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Talwar and Khullar (P.) Ltd. Vs. Inspecting Assistant - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1982)1ITD1025(Delhi)
AppellantTalwar and Khullar (P.) Ltd.
Respondentinspecting Assistant
Excerpt:
.....main objects. the previous year for the assessment year 1977-78 ended on 30-6-1976. during this year the company was engaged in work of manufacture and processing of brasswares and e.p.n.s., through artisans in cottage industries particularly centred in moradabad city. the artisans are supplied with raw materials and semi-finished materials with the construction to apply specific processes for engraving, scraping, colouring, polishing, numbering, etc., on behalf of the assessee on agreed wages per item.the sales in this year amounted to rs. 64,15,420. in the return of income filed on 30-6-1977 the income was declared at rs. 10,02,050. a revised return was filed on 17-1-1980 declaring income at rs. 8,17,033.before the ito the assessee made three claims. the first claim was that the.....
Judgment:
1. The assessee is a private limited company which was incorporated on 17-5-1966. According to the memorandum and articles of association, the objects of the company were to carry on business in India as exporters, importers, manufacturers and commission agents of brassware and a number of other articles mentioned in the main objects. The previous year for the assessment year 1977-78 ended on 30-6-1976. During this year the company was engaged in work of manufacture and processing of brasswares and E.P.N.S., through artisans in cottage industries particularly centred in Moradabad city. The artisans are supplied with raw materials and semi-finished materials with the construction to apply specific processes for engraving, scraping, colouring, polishing, numbering, etc., on behalf of the assessee on agreed wages per Item.

The sales in this year amounted to Rs. 64,15,420. In the return of income filed on 30-6-1977 the income was declared at Rs. 10,02,050. A revised return was filed on 17-1-1980 declaring income at Rs. 8,17,033.

Before the ITO the assessee made three claims. The first claim was that the assessee should be treated as an industrial company in which public are not substantially interested and the rate of tax should be charged at 60 per cent instead of 65 per cent. Such a contention had not been accepted by the ITO as also the Commissioner (Appeals) in the assessment year 1976-77 and, therefore, this contention was not accepted in this year also. The second and third contentions were that deductions under Sections 80J and 80HH should be allowed to the extent of Rs. 1,85,017 and Rs. 2,53,773, respectively. These contentions were also not accepted because according to the ITO, the assessee was not an industrial undertaking.

2. Aggrieved, the assessee filed an appeal to the Commissioner (Appeals) and submitted that the assessee should be treated as an industrial company and deduction under Sections 80J and 80HH, as claimed, should be allowed as the assessee was an industrial undertaking carrying on business in a number of articles. The Commissioner (Appeals) did not accept the assessee's submission because for the assessment year 1976-77 he had already held that the assessee was not an industrial company. The Commissioner (Appeals) for the year had relied on the judgment in Addl. CIT v. Chillies Export House Ltd. [1978] 115 ITR 73 (Mad.) On behalf of the assessee reliance was placed on the judgment in Griffon Laboratories (P.) Ltd. v. CIT [1979] 119 ITR 145 (Cal). The Commissioner (Appeals) did not accept the assessee's submission because the assessee did not possess plant and machinery as also any building wherein the manufacturing work was being carried out.

The Commissioner (Appeals) pointed out that the assessee clearly gave job work to the artisans for doing various processes. According to the Commissioner (Appeals), it was clear that the assessee did not have supervisory control or direction over the various processes applied by different artisans in their own premises with the aid of their machinery. The Commissioner (Appeal rejected the assessee's claim. The assessee is aggrieved by this order of the Commissioner (Appeals) and this is the first ground in the assessee's appeal.

