Wealth tax---

----Exemption---Interest of member or partner in industrial undertaking belonging to firm or association of persons---Meaning of "industrial undertaking"---Undertaking should be engaged in manufacture or processing of articles---Firm purchasing grey cloth and getting it converted to cloth through outside agencies and selling it---Firm was not an industrial undertaking---Partner of firm was not entitled to exemption---Indian Wealth Tax Act, 1957, S.5(1)(xxxii).

A plain reading of the- Explanation to section 5(1)(xxxii) of .the Wealth Tax Act, 1957, shows that in order that the assessee's share in the value of assets forming part of an industrial undertaking belonging to a firm can be exempt from inclusion in his taxable wealth, the pre-requirement is that the firm must be engaged in the business of (i) generation of electricity or any other form of power, or distribution of electricity or any other form of power, or (2) construction of ships, or (3) manufacture of goods, (4) or processing of goods or (5) in mining. Though the definition is of an industrial undertaking, no definition has been given of the words "manufacture" or "processing". According to the ordinary dictionary meaning, the term "manufacture" means a process which results in an alteration or change in the goods which are subjected to the process of manufacturing leading to the production of a commercially new article. The word "process" means anything done requiring continuous and regular action or succession of actions leading to the accomplishment of some result but one of the requirements is that the activity should involve some operation on some material for conversion into some other stuff. What is necessary in order to characterize an operation as processing is that the commodity must, as a result of the operation, experience some change. The words "engaged in the manufacture" in the said Explanation postulate the assessee's direct involvement in the manufacture. However, it may not be necessary that the assessee should be personally engaged ,in the manufacture. It is sufficient if he employs his own labourers. In cages 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.

The assessee was a partner in a firm. The business activities of the firm were to purchase grey cloth, its conversion to cloth through outside agencies and sale of the finished products. The assessee in her wealth tax assessment proceedings claimed her share in the firm as exempt under section 5(1)(xxxii) on the ground that the firm was an industrial undertaking. Her claim was rejected by the Wealth Tax Officer but allowed by the Tribunal. On a reference:

Held, that the finding was that the firm had got grey cloth converted into cloth through outside agencies. It was not the case that the outside agency which was processing the grey cloth was working directly under the supervision or control of the firm, in respect of whose assets the assessee claimed exemption, nor was it the case that the processing was done by the labour employed by the firm for a purpose of its own, though not at the factory premises of the firm. Nor was it the case that the processing of the cloth by that outside agency was in any way connected with the carrying on of the business of the firm. No direct involvement of the firm with any processing act had been found to exist. In that view of the matter, the assessee could not be said to have interest in a firm which was engaged in the business of manufacture of goods or processing of goods and, therefore, she was not entitled to claim the benefit of exemption under section 5(1)(xxxii), in respect of her share in the value of its assets .

CIT v. Commercial Laws of India (Pvt.) Ltd. (1977) 107 ITR 822 (Mad.); CIT (Addl.) v. A. Mukherjee & Co. (P.) Ltd. (1978) 113 ITR 718 (Cal.); CWT v. Angadi Veeriah Chettiar (V. O.) (1987) 167 ITR 341 (Mad.); CWT v. Lakshmi (K.) (1983) 142 ITR 6$6 (Mad); CWT v. Mubarak Ali Khan (1980) 123 ITR- 101 (All.) and CWT v. Prenflatabai (Smt.) (1982) 137 ITR 329 (MP) ref.B. B. Naik for Manish R. Bhatt for the Commissioner.

JUDGMENT

R. BALIA, J.---The Income-tax Appellate Tribunal, Ahmedabad Bench "A", has referred the following question of law arising out of its appellate order in W.T.A. No.671/Ahd. of 1980. for the assessment year 1975-76, dated May 30, 1981. Though the order by itself does not record more than referring to the decision in W.T.As. Nos.274, 275 and 276/Ahd. of 1980, the order made in those wealth tax applications have been made part of the statement of the case.

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal has been right in law in holding that the assessee is entitled to deduction under section 5(1)(xxxii) of the Wealth Tax Act, 1957, in respect of capital employed with Goklesh Silk Industries and as such the total wealth should be reduced by Rs.81,815 as claimed?"

The facts and circumstances in which this question had arisen are that the assessee is a partner in Goklesh Silk Industries. The business activities of the said firm are to purchase grey cloth, its conversion to cloth through outside agencies and sale of the finished products. The assessee in her wealth tax assessment proceedings claimed her share in the firm, Goklesh Silk Industries, exempt under section 5(1)(xxxii) on the ground that the firm is an industrial undertaking of which the assessee is a partner and the value of the assessee's share in the assets of the said firm are exempt under 16, section 5(1)(xxxii), which reads as under:

"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, a member. "

The word "industrial undertaking", for the purposes of clauses (xxxa), (xxxi) (xxxii) and (xxxiv) of section 5(1), has been defined in the Explanation to section 5(1)(xxxi) which reads as under:

"For the purposes of clause (xxxa), this clause, clause (xxxii) and clause (xxxiv), 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."

