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Shankar Construction Co. v. Shankaranarayana Construction Co.

Karnataka High Court

Nov 8, 1990

Judgment

Subsequent
References

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Structured Summary of the Opinion (delivered by M.P. Chandrakantaraj Urs, J.)

Factual and Procedural Background

Several Income-tax Reference Cases (I.T.R.C. Nos. 138, 139, 217, 218 of 1985 and I.T.R.C. No. 27 of 1986) were consolidated for common disposal because they involved the same question referred by the Tribunal.

The assessees in the consolidated matters included M/s. Shankar Construction Co., Bangalore (I.T.R.C. Nos. 138 & 139 of 1985); M/s. Shankaranarayana Construction Co., Bangalore (I.T.R.C. Nos. 217 & 218 of 1985); and M/s. Naveen Mechanised Construction Co. (P.) Ltd., Hubli (I.T.R.C. No. 27 of 1986).

For the relevant assessment years (1978-79 and 1979-80), the assessees claimed investment allowance at the rate of 25% of the value invested in plant and machinery employed in on-site construction work. The assessing authorities disallowed the claims.

On appeal, the Commissioners of Income-tax (Appeals) in some cases allowed the claims, treating the assessees as "industrial undertakings" and relying on decisions of High Courts (including CIT v. N.C. Budharaja and CIT v. Pressure Piling Co.). The Revenue appealed to the Income-tax Appellate Tribunal (Bangalore Bench).

The Tribunal, following a Special Bench earlier decision, held (in the first four cases) that companies engaged in construction of dams and channels could not be held to be industrial undertakings and therefore denied the allowance. In the last case (I.T.R.C. No. 27 of 1986), the Tribunal confirmed the appellate allowance in favour of the assessee.

The Tribunal referred the following question (as framed initially) to the Court for answer: “Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in upholding the disallowance of investment allowance?”

The Court reformulated the question to read: “Whether, on the facts and in the circumstances of the case, the allowance provided for under sub-clause (iii) of clause (b) of sub-section (2) of section 32A of the Act will enure to the benefit of the assessee?”

Legal Issues Presented

Whether, on the facts and circumstances of these cases, the Tribunal was justified in law in upholding the disallowance of investment allowance (original question referred by the Tribunal).
Whether the allowance provided for under sub-clause (iii) of clause (b) of sub-section (2) of section 32A of the Income-tax Act will enure to the benefit of the assessee (the Court's reformulated question).

Arguments of the Parties

Assessees' Position

The assessees claimed investment allowance at the rate of 25% of the cost of plant and machinery used in on-site construction, asserting that their activities constituted an "industrial undertaking" within the meaning of section 32A(2)(b)(iii) of the Income-tax Act.
At the appellate stage (before the Commissioner of Income-tax (Appeals)), the allowance was allowed on the ground that the firms were carrying on industrial activities and were entitled to benefit under precedents relied upon by the Commissioners.

Revenue's Position

The assessing authorities disallowed the investment allowance claims.
On appeal to the Tribunal, Revenue relied on a Special Bench decision of the Tribunal which concluded that companies engaged in construction of dams and channels could not be held to be "industrial undertakings" for the purpose of section 32A(2)(b)(iii), and the Tribunal followed that view in the first four cases to deny the allowance.

Tribunal / Commissioner Positions (procedural posture)

