1. The only issue arising out of this appeal relates to the deduction under sections 80-I and 80HH of the Act.
2. The brief facts of the case are these : The assessee-company is carrying on the business of designing, manufacturing and fabricating of effluent and water treatment plants and erecting the same at the site of the customers. The nature of the activity carried on by the assessee has been mentioned in the letter of the assessee-company dated 30-8-1991 addressed to the Asstt. C.I.T. Circle 1(1), Pune. The relevant portion of the same is being reproduced as under : "The assessee-company is engaged in the business of designing and manufacturing of effluent and water treatment plants. The manufacturing activity is carried out by procuring various components such as valves, pumps, motors, instruments, cables, etc., from established manufacturers and getting tanks, vessels, piping, etc., fabricated and rubber lined as per technical specifications/designs/drawings provided by the company, from our sub-contractors. The entire fabrication work is carried out under the constant supervision of the company's engineers. On completion of fabrication work, the equipment/components/materials are taken to customers' site for erection of plant which is also completed by company's engineers and employees. Therefore, the end product of materials subjected to manufacture is completely changed and modified by producing an article such as plant." 3. The assessee had made a claim for deduction under section 80-I before the Assessing Officer which has been rejected by him. The reason given by the Assessing Officer is that receipts by way of technical and consultancy services by the assessee exceeded the gross total income shown by the assessee. According to the Assessing Officer, the receipts by way of technical and consultancy services could not be treated as income derived from an industrial undertaking and, therefore, the same could not qualify for the deduction. He noted that the receipts by way of technical and consultancy charges amounted to Rs. 8,09,467 while the income as per P & L a/c was Rs. 5,12,598. The total assessed income is Rs. 5,41,439.
4. On appeal, the CIT(A) has confirmed the order of the Assessing Officer though on a different ground. The reasons given by the CIT (A) is that plant erected by the assessee at the site of the customers could not be said to be an article or thing in view of the decision of the Apex Court in the case of CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412/70 Taxman 312, inasmuch as the plant was embedded to the earth.
According to him, the manufacture and setting up of a plant on turnkey basis is like execution of a project and, therefore, could not amount to manufacture or production of an article or thing. Still aggrieved, the assessee has preferred this appeal before the Tribunal.
5. Both the parties have been heard. It is the contention of the learned counsel for the assessee Mr. Vora that the assessee has fulfilled all the conditions as prescribed in section 80-I. According to him, there is no dispute that the assessee is running an industrial undertaking. He also vehemently argued that the plant manufactured by the assessee according to the specification and design provided by the customers is an article or thing and the same does not cease to be an article or thing merely because it is erected at the site of the customers. According to him, it is a movable property and can be shifted to other site by unscrewing the plant. It is not permanently embedded to the earth just like buildings, walls, bridges, dams, etc.
It was also pointed out to him that no civil work was undertaken by the assessee in the year under consideration. In addition to this, it was submitted by him that even the activity of designing and making drawings according to the specification is a part of an activity of manufacturing and, therefore, the receipts on this account constitute the receipts from manufacturing business. In this connection, he relied on the decision of the Hon'ble Bombay High Court in the case of CIT v.Penwalt India Ltd. [1992] 196 ITR 813. He also drew our attention to the news report reported in [1984] 147 ITR (St.) 3 and 4 in the case of CIT v. Ion Exchange (I) Ltd. to show that the S.L.P. filed by the department against the judgment of the Bombay High Court declining to call for a reference on the question whether the assessee a manufacturer of water treatment plants was a manufacturer of chemicals machinery and therefore, entitled to concession under section 80-I of the Act, was dismissed by the Hon'ble Supreme Court. He also referred to the various details and statement of expenditure and accounts as well as the photographs of the plant manufactured by the assessee in support of his contention. He also referred to the decision of the Tribunal, Ahmedabad Bench in the case of Enviro Central Associates v.Asstt. CIT [IT Appeal No. 1650 (Ahd.) of 1990], a copy of which is enclosed in the paper book in support of the contention that the assessee is running an industrial undertaking. He also referred to the decision of this Tribunal in the case of Electrameric Systems (P.) Ltd. [IT Appeal No 598 (Pune) of 1990, dated 10-1-1995] wherein it has been held that income arising out of erection work has to be treated as income arising out of the business of industrial undertaking and, therefore, entitled to the relief under section 80-I.6. On the other hand, the learned departmental representative has heavily relied upon the decision of the CIT(A). According to him, the so-called plant fabricated and manufactured by the assessee is attached to the earth and, therefore, the same cannot be called as a movable article or thing as laid down by the Hon'ble Supreme Court in the case of N.C. Budharaja & Co. (supra). He submitted that it was not the sale of chattle as a chattel, but was the sale of entire project. He also drew our attention to various photographs of huge tanks which are constructed for this purpose. He also drew our attention to page 19 of the paper book to point out that the assessee has only shown manufacturing expenses to the extent of Rs. 19,58,075 which included labour charges, site erection expenses and other expenses and octroi duty. He submitted that the assessee has not shown the other expenses like power, fuel, excise duty and remuneration to the employees. This was pointed out to us that the assessee was not even manufacturing any article. In addition to this, he relied on the reasoning given by the Assessing Officer.
