1. The assessee is an Indian company and the assessment year is 1965-66, the accounting year having ended on 31st March, 1965. In the assessment for the said year the ITO allowed super-tax rebate at 30% on the footing that the assessee was a company in which the public were substantially interested within the meaning of s. 2(18) of the I. T. Act, 1961. The Commissioner set aside the said order of the ITO on the footing that the company was not one in which the public were substantially interested within the meaning of the said section. The Tribunal reversed the finding of the AAC and restored that of the ITO. Thereafter, the Tribunal made the present reference under s. 256(1) of the I. T. Act and the question referred to us is as follows :
'Whether, on the facts and in the circumstances of the case, for the assessment year 1965-66, the assessee is a company whose business consists wholly in the manufacture or processing of goods within the meaning of Explanation 2 to section 2(18) of the Ac ?'
2. Briefly stated the facts relating to the assessee-company, which are on record, are as follows :
The company was established in 1962. Admittedly, as stated in sub-cl. (1) of cl. 3 of its memorandum and articles of association, its first object is to carry on the business of manufacturers of, and merchants in, glass fibres and all kinds of articles made of or formed from glass fibres or of any other glass or similar organic or inorganic substance. The rest of the objects mentioned in the said cl. 3 and contained in its various sub-clauses are incidental to the said main object of manufacturing the glass fibres and all other such articles. The company's capital to the extent of 50% is held by Fibreglass Ltd., U. K., which is a private Limited company under the United Kingdom law. 4% of the shares are held by Bombay Company P. Ltd. 0.8% by another private company and the balance of 45.2% is held by the members of the public. The company went into trial production in July, 1965, and commercial production in September, 1965. Its products were put in the market in November, 1965. In the relevant accounting year ending on 31st March, 1965, the company's factory was under construction. During that stage, the moneys representing the share capital, not immediately required for construction or for acquiring plant and machinery, were invested in U. K. Treasury Bills and on short-term deposits with banks, and in the material year, therefore, the company had an income of Rs. 2,58,701 by way of interest. The ITO assessed this income as income from other sources. In computing the tax, the ITO gave a rebate of 30% on the basis that the company was a company in which the public were substantially interested within the meaning of s. 2(18) of the Act.
3. The Income-tax Commissioner acting under s. 263 of the Act revised the order of the ITO in so far as it allowed a rebate of 30% and allowed only a rebate of 20% on the footing that the assessee was not a company in which the public were substantially interested. It was argued before the Commissioner that Fibreglass Ltd., U. K., which held 50% of the assessee-company's capital should be regarded as a member of the public on the ground that the said U. K. company not having been declared as a company by the CBDT, its status should be taken as that of an association of persons. This contention was rejected by the Commissioner. The assessee's second contention was that under Expln. 2 to s. 2(18), it would be sufficient in the case of a manufacturing company, if not less than 40% of its shares carrying voting rights are held by the members of the public in order to qualify itself as a public company. Since in the instant case 45% of the capital was admittedly held by members of the public, and if the company got the benefit of Expln. 2 to s. 2(18), it could pass the test of a public company for getting rebate from income-tax. It was also pointed out before the Commissioner :
'(a) That the main object for which the company was established as per its memorandum of association was 'to manufacture glass fibres, etc.' and the other objects were incidental to this object.
(b) That the company obtained a licence under the Industries (Development and Regulation) Act, 1951, for the manufacture of 2,500 tons of glass wool per annum, 600 tons of glass textile fibres per annum and 75 tons of glass staple tissue per annum, on 21st November, 1961.
(c) That the company obtained from the Controller of Imports, an import licence on the 29th June, 1963, to import plant and machinery of the value of Rs. 22,86,700 for the said manufacture.
(d) That the orders for the plant and machinery were placed in the U. K. soon after the receipt of the manufacturing and import licences and steps had been taken even before the commencement of the relevant previous years to set up the manufacturing plant of the company.