The Commissioners of Income-tax (Appeals) allowed the claims in certain cases, applying decisions of High Courts (e.g., CIT v. N.C. Budharaja; CIT v. Pressure Piling Co.).
The Tribunal, following a Special Bench ruling, disallowed the allowance for the first four cases but confirmed allowance in the last case (I.T.R.C. No. 27 of 1986).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. N.C. Budharaja & Co. [1980] 121 ITR 212 (High Court of Orissa)	Used by the Commissioners to support treating the assessee as an industrial undertaking; illustrates that in absence of statutory definition, reference may be had to sister legislation or common parlance.	The Court referenced this decision as authority for the approach of consulting sister legislation or common parlance to determine the meaning of "industrial undertaking" and relied on its reasoning in favour of the assessees.
CIT v. Pressure Piling Co. (India) (P.) Ltd. [1980] 126 ITR 333 (High Court)	Relied upon by Commissioners in allowing allowance; another High Court decision invoked to treat construction activity as industrial for section 32A purposes.	The Court noted this decision had been relied upon by the Commissioners and treated it as part of the jurisprudence supporting the assessee's entitlement where the activity falls within an industrial description.
Bangalore Water Supply and Sewerage Board v. A. Rajappa [(1978) 2 SCC 213 : AIR 1978 SC 548]	Authoritative Supreme Court exposition of the meaning of "industry" and "undertaking" (the three-element test: systematic activity; employer-employee organisation; production/distribution of goods/services).	The Court extracted and applied the Rajappa formulation as binding authority to interpret "industrial undertaking" in section 32A(2)(b)(iii) and relied on it as determinative in favour of the assessees.
D.N. Banerji v. P.R. Mukherjee [AIR 1953 SC 58]	Explains contextual shrinkage of the term "undertaking" (as referred to in Rajappa).	The Court cited the decision (as incorporated in Rajappa) to illustrate the contextual and associational limits of "undertaking" when interpreting the statutory phrase.
Sree Yellamma Cotton, Woollen and Silk Mills Co. Ltd. [AIR 1969 Mysore 280]	Judicial examination of "undertaking" — treating it as an activity (tools of business support the activity rather than being the undertaking itself).	The Court cited this decision to support the proposition that "undertaking" denotes an activity and not merely tangible property, reinforcing the industrial-character analysis.
Commissioner of Income-Tax, Madras v. M.R. Gopal [1965] 58 ITR 598 (High Court of Madras)	Held that converting boulders into small stones by machinery is a manufacturing process and the undertaking is an "industrial undertaking".	The Court relied on this case as an example where processing with machinery was treated as industrial activity, supporting the conclusion that construction-related processes can be industrial.
Commissioner of Income-Tax, Bombay v. Oricon P. Ltd. [1985] 151 ITR 296 (High Court of Bombay)	Addressed whether a company carrying on construction was an industrial company; held that giving sub-contracts for part of the work does not negate industrial character.	The Court cited this decision (which followed the Madras ruling) to show that subcontracting does not deprive an entity of industrial character; it supported the Court's view in these cases.
CWT v. K. Lakshmi [1983] 142 ITR 656	Earlier decision relevant to the question whether a construction company is an industrial undertaking (cited in the context of the Oricon decision).	The Court referenced it as part of the chain of authority followed by the High Court of Bombay and considered it supportive of the assessees' position.
National Projects Construction Corporation Ltd. v. CWT [1969] 74 ITR 465 (Delhi High Court)	Held that a company engaged in construction of dams and barrages was an industrial company.	The Court cited this decision directly as authority holding construction of dams to be industrial activity and relied on it in concluding for the assessees.
Special Bench of the Income-tax Appellate Tribunal (earlier ruling)	Determined that a company engaged in construction of dams and channels could not be held to be an industrial undertaking for section 32A purposes (basis for the Tribunal's orders in the first four cases).	The Court observed that the Tribunal had followed that Special Bench ruling in denying allowance in the first four cases but found the Tribunal had been in undue haste in doing so and disagreed with the application of that ruling to the facts of these assessees.

Court's Reasoning and Analysis

Step 1 — Identification and reformulation of the question: The Court concluded the original question as framed by the Tribunal was not correct and reformulated it to ask whether allowance under s.32A(2)(b)(iii) of the Income-tax Act will enure to the benefit of the assessee.

Step 2 — Statutory text and undisputed elements: The Court reproduced section 32A(2)(b)(iii) and noted that the basic entitlement to an investment allowance equal to 25% of the actual cost of plant was not in dispute. The real controversy was whether the assessees' construction activities fell within the expression "industrial undertaking" in that provision.

Step 3 — Appraisal of tribunal and earlier rulings: The Court found that the Tribunal had been in some haste in the first four cases in following the Special Bench decision and denying the benefit without applying its own mind to the particular facts of the assessees.

Step 4 — Reliance on binding authority and other precedents: The Court held the Supreme Court's decision in Bangalore Water Supply and Sewerage Board v. A. Rajappa to be binding law on the question of the meaning of "industry" and "undertaking". The Court extracted the Rajappa formulation (the threefold elements for "industry" and the contextual treatment of "undertaking") and applied it to the facts.

Step 5 — Use of supporting authorities and dictionary meaning: The Court examined other decisions (including High Court decisions that treated construction or processing with machinery as industrial) and the entry from Stroud's Judicial Dictionary to support the natural and judicial meaning of "industrial undertaking".

