Delhi High Court
Commissioner Of Income-Tax vs Cement Distributors Ltd. on 24 March, 1994
Equivalent citations: 1994IIAD(DELHI)173, 1994(29)DRJ104, [1994]208ITR355(DELHI)
Author: D.K. Jain
Bench: D.K. Jain, D.P. Wadhwa
JUDGMENT
D.K. Jain J.
1. In this reference under section 256(1) of the Income-tax Act, 1961 (in short, "the Act"), at the instance of the Revenue, the following two questions have been referred for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessed's claim for deduction under section 80HH for its units, Messrs. Rockford Asbestos, despite the fact that this unit was leased out to Messrs. Hari Bros. (P.) Ltd., and the assessed company did not derive any profit from manufacturing operations?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessed's claim under section 80J for its unit, Messrs. Rockford Asbestos, and directing the Income-tax Officer to determine the relief as per the rules, on the ground that having held that the assessed is entitled to deduction under section 80HH, the assessed is also entitled to deduction under section 80J?"
2. At the outset, we may state that the first question, as framed, can straightway be answered in the negative on the short ground that the question itself suggests and holds that "the assessed-company did not derive any profit from manufacturing operations", which is a condition precedent for the deduction permissible under section 80HH of the Act. Relief under section 80J of the Act having been granted in consequence of the relief under section 80HH, and also stated so in the question itself, the answer to the second question will also go the same way. However, as the case has been argued at some length, we will also consider it so, for which it would be necessary to refer to the facts as found by the Tribunal and the relevant statutory provisions.
3. The respondent/assessed, a closely held company, was engaged in various trading and manufacturing activities. On April 1, 1971, the assessed set up a new industrial undertaking at Dalmiapuram, a notified backward area situated in the Tiruchirapalli District of Tamil Nadu, under the name and style of Rockford Asbestos for manufacturing asbestos cement pipes. For the assessment year 1975-76, with which we are concerned in the present reference and for which the accounting period ended on October 31, 1974, the assessed claimed deduction under section 80HH of the Act, amounting to Rs. 3,646, being 20 per cent. of the profits derived from its unit Rockford Asbestos. In respect of the same unit, it also claimed deduction under section 80J of the Act at Rs. 9,834.
4. While examining the said claim during the course of assessment proceedings for the relevant assessment year, the Income-tax Officer noticed that instead of carrying out the manufacturing activity itself in the said new unit, the assessed had leased out the entire industrial undertaking to Messrs. Hari Bros. (P.) Ltd. On April 10, 1973, at an annual rent of Rs. 38,000 and after deducting depreciation in respect of the unit, amounting to Rs. 19,796, a net profit of Rs. 18,231 was declared from this unit and accordingly relief under section 80HH of the Act was worked out at Rs. 3,646. The Income-tax Officer was of the view that since the assessed did not carry out any manufacturing activity itself, it was not entitled to any relief under section 80HH of the Act. The assessed's claim in this behalf was accordingly rejected. Since conditions precedent for allowance of relief under section 80J and 80HH of the Act are more or less similar, the assessed's claim under section 80J was also rejected on the same reasoning. Having failed before the Commissioner of Income-tax (Appeals), the assessed carried the matter in second appeal before the Tribunal. Before the Tribunal, it was contended on behalf of the assessed that the profit of the business by way of lease money was derived from the new industrial undertaking and, therefore, the assessed was entitled to the claim of deduction under section 80HH of the Act. It was submitted that to avail of relief under the said section it was not necessary that the manufacturing activity must be carried out by the assessed itself. The Tribunal found merit in the assessed's view-point and held that the leasing out of the commercial assets of the new industrial unit at Dalmiapuram constituted a business activity on the part of the assessed and since the Income-tax Officer had assessed the lease rent in the hands of the assessed as business profit, the said income from lease rent could clearly be said to be profit derived from the industrial unit within the meaning of section 80HH of the Act. In coming to this conclusion, the Tribunal drew support from a judgment of the Madras High Court in CIT v. Universal Radiators P. Ltd. [1981] 128 ITR 531. Since relief under section 80J of the Act had been denied to the assessed by the lower authorities mainly on the ground of disallowance of relief under section 80HH of the Act, the Tribunal further directed that relief under section 80J should also be allowed to the assessed as per the rules. It is the correctness of this conclusion of the Tribunal which is challenged before us by the Revenue by asking for a reference on the question mentioned above.
5. The answer to the questions raised in main depends on the provisions and interpretation of section 80HH of the Act, which governs the controversy in the first question. The query in the second question relates to the claim for relief under section 80J of the Act, allowed by the Tribunal in consequence of relief granted under section 80HH. The controversy, therefore, revolves round section 80HH of the Act. The material portion of section 80HH of the Act, with which we are concerned, as it stood at the relevant time, reads thus :
"80HH. - (1) Where the gross total income of an assessed includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessed, a deduction from such profits and gains of an amount equal to twenty per cent. thereof.
(2) This section applies to any industrial undertaking which fulfills all the following conditions, namely :-
(i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970, in any backward area;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area :
Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessed of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area;
(iv) it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.
