Madras High Court
Commissioner Of Wealth-Tax vs V.O. Ramalingam on 24 November, 1994
JUDGMENT
Mishra J.
1. This reference under section 27(1) of the Wealth-tax Act, 1957, is in respect of the claim of the assessee for exemption under section 5(1)(xxxii) of the Wealth-tax Act, 1957 (hereinafter referred to as "the Act"). In the proceedings before the Wealth-tax Officer, the Appellate Assistant Commissioner and the Tribunal as well as before us, his (assessee's) interests in the assets of the two industrial undertakings, i.e., Ajantha Bleaching and Dyeing Works and Onni Chettiar and Sons, are involved. The assessee claimed exemption in the assessment years 1975-76 and 1976-77, the corresponding valuation dates being March 31, 1975, and March 31, 1976, on the ground that the interest of the assessee in the assets of the said firms was to be excluded as the two firms were engaged in manufacturing and processing of yarn. The Wealth-tax Officer rejected the assessee's claim. The Appellate Assistant Commissioner, however, allowed the claim and the Tribunal has affirmed the appellate order. The reference before us has come at the instance of the Commissioner of Wealth-tax and the question, as framed by the Tribunal, is as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the bleaching of grey yarn amounts to manufacture and processing of goods within the meaning of the Explanation to section 5(1)(xxxi) of the Wealth-tax Act, 1957, for both the years ?"
2. During the pendency of the instant reference before this court, a Bench of this court in the case of CWT v. K. Lakshmi [1983] 142 ITR 656, and other connected eases has construed section 5(1)(xxxii) of the Act.
3. Section 5(1)(xxxii) reads as follows :
"5. (1) Subject to the provisions of sub-section (1A) wealth-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee- ....
(xxxii) the value, as determined in the prescribed manner, of the interest of the assessee in the assets (not being any land or building or any rights in any land or building or any asset referred to in any other clause of this sub-section) forming part of an industrial undertaking belonging to a firm or an association of persons of which the assessee is a partner or, as the case may be, a member."
4. The Explanation, which has defined an "industrial undertaking" and is found incorporated in the Act, as a part of clause (xxxi) of section 5(1) reads as follows :
"For the purposes of clause (xxxa), this clause, clause (xxxii) and clause (xxxiv), the term 'industrial undertaking' means an undertaking 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."
5. The court, in the said case, has held that the expression "in the business" occurring in the Explanation to section 5(1)(xxxi), is attributable only to "generation or distribution of electricity or any other form of power" but not to the subsequent clauses referred to in the section, i.e., in the construction of ships or in the manufacture or processing of goods or in mining. In the cases thus covered by clauses other than an undertaking engaged in the business of generation or distribution of electricity or any other form of power unless it is found that the undertaking is engaged in the manufacture or processing of goods, the assessee will not be entitled to the exemption. Proceeding further to consider what is meant by "engaged in manufacturing or processing of goods", the court in the said judgment has said (at page 659) :
"In our considered opinion, 'engaged in manufacturing' postulates the assessee's direct involvement in the manufacture. It may not be necessary that the assessee himself should be personally engaged but it is enough that he employs his own labourers. We are not prepared to accept the contention advanced by the assessee that though the goods are got manufactured by an outside agency, the assessee can be said to manufacture the goods on the contention that the assessee pays for the manufacture or feeds the expenses incurred in the maintenance of the looms. So also the mere fact that the assessee had given instructions or specifications to the weavers indicating the quality of goods will not in any way better the case of the assessee. It is also contended on behalf of the assessee that such a specification given to the outside agency for the preparation of textile goods will mean that the assessee had control over the quality of the goods. The expression engaged in manufacture', as already pointed out by us, indicates that the assessee should be directly involved in the manufacturing process and it will not include the cases where he gets the goods prepared by an-outside agency :
At the same time, we are not inclined to accept the argument of the Revenue that even though the assessee is responsible for a processing, the assessee would not be entitled to the benefits contemplated under the above provision. If we turn to the Explanation extracted above, the word used is 'processing of goods'. It does not predicate that it should be all the processes resulting in the end-manufacture. Further, it cannot be disputed that the end-manufacture may involve several processings. We are, therefore, of the opinion that if the assessee has done any processing, which ultimately brought about the product, he is entitled to avail of the above provision."