Step 6 — Applicability to the present facts: Applying the Rajappa test and the cited authorities, the Court concluded that the activities carried on by the assessees (large-scale construction, manufacture and use of plant and machinery in execution of construction work) were activities of an industrial undertaking within the meaning of s.32A(2)(b)(iii). The Court expressly stated that the assessees' activities were "certainly those of an industrial undertaking" and therefore entitled to the allowance.

Step 7 — Conclusion and correction of tribunal orders: On that basis the Court answered the reformulated question in the affirmative in favour of the assessees. The Court set aside the Tribunal's order in I.T.R.C. Nos. 138, 139, 217 and 218 of 1985 (i.e., those where the Tribunal denied allowance) and affirmed the Tribunal's order in I.T.R.C. No. 27 of 1986 (where the allowance had been confirmed).

Holding and Implications

Holding (core ruling): The Court answered the reformulated question in the affirmative and held that the allowance provided under sub-clause (iii) of clause (b) of sub-section (2) of section 32A of the Income-tax Act will enure to the benefit of the assessees in these cases; accordingly, the Court set aside the Tribunal's orders in I.T.R.C. Nos. 138, 139, 217 and 218 of 1985 and affirmed the Tribunal's order in I.T.R.C. No. 27 of 1986.

Implications:

Direct effect on the parties: The assessees in the first four reference cases are entitled to the investment allowance under section 32A(2)(b)(iii) as they were correctly to be regarded as carrying on industrial undertakings; the Tribunal's contrary orders in those cases were set aside. The Tribunal's order confirming allowance in the remaining reference case was affirmed.
No broader new precedent set was asserted by the Court in this opinion; the Court's ruling rests on application and exposition of existing authorities (notably the Rajappa decision and supporting High Court decisions and dictionary meaning) to the facts at hand.
Costs: The Court directed that there be no order as to costs.

This summary is based exclusively on the content of the provided opinion and does not add information beyond the opinion's text.

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The Judgment of the Court was delivered by

M.P Chandrakantaraj Urs, J.:— The above I.T.R.C.s are consolidated together and disposed of by the following common order as the question referred to us for answer by the Tribunal either at the instance of the assessing authority or at the instance of Revenue are the same. Before setting out the questions referred to us, we briefly state that the assessee in I.T.R.C Nos. 138 and 139 of 1985 is M/s. Shankar Construction Co., Bangalore, a registered firm carrying on business in manufacture and sale of tiles and construction work on a somewhat large scale specialising in construction of dams and channels. Similarly, the assessee in I.T.R.C Nos. 217 and 218 of 1985 is M/s. Shankaranarayana Construction Co., Bangalore. The assessee in the case of I.T.R.C No. 27 of 1986 is Naveen Mechanised Construction Co. (P.) Ltd., Hubli.

2. In the first four cases, the assessee for the relevant assessment years, viz., 1978-79 and 1979-80, claimed allowance at the rate of 25% of the value invested by them in plant and machinery employed in the execution of their construction work at the site of the construction which came to be disallowed by the assessing authority. On appeal to the Commissioner of Income-tax (Appeals)-I, Bangalore, the appeal came to be allowed on the ground that the assessee-firm carrying on business activities were in the nature of an “industrial undertaking” and as such was entitled to the benefit of the rulings of the High Court of Orissa in the case of CIT v. N.C Budharaja and Co. [1980] 121 ITR 212, as well as in the case of CIT v. Pressure Piling Co. (India) (P.) Ltd. [1980] 126 ITR 333 (decided by the Orissa High Court and the High Court of Judicature, Bombay, respectively). The Revenue Went up in appeal to the Income-tax Appellate Tribunal, Bangalore Bench, against those orders of the Commissioner of Income-tax (Appeals). The Tribunal, by its order, following the ruling of the Special Bench of the Tribunal rendered earlier, came to the conclusion that the two decisions of the High courts relied upon by the Commissioner (Appeals) were decided on other provisions of the Income-tax Act, then section 32A of the Income-tax Act (“the Act” for short). They have referred to the ruling of the Special Bench that the company engaged in the construction of dams and channels could not be held to be an industrial undertaking and, therefore, the Commissioner was in error in permitting allowance under sub-clause (i) of clause (b) of sub-section (2) of section 32A of the Act.

3. In the last of the cases, viz., I.T.R.C No. 27 of 1986, M/s. Naveen Mechanised Construction Co. (P.) Ltd., the claim was disallowed by the assessing authority. But, on appeal filed, it was given allowance under the very same provision. On appeal by the Revenue, the appellate order was confirmed by the Tribunal following the same decision. In that circumstance, the question which has been set out hereafter has been referred for our answer in all these cases:

The question is as follows:

“Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in upholding the disallowance of investment allowance?”

