Income Tax Appellate Tribunal - Cochin
Asian Techs Ltd. vs Income-Tax Officer on 13 December, 1991
Equivalent citations: [1992]40ITD37(COCH)
ORDER
P.I. Mohan Singh, Judicial Member
1. These appeals of the assessee and the revenue relate to the assessment years 1979-80 to 1982-83 and arise out of the consolidated order of the CIT (Appeals), Ernakulam, dated 8-10-1985.
2. The aforesaid appeals involve common issues and are, therefore, heard together and disposed of by a common consolidated order for the sake of convenience.
3. The following grounds have been taken by the assessee in its appeals:
(1) Disallowance of the deduction claimed by the assessee under Section 80J; This ground is common for all the assessment years.
(2) Regarding levy of tax at a higher rate though the assessee is an industrial undertaking.
This ground is common for the assessment years 1979-80 and 1982-83.
(3) Disallowance of weighted deduction under Section 35B claimed by the assessee. This ground is common for the assessment years 1980-81,1981-82 and 1982-83.
(4) Disallowance of relief claimed by the assessee under Section 80HH for the assessment year 1980-81.
(5) Disallowance of travelling and vehicle running expenses for the assessment year 1980-81.
(6) Additional ground taken by the assessee which was omitted in the regular grounds of appeal regarding disallowance of various expenses at different sites for the assessment year 1982-83, namely :
(i) Guest expenses at Rammarn Hyde! Project amounting to Rs, 14,687;
(ii) Transport expenses amounting to Rs. 952;
(iii) Medical expenses amounting to Rs.500 ; and
(iv) Food and refreshments to customers and employees amounting to Rs. 12,460.
4. The following grounds have been taken by the revenue in its appeals:
(1) The CIT (Appeals) erred in holding that the assessee is entitled to investment allowance on the new plant and machinery installed by it.
This ground is common for all the assessment years.
(2) The CIT (Appeals) erred in holding that the steel shuttering equipments used in the construction business will come under building contractors machinery and hence entitled to higher rate of depreciation at 15 per cent.
This ground is common for the assessment years 1980-81, 1981-82 and 1982-83.
5. The brief facts of the case are as under:
The assessee is a company doing business in engineering contracts. The details of contract works and the nature of manufacturing activities carried on by the assessee at various sites during the accounting periods relevant to the assessment years in question are enumerated herein below:
(a) Salem Steel Plant Concrete foundations for heavy industrial infrastructures like machinery foundations including large quantities of controlled concrete, buildings, superstructure steel fabrication and other allied engineering works including water supply systems, sanitary installations and other finishes, manufacture of concrete columns, files, aggregates etc. A full-fledged workshop for the fabrication of steel and for articles to beembedded in concrete as inserts etc. crusher plants for manufacture of aggregates, sand processing plant and operation of quarries.
(b) Chukha Hydel Project Construction of one of the biggest underground Power Houses in Asia, 2 nos. Horizontal Pressure Shafts, Butterfly Valve Chamber, Tail Race Tunnel, Cable and other connected tunnels. The roof of Underground Power House is supported by Heavy Steel Supports manufactured in theassessee's own workshops. Theenlire aggregate required for the concreting was also manufactured with the crushers and sand processing plants at site owned by the assessee.
(c) Lonavala - Karjet Tunnel Work Rock excavation in tunnels, concrete work, construction of abridge overviadutt, 13 nos. minor bridges, earthwork formation in bank and earth cutting. Concrete columns measuring 250 to 300 feet high were manufactured.
(d) Kerala Minerals & Metals work at Chavara Similar works as executed at Salem site.
(e) Malappuram Co-operative Spinning Mills work Construction of Industrial building complex, earth-work, concreting, manufacturing and fixing of steel and wooden doors and windows, fabrication of steel.
(f) Cochin Refinery Limited Civil Engineering Works - fabrication of steel girders and other allied engineering works.
(g) Kudremukh - Slurry Pipeline work Rock excavation - construction of bridges and slurry pipeline.
6. We will first take up the grounds relating to levy of tax at a higher rate of 65% which is common for the assessment years 1979-80 and 1982-83, the ground relating to the claim under Section 80J which is common for all the assessment years and also the claim of the assessee under Section 80HH for the assessment year 1980-81, since all these grounds are interconnected with each other. The Income-tax Officer levied higher rate of tax at 65% on the ground that the assessee is not an industrial company and on the ground that it is not an industrial undertaking and further it is not engaged in the manufacture or production of any article or thing as required under Section 80J and disallowed the claim of deduction under Section 80J and on the same ground disallowed the claim of the assessee under Section 80HH.
7. On appeal, the learned counsel for the assessee contended that the assessee is a manufacturing company and hence it should be treated as an industrial company and only the lower rate of tax at 60% ought to have been levied on the assessed income. In support of the ground regarding 80J and 80HH deductions, the counsel contended that the assessee is an industrial undertaking which manufactures or produces articles as envisaged in Section 80J and hence it is entitled to the deductions under Sections 80J and 80HH. After hearing the learned counsel for the assessee, the CIT (Appeals) held that an 'industrial company' has been defined in the relevant Finance Act as a company engaged in the manufacture or processing of goods etc. Since the assessee is not a company engaged in the manufacturing or processing of goods, he held that the assessee is not entitled to lower rate of tax. He justified his finding by further observing that the mere use of concrete mixers as a contractor cannot be treated as processing of goods carried on by the assessee and even if it is processing the assessee's main income cannot be attributed to that comparatively unimportant function. Regarding the claim of the assessee under Sections 80J and 80HH the CIT (Appeals) confirmed the order of the Income-tax Officer on the ground that the assessee is not engaged in the manufacture or production of any article or thing though it is true that in the course of executing the contract work the assessee would be manufacturing or producing certain articles. As against this order of the CIT (Appeals) the assessee is in appeal before us.
8. The learned counsel for the assessee drew our attention to para 3 of the CIT(A)'s order wherein he has given a categorical finding that the assessee is an industrial undertaking. He contended that there is no definition of 'industrial company' in the Income-tax Act and, therefore, one has to see the Industrial Disputes Act to find a definition for 'industrial company'. In the Industrial Disputes Act, 'an industrial company' is defined as a company which is engaged in an industry. He, therefore, contended that since the assessee is a company engaged in an industry it is an Industrial Company. In support of the ground taken by the assessee regarding deductions under Sections 80J and 80HH, the counsel explained before us the various manufacturing and processing activities done by the assessee in evidence of the fact that it manufactures or produces articles. The counsel contended that for steel plant the assessee has to lay concrete foundations. A full-fledged workshop is maintained for the fabrication of steel to be embedded in concrete as inserts. He further contended that while constructing the underground power houses, the roof of the power house is to be supported by heavy steel supporters. These steel supporters are manufactured in the assessee's own workshop. He contended that in the construction of bridges concrete columns measuring 250 to 300 feet high are also manufactured by the assessee and in the construction of industrial building complex steel and wooden doors and windows are manufactured. He further elaborated his argument by contending that the various steel items required for the works of the assessee are manufactured by the assessee itself in its own workshop. He contended that for concrete work the assessee was making slabs from cement and various other intermediary materials processed to make them into a concrete structure to support the tunnels. He contended that the assessee was obtaining big pieces of stones and was crushing them into various forms and sizes of boulders which were used in constructing tunnels and other projects. He, therefore, contended that since the assessee manufactures or produces various articles to be used in the construction activities of the assessee, it is entitled to claim deduction under Section 80J and Section 80HH. The learned counsel contended that besides the articles manufactured in the construction activities of the assessee, the assessee also manufactures articles which are independently sold and the assessee has received substantial amounts from the works under-taken by it in Bhutan, Kudremukh, Salem, Cochin Refinery and Lonavala-Karjet works. On our directions, he filed before us a copy of the details showing the description of the articles manufactured and also the amounts received by the assessee. He relied upon the following decisions of the various High Courts:
(1) National Projects Construction Corpn. Ltd. v. CWT [1969] 74 ITR 465 (Delhi);
(2)CIT v. N.C. Budharaja & Co. [1980] 121 ITR 212 (Ori.);
(3) CIT v. Pressure Piling Co. (India) (P.) Ltd. [1980] 126 ITR 333 (Bom.).
