Commissioner of Income Tax vs Vaish Brother''s and Co.

At the instance of the Commissioner of Income Tax, Kanpur, the Income Tax Appellate Tribunal, Allahabad, has referred the following question for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal is legally correct in holding that the assessee-company is an ''industrial undertaking'' within the meaning of Section 2 of the Finance Act, 1973 ?"

The aforesaid question is stated to arise out of a consolidated order dated June 26, 1980, passed by the said Tribunal in I. T. A. Nos. 476 to 479 for the assessment years 1973-74 to 1976-77.

We have heard Shri A. N. Mahajan, learned counsel for the Commis sioner-applicant, and Shri Vikram Gulati, learned counsel for the respon dent-asses see.

The assessee-respondent No. 3 is engaged in the business of civil cont ractor constructing" buildings, runways, etc. It claims to be an "industrial company" within the meaning of Section 2(7)(c) of the Finanbe Act, 1973, to be eligible to a lower rate of tax. In the said provision, the industrial company has been defined as under :

"(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.

Explanation.--For the purposes of this 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 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 included in its total income of the previous year (as computed before making any deduction under Chapter VI-A of the Income Tax Act), is not less than fifty-one per cent, of such total income."

This claim was negatived by the Assessing Officer as well as by the Commissioner of Income Tax (Appeals) but was accepted by the Appellate Tribunal. The relevant part of the Appellate Tribunal''s order containing its finding about the nature of the assessee''s activities and the Tribunal''s reasons for holding it to be an industrial company is as under :

"Three things stand out clearly from the case law discussed above. The first is that the activity should be a manufacturing or processing activity as distinguished from a mere trading activity. Secondly, the construction of buildings, etc., whether big or small can be taken to involve processing of goods. Thirdly, even adaptation for a particular use can amount to processing as in the case of preservation of potatoes in cold storage. In the present case having regard to the extent in which industrial undertaking has been defined under the Finance Act, 1973, the building activity which involves not only the mixing of mortar or cement and the placing of one brick over another with the help of such cement or mortar but also involves the work of fabrication with the help of steel and the making of doors, windows, grills, floors for which in turn the processes involved are mixing of various materials, can be said to amount to processing of goods. The wideness of the scope of this expression can be gauged from the case of Commissioner of Income Tax Vs. Commercial Laws of India Pvt. Ltd., where even the folding and stitching of the printed sheets was held to constitute ''processing of goods''. We would, therefore, take the view that the assessee in the present case is entitled to be treated as an industrial undertaking and to be entitled to the benefit of concessional rate of 55 per cent, of tax."

Since the decision of the Tribunal, the legal position has undergone great changes because of subsequent decisions of the Supreme Court and various High Courts. We may first refer to CIT v. N. C. Budharaja and Co. [1993] 204 ITR 41 . In that case, the assessee was claiming benefits u/s 80HH, Section 84(2)(iii) and Section 32A of the Act. The assessee was carrying on business like construction of dani, laying "pressure piling" foundation for buildings and other structures and the question was whether the assessee was engaged in the business of manufacturing or production of an article or articles or things. The Supreme Court held that the aforesaid activities could not be characterised as manufacture or production of an article or articles and that dams, bridges, buildings, roads or canals, etc., could not be treated as articles or things within the meaning of the''aforesaid provisions of the Act, It was also held that the word "construction" did not refer to construction of dams, bridges, etc., and referred to the construction of articles or things. The same view was followed by the Supreme Court in Builders Associations of India Vs. Union of India and others,

Learned counsel for the assessee, however, contended that the assessee does not claim to be manufacturing or producing any article or goods as is evident from the Tribunal''s order. The assessee has restricted its claim to processing of goods as in the construction of the buildings, etc., materials like cement, sand, stone, grits, bricks, steel, timber, etc., are used and processed and, therefore, the activity of the assessee means processing of goods, and, therefore, the assessee though engaged in the business of construction of buildings was actually processing goods, and, therefore, should be treated as an industrial company.

Similar controversy had arisen before the Bombay High Court in Commissioner of Income Tax Bombay City-I Vs. N.U.C. Private Ltd., in which it was held that the assessee who was engaged in the business of construction and repairs of buildings was not an industrial company within the meaning of Section 2(7)(d) of the Finance Act, 1966. It was held that although in the process and for the purpose of construction and repairs it manufactured window and door frames and concrete beams and slabs, yet they were mainly processes of construction and repair of buildings and the assessee was not an industrial company, It was also observed that there was no scope for dividing the business of the company into two parts, for neither the frames nor were the slabs or beams manufactured or prepared independently of the buildings or sold as such in the market. Similar view was taken by the same court in CIT v. Shah Construction Co. Ltd. Learned counsel for the assessee placed reliance on National Projects Construction Corporation Ltd. Vs. Commissioner of Wealth Tax, , in which it was held that the company that was engaged in the construction of dams and barrages and had established workshops at worksites for processing of steel, crushing stone, manufacturing lime and surkhi, etc.; was an industrial company. This case is distinguishable because there the assessee had established a workshop for processing of steel, crushing stone, manufacturing lime and surkhi. The present assessee does not claim to have established any such workshop. He also placed reliance on S.P. Jaiswal Estates Pvt. Ltd. Vs. Commissioner of Income Tax (No. 1), , in which a hotel engaged in the manufacturing of eatable food and drinks was held to be an industrial undertaking within the meaning of the provisions of Section of the Finance Act, 1982. This case is also distinguishable because the present assessee is not claiming to be manufacturing anything, and as. such, the case would fail because of the judgment of the Supreme Court in the two cases referred to above.

