Marine Engg. Services (P.) Ltd. Vs. Income-tax Officer - Court Judgment

Excerpt:
1. these appeals raise the question whether the assessee could be considered as an industrial company for the purposes of sections 32a, 80j and for concessional rate of tax and may be disposed of by a common order.2. the assessee is a private limited company engaged in the business of repairing ocean going vessels. in computing the income of the previous year ended 30th september, 1980, corresponding to the assessment year 1981-82, the income-tax officer granted duductions under section 80j as well as investment allowance under section 32a subject to creation of reserve.3. for the assessment year 1982-83, the income-tax officer rejected the claim for investment allowance but treated the assessee as an industrial company under the finance act for the purpose of levying tax at a.....

Judgment:
1. These appeals raise the question whether the assessee could be considered as an industrial company for the purposes of Sections 32A, 80J and for concessional rate of tax and may be disposed of by a common order.

2. The assessee is a private limited company engaged in the business of repairing ocean going vessels. In computing the income of the previous year ended 30th September, 1980, corresponding to the assessment year 1981-82, the Income-tax Officer granted duductions under Section 80J as well as investment allowance under Section 32A subject to creation of reserve.

3. For the assessment year 1982-83, the Income-tax Officer rejected the claim for investment allowance but treated the assessee as an industrial company under the Finance Act for the purpose of levying tax at a concessional rate.

4. The Commissioner of Income-tax on a review of the aforesaid assessments held that the assessee was not entitled to investment allowance under Section 32 A and deduction under Section 80J as well as concessional rate of tax for the assessment year 1981-82 and should not be treated as an industrial company for the purpose of concessional rate of tax for the assessment year 1982-83. The assessee's appeal for the assessment year 1982-83 against the rejection of the claim for investment allowance was dismissed. Consequently, the assessee has filed these three appeals claiming that it is entitled to investment allowance under Section 32 A, deduction under Section 80J and concessional rate of tax under the provisions of the Finance Act.

5. We may first consider the claim of the assessee for the deduction Under Section 80J in respect of profits and gains from newly established industrial undertaking. The deduction is in relation to the profits and gains derived by an assessee, being a company from an industrial undertaking which begins to manufacture or produce articles after 31-3-1976. The condition is satisfied where the industrial undertaking manufactures or produces articles and it employs 10 or more workers carried on with the aid of power or employs 20 or more workers carried on without the aid of power. The contention of the assessee is that this condition is satisfied in the assessee's own case because the assessee has a factory registered under the Factories Act manfacturing and fabricating articles required for its business of repairing ships.

The objection of the revenue was that the deduction could be given only in respect of the business of manufacturing articles and since the business of the assessee was not the manufacture of articles but only of repair to ships the assessee was not entitled to the deduction.

However, we find that this objection has no basis because in terms of the provisions of Section 80.1 the main section does not refer to the business of an industrial undertaking but only to the profits and gains derived from an industrial undertaking. Secondly, the condition in Sub-section (4) again refers to manufacturing process carried on with the aid of power and employing ten or more workers. This condition is identical to the condition given in the definition of a factory in Section 2(m) of the Factories Act and admittedly the assessee has satisfied this condition and has obtained the factory licence.

Moreover, the objection that the articles produced were not meant for sale is met by the provisions of Sub-section (6B) which provides that where any goods held for the purposes of the business of the industrial undertaking are transferred to any other business carried on by the assessee, then the profits and gains of the industrial undertaking shall be computed as if the transfer had been made at the market value of such goods with the further proviso that the Income-tax Officer may compute such profits and gains on such reasonable basis as he may deem fit if he finds the computation difficult. These provisions are obviously intended to cover cases of captive industrial undertakings where the articles produced by those industrial undertaking are absorbed in the business of the assessee. We also find that under analogous provisions of Section 80HH the Orissa High Court has held in the case of CIT v. N.C. Budharaja & Co. [1980] 121 ITR 212 that an assessee who manufactures articles in an industrial undertaking for the purpose of its business of construction of dams was entitled to the deduction.

6. In the present case the assessment order for 1981-82 states that the business of the assessee was manufacture and fabrication of components for ship repairs and repair services to ships. It is also stated that it is the 5th year for the deduction under Section 80J which meant that in the initial year itself it has been accepted that a new industrial undertaking had been established under that section were satisfied. It is also not in dispute that the capital employed in the industrial undertaking had been separately computed and the profits and gains of the industrial undertaking could be separately deduced and, in fact, the Income-tax Officer is empowered to compute such profits and gains on a reasonable basis even if the profits are derived from captive industrial undertaking whose products are used in the composite business of the assessee. In the circumstances, we are satisfied that the assessee was rightly granted deduction under Section 80J and we, therefore, cancel the finding in the order made under Section 263 withdrawing the deduction granting under Section 80J.7. Coming to the treatment of the assessee as an industrial undertaking within the meaning of the Finance Act, we find that the definition of an industrial company is as follows:- (c) '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.

