Income Tax Appellate Tribunal - Delhi
Dalmia Agencies Ltd. vs Income-Tax Officer on 22 April, 1988
Equivalent citations: [1988]27ITD427(DELHI)
ORDER
G. Krishnamurthy, President
1.The controversy in this appeal is whether the assessee-company can be termed or can be regarded as a company engaged in the manufacture or processing of goods or as an investment company. On its answer the applicability of Section 104 of the Income-tax Act would depend. The Income-tax Officer treated the assessee-company as an investment company while the assessee contended that it was a company engaged in the manufacture or processing of goods or in mining notwithstanding the fact that the income from that source of manufacture or processing of goods was reduced to nil on account of set off of brought forward losses of the earlier years. The Income-tax Officer says that as a consequence of set off of brought forward losses, the income from manufacture or processing of goods having been reduced to nil, the assessee could not be termed as a manufacturing company and as the income from other sources was the only source on which tax was levied, the assessee-company should be termed as an investment company.
2. The assessee is registered as M/s. Dalmia Agencies engaged in mining china clay, silicon sand and granite stones. It was also manufacturing and selling asbestos cement pipes at Dalmia-puram and. was also processing the china clay and silica sand at Rajmahal in Bihar. It was also exporting the granite stones after their mining. In the accounting year under appeal the total income from this activity of manufacture or mining as per profit and loss account came to Rs. 5,11,192 after allowing deduction of Rs. 20,282 under Section. 80HH of the Income-tax Act. In other words, the income was Rs. 5,31,484 from its manufacturing activities. There was an unabsorbed depreciation and carry forward loss relating to the assessment years 1976-77 to 1979-80 of much more than the income shown and out of that a sum of Rs. 5,11,192 was set off so as to bring the income from manufacturing activities to nil. Besides this income from manufacturing activities, the assessee has also income from other sources, which amounted to Rs. 2,16,230. After allowing claim under Section. 80M of Rs. 1,29,730, the income from other sources stood at Rs. 86,492. The assessee-comparny did not declare any dividend. The Income-tax Officer therefore gave a notice to the assessee under Section. 104 of the Income-tax Act asking it to explain as to why provisions of that Section should not be applied and tax levied as provided for therein. His view was that when the income from manufacturing operations, be it for any reason, was reduced to nil, the only income that remained was the income from other sources and therefore the assessee-company should be regarded as an investment company. The assessee objected to the imposition of tax under Section. 104 as well as its applicability to the facts of this case by pointing out that (a) the assessee should not be regarded as an investment company but should be regarded as a company engaged in the manufacture or processing of goods or mining as its income was substantial from that source notwithstanding the fact that that income was not taxed as such because of the set off of carry forward loss and unabsorbed depreciation; (b) there were not enough resources enabling the assessee to declare a dividend on acccount of the smallness of profits and past losses. The Income-tax Officer rejected both these contentions and proceeded to compute the distributable income at Rs. 1,07,381 and treating the assessee-company as an investment company, levied a tax of Rs. 46,430. It is also useful to note how the Income-tax Officer computed the distributable surplus:
Gross total income Rs. Rs.
Income as assessed as per order dated 6-3-1984 including share from URF 93,405 Add: Deductions allowed under Chapter VI-A: under Section 80HH 20,282 under Section 80M 1,29,738 1,50,020 Total 2,43,425 Less: Tax payable 55,786 Expenses allowed 81,258 1,36,044 Balance income distributable 1,07,381
Under Section 109(4)(a) of the Income-tax Act 90 per cent of this distributable income should have been distributed and as no dividend was distributed, the entire 90 per cent, which came to Rs. 96,642 was taken for the purpose of levy of tax at 50 per cent under Section 104(1)(a).
3. The Commissioner (A) on appeal confirmed the assessment of the Income-tax Officer. According to him even though there was substantial income from the manufacturing activities of Rs. 5,11,192, that amount became nil consequent on the adjustment of carry forward loss and unabsorbed depreciation. He held that the expression 'gross total income' used in Section 104 was defined as the total income computed in accordance with the provisions of this Act before making any deduction under Chapter VI-A, which meant that the gross total income as computed after giving effect to the provisions of the Income-tax Act must be taken into consideration and if so done the gross total income computed was only an amount of Rs. 2,16,230 which consisted only of income from other sources and not any income from manufacturing activities. On the question of inadequacy of profits the Commissioner (A) held that the general reserve of the assessee-company was as high as Rs. 25 lakhs and the company could not therefore complain that it had no profits much less inadequate profits.
4. The point raised before us was, as was done earlier before the authorities below, as to whether the assessee-company could be regarded as a company engaged in the manufacture or processing of goods or in mining. At this stage it is necessary to notice what Section 104 provided. Sub-section (1) of Section 104 provided that where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the 12 months immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of the company of that previous year, the Income-tax Officer shall make an order in writing that the company shall apart from the sum determined as payable by it, be liable to pay income-tax at the rate of 50 per cent in the case of an investment company. We are not concerned here with the rest of the section. But by Sub-Section (4) the applicability of this provision was excluded in the case of an Indian company, whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form or power. We are not concerned with Clause (b) of Sub-section (4) for our present purpose. Since Clause (a) of Sub-section (4) had not spelt out when a company's business activity could be said to consist mainly in the anufacture or processing of goods or in mining, an Eplana-tion was added to provide:
For the purposes of Clause (a) of this Sub-section, the business of a company shall be deemed to consist mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, if the income attributable to any of the aforesaid activities included in its gross total income for the relevant previous year is not less than fifty-one per cent of such total income.
