Commissioner of Income Tax vs Western Mechanical Industries Pvt. Ltd.

Mrs. Sujata v. Manohar J.

Both these references pertain to the same assessee company. The assessee-company carried on the business, inter alia, of manufacture and sale of heavy duty cranes. It claimed relief u/s 80-I of the Income Tax Act, 1961, in respect of profits arising, inter alia, from its manufacturing activity of making heavy duty cranes. For the assessment year 1972-73, which is the subject-matter of Income Tax Reference No. 127 of 1977, the claim of the assessee for relief u/s 80-I was disallowed by the Income Tax Officer. In appeal, however, the Appellate Assistant Commissioner allowed the claim of the assessee. In doing so, he differed from the view taken by the Appellate Assistant Commissioner in the assessee''s case for the preceding assessment year 1971-72. The Tribunal had upheld the claim of the assessee. The Department has, therefore, come by way of a reference before us u/s 256(1) of the Income Tax Act, 1961, in Income Tax Reference No. 127 of 1977.

Income Tax Reference no. 587 of 1976, which pertains to the assessment year 1971-72, the claim of the assessee for the benefit u/s 80-I in relation to the profits earned by it from manufacture and sale of heavy duty cranes has been disallowed by the Income Tax Officer, the Appellate Assistant Commissioner and the Tribunal. Hence, the assessee-company has come before us by way of reference u/s 256(1) of the Income Tax Act, 1961.

The question which remains for consideration in both these references is :

"Whether, on the facts and in the circumstances of the case, the assessee-company''s activity of manufacture of heavy duty cranes is a priority industry within the Sixth Schedule to the Income Tax Act, 1961, entitling it to deduction u/s 80-I of the Income Tax Act, 1961 ?"

This is the question in Income Tax Reference No. 587 of 1976. The same question, though differently worded, is raised in Income Tax Reference No. 127 of 1977.

It is necessary to refer to the relevant provisions of the Income Tax Act, as then in force for the purposes of deciding this question. u/s 80B(7) as then in force, "priority industry" was defined to mean, inter alia, "the business of.... manufacture or production of any one or more of the articles or things specified in the list in the Sixth Schedule....."

The Sixth Schedule to the Income Tax Act, 1961, as then in force had the following entry :

"The Sixth Schedule :

(4) Industrial machinery specified under the heading ''8''. ''Industrial machinery'', sub-heading ''A. Major items of specialised equipment used in specific industries'', of the First Schedule to the Industries (Development and Regulation) Act, 1951 (65 of 1951)."

The First Schedule to the Industries (Development and Regulation) Act, 1951, is as follows :

"Any industry engaged in the manufacture or production of any of the articles mentioned in each of the following headings or sub-headings, namely :-

Industrial machinery :

A. Major items of specialised equipment used in specific industries :

(1) Textile machinery (such as spinning frames, carding machines, power-looms and the like) including textile accessories.

(2) Jute machinery,

(3) Rayon machinery,

(4) Sugar machinery,

(5) Tea machinery,

(6) Mining machinery,

(7) Metallurgical machinery,

(8) Cement machinery,

(9) Chemical machinery,

(10) Pharmaceutical machinery,

(11) Paper machinery.

B. General items of machinery used in several industries, such as the equipment required for various ''unit process'' :......

(2) Conveying equipment-bucket elevators, skip hoists, cranes, derricks and the like...."

u/s 80-I of the Income Tax Act, 1961, as then in force, certain deductions in respect of profits and gains from a priority industry, in the case of certain companies, were granted. The section provided, inter alia, that, in the case of company to which the section applied, where the gross total income included any profits and gains attributable to a priority industry, there should be allowed a certain deduction from such profits and gains of business as specified in that section, in computing the total income of the assessee. Section 80-I, therefore, gave certain tax benefits to support a priority industry. We have to consider whether the business of manufacture of heavy duty cranes is a priority industry as defined under the Income Tax Act.

