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Judgment
R. JAYASIMHA BABU, J.
The common question that has been referred to us for our consideration is as to whether the assessee who is engaged in the construction of
buildings as also in the manufacture of doors, windows, cement slabs, etc. and from which activities of manufacture the assessee claims to derive
51 per cent of its income is a manufacturing company for the purpose of Finance (No. 2) Act, 1977. The assessment years are 1973-74 to 1977-
78.
''Industrial company"" is defined in s. 2(7)(c) of Finance (No. 2) Act, 1977, as follows :
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.
Explanation : For the purposes of this clause, a company shall be deemed to be mainly engaged in the business of generation or distribution of
electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, if the income
attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making any
deduction under Chapter VI-A of the IT Act) is not less than fifty-one percent of such total income.---
It is evident from the Explanation that before assessee-company can be regarded as an industrial company, it must be shown to be engaged in
any one of the following activities as its main activity ;
(a) generation or distribution of electricity or any other form of power,-
(b) construction of ships;
(c) manufacture or processing of goods.,
(d) mining.
Expln. to s. 2(7)(c) further explains as to what the legislature meant by using the words ''mainly engaged in the business''. If the income
attributable to any one or more of the aforesaid activities referred to in s. 2MM in the 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 the total income, then such company is to be
regarded as an industrial company.
It is, therefore, necessary to ascertain as to whether the 51 per cent or more of the income of the company which claims to be an industrial
company is derived from any one of the activities specified in s. 2(7)(c) of Finance (No. 2) Act, 1977.
The fact that the assessee is engaged, in the construction of buildings, by itself does not disqualify it from claiming to be an industrial company if
it is able to show that 51 per cent or more of the total income is derived from an activity which can be regarded as manufacture or processing of
goods. That was indeed the endeavour of the assessee before the authorities below, and it had succeeded in convincing the CIT, who in his order
dt. 27th July, 1982, relating to the asst. yrs. 1973-74; 1974-75; 1976-77 and 1977-78 had, after calling for the details from the assessee and after
perusing the data so furnished, held that the data relating to 17 items of works completed by the assessee during the period from 28th Jan., 1971
to 1st Dec., 1978, showed that the total value of the bills was Rs. 53.60 lakhs of which the bill amount relatable to activities accepted to be
manufacture or processing activities amounted to Rs. 38.88 lakhs or 72.53 per cent of its total value of the bills. The CIT had also called for the
comments of the ITO on the data so produced before him. The ITO had observed that the assessee had taken into account the works involving
cement or casting cement slabs and other works involving the use of cement, as constituting manufacturing activity to arrive at the percentage of
manufacturing activity at 72.53 per cent of the total value of the work. The CIT however held that the figure of 72.53 per cent as representing the
value of the manufactured goods was correct. He had, therefore, directed the ITO to recompute the tax payable by treating the assessee as an
industrial company. Against the order of the CIT, the Revenue went in appeal to the Tribunal. The Bench which heard the appeal was divided in its
view. The Judicial Member took the view that the appeal was to be allowed while the Accountant Member took the view that the appeal should
be rejected and the assessee held to be an industrial company. On a reference to a third Member, the third Member being the Vice President of
the Tribunal, agreed with the Accountant Member and held that the appeal should be dismissed.
Learned counsel for the Revenue submitted before us that the assessee could never be regarded as industrial company as it is engaged in the
business of construction of buildings and building is not an item of manufacture and further since the activity is construction of building any
fabrication done by it for windows or doors or the production of concrete slabs is only for the purpose of building and such activity cannot be
regarded as manufacturing activity. The primary requirement of s. (2)(7)(c), according to the counsel, is that the activity in which the assessee is
engaged should be an activity of a kind set out in the sub-section and as that is not the main activity of the assessee it cannot be treated as an
industrial company. Explanation to that provision, according to the counsel is, not to be read as part of the main provision and if the assessee is
unable to show that its main activity is manufacture or processing of goods such assessee cannot claim the status of industrial company by showing
that 51 per cent or more of its income is derived from the activity which can be accepted as amounting to manufacture or processing of goods.
Counsel relied on the decision of this Court in the case of CWT vs. Dr. G. Nallakrishnan (1997) 140 CTR (Mad) 266. That was a case under
the WT Act and the statutory provision considered therein was s. 5(1)(xxxii) of that Act. The Court held that a firm which was engaged in the
construction of building''s, manufacture or production of intermediary articles for the purpose of its construction work, like steel fabrication work,
making doors and windows and also making reinforced concrete works, such undertaking could not be regarded as industrial undertaking, so long
as the intermediary product or manufacture is an integral part of the construction business.
Sec. 5(1)(xxxii) of the WT Act does not contain any Explanation similar to one found under s. 2(7)(c) of Finance (No. 2) Act of 1977.
Counsel for the Revenue also referred to the case of Commissioner of Income Tax, Delhi-I Vs. Minocha Brothers P. Ltd., wherein the Delhi
High Court held that the building contractor who in the process of that work also manufactured doors could not be regarded as industrial company
as such manufacturing activity was really a part of the construction work. It was held that the real activity of the assessee therein was to construct
buildings which was not in the nature of processing or manufacturing goods.
Counsel also placed reliance on the decision of the Supreme Court in the case of Commissioner of Income Tax, Orissa and Others Vs. N.C.