6. A Bench of the Rajasthan High Court has also considered the above in CWT v. Vimal Chand Daga (HUF) [1988] 172 ITR 264. The assessee in the said case was a partner in two firms, which carried on the business of purchasing rough emerald from the local market and then converting it into tawdda, potta and cut emerald by processing. In this process, rough emeralds were sorted out, converted into ghats and finally shaped, polished and coloured, the manufacturing was got done though skilled labourers who were paid on the basis of work done. The assessee claimed that the firms of which he was a partner manufactured and processed emerald and this activity made it an "industrial undertaking" and so the assessee was entitled to the benefit of section 5(1)(xxxii) read with the Explanation to section 5(1)(xxxi) of the Wealth-tax Act, 1957. The Wealth-tax Officer rejected the assessee's claim and the Appellate Assistant Commissioner affirmed that view dismissing the assessee's appeal. The Tribunal, however, allowed the assessee's appeal. It is interesting to note the contentions before the court on behalf of the Revenue that there was no finding of the Tribunal that the manufacture or processing of goods was done either wholly or even in part by the firm in which the assessee was a partner and, therefore, the requisite finding to give the benefit of these statutory provisions was absent and that the Tribunal was not justified in giving the benefit to the assessee, without recording the finding requisite to attract the said provision and that of learned counsel for the assessee that the benefit of the provision was rightly given to the assessee as that the skilled labourers through whom the work was got done by those firms were piece-rated workmen of those firms and the jural relationship of employer and employee existed between the firms and those skilled labourers and that the conditions necessary to make them "industrial undertakings" were present and at least a part of the manufacture or processing of goods if not the entire activity was done by the firms themselves in their own premises in addition to the work which was got done through skilled labourers. The Rajasthan High Court on the said basis held that the Tribunal's decision to give the benefit of section 5(1)(xxxii) of the Act to the assessee without recording the requisite findings of fact which attracted the applicability of the provisions could not be justified and then referred to the requirements or requisites, in these words (at page 267) :
"The meaning of the expression 'industrial undertaking' used in section 5(1)(xxxii) has to be understood as defined in the Explanation to section 5(1)(xxxi) of the Act. According to this definition, the term 'industrial undertaking' for the purpose of the business activity of the assessee means an undertaking engaged in the business of manufacture or processing of goods, namely, conversion of raw material purchased by the firms into finished product or gem which is the marketable commodity. It is not disputed on behalf of the Revenue that this entire process which results in the conversion of the raw material into the finished product of gem in marketable shape is an activity satisfying the requirement of manufacture or processing of goods. The real question, therefore, is whether the whole or any part of it is done by the assessee's firms so as to attract this statutory provision for its benefit. It is in this light that we have to see whether the requisite findings of fact have been recorded by the Tribunal before giving to the assessee the benefit of this provision.
Examining the matter in the above background, we find that the Tribunal has not recorded the requisite findings of fact on the basis of which alone the benefit of the above statutory provision can be given to the assessee. It was necessary for the Tribunal to record a clear finding about the entire activity or the various steps or stages in the manufacture or processing of these gems beginning with the point where the same was purchased in the local market and ending with the point where it was made marketable and sold by the assessee's firms. It has then to be further found as to which, if any, of the various steps or stages of this manufacture or processing activity between these two end points is performed by the assessee's firms directly so as to be treated as being done by the assessee's firms themselves and also whether the activity got done through the skilled labourers who are paid on the basis of the work done is an activity of the firms themselves and not of an outside agency. For this purpose, the jural relationship between the assessee's firms and these skilled labourers has to be determined and it has to be decided whether the employer-employee relationship exists between them as claimed before us on behalf of the assessee. We may add that the meaning of an 'industry' defined in section 2(j) of the Industrial Disputes Act as indicated in Bangalore Water Supply and Sewerage and Sewerage Board v. A. Rajappa, may also be borne in mind in this context. The triple tests indicated the existence which show prima facie that there is an 'industry' in that enterprise would also be helpful for this-purpose. The matter has not been decided by the Tribunal or any of the authorities below it in this perspective for the obvious reason that the case was not put up by the parties in the correct perspective. Reference was made before us to a book Indian Gemmology' by Raj Roof Tank which is stated to be an authoritative book on the subject in order to show the various stages of the manufacturing or processing activity of the gems beginning with the raw material known as 'kharad' and ending up with the gems in the marketing form. A perusal of the same indicates that there are several stages in between these two end points which together constitute the manufacture or processing of these goods. There is no finding by the Tribunal as to which, if any, of these several steps in the manufacture or processing of the goods is carried on by the assessee's firms directly and whether the work got done through the skilled labourers is not the entire manufacturing or processing activity. Without these findings of fact, it is not possible to decide the question of applicability of the statutory provision, of which the assessee has claimed the benefit."
