Per Shri K. S. Viswanathan, Accountant Member - This is a departmental appeal. Two issues are raised here. First is whether the assessee is an industrial company or not; and the second is whether the assessee is entitled to set off of a loss of Rs. 16,005 being share of loss from a firm in which the company was a partner.
2. The assessee-company has been incorporated only on 5-2-1980. The main object of the firm was to carry on business as builders and contractors. There was also ancillary object of carrying on business in cotton and kapas. On 1-4-1980 the company became a partner in a firm.
The share of profit was 60 per cent. This firm was dissolved on 11-11-1980 and the company took over the entire business. We may state here that it was specifically mentioned in the partnership deed that the company was incorporated with the object of taking over the business assets and liabilities of the partnership.
3. The assessees share in respect of the business of the firm amounted to a los of Rs. 16,005. In the return filed the assessee claimed that this loss should be set off against the business income. The assessee after take over of the business had continued purchase of cotton and converting the same into lint. It is an admitted position that the assessee by itself did not have the machineries for the conversion of cotton into lint. This was being sent to others who own factories for this purpose.
4. The assessee-company claimed that since the income is from conversion of cotton into lint, they should be treated as an industrial company. It also claimed the business loss being the share from the firm. The ITO did not admit either of the claims. As far as the claim for industrial company is concerned, he held that this would not amount to any procession done by the assessee. As far as the share of loss is concerned, according to the ITO, it was a capital expenditure since the joining in the firm was expressly with the intention of acquiring the business of the firm. Hence, the loss was connected with the acquisition of the business which is a capital asset.
5. On appeal, the Commissioner (Appeals) held that the ginning of cotton amounted to processing of goods and, therefore, the assessee is entitled to be treated as an industrial company. As far as the loss is concerned, he held that it was a business loss and should be set off against the profits of the business in kapas.
6. The department is in appeal. Mr. Santhanam for the department pointed out that the main premises of the formation of the company was to do business as contractors. He submitted that the funds of the company are mostly deployed in business of contracts. The investments in respect of cotton ginning is only ancillary. Therefore, it could not be considered as an industrial company. Although we agree the main deployment of the funds are not on the processing of lint, nevertheless we have to consider the claim of the assessee under the Explanation to section 2(8) (c) of the Finance Act. As per this Explanation, if more than half of the income is from an activity of processing, then, the assessee would be considered as an industrial company. In the case before us, the income from such processing accounts for more than Rs. 4 lakhs and, therefore, the assessee will come under the Explanation aforesaid. Thereupon, Shri Santhanam submitted that the assessee is merely getting the cotton processed into lint in the factory of others.
As per the decision of the Madras High Court in the case of Addl. CIT v. Chilies Export House Ltd.  115 ITR 73 an assessee who does not itself engage in processing of goods could not be considered as an industrial company. Shri Rajagopala Rao, on the other hand, submitted that there are a number of decisions which have held that even if the processing is done in other factories, it would be sufficient for the purpose of determining whether the company is an industrial company or not. He particularly referred to the decision of the Gujarat High Court in the case of CIT v. Lakhtar Cotton Press Co. (P.) Ltd.  142 ITR 503 and the decision of the Andhra Pradesh High Court in the case of Nava Bharat Enterprises (P.) Ltd. v. CIT  143 ITR 804. He also referred to the decision of the Calcutta High Court in the case of Addl. CIT v. A. Mukherjee & Co. (P.) Ltd.  113 ITR 718.
7. We have considered the submissions. The decision relied on by Shri Santhanam is not relevant for the issue before us. In that case, the issue before the High Court was whether the clipping and stemming and fumigation of chillies would itself amount to processing. The High Court held it will not. As far as conversion of cotton into lint is concerned, there is definitely processing and that has been held so by the Gujarat High Courts decision relied on by the assessees counsel.
