COMMISSIONER OF WEALTH TAX VS A.N. NATARAJAN
1999PTD 1719
[234 I T R 363]
[Madras High Court (India)]
Before K.A. Thanikkachalam and N. V. Balasubramanian, JJ
COMMISSIONER OF WEALTH TAX
Versus
A.N. NATARAJAN
Wealth Tax Cases Nos.1110 and 1111 of 1984. (References Nos.967 and 968 of 1984), decided on 25/07/1996.
Wealth tax---
----Exemption---Industrial undertaking ---Assessee whether engaged in manufacture or processing of goods---Tests---Firm purchasing cotton Kappas and getting them ginned through outside agency---Matter remanded to find out if firm had control over outside agency---Indian Wealth Tax Act, 1957.
In determining whether the assessee had himself engaged through his employees in the manufacture or processing of goods, it will be necessary to see whether the labourers engaged were under the control of an independent contractor or were controlled by an agent, whose agency distinguished him from that of a servant or employee and how far the assessee exercised control by engaging such labourers for work, paying wages or remuneration and determining their conditions of service. It would be more appropriate to apply a complex test involving: (i) control; (ii) ownership of the tools; (iii) chance of profit; (iv) risk of loss. Control in itself is not always conclusive:
Held, that, in the instant case, the firm in which the assessee was a partner purchased cotton Kappas and got them ginned by an outside agency. In order to find out if the firm was an industrial undertaking and whether the assessee was entitled to exemption under section 5(1)(xxxii) of the Wealth Tax Act, 1957, the Tribunal had to verify if the firm satisfied the tests laid down in Montreal v. Montreal Locomotive Works Ltd. (1947) 1 DLR 161, which was followed by the Supreme Court in Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishments (1974) 45 FJR 54.
CIT v. Narayanaswami Naicker & Sons (1984) 149 ITR 283 (Mad.); CWT v. Lakshmi (K.) (1982) 143 ITR 656 (Mad.); CWT v. Ramalingam (V.O.) .(1995) 216 ITR 566 (Mad.); Montreal v. Montreal Locomotive Works Ltd. (1947) 1 DLR 161; Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishments (1974) 45 FJR 54 (SC) and State of Punjab v. Chandu Lal Kishore Lal (1970) 25 STC 52 (SC) ref.
C.V. Rajan for the Commissioner.
P.P.S. Janarthana Raja for the Assessee
JUDGMENT
K. A. THANIKKACHALAM, J.---By these reference applications relating to assessment years 1979-80 and 1980-81, the Tribunal referred the following question of law, for the opinion of this Court under section 27(1) of the Wealth Tax Act, 1957:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the firm of A.N. Natarajan, which purchases cotton kappas and gets them ginned by outside agencies should be treated as an 'industrial undertaking' and accordingly the exemption contemplated under section 5(1)(xxxii) of the Wealth Tax Act should be allowed in respect of the assessee's share of interest therein?"
The point for consideration is whether the partnership firm should be treated as industrial undertaking so as to claim exemption under section 5(1)(xxxii) of the Wealth Tax Act. The assessee claimed exemption under section 5(1)(xxxii) of the Wealth Tax Act out of the share income derived from a partnership firm, which is said, to be engaged in manufacturing activities. The Wealth Tax Officer in the original assessment granted exemption in respect of the assessee's share in the partnership firm since the firm is an industrial undertaking. So also, in the case of another partner, the Wealth Tax Officer granted exemption in respect of the assessee's share in the partnership firm. According to the Commissioner of Income-tax, such an allowance of exemption is erroneous and prejudicial to the interests of the Revenue. The Commissioner of Income-tax, therefore, set aside the assessment and directed the Wealth Tax Officer to redo the assessment for both the assessment years. On appeal, the Tribunal accepted the assessee's contention that the firm in which he is the partner is an industrial undertaking, and therefore, his share income is exempted under section 5(1)(xxxii) of the Wealth Tax Act. This view was taken by the Tribunal, following an earlier order of its own in the case of Sint. Annai Jayabarathi, Virudhunagar, in W.T.As. Nos.340 and 341 (Mds.) of 1977-78, dated July 30, 1980.