6. Explanation. - Where any machinery or plant or any part thereof previously used for any purpose in any backward area is transferred to a new business in that area or in any other backward area and the total value of the machinery or plant or part so transferred does not exceed twenty per cent. of the total value of the machinery or plant used in the business, then, for the purposes of clause (iii) of this sub-section, the condition specified therein shall be deemed to have been fulfillled...."
7. The section, introduced by the Direct Taxes (Amendment) Act, 1974, with effect from April 1, 1974, with a view to allowing deductions to newly established industrial undertakings and hotel business in certain specified backward areas, provides that where the gross total income of an assessed includes any profits and gains derived from an industrial undertaking, it shall be allowed a deduction from such profits and gains of an amount equal to 20 per cent. thereof provided the assessed satisfies the requirements prescribed therein. Besides fulfillling the conditions stipulated in sub-section (2) of section 80HH of the Act, the assessed has also to establish that his profits and gains are derived from his industrial undertaking.
8. In the instant case, it is not in dispute that the assessed's new unit, Rockford Asbestos, in respect whereof relief is claimed under section 80HH, is an industrial undertaking within the meaning of the said section and it fulfills all the conditions laid down in sub-section (2) thereof. The only objection of the Revenue to the grant of the relief under the said section is that the industrial undertaking having been leased out by the assessed, the lease income earned by the assessed does not constitute profits and gains derived from an industrial undertaking. In other words, the question which falls for consideration is whether the income earned by the leasing out of the entire industrial undertaking could be said to be profits and gains derived from the industrial undertaking of the assessed? The answer to the question posed before us thus turns on the scope and meaning of the expression "derived from" used in section 80HH of the Act. Lease income to the assessed in a wider sense could perhaps be attributable to the industrial undertaking but the question would be does it directly emerge from its running to make it a profit and gain arising from the industrial unit. The answer to the question would thus depend on whether the expression in the section "profits and gains derived from the industrial undertaking" admits of a restricted or a liberal construction.
9. While deriving support from the decision of the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 and of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, wherein the word "derived" has received judicial interpretation, Mr. Rajendra, learned standing counsel for the Revenue, has vehemently contended that the said word has to be given a very restricted meaning His submission is that the expression "any profits and gains derived from an industrial undertaking" means that the industrial undertaking must itself be the direct source of the profits or gains and implicit in it is the condition that the assessed must carry on the industrial activity by itself. His stand is that in the present case, the industrial undertaking having been leased out to Messrs. Hari Bros. (P.) Ltd., the direct source of profit to the assessed is the lease and not the industrial undertaking and, therefore, it cannot be said that the assessed has derived any profits and gains from an industrial undertaking. He has placed reliance on Hindustan Lever Ltd. v. CIT , CIT v. Cochin Refineries Ltd. [1982] 135 ITR 278 (Ker), CIT v. Cochin Refineries Ltd. [1983] 142 ITR 441 (Ker) and Sterling Foods v. CIT [1984] 150 ITR 292 (Kar).
10. On the other hand, Mr. Harihar Lal, learned counsel for the assessed, in seeking to support the view of the Tribunal, vehemently argued that the wording of section 80HH does not postulate any condition that the industrial undertaking must be run by the assessed itself. While inviting our attention to some other sections, viz., sections 33(1) and 80P(2) of the Act, he was at pains to explain that whenever the legislative intent was that to avail of a particular rebate or deduction, the assessed must carry on or engage himself in that particular activity, it had been specifically provided therein. He submitted that the decisions relied on the Revenue were distinguishable inasmuch as unlike those cases, in the present case, the direct source of income was the industrial undertaking and the lease was only a mode of safeguarding the rights of the parties. He also said that the industrial undertaking was leased out by the assessed to Messrs. Hari Bros. (P.) Ltd. lock, stock and barrel and was run by them on the same lines as was being done by the assessed itself. The statement is objected to by learned counsel for the Revenue on the ground that it does not emerge either from the statement of the case or from the annexures forming part thereof. Reference was made by Mr. Harihar Lal to a decision of the Supreme Court in Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1.
11. Since the word "derived" has already received judicial interpretation, we do not consider it necessary to go into its dictionary meaning but it will be useful to refer at this stage to the decisions wherein its scope has been considered.
12. In Raja Bahadur Kamakhaya Narayan Singh's case [1948] 16 ITR 325, the Privy Council was considering whether the interest on arrears of rent payable in respect of land used for agricultural purposes was agricultural income within the definition of the phrase contained in section 2(1) of the Indian Income-tax Act, 1922, and was, therefore, exempt from Income-tax? It was held that the said interest on rent for agricultural land was not agricultural income as it was neither rent nor revenue derived from land within the meaning of the said section. In reaching that conclusion, the Privy Council observed that (at page 328) :
"The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition."
13. From the above, passage, it is evident that a restricted meaning was assigned to the word "derived" by the Privy Council. In its view, if an enquiry was to be made as to the genealogy of the item under consideration, the enquiry should stop as soon as the effective source is discovered.
