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Obeetee (P.) Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 983 of 1976
Judge
Reported in(1983)34CTR(All)78; [1983]143ITR793(All); [1983]12TAXMAN351(All)
ActsIncome Tax Act, 1961 - Sections 154; Finance (No. 2) Act, 1967 - Sections 2(7); Finance Act, 1968 - Sections 2(6)
AppellantObeetee (P.) Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateR.K. Gulati, Adv.
Respondent AdvocateM. Katju, Adv.
Excerpt:
- .....that the profit on manufacture does not exceed 51% of the total profit which is mainly due to sale of import licences and rectified the revised assessment order charging the tax at the rate of 65%. the assessee filed two appeals against the orders passed on its application for the two assessment years. both the appeals were rejected by the aac. thereafter, the assessee filed two appeals before the income-tax appellate tribunal. the tribunal allowed the appeals, set aside the order of the aac, restored the appeals to their original numbers and directed the aac to hear the appeals on merits and according to law. the aac, by his order dated september 20, 1973, held that the assessee-company is mainly engaged in the business of manufacture and processing of goods and is entitled to be.....
Judgment:

K.N. Seth, J.

1. The assessee is a limited company and derives income from manufacture and processing of carpets. For the assessment years 1966-67 and 1967-68 the ITO taxed the income at 65 per cent. when he completed the original assessment. The assessee went up in appeal. It also made an application before the ITO under Section 154 of the I.T. Act on December 3, 1968, claiming that it was an industrial company in which the public are not substantially interested and it was liable to be taxed at fifty-five per cent. instead of sixty-five per cent.

2. The AAC granted certain reliefs to the assessee in the appeals preferred by it. The ITO, while revising his assessment orders pursuant to the order of the AAC, calculated tax at the rate of 55 per cent. Subse-quently, he issued a show-cause notice under Section 154 for rectification of the mistake on the ground that the tax should have been charged at sixty-five per cent.

3. The ITO on March 3, 1970, passed two separate orders--one on the application of the assessee under Section 154 and the other on the notice issued by him under the same provision he rejected the application of the assessee on the reasoning that the profit on manufacture does not exceed 51% of the total profit which is mainly due to sale of import licences and rectified the revised assessment order charging the tax at the rate of 65%. The assessee filed two appeals against the orders passed on its application for the two assessment years. Both the appeals were rejected by the AAC. Thereafter, the assessee filed two appeals before the Income-tax Appellate Tribunal. The Tribunal allowed the appeals, set aside the order of the AAC, restored the appeals to their original numbers and directed the AAC to hear the appeals on merits and according to law. The AAC, by his order dated September 20, 1973, held that the assessee-company is mainly engaged in the business of manufacture and processing of goods and is entitled to be classified as an industrial company. He set aside the order of the ITO dated March 31, 1978, and directed him to revise the assessments for the years 1966-67 and 1967-68 by charging tax at the rate of 55% in place of 65%. On appeal by the Revenue, the Tribunal allowed the appeal on the view that from an examination of the profit and loss account and the balance-sheet it could not be ascertained that the assessee was an industrial company and there being no error apparent on the record the order of the ITO taxing the income at the rate of 65% could not be rectified under Section 154 of the Act.

4. At the instance of the assessee the following question has been referred for the opinion of this court:

' Whether, on the facts and circumstances of the case, the assessments were liable to be rectified under Section 154 of the Act. If the answer to the above question is in the affirmative, whether, on the facts and in the circumstances of the case, the assessee was an industrial company entitled to be assessed to tax @ 55% instead of 65% assessed by the Income-tax Officer '

5. There is no dispute that the assessee-company derives its income from the manufacture and processing of carpets. In its application under Section 154 the assessee claimed to be an industrial company with an income below rupees ten lakhs and prayed for rectification of the assessment order by taxing the income at the rate of 55% instead of 65%. In response to the notice issued by the ITO under Section 154 the same stand was taken. The relevant and material portion of Clause (d) of Section 2(7) which defines an ' industrial company ' is as follows :

' (d) ' Industrial company ' means a company which is mainly engaged in the business of......manufacture or processing of goods......

Explanation.--For the purposes of this clause, a company shall be deemed to be mainly engaged in the business of......manufacture or processing of goods......if the income attributable to any one or more of theaforesaid 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.'

6. As noted earlier, the assessee is a company engaged in the business of manufacture and processing of carpets and its income is derived from that activity.

7. The Tribunal took the view that from the examination of the profit and loss account and the balance-sheet it could not be ascertained that the assessee was an industrial company and, consequently, it could not be said that there was any glaring, patent and obvious mistake which could be rectified under Section 154 of the Act. In our opinion, the view taken by the Tribunal is wholly erroneous. The definition of ' industrial company ' set out earlier entitles the assessee to the benefit of this provision if the income ' attributable to ' the activity of manufacturing of carpets is not less than fifty-one per cent. of its total income. There is no dispute that if the income relating to the sale of import licence is included and is taken into consideration, it exceeds 51% of the total income. The question is whether the income derived from the sale of import licences is attributable to the activity of manufacturing of carpets. In Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) , the Supreme Court had occasion to consider the expression occurring in Section 80E (as it stood prior to its amendment by the Finance (No. 2) Act, 1967). It was held that the Legislature had deliberately used the expression ' attributable to', having a wider import than the expression ' derived from ', thereby intending to cover receipts from sources other than the actual conduct of the business of the specified industry. Keeping in mind the scope and ambit of the expression ' attributable to ', it cannot possibly be contended that the import entitlement or its sale proceeds are received from sources other than the actual manufacturing and export of carpets. It is directly and intimately connected with that activity. If the assessee had not manufactured and exported carpets it could not have earned the import entitlement. The receipts from the sale of the import licences were attributable to the activity of manufacturing and exporting carpets within the meaning of the aforesaid Clause (d). This view was taken by this court in Addl. CIT v. Abbas Wazir (P.) Ltd. : [1979]116ITR811(All) , with which we respectfully agree.

8. In rejecting the application of the assessee under Section 154 the ITO committed an obvious and patent error in excluding the income derived from the sale of import entitlement and treating it as something different from the income derived by the assessee from its business of manufacturing and exporting carpets. The income so derived constituted almost the entire income of the assessee and was obvious from the profit and loss accounts and the balance-sheets. The Tribunal committed a manifest error in taking the view that the mistake was not apparent on the record and could not be rectified under Section 154 of the Act. We may also point out that while dealing with the appeal of the assessee for the assessment year 1970-71 the Tribunal, by its order dated March 24, 1973, held, following its decision in the case of E. Hill & Co., which also manufactured and exported carpets and derived income from the sale of import licences, that the assessee is an industrial company within the meaning of Clause (d) of Sub-section (7) of Section 2 of the Finance Act, 1966. In our opinion, the income of the assessee has been wrongly taxed at 65% and this was an error which could be rectified under Section 154 of the Act.

9. Our answer to the first part of the question referred is in the affirmative, in favour of the assessee and against the Department. Our answer to the later part of the question is also in the affirmative, in favour of the assessee and against the Department. The assessee is entitled to costs which are assessed at Rs. 250.


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