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Commissioner Of Income-Tax (Central), Bombay v. Shah Construction Co. Ltd.
Structured Summary of the Opinion — Shah Construction Co. Ltd. (Reference)
Factual and Procedural Background
The reference concerns Shah Construction Co. Ltd., Bombay, for assessment year 1964-65. The assessee is an engineering company engaged in construction of dams, bridges, buildings and other construction works, with extensive use of machinery.
The assessee held a flat in a building called “Khetan Estate.” The lease for the land was originally granted in 1943 and eventually led to the creation of Khetan Estate Ltd., which completed the building in 1952. The assessee, as a shareholder of Khetan Estate Ltd., was allotted a flat and paid monthly rent to that company as well as municipal and other taxes.
In proceedings before the Income-tax authorities, the AAC and the Tribunal found that the assessee was the owner of the flat, using it for business purposes, and allowed municipal taxes and depreciation while deleting an addition by the ITO of the flat's gross annual value as income from other sources.
Separately, the assessee claimed a rebate from super-tax under the Finance Act, 1964 (First Schedule, Pt. II, Para D) on the ground that it was wholly or mainly engaged in the manufacture or processing of goods. The Tribunal disallowed that rebate, holding the assessee's business was not manufacture or processing of goods.
At the instance of the Commissioner two questions (Nos. 1 and 2) and at the instance of the assessee a third question (No. 3) were referred to the court for opinion. The court received submissions from counsel for both sides and delivered the opinion summarized here.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the assessee was the real owner of the flat in question? (Question No. 1 — referred by the Commissioner)
- Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that no income could be said to accrue to the assessee from the aforesaid flat? (Question No. 2 — referred by the Commissioner)
- Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the assessee was not wholly or mainly engaged in the manufacture or processing of goods? (Question No. 3 — referred by the assessee)
Arguments of the Parties
Counsel for the Commissioner (Mr. Joshi)
- Conceded that Questions Nos. 1 and 2 are covered by the court's earlier decision in CIT v. Mahenira J. Shah, [1979] 118 ITR 902, and therefore should be decided in favour of the assessee.
- Relied on the decision in Commissioner Of Income-Tax, Bombay City-I v. N.U.C Private Ltd., [1980] 126 ITR 377 (Bom) to support the proposition that construction activity is not an activity of manufacture or processing of goods (though the court notes the N.U.C. decision turns on different statutory language).
Counsel for the Assessee (Mr. Trivedi)
- Contended that construction activity necessarily involves manufacture and processing of goods in large quantity; therefore the assessee should qualify as a company "wholly or mainly engaged in the manufacture or processing of goods" for purposes of the rebate under Para D, cl. (iii)(A) of Pt. II, First Schedule, Finance Act, 1964.
- Relied on CIT v. Pressure Piling Co. (India) P. Ltd., [1980] 126 ITR 333, to show that articles manufactured at a site (even if not tradable across a counter or transportable) may be considered manufactures; and on National Projects Construction Corporation Ltd. v. CWT, [1969] 74 ITR 465, and its characterization of industrial undertaking under s.45(d) W.T. Act, 1957, in support of the contention that construction companies can, on appropriate facts, be treated as engaged in manufacture/processing.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Mahenira J. Shah, [1979] 118 ITR 902 | Authority relied upon to decide ownership and income accrual issues regarding flats (Questions Nos. 1 & 2). | The court accepted counsel for the Commissioner’s concession that Questions Nos. 1 and 2 are covered by this decision and therefore answered those questions in favour of the assessee and against the Commissioner without further examination. |
| CIT v. Pressure Piling Co. (India) P. Ltd., [1980] 126 ITR 333 | Held that articles manufactured at site by special process (piles for foundations) could be considered articles manufactured by the assessee even if not tradable or transportable. | The court observed that this authority does not help the assessee here because the Tribunal in the present case did not deny rebate on the ground that manufactured items were not tradable; rather the Tribunal found that manufacture/processing was not the main activity but only incidental. |
| Commissioner Of Income-Tax, Bombay City-I v. N.U.C Private Ltd., [1980] 126 ITR 377 (Bom) | Construction (other than ships) was distinguished from manufacture or processing within the specific statutory definition of "industrial company" in the Finance Act, 1966. | The court noted this decision held construction activity (generally) was not manufacture under that particular statutory wording, but found the language of the Finance Act, 1966 differed from the provision under consideration (Finance Act, 1964), so N.U.C. could not conclusively determine the present matter. |
| National Projects Construction Corporation Ltd. v. CWT, [1969] 74 ITR 465 | Under the explanation to s.45(d) W.T. Act, 1957, an "industrial undertaking" engaged in manufacture/production/processing may include substantial and continuous manufacturing activity connected with construction (example: constructing dams with large workshops at worksites). | The court acknowledged this authority shows that, on its facts and under that statutory language, construction activity could amount to manufacture if manufacture/production was a substantial, continuous activity. It observed, however, that this decision turned on the specific language of s.45(d) and on factual findings of magnitude and continuity, so its relevance is limited. |
Court's Reasoning and Analysis
The court divided the analysis into two parts corresponding to the questions referred.
