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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 building''s 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 the Finance (No. 2) Act, 1977. The
assessment years are 1973-74 to 1977-78.
""Industrial company"" is defined in Section 2(7)(c) of the Finance (No. 2) Act, 1977, as follows see Ratan Udyog Vs. Income Tax Officer and
Another, :
''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 Income Tax Act) is not less than fifty one per cent. of such total income.
It is evident from the Explanation that before an 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.
The Explanation to Section 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 Section 2(7)(c) in the total income of the previous year as computed
before making any deduction under Chapter VI-A of the Income Tax 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 Section 2(7)(c) of the 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 Commissioner, who in
his order dated July 27, 1982, relating to the assessment years 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 work completed by the assessee during the period
from January 28, 1971 to December 1, 1978, showed that the total value of the bills was Rs. 53.60 lakhs of which the bill amount relatable to the
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
Commissioner had also called for the comments of the Income Tax Officer on that data so produced before him. The Income Tax Officer had
observed that the asses-see 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 Commissioner, 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 Income Tax Officer to recompute the tax payable by treating the assessee as an industrial company. Against the order of the
Commissioner, the Revenue went in appeal to the Tribunal. The Bench which heard the appeal was divided in its views. 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, had 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 an 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 Section 2(7)(c) according to 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. The Explanation to that provision, according to 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 an 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 Commissioner of Wealth Tax Vs. Dr. G. Nallakrishnan, . That was a case under the
Wealth-tax Act and the statutory provision considered therein was Section 5(1)(xxxii) of that Act. The court held that a firm which was engaged in
the construction of buildings, manufacture or production of intermediary articles for the purpose of its construction work, like steel fabrication
work, making doors and windows and also making re-inforced concrete works, such undertaking could not be regarded as an industrial
undertaking, so long as the intermediary product or manufacture is an integral part of the construction business.
Section 5(1)(xxxii) of the Wealth-tax Act, 1957, does not contain any Explanation similar to the one found u/s 2(7)(c) of the 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 decisions 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 her submission that an assessee who is engaged in the business of construction cannot be
regarded as industrial undertaking. Counsel referred to the observation of the court at page 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 principle, for deciding as to whether the assessee is entitled to the benefit u/s 80HH of the Income Tax 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 the benefit of Section 80HH of the Income Tax Act on the value of the articles manufactured or produced
by him which articles have gone into/been 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 has been scrutinised and considered by the Income Tax Officer also, the Commissioner of Income Tax 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 Explanation to Section 2(7)(c) of the 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 Commissioner of Income Tax, Delhi-I Vs. Minocha
Brothers P. Ltd., . 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 buildings, and the goods
manufactured by it were used in the construction made by it. The court thereafter took note of the Explanation to Section 2(7)(c) of the Finance
(No. 2) Act of 1977, and observed that the burden lay upon the assessee to establish the requirement of the 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 a 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 the Finance (No. 2) Act, 1977, u/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 Section 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 Section 2(7)(c) of the Finance (No. 2) Act, 1977. That provision contains its own dictionary in the form of an
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 Section 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 Section 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, even
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 Section 2(7)(c). The Revenue''s contention that all construction companies are wholly excluded from Section
2(7)(c) irrespective of the extent to which their income is attributable to manufacturing activity must therefore be rejected.
In the case of Minocha Bros. Pvt. Ltd. Vs. Commissioner of Income Tax, , the Supreme Court clearly recognised the eligibility of a
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 Commissioner had 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 an industrial company. Having gone through the
order of the Commissioner, we are not satisfied that his finding was rendered after considering the evidence which was required to be considered
for recording such finding. The Commissioner 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 constituted manufacturing activity. The Revenue also had not addressed itself to 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 Commissioner was of the view that the finding recorded by the Commissioner 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 Assessing Officer to make a fresh
order in accordance with law after giving an 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 Assessing Officer. We
direct the Assessing Officer 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.