7. The two authorities, i.e., judgment of this court in CWT v. K. Lakshmi [1983] 142 ITR 656 and the judgment of the Rajasthan High Court in CWT v. Vimal Chand Daga (HUF) [1988] 172 ITR 264, thus postulated that for the assessee's direct involvement in the manufacture, it may not be necessary that the assessee himself should be personally engaged in the process of manufacture, but it is enough if he employs his own employees. If the goods are manufactured by an outside agency, he cannot be said to have manufactured the goods. The Explanation above extracted, which also uses the expression "processing of goods", does not predicate that it should be all the processes resulting in the end-product, in which the assessee should be found engaged, if the assessee has done any processing, i.e., if he is directly involved at any stage of the processing, resulting in the end-manufacture, he is entitled to avail of the exemption.
8. In the case of the interest of the assessee in Ajantha Bleaching and Dyeing Works, it is conceded that the firm was engaged in bleaching grey yarn and colouring the same, thus some part of the processing the firm had done to qualify as an industrial undertaking engaged in the manufacture and processing of the goods. In the case of Onni Chettiar and Sons, it is said that the firm did not do the bleaching by itself, but it get the bleaching done by the other firm (Ajantha Bleaching and Dyeing Works). On the face of it, the assessee got all the processes of the manufacturing done by another agency. The Tribunal may not be right on such facts in holding that Onni Chettiar and Sons could qualify to the benefit so long as the manufacturing or processing was done on its account and at its expense by some other person.
9. We have some difficulty, however, in straightaway reversing the finding of the Tribunal without there being a further elucidation on the information from the assessee as well as the Revenue about the engagement of the labourers for the work of the assessee's firm, Onni Chettiar and Sons. There should be no misapprehension that "engaged in manufacturing" postulates the assessee's direct involvement in the manufacture and that it may not be necessary that the assessee himself should be personally engaged, but it is enough that he employs his own labourers. It is suggested that the processing leading to the manufacture should be in some sort of a permanent establishment with a number of employees engaged in regular work.
10. In a system such as ours, it is necessary to understand that someone can always take work from an independent contractor, who is entirely independent of any control or interference and merely undertakes to produce a specified result employing his own men to produce that result. There is yet another system of appointing an agent, who, though bound to exercise his authority in accordance with all the lawful instructions which may be given to him from time to time by his principal, is not subjected, in its exercise to the direct control or supervision of the principal. A servant or an employee, who acts under the direct control and supervision of his master and is bound to conform to all the reasonable orders given to him in the course of his work is different from an independent contractor or an agent. An agent as such is not a servant, but a servant would generally for some purposes be an implied agent, the extent of the agency depending upon the duties or position of the servant. There are several other cases, reiterating the above, one is the case of an assessee, who was appointed as a treasurer of a bank for its branches, sub-agencies and pay offices, who under the agreement had to perform the duties, liabilities and responsibilities, which by custom or contract usually devolved upon a treasurer as well as those specified in the agreement and he had to provide the staff for the cash section of the bank. He had power to suspend, transfer or dismiss any member of the staff and to appoint another person in his place and he was responsible for all the acts of the staff so appointed which resulted on loss or damage to the bank. He was also responsible for the protection of the property of the bank and for the receipt of any bad money or base money, coin or bullion or any forged or fraudulently altered currency notes. The question involved was whether the loss suffered on account of the said agreement in the performance of his duties and carried for the following year, was liable as a deduction in the subsequent year under sections 7 and 10 of the Indian Income-tax Act, 1922. In the case of CIT v. Manmohan Das [1966] 59 ITR 699, the Supreme Court considered whether the assessee on the said appointment under the agreement was a servant of the bank or was an agent of the bank or was under a contract. Reading the contents of the agreement, the Supreme Court found that the office of treasurer was to be held by the assessee and after his death, by his heirs and legal representatives. The Supreme Court thereafter said as follows (at page 706) "It is unnecessary to consider whether the agreement would be determined by any supervening disability of the treasurer, which may render the contract impossible of performance. But the treasurer holds the office not as a servant of the bank. The treasurer has unquestionably undertaken very onerous responsibilities. There is, however, no covenant which authorises the bank to control the treasurer in the due performance of duties undertaken by him under the terms of the agreement. Business of the bank has undoubtedly to be carried on in the manner normally done by the banks, and the duties, liabilities and responsibilities of the treasurer are to be such as 'either by custom or contract usually devolve on a treasurer'. The bank pays the Indian staff in the cash department, but the control is of the assessee. He has control over the staff appointed by him or deemed to be appointed by him : he has, therefore, the power to initiate proposals for transfer, suspension or dismissal of any member of the cash staff.