(e) That the interest received during the relevant year was from bank accounts in the U. K. and from U. K. Treasury bills. this was incidental to the main object of the company, being the proceeds of the issue of shares to Fibreglass Ltd., U. K., retained in the U. K. with the permission of the Reserve Bank of India for the purchase of plant and machinery for the company's plant in India.'
4. The Commissioner, however, rejected this contention also and held that the use of the present tense 'consists' in Expln. 2 was very important and the term could not be extended to include those companies whose manufacturing business was yet to take place. The Commissioner further held that the income of the company was wholly from non-manufacturing activities since, according to the Commissioner, in the material year, the company pursued the objects enumerated in sub-cls. (1), (14) and (15) of cl. 3, namely, giving loans, making investments, etc. Thus, according to the Commissioner, the income was earned by the company from the activities which were wholly non-trading although they were within the powers conferred by the memorandum and articles of the association. Lastly, the Commissioner held that there was not even any investment of funds in the capital assets. According to the Commissioner, therefore, the company did not satisfy the conditions stipulated in the said Expln. 2. He, therefore, directed the ITO to recompute the tax by allowing a rebate the rate of 20% instead of 30%.
5. The assessee appealed against the said order of the Tribunal. It was urged before the Tribunal that the assessee was a company whose business consisted wholly of manufacturing or processing of goods and, therefore, only shares of not less than 40% had to be held by the public for getting higher relief of 30%. It was pointed out on behalf of the assessee that the company's money was placed in fixed deposit and invested in short-term treasury bills not in pursuance of any objects mentioned in the memorandum and articles of association. They were so invested only for the period that they were not required for the business of the company. As soon as machinery was purchased, the said investments actually came down from Rs. 33.65 lakhs to Rs. 6.55 lakhs. It was further contended on behalf of the assessee that although during the relevant period the company had not started the business, it had no other business. The Explanation emphasis's the character of the business and of the company and it was not needed that the actual manufacturing activity should be started in the accounting year. As against this contention of the assessee, the revenue urged that while applying the Finance Act to any particular year, the position of a company in that very year had to be taken into consideration. Since, at the relevant time, there was no business activity and since the income taxed was not derived from any business of manufacture, the company was not entitled to the concessional treatment of the higher rebate. According to the revenue, before any incentive could be given there should be manufacture of goods. The incentive was given not merely to start new manufacturing companies, but also to encourage old companies engaged in other activates to switch over to the manufacturing activities and, hence, argued the revenue, the crucial test was whether there was manufacturing activity in the accounting year.
6. The Tribunal upheld the assessee's contention and took the view that a liberal construction must be adopted in the case of a provision granting a tax concession. The Tribunal also held that the assessee had, for its avowed object, the manufacture of a new type of product in a big way and it had also started the manufacture within three years of its formation. According to the Tribunal, initially the capital has to be called up and funds kept ready for setting up the factory, and till the moneys are actually required, they are kept in short-term investments. That, however, did not mean that in the interregnum between the formation of the company and the commencement of manufacturing activity, the company had a different character and, therefore, it can be said to be engaged in other activity. According to the Tribunal, it was against prudent management of the business, to keep large sums of moneys idle in the company's till without investing in short-terms investment. Merely because the company does so, it is unrealistic and imaginary to call the company as one indulging in investment activities, and, therefore, a non-manufacturing company. In the present case from its inception, it was a manufacturing company and it had not changed the said character at any time. The Tribunal also held that it was not the character or the nature of the income derived by the company but the nature of its activity which determined the character of the company. The Tribunal also held that merely because the company had yet to go into production, it cannot be called a non-manufacturing concern during the said period. The assessee-company had only one object, viz., to set up a manufacturing business. Although, incidentally, various powers were given to the company, the primary object of the company as given in sub-cl. (1) of cl. 3 of the memorandum and articles of association was that of manufacturing. The powers given to the company had no relevance in finding out the object of the company. The Tribunal, accordingly, allowed the appeal, set aside the finding of the Commissioner and restored the order of the ITO. As stated earlier, this reference has, thereupon, been made at the instance of the revenue.