Therefore it has to be seen with the help of the Explanation, whether the assessee-company could be said to be a company whose business consisted of mainly the manufacture or processing of goods or mining, the test being whether the income attributable to that activity was more than or less than 51 per cent of the total income and whether the gross total income included that amount. It is for this purpose that the definition of 'gross total income' becomes relevant and is to be noticed. It is provided in Section 109(iv) as under:
gross total income" means the total income computed in accordance with the provisions of this Act before making any deduction under Chapter VT-A. That is to say that if the gross total income as computed in accordance with the provisions of this Act but before making any deduction under Chapter VI-A, includes any income referable to the manufacturing activities and if that income was more than 51 per cent of the total income, then the assessee-company could be said to be carrying on business consisting mainly in the manufacture or processing of goods or mining. As we have mentioned earlier the authorities below have consistently taken the view that since the income from manufacturing activities was reduced to nil by process of set off of the carried forward loss and un-absorbed depreciation, the total income of the assessee could not be said to include the income from manufacturing activities and therefore the gross total income of the assessee-company did not consist of any income from that activity.
5. The learned counsel for the assessee first argued that the Explanation does not apply. For this purpose he relied upon the observations made at page 35 of Law of Income-tax by Sampat Iyengar, Seventh Edition, where principles of construction of statutes were discussed. The learned authors have pointed out that an Explanation can in no case enlarge the scope of the section to which it was appended. Ordinarily the purpose of an Explanation is to limit the scope of the main section. An Explanation is quite different in nature from a proviso; the latter excludes, excepts and restricts while the former explains, clarifies or subtracts or includes something by introducing a legal fiction. The learned counsel for the assessee submitted that this Explanation cannot apply to the facts of this case to determine whether the assessee-company is a manufacturing company or not because the assessee-company was originally incorporated as a manufacturing company and the income it derived in the form of other sources, was only the result of the investment of its surplus funds, which was not the main object of the assessee-company. Since the dominant object of the assessee-company was manufacturing or mining, the assessee-company could not be termed as an investment company. Therefore Section 104(1) has no application at all and to bring it within the ambit of Section 104 by invoking the Explanation, it is submitted, is to ignore the main purpose for which the company has come into existence. Investment company was defined in Sub-clause (ii) of section 109 as a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources". The assessee-com-pany's income though happens to consist of income from other sources, that became the only income not because of any investment activity carried on by the assessee-company to earn income mainly from that source but because of the income from manufacturing activities having been reduced to nil by the set off provided in the Act. That is how the argument on behalf of the learned counsel for the assessee proceeded and in support of his contention strong reliance was placed upon the decision of the Supreme Court judgment in CIT v. Gangadhar Banerjee & Co. (P.) Ltd. [1965] 57 ITR 176 and CIT v. Bipinchandra Maganlal & Co. Ltd. [1961] 41 ITR 290. These decisions were mainly pressed to support that the profits shown this year should not be considered adequate in view of the past losses.
6. The Departmental Representative opposed all these contentions. Greatest stress was laid upon the definition of gross total income in Section 109(iv) to submit that for the case to be taken out of the ambit of Section 104, there must be income from manufacturing activity included in the gross total income and if there was no income included in the gross total income from manufacturing activity, the assessee-company would cease to be a company, whose activity consists mainly of manufacturing and processing and once that results, it becomes an investment company liable to be taxed at 50 per cent. He also relied upon the existence of huge reserves to disprove the theory that inadequacy of profits could not be the reason not to declare any dividends.
