Madras High Court
India Leather Corporation (P.) Ltd. vs Commissioner Of Income-Tax on 3 February, 1989
Equivalent citations: [1989]179ITR170(MAD)
JUDGMENT Ratnam, J.
1. At the instance of the assessee under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the following question has been referred for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-company was not an industrial company within the meaning of clause 2(6)(c) of Chapter II of the Finance Act, 1970 ?"
2. The assessee is a private limited company and the assessment year we are concerned with is 1970-71, for which the previous year ended on December 31, 1969. The assessee has its head office at Madras and a tannery at Tiruchy. The original assessment was completed on March 29, 1973, but on appeal, it was reduced to Rs. 6,95,620. Later, the assessment was reopened under section 147(b) of the Act and the assessee was found to be a non-industrial company for purposes of levy of tax. The income-tax Officer ascertained the total income at Rs. 7,37,969 and 51% of the gross total income was worked out at Rs. 3,77,639. The tannery income should be 51% of the gross total income, if the assessee is to be regarded as an industrial company. The Income-tax Officer computed the tannery income at Rs. 3,29,008 which fell below 51% determined by him at Rs. 3,77,639 and he proceeded to tax the company as a non-industrial company. In making adjustments to arrive at the figure of Rs. 3,29,008, the Income-tax Officer took into account three items, viz., (1) profit on sale of imported chemicals - Rs. 3,501; (2) nomination premium - Rs. 1,54,898; and (3) Rs. 50,000 representing the interest apportionable to the manufacturing unit. On appeal preferred by the assessee, the Appellate Assistant Commissioner found that the assessee's head office did business in trading in hides and skins, including goods purchased from others by way of export as well as internal sales and that for the ascertainment of the proportion of industrial profits over other profits, it was necessary to make a distinction between the manufacturing unit and the trading activities of the assessee. With reference to the first item of Rs. 3,501 which represented profit on sale of certain chemicals, the Appellate Assistant Commissioner took the view that amount cannot, in any manner, be attributed to the manufacturing activity of the tannery. That amount was, therefore, excluded as part of the profits of the industrial activity. Considering the nomination premium received on transfer of export incentive licence, the Appellate Assistant Commissioner found that exports were made by the assessee in its own name as an exporter and though it may be that the goods exported by the assessee had been procured from its tannery, the receipt of premium was by the assessee and there was no nexus or link between the manufacturing activity of the tannery and the receipt of export incentive licence or even the premium received on the sale of such licence. The Appellate Assistant Commissioner also took into account the running current account between the assessee and its manufacturing unit at Tiruchy and found that on the basis of the average outstanding loans advanced by the assessee to the tannery, a sum of Rs. 45,371 should be attributed as relating to the tannery unit in the place of Rs. 50,000 estimated by the Income-tax Officer. Finally, the Appellate Assistant Commissioner held that the industrial profits could not have been 51% or more of the gross total income and in that view,he upheld the reassessment order. On further appeal to the Tribunal, as the facts arrived at by the Appellate Assistant Commissioner were not challenged before it, it found that the income of the trading unit and the manufacturing unit has to be ascertained and such ascertainment had been properly done by the Appellate Assistant Commissioner and, therefore, the order of the Appellate Assistant Commissioner deserved to be upheld. That is how the question referred at the outset has come up before this court.
3. Learned counsel for the assessee contended that in the interpretation of the word "attributable" occurring in the Explanation appended to section 2(6) (c) of Chapter II of the Finance Act, 1970, a wider interpretation has to be adopted and receipts referable to sources other than the actual conduct of the business of the manufacturing industry, i.e., the tannery, should also be taken into account for purposes of considering the question whether the assessee would be an industrial company. Reliance in this connection was placed by learned counsel on the decisions in Cambay Electric Supply Industrial Co. Ltd. v. CIT ; Addl. CIT v. Abbas Wazir (P.) Ltd. and Obeetee (P.) Ltd. v. CIT . On the other hand, learned counsel for the revenue contended that in so far as the amount representing the sale of chemicals is concerned, in the prior assessment years, with reference to the assessee, it had been decided that the assessee is not entitled to claim them as attributable to the manufacturing activity and relied on India Leather Corporation (P.) Ltd. (No. 2) v. CIT (Appendix I) (infra) and India Leather Corporation (P.) Ltd. (No. 3) v. CIT (Appendix II) (infra). In relation to the other amounts, learned counsel submitted that those items do not relate to the manufacturing activities of the assessee,but only to its trading activities and, therefore, they were rightly excluded by the authorities below in the computation of the income as an industrial unit.