7. In reply, the learned counsel for the assessee submitted that most of the work is done through the sub-contractors under the supervision of the assessee. It was also submitted by him that rest of the work is done by the assessee at the premises of the customers itself and the power is supplied by the customers for erecting and fabrication of the plant. Therefore, the expenditure on account of power is not shown in the P & L a/c. He also drew our attention to page 18 of the paper book to show that the assessee has incurred various other expenses. For example, the assessee has shown the employees' remuneration at Rs. 13,04,513 administrative and general expenses at Rs. 32,76,205, interest at Rs. 4,62,941 in addition to the manufacturing expenses as pointed out by the learned departmental representative. He also pointed out that the assessee has also purchased various components from the market amounting to Rs. 1,02,37,838 which are used in fabricating and manufacturing of the plant. It was also submitted by him that the assessee was employing 70 employees under whose supervision, the work was being done at the premises of the said contractors. In view of these facts, he submitted that the assessee was manufacturing the plant which was movable article and, therefore, the assessee was entitled to the claim under Section 80-I of the Act.
8. After considering the rival submissions of the parties we are of the view that the assessee must succeed on this issue. There is no dispute by the lower authorities that the assessee is carrying on an industrial undertaking. Both the parties have accepted this proposition. The reasons given by them are entirely different. It is also not in dispute that the assessee is manufacturing various components though through sub-contractors which are used in the manufacture of the plant. It is also not in dispute that the fabrication work is done at the customers' site for the purpose of erecting the plant. Therefore, the only question before us is whether the so-called plant erected at the site of the customers by the assessee can be said to be an article or thing.
After the decision of the Hon'ble Supreme Court in the case of N.C.Budharaja & Co. (supra), there cannot be now a dispute to the legal position that the assessee must be engaged in the manufacturing of an article or thing. The only reasoning given by the CIT(A) for holding against the assessee is that the plant as such is embedded to the earth and, therefore, ceases to be an article or thing.
9. After giving our due consideration, we are unable to accept the reasoning giving by the CIT(A). This reasoning of the CIT(A) is not supported either by any case law or by any provisions of the Act.
Therefore, we have to understand the meaning of the article or thing in the general sense. The Hon'ble Supreme Court has held that an article or thing must be understood to be movable one. The word 'movable property' has not been defined under the Income-tax Act. The sale of movable articles is governed by the Sale of Goods Act, 1930. This Act also does not define the movable property. This Act only defines the word 'goods' which means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.
Even the Transfer of Property Act does not define the word 'movable property'. What has been defined is the word 'immovable property'.
According to section 3 of this Act 'immovable property' does not include standing timber, growing crops, or grass. The words 'attached to the earth' have been defined as under : (c) attached to what is so embedded for the permanent beneficial enjoyment of that to which it is attached.
The definition of 'movable property' however, finds place in the General Clauses Act. The definition clause 34 in section 3 provides as under : "movable property shall mean property of every description excluding immovable property." "immovable property shall include land, benefits arising out of the land and things attached to the earth or permanently fastened to anything attached to the earth." Similarly, Indian Penal Code defines 'movable property' as including corporial property of every description except land and things attached to the earth or permanently fastened to anything which is attached to the earth.
