COMMISSIONER OF WEALTH TAX VS DR. G. NALLAKRISHNAN
1999 P T D 995
[232 I T R 762]
[Madras High Court (India)]
Before K.A. Thanikkachalam and N. V. Balasubramanian, JJ
COMMISSIONER OF WEALTH TAX
Versus
Dr. G. NALLAKRISHNAN
Tax Case No.785 (Reference No.522 of 1982), decided on 25/06/1996.
Wealth-tax---
----Exemption---Appeal to Appellate Tribunal---Partner---Industrial undertaking---Firm engaged in construction of buildings also manufacturing doors and windows and doing reinforced concrete works---Firm would be treated as an industrial undertaking if intermediary products like doors and windows were manufactured not as an integral part of construction work but independently---Tribunal justified in remanding case---Indian Wealth Tax Act, S.5(1)(xxxii).
An assessee would be entitled to exemption on the value of his interest in assets forming part of an industrial undertaking belonging to a firm of which he is a partner. Where an assessee is having an interest in a firm, which is engaged in the construction of buildings and manufacture or production of intermediary articles for the purpose of its construction work, the question of allowing benefit under section 5(1)(xxxii) of the Wealth Tax Act, 1957, depends upon the facts of each case. If the intermediary articles are produced or manufactured as an integral part of the main business of construction, then the assessee is not entitled to the benefit under section 5(1)(xxxii) for its activity in manufacturing, or producing intermediary articles. But if the intermediary articles are manufactured or produced not as an integral part of the main business of construction building, but independently, the assessee can ask for the benefit under section 5(1)(xxxii) on these intermediary activities:
Held accordingly, that the Tribunal was correct in remitting the issue to the assessing authority in order to find out whether the assessee was engaged in intermediary activities independently, not as an integral part of its main business, viz. building construction.
CIT v. N.C. Budharaja & Co. (1993) 204 ITR 412 (SC) and National Projects Construction Corporation Ltd. v. CWT (1969) 74 ITR 465 (Delhi) applied.
CIT v. N.C. Budharaja & Co. (1980) 121 ITR 212 (Orissa); CIT v. Minocha Brothers P. Ltd. (1986) 160 ITR 134 (Delhi); CWT v. Asha Mittal (Smt.) (1994) 209 ITR 368 (Raj.); CWT v. Kishorilal Agrawal (1993) 203 ITR 975 (Pat.); CWT v. Urmila Rungta (1994) 208 ITR 552 (Cal.) and Shantaben Chinubhai (Smt.) v. CWT (1992) 196 ITR 44 (Guj.) ref.
C.V. Rajan for the Commissioner. P.P.S.
Janarthana Raja for the Assessee.
JUDGMENT
K.A. THANIKKACHALAM, J.--- At the instance of the Department, the Tribunal has referred the following question 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 is correct in law in holding that the assessee is entitled to exemption under section 5(1)(xxxii) of the Wealth-tax Act, 1957?"
The assessee, Dr. G. Nallakrishnan, invested a sum of Rs.79,680 in a firm called Asia Engineering Company engaged in building activity on a large scale. Its activities comprised construction of several large buildings of complex designs, involving large amounts of reinforced concrete works, fabrication of steel for windows, door frames, etc. In the assessment year 1975-76 and the valuation date being December 31, 1974, the assessee claimed that these activities undertaken by the firm constituted manufacturing activities. Therefore, the assessee claimed that the investment of Rs.79,680 made in the said firm should be exempt from the levy of wealth-tax under section 5(l)(xxxii) of the Wealth-tax Act, 1957, hereinafter referred to as the "Act". The Wealth-tax Officer disallowed the claim for the reason that in his opinion the carrying on of construction activities by the said firm did not mean that the firm was an industrial undertaking. On appeal, the Appellate Assistant Commissioner confirmed the disallowance made by holding that for the purpose of claiming exemption under section 5(1)(xxxii) of the Act, the firm should be 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 opinion of the Appellate Assistant Commissioner none of the activities undertaken by the said firm could be said to be activities contemplated under section 5(1)(xxxii) of the Act and, therefore, the building activity could not be considered as manufacturing activity nor processing of goods so as to entitle it to the exemption contemplated under section 5(1)(xxxii) of the Act.
