Commissioner of Wealth-tax vs A.N. Natarajan

K.A. Thanikkachalam, J.—By these reference applications relating to assessment years 1979-80 and 1980-81, the Tribunal referred the

following question of law, for the opinion of this court, u/s 27(1) of the Wealth-tax Act, 1957 :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the firm of A. N. Natarajan,

which purchases cotton kappas and gets them ginned by outside agencies should be treated as an ''industrial undertaking'' and accordingly the

exemption contemplated u/s 5(1)(xxxii) of the Wealth-tax Act should be allowed in respect of the assessee''s share of interest therein ?

The point for consideration is whether the partnership firm should be treated as industrial undertaking so as to claim exemption u/s 5(1)(xxxii) of

the Wealth-tax Act. The assessee claimed exemption u/s 5(1)(xxxii) of the Wealth-tax Act out of the share income derived from a partnership firm,

which is said to be engaged in manufacturing activities. The Wealth-tax Officer in the original assessment granted exemption in respect of the

assessee''s share in the partnership firm since the firm is an industrial undertaking. So also, in the case of another partner, the Wealth-tax Officer

granted exemption in respect of the assessee''s share in the partnership firm. According to the Commissioner of Income Tax, such an allowance of

exemption is erroneous and prejudicial to the interests of the Revenue. The Commissioner of Income Tax, therefore, set aside the assessment and

directed the Wealth-tax Officer to redo the assessment for both the assessment years. On appeal, the Tribunal accepted the assessee''s contention

that the firm in which he is the partner is an industrial undertaking, and therefore his share income is exempted u/s 5(1)(xxxii) of the Wealth-tax Act.

This view was taken by the Tribunal, following an earlier order of its own in the case of Smt. Annai Jayabarathi, Virudhunagar, in W.T.A. Nos.

340 and 341 (Mds.) of 1977-78, dated July 30, 1980.

The point for consideration is whether the firm in which the assessee is the partner, is engaged in the manufacturing activities. The firm is

purchasing cotton kappas and through an outside agency ginning the same. By ginning, the cotton is separated from the cotton seeds. According to

the assessee, separating the cotton from the cotton seeds is the manufacturing activity.

In Commissioner of Income Tax, Central-I Vs. R. Narayanaswami Naicker and Sons, , this court while following the decision of the Supreme

Court in State of Punjab and Others Vs. Chandu Lal Kishori Lal and Others, , held that ginning of cotton results in manufacturing and hence the

assessee was entitled to investment allowance. Now the point for consideration is whether ginning cotton by an outside agency would amount to

the firm in which the assessee, is a partner, being directly involved in the manufacturing activity. According to the assessee the firm is having direct

control over the outside agency in ginning the cotton. Therefore, the firm is directly involved in the manufacturing activity. When a similar question

was raised before this court in CWT v. V. O. Ramalingam [1995] 216 ITR 566, this court held that 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. In determining whether the assessee had engaged himself through his employees in the manufacture or

processing of goods, it will be necessary to see whether the 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 order to find out this aspect, the

matter was remitted back to the Tribunal for reconsideration. But this court in Commissioner of Wealth-tax, Tamil Nadu-II Vs. K. Lakshmi, ,

while considering a similar question, held that in cases where the assessee gets the goods manufactured by an outside agency, he cannot be said to

manufacture the goods, merely because the assessee pays for the manufacture or meets the expenses incurred in the manufacture.

In Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishments [1974] 45 FJR 54, the Supreme Court, while considering a

similar question, pointed out that in recent years the control test as traditionally formulated has not been treated as an exclusive test. In the above-

said decision, the Supreme Court relied upon the decision in Montreal v. Montreal Locomotive Works Ltd. [1947] 1 DLR 161 wherein it was

held as under (at page 62) :

In Montreal v. Montreal Locomotive Works Ltd. [1947] 1 DLR 161 Lord Wright said that a single test, such as the presence or absence of

control, was often relied on to determine whether the case was one of master and servant, mostly in order to decide issues of tortious liability on

the part of the master or superior and that in the more complex conditions of modern industry, more complicated tests have often to be applied. He

said that it would be more appropriate to apply, a complex test involving : (i) control (ii) ownership of the tools; (iii) chance of profit; (iv) risk of

loss, and that control in itself is not always conclusive. He further said that in many cases the question can only be settled by examining the whole of

the various elements which constitute the relationship between the parties.

In the present case, the assessee''s counsel submitted that even though that ginning work was entrusted to an outside agency, the assessee was

having the control over the outside agency. If that is the case, the assessee must satisfy the test adumbrated in the above cited decision, which was

followed by the Supreme Court in Silver jubilee Tailoring House v. Chief Inspector of Shops and Establishments [1974] 45 FJR 54. Accordingly,

we direct the Tribunal to verify whether the assessee was having direct control over the outside agency in order to ascertain whether the firm in

which the assessee is a partner, is engaged in the manufacturing activity. Accordingly, we are returning the question unanswered. No costs.