Bombay High Court
Commissioner Of Income-Tax vs Penwalt India Ltd. on 24 April, 1991
Equivalent citations: [1992]196ITR813(BOM)
JUDGMENT T.D. Sugla, J.
1. In this departmental reference relating to the assessee's assessment for the assessment years 1971-72, 1972-73 and 1973-74, the Income-tax Appellate Tribunal has referred to this court the following questions of law for opinion under section 256(1) of the Income-tax Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case, the assessee-company is entitled in the present years to the grant of depreciation allowance under section 32 in respect of the assets whose cost has been allowed to be deducted in full in the earlier years in terms of section 35(1)(iv)/section 35(2)(ia) of the Income-tax Act, 1961 ?
2. If the answer to the above question is in the affirmative, whether such depreciation allowance should be computed on the basis of the actual cost of the assets without applying Explanation 1 to section 43(1) of the Income-tax Act, 1961 ?
3. Whether, on the facts and in the circumstances of the case, it can be said that the assessee-company carried on the business of manufacturing of sugar and tea machinery ?
4. Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to the relief contemplated under section 80-I of the Income-tax Act, 1961 ?"
2. It is common ground that the first two questions which pertain to the three assessment years under reference had come up for consideration before this court in the case of CIT v. Kelkar (S. H.) and Co. P. Ltd. [1991] 191 ITR 612 (Income-Tax Reference No. 25 of 1977) and that by its judgment dated March 26, 1991, our court had answered the questions in the affirmative and in favour of the assessee. The facts and rival contentions being identical, we answer the first two questions hereinabove in the affirmative and in favour of the assessee.
3. The facts as found by the Tribunal in relation to questions Nos. 3 and 4 are :
"The assessee canvasses orders for supplying, erecting and commissioning sugar and tea machinery. After canvassing the orders, it prepares necessary drawings and designs and places an order with Turner Hoare for manufacturing machinery as per the drawings and designs and specifications to be supplied by it. Turner Hoard manufacturers the machinery strictly in accordance with the drawings, designs and specifications furnished to it by the assessee-company. The manufacturing process is carried on under the direct supervision of the assessee-company, it does not in any way concern itself with the correctness of the drawings, designs, specifications and other details. It does not bind itself regarding the quality, standard and performance of the machines. The assessee-company binds itself regarding the proper functioning of the machines and giving guarantee for its proper performance for the stipulated period. If the machine is found defective or unservicable for any reason, it is the assessee-company which has to bear the consequences."
4. The Tribunal, observing that, in the absence of a factory or manufacturing facilities of its own, the assessee-company utilises the manufacturing facilities of Turner Hoare on payment, held that this fact by itself did not make any difference and the assessee was engaged in the manufacturing activity, that is, of manufacturing sugar and tea machinery. Accordingly, the Tribunal held that the assessee was entitled to relief as contemplated under section 80-I of the Income-tax Act, 1961.
5. Dr. Balasubramanian, learned counsel for the revenue, fairly admitted that it was not necessary for a person to be engaged in a manufacturing activity that he should undertake all manufacturing activities by himself and that it would be enough if he engages himself in a part of the manufacturing activity and gets the rest of it done through the agency of others. In the present case, according to Dr. Balasubramanian, no part of the manufacturing activity was done by the assessee. Everything concerning the manufacturing of sugar and tea machinery was, he pointed out, done by Turner Hoare, and, therefore, the Tribunal was not justified in holding that the assessee was carrying on business in the manufacture of sugar and tea machinery. In support of his contention, Dr. Balasubramanian relied on the Madras High Court decisions in the case of Addl. CIT v. Chillies Export House Ltd. [1978] 115 ITR 73 and CWT v. K. Lakshmi Oricon P. Ltd. [1985] 151 ITR 296 and CIT v. Acrow India Ltd. [1991] 188 ITR 485. In all the four decisions relied upon by Dr. Balasubramanian, it was stated to have been held that a part of the processing or manufacturing activity must be done by the assessee in order to qualify to be an industrial company engaged in manufacturing activity.
6. Mr. Vyas, learned counsel for the assessee, on the other hand, placed reliance on our High Court decision in the case of CIT v. Acrow India Ltd. [1991] 188 ITR 485, which was incidentally relied upon by Dr. Balasubramanian also, and the other decision of our High Court in the case of CIT v. Neo Pharma Pvt. Ltd. [1982] 137 ITR 879.
7. It cannot perhaps be disputed on the basis of the decisions relied upon that the expression "engaged in manufacture" indicates that the assessee should be directly involved in the manufacturing process and it will not include cases where he gets the goods manufactured totally by an outside agency. Incidentally, the Madras High Court, in its decision in Addl. CIT v. Chillies Export House Ltd. [1978] 115 ITR 73 referred to the Allahabad High Court decision in the case of Bulbu Prasad Amarnath v. CST [1964] 15 STC 46, wherein it was held that it is not merely the person who manufactures but even the person who had the goods manufactured who would be entitled to the benefit of the definition. In so doing, the learned judges referred to 33, Halasbury's Laws of England, third edition, "Revenue", paragraph 407, wherein it was said that a person is deemed to make goods or to apply a process if the goods are made, or the process is applied, by another person to his order under any form of contract other than a purchase. Therefore, we have to proceed on the basis of the decisions cited that an assessee would be said to be engaged in manufacturing activity if he is doing a part of the manufacturing activity by himself and, for the rest of it, engages the services of somebody else on a contract other than a contract of purchase.
8. Coming to the facts of the instant case, we find from the facts found by the Tribunal that the assessee's manufacturing activity consisted of (i) canvassing of orders, (ii) preparing of designs and drawings on the basis of orders, (iii) placing orders for the manufacture of machinery with Turner Hoare, (iv) to see that the manufacturing process is carried on by Turner Hoare under the direct supervision of the assessee-company, (v) to have a check over the quality control and last but not the least, to be responsible for the proper functioning of the machinery and guarantee after sales service for a stipulated period. Out of so many activities, except for one activity, namely, getting the machinery manufactured through Turner Hoare, all other activities are, admittedly, undertaken by the assessee-company. In the circumstances, we find no difficulty in agreeing with the Tribunal that the assessee is engaged in the business of manufacture of sugar and tea machinery and is, accordingly, qualified for relief under section 80-I. In the above view of the matter, we answer the third and fourth questions also in the affirmative and in favour of the assessee.
9. There would be no order as to costs.