Aggrieved, the assessee filed an appeal before the Tribunal and while repeating the arguments advanced before the authorities below, relied on the decision of the Orissa High Court in CIT v. N.C. Budharaja and Co. (1980) 121 ITR 212. The Departmental representative submitted that if the firm's activity involved fabrication work, it could - be regarded as an industrial undertaking, but since neither the Wealth-tax Officer nor the Appellate Assistant Commissioner has gone into this question, no decision could be pronounced, assuming that fact and by applying the decision of the Orissa High Court. The Tribunal, therefore, thought that it was necessary to look into this matter and examine the nature of the activities actually carried on by the firm to ascertain whether it included fabrication activities and to enable the Department to do so, the assessment was set aside, directing the Wealth-tax Officer in the following manner:--
"If there are activities involving fabrication and those activities referred to in the case of CIT v. N.C. Budharaja and Co (1980) 121 ITR 212 (Orissa), the said Asia Engineering Company could be said to be an industrial undertaking and the value of the assessee's interest could be exempt under section 5(l)(xxxii) of the Act."
Before us, learned standing counsel appearing for the Department submitted that the Tribunal was not correct in remitting back this issue to the Wealth-tax Officer for the purpose of ascertaining whether the assessee was doing any fabrication work so as to enable the assessee to claim the benefit under section 5(l)(xxxii) of the Act. According to learned standing counsel, the Tribunal gave the aforesaid direction on the basis of the decision of the Orissa High Court in CIT v. N.C. Budharaja and Co. (1980) 121 ITR 212. It was pointed out that the abovesaid decision of the Orissa High Court was reversed by the Supreme Court in the decision of CIT v. N.C. Budharaja and Co. (1993) 204 ITR 412. Therefore, according to learned standing counsel, the Tribunal was not correct in remitting back this issue on the basis of the decision rendered by the Orissa High Court in CIT v. N.C. Budharaja and Co. (1980) 121 ITR 212. Learned standing counsel further submitted that when the business of the assessee was construction of building, all the intermediary activities in that process could be an integral part of the main business, viz. construction of buildings. In such a case, according to learned standing counsel, the assessee is not entitled to ask for the benefit under section 5(1)(xxxii) of the Act, with regard to intermediary activities, like fabrication work, making doors and windows and indulging in reinforced concrete work. Further, learned standing counsel pointed out that the assessee before the authorities below and before the Tribunal, contended that their main activities are only construction work and not any fabrication work or making windows, doors, etc. Therefore, it was submitted that inasmuch as in the construction work, all the intermediary works are an integral part of the same, the assessee is not entitled to ask for the benefit of section 5(1)(xxxii) of the Act, on those intermediary activities, which cannot be considered as independent activities.
On the other hand, learned counsel appearing for the assessee submitted that even though the assessee is engaged in the construction of buildings on a large scale, the assessee is also doing fabrication work, making doors and windows and doing reinforced concrete works. Even if the assessee is not entitled to the benefit under section 5(1)(xxxii) of the Act on the investment made, with regard to the construction of buildings, the assessee is entitled to ask for the benefit under section 5(1)(xxxii) of the Act, with regard to its activities in doing fabrication work, making windows doors, etc., since these activities are being done independently and the Department was not correct in saying that the above activities are an integral part of the main activity of the assessee, viz. construction of buildings. Under such circumstances, in order to find out whether the assessee is engaged in the manufacturing and production of articles like fabricating steel, making doors and windows and making reinforced concrete construction, the Tribunal directed the Assessing Officer to ascertain the fact whether the assessee was doing the abovesaid works independently. According to learned counsel even if the intermediary works are done and articles are produced and the same went into the construction work, that does not disentitle the assessee from asking for the benefit under section 5(1)(xxxii) of the Act with regard to the manufacturing of those activities. Thus, learned counsel appearing for the assessee supported the order passed by the Tribunal.