He also relied upon the following Tribunal decisions:
(1) Raj Kumar Singh & Co. v. ITO [1986] 24 TTJ (All.) 458, (2) Ratilal Bhagwandas & Associates v. ITO [1984] 20 TTJ (Pune) 273.
The counsel next relied upon the decision of the Orissa High Court in the case of CIT v. Belpahar Refractories Ltd. [1981] 128 ITR 610, wherein their Lordships of the Orissa High Court have held that the rule of res judicata does not apply to assessment proceedings, but there are two exceptions to this rule, namely, an earlier decision on the same question cannot be reopened unless that decision is arbitrary or perverse or arrived at without due enquiry. The second limitation is that the effect of revising the earlier decision should not lead to injustice and the court may prevent an assessing authority from doing something which would be unjust and inequitable. On the basis of the ratio laid down in the aforesaid case, the learned counsel contended that since the Income-tax Officer has allowed the deduction claimed by the assessee under Section 80 J for the assessment year 1978-79, he cannot deviate from the view taken earlier on the same facts as the decision given by him earlier is on full appreciation of the facts on record. He, therefore, contended that the rule of res judicata applies to the facts of this case and the Income-tax Officer is not justified in not granting deduction claimed by the assessee under Section 80J.
9. The learned departmental representative, on the other hand, referring to the decision of the Orissa High Court mentioned supra contended before us that though their Lordships of the Orissa High Court have held a dam to be an article or thing, this decision is not accepted by the department and the special leave petition filed by the department is admitted and the same is pending before the Supreme Court. He, further contended that when the definition of 'industrial undertaking' is found in the sister legislation, viz., the Wealth -tax Act, in the Explanation to Section 5(1)(xxxi), one need not look into the Industrial Disputes Act to find out the definition of 'industrial undertaking'. To controvert the argument of the learned counsel for the assessee that there is no definition given for industrial company in the accounting years relevant to the assessment years in question, he contended that the definition of 'industrial company' is found for the relevant assessment years in the Finance Act 1979 reported in 117 ITR 68 (Statutes), Finance Act (No. 2), 1980 reported in 124 ITR 67 (Statutes), Finance Act, 1981 reported in 129 ITR 81 (Statutes), and Finance Act, 1982 reported in 135 ITR 29 (Statutes).
He contended that as per the definition found in the relevant Finance Acts, since the assessee is neither engaged in the business of generation or distribution of electricity or in the construction of ships nor in the manufacture or processing of goods or in mining, it is not an industrial company and is not entitled to the levy of tax at a lower rate. He further contended that since the assessee is not an industrial undertaking engaged in the manufacture or production of an article or thing, it is not entitled to the relief under Sections 80J and 80HH. He heavily relied upon the decision of Delhi High Court in the case of CIT v. Minocha Bros. (P.) Ltd. [1986] 160 ITR 134 and the decision of the Bombay High Court in the case of CIT v. Shah Construction Co. Ltd. [1983] 142 ITR 696. He also relied upon the decision of the Full Bench (Delhi Bench 'B') in the case of ITO v. Hydlc Constructions (P.) Ltd. [1983] 6 ITD 575. He further relied upon the decision of the Calcutta High Court in the case of Addl. CIT v. A. Mukherjee & Co.(P.) Ltd. [1978] 113 ITR 718, wherein their Lordships of the Calcutta High Court have held thata publisher is engaged in the manufacture or processing of books; whereas a printer is not engaged in the manufacture or processing of books but is a mere contractor. On the basis of the ratio laid down in the aforesaid case, the departmental representative contended that the assessee being a mere contractor is not entitled to any of the reliefs claimed by it.
10. We have carefully considered the facts and circumstances of the case, the material on record and the arguments advanced by both sides. We will first consider the question whether the assessee-company could be considered as an 'industrial company' within the meaning of the relevant Finance Acts. In the relevant Finance Acts, 'industrial company' has been defined as under:
Industrial company' means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining.
Explanation - For the purpose of this clause, a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, if the income attributable to any 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 Income-tax Act) is not less than fifty-one per cent of such total income.
A close reading of the definition shows that the crucial words are 'mainly engaged'. In the Explanation we find that the various parts of the definition have been described as 'activities'. We have to, therefore, find out whether the company in question is mainly engaged in one or the other activities mentioned therein. While in respect of generation or distribution of electricity or any other form of power the activity should be in the nature of business of such generation or distribution, in respect of other activities the word 'business' has not been used. Thus it appears that in respect of the other activities it is possible that the company may carry on any other business, but while doing so may be mainly engaged in one of the activities like manufacture or processing of goods. The Special Bench in the case of Hydle Constructions (P.) Ltd. (supra) has clearly brought out the different approaches made by the Bombay High Court in the case of CIT v. N.U.C.(P.) Ltd. [1980] 126 ITR 377 , on the one hand and the Delhi High Court in the case of National Projects Construction Corporation Ltd. v. CWT [1969] 74 ITR 465 and the Calcutta High Court in the case of National Planning & Construction Ltd. v. CIT [1980] 122 ITR 197 on the other hand. The Special Bench has ultimately followed the decision of the Delhi High Court in the case of National Projects Construction Corpn. Ltd. (supra). In the aforesaid decision, the Delhi High Court was considering the scope of 'industrial undertaking' as used in Section 45(d) of the W.T. Act, 1957.'Industrial undertaking' is defined in this Act to mean an undertaking engaged in the manufacture, production or processing of goods or articles or in mining or in the generation or distribution of electricity or any other form of power. The Wealth-tax Officer had not allowed exemption, as according to him, the company in that case was not engaged in. the manufacture, production or processing of goods orarticles. 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 and barrages and engaged itself in the activity of producing, manufacturing and processing of goods and articles and quarrying stones only incidentally for the purpose of carrying out its main work and, therefore, it could not be said that the company was engaged in the manufacture, production or processing of goods. The High Court found that the manufacturing and processing work undertaken by the assessee-company was of considerable magnitude. The High Court held that the only condition prescribed was that the undertaking should be engaged in manufacture, production or processing of goods or articles. The words 'engaged in manufacture, production or processing of goods' should normally, therefore, mean continuously occupied in the manufacture as a principal business as distinguished from an occasional participation or casual employment. The High Court further held that it was not necessary that the articles manufactured or processed were sold as such and they could be used by the assessee in its own business. Their Lordships held that if the incidental or feeding activity is of a large magnitude then one has to see and decide whether or not the undertaking is engaged in the manufacturing activity etc., from a business point of view. The High Court further held that it may be termed as a feeding activity but that activity is not minor and the proportion that the manufacturing activity seems to have assumed makes it one of the assessee's principal activities. From the aforesaid discussion, it would be clear that if the company is mainly engaged in the manufacture or processing of goods, it is an 'industrial company' entitled to the lower rate of tax. We will now examine this aspect with reference to the various activities of the assessee-company. The various manufacturing activities carried on by the assessee are given in para 5 above. From the details of the work furnished by the assessee it is seen that the assessee does fabrication of feel in its own workshop for the same to be embedded in concrete as inserts, manufactures steel structures for being used as supporters in the underground power houses, manufactures concrete columns measuring 250 to 300 feet high in the construction of bridges where several materials are mixed in a particular proportion to make it reinforced concrete and for concrete works, the assessee makes slabs from cement and various other intermediary materials which are processed to make them into a concrete structure to support the tunnels, again big pieces of stones are crushed and obtain boulders of various forms and sizes which are used in the construction of tunnels and other project, and steel and wooden doors and windows are manufactured in the assessee's own workshop in the construction of industrial building complex. It is, therefore, clear that the entire activity of the assessee is manufacture and processing of various materials to be used, in its construction activities. We, therefore, hold that the assessee is mainly engaged in the manufacture or processing of goods and as such an 'industrial company' entitled to lower rate of tax.
