COMMISSIONER OF WEALTH TAX VS URM11A RUNGTA
1995 P T D 989
[208 I T R 552]
[Calcutta High Court (India)]
Before Ajit K Sengupta and Shyamal Kumar Sen, JJ
COMMISSIONER OF WEALTH TAX
Versus
URM11A RUNGTA
Matter No.3963 of 1990, decided on 06/02/1992.
Wealth Tax------
----Exemption---Industrial undertaking---Meaning of---Firm engaged in construction of multi-storeyed buildings---Not an industrial undertaking-- Partner of firm not entitled to exemption under S.5(1)(xxxii)---Indian Wealth Tax Act, 1957, S.5(1)(xxxii): ---[National Projects Construction Corporation Ltd. v. CWT (1969) 74 ITR 465 (Delhi) dissented from].
The expression "industrial undertaking" for the purpose of the several clauses of section 5(1) of the Wealth Tax Act, 1957, is defined by an Explanation as meaning an undertaking 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. The Explanation contains a definition which is exhaustive. Therefore, unless a particular activity pertains to any of the three broad divisions, it cannot be said to be the activity of an industrial undertaking in terms of the said definition. The Explanation covers a construction company, but such coverage is only for construction undertaking engaged in construction of ships. No other type of construction has a place in it. By necessary implication, all constructions as well as repair of buildings is not comprehended by the expression "construction of ships". The words "articles" and "goods" refer to movables. The construction of a multi-storeyed building cannot be brought within the import of the expression "the manufacture or processing of goods".
Held, accordingly, that the assessee, as a partner of a firm, engaged in construction of multi-storeyed buildings, was not entitled to the exemption under section 5(1)(xxxii), in respect of the value of her interest m the firm.
National Projects Construction Corporation Ltd. v. CWT (1969) 74 ITR 465 (Delhi) dissented from.
C.I.T. v. Budharaja (N.C.) & Co. (1980) 121 ITR 212 (Orissa); CIT v. Madgul Udyog (1994) 208 ITR 541 (Cal.); CIT v. Minocha Bros. (P.) Ltd. (1986) 160 ITR 134 (Delhi); CIT v. N.U.C. (Pvt.) Ltd. (1980) 126 ITR 377 (Bom.); Regional Provident Fund Commissioner v. Shree Krishna Metal Mfg. Co. (1962-63) 22 FJR 153 and AIR 1962 SC 1536 ref.
JUDGMENT
AJIT K. SENGUPTA, J: --In this reference under section 27(1) of the Wealth Tax, 1957, the Tribunal has referred the following common question for the assessment years 1979-80 to 1982-83 for our opinion:
"Weather, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the assessee is entitled to the exemption under section 5(1)(xxxii) of the Wealth Tax Act, 1957, in respect of his investment as a partner in the firm, Messrs Madgul Udyog, which is engaged in the business activity of construction and sale of multi-storeyed buildings consisting of flats ?"
Shortly stated, the facts are that the assessee, on the relevant valuation ' dates, was a partner of a firm, Messrs Madgul Udyog, engaged in the business of the construction and sale of multi-storeyed buildings. The assessee claimed that the investments in the said firm were exempted under section 5(1)(xxxii) of the Wealth Tax Act on the ground that the firm being engaged in the construction of multi-storeyed buildings is an industrial undertaking within the meaning of the said provision. The firm set up a similar claim under section 80-J of the Income-tax Act but the Income Tax Officer did not accept the firm as an industrial undertaking. Consequently, the claim of exemption under section 5(1)(xxxii) of the Wealth Tax Act was also denied to the assessee.
Being aggrieved, the assessee challenged the above order in appeal before the Deputy Commissioner of Income-tax (Appeals), and contended that the Tribunal, in the case of the firm, held the firm to be an industrial undertaking for the purpose of section 80-J of the Income-tax Act, vide its order dated September 4, 1986, in Income-tax Appeals Nos. 720 to 722 and 2037/(Cal.) of 1985. The Deputy Commissioner of Income-tax (Appeals), following the said order of the Tribunal, directed that exemption under section 5(1)(xxxii) of the Wealth Tax Act be allowed to the assessee.
