High Court Of Karnataka
CIT vs. Nitco Constructions (P.) Ltd.
Assessment Year : 1996-97
Section : 80-I
D.V. Shylendra Kumar And H.S. Kempanna, JJ.
IT Appeal No. 19 Of 2005
September 13, 2010
JUDGMENT
D.V. Shylendra Kumar, J. – This appeal is filed under section 260A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), at the instance of the Revenue questioning the correctness and legality of the order dated August 27, 2004, passed by the Income-tax Appellate Tribunal, Bangalore Bench, in I. T. A. No. 313/Bang/2000 posing the following questions of law for our answer in this appeal :
“(i) Whether the activity of the assessee involving manufacture, sale and laying of mosaic tiles in construction of buildings, as well as manufacture and direct sale would amount to manufacture and sale of an article or thing entitled to deduction under section 80-I of the Act ?
(ii) Whether the appellate authorities were correct in distinguishing the judgment of the hon’ble apex court in CIT v. N. C. Budharaja and Co. [1993] 204 ITR 412 (SC) and the judgment of the Bombay High Court in Mittal Builders which clearly enunciates the law that material utilised in the construction of dams or buildings would not amount to an article or thing and, therefore, under the facts and circumstances of the present case, would not be entitled to deduction under section 80-IA of the Act ?”
2. The assessee is a limited company carrying on the activity of manufacturing selling and laying of mosaic tiles and the same was used for flooring for the purpose of construction of buildings. The assessee filed its returns of income for the assessment year 1996-97.
3. The assessee, it appears apart from selling the tiles manufactured, had also entered into contract with its customers for laying the tiles using its own manpower and skills and, thereafter, for even getting it polished. It was charging the customers for the entire contract work inclusive of the value of the tiles, which has been utilised during the execution of the contract, etc.
4. The assessee, it appears, had made a distinction of profits earned under the head “Business income”, in so far as the activity relating to the manufacture and sale of tiles and also the activity relating to laying and polishing of tiles and charging its customers at comprehensive price for the product and service.
5. The assessee putforth his claim for the benefit available to an industrial undertaking ventured in manufacturing a product or an article not coming within Schedule 11 of the Act as provided under section 80-I of the Act. Section 80-I reads as under :
80-I. Deduction in respect of profits and gains from industrial undertakings after a certain date, etc.-(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, or the business of repairs to ocean-going vessels or other powered craft, 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 assessee, a deduction from such profits and gains of an amount equal to twenty per cent. thereof :
Provided that in the case of an assessee, being a company, the provisions of this sub-section shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel, as if for the words ‘twenty per cent.’, the words ‘twenty five per cent.’ had been substituted.
(1A) Notwithstanding anything contained in sub-section (1), in relation to any profits and gains derived by an assessee from-
(i) an industrial undertaking which begins to manufacture or produce articles or things or to operate its cold storage plant or plants ; or
(ii) a ship which is first brought into use ; or
(iii) the business of a hotel which starts functioning,
on or after the 1st day of April, 1990, but before the 1st day of April, 1991, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty-five per cent. thereof :
Provided that in the case of an assessee, being a company, the provisions of this sub-section shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel as if for the words ‘twenty-five per cent.’, the words ‘thirty per cent.’ had been substituted.
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :-
(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence ;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose ;
(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India, and begins to manufacture or produce articles or things or to operate such plant or plants, at any time within the period of ten years next following the 31st day of March, 1981, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking ;
(iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking 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 :
Provided that the condition in clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee 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 :
Provided further that the condition in clause (iii) shall, in relation to a small-scale industrial undertaking, apply as if the words ‘not being any article or thing specified in the list in the Eleventh Schedule’ had been omitted.
Explanation 1.-For the purposes of clause (ii) of this sub-section, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :-
(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India ;
(b) such machinery or plant is imported into India from any country outside India ; and
(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.
Explanation 2. – Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business 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 (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with.
Explanation 3. – For the purposes of this sub-section, ‘small-scale industrial undertaking’ shall have the same meaning as in clause (b) of the Explanation below sub-section (8) of section 80HHA.
(3) This section applies to any ship, where all the following conditions are fulfilled, namely :-
(i) it is owned by an Indian company and is wholly used for the purposes of the business carried on by it ;
(ii) it was not, previous to the date of its acquisition by the Indian company, owned or used in Indian territorial waters by a person resident in India ; and
(iii) it is brought into use by the Indian company at any time within the period of ten years next following the 1st day of April, 1981.