11. We will now proceed to decide whether, on the facts and in the circumstances of the case, the assessee is entitled to the reliefs under Sections 80J and 80HH. For claiming reliefs under Sections 80J and 80HH, the assessee should be an industrial undertaking which manufactures or produces an article or thing. Here again, the Special Bench in the case mentioned (supra) has drawn a distinction between an 'industrial company' as defined under the relevant Finance Act and the 'industrial undertaking' which is eligible for the benefit under Sections 80J and 80HH. The words 'industrial undertaking' are not defined in the Act and one has to take the general meaning as used at other places and if necessary in other laws. A construction company of the magnitude of the assessee can be said to be an industrial undertaking considering the nature of its activities and the extent of men and machinery used by it. We are, therefore, of the opinion that the assessee-company is an industrial undertaking and we have now to see whether this industrial undertaking manufactures or produces an article or thing. The Special Bench in the case of Hydle Constructions (P.) Ltd. (supra) has followed the decision of the Gujarat High Court in the case of Cellulose Products of India Ltd. v. CIT [1977] 110 ITR 151, held that 'articles' should only mean the end product and not the intermediary product. The Special Bench, after brief discussion, held that the assessee-company in its undertaking for the construction of tunnels and dams is not manufacturing or producing articles so as to enable it to get the deduction under Sections 80J and 80HH. The ratio laid down by the Special Bench is not applicable to the facts of the case in question before us as the same is distinguishable on facts. In the case on hand the assessee-company is manufacturing articles in different sites and each article is an end product by itself, on the sale of which the assessee received the price of the articles which are independent of the main activity of the assessee. The mere fact that the cost of such articles is claimed in the monthly running bill will not, in our opinion, change the character of the manufacturing activity of the assessee, inasmuch as, the proforma of the running account bill contains only the nature of the work done and the specification of the work executed by a contractor. The assessee-company has manufactured the following articles for being entitled to claim the relief under Sections 80J and 80HH:
(1) Permanent steel supports Steel supports are manufactured as they are required for supporting the roofs of the power house cavern and butterfly valve chambers. At the first look it appears that the end product in this case is ultimately a power house, but if we examine the original contract the assessee was required to undertake only the construction of underground power house. During excavation, when it was lound that the entire rock strata was highly jointed and sheared which resulted in frequent loose rock falls, the assessee was asked to manufacture steel supports which was not there in the original contract. The assessee in its own workshop in Bhutan has manufactured steel supports for preventing the fall of loose rocks. The cost of one ton of steel supports is Rs. 9,689.24 as can be seen from the rate analysis filed by the assessee. The total steel supports manufactured and filled for power house division alone comes to Rs. 1,20,00,000. Besides the manufacture of steel supports, the assessee-company was also required to manufacture steel ribs as per the directions of Chukhha Project authority to support the roofs of the tunnels in view of the loose rock strata to prevent rock falls which was again not there in the original contract.
(2) Rock bolts While the roofs of the power house and butterfly valve chamber are supported by heavy permanent steel supports, the side walls were to b6 bolted to prevent the rocks moving and falling. For this purpose, the assessee-company was required to manufacture rock bolts using 22 mm to 38 mm dia. M.S. rounds and for steel, which the assessee-company is not required to do under the original contract. The total cost of the rock bolts and anchor bolts supplied and billed by the assessee-company comes to Rs. 1,54,01,492.49.
(3) Steel reinforcement work The assessee-company provided the steel enforcement by cutting into required sizes, bending, binding and welding them in its own workshop. The articles are separately billed and payment received. The total of the amount received for such work is Rs. 1,00,46,410.15.
(4) Heavy foundation work The only work entrusted to the assessee at Salem by Hindustan Steelworks Construction Company was to lay heavy foundation for installing the steel plant machinery. A great deal of steel fabrication had to be done for concrete columns. Heavy foundation had to be laid using 75 mm graded crushed stone aggregates. The details of the foundation work can be seen from pages 2,3,4,5 & 6 of Annexure H. Total work amount comes to Rs.70,76,500. Since the assessee has to lay specialised heavy foundation for installing the steel plant machinery, the foundation laid by the assessee-company is an article as held by the Bombay High Court in the case of Pressure Piling Co. (India) Ltd. (supra). Again at the Cochin Refineries site the main work executed by the assessee is structural and concreting with crushed stone aggregates of specified grades. The assessee has produced 20 mm aggregates for manufacturing columns footings, walls, beams, slabs, rafts and equipment foundations. The total amount as per the bill for the above work is Rs. 32,33,724.08, as can be seen in Annexure E - items (a) to (e). Besides the above, the assessee manufactured anchor bolts in its own workshop. The assessee has been paid separately for these anchor bolts as can be seen from item No. 3 of annexure E. The total amount claimed was Rs. 5,99,061.56. It is, therefore, clear that though the assessee is a contractor it has manufactured articles which it is not required to manufacture under the contract and received payments separately for the same. Since the end product in all the aforesaid cases being articles, we are of the opinion that the assessee has manufactured articles and is, therefore, entitled to claim the relief under Sections 80J and 80HH. The relief claimed by the assessee is, therefore, allowed.
12. The assessee's counsel, further relying upon the decision of the Orissa High Court in the case of Belpahar Refractories Ltd. (supra), contended before us that this is a case where resjudicata applies since the Income-tax Officer has allowed the deduction claimed by the assessee under Section 80J for the assessment year 1978-79 and that he cannot deviate from the view taken earlier on the same facts as the decision given by him earlier was on full appreciation of the facts on record. From the facts on record, it is seen that the Income-tax Officer has allowed the claim of the assessee under Section 801 only for one assessment year, namely, assessment year 1978-79. Had the department allowed the deduction to the assessee continuously for a certain number of years and then took a different view in a subsequent year it is only then the principle of res judicata can apply. Since the Income-tax Officer has granted deduction under Section 80J claimed by the assessee only for one assessment year and subsequently rectified his order by disallowing the claim under Section 80J, we are of the opinion that the principle of resjudicata will not apply to this case.
