Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Beehive Engineering Co. And Allied ... on 13 February, 1995
Equivalent citations: [1996]221ITR561(AP)
Author: Syed Shah Mohammed Quadri
Bench: S.S. Mohammed Quadri
JUDGMENT Syed Shah Mohammed Quadri, J.
1. In this reference, at the instance of the Commissioner of Income-tax, Andhra Pradesh-II, Hyderabad, under section 256(1) of the Income-tax Act, 1961 the following question is referred to this court for our opinion :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the assessee is a company which manufactures or processes goods within the meaning of the definition of 'industrial company' ?"
2. It will be useful to notice the relevant facts giving rise to that question :
The assessee is a private limited company. It purchases M. S. angles, joint, channels, etc., and cuts them into required sizes; thereafter, the pieces are welded, drilled with holes and fitted with bolts, nuts, etc., for manufacturing trusses. The assessee-company had also undertaken the work of fixing the trusses for purposes of roofing on the buildings which were under construction.
3. By the Finance Art, 1978, a reduced rate of tax was prescribed for an industrial company. Section 2(7)(c) of that Act defines the expression "industrial company". The assessee claimed that it was an "industrial company" and entitled to the benefit of the reduced rate of tax. The Income-tax Officer rejected the claim. The assessee carried the matter before the Appellate Assistant Commissioner of Income-tax. The appellate authority held that the activities of the assessee-company amounted to manufacture. He also recorded the finding that the income of the assessee from those activities was more than 51 per cent. However, following the judgment of the Orissa High Court in CIT v. N. C. Budharaja and Co. , he allowed the appeal on April 30, 1983. Aggrieved by the said order of the appellate authority, the Commissioner of Income-tax went in appeal before the Income-tax Appellate Tribunal. The Tribunal dismissed the appeal of May 30, 1984. It is from that order, the said question has arisen.
4. Mr. Habeeb Ansari, learned counsel for the Revenue, strenuously contends that the activities of the assessee do not amount to manufacture and in any event, as the assessee was laying trusses on the building, it amounted to construction the building. Therefore, the Tribunal went wrong in holding that the activities of the assessee-company amount to manufacture. He further submits that N. C. Budharaja's case [1980] 21 ITR 212 (Orissa) has been reversed by the Supreme Court in CIT v. N. C. Budharaja and Co. and for this reason also the question referred has to be answered in the negative-against the assessee.
5. Mr. V. Venkataramana, learned counsel for the assessee, supported the orders of the Tribunal. Before we construe the definition of the "industrial company" in section 2(7)(c) of the Finance Act, 1978, it would be useful to notice the findings of fact recorded by the Tribunal.
6. From the order of the Commissioner, the Tribunal noted the activities of the assessee as follows :
Rs.
"(a) Sale of manufactured goods like genr.
wheels, nozzles, etc. 1,22,126
(b) Fabrication and erection and assembling
of trusses, purling, etc. 11,74,508
(c) Labour charges on structural work 2,39,602
(d) Sale of asbestos cement materials 24,896
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Total 15,61,132."
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7. The Tribunal noticed the according to the assessment order, a part of the fabrication of steel structures for the trusses took place at the workshop; that the profit attributable to the activities if worked out on a proportionate basis would show that more than 51 per cent. related to manufacturing or processing of goods. After considering those findings, the Tribunal recorded its own finding as follows :
"It is clear that the assessee had purchased M. S. angles, joints, channels, etc., and they were cut to different required sizes and from the note filed by the assessee it was seen that the assessee did only welding, drilling of holes, fixing bolts, nuts, etc. Finished trusses were naturally different articles from the raw material used. After the assessee had manufactured the trusses, merely because the assessee also did the job of placing them in position in buildings which were under construction by others, it did not make the assessee, which is a manufacturer of goods turn into a building contractor. . . ."
8. From the facts recorded by the Departmental authority, it is seen that the assessee-company was treated as manufacturing industrial company prior to the assessment years 1973-74 to 1977-78. This dispute arose only in respect of the assessment year 1978-79. But the finding of the Appellate Tribunal is that the assessee is clearly an entity which manufactures of or processes goods within the meaning of the definition of "industrial company".
9. In view of these findings, in our view, the question as framed is not proper. The proper question on these facts should be "whether the assessee-company is an 'industrial company' within the meaning of section 2(7)(c) of the Finance Act, 1978;" and accordingly we reframe the question as noted above.