4. The question as formulated, we feel, is not correct. Therefore, we reformulate the question under the circumstances and the facts of the case as follows:

“Whether, on the facts and in the circumstances of the case, the allowance provided for under sub-clause (iii) of clause (b) of sub-section (2) of section 32A of the Act will enure to the benefit of the assessee?”

5. Sub-section (2) of section 32A of the Act, relevant for our purpose and applicable to the relevant assessment years in question, reads as follows:

“32 A. Investment allowance —….

(2) The ship or aircraft or machinery or plant referred to in sub-section (1) shall be the following, namely:—

(a) a new ship or new aircraft acquired after the 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft;

(b) any new machinery or plant installed after the 31st day of March, 1976—

(i) for the purposes of business of generation or distribution of electricity or any other form of power; or

(ii) in a small-scale industrial undertaking for the purpose of business of manufacture or production of any article or thing; or

(iii) in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule.”

6. From the language employed in section 32A(1) of the Act, it is clear that investment allowance equal to 25% of the actual cost of plant to the assessee should be given deduction. On that question, there is no dispute between the assessees and the Revenue. The dispute centres round the question whether the assessees are to be considered to have engaged themselves in industrial activities by undertaking construction work falling within the definition or description of “industrial undertaking” occurring in sub-clause (iii) of clause (b) of sub-section (2) of section 32A of the Act.

7. We feel that the Tribunal was in some haste in the first four cases in following the Special Bench's decision and denying the benefit to the assessee without application of its own mind to the question. In the circumstances of the case of the assessees in the first four cases, on consideration by us, as held by the High Court of Orissa in the case of CIT v. N.C Budharaja and Co. [1980] 121 ITR 212, the law is fairly settled that in the absence of a statutory definition, it would be open to look for the meaning by reference to definitions in a sister legislation and, failing that, to adopt the meaning in common parlance. It is too late in the day to say that the word “industrial undertaking” has not fallen for judicial consideration. It is possible to refer to numerous decisions. But it would be most useful to refer to the decisions of the Supreme Court in Bangalore Water Supply and Sewerage Board v. A. Rajappa [1978] 52 FJR 197 : (1978) 2 SCC 213 : AIR 1978 SC 548, wherein the words “industry” and “undertaking” fell for consideration and certain other earlier decisions were specifically overruled. It suffices for us to extract the following passage to drive home the meaning of the expression “industrial undertaking” occurring in sub-clause (iii) of clause (b) of sub-section (2) of section 32A of the Act and it is as follows (head-note of (1978) 2 SCC 213 : AIR 1978 SC 548):

“‘Industry’ as defined in section 2(j) has a wide import.

Where there is (i) systematic activity; (ii) organised by co-operation between employer and employee (the direct and substantial element is chimerical, (iii) for the production and/or distribution of goods and services calculated to satisfy human wants and wishes (not spiritual or religious but inclusive of material things or services geared to celestial bliss, e.g, making, on a large scale, prasad or food), prima facie, there is an industry in that enterprise.

Absence of profit motive or gainful objective is irrelevant, be the venture in the public, joint, private or other sector.

The true focus is functional and the decisive test is the nature of the activity with special emphasis on the employer-employee relation.

If the organisation is a trade or business, it does not cease to be one because of philanthropy animating the undertaking.

Although section 2(j) uses words of the widest amplitude in its two limbs, their meaning cannot be magnified to overreach itself.

‘Undertaking’ must suffer a contextual and associational shrinkage as explained in D.N Banerji v. P.R Mukherjee [1952-53] 4 FJR 443 : AIR 1953 SC 58, so also, service, calling and the like. This yields the inference that all organised activity possessing the triple elements above mentioned, although not trade or business, may still be ‘industry’ provided the nature of the activity, viz., the employer-employee basis, bears resemblance to what is found in trade or business. This takes into the fold of ‘industry’ undertakings, callings and services, adventures analogous to the carrying on of trade or business. All features, other than the methodology of carrying on the activity, viz., in organising the co-operation between employer and employee, may be dissimilar. It does not matter, if on the employment terms there is analogy”.