13. The next ground taken by the assessee is regarding the disallowance of weighted deduction claimed by it under Section 35B for the assessment years 1980-81, 1981-82 and 1982 83. The assessee claimed weighted deduction in respect of the expenditure incurred on travelling in Bhutan as also on the maintenance of two branch offices in Bhutan, The Income-tax Officer disallowed the claim of the assessee mainly on the ground that the assessee is not an exporter of goods and also according to him weighted deduction can be granted only in the case of the assessee who is engaged in the export of goods, services or facilities by sale. On appeal before the CIT(Appeals), the learned counsel for the assessee relied upon the decision of the Madras High Court in the case of CIT v. CM. Narayana Rao [1984] 146 ITR 310, in support of its stand that it is an exporter and, therefore, entitled to weighted deduction under Section 35B. The CIT(Appeals) rejected the contention of the assessee mainly on two grounds, viz., (1) that the expenses incurred in the course of executing the contract work cannot be considered as an expenditure incurred in the course of an export activity and (2) the assessee who is constructing certain tunnels, buildings, plants etc., cannot be considered to have exported those items even though certain labour has been taken from India to Bhutan for carrying out the contract work. The CIT (Appeals), therefore, confirmed the order of the Income-tax Officer. As against this order of the CIT (Appeals), the assessee is in appeal before us.
14. The learned counsel for the assessee drew our attention to the provision 35B(1)(b)(iv), according to which the assessee would be entitled to weighted deduction on the expenditure incurred by the assessee wholly and exclusively on the maintenance outside India of a branch office or agency for the promotion of sale outside India of such goods, services or facilities. He, therefore, contended that since the maintenance of the office by the assessee in Bhutan is for the sale of services in Bhutan by the assessee it is entitled to weighted deduction under Section 35B. He then relying upon the proviso in Section 35B(1)(b) (vii) contended that the travelling expenses claimed by the assessee in Bhutan is also eligible for deduction under the aforesaid proviso as the expenses are incurred for travelling in Bhutan for the promotion of sale, services or facilities. He also relied upon the decision of the Madras High Court in CM. Narayana Rao's case (supra) in support of his contention. The learned departmental representative, on the other hand, supported the orders of the lower authorities.
15. We have carefully considered the facts and circumstances of the case, the material on record and the arguments advanced by both sides. In the case relied upon by the assessee's counsel, their Lordships of the Madras High Court have held as under:--
Export expenses do not differ in kind or nature from inland expenses. It follows, therefore, that apart from the weightage factor enacted in Section 35B, export expenses must qualify for allowance even under the general principles. In other words, what is special about the allowance under Section 35B is not the nature of the expenses or their eligibility to deduction, but the weightage given to them by Parliament as a matter of legislative policy. It follows, therefore, that the basic principles which we apply to allowance of trading expenses cannot be ruled out as inapplicable to claims for deduction under Section 35B.
It is now well settled that the test for allowance of business expenditure is that it should be incurred or laid out wholly and exclusively for the purposes of the assessee's business. It is also well settled that it is not a pre-condition for the allowance that the outlay of expenditure should have yielded any income receipts... On the contrary, there are clear indications in the text of this provision to hold that the same principles which apply to the general provisions of Section 37 of the Act also apply to the weighted allowance under this section. Mark the words enclosed within brackets 'not being in the nature of capital expenditure or personal expenses of the assessee' occurring in Section 35B(1)(a) and the words 'incurred wholly and exclusively' occurring in Section 35B(1) (b). These words have a familiar ring that are a constant reminder to us of the language of Section 37.
If we apply the ratio laid down in the aforesaid case to the case under consideration before us, what we have to see is whether the expenditure has been incurred by the assessee or laid out wholly and exclusively for the purposes of its business. Since these expenses are incurred for the purposes of the business and clearly fall under the provisions of Section 35B(1)(b)(iv) and (vii) we are of the opinion that the assessee would be entitled to weighted deduction of the expenditure incurred by it. At this stage we may also state that since the Income-tax Officer has allowed the claim of the assessee under Section 35B for the assessment years 1978-79 and 1979-80, rule of res judicata applies to the facts of this case in view of the ratio laid down by the Orissa High Court in the case of Belpahar Refractories Ltd. (supra). Inasmuch as, we do not find anything on record to show that the decision taken by the Income-tax Officer earlier is arbitrary or perverse or arrived at without due enquiry it is patently clear that the effect of revising the earlier decision has caused injustice to the assessee.
16. The next ground taken by the assessee is regarding travelling and vehicle running expenses disallowed by the Income-tax Officer. The assessee has claimed a sum of Rs. 8,30,923 on travelling expenses and a sum of Rs. 57,291.42 towards vehicle running expenses for the assessment year 1980-81. The Income-tax Officer has disallowed on estimate Rs. 20,000 out of travelling expenses claimed by the assessee for want of details under Rule 6D. He also disallowed Rs.7,500 on the ground that the same relates to personal use of the car by the directors. On appeal, the CIT(Appeals) confirmed the disallowances made by the Income-tax Officer. Before us, the learned counsel for the assessee reiterated the contentions made before the CIT(Appeals) regarding travelling expenses. Regarding vehicle running expenses, the learned counsel contended that all the directors are owning cars and there is no necessity for the directors to use the company cars. He further contended that for the assessment years 1981-82 and 1982-83 nothing was disallowed on this count by the Income-tax Officer himself.
17. We have considered the rival submissions. The total amount claimed by the assessee towards travelling expenses, as is seen from the records, was Rs. 8,30,923 and the amount disallowed by the Income-tax Officer was only Rs. 20,000. When the substantial portion of the expenses incurred by the assessee had been admitted by the Income-tax Officer as incurred for travelling, we are of the opinion that the entire amount claimed by the assessee should have been allowed by the Income-tax Officer without resorting to estimate. Even with regard to the vehicle running expenses, since the directors are owning cars and since the Income-tax Officer has not disallowed any amount this count for the subsequent assessment years 1981-82 and 1982-83, we are of the opinion that the entire claim made by the assessee on this count should have been allowed by the Income-tax Officer. The Income-tax Officer is, therefore, directed to give deduction of the entire claim made by the assessee towards travelling and vehicle running expenses.
18. The next ground taken by the assessee is regarding the disallowance of certain revenue expenses. The Income-tax Officer disallowed the expenses incurred by the assessee at Lonavala site amounting to Rs. 14,687 for the assessment year 1982-83, on the ground that this is an expenditure not relating to the business of the assessee. On appeal, the order passed by the Income-tax Officer was confirmed by the CIT(Appeals).
19. Before us, it was contended by the learned counsel for the assessee that the Income-tax Officer has wrongly given the name as 'Lonavala site'; whereas the expenditure was incurred actually at Rammam Hydel Project. He contended that it is an isolated place situated on the Sikkim border and it is mainly used for providing food and lodging for the employees or persons who go there for supervision. The Income-tax Officer, according to him, has wrongly treated this expenditure as not relating to the business. The counsel contended that since this expenditure is purely incurred for the business purposes of the assessee, the same may be allowed in full. The learned departmental representative, on the other hand, supported the orders of the lower authorities.
20. We have carefully considered the rival submissions. It cannot be said that the entire amount spent by the assessee was to provide food and lodging to the employees and for persons who go there for supervision. At least a portion of the amount should have been spent on visitors also. Estimating l/3rd of the expenditure incurred by the assessee for visitors the same is sustained and the Income-tax Officer is directed to allow the balance amount out of the claim of Rs. 14,687.
21. The next ground taken by the assessee for this year is the disallowance of the expenditure of Rs. 12,460 incurred by the assessee on food and refreshments to customers and employees. The Income-tax Officer disallowed a sum of Rs. 12,460 under the head 'staff welfare expenses' as according to him under this head guest house expenses are shown on various dates. The Income-tax Officer concluded that this expenditure is incurred by the assessee purely on entertaining the guests, but not for the staff of the company. On appeal, the CIT (Appeals) confirmed the order of the Income-tax Officer.