3. The learned counsel for the assessee submitted that the business of the assessee was 100 per cent export business, mainly, of brassware goods. He submitted that in the assessment year 1976-77, the controversy was only limited to the point whether the assessee was an industrial undertaking or not. He filed a copy of the order of the Tribunal dated 12-11-1980 in IT Appeal No. 3609 (Delhi) of 1979 wherein it has been held that the assessee is an industrial company. On the basis of this order he submitted that in this year also it should be held that the assessee is an industrial company. He further submitted that the assessee should also be held to be a new industrial undertaking and the deduction permissible under Section 80J as well as Section 80HH should be allowed. He submitted that the first year of the assessee's business was for the year ending 30-6-1974, relevant to the assessment year 1975-76, and this was the third year of the assessee's business. He submitted that the assessee was manufacturing brassware and the activities carried on by the assessee would come within the words "manufacture or produce articles" used in Sections 80J and 80HH.He referred to the judgment in Griffon Laboratories (P.) Ltd. v. CIT (supra) for the submission that for manufacturing or producing goods the assessee need not have its own machinery or plant. For the same submission he referred to the judgment in Addl. CIT v. A. Mukherjee & Co. (P.) Ltd. [1978] 113 ITR 718 (Cal.), wherein it has been held that in order that a publisher of books should be a manufacturer of books it is wholly unnecessary for him to be a bookbinder himself. He submitted that if plant and machinery was not a requirement for manufacture or production of goods, then it would follow that workers also need not be employed by the assessee for those jobs which were got done from artisans. He also referred to the judgment in Orient Longman Ltd. v.CIT [1981] 130 ITR 477 (Delhi) wherein the assessee-company, a publisher of books, was held to be an industrial company. He submitted that the conditions laid down under Sections 80J(4) and 80HH(2) were fully satisfied and, therefore, the assessee should be allowed deduction both under Sections 80J and 80HH. He also referred to the order dated 22-10-1980 in IT Appeal No. 265 (Coch.) of 1978-79 of the Cochin Bench of the Tribunal, wherein Section 80HH relief was allowed to an assessee, who was exporting shrimps to foreign countries. This judgment was particularly relied on for the submission that the activities carried on by the assessee should be considered as manufacturing activities. The learned departmental representative submitted that the assessee was neither an industrial company nor an industrial undertaking and, therefore, it was neither entitled to concessional rate of tax nor entitled to deductions under Sections 80J and 80HH. He submitted that both under Sections 80J and 80HH the assessee itself was required to manufacture or produce articles and the assessee should also have its own plant and machinery which should be new. He pointed out that it was not enough for the assessee to get the goods manufactured from artisans, who were already working at Moradabad in their own premises. He pointed out that in the jobs assigned to the artisans the assessee was not exercising any supervisory control. He pointed out that in the immediately preceding year it was not argued that the company's own employees were supervising and controlling the artisans. He, however, submitted that in this year it was specifically argued that no supervisory control was exercised by the assessee over the artisans. He referred to the judgment in Farrukhabad Cold Storage (P.) Ltd. v. CIT [1979] 119 ITR 895 (All.) for the submission that the words "processing" and "production" had different meanings. He also submitted that the assessee's submission that the conditions laid down under Sections 80J(4) and 80HH(2) were satisfied should not be accepted because this aspect of the matter had not been either considered by the ITO or by the Commissioner (Appeals). He thus submitted that the assessee was not entitled to any of the claims made. In reply, the learned counsel for the assessee submitted that the judgment in Farrukhabad Cold Storage (P.) Ltd. v. CIT (supra) actually supported the assessee's case.

4. We have carefully considered the rival submissions. The question whether the assessee is an industrial company or not has already been determined by the Tribunal in IT Appeal No. 3609 (Delhi) of 1979 dated 12-11-1980 pertaining to the assessment year 1976-77 and respectfully following that order, we would hold that the assessee is an industrial company for this year also. In Addl. CIT v. A. Mukherjee & Co. (P.) Ltd.'s case (supra) and Griffon Laboratories (P.) Ltd. (supra), it has been held that for manufacture or processing of goods the assessee need not possess its own plant and machinery. For purposes of determining that the assessee is an industrial company the words to be considered are "engaged ... in the manufacture or processing of goods ...". We are holding the assessee-company to be an industrial company as the word "processing" is also used in the definition of ''industrial company".

5. We are, however, unable to accept the assessee's further submission that it should be held to be a new industrial undertaking also. Under Section 80J(1), in computing the total income of an assessee, deduction is allowed at the rate of 6 per cent of the capital employed in the industrial undertaking. Section 80J(2) provides that the deduction specified under Section 80J(1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles. Section 80J(4) lays down the following conditions : (4) This section applies, to any industrial undertaking which fulfils all the following conditions, namely :- (i) it is not formed by the splitting up, or the reconstruction, of a business already in existence ; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose ; (iii) it manufactures or produces articles, or operates one or more cold storage plant or plants, in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of thirty-three years next following the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking ; (iv) in a case where the industrial undertaking manufactures or produces articles, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in manufacturing process carried on without the aid of power : Explanation I to Section 80J(4) lays down that if the conditions specified therein are satisfied, then the machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose.