(4) This section applies to the business of any hotel, where all the following conditions are fulfilled, namely :-
(i) the business of the hotel is not formed by the splitting up, or the reconstruction, of a business already in existence or by the transfer to a new business of a building previously used as a hotel or of any machinery or plant previously used for any purpose ;
(ii) the business of the hotel is owned and carried on by a company registered in India with a paid-up capital of not less than five hundred thousand rupees ;
(iii) the hotel is for the time being approved for the purposes of this sub-section by the Central Government ;
(iv) the business of the hotel starts functioning after the 31st day of March, 1981, but before the 1st day of April, 1991.
(4A) This section applies to the business of repairs to ocean-going vessels or other powered craft which fulfils all the following conditions, namely :-
(i) the business is not formed by the splitting up, or the reconstruction, of a business already in existence ;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose ;
(iii) it is carried on by an Indian company and the work by way of repairs to ocean-going vessels or other powered craft has been commenced by such company after the 31st day of March, 1983, but before the 1st day of April, 1988 ; and
(iv) it is for the time being approved for the purposes of this sub-section by the Central Government.
(5) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning or the company commences work by way of repairs to ocean-going vessels or other powered craft (such assessment year being hereafter in this section referred to as the initial assessment year) and each of the seven assessment years immediately succeeding the initial assessment year :
Provided that in the case of an assessee, being a co-operative society, the provisions of this sub-section shall have effect as if for the words ‘seven assessment years’, the words ‘nine assessment years’ had been substituted :
Provided further that in the case of an assessee carrying on the business of repairs to ocean-going vessels or other powered craft, the provisions of this sub-section shall have effect as if for the words ‘seven assessment years’, the words ‘four assessment years’, had been substituted :
Provided also that in the case of-
(i) an industrial undertaking which begins to manufacture or produce articles or things or to operate its cold storage plant or plants ; or
(ii) a ship which is first brought into use ; or
(iii) the business of a hotel which starts functioning,
on or after the 1st day of April, 1990, but before the 1st day of April, 1991, provisions of this sub-section shall have effect as if for the words ‘seven assessment years’, the words ‘nine assessment years’ had been substituted :
Provided also that in the case of an assessee, being a co-operative society, deriving profits and gains from an industrial undertaking or a ship or a hotel referred to in the third proviso, the provisions of that proviso shall have effect as if for the words ‘nine assessment years’, the words ‘eleven assessment years’ had been substituted.
(6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to ocean-going vessels or other powered craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.
(7) Where the assessee is a person other than a company or a co-operative society, the deduction under sub-section (1) from profits and gains derived from an industrial undertaking shall not be admissible unless the accounts of the industrial undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant.
(8) Where any goods held for the purposes of the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the business of the industrial under-taking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft does not correspond to the market value of such goods as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of the industrial undertaking or the business of the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date :
Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the industrial undertaking or the business of the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.
Explanation.-In this sub-section, ‘market value’, in relation to any goods, means the price that such goods would ordinarily fetch on sale in the open market.
(9) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft, the Assessing Officer shall, in computing the profits and gains of the industrial undertaking or the hotel or the ship or the business of repairs to ocean-going vessels or other powered craft, for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.
(10) The Central Government may, after making such inquiry as it may think fit, direct, by notification in the Official Gazette, that the exemption conferred by this section shall not apply to any class of industrial undertakings with effect from such date as it may specify in the notification.”
6. The assessee, before the Assessing Officer had claimed that he is entitled for the benefit in respect of the profit attributable to the activity of executing the contract of selling, laying and polishing the tiles manufactured by it.
7. The Assessing Officer, while passing the assessment order for the year 1996-97 was of the view that the assessee being a manufacturer of a thing or an article, i.e., mosaic tiles, he was entitled to claim deduction under section 80-I of the Act, in so far as it relates to the profits attributable to the manufacture of tiles are concerned and in so far as the profits relating to the activity of laying and polishing is concerned, the Assessing Officer made distinction and took a view that the other part of the activity did not qualify for deduction under section 80-I of the Act for the simple reason that in the activity of laying and polishing there is no product or article produced from out of this activity and the mere fact that the assessee had a comprehensive contract with its customers by paying lump sum amount for the entire activity of laying and polishing of tiles manufactured by it.