This court in Dharangadhara Chemical Works Ltd. v. State of Saurashtra [1957] SCR 152, 157, observed :
'The principles according to which the relationship as between employer and employee or master and servant has got to be determined are well-settled. The test which is uniformly applied in order to determine the relationship is the existence of a right of control in respect of the manner in which the work is to be done. A distinction is also drawn between a contract for services and a contract of service and that distinction is put in this way : "In the one case the master can order or require what is to be done while in the other case he can not only order or require what is to be done but how itself it shall be done".'
10. After referring to a large number of cases, the court observed at page 160 :
11. The nature or extent of control which is requisite to establish the relationship of employer and employee must necessarily vary from business to business and is by its very nature incapable of precise definition .... it is not necessary for holding that a person is an employee, that the employer should be proved to have exercised control over his work, that the test of control was not one of universal application and that there were many contracts in which the master could not control the manner in which the work was done .....
12. The correct method of approach, therefore, would be to consider whether having regard to the nature of the work there was due control and supervision by the employer or to use the words of Fletcher Moulton L.J.; at page 549 in Simmons v. Health Laundry Co. [1910] 1 KB 543 :
"... it is impossible to lay down any rule of law distinguishing the one from the other. It is a question of fact to be decided by all the circumstances of the case. The greater the amount of direct control exercised over the person rendering the services by the person contracting for them the stronger the grounds for holding it to be a contract of service, and similarly the greater the degree of independence of such control the greater the probability that the services rendered are of the nature of professional services and that the contract is not one of service".
13. Under the contract, the treasurer had to procure due performance of the duties of the cash department by employees under his supervision and that he was to be responsible for all the acts done by them and to make good the loss which may result from any embezzlement, theft, fraud, misappropriation, mistake, misconduct, omission, negligent act or default of any such person. In carrying out his duties under the contract apparently he was not to be controlled or supervised by the bank. The contract was, therefore, one for service and the treasurer could not be called a servant of the bank.
14. In the Rajasthan judgment, it is indicated that the jural relationship between the assessee's firms and these skilled labourers has to be determined and it has to be decided whether the employer-employee relationship existed between them. It has thus to be properly understood that in all such cases, the question will be whether the activity got done through skilled labourers, who are paid on the basis of work done by them, is a contract for work or is a contract of work. This can be properly evaluated by understanding the limitations and as pointed out in the case of Ram Prashad v. CIT , the context plays a vital part, the nature of work and the control of supervision will disclose whether the processing is done by the employees or agents or independent contractors. It is difficult to lay down any one test to distinguish the relationship of master and servant from that of an employer and an independent contractor or that of a principal and agent. Certain things, however, are repeatedly pointed out and it is said that if they are found to exist, the relationship of master and servant can be gathered. A Constitution Bench of the Supreme Court in State of Assam v. Kanak Chandra Dutta, , considered whether a Mauzadar in the Assam Valley, who was appointed to collect revenue and who was Spoken of as a "revenue contractor", was an employee. It was noticed that he was not a whole-time employee nor drew a salary. He drew only a commission. The Supreme Court noticed (at page 886) :
"A post is a service or employment. A person holding a post under a State is a person serving or employed under the State, see the marginal notes to articles 309, 310 and 311. The heading and the sub-heading of Part XIV and Chapter I emphasise the element of service. There is a relationship of master and servant between the State and a person said to be holding a post under it. The existence of this relationship is indicated by the States right to select and appoint the holder of the post, its right to suspend and dismiss him, its right to control the manner and method of his doing the work and the payment by it if his wages or remuneration. A relationship of master and servant may be established by the presence of all or some of these indicia, in conjunction with other circumstances and it is a question of fact in each case whether there is such a relation between the State and the alleged holder of a post.
