory capacity. If the Tribunal, after considering the evidence produced before it on a question of fact, records its finding, it cannot be interfered with in a reference by the High Court unless of course such finding was not supported by any evidence, was perverse or patently unreasonable. In our opinion, the finding of the Tribunal in the instant case did not suffer from any of these infirmities. The finding that the production of cellulose pulp during the month of March, 1961, was not a trial production and that cellulose pulp as manufactured by the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so the other High Courts must, therefore, be considered while taking into the account the fact situation obtaining in each case. Furthermore, we may notice that as regards investment allowance in CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308 (SC) and another matter, it has been held: "Sub-section (2) of section 32A, however, requires to be examined to see whether there is any provision in that sub-section which requires that the assessee should not merely use the machinery for the purposes of his business, but should himself use the machinery for the purpose of manufacture or for whatever other purpose the machinery is designed. Sub-section (2) covers all items in respect of which investment allowance can be granted. These items are, ship, aircraft or machinery or plant of certain kinds specified in that sub-section. In respect of a new ship or a new aircraft, section 32A(2)(a) expressly prescribes that the new ship or the new aircraft should be acquired by an assessee, which is itself engaged in the business of operation of ships or aircraft. Under sub-section (2)(b), however, any such express requirement that the assessee must himself use the plant or machinery is absent. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be allowed at the rate of 35 per cent. of the actual cost of the machinery. In the instant case, the machinery was installed before April 1, 1970. It cannot be disputed that it was installed for the purpose of manufacture of nuts, bolts and screws for automobiles falling under item No. (20) in the Fifth Schedule being automobile ancillaries'. These items were in fact manufactured. Section 33(1)(b) does not state that the machinery which has been installed for the manufacture or production of one or more of the articles specified in the Fifth Schedule should be used solely or exclusively for the manufacture of that/those article/articles. As long as the machinery, which is installed, manufactures any of the articles specified in the Fifth Schedule, the assessee would be entitled to claim development rebate at the rate of 35 per cent. If the machinery is installed before April 1, 1970, notwithstanding the fact that in addition to the manufacture of the listed items, the assessee also manufactures some other goods with the help of that machinery. If the contention of the Department is accepted, the effect would be that if the machinery is used for the manufacture of one of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 ITR 722, in the assessee's own case for 1985-86 and submitted that the views of the Commissioner of Income-tax (Appeals) and the Tribunal cannot be maintained. Learned counsel for the assessee submitted with reference to the decision of the apex court in Minocha Bros. (P.) Ltd. v. CIT [1993] 204 ITR 628, that the view expressed by the Commissioner of Income-tax (Appeals) and the Tribunal are on terra firma. It is to be noted that the decision of the apex court in Minocha Bros. (P.) Ltd.'s case [1993] 204 ITR 628 was in respect of a decision of this court in CIT v. Minocha Bros. (P.) Ltd. [1986] 160 ITR 134. We find from the case of Minocha Bros. (P.) Ltd.'s case as decided by the apex court that the determinative factor would be the percentage of the total income attributable to manufacturing, processing and mining activities undertaken by the assessee. If it is not less than 51 per cent., it has to be treated as an industrial company. The assessee with reference to certain observations made by the Commissioner of Income-tax (Appeals) and the Tribunal claimed that there was a positive finding in this regard. We find that the Commissioner of Income-tax (Appeals) and the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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