8. The Assessing Officer, though appears to be an officer well versed in such matters having good language and wisdom ability to examine such aspects has summed up his view very aptly in paragraphs 3.1, 3.2 and 3.3 and relying upon the judgment of the Supreme Court in the case of CIT v. N. C. Budharaja & Co. [1993] 204 ITR 412/70 Taxman 312 concluded in paragraph 3.4 holding that the activity of laying and polishing does not qualify for deduction under section 80-I of the Act, particularly, the profits attributable to the manufacturer or producer of such article. The very opinion of the Assessing Officer as contained in paragraphs 3.1 and 3.2, 3.3 and 3.4 reads as under :
“3.1 Simultaneously, the assessee was asked to show cause why the profits derived from the contract receipts of Rs. 1,65,51,346 (Rs. 2,14,33,318 – Rs. 48,81,972) should not be excluded for the reason that profits derived from contract receipts on flooring works cannot be characterised as ‘production or manufacture of an article or a thing’ since this does not result in any end product which is commercially known as a different product from the materials out of which it is so produced in keeping with the decision of the Supreme Court in CIT v. N. C. Budharaja and Co. [1993] 204 ITR 412 (SC).
3.2 Vide letter dated January 12, 1998, the assessee asserted that contract receipts are nothing but turnover related to flooring work undertaken where the tiles manufactured by the assessee are used, so that these tiles are either sold directly or used in the flooring work. The assessee further emphasised that when the customer insist upon the assessee to do a turnkey job, execution of the work at site is entrusted incurred for carrying out such works are charged to the customers. The assessee finally stated that it had to undertake turnkey jobs in the interests of sale or products being manufactured by their factory to its viable capacity, however, I tend to disagree with the assessee for the following reasons :
3.3 Irrespective of whether the cost of tiles used which are manufactured by the assessee forms a larger or lesser component of contract receipts and whether or not the assessee undertakes these turkey jobs for manufacture, laying and polishing of tiles for flooring work for its customers at their insistence or for the viable running of its factory the irrefutable facts remains that the words ‘manufacture’ and produce are normally associated with movable articles and goods and are never employed to denote construction activity in the nature of flooring work undertaking for which contract receipts are received. It has been held by the Bombay High Court (sic) in the case of Mittal Builders [1993] 199 ITR (AT) 40 that an assessee engaged in the activity of construction of building is not entitled to relief under section 80-I as it cannot be said that he was engaged in the production of an article or thing. It is indisputable that undertaking flooring contracts would form an integral part of construction of a building.”
9. It is quite natural that the aggrieved assessee took up the matter by way of an appeal before the Commissioner of Income-tax (Appeals), Bangalore. The Appellate Commissioner took opposite view in terms of his order dated February 22, 2000, annexure B.
10. The Appellate Commissioner without any rhyme or reason merely by relying on the judgment rendered by the Supreme Court in N.C. Budharaja & Co.’s case (supra) allowed the appeal by reversing the view of well considered reasoned finding of the Assessing Officer and held that the assessee was entitled for the benefit of deduction under section 80-I of the Act in respect of the profit attributable to the entire contract value, etc.
11. It was the turn of the Revenue to take up the matter, by way of an appeal to the Appellate Tribunal but without success as the appellate authority without applying its mind, without going into the questions raised by the Revenue and without spelling out any reasons, agreeing with the Appellate Commissioner simply opined that the Appellate Commissioner’s order has to be affirmed. In our view, the order passed by the Appellate Tribunal is nothing but a non-speaking order not showing any awareness to the arguments advanced on behalf of the Revenue to produce an order without rhyme or reason but by just extracting some portions of the order passed in other cases not relating to the fact and circumstances of this case. It is in such circumstances, the Revenue is yet again before this court under section 260A of the Act.
12. We have heard Sri Sanmathi Indrakumar, learned senior counsel appearing for the Revenue-appellants and though the assessee as per the indication in the cause list is represented by a counsel, Sri K. M. Basavaraj, neither his counsel is present before us nor our efforts to secure his presence before the court by directing the registry to ring up to his cell number as provided in the vakalat form, therefore, we proceed to pass judgment only with the assistance of learned senior counsel appearing for the appellants.
13. Questions posed as indicated above, the second question automatically answers on the first question being answered. In fact, it may not be very necessary to answer the second question elaborately.
