The Judgment of the Court was delivered by

Thanikkachalam, J.:— At the instance of the Department, the Tribunal referred the following common question of law for the opinion of this court under section 256(1) of the Income-tax Act, 1961, for the assessment years 1977-78 and 1978-79:

“Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 2(7)(c) of the Finance (No. 2) Act, 1977, the Appellate Tribunal was right in holding that the assessee-company is an ‘industrial company’ and is eligible for being taxed at the concessional rate of 55 per cent, for the assessment years 1977-78 and 1978-79?”

2. The assessee, Lakshmi Industries Pvt. Ltd., Pudukottai, was engaged in the business of hulling of paddy and extraction of oil. It leased out its factory to another concern and was earning lease income. For the assessment year 1977-78, the assessee claimed the concessional rate of tax of 55 per cent, on the ground that the assessee was an industrial company as defined under section 2(7)(c) of the Finance (No. 2) Act, 1977. So also for the assessment year 1978-79, the assessee claimed the same benefit under section 2(7)(c) of the Finance Act, 1978. However, the Income-tax Officer denied this concession on the ground that the assessee is not an industrial company. Aggrieved, the assessee filed appeals before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, in the assessment year 1977-78, following the earlier order of the Tribunal in I.T.A No. 1303 of 1978-79, dated December 15, 1978, for the assessment year 1976-77 in the case of the same assessee, held that the assessee-company would not come within the definition of “industrial company” under section 2(7)(c) of the Finance (No. 2) Act, 1977, and, therefore, the assessee is not eligible for the concessional rate of tax. Accordingly, the order passed by the Income-tax Officer was confirmed. So also for the assessment year 1978-79, aggrieved by the order of the Income-tax Officer, the assessee filed an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the assessee is an industrial company and, therefore, entitled to the concessional rate of tax of 55 per cent. Accordingly, the appeal was allowed. Aggrieved by the order of the Appellate Assistant Commissioner, both the Department as well as the assessee went in appeal before the Tribunal for the assessment years under consideration. The Tribunal relying upon the decisions in the cases of Lakshmi Industries (Private) Ltd. v. Commissioner Of Income-Tax, Madras., [1961] 41 ITR 645 (Mad); CIT v. National Mills Co. Ltd., [1958] 34 ITR 155 (Bom) and Addl. Commissioner Of Income-Tax v. Abbas Wazir (P.) Ltd., [1979] 116 ITR 811 (All) held that the assessee is an industrial company entitled to the concessional rate of tax of 55 per cent. The Tribunal allowed the appeal filed by the assessee and dismissed the appeal filed by the Department.

3. Before us, learned standing counsel submitted that the assessee is not an industrial company since it was not 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 as contemplated under section 2(7)(c) of the Finance (No. 2) Act, 1977. The contention of learned standing counsel for the Department was that the assessee was not directly engaged in the manufacture or processing of goods so as to claim the concessional rate of tax at 55 per cent. The assessee during the assessment years under consideration leased out the factory to a third party and earned lease income. Therefore, inasmuch as the assessee was not mainly engaged in the manufacture or processing of goods, it cannot claim even to be an industrial company. In order to support this contention, learned standing counsel relied upon a decision of the Madras High Court in CWT v. P.T.N Shenbagamoorthy, [1983] 144 ITR 724. Learned standing counsel also relied upon another decision of the Bombay High Court in Vita Pvt. Ltd. v. CIT, [1995] 211 ITR 557. According to learned standing counsel, the decision rendered by this court in Commissioner Of Income-Tax v. First Leasing Co. Of India Ltd., [1995] 216 ITR 455 would not be applicable to the facts of this case. Relying upon the abovesaid decisions, learned standing counsel for the Department contended that the Tribunal was not correct in holding that the assessee is an industrial company mainly engaged in the manufacture or processing of goods and, therefore, entitled to the concessional rate of tax at 55 per cent.

4. On the other hand, learned counsel appearing for the assessee, while supporting the order passed by the Tribunal contended that in view of the earlier decision of this court rendered in the case of the same assessee in Lakshmi Industries (Private) Ltd. v. Commissioner Of Income-Tax, Madras., [1961] 41 ITR 645 (Mad), the assessee is entitled to the concessional rate of tax since the assessee is also an industrial company mainly engaged in the manufacture or processing of goods.