Explanation ii to Section 80J(4) lays down that if 20 per cent of the total value of machinery or plant or any part thereof previously used for any purpose is transferred to a new business, then the condition laid down in Clause (ii) shall be deemed to have been complied with and the total value of the machinery or plant or part so transferred shall not be taken into account while computing the capital employed in the industrial undertaking. The second proviso to Section 80J(4) provides that where any building or any part thereof previously used for any purpose is transferred to the business of the industrial undertaking, the value of the building or plant so transferred shall not be taken into account in computing the capital employed in the industrial undertaking. The various clauses of Section 80J clearly specify that the industrial undertaking has to employ capital. The capital employed would largely be in the shape of building and machinery and plant. The industrial undertaking has itself to employ ten or more workers in a manufacturing process carried on with the aid of power, or twenty or more workers in a manufacturing process carried on without the aid of power. Section 80J(4)(m) clearly states that "it manufactures or produces articles ...". It is thus clear that for obtaining the deduction under Section 80J, the industrial undertaking has itself to manufacture or produce articles. The learned counsel for the assessee had argued that so long as the manufacturing of goods was done under the assessee's supervision, it should be held that the assessee itself was manufacturing articles as required by Section 80J. In Chowgula & Co. (P.) Ltd. v. Union of India 1981 Tax LR 2929 (SC), it has been held that the test for determining whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity, but is recognised in the trade as a new and distinct commodity. In that case blending of different kinds of ores was not considered to be manufacturing of ore but the blending of ores of different qualities was considered to have undergone processing. Now, when the assessee buys semi-finished goods from the artisans and then gives those goods for engraving, scraping, colouring, polishing and numbering, etc., it cannot be said that the original commodity (semi-finished articles) has become a new and distinct commodity. The assessee may be supplying raw material to the artisans of Moradabad, and may be getting semi-finished articles prepared but that process of preparing semi-finished articles is not done by the assessee itself. The profit and loss account shows purchases of Rs. 39,39,309 and wages of Rs. 5,15,199. The assessee has filed a list of 158 workers (pages 2 to 6 of the second paper book) to show that the assessee is itself carrying on manufacturing activity. No bifurcation of Rs. 39,39,309 is available to show how much of this amount represents purchase of semi-finished goods and how much represents purchase of raw material. Similarly out of wages of Rs. 5,15,199 also it was not known as to how much is paid for finishing, etc., of semi-finished articles and how much is paid for getting articles manufactured out of the raw material supplied by the assessee. The assessee does not have a building, machinery or plant for carrying on any manufacturing of articles. In the assets on which depreciation has been allowed in the assessment order there is no building or machinery or plant. Thus, it cannot be held that the assessee itself is carrying on any activity of manufacturing or producing of articles. We have thus no hesitation in holding that the assessee is not entitled to the deduction under Section 80J.6. We may now consider the judgments on which the learned counsel for the assessee had relied on for the submission that the assessee should be considered to have manufactured or produced articles as provided under Section 80J. In A. Mukherjee & Co. (P.) Ltd. (supra), the assessee was publishing books but it did not have a printing press. The controversy in that case was whether the assessee could be considered to be an industrial company engaged in the manufacture or processing of goods. The case was decided in favour of the assessee but it has to be noted that along with the word "manufacturing" the word "processing" was also required to be considered. The word "processing" does not find a place in Section 80J. In Section 80J the words used are "it manufactures or produces articles". The aforesaid judgment is, therefore, distinguishable on facts. In Griffion Laboratories (P.) Ltd. (supra) also the company was held to be an industrial company. As already pointed out, the definition of industrial company uses the words "mainly engaged ... in the manufacturing or processing of goods ...". That case is also distinguishable. The judgment in Orient Longman Ltd. (supra) also deals with the definition of industrial company for the relevant year. That judgment also does not help the assessee. The judgment in Farrukhabad Cold Storage (P.) Ltd. (supra) also does not help the assessee.

7. The next question for consideration is whether the assessee is entitled to deduction under Section 80HH. This section provides a certain deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas. The conditions for deduction are laid down in Sub-section (2) which reads as under : (2). This section applies to any industrial undertaking which fulfils all the following conditions namely :- (i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970, in any backward area ; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area : Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in Section 33B, in the circumstances and within the period specified in that section ; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area ; (iv) it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.

Explanation : Where any machinery or plant or any part thereof previously used for any purpose in any backward area is transferred to a new business in that area or in any other backward area and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purpose of Clause (iii) of this sub-section, the condition specified therein shall be deemed to have been fulfilled.

The proviso to Section 80HH(4) uses the words "provided that,-(i) in the case of an industrial undertaking which has begun to manufacture or produce articles". The condition for allowance of deduction under Section 80HH are similar to the conditions laid down under Section 80J.In fact, if deduction is available under both Sections 80HH and 80J, then the deduction under Section 80HH is to be allowed first. In addition to his arguments which have been dealt with in respect of the claim under Section 80J, the learned counsel for the assessee had relied on the order of the Tribunal in the case of Marwell Sea Foods v.ITO [1981] 11 TTJ 22 for the submission that deduction under Section 80HH should be allowed to the assessee. In that case it was held that export of shrimps constituted production of a new commodity as the end product could not be restored to the original condition (fish). We are not dealing with an article of that nature and it is unnecessary for us to examine whether shrimps exported became a different commodity from fish. We have already held that without investment of capital in building, plant and machinery and without employing the required number of persons, the assessee is not entitled to deduction under Section 80J. For the same reasons, we reject the assessee's claim for deduction under Section 80HH.8 to 31. [These paras are not reproduced here as they involve minor issues.]


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