income-tax Officer Vs. Kalima Plastics (P.) Ltd. - Court Judgment

Excerpt:
1. this departmental appeal is directed against the order dated 24-2-1987 of the commissioner of income-tax (appeals), for the assessment year 1982-83.2. the relevant facts, briefly stated, are that the assessee-company derived income from the business of pvc shoes, chappals etc. in the assessment year under consideration it also had rental income as well as the income from interest. the assessment for the assessment year under consideration was framed by the ito on 31-1-1985 under section 143(3) and a demand of rs. 52,557 was created. tax was levied at 65%.the assessee moved an application dated 22-2-1985 under section 154 wherein it was, inter alia, contended that the assessee was an industrial company and its income was less than rs. 2 lakhs. as such, tax has to be calculated at 55%.....

Judgment:
1. This departmental appeal is directed against the order dated 24-2-1987 of the Commissioner of Income-tax (Appeals), for the assessment year 1982-83.

2. The relevant facts, briefly stated, are that the assessee-company derived income from the business of PVC shoes, chappals etc. In the assessment year under consideration it also had rental income as well as the income from interest. The assessment for the assessment year under consideration was framed by the ITO on 31-1-1985 Under Section 143(3) and a demand of Rs. 52,557 was created. Tax was levied at 65%.

The assessee moved an application dated 22-2-1985 Under Section 154 wherein it was, inter alia, contended that the assessee was an industrial company and its income was less than Rs. 2 lakhs. As such, tax has to be calculated at 55% as against @ 65% applied in its case.

This application was disposed of by the ITO vide his order dated 12-9-1985 passed Under Section 154. The ITO held that the assessee's main source of income was from non-manufacturing and that the Board's instructions on the point were not applicable in this case. The application made by the assessee Under Section 154 accordingly was rejected.

3. The assessee appealed to the CIT(A) before whom it was submitted that the assessee was mainly engaged in manufacturing activities and that income from interest and property shown in the return was only ancillary income. It was further pointed out that identical mistake had been committed in the earlier years and the same had been rectified by the ITO Under Section 154 and so there was no justification for rejecting the application Under Section 154 for the year under consideration. Reliance was also placed on the Board's Circular No. 103 dated 17-2-1973.

4. The CIT(A) held that the assessee-company is an industrial company engaged in the manufacture and sale of PVC shoes, chappals etc. since long and has also been showing besides income from jnanufacturing business, interest and rental income. The CIT(A) also considered the details of sales, gross profit, interest and rent received during the year under consideration as well as the preceding three assessment years. These details extracted from the CIT(A)'s order are as follows :Sales 52,58,844 81,31,900 34,71,577 29,80,089Gross profiton sales 2,76,437 3,43,093 2,26,250 2,15,855Intt. Rece-Ived 1,07,888 1,10,947 1,45,810 1,53,994Rent rece- The CIT(A) further pointed out that in the preceding three assessment years also, tax was first calculated at 65% but was reduced to 55% on the basis of the assessee's application Under Section 154. On the basis of its finding that the assessee was an industrial company mainly engaged in the manufacture of PVC shoes, chappals etc., the CIT(A) held that the ITO was not justified in rejecting the assessee's application Under Section 154. The ITO was accordingly direct to calculate and charge interest at 55%. Aggrieved, the revenue has come up in appeal before the Tribunal.

5. The learned Departmental Representative submitted before us that details of sales, gross profit, interest and rent received by the assessee in various years including the assessment year under consideration clearly showed that in the preceding three assessment years income of the assessee from manufacturing activity was more than 51% of its total income and, therefore, for those assessment years the assessee was held to be an industrial company and the concessional rate of 55% was applied. It was further contended that for the asst. year 1982-83, the income from the manufacturing activity was less than 51% of the total income and, therefore, in view of the Explanation to Section 2(7) of the Finance Act, 1982, the assessee-company cannot be held to be an industrial company and, therefore, in this case concessional rate of tax at 55% was not applicable.

6. The learned counsel for the assessee, on the other hand, supported the impugned order of the CIT(A) on the point. Reliance has also been placed on the Board's Circular No. 103 dated 17-2-1973, the relevant portion whereof is also reproduced in Taxman's Direct Taxes Circulars (1988) Edition Volume II at pages 1804 and 1805. A copy of the said Circular is also included in the paper book filed by the assessee.

7. We have considered the submissions made on behalf of the parties and have gone through the record of the case. Clause (c) of Section 2(7) of the Finance Act, 1982 defines "industrial company as a company which is mainly engaged in the business of generation of distribution of electricity or any other form or power or in the construction of ships or in the manufacture or processing of goods or any mining".

Explanation to Clause(c) of Section 2(7) is as follows : Explanation - For the purposes of the 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 six ships or building manufacture or processing of goods or in mining, if the income attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making any deduction under Chapter XVI-A of the Income-tax Act) is not less than 51% of such total income.

8. According to the Board's Circular No. 103 dated 17-2-1973 an industrial company would mean - (a) 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 of processing of goods or in mining, even if its income from such activity is less than 51% of its total income; and (b) A company which, even though mainly not so engaged, derives income in any year 51% or more of its total income from such activities.

The Explanation to Clause(c) of Section 2(7) of the Finance Act, 1982 contains a deeming provision as a result of which a company which, in fact, is not 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 the mining shall be deemed to be engaged in such activities if the income attributable to any one or more of such activities included in its total income is not less than 51% of such total income. It is precisely for this reason that the Board has clarified in its Circular No. 103 that a company which is mainly engaged in one or more of the activities enumerated in the Explanation would be an industrial company even if its income from such activities is less than 51 % of its total income. Here, it may be pointed out that definition of an industrial company in Sub-section 7(d) of Section 2 of the Finance Act, 1966 and the Explanation thereto are in pan materia with Clause (c) of Section 2(7) of the Finance Act, 1982 and the Explanation to Clause(c). The Board's circular further makes it clear that a company which is even though not mainly so engaged in the one of the aforesaid activities, derives in any year 51 % or more of its total income from such activities, would be an industrial company. It is, therefore, not correct to say that it is only when income derived by a company from one or more activities enumerated in Clause(c) of Section 2(7) of the Finance Act, 1982 is not less than 51% of its total income that it can be treated as an industrial company for the purpose of applying the concessional rate of tax at 55%. Explanation to Clause(c) applies only to cases where a company, in fact, is not mainly engaged in one of the activities enumerated in Clause(c) but by legal fiction it is deemed to be mainly engaged in one or more such activities provided its income from such activities is not less than 51% of such total income. If an industrial company is mainly engaged in one or more of the activities enumerated in Clause(c) it would be an industrial company within the meaning of Clause(c) of Section 2(7) and in such a case the Explanation is not at all called into play. The Board's Circular No. 103 makes the position quite clear.

9. In the instant case, from the details of sales, gross profits on sales, interest and rent received by the assessee-company it is clear that it is mainly engaged in the manufacturing activities. It is not by virtue of the legal fiction available under the Explanation that it is to be treated as an industrial company. Since the assessee is an industrial company within the meaning of Clause(c) of Section 2(7) of the Finance Act, 1982 concessional rate of tax at 55% would be applicable for the assessment year under consideration. In this view of the matter, we uphold the order of the CIT(A) on the point