5. We have heard the rival submissions. The point for consideration is, whether the assessee is an industrial company entitled to concessional rate of tax at 55 per cent. According to the facts arising in this case, the assessee has a factory and was engaged in the business of hulling of paddy and extraction of oil. For the assessment years under consideration, the factory and the machinery were leased out to a third party and the assessee was earning lease income. But the assessee was not doing any manufacturing or processing activities by itself during the assessment years under consideration. The assessee claimed the concessional rate of tax of 55 per cent, under section 2(7)(c) of the Finance (No. 2) Act, 1977, and the Finance Act, 1978. According to the Department, inasmuch as the assessee was not mainly engaged in the manufacturing activities, it cannot be considered as an industrial company. But, according to the assessee, even an income earned by leasing out the factory and the machinery would be entitled to the concessional rate of tax under section 2(7)(c) of the Finance (No. 2) Act, 1977, and the Finance Act, 1978.

6. section 2(7)(c) of the Finance (No. 2) Act, 1977, states as under (see [1977] 109 ITR (St.) 1, 4):

“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.

Explanation.— For the purposes of this clause, a company shall be deemed to be 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, if the income attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making any deduction under Chapter VI-A of the Income-tax Act) is not less than fifty-one per cent, of such total income.”

7. According to the facts arising in Lakshmi Industries (Private) Ltd.'s case, [1961] 41 ITR 645 (Mad), the assessee-company which owned an oil and rice mill, manufactured groundnut oil and cake and sold them, leased the entire mill during the relevant year at a rent of Rs. 3,000 per month. The assessee also sold a small quantity of oil and groundnut which it had in stock at the beginning of the year. The Department and the Tribunal refused to set-off the loss it has sustained in the earlier years against the profits realised during that year on the ground that the lease of the mill was not the same business as that carried on by the assessee during the earlier years, viz., the manufacture of groundnut oil and cake and the sale of the products thereof. On a reference, this court held that the rental income realised by the assessee by letting out the entire mill was no less the income of the business which it was carrying on than the income which it would have realised had it itself worked the mill. From the mere fact that the entire manufacturing plant had been leased out for a duration, the assessee could not be said to have given up its business altogether and had no intention of resuming the business when favourable conditions offered themselves. The fact that the assessee sold the stock of oil and groundnut, although the sales were not of a large volume, showed that the assessee still carried on its business. The assessee was, therefore, entitled to carry forward and set-off the loss of earlier years against the income of the relevant year. In this case, this court was concerned with the provisions contained in section 24(2) of the Income-tax Act, according to which provision carrying forward of the loss will be allowed only if the same business in which the loss was originally sustained continued to be carried on by him in that year. Therefore, this court held that the lease income earned by letting out the factory and machinery for a temporary period would amount to business income of the assessee. Therefore, this decision rendered while considering the provisions for set-off of the loss under section 24(2) of the Act cannot be relied upon for the purpose of saying that the assessee is entitled to concessional rate of tax under section 2(7)(c) of the Finance (No. 2) Act, 1977, wherein it is clearly stated that the assessee should be mainly engaged in the manufacture or processing of goods. Therefore, unless the assessee is personally engaged in the manufacturing activity or processing of goods, it cannot claim itself to be an industrial company under the abovesaid provisions.

8. According to the facts arising in CWT v. P.T.N Shenbagamoorthy, [1983] 144 ITR 724 (Mad), one of the assessees who was owning certain salt pans actually manufactured salt and was engaged in the said business while the other had leased out the salt pans to a third party who was manufacturing the salt. The assessee's claim that exemption under section 5(1)(xxxi) of the Wealth-tax Act, 1957, should be granted in respect of the salt pans was accepted by the Tribunal. On a reference, this court held that the production of salt was clearly a manufacturing activity and that the activity of manufacture would alone be considered to be an industrial undertaking, and not mere ownership of an asset as such, because an undertaking is normally understood as any business or any work or project which one engages in or attempts as an enterprise analogous to business or trade. In the abovesaid decision the assessee who actually manufactured salt on his own lands would be eligible for exemption under section 5(1)(xxxi). However, the assessee who owned the salt pans but who had leased out the same to a third party could not be held to be actually engaged in the manufacture of salt and consequently could not get exemption under section 5(1)(xxxi). Section 5(1)(xxxi) uses the expression “industrial undertaking” and the “industrial undertaking” has been defined under the Explanation to section 5(1)(xxxi) as follows:

“‘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.”