We have heard the rival submissions made by the parties. The assessee is a partner in a firm called Asia Engineering Company, which is carrying on business as contractors of building, bridges, factories and other construction activities. The assessee claimed exemption under section 5(1)(xxxii) of the Act in respect of the capital invested in Asia Engineering Company. Section 5(1)(xxxii) of the Act reads as under:--
"5. (1) Subject to the provisions of subsection (IA), wealth-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee;-?
(xxxii) the value, as determined in the prescribed manner, of the interest of the assessee in the assets (not being any land or building or any rights in any land or building or any asset referred to in any other clause of this subsection) forming part of an industrial undertaking belonging to a firm or an association of persons of which the assessee is a partner or, as the case may be, as member.
The explanation to section 5(1)(xxxii) of the Act reads as under:-?
"For the purposes of this clause 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 point for consideration is whether the assessee is entitled to the benefit under section 5(1)(xxxii) of the Act with regard to the intermediary activities in which the company is engaged, in manufacturing steel fabrication work, making doors and windows and also making reinforced concrete works, since, according to the assessee, these activities are being done independently and not as an integral part of the main business of construction. Even otherwise, according to the assessee, if the intermediary products made or manufactured went into the construction work, then also the assessee is entitled, to the benefit under section 5(1)(xxxii) of the Act on the investment made with regard to intermediary activities.
The Tribunal remitted back this issue in order to find out whether the assessee was doing any intermediary works as claimed by it independently so as to enable it to claim the benefit under section 5(1)(xxxii) of the Act. The Tribunal's order is based upon the decision of the Orissa High Court in CIT v. N.C. Budharaja and Co. (1980) 121 ITR 212; wherein the Orissa High Court held that the term "industrial undertaking" in section 80-HH of the Income-tax Act, 1961, has no statutory definition. Law is fairly settled that in the absence of a statutory definition, it could be open to look for the meaning by reference to definitions in sister legislation and, failing that, to adopt the meaning in common parlance. The concept of industrial undertaking need not necessarily be confined to manufacture and production of articles. Even in the absence of either of them in the strict sense there could be an industrial undertaking. The business of a contractor, who has undertaken the construction of an irrigation project, would be an industrial undertaking for the purpose of the Industrial Disputes Act, 1947.
This decision was taken on appeal before the Supreme Court. The Supreme Court, while considering this issue in CIT v. N.C. Budharaja and Co. (1993) 204 ITR 412, reversing the decision of the Orissa High Court.
held that the assessee was not entitled to the benefit provided under section 80-HH, because the activity of construction of a dam could not be characterised as manufacture or production of an article or thing within the meaning of section 80-HH(2)(i) of the Act. While rendering its decision in the abovesaid case, the Supreme Court observed as under (page 424):
"It may be that the respondent is himself manufacturing some of the articles like gates, windows and doors which go into the construction of a dam out that makes little difference to the principle. The petitioner is not claiming the deduction provided by section 80-HH on the value of the said manufactured articles but on the total value of the dam as such. In such a situation, it is immaterial whether the manufactured articles, which go into the construction of a dam are manufactured by him or purchased by him from another person. We need not express any opinion on the question what would be the position if the respondent had claimed the benefit of section 80-HH on the value of the articles manufactured or produced by him which articles have gone into/consumed in the construction of the dam."
Relying upon this observation, now learned counsel appearing for the assessee submitted that inasmuch as the Supreme Court has not expressed any opinion with regard to the claim for the benefit under section 5(1)(xxxii) of the Act, for the intermediary activities in manufacturing articles which went into the construction work, the assessee should be given the benefit under section 5(1)(xxxii) of the Act with regard to the manufacturing work done for the production of steel fabricating, making doors and windows and doing reinforced concrete work. Learned counsel for the assessee relied upon the decision in National Projects Construction Corporation Ltd. v. CWT (1969) 74 ITR 465, wherein the Delhi High Court, while considering the provisions of section 45(d) of the Wealth-tax Act, 1957, held as under (headnote):--
?... that the assessee was engaged in the manufacture, production or? processing of goods or articles within the Explanation to section 45(d) and was therefore, qualified for the exemption. From a business point of view it could not be said that the assessee was not engaged in manufacturing or processing of goods. Though it was true in one sense that it might be termed a feeding activity, the proportion that the assessee's manufacturing activity assumed made it one of the assessee's principal activities.
