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income-tax Officer Vs. Hedavkar Mechanical Works (P.) - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1983)6ITD141(Mum.)
Appellantincome-tax Officer
RespondentHedavkar Mechanical Works (P.)
Excerpt:
.....industrial company envisaged under the act has to be considered not in watertight compartments of year to year but has to be viewed taking the overall picture over a period of a number of years. even assuming his contention to be correct, we do not find that the facts of this case help us to draw an inference favourable to the assessee.admittedly, the assessee has stopped manufacturing activities prior to the previous year relevant to the first year under consideration before us. it has not resumed manufacturing activities on any significant scale till the date of the hearing of these appeals. in our opinion, there should be a limit to the number of years for which one can have an overall view and that limit has already been crossed in this case.we, therefore, do not find any merit in.....
Judgment:
1. These three appeals filed by the department relate to the same assessee. Hence, they are heard together and disposed of by this common order for the sake of convenience.

2. The assessee is a limited company. The only common ground in these three appeals relates to the question as to whether the assessee can be regarded as an industrial company for the purpose of being charged at the concessional rate of tax as provided under the relevant Finance Act, 1966 ('the Act').

3. The assessee was incorporated on 20-12-1960 with the main object of manufacturing all kinds of machineries, implements, tools, etc. Hence, the assessee was treated as a company mainly engaged in the manufacture of goods within the meaning of the relevant Finance Act up to and including the assessment year 1977-78. However, the assessee closed its factory and stopped production with effect from 28-9-1976. It allowed its machineries to be used by another party in consideration of hire charges received by it. For the whole of the calendar year 1977, relevant for the assessment year 1978-79, as well as the subsequent two years which are under consideration, the assessee had leased out the plant and machinery formerly used by it in its manufacture. Thus, the main source of income of the assessee during these three years was the lease rent received from the letting on hire of the plant and machinery formerly used by itself for the manufacture of goods.

4. The case of the assessee before the ITO was that it should be treated as an industrial company within the meaning of the Act, because of Circular No. 103 [F. No. 166/1/73-IT (A-I)], dated 17-2-1973[1973] 88 ITR (St.) 80of the CBDT. Further, it was urged by the assessee that it had stopped manufacturing activities only temporarily because of labour troubles and it actually intended to revive its manufacturing activities at a subsequent date when matters settled down. It was pointed out that the assessee actually sold manufactured goods worth more than Rs. 4 lakhs in the first of the three years under consideration. In the second year, similar sales amounted to about Rs. 50,000. Further, certain machineries amounting to about Rs. 41,700 were not let out. In the second year under consideration, fresh machineries worth about Rs. 26,700 were also purchased. However, the fact remained that during the three years under consideration the asses-see was not mainly engaged in the manufacutre of goods, because, almost the entire bulk of its machineries used by itself for manufacture formerly were let out to another party, and the income from non-manufacturing activities exceeded 51 per cent of the total income. Under the circumstances, the assessee claimed to be treated as an industrial company. The ITO refused to accept the claim of the assessee on the ground that it was not mainly engaged in the manufacturing activities nor its income from manufacturing activities exceeded 51 per cent of the total income. In the second year under consideration, the assessee applied to the ITO to pass a rectification order under Section 154 of the Income-tax Act, 1961 ('the 1961 Act') and treat the assessee as an industrial company. By an order under Section 154 the ITO refused to do so.

5. The assessee appealed to the Commissioner (Appeals) against the orders under Section 143(3) of the 1961 Act for the assessment years 1979-80 and 1980-81, and the order under Section 154 for the assessment year 1978-79. As stated earlier, the only dispute in all these three appeals before the Commissioner (Appeals) was as to whether the assessee could be treated as an industrial company within the meaning of the Act. The Commissioner (Appeals) agreed with the contention of the assessee, and directed the ITO to treat the assessee as an industrial company. He mainly relied on the aforesaid circular of the CBDT. In the second year, the Commissioner (Appeals) observed that the IAC in his directions under Section 144B of the 1961 Act has held that the assessee was still engaged in business, and so was entitled to the set off of the carried forward loss of the earlier years. In view of the above fact, the Commissioner (Appeals) held that the assessee was an industrial company, and that the said mistake was apparent from the records. Hence, he allowed the petition under Section 154 for that year. In other words, the Commissioner (Appeals) held the assessee to be an industrial company under Section 154 for the assessment year 1978-79, and in the regular assessments under Section 143(3) for the subsequent two years.

6. Aggrieved by the above orders of the Commissioner (Appeals) the department is in appeal before us. Shri D.R. Chawla, the learned representative for the department, urged before us that the learned Commissioner (Appeals) erred in his decision. He stated that the Board's circular dated 17-2-1973 is quite clear. The said circular comes into operation only when the assessee is mainly engaged in the business of manufacture of goods or even if it is not so mainly engaged, it derives income in any year to the extent of 51 per cent or more of its total income from such activities. He pointed out that during the three years under consideration, the income from manufacturing activities derived by the company was not equal to 51 per cent or more of its total income. Hence, the assessee did not come under the second alternative of the said circular. The assessee was also not carrying on manufacturing activities itself as it had let out on hire almost the entire block of the plant and machineries formerly used by it for manufacture. Hence, the assessee could not be said to have been mainly engaged in the manufacture of goods, and so it did not come under the first alternative of the aforesaid circular either.