22. The learned counsel for the assessee contended before us that this expenditure was incurred purely for the employees at the site of the Kerala Minerals and Metals Works. Since the entire amount is spent for the employees of the company, the entire amount should have been allowed by the lower authorities as it is incurred for the purposes of the business. The departmental representative, on the other hand, relied upon the orders of the lower authorities.
23. We have carefully considered the rival submissions. The very head under which this expenditure is incurred is indicative of the fact that the expenditure was incurred for the employees. Simply because a guest house is there, it cannot be said that only guests are entertained in the guest house. The nature of the business is such that guest houses might have been provided at different sites for providing food to the employees and for giving shelter to persons who go there for supervision. We are, therefore, of the opinion that the entire amount claimed by the assessee should have been allowed as a deduction by the Income-tax Officer and the Income-tax Officer is directed to allow the claim of the assessee in its entirety.
24. In the result, the appeals filed by the assessee are allowed in part.
25. The first ground taken by the revenue in its appeals is regarding the investment allowance granted by the CIT (Appeals) for all the assessment years in question. The assessee had claimed investment allowance in respect of the new machinery purchased and installed by it during the previous year relevant to each of the four assessment years under consideration. The claim of the assessee has been disallowed by the Income-tax Officer solely on the ground that the assessee is not an industrial undertaking for the purpose of business of construction, manufacture or production of an article or thing, let alone an article or thing be not included in the list of the Eleventh Schedule. On appeal before the CIT (Appeals) it was contended by the learned counsel for the assessee that as a contractor using extensive raw materials and fabrication of such raw materials including pile driving, the assessee is clearly manufacturing an article or thing as envisaged under Section 32A. It was also the assessee's stand that for the elaborate work undertaken in Bhutan which is the main aim of the assessee, a huge factory has been set up at the work site for the execution of the work and that is simple evidence to show that manufacturing activities are being carried on in the process of contract work. The counsel also relied upon the decision of the Bombay High Court in Pressure Piling Co. (India) P. Ltd.' s case (supra) to drive home the point, that there is manufacturing activity in the course of the execution of contract work. After hearing the learned counsel for the assessee, the CIT (Appeals) held that the assessee is entitled to investment allowance on the ground that the assessee is an industrial undertaking engaged in the construction work. As against this order of the CIT(Appeals), the revenue is in appeal before us.
26. The main thrust of the argument of the learned departmental representative is that the assessee is not an industrial company as defined in the relevant Finance Acts and since it is not an industrial undertaking it is not entitled to investment allowance as claimed by it. He, therefore, supported the order of the Income-tax Officer.
27. Before us the learned counsel for the assessee has more or less repeated the arguments advanced by him before the CIT (Appeals). He also relied upon several Tribunal decisions reported in Ratilal Bhagwandas & Associates' case (supra), ITO v. Hindustan Engineers [1985] 23 TTJ (Pune) 227, Shapoorji Pallonji & Co. (P.) Ltd. v. ITO [1986] 25 TTJ (Bom.) 314, and in Harihar Quarry v. ITO [1986] 25 TTJ (Ahd.) 144.
28. We have considered the facts and circumstances of the case, the materials on record and the arguments advanced by both sides. We have already held in the foregoing paragraphs that the assessee is an industrial undertaking. For the assessment year 1977-78 investment allowance is allowable if the machinery installed is used for the purposes of construction, manufacture or production of any one or more articles or things specified in the list of Ninth Schedule. In the assessment year 1978-79, however, the law was changed. From the assessment year 1978-79 onwards it was provided that an assessee would be entitled to investment allowance if the machinery was used in an industrial undertaking for the purpose of the business of construction, manufacture or production of any articles or things, not being an article or thing specified in the list of Eleventh Schedule. In other words, except forsuch machinery which are producing articles or things specified in the Eleventh Schedule, other machinery which are used for the purpose of business of construction, manufacture or production or any other thing would get investment allowance. The years under Appeal before .us are the assessment years 1979-80 to 1982-83. Since the machinery was used in an industrial undertaking, being the assessee, for the business of construction, manufacture or production of articles or things, the assessee is entitled to investment allowance under Section 32A. This finding is in consonance with the Special Bench decision in Hydle Construction Co. (P.) Ltd.'s case (supra). We, therefore, fully agree with the order passed by the CIT(Appeals).
29. The next ground taken by the revenue in its appeals is regarding the higher rate of depreciation allowed by the CIT (Appeals) on steel shuttering equipments used by the assessee in respect of the assessment years 1980-81,1981-82 and 1982-83. The Income-tax Officer has granted only 10% depreciation on these equipments. The CIT (Appeals) allowed a higher rate of depreciation at 15% on the ground that the steel shuttering equipments which are used in the construction business come under Building contractor's machinery shown at Item No. III(B)(4) - Appendix I, Part I of the Income-tax Rules, 1962. As against this order of the CIT (Appeals), the revenue is in appeal before us.
30. The learned departmental representative supported the order of the Income-tax Officer; whereas the learned counsel for the assessee relied on the order of the CIT (Appeals).
31. We have carefully considered the rival submissions. We are fully satisfied that steel shuttering equipments which are used in the construction business come under Building contractor's machinery shown at Item No. III(B)(4) - Appendix I, Part I of the IT Rules, 1962. We, therefore, fully agree with the orders passed by the CIT (Appeals) in allowing depreciation at 15% instead of at 10% allowed by the Income-tax Officer.
32. In the result, the appeals filed by the revenue are dismissed.
A. Satyanarayana, Accountant Member
33. I have gone through the order of my learned brother. But I am unable to agree. with his conclusions about the assessee's claims under Sections 80J and 80HH.
34. The activities of the assessee included construction work of the largest underground power house in Asia, for the Chukha Hydel project. The assignment consisted of construction of connected tunnelling systems, inclined pressure shafts, butterfly valve chambers etc. Through solid rock strata; work at Kudremukh of construction of the Slurry Pipeline tunnel, the down-hill Conveyor Tunnel, the R.C.C. bridge, civil works for tailings and reclaim water pipeline and the construction of a Pollution prevention Arch Fill Dam etc. as enumerated in paragraph 5 of the Judicial Member's order and the colour pamphlet filed by the assessee. In the argument notes filed by the assessee it was mentioned as under:
As may be seen from the details furnished separately (few items from 3 or 4 sites only), the contracts consist mainly of supply of certain finished articles such as piles, fabricated girders, fabricated steel supports etc. for which payments are made separately. For manufacturing the above items no intermediary articles or things are manufactured or required. Whatever articles manufactured are themselves the end products for which the payments are made separately.
The details were given as under:
Item of Description of articles/ Qty. Amount
Schedule activities
Rs.
