Bezbaruah Tea Co. (P.) Ltd. vs Commissioner of Income Tax

D.N. Baruah, J.—In this reference u/s 256(1) of the income tax Act, 1961 (''the Act''), the following question has been referred by the Tribunal, Gauhati Bench, for opinion of this Court: Whether, on the facts and in the circumstances of the case and on proper interpretation of law and rules thereof, the Hon''ble Tribunal is correct in holding that the assessee-company will not be entitled to the benefit of lower rate as an industrial company, as because under rule 8 of the income tax Rules, 1962, 40 per cent of the combined income (both agricultural and non-agricultural) is liable to tax under the income tax Act, 1961?

The assessee is a company incorporated under the Companies Act, 1956 and owns a tea estate and carries on business of tea plantation and sale of tea. The company is an assessee under the income tax Act. For the assessment year 1982-83, the ITO observed that the company was assessed on a non-industrial rate. The composite income from agriculture and non-agriculture was computed to the extent of Rs. 1,78,883 and 40 per cent of the sale amount came to Rs. 71,553. Besides, another sum of Rs. 50 was also added and, therefore, the total amount assessed was at Rs. 72,600. For the assessment year 1983-84, the ITO completed the assessment in the same manner and the composite income from agriculture and non-agriculture was taken at Rs. 3,76,169 and 40 per cent of the total income came to Rs. 1,50,467. No special deduction was given as entitled to the industrial undertakings. The assessee, therefore, took up the matter before the Commissioner (Appeals) challenging, inter alia, the assessment of the ITO after treating the assessee-company as non-industrial one and, thus, no rebate for industrial undertaking was given. The assessee-company has a tea estate but it is a fact that it has no tea manufacturing factory of its own. The tea leaves produced in the garden belonged to the assessee-company. The manufactured tea leaves are sold by the assessee-company after the green leaves are manufactured by a sister concern in a nearby factory on behalf of the assessee. The Commissioner (Appeals) allowed the appeal of the assessee-company and granted the rebate by way of lower rate. Thereafter, the revenue took up the matter before the Tribunal. The Tribunal after hearing the parties by its order set aside the order of the Commissioner (Appeals) and restored the order passed by the ITO. While doing so, the Tribunal held that the activities of the assessee-company right from plantation of tea till the sale of the manufactured tea constituted a composite activity of the assessee. The Tribunal further held that the assessee-company would be entitled to the benefits of lower rate as an industrial company only when the income from industrial company constituted 51 per cent or more of the entire activity including the stage of growing of tea bushes till the sale of the manufactured tea and not restricted only to 40 per cent of the entire income of the assessee. While coming to that finding the Tribunal held that the entire activities right from the cultivation of tea to sale of manufactured tea constituted an integrated activity. At the request of the assessee, the above question has been referred. 2. Heard Mr. B.N. Sarma Borthakule and also Dr. Saraf, the learned counsel for the assessee. The learned counsel submitted that the Tribunal was not justified in holding that the activities of the assessee-company right from the stage of growing tea leaves, namely, cultivation of tea and the manufacture of tea and sale thereof, constituted a composite activity and the income therefrom would be deemed and computed as if it were the income from business. It was also wrong on the part of the Tribunal to hold that 51 per cent of the entire activities should be taken into consideration by determining as an industrial company. The learned counsel for the assessee-company has drawn our attention to section 2(7)(c) of Chapter II of the Finance Act, 1982 where the industrial company has been defined 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.

From a reading of the section it appears that an industrial 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 ships or in the manufacture or processing of goods or in mining.

In the present case the learned counsel for the assessee-company submits that herein the assessee-company comes within the meaning of manufacturer of goods because tea is grown and manufactured. The expression ''mainly'' has been explained in the Explanation in section 2(7)(c). As per provisions of the law contemplated under the said Explanation, a company (industrial 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 ships or in the manufacture or processing of goods or in mining, if the income attributable to any one or more of the aforesaid activities includes in its total income of its previous year as computed before making any deduction under Chapter VIA of the income tax Act is not less than 51 per cent of such total income. The learned counsel for the assessee submits that while taking into consideration of total income, it should be determined on the basis of the definition of section 2(45) and section 5 of the 1961 Act and if total income is determined on that basis, the total agricultural income shall have to be excluded by virtue of the provisions of law contemplated u/s 10 of the Act.

Mr. Joshi, the learned standing counsel appearing on behalf of the revenue on the other hand disputes the contention of the learned counsel for the petitioner-assessee. According to Mr. Joshi, the Tribunal was absolutely justified in coming to its finding inasmuch as the total income will be the composite income of an industrial company and unless 51 per cent or more income is derived by the industrial company, the assessee-company cannot be considered as an industrial company.

