JAGANMOHAN REDDY C.J. - The Income-tax Appellate Tribunal has referred the following question under the Wealth-tax Act, 1957, for our opinion, namely, whether the assessee was entitled to claim exemption under section 5(1)(xxi) read with section 45(d) of the Wealth-tax Act in respect of the net wealth employed by it for its starch factory and carbon-dioxide treatment plant.
The assessee-company was incorporated in 1934, and it was carrying on business of executing contracts for construction of masonry work, roadways, etc. In 1957, the company started the construction of a factory for production of starch and completed it in 1959, and also installed a carbon-dioxide treatment plant. As on December 31, 1958, the total assets of the starch factory and carbon-dioxide treatment plant amounted to Rs. 32,69,547, against which there were liabilities amounting to Rs. 10,60,447, the net wealth being Rs. 22,09,100. The company filed its return showing net wealth of Rs. 17,50,882. The amount of Rs. 22,09,100, mentioned above was not shown as net wealth, as the assessee claimed exemption under the provisions of section 5(1)(xxi) read with section 45(d) of the Wealth-tax Act. The Wealth-tax Officer rejected this claim and included this amount also in its net wealth. After making some other additions, the Wealth-tax Officer assessed a net wealth of Rs. 43,64,759. The Appellate Assistant Commissioner, however, allowed the exemption claimed, holding that the requirement of the Act for allowing the exemption was fulfilled. In coming to that should have been established with the object is said to have been achieved by incorporation of clauses 4, 8, 9, 18 and 20 in the memorandum and articles of association of the company, a persual of which would show that one of the objects of the assessee-company was also to carry on industrial undertaking in India. The department filed an appeal to the Tribunal against this order. The Tribunal while agreeing with the Appellate Assistant Commissioner that the new industrial undertaking commenced by the company came within the ambit of the object as mentioned in the articles of association, nonetheless held that in order to qualify for the exemption, the carrying on of an industrial undertaking should have been the primary object with which the company was established, and unless it did so, no exemption could be given to it. In this view, according to the Tribunal the assessee-company, not having been established with such a primary object would not be entitled to the exemption. The Tribunal further held that the second qualification for exemption that the new unit set up was by way of substantial expansion of the undertaking, was also not satisfied, inasmuch as the company had not been carrying on an industrial undertaking of which there can be said to be a substantial expansion. In short, it was the view of the Tribunal that unless there was already in existence an industrial undertaking which the company was carrying on, there could not have been a substantial expansion as contemplated in section 5(1)(xxi).
The answer to the reference, in our view, would depend on the interpretation of section 5(1)(xxi) read with section 45(d) of the Wealth-tax Act, which we give below :
'5. (1) Wealth-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee -......
(xxi) that protion of the net wealth of a company established with the object of carrying on an industrial undertaking in India within the meaning of the Explanation to clause (d) of section 45, as is employed by it in a new and separate unit set up after the commencement of this Act by way of substantial expansion of its undertaking :
Provided that -
(a) separate accounts are maintained in respect of such unit; and (b) the conditions specified in clause (d) of section 45(d) are complied with in relation to the establishment of such unit :
Provided further that this exemption shall apply to any such company only for a period of five successive years commencing with the assessment year next following the date on which the company commences operations for the establishment of such unit.
45. The provisions of this Act shall not apply to -.....
(d) any company established with the object of carrying on an industrial undertaking in India in any case where the company is not formed by the splitting up, or the reconstruction of a business already in existence or by the transfer to a new business of any building, machinery or plant used in a business which was being previously carried on :
Provided that the exemption granted by clause (d) shall apply to any such company as is referred to therein only for a period of five successive assessment years commencing with the assessment year next following the date on which the company is established, which period shall, in the case of a company established before the commencement of this Act, be computed in accordance with this Act from the date of its establishment as if this Act had been in force on and from the date of its establishment.
Explanation. - For the purposes of clause (d), industrial undertaking means an undertaking engaged in the manufacture, production or processing of goods or articles or in mining or in the generation or distribution of electricity or any other form of power.'