First, for Questions Nos. 1 and 2 (ownership of the flat and accrual of income from the flat), the court accepted the concession of counsel for the Commissioner that these issues were covered by the court's earlier decision in CIT v. Mahenira J. Shah. On that basis the court answered Questions Nos. 1 and 2 in the negative (that is, in favour of the assessee and against the Commissioner), and did not undertake further examination of those questions.
The substantive analytical effort was devoted to Question No. 3: whether the assessee was "wholly or mainly engaged in the manufacture or processing of goods" for purposes of the rebate under cl. (iii)(A) of Para D, Pt. II of the First Schedule to the Finance Act, 1964.
The court set out the statutory framework: Para D imposes super-tax on companies but contains provisos allowing partial rebates for companies "wholly or mainly engaged in the manufacture or processing of goods" (among other categories) subject to income thresholds. The precise issue was whether Shah Construction's business of constructing dams, bridges, buildings and other constructions qualified.
The court examined the factual findings of the AAC and of the Tribunal: both described the assessee's main business as construction (an engineering company using extensive machinery) and recorded that any processing activities (mixing materials for concrete, converting boulders to stones, etc.) were incidental or subsidiary. The Tribunal specifically held those processing activities to be a small component compared with the principal construction activity.
The court reviewed the precedents cited by the parties:
- Pressure Piling: held site-manufactured piles could be treated as manufactured articles, but the Tribunal in the present case had not denied rebate on the basis that manufactured items were not tradable; rather it found manufacture/processing was not the principal activity.
- NUC (Bombay): held construction not to be manufacture under the definition of "industrial company" in the Finance Act, 1966; the court found the NUC decision turned on that specific statutory phrasing and therefore did not conclusively apply to the Finance Act, 1964 provision at issue here.
- National Projects (Delhi): under s.45(d) W.T. Act, 1957, construction companies with substantial, continuous manufacturing operations at worksites could be treated as engaged in manufacture/production; the court observed this depends on the specific statutory language and the factual finding of considerable, continuing manufacturing activity.
Applying the statutory test to the facts as found by the income-tax authorities, the court concluded that Shah Construction's main activity was construction and that any manufacturing or processing was ancillary. The court characterized such ancillary processing at best as a "feeding activity" to the engineering construction operation, and not a main or predominant business of manufacture or processing of goods. There was no material in the record to show the extent of manufacturing or processing necessary to regard that activity as constituting the bulk of the company's business.
On these bases the court upheld the Tribunal's finding that the assessee did not qualify for the rebate under prov. (iii)(A) of Para D of the First Schedule to the Finance Act, 1964.
Holding and Implications
The court answered the referred questions as follows (verbatim in effect from the opinion):
Questions Nos. 1 and 2: In the negative, that is to say, in favour of the assessee and against the Commissioner.
Question No. 3: In the negative, that is to say, in favour of the Commissioner and against the assessee.
Immediate consequences for the parties (direct effects stated in the opinion):
- The Tribunal's determinations that the assessee was the real owner of the flat and that no income accrued to the assessee from the flat are upheld for the assessee (Questions 1 and 2 answered in the assessee's favour).
- The Tribunal's disallowance of the assessee's claim to the super-tax rebate under prov. (iii)(A) of Para D, First Schedule, Pt. II of the Finance Act, 1964 is upheld (Question 3 answered for the Commissioner); the assessee does not qualify as "wholly or mainly engaged in the manufacture or processing of goods" on the facts found.
- The court ordered costs: the respondent is to pay the applicant half of the costs of the reference (as stated in paragraph 12 of the opinion).
The opinion does not assert that it creates any new legal precedent beyond applying existing decisions and statutory language to the facts before the court. The court emphasized that particular prior authorities turned on distinct statutory language or on specific factual findings, limiting their direct applicability to this case.
Sujata Manohar, J.:— The assessees-in this reference are Shah Construction Co. Ltd., Bombay. The reference relates to assessment year 1964-65. The assessee-company is engaged in the business of constructing dams, bridges, buildings and other construction work. It is an engineering company and its work is mainly done with the extensive aid of machinery.