10. It may be appropriate to note here the provisions of section 2(7)(c) of the Finance Act, 1978 :
"2(7)(c). - '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."
11. In interpreting this definition, we may usefully refer to Division Bench decision of our High Court in Nava Bharat Enterprises (P.) Ltd. v. CIT [1983] 143 ITR 804. There the division Bench was concerned with the definition of "industrial company" contained in section 2(6)(c) of the Finance Act, 1969, which is in pari materia as the definition under consideration. While interpreting the said definition, the Division Bench observed as follows (page 811) :
"For holding that the assessee in an 'industrial company' as defined in section 2(6)(c) of the Finance Act, 1969, it must be held that it is 'mainly engaged in the processing of goods'. This is essentially a question of fact. Mr. M. Suryanarayana Murthy, the learned standing counsel for the Department, contends that the main activity of the assessee is export and sale of tobacco and not processing. According to him processing is only incidental to the sale or export, as the case may be, whereas according to Mr. Parvatha Rao, the learned counsel for the assessee, processing is the main activity of the assessee-company. This is a question which can must, however, express our opinion on the construction and application be under the impression that unless the income attributable to the 'specified activity" (in short for for the business of generation or distribution or it the manufacture or processing of generation or distribution or in the manufacture of processing of goods in mining') is not less than fifty-one per cent. of the total income of the assessee, a company cannot be an industrial company. We do not think so. According to the mainly engaged in a specified activity, while the Explanation says that the company shall be deemed to be mainly engaged in a specified activity if the income attributable to the specified activity is not less than fifty per cent. of its total income computed in accordance with the Explanation. Two views are urged before us. Mr. Suryanarayana Murthy, learned standing counsel for the Department, submits that in every case the lest prescribed by the Explanation has to be satisfied and that unless it is so satisfied, an assessee would not be called an 'industrial company'. The other view urged by Mr. Parvatha Rao is based upon a circular of the Central Board of Direct taxes which is found printed in paragraph 507 of Taxman's Direct taxes Circulars, Vol. 1, at Page 851. The circular referred to is Circular No. 103 (F.No. 166/1/73-II (A1), dated February 17, 1973) (see [1973] 88 ITR (St.) 80). It reads :
'Interpretation of the term "industrial company" as given in the Explanation to sub-section (7)(d) of section 2 of the Finance Act, 1966.
".... 'industrial company' means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power in the construction of ships or in the manufacture or processing of goods or in mining. According to the explanation to be deemed to be mainly engaged in business of generation or distribution of electricity or any other form of power or in the construction income attributable to any of the aforesaid activities included in its total income for the previous year is not less than fifty-one per cent. of such total income.
2. The question as to the exact meaning of the Explanation to sub-section (7)(d) of section 2 of the Finance Act, 1966, came up for consideration and the Board are advised that an 'industrial company' would mean -
(i) 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, even if its income from such activities is less than 51 per cent. of its total income; and
(ii) a company which, even though not mainly so engaged. Derives in any year, 51 per cent or more of its total income from such activities."
We are of the opinion that the construction placed by the Central Board of Direct Taxes upon the definition represents the correct views"
12. 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 (i) 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 an industrial company. In the instant case, having regard to the findings of fact recorded by the Tribunal, the assess-company squarely falls within the meaning of "industrial company", whether or not the income from the activities mentioned above exceeds 51 per cent. Indeed, as a matter of fact, the Revenue itself treated the assessee-company as an "industrial company" for the years 1973-74 to 1977-78.
13. We many, however, make note of the fact that though N. C. Budharaja's case was reversed by the Supreme Court in CIT v. N. C. Budharaja and Co. , yet it would not have any bearing on the facts of this case. There the finding was that the assessee-company was a firm of contractors constituted for the purpose of construction of a dam on Orissa. The contention there was that the activity industrial undertaking for the purpose of section 80HH. The Orissa High Court had taken the view that it was an industrial undertaking and that was reversed by the Supreme Court. Therefore, that decision does not directly apply to the facts of the present case where there is a finding of fact recorded by the Tribunal that the assess-company was carrying on manufacturing activities. In this view of the matter, we need not go into the other decisions cited by learned counsel for the Revenue.
14. The question referred by us is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. The referred case is accordingly answered.