7. In order to decide the controversy between the parties, it will be necessary to examine s. 2(18) of the Act which defines the expression 'company in which the public are substantially interested'. The said sub-section as it stood at the relevant time was follows :
'2. (18) `company in which the public are substantially interested'- A company is said to be company in which the public are substantially interested.....
(b) if it is not a private company as defined in the Companies Act, 1956 (1 of 1956), and
(i) its shares (not being shares entitled to a fixed rate of dividend whether with or without as further right to participate in profits) carrying not less than fifty per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by-....
(d) the public (not being a director, or company to which this clause does not apply);.....
Explanation 2. - In its application to an Indian company whose business consists wholly in the manufacture or processing of goods.. sub-clause (b) shall have effect as if for the words `not less than fifty per cent.' and `more than fifty per cent.' the words 'not less than forty per cent. and `more than sixty per cent.' had been substituted.'
8. From the aforesaid definition of the expression, it is clear that in order to qualify itself as a company in which the public are substantially interested, firstly, it must not be a private company as defined in the Companies Act, and secondly, when it is an Indian company it must be one whose business consists wholly of the manufacture or processing of goods and whose shares carrying not less than forty per cent. of the voting power are held by the members of the public. It is not disputed that about 45.2 per cent. of the assessee's shares are held by the members of the public. Therefore, the only other condition that the assessee has to satisfy is whether its business consists wholly of the manufacture or processing of goods. If it satisfied the said test, then, admittedly it would qualify to a higher rebate of 30 per cent. Hence, the controversy is whether the assessee's business consists wholly of the manufacture or processing of goods.
9. Shri Kotwal, the learned counsel appearing for the revenue, urged the very same contentions which were urged on behalf of the revenue before the lower authorities. His first contention was that during the year in question the company had not started its manufacturing business, and, therefore, it could not be said to have engaged even partly in the manufacture of goods. His second contention was that, admittedly, during the relevant period the only income that it received was by way of interest from its bank accounts and treasury bills and no part of its income was attributed to any manufacturing activity. His last contention was that the object of the company shows that it was not established only for the purpose of engaging in the manufacture of goods. It was also empowered by its memorandum and articles of association to undertake other activities such as investing its funds and advancing loans. For all these reasons, Shri Kotwal urged that the company cannot be said to be having business consisting wholly of the manufacture or processing of goods, and, therefore, for the relevant year it was not entitled to the higher rebate of 30 per cent.
10. We are unable to accept any of the said contentions. As regards the first contention that the company had not started its business of manufacture during the relevant year, the argument is only to be stated to be rejected. It is not disputed that the company was established in the year 1962 for the manufacture of glass fibres and all kinds of articles made of or prepared from glass fibres, etc. In fact, it went into production in July, 1965, and commercial production in September 1965, and its goods were in the market in November, 1965. It is common knowledge that before the concern starts the actual manufacturing activity, it has to undertake several jobs, viz., that of acquiring land, constructing plant, purchasing machinery, sometimes even acquiring technical know-how etc. For completing these jobs, some breathing period is necessarily required. But all these activities which are undertaken prior to the actual manufacture of goods are designed for and undertaken with the object of the actual manufacture of goods in question. These activities are, therefore, preliminary to the actual production of goods, without which preliminary steps, no manufacture of any goods is possible. Therefore, merely because during this interregnum between the establishment of the company formally on paper and the actual start of its manufacturing activity, the company has no production of the goods a such, it is not without its character as a manufacturing concern. It is both unrealistic as well as unimaginative to divide the stages of such companies into two parts and label it with a different character merely because prior to the actual start of the manufacturing activity, the company has to undergo the work-pains preliminary to production. We fail to understand as to how the company could be described as one other than a manufacturing concern during this preliminary stage when the concern is busy collecting and putting together its assets and resources for starting the manufacturing activity which is its avowed object and for which it has come into existence. Therefore, merely because during the accounting year ended on 31st March, 1965, the company had not started its manufacturing activity although it was preparing for the same, it could not be said that the company did not partake of the character of a concern whose business consisted wholly of the manufacture or processing of goods. The argument, therefore, has only to be stated to be rejected.