4. We first proceed to consider why it becomes necessary to determine the profits of the industrial activity of the assessee in view of Paragraph 'F', Part III of the First Schedule to the Finance Act, 1970. Thereunder, an industrial company is subjected to income-tax at 55% in respect of so much of its total income as does not exceed Rs. 10 lakhs and at 60% on the residue, while in the case of non-industrial company, the rate of tax on the entire total income is 65%. Under section 2(6)(c) of the Finance Act, 1970, an 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. An Explanation appended to this section states that for the purposes 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 51% of such total income. The assessee in this case, through its tannery at Tiruchy, is engaged in the manufacture or processing of leather. Even so, under the explanation, if the assessee should be regarded as an industrial company, then, the income attributable to the activities pertaining to the manufacture or processing of leather included in its total income should be not less than 51% of such total income. The emphasis in the Explanation is laid on the income attributable to the manufacturing activity of several kinds mentioned in section 2(6)(c) as well as the Explanation and not to any other activity. In other words, if 51% of the total income of the assessee, before making any deduction under Chapter VI-A of the Income-tax Act, is not attributable to the manufacturing activities of the assessees, then, it cannot be regarded as an industrial company for purposes of the Act. It may be that, as in this case, the assessee has a trading unit as well as a manufacturing unit, but what should be fulfilled for treating a company as an industrial company is that 51% of its total income, without deductions, should be referable or attributable to its manufacturing activities, failing which the company cannot be considered to be an industrial company for purposes of subjecting it to the concessional rate of tax. The tax concession so made available appears to us to have been intended only with a view to encourage and promote manufacturing activities and industrial development and growth with reference to the processing of goods and others as set out in section 2(6)(c) of the Finance Act, 1970, read with the Explanation and not to take in cases where some resources are generated purely from trading activities like dealing and trafficking in import entitlements, etc. From the very scheme of the concession so made available, it becomes necessary, in any given case, to ascertain the income which is referable or relatable to the manufacturing activities and other activities, and if the requirements of section 2(6)(c) read with the Explanation are fulfilled, only then, the benefit of the concessional rate of tax can be availed of by the assessee as an industrial company.
5. It is in the above background that the amounts excluded by the authorities below in considering the percentage of profit referable to the manufacturing activities of the assessee have to be considered. In so far as the amount of Rs. 3,501 is concerned, that represents the sale of certain chemicals by the assessee. By no stretch of imagination can this amount be attributed to any manufacturing activity of the tannery belonging to the assessee. The sale of chemicals was not in any manner connected with or even necessary for the manufacturing activity carried on by the tannery. That amount cannot, therefore, be considered as part of the profits of the industrial activity of the assessee. We may, in this connection, refer to the case of the assessee in India Leather Corpn. (P.) Ltd. (No.2) v. CIT [1989] 179 ITR 179. There the question was whether the profits earned by the sale of imported chemicals could be regarded as the income of the industrial company. Considering the total income of the assessee, the income by the sale of chemicals was held to constitute the bulk of the income from the sale of goods and therefore, the company cannot be termed as an industrial company. Though this decision was rendered with reference to section 2(6)(d) and the Explanation thereto in the Finance Act, 1968, we do not see how the principle that the income realised by the sale of chemicals related to a business of trading activity is inapplicable. To similar effect is the decision in the case of the assessee in T.C. No. 33 of 1975 (India Leather Corpn. (P) Ltd. (No. 3) v. CIT . In that case, it was pointed out that though it may be that the business of selling imported goods and the earning of income thereby may, in a sense be stated to be connected with the manufacturing activity, such connection is not sufficiently proximate to hold that the income is attributable to a manufacturing process. In view of the aforesaid decisions, we are of the view that the authorities below rightly declined to regard the amount of Rs. 3,501 as income attributable to the manufacturing activity carried on by the assessee.