9. The expression “industrial undertaking” occurring in section 5(1)(xxxi) of the Wealth-tax Act, 1957, is more or less similar to the expression “industrial company” occurring in section 2(7)(c) of the Finance (No. 2) Act, 1977. Even in the abovesaid decision this court pointed out that being the owner of the salt pan alone is not sufficient for claiming exemption under section 5(1)(xxxi) of the Wealth-tax Act. In order to get the benefit in the abovesaid provision, the assessee should be actually engaged in the manufacture of salt as otherwise the assessee could not get exemption under section 5(1)(xxxi) of the Wealth-tax Act.

10. Our attention was drawn to the decision of the Bombay High Court in Vita Pvt, Ltd. v. CIT, [1995] 211 ITR 557. According to the facts arising in this case, the assessee-company which, was engaged in the business of manufacturing and selling various kinds of brushes including tooth brushes, hair combs and articles and tooth paste and other toilet articles and which were marketed by it under its own brand name, installed machinery in a building occupied on rent and employing a number of employees in the factory. The assessee entered into an agreement of lease with another company under which the tight to carry on the business for a period of five years was let out to the lessee-company. The lessee-com-pany had to pay the assessee a certain amount monthly as consideration for the right to conduct the business and the business was to be carried on by the lessee-company at its own risk and responsibility. For the assessment year 1975-76, the assessee claimed that it should be deemed to be an industrial company as defined by section 2(8)(c) of the Finance Act, 1975, liable to pay tax at a concessional rate, though the assessee itself did not carry on any manufacturing activity during the previous year relevant to the assessment year in question, by virtue of the amount received by it by letting out the factory to the lessee. The assessee also contended that it still continued the business of manufacturing goods in the year in question through the instrumentality of the lessee-company. On these facts, on a reference, the Bombay High Court held that after the agreement, the assessee ceased to be engaged in the manufacture or processing of goods and hence no part of the income of the asessee was attributable to such activity. The lease rent or royalty received by the assessee could not be termed as income attributable to any manufacture or processing of goods undertaken by the assessee. Therefore, the assessee could not be held to be an industrial company within the meaning of section 2(8)(c) of the Finance Act, 1975.

11. We have also come across a decision of this court rendered in Commissioner Of Income-Tax v. First Leasing Co. Of India Ltd., [1995] 216 ITR 455. According to the facts arising in the abovesaid decision, the assessee owned plant and machinery and let out the same to a third party for being exploited by the latter. The assessee was receiving lease amount for such letting out of the machinery. The assessee claimed investment allowance under section 32A(1) of the Income-tax Act, 1961. Section 32A(1) of the Act runs as follows (page 461):

“32A. (1) In respect of a ship or an aircraft or machinery or plant specified in sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed… of a sum by way of investment allowance equal to twenty-five per cent, of the actual cost of the ship, aircraft, machinery or plant to the assessee….”

12. For the purpose of obtaining investment allowance under section 32A of the Income-tax Act, 1961, the plant or machinery specified in subsection (2) should be owned by the assessee and be wholly used for the purpose of the business carried on by him. Therefore, what is relevant for obtaining investment allowance is that the plant or machinery should be owned by the assessee and it should be wholly used for the purpose of the business carried on by the assessee. According to the facts arising in the abovesaid case, the business of the assessee was leasing out the machinery installed in its factory. Therefore, inasmuch as the plant and machinery installed in the factory owned by the assessee was wholly used by way of letting out to a third party which is the business carried on by the assessee, the assessee was granted investment allowance under section 32A of the Income-tax Act, 1961. But, in order to claim reduced rate of tax under section 2(7)(c) of the Finance (No. 2) Act, 1977, the assessee should be mainly engaged in the manufacture or processing of goods in order to consider itself as an industrial company. If the assessee is not mainly engaged in the manufacture or processing of goods, the assessee cannot consider itself as an industrial company. If the assessee is not an industrial company, it cannot claim concessional rate of tax. In the present case, it was clearly pointed out that the assessee was not utilising the plant and machinery for the purpose of mainly engaging in the manufacture or processing of goods. On the other hand, the assessee was leasing out the plant and machinery to a third party and earning lease income. Hence, the lease income cannot be considered to be earned by mainly engaging in manufacture and processing of goods by the assessee. Therefore, the assessee is not entitled to claim concessional rate of tax as an industrial company.

13. In that view of the matter, we hold that the Tribunal was not correct in coming to the conclusion that the assessee is an industrial company under the provisions of section 2(7)(c) of the Finance (No. 2) Act, 1977. Accordingly, we answer the question referred to us in the negative and in favour of the Department in both the assessment years under consideration. However, there will be no order as to costs.