It may be observed that the Explanation to section 45(d) is made applicable to section 5(1)(xxi) so that the conditions necessary to qualify for such exemption for the main undertaking under section 45(d) are the same as those which are necessary for exempting the amount employed by it in a new and separate unit by way of substantial expansion of its undertaking. The words by it section 5(1)(xxi) would definitely indicate that the net wealth which is employed in the new and separate unit set up by way of substantial expansion of its undertaking, must be that of a company established with the object of carrying on an 'industrial undertaking' in India within the meaning of clause (d) of section 45, which is that it should be an industrial undertaking actually engaged in the manufacturing or other processes specified in the Explanation to section 45(d). Sri Ananta Babus contention, that so long as the company is formed, which has as one or several of its objects the carrying on of an industrial undertaking in India, the exemption both under section 45(d) as well as section 5(1)(xxi) would be available, notwithstanding the fact that such a company is not actually engaged in the manufacturing or other processes specified in the Explanation, does not appeal to us, either on a first impression or on a prima facie reading of the provisions.
It is not unknown that the memorandum of a company is so drawn up as to embrace a wide number of objects; sometime the objects are not incidental or ancillary but are wide and divergent and even incompatible. It cannot, therefore, be said that a company which merely has as one of its objects the establishment of an industrial undertaking, would be exempt, notwithstanding the fact that it carries on primarily a business which cannot in the remotest be considered to be an industrial undertaking. The object of giving exemption is to encourage industry in this country, and in order to encourage such industries the wealth of those companies which are actually carrying on the manufacturing or other processes as defined in the Explanation to section 45(d) as well as the net wealth employed by them in a new and separate unit set up by way of substantial expansion of their undertaking, are exempt from the wealth-tax. Further, a perusal of section 5(1)(xxi) and 5(1)(xxi) would also show that certain other exemptions are also granted in order to attract capital for the establishment of companies formed to carry on new industrial undertakings as defined in the Explanation to section 45(d). Clause (xix) says that the value of any shares held by the assessee in any other company in any case where the assessee is a company is exempt from wealth-tax, while clause (xx) states that any person who subscribes to the initial issue of equity share capital made by such a company after the 31st day of March, 1964, will be entitled to exclude from his net wealth for a period of five successive assessment years the value of the share he holds in the company. No doubt, as pointed out by Mr. Ananta Babu, there are one or two clauses in the memorandum and articles of association of the company empowering the company to engage in manufacturing processes as contemplated in the Explanation to clause (d) of section 45, viz., clause 9 authorises the company to manufacture cement and ceramics, such as bricks, tiles, earthenware, pottery, etc., but this does not on the face of it empower it to carry on starch products. The learned counsel, however, refers us to clause 18 which empowers the assessee-company to carry on any other trade or business, whether manufacturing or otherwise subsidiary or auxiliary to, or which can be conveniently carried on in connection with, any of the companys objects, as empowering the company to carry on the manufacturing processes. He, therefore, contended that under this clause, the starch factory has been set up. Be that as it may, as we have already stated, the question is not whether the objects of the company permit the carrying on of the manufacturing processes as contemplated in the Explanation to section 45(d), but whether it is actually engaged in the manufacturing processes specified therein for it to claim exemption for the setting up of the starch factory. In our view, two conditions would be necessary to get exemption, viz., that not only should the company be formed with the object of carrying on an industrial undertaking in India, but also that it should actually be engaged in the manufacturing, production or processing of goods or articles or in mining or in the generation or distribution of the electricity or any other form of power. It may be possible that a company is in fact engaged in one of the processes specified in the Explanation, which in fact is not authorised by its memorandum of association to carry on. Would such an undertaking be entitled to claim exemption Ex facie we think it would not, because it would not be in conformity with the objects with which the company has been formed. It is well established proposition that under the company law, the act of a company which carries on a business which is not authorised to carry on, would be ultra vires. As observed by Lord Cairns in Ashbury Railway Carriage and Iron Co. v. Riche :
'If every shareholder of the company had been in the room, and every shareholder of the company had said, that is a contract which we desire to make, which we authorise the directors to make, to which we sanction the placing of the seal of the company, the case would not have stood in any different position from that in which it stands now. The shareholders would thereby, by unanimous consent, have been attempting to do the very thing which by the Act of Parliament they were prohibited from doing.'
It is, therefore, clear that any act of the company outside its stated objects, is ultra vires. This legal position, in our view, had to be taken note of by the legislature by prescribing as one of the conditions of exemption that the objects of the company must be to carry on an industrial undertaking and that, secondly, that it should in fact carry on the undertaking before the wealth of that company could be exempt. In our view, therefore, before the exemption can be claimed, it must be shown that the substantial expansion is of a company established with the object of carrying on an industrial undertaking and is actually engaged in the manufacturing or other processes specified in the Explanation to section 45(d). Accordingly, we answer the reference in the negative and in favour of the department, with costs. Advocates fee Rs. 250.
Question answered in the negative.