2. The assessee had a flat in a building known as “Khetan Estate” in Bombay. On or about 29th May, 1943, the State of Bombay granted a lease in respect of an open plot of land, on which Khetan Estate stands now, in favour of Kanji Property Ltd. for the construction of a building. Kanji Property Ltd. assigned this lease in favour of one Khetan on 6th November, 1950. Khetan in turn formed a company called “Khetan Estate Ltd.” The said company completed construction of the building on the said plot of land by 19th September, 1952. The assessee-company is one of the shareholders of Khetan Estate Ltd., and a flat in the said building has been allotted to the assessee as such shareholder. The shareholders are required to pay a monthly rent to the company for the flat allotted to them. They also pay municipal and other taxes levied in respect of the flat. In respect of the flat so held by the assessee-company the Tribunal, confirming the finding of the AAC, held that the assessee was the owner of the flat and it was using the flat for the purpose of its business. It allowed the muncipal taxes and depreciation in respect of the flat and deleted the addition, which the ITO had made, of the gross annual value as income from other sources. The assessee-company had also claimed a rebate from super-tax under the provisions of the Finance Act, 1964, First Schedule, Pt. II, Para. D, on the ground that it was wholly or mainly engaged in the manufacture or processing of goods. The Tribunal disallowed such a rebate, holding that the business of the assessee-company cannot be considered as either wholly or mainly manufacture or processing of goods. From these findings of the Tribunal, at the instance of the Commissioner, two questions have been referred to us for our opinion. At the instance of the assessee a third question has been referred to us for our opinion. The questions which have been so referred to us are as follows:
By the Commissioner
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the assessee was the real owner of the flat in question?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that no income could be said to accrue to the assessee from the aforesaid flat?”
By the assessee
“(3) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the assessee was not wholly or mainly engaged in the manufacture or processing of goods?”
3. Mr. Joshi, learned counsel for the Commissioner, has very fairly stated that questions Nos. 1 and 2, which have been raised at the instance of the Commissioner, are covered by a decision of this court in the case of CIT v. Mahenira J. Shah, [1979] 118 ITR 902. In view of this decision, both these questions will have to be decided in favour of the assessee and against the Commissioner.
4. In view of this submission of Mr. Joshi, we need not examine questions Nos. 1 and 2 any further.
5. The third question that requires consideration is whether the assessee can be considered as wholly or mainly engaged in the manufacture or processing of goods. The Finance Act, 1964, in the First Schedule, Pt. II, lays down the rate for super-tax and surcharge on super-tax. Under Para. D of Pt. II of the First Schedule, in the case of every company, other than the Life Insurance Corporation of India, super-tax at the rate of 55 per cent. has been levied on the whole of the income of a company. There are various provisos to Para. D. Under cl. (iii)(A), “in the case of a company which is wholly or mainly engaged in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power and whose total income does not exceed rupees five lakhs, a rebate at the rate of 30 per cent. on so much of its total income as does not exceed rupees two lakhs and a rebate at the rate of 20 per cent. on the balance of the total income,…… etc.” is allowed. According to Mr. Trivedi, learned counsel for the assessee-company, the business of the assessee-company is of constructing dams, bridges, buildings and other construction work. He submits that construction activity necessarily involves manufacture and processing of goods in a large quantity and, therefore, the assessee-company should have been entitled to a rebate on the basis that it was a company which was wholly or mainly engaged in the manufacture or processing of goods. He drew our attention to a decision of our court in the case of CIT v. Pressure Piling Co. (India) P. Ltd., [1980] 126 ITR 333. In that case the court was required to consider whether piles which were manufactured by the assessee-company by a special process and which were used in the foundation work of buildings could be considered as articles manufactured by the assessee-company. The court held that it was not necessary that articles which were manufactured should necessarily have the quality or the possibility of being sold and purchased across the counter nor was it necessary that they should be transportable to another site. A manufacturer specialising in the production of a particular product may produce and supply the article at the site itself. It held that the piles which were manufactured by the assessee-company at site for the foundation work in the construction of a building could be considered as articles manufactured by the assessee. We fail to see how this decision helps Mr. Trivedi in any manner. The Tribunal has not deprived the assessee in the present case of the rebate on the ground that they were not manufacturing articles which were capable of being sold across the counter. The Tribunal has held that the assessee's main activity was not the activity of manufacture or processing of articles or goods. This case, therefore, does not have any relevance to the question in issue.
6. The next decision which has been shown to us is the decision in the case of Commissioner Of Income-Tax, Bombay City-I v. N.U.C Private Ltd., [1980] 126 ITR 377 (Bom). In that case our High Court was required to consider the definition of “industrial company” as laid down in the Finance Act, 1966. Under the Finance Act, 1966, an “industrial company” was defined as follows:
“‘Industrial company’ means a company which is mainly 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.”