In the context of articles 309, 310 and 311, a post denotes an office. A person who holds a civil post under a State holds 'office' during the pleasure of the Governor of the State, except as expressly provided by the Constitution, see article 310. A post under the State is an office or a position to which duties in connection with the affairs of the State are attached, an office or a position to which a person is appointed and which may exist apart from and independently of the holder of the post. Article 310(2) contemplates that a post may be abolished and a person holding a post may be required to vacate the post, and it emphasises the idea of a post existing apart from the holder of the post. A post may be created before the appointment or simultaneously with it. A post is an employment, but every employment is not a post. A casual labourer is not the holder of a post. A post under the State means a post under the administrative control of the State. The State may create or abolish the post and may regulate the conditions of service of persons appointed to the post.
Judged in this light, a Mauzadar in the Assam Valley is the holder of a civil post under the State. The State has the power and the right to select and appoint a Mauzadar and the power to suspend and dismiss him. He is a subordinate public servant working under the supervision and control of the Deputy Commissioner. He receives by way of remuneration a commission on his collections and sometimes a salary. There is a relationship of master and servant between the State and him. He holds an office on the revenue side of the administration to which specific and onerous duties in connection with the affairs of the State are attached, an office which falls vacant on the death or removal of the incumbent and which is filled up by successive appointments. He is a responsible officer exercising delegated powers of Government. Mauzadars in the Assam Valley are appointed Revenue Officers and ex officio Assistant Settlement Officers. Originally, a Mauzadar may have been a revenue farmer and an independent contractor. But having regard to the existing system of his recruitment, employment and functions, he is a servant and a holder of a civil post under the State.
Counsel for the State stressed the fact that normally a Mauzadar does not draw a salary. But a post outside the regularly constituted services need not necessarily carry 'a definite rate of pay'. The post of a Mauzadar carries with it a remuneration by way of a commission on the collections of Government dues Counsel stressed the fact that a Mauzadar is not a whole-time employee. But a post outside the regularly constituted services may be a part-time employment. The conditions of service of a Mauzadar enable him to engage in other activities.
In Venkata Swamy v. Supdt. of Post Offices, , the Orissa High Court held, on a consideration of the relevant conditions of employment, that a temporary extra-departmental branch postmaster was not a person holding a civil post, but the observation in that case that a part-time employee cannot be the holder of a civil post outside the regularly constituted services is too wide and cannot be supported. In Sher Singh v. State of Rajasthan , the Rajasthan High Court held that a Chaudhari appointed under the Land Revenue Act of Bikaner is not entitled to the protection of article 311. The report of the case does not disclose the functions of the chaudhuri and the regulations governing his employment. In Bindu Nath Chaudhury v. State of Assam, AIR 1959 Assam 118, the court found that the applicant was never appointed to the post of a Mauzadar, and no question of the protection of article 311 could arise in the circumstances."
15. We thus have no manner of doubt that in deciding whether the assessee had engaged himself through his employees in the manufacture or processing of goods, it will be necessary to see whether labourers engaged were under the control of an independent contractor or were controlled by an agent, whose agency distinguished him from that of a servant or employee, and how far the assessee exercised control by engaging such labourers for work, paying wages or remuneration and determining their conditions of service. In the instant case, it seems the assessee controlled both Ajantha Bleaching and Dyeing Works as well as Onni Chettiar and Sons and engaged labourers for the works of Ajantha Bleaching and Dyeing Works as well as Onni Chettiar and Sons, may be as employees, may be as contractors or agents. The relationship will depend on considerations, which are necessary to establish the jural relationship.
16. So far thus, in the firm, Ajantha Bleaching and Dyeing Works, is concerned, since it is conceded that the assessee got the bleaching of grey yarn and colouring done in the firm, it is covered by section 5(1)(xxxii) of the Act. So far as Onni Chettiar and Sons is concerned, unless full facts are available and further investigations are done, it will not be possible to accept the case of the assessee. The Revenue, however, has not addressed itself to this aspect of the matter. It will be necessary for it to examine in some detail after giving an opportunity to the assessee to produce any material/further materials on this aspect of the matter. It is a fit case, in our opinion, thus to have the matter remitted to the Wealth-tax Officer, i.e., in so far as Onni Chettiar and Sons is concerned. We accordingly, direct the Tribunal to do so for examination of the matter in the light of the observations made above. The reference is answered accordingly. There will be no order as to costs.