??????????? Section 45(d) does not require that the undertaking should be engaged in the manufacture of goods for being sent to market or be solely engaged in the manufacture. An undertaking engaged in the manufacture of goods for its own use may, therefore, equally qualify for the exemption. The word "engage" may have a variety of meanings depending on the context and setting in which it is used. Ordinarily, the expression connotes doing of more than one act or one transaction. Continuity of action is implicit in the meaning of the word. It has also been used in the sense of being busy or conducting or devoting attention or effort or employing oneself. The words engaged in the manufacture, production, etc., should normally, therefore, mean continuously occupied in the manufacture as a principal business as distinguished from an occasional participation or single act or casual employment or a mere supervision without physical participation. The extent of activity would be a relevant factor and if such activity is at an extended scale it may be suggestive of being 'engaged' in manufacturing activity.
Reliance was also placed upon the decision of the Patna High Court in CWT v. Kishorilal Agrawal (1993) 203 ITR 975, wherein the Patna High Court, while considering the provisions of section 5(1)(xxxii) of the Wealth tax Act, held as under (page 978):--
"Therefore, the construction of buildings, roads, drains, etc. being immovable properties is on the face of it not embraced by the expression manufacture or processing of goods. As such, the business activities of the firm cannot be said to be those of an industrial undertaking within the meaning of the statutory definition. The 'manufacturing' of bricks for execution of the works contract is wholly inconsequential for determination of the issue involved because it is merely an ancillary or incidental activity. The same view has been taken by the Gujarat High Court in a recent case in Smt. Shantaben Chinubhai v. CWT (1992) 196 ITR 44 by placing reliance on the decision of the Delhi High Court in the case of CIT v. Minocha Brothers P. Ltd. (1986) 160 ITR 134. The Delhi High Court itself has distinguished its earlier judgment in the case of National Projects Construction Corporation Ltd. (1969) 74 ITR 465 (Delhi), while considering a question identical to the one at hand."
According to learned counsel appearing for the assessee, the benefit under section 5(1)(xxxii) of the Act was denied in the abovesaid case, since the value of the bricks manufactured formed a negligible part of the total turnover of the firm of the assessee. So also in Smt. Shataben Chinubhai v. CWT (1992) 196 ITR 44, the Gujarat High Court, while considering the provisions of section 5(1)(xxxii) of the Act, held (headnote):
.... That the activity in which the firms were engaged was the construction of buildings and merely because they, in the course of construction of buildings, prepared or manufactured cement concrete, they could not be said to be engaged in the activity of manufacture or processing of goods. Preparation or manufacture of cement concrete is only ancillary or incidental to their business of construction of buildings. In the instant case, the firms in which the assessee was a partner did not have or own any undertaking, which was engaged in the manufacture or processing of goods. Making or preparation of cement concrete or other such articles was not an activity in which the firms in which the assessee was a partner were engaged, but such activity was an integral part of the activity of construction of buildings, in which the firms were engaged. Therefore, the assessee was not entitled to exemption under clause (Viii) of section 5(1) of the Act in respect of his share in. the two partnership firms."
According to learned counsel appearing for the assessee, the benefit under section 5(1)(xxxii) of the Act was denied in the abovesaid case, because the Court found that preparation or manufacture of cement concrete is only ancillary or incidental to the business of construction of building.