The point for consideration is whether the firm in which the assessee is the partner, is engaged in the manufacturing activities. The firm is purchasing cotton kappas and through an outside agency ginning the same. By ginning, the cotton is separated from the cotton seeds. According to the assessee, separating the cotton from the cotton seeds is the manufacturing activity.
In CIT v. Narayanaswami Naicker & Sons (1984) 149 ITR 283, this Court while following the decision of the Supreme Court in State of Punjab v. Chandu Lal Kishore Lal (1970) 25 STC 52, held that ginning of cotton results in manufacturing and hence the assessee was entitled to investment allowance. Now the point for consideration is whether ginning cotton by an outside agency would amount to the firm in which the assessee, is a partner, being directly involved in the manufacturing activity. According to the assessee the firm is having direct control over the outside agency in ginning in cotton. Therefore, the firm is directly involved in the manufacturing activity. When a similar question was raised before this Court in CWT v. V.O. Ramalingam (1995) 216 ITR 566, this Court held that a servant or an employee who acts under the direct control and supervision of his master and is bound to conform to all the reasonable orders given to him in the course of his work, is different from an independent contractor or an agent. In determining whether the assessee had engaged himself through his employees in the manufacture or processing of goods, it will be necessary to see whether the labourers engaged were under the control of an independent contractor or were controlled by an agent, whose agency distinguished him from that of a servant or employee, and how far the assessee exercised control by engaging such labourers for work, paying wages or remuneration and determining their conditions of service. In order to find out this aspect, the matter was remitted back to the Tribunal for reconsideration. But this Court in CWT v. K. Lakshmi (1983) 142 ITR 656 (Mad), while considering a similar question, held that in cases where the assessee gets the goods manufactured by an outside agency, he cannot be said to manufacture the goods, merely because the assessee pays for the manufacture or meets the expenses incurred in the manufacture.
In Silver Jubilee Tailoring House v. Chief Inspector of Shops and Establishments (1974) 45 FJR 54, the Supreme Court, while considering a similar question, pointed out that in recent years the control test as traditionally formulated has not been treated as an exclusive test. In the above-said decision, the Supreme Court relied upon the decision in Montreal v. Montreal Locomotive Works Ltd. (1947) 1 DLR 161, at page 169 wherein it was held as under (at page 62):
"In Montreal v. Montreal Locomotive Works Ltd. (1947) 1 DLR 161, 169 Lord Wright said that a single test, such as the presence or absence of control, was often relied on to determine whether the case was one of master and servant, mostly in order to decide issues of tortious liability on the part of the master or superior and that in the more complex conditions of modern industry, more complicated tests have often to be applied. He said that it would be more appropriate to apply, a complex test involving: (i) control; (ii) ownership of the tools; (iii) chance of profit; (iv) risk of loss, and that control in itself is not always conclusive. He further said that in many cases the quetsion can only be settled by examining the whole of the various elements which constitute the relationship between the parties. "
In the present case, the assessee's counsel submitted that even though that ginning work was entrusted to an outside agency, the assessee was having the control over the outside agency. If that is the case, the assessee must satisfy the test adumbrated in the above cited decision, which was followed by the Supreme Court in Silver Jubilee Tailoring House v. Chief Inspector of Shops and, Establishments (1974) 45 FJR 54. Accordingly, we direct the Tribunal to verify whether the assessee was having direct control over the outside agency in order to ascertain whether the firm in which the assessee is a partner, is engaged in the manufacturing activity. Accordingly, we are returning the question unanswered. No costs.
M.B.A./2092/FC???????????????????????????????????????????????????????????????????? Reference answered