The Commissioner of Income Tax vs Ashok Leyland Ltd.

P. Govindan Nair, C.J.—The question referred to us for the assessment years 1966-67 and 1967-68 in relation to the assessment of income tax of Messrs. Ashok Leyland Limited., Madras reads as follows:

Whether on the facts and in the circumstances of the case, it has been rightly held that the Assessee would be entitled to relief under Sections 80-E and 80-I of the Income tax Act, 1961, for the assessment years, 1966-67 and 1967-68 respectively on the income earned by it from import and sale of spare parts from abroad?

The asessee is engaged in the business of manufacturing Ashok Leyland trucks and also spare parts for such vehicles. In addition to this, the assesee is also importing spare parts and selling those spare parts to those persons, who had purchased the trucks manufactured by the Assessee. It is further stated that the imports of those spare parts had gradually, but steadily decreased from year to year and the production of such spare parts had increased and more and more spare parts were manufactured by the Assessee. It appears, though it is not very clear, that the profits and gains which can be said to arise directly from the sale of imported spare parts are not substantial compared to the profits and gains arising from the manufacture and production of vehicles and spare parts and the sale of those vehicles which were manufactured and the parts which were produced. The question is whether on these facts, it can be said that the Assessee is entitled to the benefit of Section 80-E for the earlier year, 1966-67 and Section 80-I for the latter year, 1967-68. It is enough, if we extract Section 80-I, because it is admitted before us that the two Section, 80-E and 80-I are practically the same. Section 80-1 is in these terms:

(1) In the case of a company to which this section applies where the gross total income includes any profits and gains attributable to any priority industry, there shall be allowed in accordance with and subject to the provisions of this section, a deduction from such profits and gains of an amount equal to eight percent thereof, in computing the total income of the company.

In order to understand Section 80-I, it is necessary to look into the definition of priority industry in Section 80-B(7). It is in these terms:

Priority industry means the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the (Sixth) Schedule or the business of any hotel, where such business is carried on by an Indian Company and the hotel is for the time being approved in this behalf by the Central Government;

The argument that has been advanced by Counsel on behalf of Revenue at whose instance the reference has been made is that the reasoning of the Tribunal is not correct. The submission was that unless there is a direct nexus which indicated an intimate connection between profits and gains in the priority industry, Section 80-I is not attracted. It is not enough that the import of those spare parts and the sale of such imported spare parts are desirable or even necessary for carrying on of the business, which is involved in the manufacture and production which would imply that the Assessee is engaged in a priority industry. The profits and gains must flow from the priority industry. It must be the profits and gains arising from the manufacture and production. On the other hand, it was contended by the Assessee that the word used in the section is attributable and not derived the word that was used in Section 15-C of the income tax Act, 1922. Section 15-C(1) is as follows:

(1) Save as otherwise hereinafter provided, the tax shall not be payable by an Assessee on so much of the profits or gains derived from any industrial undertaking or hotel to which this section applies as do not exceed six per cent, per annum on the capital employed in the undertaking or hotel, computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue.

The Tribunal dealt with this matter in paragraphs 3 to 6 of its order. Briefly stated, what the Tribunal said was that since the word attribute has the meaning To ascribe, assign, or consider as belonging it is not necessary that source of income must necessarily be the priority industry. The Tribunal observed:

It is sufficient, if such priority industry is the cause the principal cause, for getting this income, it is sufficient, if the income, can be ascribed to the priority industry....

From the above quotation, it is clear that step by step, the Tribunal came to the conclusion that, if the cause of the income is the priority industry or the principal cause of any income is the priority industry, then the income could be ascribed to the priority industry. We are unable to accept this reasoning. The meanings given in the dictionary to the word ascribed clearly indicate a far more intimate connection between the industry and the income. It is not enough if there is an intimate connection between the priority industry and the other business carried on by the Assessee. The section contemplates the company having the income arising from priority industry as well as income arising from other business. This appears from the wording of the section which says:

...where the gross total income includes any profits and gains attributable to any priority industry.

It is not possible to look at the meaning of the word attributable alone without reference to what it is attributable to. The words attributable to any priority industry must be read as a whole. If it is so read, it is clear that the income must belong to or must arise from the priority industry.

Counsel for the Assessee contended, that if that is the meaning to be given to the expression attributable to any priority industry we will be going back to the position which obtained, u/s 15-C of the income tax Act, 1922 where in the word derived was used. It was submitted that the word derived has a different meaning from the word attributable. It was also emphasised that the word attributable is much wider and did not insist on the income flowing from an industrial undertaking as in the case of Section 15-C, but only insisted on an income being connected with an industrial undertaking. Though the argument is-attractive we are satisfied that the wording of the Section 80-I justifies a clubbing in of the income of a Company, which arises, from a business, which is distinct and separate from the business of manufacture or production which alone would amount to priority industry. The purpose of the section appears to be to encourage manufacture and production. The fact that manufacture and production may thrive and may expand and might reach a state when the import of spare parts could be completely eliminated may be a good reason for providing for an exemption on the income arising from the sale of imported spare parts if the Legislature deems fit to do so. But the question is has the Legislature done so by the wording of the section. It appears that in substance, there is no change in the effect and the extent of the exemption that has been granted by Section 15-C of the income tax Act, 1922 and by Section 80-E or Section 80-1 of the income tax Act, 1961.

Two rulings of this Court one in Ashok Motors Ltd. Vs. Commissioner of Income Tax, Madras, and the other in Commissioner of Income Tax, Madras Vs. Standard Motor Products of India Ltd., have been relied on by counsel for Revenue. Both rulings contain strong reasons for the conclusion that was reached that the income arising from the sale of imported parts will not be within the ambit of Section 15-C of the Act. In Commissioner of Income Tax, Madras Vs. Standard Motor Products of India Ltd., it was highlighted that the income derived from the sale of any imported parts was negligible compared to the income that was derived by the Assessee from any industrial undertaking activity. Nevertheless, the Court came to the conclusion that such income from the sale of imported parts will not fall under that section. The reasons in the two decisions appeal to us. We think that no material change has resulted from the use of the word attributable in substitution of the word derived. We are not suggesting that the two words mean the same thing. Even for the word attributable, there must be a direct nexus between the manufacture or production and the income. Such a direct nexus we art not able to find between the income arising from the sale of the imported parts, though such activity by the company, it is said, was essential for the other activity of the company for manufacture and/or production.

In the light of the above, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the Asseesee. The Assessee will pay the costs of the Revenue.