Reliance has also been placed on the following cases :

(i) Commissioner of Income Tax Vs. Commercial Laws of India Pvt. Ltd.,

Commissioner of Wealth-tax Vs. Jagphool Narain,

(iv) Nu-look (P.) Ltd. Vs. Commissioner of Income Tax, Delhi,

(v) Commissioner of Income Tax Vs. Acrow India Limited, .

(vi) Commissioner of Income Tax v. Bhageeratha Engineering Ltd, (1993) 199 ITR 12 (SC)

(vii) Commissioner of Income Tax Vs. Hindustan Marbles Ltd.,

(viii) Obeetee (P.) Ltd. Vs. Commissioner of Income Tax,

(ix) Commissioner of Income Tax, Bombay Vs. Oricon P. Ltd.,

We need not discuss all the aforesaid rulings as they are not applicable in the facts and circumstances of the present case. In Commissioner of Income Tax Vs. Hindustan Marbles Ltd., , the company was engaged in the cutting and processing of marble slabs and therefore was held to be an industrial company. In the present case, the assessee claims that while constructing the buildings, roads, etc., the materials that are used are subjected to various processes and, therefore, the activity involves processing of goods. The processes that are actually undertaken are not specified and we are unable to accept that mere preparation of mortar by mixing cement with sand and laying of bricks one after the other or the manufacturing of doors and windows out of timber can be said to be processing of goods, In our view, if the activity is the processing of goods then the goods must substantially retain their original identity. In the case of construction of buildings or road, the materials that are used lose their identity and are actually consumed and there is no authority for the view that even consumption of material can amount to the processing of goods. Once the building is raised there is no cement, no brick, no sand having their separate identity and what comes about is the building which as held by the Supreme Court is not article or things. What amounts to process can be demonstrated by the judgment of this court in Commissioner of Wealth-tax Vs. Jagphool Narain, in which the assessee was engaged in dyeing and printing white cloth and making sarees therefrom. It was held that this would amount to processing of goods. This ruling supports our thinking that in the case of processing, the goods that are subjected to alleged process must substantially retain their identity. In Nu-look (P.) Ltd. Vs. Commissioner of Income Tax, Delhi, , the assessee was engaged in preparation of garments and also did tailoring for customers who brought their own cloth and also in manufacturing of garments to be sold as readymade garments.

The question was whether it was an industrial company. The Delhi High Court held that the assessee was engaged in the manufacturing of goods. We are in agreement with the view that the activity of preparing garments from the cloth is a manufacturing activity and the goods, i.e., garments, stand manufactured after the cloth is cut and stitched.

What is processing of goods came for consideration before the Supreme Court in Delhi Cold Storage Pvt. Ltd. Vs. Commissioner of Income Tax, New Delhi, and in that case vegetables, fruits and several other articles which require preservation by refrigeration were as such stored in a cold storage and the Supreme Court held that this activity did not amount to processing of goods. The Supreme Court referred to its observations in Chowgule and Co. P. Ltd. v. Union of India [1981] 47 STC 124 which are as under (page 131) :

"What is necessary in order to characterise an operation as ''processing'' is that the commodity must, as a result of the operation, experience some change. Here, in the present case, diverse quantities of ore possessing different chemical and physical compositions are blended together to produce ore of the requisite chemical and physical compositions demanded by the foreign purchaser and obviously as a result of this blending, the quantities of ore mixed together in the course of loading through the mechanical ore handling plant experience change in their respective chemical and physical compositions, because what is produced by such blending is ore of a different chemical and physical composition. When the chemical and physical composition of each kind of ore which goes into the blending is changed, there can be no doubt that the operation of blending would amount to ''processing'' of ore within the meaning of section 8(3)(b) and rule 13. It is no doubt true that the blending of ore of diverse physical and chemical compositions is carried out by the simple act of physically mixing different quantities of such ore on the conveyor-belt of the mechanical ore handling plant. But, to our mind it is immaterial as to how the blending is done and what process is utilised for the purpose of blending. What is material to consider is whether the different quantities of ore which are blended together in the course of loading through the mechanical ore handling plant undergo any change in their physical and chemical compositions as a result of blending and so far as this aspect of the question is concerned, it is impossible to argue that they do not suffer any change in their respective chemical and physical compositions."

The Supreme Court also observed that in common parlance, "processing" is understood as an action which brings forth some change or alteration of the goods or material which is subjected to the act of processing. In Commissioner of Wealth-tax Vs. Syed Amjad Ali, , this court was concerned with the meaning of the word "processing" for determining whether the firm was an industrial undertaking u/s 5(1)(xxxii) of the Wealth- tax Act, 1957. In that case the assessee purchased tobacco leaves which were subjected to the operation of crushing and separating stems and dust therefrom. It was held that these operations amounted to processing and the firm was an industrial undertaking. As is evident in this case also tobacco after undergoing the aforesaid process remained tobacco and did not lose its original identity so that the resultant product was not a different commodity. So far as the judgment of the Supreme Court in Commissioner of Income Tax v. Bhageeratha Engineering Ltd, (1993) 199 ITR 12 (SC) is concerned, the same has been considered and explained by the Supreme Court itself in the case of Builders Associations of India Vs. Union of India and others, in which it has re-affirmed its earlier judgment in Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others,

In the result, we hold that the use of building material for raising a building or for construction of roads, etc., does not amount to processing of these materials and the assessee was not an industrial company within the moaning of Section 2(7)(c) of the Finance Act, 1973, and the Tribunal was wrong in holding so. We, therefore, answer the aforesaid question in the negative, i.e., in favour of the Commissioner and against the assessee-respondent.