What we have to see is whether the fact that the assessee gets it done through others would disentitle them from making the claim. The Calcutta High Courts decision relied on by the assessee was a case where the assessee was getting his printing and blinding of books done by others. In that case, the assessee was a publisher of books. The assessees job was to get the manuscript for publication, hit upon a suitable fromat for the book, get it printed as per its requirements under its supervision, get the book bound after suitable changes and then put out the publication for sale. In all these activities, the assessee had to play an active role of coordinating the activities in a business-like-manner. The Calcutta High Court found all these activities dovetailed into one another and the stage from the acquisition of the manuscript right to the publication was one integrated activity which amounted to manufacturing or processing. So, the assessee not owning a printing press itself was not found to be against a finding in favour of the assessee. It will be noticed that the decision rested on the facts that right from getting the manuscript to the binding and publication of the book was one integrated activity and only a part of it was done by outsiders. Under these circumstances, only it could be considered as an industrial company. In the case of the assessee, apart from buying of the cotton and sending it to the other factories for converting it into lint, the assessee has nothing else to do. We had asked Shri Rajagopala Rao whether there was any evidence to show whether the conversion of cotton into lint was under the assessees control and supervision. No evidence was available with him to prove the same since, according to him, none of the authorities had asked for such an evidence. Under these circumstances, the Calcutta High Court decision can be distinguished.
8. The Bombay High Court had occasion to consider a similar issue in the case of CIT v. Neo Pharma (P.) Ltd.  137 ITR 879. In that case, the assessee-company had a licence for manufacturing pharmaceuticals. They, however, did not own any machineries which would enable them to do the manufacturing. They entered into an agreement with another company to make available to the assessee plant, machinery and services of staff to carry on the manufacturing. The products manufactured in the other company were under the direct supervision of the assessees own technically qualified staff and under the assessees own quality control. Raw materials and packing was also done by the assessee. It was under these circumstances that the Bombay High Court held that the assessee would be considered as an industrial company although they themselves did not won the machineries. It will be seen that in this case again emphasis is laid on the supervision and control of the manufacturing process by the assessee themselves although the actual the others. The Delhi High Court had also considered a similar issue in the case of Orient Longman Ltd. v. CIT  130 ITR 477. The assessee, therein carried on business of publication, purchase and sale of books and claimed that they were industrial company. The Delhi High Court found that the facts of this case were identical with the facts of the Calcutta case - A. Mukherjee & Co. (P.) Ltd. (supra). Thus, they pointed out that although the printing was done by some one else, it was under control by the assessee.
9. From an analysis of the authorities above, we find that it is essential that the assessee must be continuously associated with the processing of the goods even though such processing might be done in the factory of others. No evidence had been led on this point before the ITO or the Commissioner (Appeals). Therefore, we find it difficult to hold that the assessee is an industrial company. Since no enquiry had been made to find out whether the conversion into lint undertaken in the factory of others was under the control and supervision of the assessee and their staff, we think it is necessary that this matter should be further investigated. For the purpose, we will set aside the findings of the Commissioner on this point. The ITO is directed to make enquiries on the lines suggested above and decide the point according to law.
10. We now consider the question of the loss allocated to the assessee from the firm in which the assessee was a partner. The ITOs case is that since the assessee became a partner with the sole intention of taking over the business of the firm, any expenditure incurred in connection therewith will be only a capital expenditure. It is true that the partnership deed itself mentions the intention of the company in becoming a partner. But that would not be sufficient for holding that the share of loss allocated to the assessee would amount to a capital expenditure. In taxation laws, there is a distinction between motive and purpose. The Bombay High Court has laid down as early as 1956 in the case of Bai Bhuriben Lallubhai v. CIT  29 ITR 543 that there is a difference between the motive for incurring an expenditure and the purpose of the expenditure. The motive with which the assessee may have incurred an expenditure would be irrelevant and what was relevant is only the purpose. We may mention that this distinction has been approved by the Supreme Court in the case of Madhav Prasad Jatia v. CIT  118 ITR 200. Now, the motive of the company in becoming a partner is certainly to take over a running business of the firm. But that motive is not very relevant. The purpose of becomming a partner is the immediate objective as against the remote objective is to become a partner and earn the profit or loss in conducting the business for the year. For the accounting year concerned, the assessees share was a loss. This loss has to be clearly allowable since it is a loss incurred by the assessee as a partner in a firm doing business. We will, therefore, uphold the order of the Commissioner (Appeals) on this point.