Budharaja and Company and Others, in support of his submission that an assessee who is engaged in the business of construction cannot be
regarded as industrial undertaking. Counsel referred to the observance of the Court at p. 424 of the report wherein it was observed that the
manufacture by the assessee in that case of some of the articles like gates, windows and doors which go into the construction of a dam made little
difference to the principles, for deciding as to whether the assessee is entitled to the benefit under s. 80HH of the IT Act. The Court also
proceeded to observe in that very paragraph that it was not necessary for the Court to express any opinion on the question as to what would be
the position if the respondent had claimed benefit of s. 80HH of the IT Act on the value of the articles manufactured or produced by him which
articles have gone into/consumed in the construction of the dam.
Learned counsel for the assessee, on the other hand, submitted that the assessee has been found to be an industrial company as after perusing
the data which had been scrutinised and considered by the ITO also, the CIT(A) had held in appeal, that over 73 per cent of the income of the
assessee was derived from activity which could properly be regarded as manufacturing activity and, therefore, the assessee satisfied the stipulation
in the Expln. to s. 2(7)(c) of Finance (No. 2) Act of 1977 and is entitled to be regarded as an industrial company. He placed strong reliance on the
decision of the Supreme Court in the case of Minocha Bros. Pvt. Ltd. Vs. Commissioner of Income Tax, which was an appeal from the decision
of the Delhi High Court in the case of CIT vs. Minocha Bros. (P) Ltd. (supra). The Supreme Court affirmed the decision of the Delhi High Court
but on a ground different from that on which the High Court had based its decision. The apex Court noticed the fact that the appellant before it was
engaged in the construction of buildings; that the appellant therein was also manufacturing windows, doors, shutters and other goods for the
purpose of constructing the building and that the goods manufactured by it were used in the construction made by it. The Court thereafter took
note of the Expln. to s. 2(7)(c) of Finance (No. 2) Act, 1977, and observed that the burden lay upon the assessee to establish the requirement of
that Explanation, but the defendant had failed to adduce any material to establish that the income attributable to the manufacturing activity
undertaken by it represented not less than 51 per cent of its total value. The appellant was thus denied relief on the ground that it had not adduced
the requisite evidence. The denial was not on the ground that the assessee was construction company which was manufacturing goods only for the
purpose of its use in the construction and that its main activity was construction and not manufacture. The Court thus took note of the possibility
that the construction company could also be regarded as an industrial company for the purpose of Finance (No. 2) Act, 1977, under s. 2(7)(c) if
such a construction company is able to satisfy the test set out in the Explanation, namely, deriving 51 per cent or more of its income from an activity
which is referred to in s. 2(7)(c).
We cannot subscribe to the view canvassed for the Revenue that the construction company per se is ineligible for claiming a status of industrial
company for the purpose of s. (2)(7)(c) of Finance (No. 2) Act, 1977. That provision contains its own dictionary in the form of Explanation which
must be used for deciding as to whether an assessee claiming to be an industrial company is engaged ''mainly'' in any of the activities referred to in
s. 2(7)(c) of the Finance (No. 2) Act, 1977. There is no other test required to be adopted except the one set out in the Explanation.
The fact that the word ''construction'' is used in s. 2(7)(c) refers to ships and not to buildings does not imply that a company which is engaged in
construction of buildings as also in the manufacture of articles is debarred from claiming the status of industrial company, every when such company
is able to satisfy the test of having received 51 per cent of its income from manufacturing activity or from the processing of goods or other activities
referred to in s. 2(7)(c). The Revenue''s contention that all construction companies are wholly excluded from s. 2(7)(c) irrespective of the extent to
which their income is attributable to manufacturing activity must, therefore, be rejected.
In the case of CIT vs. Minocha Bros. (supra), the Supreme Court clearly recognised the eligibility of construction company to be regarded as
industrial company if such company was able to adduce evidence to demonstrate that 51 per cent or more of its income was derived from
manufacturing or processing of goods. The question is one of proof and not one of eligibility for claiming that status.
Learned counsel for the assessee sought to contend that the CIT(A) has found that 72.53 per cent of the assessee''s income was due to
manufacturing activity and that finding being on record, the assessee is entitled to be treated as industrial company. Having gone through the order
of the CIT(A), we are not satisfied that his finding was rendered after considering the evidence which was required to be considered for recording
such finding. The CIT(A) has not given any reason for his holding that the works like casting cement or reinforced cement slabs and other works
involving use of cement constitute manufacturing activity. Revenue also had not addressed itself this aspect but had only been pursuing the
contention that any construction company was ineligible for being regarded as an industrial company. The Judicial Member who considered the
order of the CIT was of the view that the finding recorded by the CIT was not adequately supported by materials on record.
The assessee though engaged in the business of construction besides being engaged in the manufacture of certain articles is eligible for being
regarded as an industrial company if it is able to establish that 51 per cent or more of its income in the relevant previous year was on account of its
manufacturing activity.
In these circumstances, we consider it just to set aside the orders of the authorities below and direct the AO to make a fresh order in
accordance with law after giving opportunity to the assessee as also to the Revenue to adduce such evidence as they may wish to and after
considering the same, decide as to whether the proof adduced by the assessee is sufficient to hold that the assessee is an industrial company. The
question referred to us is returned unanswered, as the answer would depend upon the finding to be recorded by the AO. We direct the AO to
complete the fresh assessment within a period of six months from the date of receipt of a copy of this order. The parties to bear their respective
costs.
OPEN