8. It is needless for us to point out that the above ruling is binding on us.

9. In the matter of Sree Yallamrna Cotton, Woollen and Silk Mills Co. Ltd. [1970] 40 Comp Cas 466, 485 : AIR 1969 Mysore 280, late Justice A. Narayana Pai (as he then was), sitting as company judge, had occasion to judicially examine the expression “undertaking” in the context of “floating charge”. The learned judge ruled as follows (headnote of AIR 1969 Mysore 280):

“‘Undertaking’ is not in the real meaning anything which may be described as a tangible piece of property like land, machinery or the equipment; it is in actual effect an activity of man which in commercial or business parlance means an activity engaged in with a view to earn profit. Property, movable or immovable, used in the course of or for the purpose of such business can more accurately be described as the tools of business or undertaking, i.e, things or articles which are necessarily to be used to keep the undertaking going or to assist the carrying on of the activities leading to the earning of profits.”

10. Similarly, the High Court of Madras in Commissioner Of Income-Tax, Madras v. M.R Gopal. [1965] 58 ITR 598, came to the conclusion that the process employed in converting boulders into small stones with the aid of machinery is a manufacturing process and the undertaking is an “industrial undertaking”.

11. The High Court of Judicature, Bombay, in the case of Commissioner Of Income-Tax, Bombay v. Oricon P. Ltd. [1985] 151 ITR 296, following the ruling of the High Court of Madras in CWT v. K. Lakshmi [1983] 142 ITR 656, ruled that merely because the assessee had given sub-contracts for a part of the work, it would not lose its character of being an industrial company (See [1984] 16 Taxman 100). We must only point out that, in that case, it was disputed whether the company which was carrying on the business of construction of building was an industrial company or not. Therefore, we have referred to the decision though the same was cited by learned counsel for the Revenue.

12. Similar is the view taken by the Delhi High Court in the case of National Projects Construction Corporation Ltd. v. CWT [1969] 74 ITR 465. It was therein held that the company engaged in the construction of dams and barrages was an industrial company.

13. In addition to the decisions mentioned, we have examined the natural meaning of the expression “industrial undertaking” given in Stroud's Judicial Dictionary, Volume 3, IV Edition, at page 1357. Following is the judicial meaning of the expression “industry”.

“Industry.—(1) ‘Promotion of Industry and Commerce’ (Town and Country Planning Act, 1947 (10 and 11 Geo. 6, C. 51) s. 85): See Crystal Palace Trustees v. Minister of Town and Country Planning, 66 TLR (Pt. 2) 753.

(2) (Australia: Commonwealth Conciliation and Arbitration Act, 1901-1947. S. 13) ‘Industry’ included ship painters and dockers, see R.V Galvin, 23 ALJ 20.

(3) An undertaking, although not carried on for profit, could be an ‘industry’ within the meaning of s. 18 of the Industrial Arbitration Act, 1940 (N.S.W) (Re Independent Schools and Colleges Domestic Staff [1963] AR (N.S.W) 904).

(4) Fire-fighting has been held to be an ‘industry’ within the meaning of s. 96(1) of the Industrial Arbitration Act, 1940-1968 (N.S.W) Steward v. Board of Fire Commissioners (N.S.W) [1970] LB Co's Indus. Arb. Serv. Current Review p. 32), but not an ‘industry’ within the meaning of s. 132(1)(b) of the Conciliation and Arbitration Act, 1904-1969 (6th) (Pitfield v. Franki [1970] 44 ALJR).

(5) The process of destroying garbage by incineration was not an ‘industry’ within cl. 3 of the Country Cumberland Planning Scheme Ordinance (Woollahra Municipal Council v. Sydney City Council [1966] 12 L.G.R.A)

Stat. Def. Industrial Reorganisation Corporation Act, 1966 (C. 50) S. 2(7); Industrial Relations Act, 1971 (C. 72), s. 167.”

14. Therefore, when a taxing statute has to be construed even when two views are possible, the view that favours the assessee who bears the burden of tax should be favoured by the court.

15. Assuming that any other interpretation is possible for the expression “industrial undertaking” occurring in section 32A(2)(b)(iii) of the Act (which is doubtful), it is unexceptionable that the activities carried on by the assessee in these cases were certainly those of an industrial undertaking and as such were entitled to the allowance.

16. In the result, we answer the question we have reformulated in the affirmative and in favour of the assessee and set aside the order of the Tribunal in Income-tax Reference Cases Nos. 138, 139, 217 and 218 of 1985 and affirm the order of the Tribunal in Income-tax Reference Case No. 27 of 1986.

17. No order as to costs.