7. To our mind it is not necessary for us to deal with the purpose of an Explanation as much as to find out whether the Explanation applies or not. In our view it cannot be said that we can read Section 104 without the Explanation to understand its meaning and purport, its scope and ambit and its applicability to the facts of the case. One thing is true, namely, that the assessee-com-pany was incorporated as a manufacturing company and not as an investment company. The income from investments arose because of the investment of its surplus funds, which was not the main activity of the assessee-company. The main activity of the assessee-company resulted in a profit of Rs. 5,11,192. That amount was not brought to tax because of the set off of losses. When gross total income definition provided that income as computed in accordance with the provisions of this Act before making any deduction under Chapter VI-A has to be taken into account, the income to be computed under the provisions of this Act has to take into account Chapter VI, which provided for the aggregation of income as well as set off of carry forward and set off of losses. It is as a result of applying the provisions of Chapter VI that the income from the manufacturing activities was reduced to nil. That was the result of computing the income in accordance with the provisions of the Act. The total income as computed in accordance with the provisions of this Act is a loss in respect of the manufacturing operations of the assessee-company. When we compute the income for the purpose of assessment, the income under each head is separately computed and the resultant sums were aggregated to find out the total income or loss. This is what was contemplated under the Income-tax Act and we do not have to spend much time to show that that was the object of the Income-tax Act, otherwise the various provisions relating to the computation of income under each head and set off of losses from one source to another source in the same head and set off of losses from one head against income from another head and carry forward and set off of business losses would all become meaningless. Therefore when the Explanation provided that the gross total income must include the income attributable to the activity of manufacturing or processing of goods or mining it certainly meant that there must be a positive income from that activity and that income must be more than 51 per cent of the total income computed in accordance with the provisions of the Act. Therefore the word "included" used in the Explanation assumes any amount of significance. If no income attributable to the activities of manufacture was included in the gross total income, then the provisions of Section 104 would be attracted, i.e., the exemption provided for in Sub-section would not apply. The object of Section 104 appears to mean to force investment companies and trading companies to declare dividends more than the statutory percentage of its income on pain of penal tax providing however for exception in the case of company referred to in Clause (a) of Sub-section (4) provided the income from that activity is more than the income from other sources. This clearly means that even if the companies referred to in Clause (a) of Sub-section (4) solely exist for the manufacture or processing of goods or for mining or for construction of ships or generation and distribution of electricity, still they would not be entitled to get out of the reach of Section 104 if the income from the main activity of manufacture does not produce income and income was derived only from the other activity of investment. In other words, the Legislature appears to have contemplated that the company engaged in the construction of ships or in the manufacture or processing of goods or mining, etc., would also be having income from other sources and as it would be unwise to force those companies to declare dividends out of their profits, thereby depleting them of their resources, an exception is provided that those companies need not declare the dividends as provided for in Section 104(1) so that they may be able to plough back their profits, which is also very essential for the improvement of the industrial climate of the company. But if those companies happened to have income from other sources more than the income from manufacturing activities, then the exception would not be applicable. That was the object with which the Explanation was enacted. If this is the object of enacting Sub-section (4) and the Explanation, the fact that a company was mainly incorporated for the purpose of manufacture or processing of goods or mining, will lose its significance in so far as the applicability of Section 104 is concerned. This is the view that we held on the reading of Section 104 a little more closely.
8. Secondly the Explanation uses the expression "for the relevant previous year" immediately after the expression "gross total income". The expression "for the relevant previous year" suggests that the process of finding out whether the income attributable to the activities of manufacture or processing of goods was more or less than 51 per cent of the total income has to be exercised every year. If in a relevant previous year the income attributable to the manufacturing activities was more than 51 per cent of the total income, then the provisions of Section 104 would not apply. But if in another previous year, may be even the immediately subsequent year, the position is reversed, the provisions of Section 104 would appear to be attracted. That was why the expression "for the relevant previous year" was used so as to enjoin upon the Income-tax Officer an obligation to find out as to how the composition of income was ultimately going to be. In the Income-tax Act every year is a separate unit of assessment. What happens in one year may be relevant for the subsequent year but not binding. Therefore, if in a relevant previous year, the income attributable to the manufacturing activities was less than 51 per cent of the total income, then that company would be a company which is to declare dividends above the statutory percentage of the distributable income. Perhaps it cannot be said in the present case that the assessee is an investment company within the meaning of Section 109(ii) even though the gross total income happens to include income from other sources not by reason of the fact that earning income from investment was the main activity but by reason of the fact that the income from other activity, namely, manufacture turned out to be nil. In such an event the rate of tax applicable would be perhaps as provided for in Sub-section (1)(c) of Section 104, namely 25 per cent. In other words, in the case of a company referred to in Clause (a) of Sub-section (4) of Section 104 if the income from those activities happens to be less than 51 per cent of the total income, then the rate of tax to be applied in case the other conditions of Section 104 are satisfied is 25 per cent and not 50 per cent treating the company as an investment company.
9. It is also possible to argue that the expression "included in the gross total income" is a process of computation of income and even though it may result eventually in loss, the fact that the income was processed and included in the total income could not be lost sight of and if the gross total income in that manner included the income from manufacturing activities and if that income happens to be more than 51 per cent, the company would be out of the reach of Section 104. This argument may not be tenable for the reason that the income from each head has to be separately computed and the result of such a computation must be such as being available to be included in the total income. Therefore the mere fact that the profit and loss account of a company discloses a profit does not mean that the requirements of Explanation are satisfied nor are we convinced of the argument that the Explanation a.dded to Section (4) was not applicable. As we have already mentioned, we cannot read Section 104 without the Explanation as Explanation is as much a substantive part as any other part of that section.
10. As regards the non-availability of surplus, we do not think we need spend much time on this issue because the reserves of the company, which can be described as free reserves are about Rs. 25 lakhs. The liquid position of the company was not weak. The profit and loss account was not showing any debit balance. Therefore, this company cannot be said to be a company, whose resources are inadequate or whose profits are inadequate or dividend could not be declared in view of the past losses. We are therefore of the opinion that the authorities below have correctly applied the provisions of Section 104 except to the extent of the rate of tax.
11. The appeal is therefore allowed in part.