11. As regards the second contention, viz., that during the relevant period the income that the company derived was not from any manufacturing activity but wholly consisted of the interest earned on its funds invested in the short term deposits and treasury bills, the argument is again unrealistic. As has been rightly pointed out by the Tribunal, during the period that the company is busy acquiring different assets for starting the manufacturing activity, the concern is bound to have on its hand large sums of money collected for the purpose. All the material and paraphernalia required for starting the manufacturing activity is not collected at a time but has necessarily to be acquired in stages. Therefore, at any particular point of time during the relevant period, the company is bound to have large sums of money on its hand which only a non-prudent management would keep idle without trading on the same. This investment was made only with a view to see that the sums of money which it had collected for starting its manufacturing activity do not lie idle when they can very well fetch some income. It is not disputed that these investments came to be liquidated in stages no sooner the material required for starting the manufacturing activity came to be acquired. The mere fact, therefore, that the company had invested its funds which were admittedly acquired for starting its manufacturing activity, during the said short preliminary period, cannot deprive it of its character as one engaged wholly in manufacturing activity. It is also further necessary to remember that Expln. 2 has no reference to the character or nature of the income of the company. It has reference to the character or nature of the activity of the company. This is apart from the fact that merely because some income of such company happens to come from a source which is not directly related to the manufacturing activity, the company does not lose its character as a manufacturing concern. Therefore, it is not correct to say that merely because the income which was assessable during the relevant period came from a source other than that of manufacture, the company was not entitled to higher rebate of 30 per cent. As regards the last argument, viz., that the company was not established only for manufacturing the relevant goods because the other objects mentioned in cl. 3 of its memorandum and articles of association empowered the company to undertake activities other than the activity of manufacture, we may point out that even a casual perusal of the other objects mentioned in the said cl. 3, would convince anyone that the said objects are incidental to and necessary for its main activity, viz., the manufacture of the said goods. In fact, if the so called other objects which follow sub-cl. (c) of the said cl. 3 are not mentioned and powers are not given to the company to undertake the said activities, it would not be possible for the company to carry out its main activity, viz., the manufacture of the said goods. In the first instance, it is wrong to call the said other activities as the objects of the assessee-company. They are powers conferred on the company. Were it not for those powers as stated earlier, it would not be possible for the company to carry on its main business of activity. The said powers are necessary to undertake any manufacturing activity. As and by way of illustration, we may point out that sub-cl. (2) gives power to carry on all or any of the trades or business of mechanical, electrical, insulating, heating, etc. ; sub-cl. (3) gives power to acquire, construct, carry out, equip, maintain, etc. ; sub-cl. (4) gives power to buy, sell, manufacture, repair, plant, machinery, etc. ; sub-cl. (5) gives power to purchase, take on lease or tenancy or in exchange, hire property, etc. ; sub-cl. (6) gives power to acquire from any person the technical know-how; sub-cl. (7) empowers to sell, exchange, mortgage property, options and other rights over them; sub-cl. (8) empowers to remunerate any person; sub-cls. (9) and (10) empower to advance or deposit or lend money, securities on property; sub-cl. (11) empowers to undertake financial and commercial obligations; sub-cl. (12) empowers to guarantee the performance of such obligations; sub-cl. (13) empowers to guarantee the payment of money unsecured or secured; sub-cl. (14) empowers to subscribe for, underwrite, acquire, hold, sell and otherwise deal in shares, stocks; sub-cl. (15) empowers to invest any moneys of the company in such investments as may be thought proper and to hold, sell or otherwise deal with such investments and sub-cl. (16) deals with the receipt of money. The rest of the powers are similar in nature. From these powers it is difficult to gather that the company has been empowered to carry on activity other than that of manufacturing and that because of the said powers, the company is a concern which cannot be said to have the character of a manufacturing unit. In the circumstances, we are of the view that the finding recorded by the Tribunal is legal and proper.
12. Hence, we answer the question referred to us in the affirmative and in favour of the assessee.
13. The revenue to pay the costs of the assessee.