Therefore, according to learned counsel appearing for the assessee, in view of the observations made by the Supreme Court in CIT v. N.C. Budharaja and Co. (1993) 204 ITR 412, if the assessee claims the benefit under section 5(1)(xxxii) of the Act with regard to the intermediary activities, which are independent and not an integral part of the main business of building construction, the assessee is entitled to the benefit under section 5(1)(xxxii) of the Act, with regard to those intermediary activities even if the products went into the construction work of the building. Learned counsel further pointed out that in the above decisions cited supra, the Courts came to the conclusion that the intermediary activities are ancillary or incidental to the main business of building construction. Therefore, it was held that the assessee is not entitled to the benefit under section 5(1)(xxxii) of the Act with regard to the goods manufactured by the intermediary activities.
Learned standing counsel for the Department apart from relying upon the decision of the Supreme Court in CIT v. N.C. Budharaja and Co. (1993) 204 ITR 412, also relied upon the decisions in Smt. Shantaben Chinubhai v. CWT (1992) 196 ITR 44 (Guj.) CWT v. Kishorilal Agrawal (1993) 203 ITR 975 (Pat.), CWT v. Urmila Rungta (1994) 208 ITR 552 (Cal.) and CWT v. Smt. Asha Mittal (1994) 209 ITR 368 (Raj.) in order to support his contention that the assessee is not entitled to the benefit under section 5(1)(xxxii) of the Act, when the assessee is engaged in the intermediary activities, like the manufacture and production of steel fabricating, making doors and windows and doing reinforced concrete work, since those activities are an integral part of the main activity of building construction. In CWT v. Urmila Rungta (1994) 208 ITR 552, the Calcutta High Court, while considering the provisions of section 5(1)(xxxii) of the Act, held that the assessee, as a partner of the firm, engaged in the construction of multi-storeyed buildings, is not entitled to the exemption under section 5(1)(xxxii) of the Act in respect of the value of her interest in the firm. Similarly in CWT v. Smt. Asha Mittal (1994) 209 ITR 368, the Rejasthan High Court, while considering the provisions of section 5(1)(xxxii) of the Act, held that a firm engaged in the construction of dams does not constitute an industrial undertaking. Therefore, the interest of the assessee, 'a partner in a firm, in the assets of the firm, forming part of its industrial undertaking and which firm is engaged in the construction of dams, does not qualify for exemption under section 5(1)(xxxii) of the Act.
A plain reading of the decisions cited supra would go to show that where an assessee is having an interest in a firm which is engaged in the construction of buildings, manufacture or production of intermediary articles for the purpose of its construction work, the question of allowing benefit under section 5(1)(xxxii) of the Act, depends upon the facts of each case. If the intermediary articles are produced or manufactured as an integral part of the main business of construction, then the assessee is not entitled to the benefit under section 5(1)(xxxii) of the Act, for its activity in manufacturing or producing intermediary articles. But if the intermediary articles are manufactured or produced not as an integral part of the main business of construction of building, but independently, the assessee can ask for the benefit under section 5(1)(xxxii) of the Act on these intermediary activities. This principle we have culled out from the observation of the Supreme Court made in CIT v. N.C. Budharaja and Co. (1993) 204 ITR 412 and the decision of the Delhi High Court in National Projects Construction Corporation Ltd. v. CWT (1969) 74 ITR 465. Inasmuch as the claim of benefit under section 5(1)(xxxii) of the Act is depending upon the facts, the Tribunal thought it fit to remit back this issue to the assessing authority in order to find out whether the assessee is engaged in intermediary activities independently, not as an integral part of its main business, viz. building construction. Inasmuch as such a direction is in accordance with the decision cited supra, we consider that there is no infirmity in giving such direction by the Tribunal. Accordingly, we hold that there is no infirmity in the order passed by the Tribunal in remitting back this issue. Inasmuch as the question framed and referred by the Tribunal does not reflect the true issue arising in this case, we would like to reframe the question as under:--
"Whether, on the facts and in the circumstances, of the case, the appellate Tribunal is correct in law in remitting back the issue, to consider the claim of exemption under section 5(1)(xxxii) of the Wealth-tax Act, 1957, after ascertaining the facts arising in this case?
In view of the foregoing discussion, we answer the question referred to us in the affirmative and against the Department. No costs.
M.B.A./1879/FC???????????????????????????????????????????????????????????????????????????????? Reference answered.