High Court Of Karnataka
CIT vs. Khoday Industries Ltd.
Sections 1984FA 2(8)(c), 1985FA 2(8)(c)
Asst. Years 1984-85, 1985-86
P. Vishwanatha Shetty & N. Kumar, JJ.
ITRC Nos. 570 & 571 of 1998
7th March, 2006
Counsel Appeared
E.R. Indra Kumar, for the Revenue : Smt. Nithya for K.R. Prasad, for the Assessee
ORDER
N. Kumar, J. :
In these two appeals, at the instance of the Revenue, the Tribunal, Bangalore has referred the following question of law under s. 256(1) of the IT Act, 1961 (for short, hereinafter referred to as the ‘Act’) for our opinion :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee should be treated as an industrial company because it was carrying on business mainly as a manufacturing concern, although a considerable amount of income arose out of rent received on leasing of its manufacturing unit to a sister-concern and in that view in cancelling the order passed by the CIT under s. 263 in which a direction had been given to the AO to treat the assessee as a non-industrial company ?”
2. The facts leading to this reference are as under : The assessee-company was earlier engaged in the business of manufacture of liquor. It had leased out its plant and machineries to a sister-company some time in the year 1976-77. However, the assessee still retained for itself a bottling unit at Pondicherry and also another unit engaged in the manufacture of stationary goods at Bangalore. The assessee was assessed to tax as an individual company and by subjecting it to a lower rate of tax at 60 per cent. The CIT found that the income of the assessee from actual manufacturing unit was less than 51 per cent of its gross total income. Therefore, he passed an order under s. 263 of the Act revising the original assessment order and directing that the assessee-company be not treated as an industrial company and on the other hand, be charged to tax at the rate of 65 per cent. Aggrieved by the said order, the assessee preferred an appeal before the Tribunal. The Tribunal after taking note of the decision of the Kerala High Court in the case of Cochin & Co. vs. CIT 1975 CTR (Ker) 104 : (1978) 114 ITR 822 (Ker) and also the decision of the Allahabad High Court in the case of Addl. CIT vs. Abbas Wajir (P) Ltd. (1979) 9 CTR (All) 167 : (1979) 116 ITR 811 (All) found that the expression ‘attributable’ had been used ‘deliberately’ by the legislature in the definition of an ‘industrial company’ inasmuch as the expression ‘attributable’ is having a wider import than the expression ‘derived from’ and includes receipts from sources other than actual conduct of the business of the company. The Tribunal, further, took note of the Circular No. 103, dt. 17th Feb., 1973 issued by the Central Board of Direct Taxes (for short, hereinafter referred to as the ‘Board’) in which, the Board had recognised that for being given the benefit of the lower tax rate as an industrial company, it is not necessary for a company to have its income from manufacturing activities to be actually 51 per cent or more of its total income having in any particular year, provided the company be found to be mainly engaged in manufacturing business. The Tribunal, therefore, came to the conclusion that on the facts of the case, the assessee was to be considered as mainly engaged in the manufacturing activities whatever may be the amount of income from other activities. Therefore, it set aside the order of the CIT and held that there was no warrant for the CIT to exercise his powers under s. 263 of the Act. Aggrieved by the said order, at the instance of the Revenue as stated earlier, this reference is made.
Sri Indra Kumar, learned counsel appearing for the Revenue relying on the two judgments of the Supreme Court contended that the income of the assessee by way of interest on loans and fixed deposits, lease rents, and compensation KB and DI are not directly attributable to manufacturing activity conducted by the assessee and therefore, if the said income is excluded, the income from the manufacturing activity is less than 51 per cent and therefore, it does not fall within the definition of an industrial company and the assessee is not entitled to the benefit of lower rate of tax at 60 per cent. Therefore, he submits that the order passed by the Tribunal calls for interference.
Per contra, learned counsel, Smt. S. Nitya, appearing for the respondent contends that in the first place, as is clear from the question referred for our consideration, the only income which has to be considered is lease rent as forming part of the income from manufacturing activity and secondly, she contends that as is clear from the wordings of the circular and the section itself, the decisive factor to decide the benefit is whether the assessee is mainly engaged in the business of manufacturing activity and if it is so, then, irrespective of the income derived from the said business, the assessee would be entitled to the concessional rate of tax at 60 per cent.
In order to appreciate the rival contentions, it is necessary to have a look at the relevant provision as provided under s. 8(c), Finance Act, 1984, and the Finance Act, 1985, which reads as follows : “8(c)—”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 carriage, by road or inland waterways, of passengers or goods or in the construction of ships or in the execution of projects or in the manufacture or processing of goods or in mining. Explanation—For the purposes of this clause— (i) 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 carriage, by road or inland waterways, of passengers or goods or in the construction of ships or in the execution of projects 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 IT Act) is not less than fifty one per cent, of such total income; ……….”
6. In view of the controversy that arose with regard to the definition of an ‘industrial company’ and theexplanation appended to the said provision, earlier also, under the Finance Act of 1966, the Board issued a Circular No. 103, dt. 17th Feb., 1973 which reads as under : “Under sub-s. 7(d) of s. 2 of the Finance Act, 1966, 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. According to the Explanation to cl. (d) of sub-s. (7) of s. 2 of the above Act, 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 of the aforesaid activities included in its total income for the previous year is not less than fifty one per cent of such total income.