In its appeal before the Tribunal, the Revenue contested the finding of the Deputy Commissioner of Income-tax (Appeals). The Tribunal, however, found that, in view of its finding in the context of section 80-J of the 'Income Tax Act, 1961, that the firm's activity in the construction of multi- storeyed buildings and sale of flats to customers constituted an industrial undertaking, the assessee as a partner could claim exemption under section 5(1)(xxxii) of the Act. In deciding the question whether the firm, engaged in the construction of multi-storeyed buildings comprising flats, is an industrial undertaking for the purpose of section 80-J, the Tribunal followed the decision of the Orissa High Court in N.C. Budharaja & Co. (1980) 121 ITR 212, wherein the Orissa High Court held that the activity of construction of multi-storeyed buildings was manufacture and production of articles under section 80-J of the Income Tax Act. The Tribunal, in the order under reference, did not see any difference between the word "articles" used in section 80-J of the Income-tax Act and the word "goods" used in section 5(1)(xxxii) of the Wealth Tax Act. The Tribunal, therefore, held that the decision given with reference to section 80-J of the Income Tax Act, 1961, in the case of the firm was fully applicable in the case of its partners for the purpose of section 5(1)(xxxii) of the Wealth Tax Act. The Tribunal, accordingly, held that the Deputy Commissioner of Income-tax (Appeals) was right in holding that the partners were entitled to the exemption.
At the hearing before us, the contentions raised before the authorities below have been reiterated.
The expression "industrial undertaking" for the purpose of several clauses of section 5(1) is defined by an Explanation which is as under:
"For the purpose of clause (xxxii), this clause, clause (xxxii) and clause (xxxii), the term `industrial undertaking' means an undertaking 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."
The Explanation contains a definition, which is exhaustive. Therefore, unless a' particular activity pertains to any of the three broad divisions, it cannot be said to be the activity of an industrial undertaking in terms of the said definition. The Tribunal's view that a multi-storeyed building is equivalent to an article or goods is, in our opinion, incorrect. The words "articles" and "goods" refer to movables. The construction of a multi-storeyed building cannot be brought within the import of the expression "the manufacture or processing of goods". The Tribunal has sought to find this activity a place in the last category of industrial undertaking, viz., an undertaking engaged in "manufacture or processing of goods" obviously because the description of other industrial activities do not admit of inclusion of such activity.
Any activity to come within the scope of this definition must fall under any of the classes. One thing is quite clear that the manufacture or processing of goods cannot include construction of multi-storeyed buildings. The Explanation, no doubt, covers a construction company, but such coverage is only for construction undertakings engaged in construction of ships. No other type of construction has place in it. By necessary implication, all constructions as well as repair of buildings are not comprehended by the expression "construction of ship". Our attention has been drawn to a decision of the Bombay High Court in CIT v. N.U.C. (Pvt.) Ltd. (1980) 126 ITR 377 and to a decision of the Delhi High Court in CIT v. Minocha Bros. (P.) Ltd (1986) 160 ITR 134. In these' cases: the implication of definition is set out.
"industrial undertaking (xxxii) of the Wealth Tax Act was not. The question there arose in connection with the definition of 2(6)(c) of the Finance Act. The close to the definition of industrial form of power or in the construction of ships or in the manufacture or processing of goods or in mining.
The definition is almost the same in the matter of classification of the industrial activity. Therefore, the decision in the context of the definition of "industrial company" is of substantial relevance and aid to resolve the question presented before us.
In National Projects Construction Corporation Ltd. v. CWT (1969) 74 ITR 465 (Delhi), it has been held that a company engaged in construction of dams and barrages is entitled to exemption. We, however, respectfully dissent from that view for the reasons hereinafter mentioned.
Apart from our disagreement on the principles formulated in the said decision, the facts in that case also substantially differ. The Tribunal in that case found that the assessee at the work-site manufactured and processed steel materials, crushed stones and soon for the purpose of constructing dams and barrages: The incidental work of such manufacturing or processing undertaken by the assessee was of considerable magnitude for which purpose the assessee had to set up a large workshop at the work site. That case was in connection with the exemption under section 45(d) of the Wealth Tax Act as a newly established industrial undertaking engaged in the manufacture, production or processing of goods or articles. The Tribunal held that the manufacture, though of substantial magnitude, is only a feeding activity or an incidental activity for the principal activity of construction of dams and barrages. According to the Tribunal, it is the end-product which should decide the nature of the activity. The manufactured or processed goods not being the end-result of the activity, the Tribunal negatived the assessee's claim as an industrial undertaking for the purpose of section 45(d).