A plain reading of the Explanation suggests that in order that the assessee's share in the value of assets forming part of an industrial undertaking belonging to a firm can be exempt from inclusion in his taxable wealth, the pre-requirement is that the firm must be engaged in the business of (1) generation of electricity or any other form of power, or distribution of electricity or any other form of power, (2) construction of ships, or (3) manufacture of goods, (4) or processing of goods or (5) in mining. As the assessee's claim is to the firm being engaged in the processing of grey cloth into cloth ready for sale, we are to examine whether the assessee satisfies the condition of being a partner in the firm which is engaged in the business of processing cloth.

As we have noticed, the finding is that the assessee has got grey cloth converted into cloth through outside agency. It is not the case that outside agency which was processing the grey cloth was working directly under the supervision or control of the firm, in respect of whose assets the assessee claims exemption, nor is it the case that the processing was done by the labour employed by the assessee for that purpose for his own though not at the factory- premises of the firm. Nor is it a case that the processing of the cloth by that outside agency was in any way connected with the carrying on of the business by the assessee as such. Can such an act of processing by a third agency help reaching a finding that a firm selling the end product in the market without any involvement of the firm in any part of the processing is a firm engaged in the business of processing goods?

Our conclusion, on a plain reading of the provision, is in the negative. What is required of an industrial undertaking belonging to a firm or an association of persons of which the assessee is a partner is that the firm or an association of persons must be engaged in the business of manufacture of goods or processing of goods. I do suggest that whether it is a manufacturing activity or processing activity in some way there must be direct involvement of such firm or association of persons in the manufacturing activity or the processing activity applied to the goods. We may notice that though the definition is of an industrial undertaking but no definition has been given of the words "manufacture" or "processing". According to the ordinary dictionary meaning, the term "manufacture" means a process which results in an alteration or change in the goods which are subjected to the process of manufacturing leading to the production of a commercially new article. In contrast to this, the activity contemplated by the word "process" in its, ordinary meaning means anything done requiring only continuous and regular action or succession of actions leading to the accomplishment of some result but one of the requirements is that the activity should involve some operation on some material for conversion into some other stuff. What is necessary in order to characterize an operation as processing is that the commodity must, as a result of the operation, experience any change, With this requirement of an activity of manufacture or process in mind, if one considers the further requirement that a person in order to take benefit of section 5(1)(xxxii), by pointing out that certain assets belong to an industrial undertaking the requirement is, it. must be engaged in the business of manufacture or processing of goods, that is to say, it must be engaged in carrying out such activity which resulted in bringing out a new product or engaged in carrying out such activity by which the goods have experienced some change. If the firm or association of persons is not carrying out any such activity of manufacturing of the goods or processing of the goods, it cannot be said that it is carrying on the business of processing or manufacturing of goods.

It may not be necessary that the manufacturing activity or the processing activity is carried on by the assessee or the firm or association of persons personally. It is only if the activity of processing or manufacturing is carried on under its supervision and control or by employing its own labour but certainly it cannot include where such manufacturing activity or processing activity is carried on by an independent person as its own business and the person who is engaged in selling of the end-product is only, concerned with paying the processing charges or manufacturing charges and then sell the goods. By paying the price of raw material and manufacturing or processing charges separately, it cannot be said that the person concerned is engaged in the business of carrying on the processing or manufacturing of goods. If that be so, it will be sufficient that goods sold by a person is manufactured or processed as per specific order and nothing more will be required.

The Tribunal has relied on, for the purpose of upholding the contention of the assessee, on a decision of the Allahabad High Court in CWT v. Mubarak Ali Khan (1980) 123 ITR 101. We are unable to find any support from that decision for the conclusion to which the Tribunal was reached. It was a case where the assessee was engaged in the business of manufacture and sale of biris. The Court found that the method of manufacture of biris involved the following process. The firms purchased tendu leaves and tobacco and these were given to local contractors for getting the biris manufactured. The labourers cut the useless portion of tendu leaves from all sides and then cut the leaves to small pieces of required size. These pieces were then rolled in the shape of biris. Tobacco was filled and the top portion was closed and the bidis were tied up with a thread. The biris were then brought to the factory of the firms and were hated for a short time. They were then packed in bundles of 25 each, wrapped in specially designed paper bearing trade mark and label of the firms. Therefore, from the tendu leaves and the tobacco, a new and different article, viz., the biris emerge as a result of various processes to which the tendu leaves and the tobacco were subjected. It may be noticed that not the entire activity of manufacture and the processing before the goods were ready for marketing was carried out by the third agency. Some part of the processing of the biris was carried on within the factory of the firm of which the assessee was a partner, viz., heating of the bidis which ultimately made it marketable.