According to the assessee, its business of manufacturing heavy duty cranes is a priority industry because the cranes of the kind manufactured by it are specialised equipment used in industries specified in item No. 8A of the First Schedule to the Industries (Development and Regulation) Act. 1951. It is the case of the assessee that it does not manufacture cranes of the kind generally used in a number of industries. The assessee has pleaded a specific case before the Income Tax authorities which has been accepted by the appellate tax authorities for the assessment year 1972-73. According to the assessee-company, it manufactures cranes as per orders and specifications received from various clients who are manufacturers or users of sugar, chemical, textile or cement machinery or other machinery of industries in item No. 8A. The assessee-company contends that all these industries are covered by item No. 4 in the Sixth Schedule to the Income Tax Act read with item No. 8A of the First Schedule to the Industries (Development and Regulation) Act, 1951. The cranes are designed to suit the requirements of each purchaser.

The assessee-company has pointed out, for instance, that it manufactures grab cranes with grab buckets which automatically open out and close at intervals and pick up the required raw materials such as lime-stone, etc. The capacity, size and nature of the grab bucket and its automatic working is required to be designed having regard to the special functions it is intended to perform. The movement of the component parts of the bucket is specially worked out. The machinery regulating the vertical movement of the grab buckets is required to be specially manufactured having regard to the extent of the movement and the timings thereof. The grab bucket moves horizontally over the rails on the bridge constructed for the purpose. The length of the bridge always depends upon the position of the building and the area it is required to cover. Hence, the entire bridge and the machinery regulating the movement of the grab buckets on the rails has to be designed and manufactured individually to suit each plant. In so designing the crane, the capacity of the plant is also a relevant factor. A crane manufactured and installed in one plant cannot be used in another plant, because the requirements of each plant are different. The assessee also submitted that even if two plants have identical capacity and machinery, it would be difficult to use the crane intended for one plant in another plant, as each crane has to be designed not merely with reference to the functions it is intended to perform, but is also designed with reference to the atmospheric conditions such as the velocity and the direction of the wind, etc. The assessee also pointed out that electrical equipment which regulates the automatic functions of various parts has to be specially designed and manufactured to suit the individual needs of each crane.

Similarly, the assessee makes stacker cranes for stacking various products. Such cranes are also required to be designed in detail with special reference to the plant in which they are required to be used.

The third type of crane manufactured by the assessee is called the gate-lifter. It is designed for lifting gates of reservoirs and dams. Each gate-lifter crane has to be specially designed to suit the dam where it is meant to function.

All these submissions of the assessee have been accepted by the Appellate Assistant Commissioner in his order for the assessment year 1972-73. These findings of fact have been upheld by the Tribunal for the assessment year 1972-73. In view of these findings of facts, we have to consider whether such specially designed cranes which are used in industries specified under item No. 8A of the First Schedule to the Industries (Development and Regulation) Act, can be considered as falling under item No. 8A of that Schedule. If they fall under item No. 8A, the assessee-company would be entitled to the benefit of section 80-I of the Income Tax Act, 1961.

Item No. 8A of the First Schedule to the Industries (Development and Regulation) Act, deals with "major items of specialised equipment used in specific industries." For any item of equipment to fall under item No. 8A, it is, therefore, necessary :

(a) that it should be a major item of equipment;

(b) that it should be a specialised equipment; and

(c) that it should be used in "specific industry", that is to say, an industry specified in sub-items(1) to (11) of item No. 8A.

In contradistinction to item No. 8A, item No. 8B deals with general items of machinery used in several industries. One of the general items of machinery under item No. 8B is conveying equipment which includes cranes. This would indicate that, ordinarily, items of machinery such as cranes which are used as a general item of machinery in several industries would fall under item No. 8B and not under item No. 8A. This, however, does not imply that each and every type of crane has to be necessarily classified under item No. 8B. Cranes which can be generally used in a number of industries would certainly have to be classified under item No. 8B. But if there are any special types of cranes designed for use only in specific industries, they may fall under item No. 8A. Item No. 8A provides for certain specialised equipment. Hence, such specialised equipment has to be excluded from the general category under item No. 8B.

We have, therefore, to see whether the heavy duty cranes of the kind manufactured by the assessee-company are specialised equipment which can be classified under item No. 8A and not general items of machinery which are required to be classified under item No. 8B.