9.1. The only inference that can be inferred from the various definitions given in various enactments discussed above is that an article can be said to be an movable item only if it is capable of being moved from one place to another. The reasoning given by the CIT(A) is that where the plant is erected, it is embedded to the earth and, therefore, cannot be said to be a movable property. In our opinion, it cannot be said that the plant is embedded to the earth when it is erected at the site of the customers. The "embedded in the earth" have been meant as in the case of walls or buildings as per section 3 of the Transfer of Property Act. If this criteria is to be adopted then erection of plant cannot be equated with the wall or building. Merely the plant is attached to earth by fixing the same on the foundation by nut and bolts, it cannot be said that it is embedded in the earth or it is attached to the earth. It cannot be disputed that such plants can be shifted from one place to another by unscrewing the same. This submission of the assessee has not been disputed by the learned departmental representative. Therefore, we are of the considered view that the assessee is engaged in the business of manufacturing and fabricating of plant which is an article or thing as mentioned in section 80-I.10. In the course of hearing, the learned departmental representative had made a reference to various details to show that the assessee is not a manufacturer since relevant expenditures like employees' remuneration, power and fuel expenses, etc., have not been shown by the assessee. According to us, this reference is out of the context since none of the lower authorities have disputed the activity of the assessee being a manufacturing activity. However, even on merits, we are unable to accept this contention, inasmuch as the assessee has duly shown the remuneration to the employees amounting to Rs. 13,04,413 and the administrative and general expenses amounting to Rs. 32,76,205 as is apparent from the P & L a/c appearing at page 18. It is also pertinent to note that in such cases, the power is supplied by the customers where the fabrication and erection work is done at the site of the customers. It is also a fact that most of the work is done by the sub-contractors under the supervision of the employees of the assessee. Therefore, the question of showing power expenses does not arise. In this connection, reference may be made to the judgment of the Hon'ble High Court in the case of CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 879 (Bom.) wherein it has been held that where the manufacturing activity has been carried on by another concern under the supervision of qualified staff of the assessee then such activity could be treated as activity of the assessee. In that case, the raw-materials were supplied by the assessee. On the basis of these facts, the assessee was held to be an industrial company. On the basis of the aforesaid decision, we hold that the assessee been carrying on the manufacturing activity.
11. Another contention taken by the learned departmental representative is that the receipts by way of technical services, such as preparation of designs and drawings according to the specification of the customers could not be treated as income derived from the manufacturing activity.
This contention also cannot be accepted in view of the direct decision of the Bombay High Court in the case of Penwalt India Ltd. (supra). In that case also, the assessee had claimed deduction under section 80-I.The activity of preparing of designs and drawings on the basis of orders for the purpose of manufacturing the machinery was held to be a manufacturing activity by the Bombay High Court. Therefore, the reasoning given by the Assessing Officer relied upon by the learned departmental representative cannot be accepted.
12. In view of the above discussion, we hold that the assessee is entitled to deduction under section 80-I of the Act. The order of the CIT(A) is set aside on this issue.
13. The other ground taken by the assessee relates to the claim under section 80HH of the Act. In view of the discussions mentioned in the preceding paras, the basis of rejection by the CIT(A) does not survive.
However, the claim cannot be allowed unless it is established by the assessee that an industrial undertaking was established in the backward area. There is no material on record to suggest that the assessee's establishment exists in the backward area. From the facts available on record, it appears that most of the work has been done by the sub-contractors in Pune itself which is not the backward area. It was submitted by the learned counsel for the assessee that various sites where the erection was done falls within the backward area. We find that the assessee has not maintained separate account with reference to the manufacturing work at the site of the customers and therefore, it is also not possible to hold that how much profit was earned by the assessee. The main establishment of the assessee is in Pune which is not backward area. Merely, some work is done at the site of the customers, it cannot be said that industrial undertaking of the assessee is established in backward area. Therefore, we reject this contention of the assessee. The order of the CIT(A) is upheld on this issue.