3-III(a) Steel supports - fabrication
& supply 176.59MT 9,71,232
7-VIII Rock Bolls - supply &
fabrication 11966 Mtr. 11,96,609
5-VI Steel reinforcements 1710 Mt. 71,80,965
In the further clarification filed by the assessee it was mentioned at page 3 that "as per the original tender the requirement of steel supports were not visualised. We were asked to manufacture the entire quantity of steel supports required for supporting the roofs of Power House & Butterfly Valve Chamber. These steel supports are independent articles or things which are not required in the ordinary tunnelling work". The assessee has not filed copy of the original tender or copy the original agreement entered into by the assessee with Chukha hydel project to substantiate his abovesaid claim. So this statement of the assessee cannot be taken for granted as true. But the papers filed by the assessee, namely, the running account bill for the months of October and November 1986 in respect of the work relating to the Power House, Chukha Hydel Project goes against the assessee's above said assertions. In the said running account bill the steel supports were shown as item 3-III(a), Rock Bolts were shown as item No. 7-VIII and steel reinforcements were shown as item No. 5-VI. The work as mentioned in the said Running Account Bill consisted of underground power house, two numbers inclined pressure shafts, drainage gallery, butterfly valve chambers and ancillary work, power cable tunnel and control-cable-cum-ventilation tunnel. The running account bill is made with reference to agreement No. PHD/1/79. As the assessee has claimed payments in respect of steel supports, rock bolts and steel reinforcements as items of the underground power house i t has to be taken that those steel supports, rock bolts etc. formed an integral part of the underground power house only. These steel supports, rock bolts etc. cannot be taken as independent articles. Had they been so the execution of such steel supports etc. would have been supported by separate tenders and agreements. The assessee has not filed before us copies of any separate tenders and agreements in respect of these steel supports, rock bolts, steel reinforcements etc. On the other hand these are included as specific items in the running account bills in respect of the work of the underground power house. Hence the extent of monetary value and the quantity of these steel supports etc. would not make any difference. They are only to be taken as intermediary products and not the end products. The end product in this particular instance is the underground power house. The underground power house of Chukha Hydel Project, Slurry Pipe Line Tunnel at Kudremukh etc., the construction of which was undertaken by the assessee are all products of immovable properties. They cannot be termed as articles as mentioned in Sections 80J and 80HH. So, following the reasonings given in the special bench decision of the Tribunal in Hydle Constructions (P.) Ltd.' s case (supra), I hold that the assessee has not manufactured or produced any article as per Section 80J(4) (iii) and Section 80HH(2) (i) of the IT Act, 1961 and so it is not entitled to the relief under the above two sections.
35. Regarding the claim of the assessee to be treated as an industrial company, I hold that the assessee is mainly engaged in the processing of goods and, therefore, it has to be treated as an industrial company. But, however, I do not agree with the observations of my learned brother that the entire activity of the assessee is manufacture of various materials used in its construction activities.
36. In the result, the appeals by the assessee and the appeals by the department are allowed in part.
Reference under Section 255(4) of the IT Act As there is a difference of opinion among the Members in the above cases, the following point of difference is framed and sent to the President of the Income-tax Appellate Tribunal for being referred to the Third Member for decision:
Point of difference Whether, on the facts and in the circumstances of the case, the assessee has manufactured articles or things independent of the main contract to claim the benefit under Sections 80J and 80HH?
ORDER
1. This matter came before me as a third Member under Section 255(4) of the Income-lax Act, 1961 from the appeals arising out of an order passed by the Cochin Bench in the above case. The point of difference of opinion referred to me is:
Whether, on the facts and in the circumstances of the case, the assessee has manufactured articles or things independent of the main contract to claim the benefit under Sections 80J and 80HH?
2. The assessee is a company doing business in engineering contracts. It has during the year several contracts and manufacturing activities at various sites, one of which is at Chukha Hydel Project, with which I am concerned in this matter. In Chukha Hydel Project, an underground power house was to be built with 2 nos. Horizontal Pressure Shafts, Butterfly Valve Chamber, Tail Race Tunnel, Cable and other connected tunnels. The roof of Underground Power House is supported by Heavy Steel Supports manufacturing in the assessee's own workshops. The entire aggregate required for the concreting was also manufactured with the crushers and sand processing plants at site owned by the assessee. One of the issues that arose forconsideration before the Bench was whether the assessee is an industrial company eligible for low rate of tax and another dispute was whether the assessee was engaged in the manufacture or production of any article or thing for the purpose of granting relief under Section 38J as also under Section 80HH. On the first ground both the Members agreed that the assessee is an industrial company but on the second ground the learned Members differed. According to the learned judicial Member the assessee was manufacturing articles or things which are independent of the main activity of the assessee at different sites and each of the articles thus manufactured was an end product by itself on the sale of which the assessee received its price, though as a part of the regular bills prepared for other works also. According to him the following are such independent items:
(i) Permanent steel supports;
(ii) Rock bolts;
(iii) Steel reinforcement work; and
(iv) Heavy foundation work.
Steel supports were manufactured as they are required for supporting the roofs of the power house and butterfly valve chambers. According to him under the original contract, the assessee was required to undertake only the construction of underground power house. During excavation, it was found that the entire rock strata was highly jointed and sheared which resulted in frequent loose rock falls..
The assessee was, therefore, asked to manufacture steel supports to prevent the loose rock falls. This item was not in the original contract. The assessee in its own workshop in Bhutan manufactured steel supports at a cost of about Rs. 20 lacs. It also manufactured what are called steel ribs to support the roof tunnels again to prevent rock falls, which item was also not there in the original contract. Insofar as rock bolts were concerned, these are required as supports of the side walls again to prevent the rocks moving and falling. This work also was not in the original contract. The total cost of the rock bolts came to Rs. 1.54 crores. Then there was a steel reinforcement work, which was to cut the steel into required sizes, bend, bind and weld them and a total sum of Rs. 1.046 crores was received. The heavy foundation work also required a great deal of steel fabrication for the concrete columns by using a special graded crushed stone aggregates. This also costed about Rs. 70 lacs. On the basis of these, the learned Judicial Member came to the view that though the assessee was a contractor, it manufactured articles, which it was not required to manufacture under the original contract and since they are all independent of the main contract and being end products in themselves, the assessee had manufactured articles and, therefore, entitled to the claim under Section 80J as well as under Section 80HH.
3. But the learned Accountant Member took a totally different view. According to him the activities of the assessee included construction work of the largest underground power house in Asia, that the assignment consisted of construction of connected tunnelling systems, inclined pressure shafts etc. The argument that impressed the learned Judicial Member was that the extra work enumerated by him in his order was not included in the original contract but according to the learned Accountant Member the copy of the original tender was never filed nor the copy of the original agreement to substantiate this claim. He, therefore, doubted the claim of the assessee and its acceptance by the learned Judicial Member as correct. According to him the running account bill for the months of October, November 1986 did not support this assertion. Since these running bills claimed payments in respect of those items, which the learned Judicial Member mentioned in his order, it has to be taken that these items also formed the integral part of the original contract and could not be construed as independent items. Had they been so, the learned Accountant Member observed the execution of such steel supports would have been supported by separate tenders and agreements because they were of considerable value. No such separate order, or agreements were produced. He, therefore, regarded them as intermediary products and not end products. Since the end product in this case was the underground power house, all other items undertaken by the assessee were only intermediate products supporting the end product and consequently they could not be termed as articles as mentioned in Sections 80J and 80HH. He, therefore, followed the view taken by the Special Bench of the Tribunal in the case of Hydel Constructions (P.) Ltd. (supra) and held that the assessee had not manufactured or produced any article and, therefore, not entitled to the relief under those sections.
4. I have gone through the relevant records and heard the arguments addressed to me on behalf of the assessee as well as on behalf of the Department. At the time of the hearing, the learned counsel for the assessee sought to introduce additional evidence to support its claim but this additional evidence not having been produced either before the Bench or before the authorities below at any point of time and having regard to the very limited and restricted jurisdiction of the third Member to confine himself only to express his opinion on the point of difference of opinion referred to him, this additional evidence was not admitted. A request was also made to enlarge the scope of the point of difference of opinion. As a third Member my role is limited to express my opinion on the point of difference of opinion as framed by the Members constituting the Bench and no scope is left to the third Member to enlarge the point of difference of opinion. This request also is therefore not acceded to.