From the material which has been accepted by the Appellate Assistant Commissioner and the Tribunal for the assessment year 1972-73, it appears that the cranes manufactured by the assessee are made to specifications and are designed to suit not merely the requirements of a specified industry, but even to suit the requirements of each and every plant. These cranes have been specifically designed for the industries which are enumerated in item No. 8A and have been supplied either directly to the plants of such industries or to the manufacturers of such plants. These cranes satisfy all the three tests laid down in item No. 8A, namely :-

(i) they are a major item of equipment;

(ii) these cranes are specialised equipments designed for the plant in question and specially manufactured to carry out various functions which may be required in that plant; and

(iii) these cranes are used in specific industries set out in sub-items (1) to (11) of item No. 8A.

In our view, therefore, the Tribunal was right when it came to the conclusion (in Income Tax Reference No. 127 of 1977) that the assessee-company was entitled to relief u/s 80-I of the Income Tax Act, 1961.

It is contended By Mr.Jetley, learned counsel for the Department, that only the machinery set out in sub-items Nos. (1) to (11) of item No. 8A would qualify for the benefit u/s 80-I.He urged that, for instance, only textile machinery or jute machinery or sugar machinery would qualify for exemption. He submitted that a crane cannot be considered as forming a part of textile machinery or jute machinery, etc. This argument cannot be accepted. Special cranes of this type do form an integral part of the industrial machinery in question. Also, the operative words of item No. 8A are "Major items of specialised equipment used in specific industries". These govern the sub-headings, namely, textile machinery, jute machinery, etc. Therefore, if a textile plant uses machinery of which a specialised crane forms an integral part, such a crane would be covered by the phrase "textile machinery". In our view, the cranes of the kind manufactured by the assessee are an integral part of the plants of such specific industries.

Mr. Jetley relied upon a decision of the Supreme Court in the case of Hindustan Wire Products Ltd. Vs. Commissioner of Income Tax, Patiala, . The Supreme Court, in that case, was required to construe item No. 7 of the Sixth Schedule. Item No. 7 of the Sixth Schedule is totally different from the item with which we are concerned in the present case. The Supreme Court''s interpretation of whether "wires" manufactured by the assessee in that case would be covered by the word "cables" used in item No. 7 is, therefore, of no relevance to the present case. The Supreme Court construed item No. 7 along with item No. 24 of the Sixth Schedule. The interpretation so put by the Supreme Court on item No. 7 does not assist us in any manner. The same is the case with the two other decisions relied upon by Mr.Jetley, namely, the case of Commissioner of Income Tax Vs. Caltex (India) Limited, and the case of Commissioner of Income Tax Vs. Sriyansh Knitters, .

In Income Tax Reference No. 587 of 1976, which deals with the earlier assessment year 1971-72, the Tribunal erred when it came to the conclusion that item No. 8B dealt separately with all kinds of conveying equipment such as cranes. Hence, all types of cranes would necessarily fall under item No. 8B. For the reasons set out by us above, this reasoning does not appear to be correct. When cranes are of a special kind which are not used generally in a number of industries but are designed specially for the specified industries, they would fall under item No. 8A and not item No. 8B. There is no reason why such special types of cranes cannot fall under item No. 8A. The Tribunal also fell into an error when it held that the submission of the assessee that these cranes are specially designed to suit the special requirements of a given industry was irrelevant for deciding the issue.

We would also like to point out that section 80-I is designed to give encouragement to certain industries which are designated as priority industries. The benefit so given to priority industries u/s 80-I requires to be liberally construed in order to carry out the objectives of that section.

The Supreme Court, in the case of CIT v. South Arcot District Co-operative Marketing Society Ltd. : [1989]176ITR117(SC) , while dealing with the exemption granted u/s 14(3)(iv) of the Indian Income Tax Act, 1922, said that the provision for exemption was intended to encourage co-operative societies to construct warehouses. Having regard to that object, a liberal construction has to be given to the language of section 14(3)(iv). By a parity of reasoning, the benefit which is granted u/s 1001m900194 to encourage priority industries should also be liberally construed so as to further the objective of that section. Even if two views are possible in a case like the present one, the benefit ought to go to the assessee.

In the premises, the question which is referred to us in both these references is answered in the affirmative and in favour of the assessee. In the circumstances, there will be no order as to costs.