That section had also an Explanation defining 'the industrial undertaking as an undertaking "engaged in the manufacture, production or processing of goods or articles". The Delhi High Court, however, reversed the Tribunal's final conclusion holding that so far as the incidental product or the feeding product could have a market, it is to be said that the undertaking was engaged in the manufacture or production or processing of goods or articles, no matter that, in the assessee's case, the said product was not intended for the market but for exclusive use of the assessee's ultimate product, i.e., dams and barrages. The Delhi High Court, relying on the facts furnishing the requirement of continuity of action in manufacturing or processing of such feeding materials, ultimately held that the manufacture or production of the feeding material should entitle the. assessee to the exemption. The words "engaged in the manufacture, production" should normally mean a continuity of occupation in the manufacture as distinguished from an occasional participation or single act or casual employment or a mere supervision without physical participation. In that connection, the Delhi High Court relied upon a decision of the Supreme Court interpreting section 1(3)(a) of the Employees' Provident Funds Act, 1952, in Regional Provident Fund Commissioner v. Shree Krishna Metal Manufacturing Co. (1962-63) 22 FJR 153, 157; AIR 1962 SC 1536, 1539. The relevant passage which was the cornerstone of the ratio in National Projects Construction Corporation Ltd. v. CWT (1969) 74 ITR 465, 470 is set out hereunder:
"Subject to the provisions contained in section 16, it (i.e., the Act) applies in the first instance to all factories engaged in any industry specified in Schedule I in which fifty or more persons are employed, but the Central. Government may, after giving not less than two months' notice of its intention so to do, by notification in the Official Gazette, apply the provisions of this Act to all factories employing such number of persons less than fifty as may be specified in the notification and engaged in any such industry."
Then the Delhi High Court proceeded to observe as follows (at page 470):
"Their Lordships of the Supreme Court considered the cases of two respondents. Shree Krishna Metal Manufacturing Company had diverse business consisting of (1) manufacturing brass, copper and `Kasa' circular sheets and making of utensils therefrom; (2) milling paddy; (3) a flour mill; and (4) a saw mill. For the manufacture of metal circular sheets, the respondent had a rolling machine. The other respondent was carrying on the business of manufacturing hydrogenated vegetable oil and for the purpose of packing the vegetable oil it manufactured its own tin containers and the question was whether the two respondents were factories within section 1(3)(a). With respect to Shri Krishana Metal Manufacturing Company, their Lordships said that the activity in relation to industry which falls in Schedule I was neither minor, nor subsidiary, nor incidental to the other activities and was, therefore, a factory under section 1(3)(a). With respect to the other respondent, the Supreme Court decided that the main industrial activity was of manufacturing hydrogenated vegetable oil and though manufacture of tin containers was an activity covered by the First Schedule, yet this branch of activity formed a minor portion of its larger activity. For the purposes of determining the meaning of the expression `engaged in any industry specified in Schedule I' for the said Act, their Lordships laid down the following test:
`It is true that in dealing with the construction of a clause which is capable of two reasonably possible constructions, it is not easy to make a choice, particularly when both constructions seem to lead to some anomalies. On the whole, however, we are inclined to take the view that the clause `engaged in any industry specified in Schedule I' should be interpreted to mean `mainly engaged in any industry specified in Schedule I'. If a factory is engaged in two industrial activities one of which is its primary, principal or dominant activity and the other is a purely subsidiary, incidental, minor or feeding activity, then it is the primary or the dominant activity which should determine the character of the factory under section 1(3)(a). This view does not purport to add any word to the section; it merely interprets the relevant expression `engaged in any industry specified in Schedule I'. When it is said that a person is engaged in any business, it usually means he is engaged mainly or principally in that business; and the same would be the position when the relevant clause refers to an establishment engaged in the specified industry. That is the commonsense view, which is consistent with the current and accepted denotation of the words `engaged in'.
One of the tests which can sometimes be applied is whether the product of the incidental activity is intended for the market or exclusively for use by the factory in its other departments only. If the answer to this question is that the said product is sent out to the market for sale, then the activity in question cannot be treated as incidental. In such a case, it may be said that the factory is engaged in both the activities and, as such, it is engaged in the industry specified in Schedule I. But the test of sending the product to the market cannot be treated as decisive or even very significant because the definition of the word `manufacture' given in section 2(i-a) shows that a commodity may be produced by the factory as much for sale, transport, delivery or disposal as for its own use. Therefore, the fact that a commodity is produced only for the use of the factory in its other departments may not necessarily show that the activity which leads to the production of the said commodity is not the main activity of the factory.