5. The main argument that was advanced on behalf of the assessee was that the learned Accountant Member followed the order of the Special Bench of the Tribunal in the case of Hydel Constructions (P.) Ltd. (supra) which followed a decision of the Gujarat High Court in the case of Cellulose Products of India Ltd. (supra). This decision was not approved of by the Supreme Court in the case of CIT v. Cellulose Products of India Ltd. [1991] 192 ITR 155.Therefore the principle laid down in Hydel Constructions (P.) Ltd. is no more a good law and that should not have been followed. Since the assessee was manufacturing intermediate products as admitted by both the Members, the assessee is entitled to the relief under Sections 80J and 80HH according to the law now enunciated by the Supreme Court in Cellulose Products of India Ltd's case (supra) though the products manufactured by the assessee were not end products. According to the Supreme Court the assessee must manufacture some article not necessarily the end product. That the assessee has done in this case and that was admitted by both the Members.
6. The learned Departmental Representative, on the other hand, contended that the Supreme Court decision was not applicable to the facts of this case. The Supreme Court decision turned on the fact whether the pulp manufactured by that company was marketable or not and since the pulp was found to be marketable by itself and since the Memorandum of Association of that company permitted the manufacture of pulp, which was independently marketable, the Supreme Court held that relief under Section 80J was admissible. But a close reading of the judgment of the Supreme Court would show that if the things manufactured were not marketable, then the relief under Section 80J would not be admissible because those things could not be articles within the meaning of Section 80J. The Departmental Representative further pointed out by referring me to the contract already on records that the original contract provided for the additional items because a large discretion was allowed to the contractor and also to the department to fabricate additional items as per the needs subject only to the fixation of rates subsequently. Therefore, the extra items did form part of the original contract and not de hors them. He also pointed out with reference to original contract that the manufacture of supports and rock bolts etc. were in contemplation and they were not independent items. They were only intermediate items meant for the end product. He placed reliance on the decisions of the Bombay High Court in the case of Shah Construction Co. Ltd. (supra) and of the Delhi High Court in the case of Minocha Bros. (P.) Ltd. (supra) for the view that in the case of contractors relief under Section 80J was not admissible.
7. In reply the learned counsel for the assessee pointed out that neither Section 80J nor Section 80HH stipulated that the things manufactured should be marketable and therefore the marketability of the things manufactured should not be a test to allow relief under Section 80J or under Section 80HH. All that these Sections provided is that articles or things should be manufactured. In this case articles or things were manufactured and, therefore, the assessee is entitled to the relief. He also pointed out that according to the decision of the Delhi High Court in the case of National Projects Construction Corpn. Ltd. (supra) the assessee is entitled to the relief.
8. It is not necessary for me to reproduce Sections 80J and 80HH, the interpretation and application of which to the facts of this case is in dispute before me. Section 80J grants deduction in respect of profits and gains from newly established industrial undertakings in certain cases. The deduction is to be calculated as a percentage of the capital employed and the deduction is dependent upon the satisfaction of the provisions of Sub-section (2) of Section 80J, which provides that the industrial undertaking must "begin to manufacture or produce articles.... I have not reproduced here the other parts of Sub-section (2) because they are not relevant for my present purpose. To be able to obtain the relief under Section 80J, the industrial undertaking must manufacture or produce articles. What sort of articles are required to be produced had come for consideration before the Gujarat High Court in the case of Cellulose Products of India Ltd. (supra). In this case an industrial licence was granted to the assessee-company by the Central Government for the manufacture of CMC. The company installed a cellulose plant for the manufacture of cellulose pulp, which in its turn was utilised as a raw material for the manufacture of CMC. On 18-3-1961 the production of cellulose pulp in the cellulose plant was started. On 15-6-1961 the company started production of CMC. For the assessment year 1966-67, for which the previous year was the financial year 1965-66, the company claimed deduction from its total income under Section 84 of the Income-tax Act, 1961, which is a predecessor of Section 80J. The Income-tax Officer held that as production of cellulose pulp had started in the month of March 1961, the assessee had begun to manufacture or produce finished articles or goods in that year. He, therefore, took the assessment year 1961-62 as the first year and reckoning five years from that year, he found that the assessment year 1966-67 was not within the five years from the year in which the production of articles or goods have started. He, therefore, did not grant relief under Section 84 to the assessee. On appeals both the Appellate Asstt. Commissioner and the Tribunal agreed with the Income-tax Officer. On a reference the Gujarat High Court held that the word "articles" used in Section 84 (same as the word 'articles' used in Section 80J now) meant the end product or the finished product for the manufacture of which the undertaking had been set up. Even if an industrial undertaking is capable of manufacturing an intermediary product, which is a marketable commodity, the assessee company having started as part of its undertaking for the manufacture of CMC and as the cellulose pulp plant was not independently established nor it was an independent undertaking, the manufacture of pulp could not be taken to be the manufacture of the 'article'. Therefore, it is only in the assessment year during which the production or manufacture of the particular item for the manufacture of which the industrial undertaking was set up, that would be counted as the first year for the purpose of granting relief under Section 84 of the Income-tax Act, 1961. The fact that the production of cellulose pulp was started did not mean that the assessee company had begin to produce or manufacture the articles because the cellulose was only an intermediary product and not an end product. Thus the Gujarat High Court laid emphasis upon the manufacture of the end product as to satisfy the requirement of Section 84 and not the manufacture of an intermediate product though it is marketable by itself. Relying upon this judgment of the Gujarat High Court, the Special Bench of the Tribunal in the case of Hydle Constructions (P.) Ltd. (supra) held that the Hydle Construction Company was not entitled to the relief under Section 80J, inasmuch as, the end product manufactured by the said construction company was either a tunnel or a power house or a dam, none of which could be considered as articles. In the course of making of dams and tunnels, the assessee might acquire various raw materials and might process them to construct the dams. In that process, it was likely that some components were manufactured by the undertaking itself, which would be only intermediary products. It could not result in the conclusion that the undertaking was manufacturing articles for which it had come into existence. If each intermediate article was to be taken into consideration, there would be no end to the confusion of computation or grant of relief. Now this decision of the Gujarat High Court was appealed against by the Commissioner of Income-tax to the Supreme Court. The Supreme Court in Cellulose Products of India Ltd.'s case (supra) reversed the judgment of the Gujarat High Court by pointing out that the finding of the Tribunal that the production of cellulose pulp during the month of March 1961 was not a trial production and that the cellulose pulp manufactured was a finished product, which was a marketable commodity and though it was true that cellulose pulp constituted raw material for the manufacture of CMC, it was even by itself a finished marketable commodity. The fact that the industrial licence granted to the respondent was for the manufacture of CMC and not cellulose pulp was not of much significance keeping in view the nature of the two articles. The licence granted for the manufacture of CMC included the manufacture of cellulose pulp, which was an intermediate product to be used in its turn as raws material for the manufacture of CMC. Manufacture of pulp was covered by one of the wide objects specified in the Memoranum of Association. Thus, the view taken by the Gujarat High Court was reversed by the Supreme Court and according to ruling of the Supreme Court even if intermediate products are manufactured, if they are marketable by themselves and if their production was covered by the objects specified in the Memorandum of Association, such products would also be covered by the expression "Articles".