On the rival contention of the parties, it is to be seen whether applicant-assessee-company is an industrial undertaking having 51 per cent or more earning from manufacturing of tea. In order to appreciate the submission of the learned counsel for the parties, it is expedient to look to some of provisions of the Act. As per section 2(45), ''total income'' means the total amount of income referred to in section 5, computed in the manner laid down in this Act; as per section 5, the total income of any previous year of a person includes all income from whatever source derived. From reading of section 5 it will appear that whatever is received by a person unless other than those which are excluded from the total income can be regarded as total income for the purpose of section 7 of the Finance Act. Section 10 in Chapter-Hi of the income tax Act, gives a list of income which cannot be included in the total income. As per section 10 in computing the total income of a previous year of any person, any income falling within the clauses mentioned therein shall not be included in the total income; the first clause/item is ''agricultural income'' and, therefore, the ''agricultural income'' shall have to be excluded. In our opinion the Tribunal was not correct in holding that 51 per cent of the total composite income of a particular tea company should be taken within the scope of section 2(7)(c) to enable the assessee-company to receive the lower rate. At this stage, Mr. Joshi, has drawn our attention that assessee-company does not possess a tea manufacturing factory and, therefore, the assessee- company cannot be said to be a manufacturer of tea. From the statement of facts we also find that the assessee-company does not possess a tea manufacturing factory of its own. The statements further indicate that the tea is manufactured in a sister concern on behalf of the assessee- company. If that be so the assessee-company cannot be said to be a manufacturer because it is the sister concern who actually manufacture of tea. Dr. Saraf on the other hand, submits that though a sister concern which undertakes the manufacturing process of green tea leaves, it is done for and on behalf of the assessee-company, therefore, for all practical purposes it is the assessee-company which undertakes the manufacture of tea. In this connection. Dr. Saraf has drawn our attention to a decision of the Supreme Court in CST v. Dr. Sukh Deo [1969] 23 STC 385. In the said decision, the Apex Court held thus:

The expression ''manufacture'' has in ordinary acceptation a wide connotation; it means making of articles, or material commercially different from the basic components, by physical labour or mechanical process; and a manufacturer is a person by whom or under whose direction and control the articles or materials are made.

Dr. Saraf has also drawn our attention to a decision of this Court in Kumar Iron & Steel (P.) Ltd. v. Commissioner of Taxes [1994] 95 STC 298. This court also held thus:

...The admitted position is that the petitioner did not manufacture himself those excess M.S. rounds. At the time of conversion of billets into M.S. rounds the petitioner manufactured the same only on behalf of the respective owner. No doubt, the left out M.S. rounds are taxable goods. But while assessing tax under the Act, the sale proceed thereof cannot be included in his turnover inasmuch as the sale proceeds cannot be said to be sale price as defined inasmuch as the petitioner did not undertake any manufacture work or process the said M.S. rounds....

Similarly, the Calcutta High Court in a case in Addl. Commissioner of Income Tax Vs. A. Mukherjee and Co. (P.) Ltd., had the occasion to decide the same point. The Calcutta High Court held thus:

In order that a publisher of books should be a manufacturer of books it is wholly unnecessary for him either to be an owner of a printing press or to be a book-binder himself. A paper is not a book, though it is printed on papers. A publisher may get the books printed from any printer but the printer is not the manufacturer but a mere contractor. The finding of the Tribunal in our opinion conclusively show that the assessee was carrying on the activities of manufacturing and also processing of goods which are also goods.

The said principle was reiterated by the Calcutta High Court in another decision in Griffon Laboratories (P.) Ltd. Vs. Commissioner of Income Tax, : A manufacturer may hire a plant or machinery and employ hired labour and manufacture the goods. But to earn the benefit of the concessional rate of tax a company must mainly engage itself in the manufacture or processing of goods specified in the aforesaid provisions either personally or by someone under its supervisory control or direction.

From the statements of case it is abundantly clear that though the assessee did not have a tea manufacturing factory of its own, tea was used to be manufactured in a sister concern under its supervision and after the tea is made, the assessee-company used to get back the tea for further sale. Therefore, we do not have any hesitation to come to a conclusion that the assessee-company mainly engaged in the manufacture and processing of goods, namely, tea having income attributable to the said activities included in its total income of the relevant previous year which is not less than 51 per cent of such total income. Therefore, in our considered view, the company is entitled to lower rate. Accordingly, we answer the question in negative and in favour of the assessee, against the revenue. In the facts and circumstances of the case, there will be no direction as to costs.