If a factory is engaged simultaneously in different industrial activities and one of these is in relation to an industry specified in Schedule I, then it can be said that the factory is engaged in the industry specified in Schedule I. The fact that the factory is engaged in other industrial activities will not necessarily take it out of the purview of section 1(3)(a). The broad test which may safely be applied in dealing with this question is: is the factory engaged in the industry specified in Schedule I from a business point of view? and the answer to this question would generally give a satisfactory solution to the problem posed by section 1(3)(a). Whether or not a factory is engaged in any industry specified in Schedule I would, thus, be a question of fact to be determined in the facts and circumstances of each case.
Thus, according to the Delhi High Court, it is the dominant activity which should determine the nature of the activity, whether manufacturing or construction or otherwise. That being the settled position, it is hard to find any reason to conclude that, by virtue of having some manufacturing on a large scale for captive consumption of such manufactured products could lend to the main activity of the undertaking the character of manufacturing activity even though the dominant or the end result is not manufacture of goods or articles but manufacture of an immovable thing like a dam or a barrage.
The Supreme Court's decision relied on by the Delhi High Court, far from lending support to the assessee's case, strengthens the Revenue's contention that any manufacturing or processing incidental to the' fundamental object of construction of civil structure could not be a material consideration. The ultimate fact that the result of the activity is the construction of a dam or barrage shall override the consideration of manufacturing activity arising incidentally or obliquely. The Supreme Court in that case said that, if the dominant object is non-manufacturing or non-processing, then the manufacture of input materials of such end-product would also take its colour from the end-product. Thus, in our view, the decision in National Projects Construction Corporation Ltd. (1969) 74 ITR 465 (Delhi) has invested the underlying proposition of the said decision of the Supreme Court. The decision of the Delhi High Court amounts to saying that their end-result, i.e., construction of dams or barrages, does not stand in the way of treating the assessee as one engaged in manufacturing or processing because it manufactures or processes the input materials for such construction, the continuity and the scale of such manufacturing or processing would be enough to support the claim of a construction undertaking for treatment as a manufacturing or processing-undertaking.
With respect, we, however, find that the Supreme Court in Shree Krishna Metal Manufacturing Co. (1962-63) 22 FJR 153; AIR 1962 SC 1536, only laid down that the focal point in the end-product and not the incidental products.
One thing is, however, to be noted, the Delhi High Court in National Projects Construction Corporation Ltd.'s case (1969) 74 ITR 465 has implidely declined to equate manufacturing or processing of goods or articles with the activity of construction of dams or barrages or, for that matter, as a logical corollary, of any building. The ratio of that case is of no assistance to the assessee's claim in the present case because the assessee nowhere indicated that, in the process of construction work, it is engaged in manufacturing on a considerable scale so as to be able to claim that, by virtue of its activity incidental to construction involving substantial manufacturing or processing work, it should be treated as an industrial undertaking answering the definition in the Explanation below section 5(1)(xxxi) or (xxxii).
The Tribunal, in extending the exemption under section 5(1)(xxxii) to the assessee herein, has followed its earlier decision granting eligibility for relief under section 80-J to the self-same partnership firm of which the assessee is a partner. We have, however, negatived such decision of the Tribunal in the case of the firm with respect to its claim under section 80-J, in Income-tax Reference No. 293 of 1987 (CIT v. Madgul Udyog (1994) 208 ITR 541 (Cal.), where the judgment was delivered on January 20, 1992, and where we have held that construction of buildings cannot fall under manufacture or production of articles. The word "article", in our view, clearly refers to movables. So, does the word "goods".
We, therefore, hold that the assessee, as a partner of the firm, Messrs Madgul Udyog, engaged in construction of multi-storeyed buildings, is not entitled to the exemption under section 5(1)(xxxii) in respect of the value of her interest in the firm.
For the reasons aforesaid, we answer the question in the negative and against the assessee and in favour of the Revenue.
There will be no order as to costs.
SHYAMAL KUMAR SEN, J.--I agree.
M.BA./438/T.F. Reference answered.