9. Applying the law as laid down by the Supreme Court to the facts of this case I have to find out whether in the light of that law the difference of opinion could be so resolved that the assessee is entitled to the relief claimed under Section 80J and under Section 80HH. The Supreme Court made it clear that the manufacture whether it is of intermediate product or final product or end product, only if they are marketable either at the intermediate stage or at the final stage and the background of the case so provided that it could manufacture even the marketable intermediate products, the deduction under Section 80J is permissible i.e. to say the intermediate products manufactured must also be marketable. Since the cellulose pulp in that case as manufactured by the respondent was itself a finished product, which was also a marketable commodity, the Supreme Court ruled that the provisions of Section 84 were satisfied because the assessee company was manufacturing articles. Therefore marketability of the commodities manufactured, whether intermediate or final, is the essential test to be satisfied before an article manufactured could be considered as an article entitled to the relief under Section 80J. But in the case of Hydle Construction Company the decision did not solely depend upon the decision of the Gujarat High Court in the case of Cellulose Products of India Ltd. now reversed by the Supreme Court. It depended upon several other factors. But the final conclusion of the Tribunal there was that the end product in that case was a tunnel, a power house or a dam, which could not be considered as articles. On this issue, whether the tunnel, power house or a dam is or is not an article was not decided by the Supreme Court. If we apply the principle laid down by the Supreme Court, the test of marketability becomes prominent and if that test is applied neither the end product is marketable nor any of the items mentioned in the order of the learned Judicial Member is marketable. Since for the grant of relief under Section 80J marketability has now been laid as a test, that test cannot be said to have been satisfied in the case of manufacture or fabrication of these items nor even the end product. Notwithstanding the reversal of the judgment of the Gujarat High Court by the Supreme Court which was relied upon by the Special Bench of the Tribunal in the case of Hydle Construction (P.) Ltd. (supra), still the ratio of that decision in my view applies to the facts of this case. That apart the terms of the grant of the contract under the tender do envisage the fabrication of the items mentioned by the learned Judicial Member in his order. Had the fabrication of these items was not envisaged, there would have been a separate cal ling of tenders or authorising in writing the assessee company to fabricate them and in this matter the view expressed by the learned Accountant Member appears to be correct. In the absence of any specific order permitting the assessee company to fabricate those items and in view of the fact that the fabrication of these items were in the contemplation while granting the contract because of the large discretion provided to the contractor, i.e., the assessee to fabricate items as per needs subject only to the fixation of rates, I am of the opinion that the fabrication of these items also was very much in the contemplation at the time of the grant of the contract and the fabrication of these items could not be regarded as de hors the original contract. I find it, therefore, difficult to say that the assessee has manufactured articles or things independent of the main contract to claim the benefit of Section 80J and Section 80HH.
10. The Bombay High Court in the case of Shah Construction Co. Ltd. (supra) held that the construction activity is a very complex activity involving the application of technical know-how, material and skill of trained personnel for the purpose of construction of dams, bridges and so on. A company which engages in such engineering activity cannot be said to be a company which is either wholly or mainly engaged in the manufacture of processing of goods. Therefore, the company is not an industrial company. But in the case before me both my learned Brothers agreed that the assessee is an industrial undertaking. This decision will not, therefore, throw any light on the point that is before me except to the extent that the construction activity cannot be considered as manufacturing of any goods, which might include articles and thus indirectly supporting the view taken by the Special Bench of the Tribunal in the case of Hydle Constructions (P.) Ltd. (supra).
11. To the same effect is the decision of the Delhi High Court in the case of Minocha Bros. (P.) Ltd. (supra). Here also the Delhi High Court had categorically stated that the assessee-company, which was doing building work as a contractor, even if some manufacture had to be done like the manufacture of doors etc., it could not be said that it resulted in the manufacture of goods and that they were really part of the construction work. The assessee utilised what all it fabricated in the execution of the contract. It cannot, therefore, be described as a manufacturer or a processor of goods. This decision also though not directly on the point, supports the view taken by the Special Bench of the Tribunal in the case of Hydle Constructions (P.) Ltd. (supra).
12. It is no doubt true that the Delhi High Court in an earlier decision in the case of National Projects Construction Corpn. Ltd. (supra). While dealing with reference under the Wealth-tax Act had to consider a similar question and it was held that an assessee, who is engaged in the manufacture or production or processing of goods or articles within the Explanation to Section 45(d) of the Wealth-tax Act, 1957 could be said to be engaged in the manufacture or processing of goods, though not from a commercial point of view because there was no requirement in the section that the things manufactured should be sent to the market for sale or solely engaged in the manufacture. An undertaking engaged in the manufacture of goods for its own use may also qualify for the exemption. This decision does not advance the case of the assessee in view of the subsequent decision of the Delhi High Court in the case of Minocha Bros. (P.) Ltd. (supra) and the distinct difference in the language of Section 45(d) of the Wealth-tax Act for the purpose of grant of exemption from the levy of wealth-tax and the language of Section 80J for the purpose of granting deduction. This decision cannot, therefore, be relied upon to advance the case of the assessee.
13. It is no doubt true that neither in Section 80J nor in Section 80HH there is a stipulation that the things or articles manufactured should be marketable but according to the interpretation placed upon an identical Section 84 by the Supreme Court upon similar words, marketability of the things manufactured become the only revclant consideration and has to be assumed to be implied for the grant of relief under Section 80J, though the marketability was not laid down in the section as a condition. This can be understood even from a commercial angle. What is the purpose of manufacturing things or articles unless they are to be sold and how can an undertaking yield any income unless the things or articles manufactured by it are sold; either it may manufacture the articles or things for sale or for eventual consumption as raw material for the manufacture of other products. In the former case the marketability test will naturally become the relevant test. In the latter case the finished product will have to become marketable. Thus in either case the things manufactured or produced will have to be marketed because it is inconceivable for an industrial undertaking to exist to manufacture articles or things not intended for sale or consumption. If it is the case of the consumption of the articles manufactured, then the ultimate thing, i.e., the final product must become marketable. In the case of a contractor, who builds a power house is not selling the power house after it is built to the contractee. Therefore that was the reason why the High Courts have consistently held that in the case of contractors building bridges, buildings etc. there could not be any manufacture of articles intended for sale otherwise than for consuming them in executing the contract. This argument, therefore, does not bring out, in my opinion, the true implication of Section 80J. Another argument advanced by the learned counsel for the assessee was that in view of the decision of the Supreme Court in the case of Cellulose Products of India Ltd. 192 ITR 155 (supra), reversing the decision of the Gujarat High Court in the case of Cellulose Products of India Ltd. 110 ITR 151 (supra), the decision of the Special Bench of the Tribunal in the case of Hydle Constructions (P.) Ltd. (supra), is not the correct enunciation of law. I have already mentioned above how inspite of the reversal by the Supreme Court of the decision of the Gujarat High Court, the principle laid down by the Special Bench of the Tribunal still applies to the facts of the case of a contractor, who are building, bridges, power houses etc. This argument, therefore, does not help the assessee's case.
14. I may also mention that the issue whether the assessee is entitled to the grant of relief or not in a way becomes academic if there is no income liable to tax because under Chapter VIA, the relief to be granted is available only when there is gross total income and not otherwise and as it appeared to me there does not appear to be a gross total income to the assessee. In any way this is a matter to be examined by the regular Bench, before whom this matter will now go back to decide the appeals according to the majority view, although this was not a point referred to me as a point of difference of opinion.
15. Having considered all the aspects of the case and the case law cited before me and the facts of the case, I am of the opinion that the assessee has not manufactured any articles or things independent of the main contract to claim the benefit under Section 80J and under Section 80HH and the view expressed by the learned Accountant Member commends itself to me and I agree with it.
16. The matter will now go before the regular Bench for deciding the appeals according to the majority view.