In this connection, we may refer to the view expressed by the Madras High Court as well. In CIT v. Commercial Laws of India (Pvt.) Ltd. (1977) 107 ITR 822, the question arose whether the assessee-company, which was engaged in the business of printing and publication of a fortnightly journal "Sales Tax Cases", which did not own its own printing press, can be considered to be an industrial company engaged in the manufacture and processing of books. The facts found in that case were that the assessee-company entrusted the printing of the journal to another concern and on receipt of the printed sheets, engaged labour contractors, who folded and stitched the printed sheets and thereafter packed and despatched the parts to the subscribers. The case which had arisen under section 2(6)(d) of the Finance Act, 1968, giving benefit to industrial company which is manufacturing or processing of goods held that it is enough if the assessee, in order to get the benefit of the lower rate of tax, is engaged in the "processing" of goods. Though the printing of the sheets were done by a different concern and, therefore, there was no' question of the assessee carrying on any "manufacture", the folding and stitching of the printed sheets would constitute "processing' of goods" so as to fall within the scope of section 2(6)(d) and, as the assessee was engaged in such "processing", it would be liable to pay income-tax as an "industrial company".

CIT (Addl.) v. A. Mukherjee & Co.(P.) Ltd. (1978) 113 ITR 718 (Cal.), was again case of a publisher and printer of books. The assessee which was a publisher of books established the facts that it was to get the manuscript for publication, hit upon a suitable format for the book, get it printed as per its requirements under its supervision, get the book bound after suitable charges and then put out the publication for sale. In all these activities the assessee had to play an active role by coordinating its activities in a businesslike manner. All these activities dovetailed into one another and the stage from the acquisition of the manuscript right up to the publication was one integrated activity which tantamounted to a manufacturing be processing activity. That. the assessee did not own a printing press was not found to be a relevant consideration. The Court held that the assessee was engaged in the business of manufacturing or processing some of the activity was carried on by the assessee or the entire activity is carried on under the supervision and control of the assessee who was responsible for carrying out the entire process which was one integrated whole. The direct involvement of the assessee in the process of manufacturing was held to be an essential part and not the personal involvement or actual owning of the machines.

In CWT v. Premlatabai (Smt.) (1982) 137 ITR 329 (MP), which had arisen under section 5(1)(xxxi) of the Wealth Tax Act to which the Explanation in question is attached, the Court had opined that the Explanation nowhere lays down that the undertaking to be treated as "industrial undertaking", should itself carry out the entire processing of goods. If part of the processing is carried out by some other agency, the undertaking will not cease to be an "industrial undertaking" so long as it is engaged in the business of processing of goods. Thus, it was a case where at least part of the processing was carried out directly by the assessee under its control and supervision though part of it was carried out by an outside agency. But it was also a case where at least, to some extent, direct involvement of the assessee was found to be necessary. It was a case of ginning factory.

In CWT v. Lakshmi (K.) (1983) 142 ITR 656, a Bench of the Madras High Court, considering the very same provisions with which we are concerned, held that (headnote):

" ....the words 'engaged in the manufacture' in the said Explanation postulate the assessee's direct involvement in the manufacture. However, it may not be necessary that the assessee should be personally engaged in the manufacture, but it is sufficient if he employs his own labourers. 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 feeds the expenses incurred in -the manufacture. In respect of 'processing' it will not be correct to state that all the process resulting in the end manufacture must be carried out by the assessee himself. Accordingly, if the assessee has done some process which ultimately has brought about the end-product, such an assessee will be entitled to the benefit of the exemption."

In our opinion, this postulates the correct state 'of law with which we are in respectful agreement.

CWT v. Angadi Veeriah Chettiar (V. O.) 1987) 167 ITR 341 (Mad.), the facts .of which are more close to the case at hand, may be noticed. In the said case, the assessee was a partner in two firms O and A. The firm O purchased grey yarn and got it bleached for charges by the other firm A. The claim of the assessee for exemption under section 5(1)(xxxii) of the Wealth Tax Act in respect of his interest in the two firms was disallowed by the Income-tax Officer but accepted by the Appellate Assistant Commissioner and the ,Tribunal. The Court held that on the findings recorded by the Tribunal that the bleaching process is undertaken only by the firm A and the other firm O only got the grey yarn purchased by it bleached by the said firm A, the interest of the assessee in the assets of the firm O will not be entitled to exemption under section 5(1)(xxxii), but the assessee will be entitled to the exemption in respect of his interest in the assets of the other firm A.

Thus, the principles of law are settled by a catena of decision of various High Courts, none of which has opined contrary to what we have stated earlier. If we look at the facts found by the Revenue Authorities, they go to show that no direct involvement of the assessee with any processing act has been found to exist. In that view of the matter, the assessee cannot be said to have interest in a firm which is engaged in the business of manufacture of goods or processing of goods and, therefore, she is not entitled to claim the benefit of exemption under section 5(1)(xxxii), in respect of her share in the value of its assets.

Accordingly, we answer the question referred to us in the negative, that is to say, in favour of the Revenue and against the assessee. The assessee has not appeared in spite of service. No order as to costs.

M.B.A./122/FC Reference answered.