14. A similar view was expressed by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd.'s case [1978] 113 ITR 84, while examining the scope of section 80E, as it stood at the relevant time. In the said decision, the Supreme Court explained the distinction between the expression "attributable to" and the expression "derived from" and observed that the former expression is wider in import than the latter expression.
15. In Sterling Foods' case [1984] 150 ITR 292, the Karnataka High Court had occasion to consider the provisions contained in section 80HH of the Act, though in a different context. Following the ratio of the aforesaid two decisions, the Karnataka High Court held that the expression "derived from" has a definite but narrow meaning and it cannot receive a flexible or wider concept. The court went on to observe that to claim relief under section 80HH of the Act, the assessed must establish that his profits and gains were derived from his industrial undertaking and it was not just sufficient if a commercial connection is established between the profits earned and the industrial undertaking. The court held that the law requires that such profits must have been derived from the industrial undertaking, which must itself be the source of that profit.
16. Thus, the word "derived" has to be assigned a restricted meaning as compared to the words "attributable to" or "referable to" and, therefore, to avail of a rebate under section 80HH, an assessed must establish that he has derived profits or gains from the industrial undertaking. In other words, the industrial undertaking must itself be the source of that profit and gain and it is not sufficient if a commercial connection is established between the profits and gains earned and the industrial undertaking.
17. As we have noted above, the assessed established a new industrial undertaking on April 1, 1971, in a backward area and fulfillled all the conditions specified in the section and became entitled to claim rebate under the said section. It ran the industrial undertaking itself up to April 9, 1973, where after it was leased out to Hari Bros. (P.) Ltd. Therefore, for the period from April 1, 1971, to April 9, 1973, there could be little doubt that the assessed qualified for rebate under section 80HH. However the intervening factor, which, as per the stand of the Revenue, disentitled the assessed from claiming the rebate with effect from April 10, 1973, is the leasing out of the industrial undertaking by the assessed for a fixed sum, on which amount the assessed claimed rebate under the said section.
18. The cardinal rule of interpretation is that the statute must be construed according to its plain language and neither should anything be added nor subtracted there from unless there are adequate grounds to justify the inference that the Legislature clearly so indicated (intended (?)). It is also well-settled that in a taxing statute one has to look merely at what is clearly stated. The meaning and extent of the statute must be collected from the plain and unambiguous expression used therein, rather than from any notions which may be entertained by the court as to what is just or expedient.
19. Going by the language of section 80HH of the Act, the short question for consideration is whether the lease money received by the assessed could be said to be "profits and gains derived from an industrial under taking". As noticed above, the meaning of the term "derived" has been construed by the Privy Council in Raja Bahadur Kamakhaya Narayan Singh's case [1948] 16 ITR 325 and by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd.'s case [1978] 113 ITR 84, followed in Sterling Foods' case [1984] 150 ITR 292 by the Karnataka High Court to have a definite, narrow and restricted meaning. It cannot receive a flexible or wider connotation. The source of particular income by an assessed on which a rebate is sought for must directly emerge from the running of the industrial undertaking, yielding profits and gains. Rebate is not allowable if the particular income is merely attributable or relatable to an industrial undertaking. Lease of an immovable property (including plant and machinery embedded in the soil) is a transfer of a right to enjoy such property, in consideration of a price paid or promised, or of money. Lease money for such transfer, having no direct nexus with the profits or gains from the property transferred for use, cannot, therefore, be said to be "profits and gains derived from an industrial undertaking" within the meaning of section 80HH of the Act. It is entirely of a different character and species from profits and gains derived from the running of an industrial undertaking. Fixed lease money as herein is not dependent on the running of industrial undertaking. Once settled, the lease money becomes payable irrespective of any profit or gain or for that matter from the running of an industrial undertaking by the lessee. The lessee may or may not run the unit (industrial undertaking) or may or may not earn any profit or gain and in fact may incur loss in running it, but he still will be liable to pay the lease money. Thus income from lease money earned herein, though in a wider sense attributable to the industrial undertaking (as it is for leasing out the unit) cannot be said to be profits or gains (or a mode safeguarding it) derived from the industrial undertaking so as to entitle the lesson-assesses to a rebate under section 80HH of the Act. In this view of the matter, it is not necessary for us to go further into the contentions urged by learned counsel for the assessed.
20. In our opinion, therefore, the Tribunal fell into error in holding that the assessed was entitled to deduction under section 80HH of the Act on the fixed lease money received by it for the industrial undertaking.
21. As regards question No. 2, we find from the statement of the case that the assessed's claim for deduction under section 80J of the Act has been allowed by the Tribunal on the ground that since the assessed is entitled to relief under section 80HH of the Act, it has to be allowed deduction under section 80J also. As we have held that the assessed is not entitled to deduction under section 80HH in respect of its unit, Rockford Asbestos, on the same analogy, it cannot be granted relief under section 80J of the Act.
22. For the reasons recorded above, we answer both the questions in the negative, in favor of the Revenue and against the assessed.
23. The Revenue will be entitled to costs, which we assess at Rs. 2,000.