6. Regarding the nomination premium of Rs. 1,54,898, it is seen that this amount had been received on transfer of export incentive licence. The Appellate Assistant Commissioner has factually found that the exports were made by the assessee in its own name and though it may be that the manufacturing unit transferred its exportable goods to the assessee, which actually exported them, there is no other nexus or link between the manufacturing activity of the tannery and the receipt of the export incentive licence or even the premium received by the sale of those licences. This factual finding had not been challenged by the assessee before the tribunal, as could be seen from para 5 of the order of the Tribunal. The receipt of premium or the incentive licences cannot be attributed to the manufacturing activities of the assessee, but they are relatable to the activity of export of goods. It may be that unless goods are manufactured, there may not be an occasion for the export of the manufactured goods. Even so, the export of either leather or other goods by the assessee has to be considered as the remote cause for the export entitlement. Such connection or nexus is not so sufficiently proximate as to enable us to hold that the income obtained therefrom is attributable to the manufacturing process undertaken by the assessee. Beside, the export was made by the assessee company and not by the manufacturing unit. For the purpose of ascertaining the proportion of industrial profits over other profits, it is essential to bear in mind the distinction between the manufacturing activity and the rest of the activities and if that distinction is maintained, it is at once clear that the premium received on transfer of incentive licences by the assessee cannot, in any manner, be attributed to any manufacturing activity of the tannery nor be treated as part of its profits arising out of its manufacturing activities, viz., the processing of leather or goods. We are, therefore, of the view that the authorities below rightly excluded this amount also in ascertaining the profits attributable to the manufacturing unit of the assessee.
7. That takes us to a consideration of the question whether the authorities below were right in concluding that the sum of Rs. 45,371 relatable to the allocation of interest in respect of the funds utilised by the tannery should also be excluded in considering the income of the assessee as an industrial company engaged in manufacturing activities. We find that in the course of the proceedings before the Appellate Assistant Commissioner and at his instance, the representative of the assessee worked out the interest and had arrived at a certain amount representing 6 per cent. average rate of interest that could have been charged to the tannery by the assessee. However, the Appellate Assistant Commissioner was of the view that the average rate of interest has to be ascertained in a different manner and he found that the assessee had been borrowing large funds from banks as well as on its own securities and that a total interest of Rs. 14,91,584 had been paid by the assessee, in addition to bank charges of Rs. 1,47,290, totalling to Rs. 16,35,946. Taking into account the average outstanding loans to the tanneries in the course of the year at Rs. 1,51,29,951, the percentage of payment of interest and bank charges was worked out at 10.8 and applied. Applying that rate to the funds allocated to the tannery division, the Appellate Assistant Commissioner worked out that Rs. 45,371 would be the interest liability attributable to the tannery division engaged in the manufacturing activity. Though the assessee had borrowed large amounts and had also paid heavy interest thereon, it is at once obvious that borrowed funds had also been utilised in respect of the manufacturing activities in the tannery of the assessee and such interest has also to be apportioned and excluded as attributable to the manufacturing activity while computing the income of the assessee for the purpose of considering the question whether it is an industrial company or not. We may observe that even before this court, no exception was taken to the manner of apportionment of the interest in respect of the trading activities of the assessee and the manufacturing activities of the tannery of the assessee.
8. We may now briefly refer to the decisions relied on by learned counsel for the assessee. In Cambay Electric Supply Industrial Corpn. Ltd. v. CIT , section 80E of the Act, prior to its amendment by the Finance (No.2) Act, 1967, came up for consideration and it was in that context, that the supreme court pointed out that for the purpose of granting special deductions under section 80E of the Act by the use of the expression "attributable to" instead of "derived from", a wider import to cover receipts from sources other than the actual conduct of the business of the specified industry was intended. We are of the view that that decision cannot be pressed into service for the purpose of deciding the question whether the assessee is an industrial company within the meaning of section 2(6)(c) and the Explanation appended thereto, as introduced by the Finance Act, 1970. Apart from this, the amounts in controversy relate predominantly to the trading activities of the assessee, as held earlier, and cannot, even if a wider interpretation as suggested by counsel for the assessee, is adopted, assist the assessee to claim the status of an industrial company. In Addl. CIT v. Abbas Wazir , the assessee-company was held to be an industrial company, on the finding of fact that the import entitlements or the sale proceeds received from other sources were directly connected with the actual manufacturing and export of carpets. In other words, it was found that the export entitlements or its sale proceeds received from other sources were held to be attributable to the manufacturing activity of export of carpets, which is not the case on the facts found in this reference. That decision cannot, therefore, be of any assistance to the assessee. In Obeetee (P.) Ltd. v. CIT also, it was found that the proceeds received from other sources like the export entitlement and export of carpets were attributable to the activity of manufacturing and export of carpets and, therefore, the assessee would be entitled to the benefit of the concessional rate of tax as an industrial company. On the factual findings rendered in this case by the Appellate Assistant Commissioner, which have not in any manner been challenged by the assessee before the Tribunal, the decisions relied on by learned counsel for the assessee cannot have any application at all. We, therefore, answer the question referred to us in the affirmative and against the assessee. The Revenue will be entitled to its costs of this reference. Counsel's fee Rs. 500.