2. The question as to the exact meaning of the Explanation to sub-s. 7(d) of s. 2 of the Finance Act, 1966, came up for consideration and the Board are advised that an “industrial company” would mean— (i) 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, even if its income from such activities is less than 51 per cent of its total income; and (ii) a company which, even though not mainly so engaged, derives in any year, 51 per cent or more of its total income from such activities. 3. Necessary instructions may please be issued to all the officers working in your charge on the above lines.”
7. A conjoint reading of the aforesaid provision and the circular makes it clear that 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. A company which is mainly engaged in the aforesaid businesses, irrespective of the income which it derives from the said activity, is entitled to the benefit conferred under the Act insofar as the payment of income-tax is concerned, i.e., at the rate of 60 per cent. The Explanation is added to the section to extend the said benefit to a company, even though it is not mainly engaged in the business of manufacture or processing of goods, if the income attributable to any one or more of the aforesaid activities included in the main section in its total income of the previous year is not less than 51 per cent of such total income. This position is made clear by the circular wherein it was stated that an ‘industrial company’ would mean a company which, even though not mainly so engaged, derives in any year 51 per cent or more of its total income from such activities. Therefore, it is clear that if an assessee is mainly engaged in the business of manufacturing or processing of goods he is entitled to the benefit of concessional rate of tax irrespective of the income which it derives from the said business. However, the said benefit is also extended to an assessee who is not mainly engaged in the business of manufacture but, derives more than 51 per cent of its income from the income attributable to any one or more of the activities mentioned in the main section. The circular issued by the Board is in conformity with s. 8 (c) which is clarificatory in nature. Dealing with the status of these circulars issued under s. 119(1) of the Act, the Supreme Court in the case of UCO Bank vs. CIT (1999) 154 CTR (SC) 88 : (1999) 237 ITR 889 (SC) held that the Board has, power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under s. 119 of the Act which are binding on the authorities in the administration of the Act. Under s. 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Therefore, it was held that the authority which wields the power for its own advantage under the Act is given the right to forgo the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law or in other permissible manners as laid down in s. 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. Therefore, it was held that it is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorised as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities. Therefore, it is clear that the aforesaid circular which is clarificatory in nature clarifies the legal position and confers the benefits on the assessee and the authorities are bound by the said circular in the administration of the Act.
8. The learned counsel for the Revenue relied on two judgments of the Supreme Court in support of his contention viz., Indian Leather Corporation (P) Ltd. vs. CIT (1998) 145 CTR (SC) 171 : (1997) 227 ITR 552 (SC) and Minocha Brothers (P) Ltd. vs. CIT (1994) 116 CTR (SC) 476 : (1993) 204 ITR 628 (SC).
9. In our view, the two judgments of the Supreme Court on which reliance was placed by the Revenue are of no assistance. In India Leather’s case (supra), the assessee was a private limited company carrying on business of tanning hides and skins by chemical process and selling the resultant leather as well as purchase and sale of leather on commission basis. By virtue of the Explanation to the aforesaid section, it claimed that income derived from the sale of chemicals imported under the import licence on the basis of the export of leather, hides and skins shall be treated as the income attributable to the business of manufacture of such goods by the assessee. In that context, it was held that the import licence for such imports was obtained by the assessee on the basis of its export performance in respect of goods in which the goods manufactured or processed by the assessee was less than 10 per cent and therefore, it was held that there was no direct or sufficiently approximate connection with the activity of manufacturing and the income derived from the sale of chemicals imported by the assessee under the import licence obtained on its export performance should not be held to be in fact attributable to the business of manufacture or processing carried on by the assessee under s. 404(4) of the Act. In the case of Minocha Brothers (P) Ltd. (supra), the Supreme Court held that in order to be entitled to the lower rate of tax as an industrial company, it is for the assessee-company to produce material to establish that its income attributable to the activities of manufacture or production of goods is not less than 50 per cent of the total income. In fact, both the judgments are delivered on the facts of those cases and no law is laid down. Even otherwise, the said judgments have no application to the facts of this case and also the question involved.
10. In the instant case, it is not in dispute that the assessee is mainly engaged in the business of manufacture of stationery items as well as the process of bottling. The Tribunal has recorded a categorical finding on the basis of the material on record to the effect that the assessee-company, much earlier, was engaged in the manufacture of liquor and leased out its plant and machineries to a sister-concern some time in the year 1976-77 as a temporary measure. However, the assessee still retained for itself a bottling unit at Pondicherry and also another unit engaged in manufacturing of stationery items in its factory at Bangalore. Therefore, the assessee is mainly engaged in the business of manufacture and processing. Further, one of the units, for a temporary period, had been leased to a sister-concern for carrying on manufacturing activity and income was derived by way of rent which, in effect, is an income of the business. Merely because, it had let out one unit while retaining the other two units where manufacturing activity is mainly being carried out, it cannot be said that the assessee is not mainly engaged in the business of manufacturing. Therefore, when the Tribunal has considered all the aspects and recorded a categorical finding, we do not find any justification to take the view contrary to the one recorded by the Tribunal. Accordingly, the reference is disposed off. However, no order is made as to costs.
11. In the result, we answer the question of law referred for our opinion in the affirmative, i.e., in favour of the assessee and against the Revenue.
[Citation : 285 ITR 523]
