Commissioner of Income-tax Vs. Dhandia Gems Corporation - Court Judgment

Excerpt:
- - vimal chand daga (huf) [1988] 172 itr 264 referred to above is satisfied. the matter could have been remanded to the income-tax appellate tribunal for deciding the triple test as was done in the case of vimal chand daga (huf) [1988] 172 itr 264 referred to above but since the finding has been given in this case that the manufacturing is got done through skilled labourers who are paid on the basis of work, it establishes that there was no small scale industrialundertaking and the requirements of section 35b(1a) are not satisfied.v.k. singhal, j.1. the income-tax appellate tribunal has referred the following question of law arising out of its order dated january 18, 1993, in respect of the assessment year 1979-80 under section 256(1) of the income-tax act, 1961 :'whether, on the facts and in the circumstances of the case, the tribunal was justified in upholding the findings of the commissioner of income-tax (appeals) that the firm is an industrial undertaking and as such weighted deduction under section 35b(1a) of the income-tax act, 1961, was to be allowed ?'2. the brief facts of the case are that the assessee is carrying on business in rough emeralds by purchasing the same from the local marketand converting the same to tawadda, potta and cut emeralds by processing. the contention of the assessee was that the firm was engaged in manufacturing and, therefore, it constituted an industrial undertaking and it being a small scale exporter was entitled to weighted deduction. the inspecting assistant commissioner came to the conclusion that the assessee is not an industry at all and, therefore, the deductions have wrongly been claimed which were accordingly disallowed.3. in appeal, the commissioner of income-tax (appeals), following the decision of the income-tax appellate tribunal in the case of prem lata navalkha wherein the provisions of section 5(1)(xxxii) of the wealth-tax act, 1957, were considered, came to the conclusion that the assessee is an industrial undertaking and, therefore, entitled to deduction. the appeal before the tribunal was rejected.4. we have considered the matter. the provisions of section 35b(1a) which were enforced during the relevant period were as under :'notwithstanding anything contained in sub-section (1), no deduction under this section shall be allowed in relation to any expenditure, incurred after the 31st day of march, 1978, unless the following conditions are fulfilled, namely :-- (a) the assessee referred to in that sub-section is engaged in- (i) the business of export of goods and is either a small scale exporter or a holder of an export house certificate ; or (ii) the business of provision of technical know-how, or the rendering of services in connection with the provision of technical know-how, to persons outside india ; and (b) the expenditure referred to in that sub-section is incurred by the assessee wholly and exclusively for the purposes of the business referred to in sub-clause (i) or, as the case may be, sub-clause (ii) of clause (a).' 5. the fact that the assessee is engaged in the business of export of goods is not in dispute. the assessee is not a hplder of an export house certificate and it has to be seen as to whether it is a small scale exporter. explanation (a) to section 35b(1a) has defined 'small scale exporter' according to which he is a person who exports goods manufactured or produced in any small scale industrial undertaking owned by him. the tribunal has taken into consideration the fact that, in the process rough emeralds are sorted, converted into ghats and finally shaped, polished and colouring was done through skilled labourers who are paid on the basisof work done. the provisions of section 5(1)(xxxii) of the wealth-tax act are as under :'the value, as determined in the prescribed manner of the interest of'the assessee in the assets (not being any land or building or any rights in any land or building or any asset referred to in any other clause of this sub-section) forming part of an industrial undertaking belonging to a firm or an association of persons of which the assessee is a partner or, as the case may be, a member.'6. this court in cwt v. vimal chand daga (huf) [1988] 172 itr 264 has observed as under (at page 267) :'the meaning of the expression 'industrial undertaking' used in section 5(1)(xxxii) has to be understood as defined in the explanation to section 5(1)(xxxi) of the act. according to this definition, the term 'industrial undertaking' for the purpose of the business activity of the assessee means an undertaking engaged in the business of manufacture or processing of goods, namely, conversion of raw material purchased by the firms into finished product or gem which is the marketable commodity. it is not disputed on behalf of the revenue that this entire process which results in conversion of the raw material into finished product of gem in marketable shape is an activity satisfying the requirement of manufacture or processing of goods. the real question, therefore, is whether the whole or any part of it is done by the assessee's firm so as to attract this statutory provision for its benefit. it is in this light that we have to see whether the requisite findings of fact have been recorded by the tribunal before giving to the assessee the benefit of this provision.'7. the decision of the apex court in bangalore water supply and sewerage board v. a rajappa, air 1978 sc 548, was also taken into consideration and it was found that the entire activity or various steps or stages in the manufacture or process of gems beginning with the point where the same was purchased from the local market and ending with the point where it was made marketable and sold by the assessee-firm has to be seen. the definition of industry as given under section 2(j) of the industrial disputes act is as under :industry.--the definition of 'industry' in this clause is both exhaustive and inclusive and is ambivalently comprehensive in scope. it is in two parts. the first part says that it 'means any business, trade, undertaking, manufacture or calling of employers' and then goes on to say that it 'includes any calling, service, employment, handicraft or industrial occupation or avocation of workmen' (e). thus one part defines it from thestandpoint of the employer ; the other from the standpoint of the employees. the first part of the definition gives the statutory meaning of industry, whereas the second part deliberately refers to several other items of industry and brings them in the definition in an inclusive way (f). the first part of the definition determines an industry by reference to occupation of employers in respect of certain activities. the activities are specified by five words, namely, 'business, trade, undertaking, manufacture or calling'. these words determine what an industry is and what the cognate expression industrial is intended to convey. this is the significance or denotation of the term or what the word denotes(g).8. the tribunal has not recorded any finding to the effect that the industrial undertaking is owned by the assessee. it has referred to the order of the commissioner of income-tax (appeals) wherein he has observed that the assessee was engaged in manufacturing and, therefore, it was a small scale exporter exporting its own manufactured goods. an assessee who has got the goods manufactured from any other industrial undertaking or from any other person may be a manufacturer but the condition which is contemplated in the explanation to section 35b(1a) is that such small scale industrial undertaking must be owned by the exporter. the decision in the case of vimal chand daga (huf) [1988] 172 itr 264 relied on by the commissioner of income-tax (appeals) has already been the subject-matter of reference to this court and it was found that the triple test mentioned therein have to be established even under the language of section 5(1)(xxxii) of the wealth-tax act. under section 5(1)(xxxii), the value of the assets forming part of an industrial undertaking belonging to a firm has to be determined. even if the words 'belonging to a firm' is interpreted equivalent to owned by the firm still the assessee has to establish that the triple test which was laid down in the case of cwt v. vimal chand daga (huf) [1988] 172 itr 264 referred to above is satisfied. looking to the factual position as found by the tribunal, lacking on the point of the triple test, we are of the view that the income-tax appellate tribunal was not justified in upholding the finding of the commissioner of income-tax (appeals) that the firm is an industrial undertaking and as such weighted deduction under section 35b(1a) of the income-tax act, 1961, cannot be allowed. the matter could have been remanded to the income-tax appellate tribunal for deciding the triple test as was done in the case of vimal chand daga (huf) [1988] 172 itr 264 referred to above but since the finding has been given in this case that the manufacturing is got done through skilled labourers who are paid on the basis of work, it establishes that there was no small scale industrialundertaking and the requirements of section 35b(1a) are not satisfied. the burden was on the assessee and there is no document on the basis of which it could be said that the goods which are manufactured or produced were thus goods which were from a small scale industrial undertaking owned by the assessee.9. accordingly, the reference is answered in favour the revenue and against the assessee. no order as to costs.