7. In construing this definition the court held that the activity of construction of ships was mentioned separately from the activity of manufacture or processing of goods. Since construction and manufacture were used in contradistinction to each other, a company which was engaged in the construction activity other than construction of ships could not be said to be a company engaged in the manufacture or processing of goods. This decision also turns upon the language of the definition of an industrial company. This language is different from the language used in cl. (iii)(A) of Para. D of Pt. II of the First Schedule to the Finance Act, 1964, where there is no reference to construction of ships or any other construction activity. Mr. Joshi strongly relied upon this decision and submitted that the construction activity was held as not an activity of manufacture or processing of goods. Since, however, the finding to this effect given in the decision turns upon the special language of the definition of an industrial company, it is not possible to hold that the matter in the present case is conclusively covered by the authority.
8. Mr. Trivedi, learned counsel for the assessee, drew our attention to a decision of the Delhi High Court in the case of National Projects Constrution Corporation Ltd. v. CWT, [1969] 74 ITR 465. In that case the court was required to construe the provisions of s. 45(d) of the W.T Act, 1957. Under the Explanation to that sub-section, for the purposes of cl. (d) : “an industrial undertaking” was defined as “an undertaking engaged in the manufacture, production or processing of goods or articles or in mining or in the generation or distribution of electricity or any other form of power.” In that case the assessee-company was engaged in the activity of constructing dams and barrages. The Tribunal had given a finding that the manufacturing work undertaken by the assessee was of considerable magnitude, for which purpose the assessee had large workshops at worksites. The court held that the only condition prescribed by the Explanation to s. 45(d) was that the industrial undertaking should be engaged in the manufacture, production or processing of goods or articles. It was not a condition that the goods should be produced for sale. So long as the activity of manufacture or production was not an occasional activity but was a continuing activity and it was a considerable activity, it could be said that the company was engaged in the manufacture, production or processing of goods or articles. The decision in this case also turns upon the language of the definition of “industrial undertaking” under s. 45(d) of the W.T Act, 1957, and the facts as found by the Tribunal there.
9. In the present case, in order that the company may qualify for rebate, it is necessary that the company should be wholly or mainly engaged in the manufacture or processing of goods. In this connection, in the present case, the finding given by the AAC is to the effect that the appellant-company's main business is to construct dams, bridges, buildings and other constructions. It is an engineering company and the work is being done with the extensive aid of machinery. The Tribunal has also held that the assessee is engaged in the work of constructing buildings, bridges, etc. The buildings and bridges, etc., cannot be said to be goods, and, therefore, the assessee-company cannot be said to be engaged in manufacturing goods. The Tribunal has also held that the assessee-company cannot be said to be engaged wholly or mainly in the processing of goods, though the assessee-company was required to carry out some processing activity, such as mixing of certain material to make concrete, converting of boulders into stones and so on. It has held that such processing activity was only incidental or subsidiary to the main activity of construction. When compared with the principal business of the assessee, such processing was only a very small component of its activity. In the statement of the case also the activities of the assessee-company are described as construction of dams, bridges, buildings and other constructions. The statement of the case also describes the assessee company as an engineering company whose work is mainly done with the extensive aid of machinery.
10. In view of these findings, it is not possible to accept the contention of Mr. Trivedi that the assessee-company is either wholly or mainly engaged in the manufacture or processing of goods. The main business of the assessee-company is construction business. Any activity which may be described as manufacturing of goods or processing of goods is ancillary to the construction activity of the assessee. At the highest, it can be described as a feeding activity. For, construction activity is a very complex activity involving application of technical know-how, material and skill of trained personnel for the purpose of construction of dams, bridges and so on. The company which engages in such engineering activity cannot be said to be a company which is either wholly or mainly engaged in the manufacture or processing of goods.
11. Thus, there is no merit in Mr. Trivedi's contention that manufacture and processing of goods is the main activity of the assessee. There is no material to show the extent of the manufacturing or processing of goods which is required for such construction activity. Hence, Mr. Trivedi's contention that manufacture and processing of goods forms a substantial part of the assessee's activities is not supported by any findings of the Tribunal or any other income-tax authority. On the contrary, the Tribunal has given a finding that the activity of manufacture or processing of goods is merely an ancillary or incidental activity of the assessee-company and forms only a small component of its main activity. In view of this position, in our view the Tribunal has rightly held that the assessee-company does not qualify for a rebate under prov. (iii)(A) of Para. D of the First Schedule to the Finance Act, 1964. Under the circumstances, the questions referred to us are answered are as follows:
Questions Nos. 1 and 2 referred to us at the instance of the Commissioner. In the negative, that is to say, in favour of the assessee and against the Commissioner. Question No. 3 referred to us at the instance of the assessee. In the negative, that is to say, in favour of the Commissioner and against the assessee.
12. In the circumstances of the case, the respondent to pay to the applicant half of the costs of the reference.
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