14. The provision occurring in Chapter VI-A of the Act is a provision for extending certain issues or benefits though called by different names such as deduction, relief or rebate, etc. Ultimately, such provisions attract the assessee because it reduces the tax liability, which would welcome the assessee. In all, section 80-I of the Act, very clearly indicates the benefits that will be available when there is an industrial undertaking in existence and such an industrial undertaking should embark upon an activity of producing or manufacturing an article or thing, which are the keywords as found in clause (iii) of sub-section (2) of section 80-I of the Act. The fact situation is quite simple, clear, and unambiguous. It appears that the assessee is a manufacturer of tiles, which undoubtedly fits into the description of a thing or article or product. We are not concerned with that aspect because the assessee has been given the benefit of deduction under section 80-I of the Act in so far as the profits attributed to the manufacturing activity is concerned. It is only with reference to the profits attributable to the service rendered to its customers apart from selling its products, viz., laying and polishing the tiles for the benefits of its buyers. This question has become an issue between the assessee and the Revenue. The assessee claims the benefits even in respect of the profits attributable for laying and polishing. Even one should look into the value of the tiles and the charges for the activity of laying and servicing. The servicing part cannot be considered either insignificant or similar segment to earn ability of the assessee even while the manufacturing activity is to be taken as its main activity. The assessee had also undertaken independent contracts for flooring work. It is nothing but laying and polishing the tiles as per the specification of the customers, i.e., better appearance or appealing presentation and charge for the particular service.
15. The Income-tax Officer, in our view, has very rightly and aptly come to the conclusion, that such an activity does not produce either a product or an article or a thing and he is fully justified in placing reliance on the judgment of the Supreme Court in N.C. Budharaja & Co.’s case (supra) wherein the Supreme Court, while examining a similar question in the context of the provisions of section 80HH of the Act, has opined that any activity in the nature of utilising necessary raw materials for constructing a dam does not result in producing an article or thing for the purpose of claiming deduction, which had been given to the assessee under the provisions of section 80HH of the Act.
16. While it is no doubt true section 80-I of the Act is a different section and the Supreme Court has not either interpreted or examined the statutory provisions of section 80-I of the Act in Budharaja’s case. In so far as the understanding of the meaning of the words “article” or “thing” as spelt out by the Supreme Court in Budharaja’s case, in our view, is a relevant aspect which can be definitely called in aid without per se interpretation placed on different section cannot be imported to interpret another section and in this case, interpretation under section 80HH per se cannot be transplanted to section 80-I of the Act. If we go by that version, then, we find that the Division Bench decision of the Madhya Pradesh High Court reported in CIT v. Agrawal Brothers [1997] 228 ITR 144 (MP), wherein the Bench has opined that section 80-I of the Act interpret the provision in favour of the Revenue to hold that an activity under the nature of contract of overhead water tanks is not an activity of manufacturing or even the activity undertaken by the assessee is an industrial undertaking. Therefore, we do not find that section 80-I of the Act having directly come for interpretation either by other High Courts or by the Supreme Court. Of course, in the present situation, the question before us is exactly which was considered by the Madhya Pradesh High Court as the assessee per se is a manufacturer of tiles, which is a thing or article, embarked upon and, therefore, an industrial undertaking has also embarked on the wider activities which does not necessarily partake of the character in producing or manufacturing of an article or thing. The activity of flooring which includes laying and polishing, in our view, is definitely not an activity even if it is undertaken by an industrial undertaking, amounting to producing an article or thing to become eligible for the benefit under section 80-I of the Act as the provisions of the said section will be available to the assessee only when all the conditions required under clauses (i) to (iv) of sub-section (2) of section 80-I of the Act are cumulatively made or not otherwise. The condition required under clause (iii) of sub-section (2) of section 80-I of the Act is not definitely made in this case. Therefore, the assessee does not fit into this section in so far as it relates to activity of flooring of tiles is concerned. We also notice in the present case the assessee has claimed deduction for the assessment year 1996-97 whereas in terms of clause (iii) the benefit of the notification is available for initial period of ten years next following March 31, 1981, or such further period as the Central Government may, by a notification in the Official Gazette, specify with reference to any particular industrial undertaking. In fact, learned senior counsel appearing for the appellant specifically submits that no such notification has been issued, authorities having not gone into this aspect, there is no need for examining this question though otherwise, it might have arisen. We also realise the absence of such a notification for the simple reason that the Revenue would agree the activity of flooring would amount to an activity in the nature of producing an article or a thing is the very question with reference to which they are before this court seeking for an answer, though the assessee has never taken out any notification. If such is the factual position, the assessee even otherwise is disentitled to the benefit of section 80-I of the Act. Therefore, this appeal is allowed. The orders of the Tribunal and the Appellate Commissioner are set aside. The view taken by the Assessing Officer is affirmed and question regarding profits attributable for the service provided by the assessee in laying and polishing mosaic tiles is answered in favour of the Revenue and against the assessee.
[Citation : 347 ITR 170]
