Kerala High Court
Commissioner Of Income-Tax vs Rajmohan Cashews (P.) Ltd. on 25 February, 1986
Equivalent citations: [1990]185ITR472(KER)
Author: T. Kochu Thommen
Bench: T. Kochu Thommen
JUDGMENT T. Kochu Thommen, J.
1. The following question has been, at the instance of the Revenue, referred to us by the Income-tax Appellate Tribunal, Cochin Bench :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was an industrial company within the meaning of Section 2(6)(c) of the Finance Act, 1972 ?"
2. Section 2(6)(c) of the Finance Act, 1972, provides : ...
(6) For the purposes of this section and the First Schedule,--...
(c) 'industrial company1 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.
3. The Income-tax Officer, by his order dated November 16, 1976, for the assessment year 1972-73, found that the assessee was liable to be taxed at 65 per cent. and not at the lower rate applicable to an industrial company as defined under the aforesaid provision. In the note to the order, the Officer stated :
"Note : The assessee's accounts show that the major portion of the processing work is done by others, Out of the total manufacturing expenses of Rs. 12,95,017, an amount of Rs. 11,22,128 is seen to be paid as outside processing charges. The assessee cannot, therefore, be treated as an industrial company. Mere supervision by the assessee cannot be considered as 'processing' done by the assessee."
4. The assessee appealed against the order. Allowing the appeal, the Appellate Assistant Commissioner found :
"2. ... It is seen therefrom that the appellant is also engaged in processing of raw cashew nuts in its own factories. It is well established in law that processing of cashew nuts, i.e., converting raw cashew into edible cashew kernels, is an industrial activity. It is also well established in law that conversion even if it is done through the agency of others constitutes the appellant's industrial activity. The Income-tax Officer is, therefore, directed to accept the claim and treat the company as an industrial company."
5. This order was challenged by the Revenue before the Tribunal. The Tribunal held :
". . .An activity of 'manufacture or processing' could be carried on by an assessee either with plant and machinery belonging to others by paying the necessary charges for the use of such plant and machinery. In the present case, the assessee has chosen the latter course as it would have been an onerous responsibility to start a factory of its own, install plant and machinery and engage labour and create certain permanent commitments, The payments made by the assessee towards the processing of the nuts have been made under specific heads, such as roasting wages, peeling wages, shelling wages, etc., as demanded by the factories in which the processing is done. Keeping these facts in view, we consider that the assessee satisfies the condition of being a company engaged in the processing of goods and, accordingly, answers the description of an 'industrial company' within the meaning of Section 2(7)(c) of the Finance Act, 1973. The Appellate Assistant Commissioner was, therefore, right in directing the Income-tax Officer to treat the assessee as an 'industrial company' and in taxing it as such."
6. Clause (c) which we have set out above shows that the company has to be "mainly engaged" in the processing of goods to claim the status of an industrial company. The note to the Income-tax Officer's order shows that, out of Rs. 12,95,017 expended by the assessee for manufacturing purposes, Rs. 11,22,128 has been paid as outside processing charges. This means that the bulk of the processing charges has been paid to outside agencies. It is on that assumption that the Officer found that the assessee was not engaged mainly in processing.
7. The fact that the processing was not done in the factory of the assessee, but in the factory of someone else would not necessarily mean that the assessee is not mainly engaged in the processing of the goods, provided there is material to show that the processing was done by the outside agency for and on behalf of the assessee and the charges incurred therefor were met by the assessee directly. The books of account of the assessee disclose, as found by the Tribunal, that the labour charges have been directly paid by the assessee under various heads in respect of the processing done in the factories of outside agencies. This means that, for the purpose of processing the goods entrusted by the assessee, the men employed in the factory of the outside agency are, for all practical purposes, the employees of the assessee itself. This, in fact, is the finding of the Tribunal and that finding is with reference to the books of account of the assessee. See the principle stated in Addl. CIT v. A. Mukherjee and Co. (P.) Ltd. [1978] 113 ITR 718 (Cal) ; CIT v. Neo Pharma Private Ltd. [1982] 137 ITR 879 (Bom) and Orient Longman Ltd v. CIT [1981] 130 ITR 477 (Delhi).
8. In the circumstances, we must, on the basis of the facts found by the Tribunal with reference to the relevant records, answer the question referred to us in the affirmative, that is, in favour of the assessee and against the Revenue. We do so.
9. We direct the parties to bear their respective costs in this tax referred case.
10. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.