Thus, he urged that the orders of the Commissioner (Appeals) deserved to be reversed on the above grounds. In any case, he urged that this was not a matter which could be rectified under Section 154 as has been erroneously held by the learned Commissioner (Appeals). According to him, this fact was an additional reason in support of quashing the order of the Commissioner (Appeals) for the first year under consideration. Shri V.H. Patil, the learned representative for the assessee, on the other hand, supported the orders of the Commissioner (Appeals). He relied on the facts already stated above, namely, that the assessee had not stopped its business, and so the IAC has allowed the set off of the carried forward losses during the years under consideration. Further, there were sales though out of the closing stock of the earlier years. Again, there were purchases of machineries to the tune of about Rs. 26,700. His point was that the assessee had not stopped its business. Nor had it stopped its manufacturing activities permanently. It was only a temporary lull. The assessee was intending to re-start its manufacturing activities in full swing as soon as the circumstances permitted it to do so. However, to a query put by us, he answered that the assessee had not yet resumed full manufacturing activities and the plant and machineries continued to remain on hire even up to the date of the hearing of the appeals before us. Shri V.H. Patil relied on the aforesaid circular dated 17-2-1973 of the CBDT, as well as the decisions in the cases of Griffon Laboratories (P.) Ltd. v. CIT [1979] 119 ITR 145 (Cal.) and CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 879 (Bom.) in support of his contentions.

7. We have considered the contentions of both the parties, as well as the facts on record. The short question that is raised in these appeals is whether the assessee can be regarded as an industrial company within the meaning of the Finance Act. The definition of 'industrial company' as laid down in Section 2(1)(d) of the Act, reads as follows : (7) For the purposes of this section and the First Schedule,** ** ** (d) 'industrial company' means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining.

Explanation. For the purposes of this clause, a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, if the income attributable to any of the aforesaid activities included in its total income for the previous year is not less than fifty-one per cent of such total income ;" This definition has been explained by the circular dated 17-2-1973 of the CBDT. This circular says that a company will become an industrial company if either of the two following alternatives are satisfied in its case : (i) if it is mainly engaged in the manufacture of goods or the other activities enumerated in the Finance Act ; or (ii) even if it is not so mainly engaged, if its income from such activities amounts to 51 per cent or more of its total income.

It is, therefore, to be seen as to whether the assessee before us can come within either of the aforesaid two alternatives during the three years under consideration. We find that the assessee is not coming under the second alternative because its income from manufacturing or other prescribed activities did not exceed 51 per cent of its total income in any of these three years. At the same time, we find that the assessee was mainly deriving income from hire rent by letting out its machineries to another party. Hence, it cannot be said to be mainly engaged in manufacturing or other prescribed activities. It is true that the assessee sold some goods manufactured earlier by it out of the opening stock of the first year under consideration. But, there was no manufacturing activity in that year. It is also true that the assessee subsequently had operated a small amount of its own machineries but the income therefrom was negligible. Similarly, the assessee had also purchased a small amount of new machinery amounting to about Rs. 26,700 only.

Considering the nature and extent of the manufacturing activities carried on by the assessee before it let out its plant and machineries on hire, as well as the activities carried on by it during the three years under consideration, we are of the opinion that the assessee cannot be said to be mainly engaged in manufacturing or other prescribed activities within the meaning of the Act. Hence, the assessee does not come even under the first alternative of the aforesaid circular.

8. We have considered the contention of Shri V.H. Patil that the issue of industrial company envisaged under the Act has to be considered not in watertight compartments of year to year but has to be viewed taking the overall picture over a period of a number of years. Even assuming his contention to be correct, we do not find that the facts of this case help us to draw an inference favourable to the assessee.

Admittedly, the assessee has stopped manufacturing activities prior to the previous year relevant to the first year under consideration before us. It has not resumed manufacturing activities on any significant scale till the date of the hearing of these appeals. In our opinion, there should be a limit to the number of years for which one can have an overall view and that limit has already been crossed in this case.

We, therefore, do not find any merit in this argument.

9. We have considered the two decisions relied on by the learned representative for the assessee. Once again, we do not find anything therein to help the case of the assessee. In the case of Griffon Laboratories (P.) Ltd. (supra), the High Court observed that A manufacturer may hire a plant or machinery and employ hired labour and manufacture the goods. But to earn the benefit of the concessional rate of tax a company must mainly engage itself in the manufacture or processing of goods specified in the aforesaid provisions either personally or by someone under its supervisory control or direction." (p. 149).We thus find that in that case, the assessee was engaged in the manufacturing activities though with, the help of the machineries not belonging to it. In the case before us, the assessee was not engaged in any manufacturing activity. Similarly, in the case of Neo Pharma (P.) Ltd. (supra), the assessee itself was manufacturing goods, though with the help of the premises, plant, machinery and the services of the staff of another party. The important point to note is that in that case, the assessee itself was engaged in manufacturing activities unlike the case before us.

10. We find force in the contentions raised for the department that so far as the second year under consideration is concerned, the question as to whether the assessee was an industrial company or not was a debatable one and so it could not have been rectified under Section 154 as directed by the learned Commissioner (Appeals).

11. For the above reasons, we vacate the orders of the Commissioner (Appeals) for all the three years under consideration, and restore those of the ITO for those years.


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