The Explanation to this section states that a company shall be deemed to be mainly engaged in the business of manufacture or processing of goods if the income attributable to such activity is not less than 51% of such total income. Since we have seen above that for the purpose of Section 80J it is possible to compute the income of the industrial undertaking there should be no difficulty in finding out whether the income so derived is more than 51 % of the total income of the assessee. However, we find that no such allocation had been made in the assessment order. The Commissioner of Income-tax in his order under Section 263 proceeded mainly on the basis that the business of repairing ships could not be considered as the business of manufacture or processing of the goods. But the Explanation as well as the possibility of bifurcation of the industrial activity from the repair activity was not considered by him. In the circumstances, we modify the order of the Commissioner under Section 263 on this aspect by setting aside the assessment order on this point and remitting the matter to the Income-tax Officer to determine whether in terms of the Explanation the assessee could be said to be mainly engaged in the activity of manufacture or processing of goods so as to be treated as an industrial company for the purpose of concessional rate of tax.

8. We now come to the claim of the assessee under Section 32 A. That section, however, is worded differently. There is no definition of an industrial company in this section. Section 32A merely states that the allowance is available for machinery installed after 31-3-1976 in an industrial undertaking for the purpose of business of manufacture or production of any article or thing.

9. The first contention of the revenue is that the main business of the assessee is that of repairing ships and such a business will not fall within scope of this section which refers only to manufacture or production of articles or things. It may at once be stated that by an amendment introduced by the Finance Act, 1988 machinery installed for the purpose of repairs to ocean going vessels were also made eligible for investment allowance. This clearly indicates that the machinery installed in the business of repairs to ships were not eligible for investment allowance prior to 31-3-1983.

10. The assessee, therefore, made an alternative claim that the industrial undertaking established for the production of articles and things used for the repair business would qualify for the investment allowance. The contention of the revenue is that this section must be confined to a business of manufacturing an article or thing for sale and reliance was placed on the decision of the Tribunal in the case of ITO v. Ahum Shipping &Engg. Co. (P.) Ltd. [1984] 8ITD 435 (Bom.) as well as the decision of the Delhi High Court in the case of CIT v.Minocha Bros. (P.) Ltd. [1986] 160ITR134. On the other hand, the assessee relied on the observation of the Delhi High Court in the same case at page 139 that to give a meaningful purpose to the Act it must be understood that the definition is to operate in respect of companies which are industrial companies in the proper sense, i.e. they must be manufacturing or processing goods. We find that this observation is being read out of the context, for, in that case it was held that an assessee who does building work as a contractor and in the process of that work manufactures doors and windows etc. could not be considered eligible for the investment allowance under Section 32A. A comparison of the wording of this section with those sections 80J and 80HH as well as the definition of 'industrial company' in the Finance Act shows that this Section 32A does not incorporate the defintion of a factory as in 80J or provide for the bifurcation of the industrial undertaking in the case of a captive unit where the business of the assessee is a composite business. It is also significant that this section does not refer to an assessee who is mainly engaged in the manufacture of articles as in the definition of an industrial company in the Finance Act. Therefore, a reading of the provisions of Section 32A confines it to a case of an assessee whose business is manufacture of articles.

11. It was then contended on behalf of the assessee that where the assessee is admittedly engaged in the manufacture of articles it should be possible to bifurcate the manufacturing activity from the other activities so that the investment allowance could be given in respect of machinery employed in such manufacturing activity. It was suggested that a bifurcation could be made with reference to the turnover or the capital employed or such other criteria. We are unable to accept this contention because significantly this section does not provide for such a bifurcation in contrast to the provisions of Section 80J and the definition of the industrial company in the Finance Act. Moreover, the introduction of Clause (c) in Sub-section (2) providing for investment allowance in the business of repairs to ocean going vessels indicates that it was not intended to bifurcate composite business and isolate the manufacturing activity for the purpose of granting the investment allowance.

12. One would have thought that a common definition of an 'industrial company' would have obviated the necessity of applying different yardsticks to decide the application of these three provisions. But contextually these provisions apply to three different situations.

Section 80J provides for a deduction from the profits of an industrial undertaking which may be a unit of the business. The Finance Act provides for a concessional rate of tax on the total income of the assessee if it is mainly engaged in industrial activity. But Section 32A grants an allowance in computing the profits of the business as such. Hence unless the business itself is an industrial undertaking this section will not be attracted.

13. A purposeful construction of this section shows that the investment allowance is only in respect of the business as such and not for any activity carried on in the course of that business as held by the Delhi High Court in the case of Minocha Bros. (P.) Ltd. (supra). In the circumstances, we have to reject the claim of the assessee for investment allowance and uphold the findings of the Commissioner on this aspect 14. In the result, all the appeals are treated as partly allowed for statistical purposes.