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Commissioner Of Income Tax v. Sutna Stone & Lime Co. Ltd

Calcutta High Court

May 12, 1981

Judgment

Subsequent
References

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Concise Analytical Summary of the Opinion

Factual and Procedural Background

The assessee is a public limited company engaged in the production of limestone and in producing lime for sale. For the assessment year 1970-71 its assessment exceeded Rs. 5,40,000. The assessee manufactured limestone and lime in its own quarries but also got the same goods manufactured for it by two other concerns (Sanderson & Co. and Dewan Lime Co.) according to its clients' specifications. It claimed deduction under Section 80-I of the Income-tax Act in respect of profits from three sources: (i) manufacture and sale of limestone from its own quarries, (ii) manufacture of lime on its own, and (iii) manufacture of lime/limestone through the two other concerns.

The ITO granted relief under Section 80-I only in respect of profits from the manufacture of limestone but denied relief for the profits from lime and for profits attributable to goods produced through the other two concerns. The AAC upheld the ITO's conclusions. On further appeal the Tribunal allowed relief under Section 80-I for profits from lime (finding lime to be calcined limestone and production of lime integrated with limestone production), but declined to extend relief for goods manufactured through others because of lack of evidence of control or supervision. The matter was referred to this Court under Section 256(1) of the Income-tax Act on the question whether the Tribunal was right in holding that manufacture of lime out of limestone produced in the assessee's quarries was a priority industry under Section 80B(7) read with item 3 of Schedule VI and thus eligible for Section 80-I relief.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the manufacture of lime by the assessee out of limestone produced in its quarries was a priority industry within the meaning of Section 80B(7) of the Income-tax Act, 1961 read with item 3 of the Sixth Schedule, and therefore whether the assessee was entitled to relief under Section 80-I in respect of profits and gains derived from such manufacture of lime.

Arguments of the Parties

Assessee's Position

The assessee claimed Section 80-I relief on profits from limestone produced in its quarries, lime it produced, and goods manufactured for it by other concerns.
The assessee (through its advocate) relied on the wider meaning of the expression "attributable to" (as distinguished from "derived from") and prior authorities interpreting that expression to cover receipts closely connected to the priority industry.
The Tribunal's factual finding was that lime is calcined limestone and the production of lime is an integrated or composite part of the assessee's quarrying/manufacturing operations; the assessee relied on that integrated-process finding to claim relief for profits from lime as attributable to the Schedule VI item (limestone).

Revenue / ITO / AAC Position

The ITO granted relief only for profits from manufacture of limestone and denied relief for profits from lime and for profits on items manufactured by other concerns on the assessee's account.
The AAC agreed, holding that profits from manufacture of lime (quicklime or slaked lime) were not covered by item 3 of Schedule VI or any other item in that Schedule, and that profits from goods manufactured by other concerns could not be treated as the assessee's manufacture because the assessee itself did not manufacture those items.
Learned advocate for the Revenue drew attention to authorities and technical sources arguing that chemical compositions of limestone and lime differ, implying that lime may not fall within the Schedule VI item for limestone.

Tribunal's Findings (as presented)

On profits from items manufactured through others: there were no written agreements or evidence showing control or supervision by the assessee; unlike an earlier case relied upon by the assessee, here the assessee merely got goods manufactured and thus could not be treated as the manufacturer for Section 80-I purposes.
On profits from sale of lime: the Tribunal held lime is calcined limestone and the production of lime is an extension of quarrying limestone; production of lime and limestone were integrated, composite parts of a single productive activity of the assessee. Given the purpose of Section 80-I to incentivise specified industries and the principle that exemption provisions should be liberally construed, the Tribunal directed that relief under Section 80-I should be granted for profits from sale of lime.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Cambay Electric Supply Industrial Co. Ltd. v. CIT (Supreme Court)	Held that the expression "attributable to" is wider in import than the expression "derived from".	The Court relied on this to conclude that profits from lime could be "attributable to" production of limestone when part of an integrated process, even though lime is not expressly listed in Schedule VI.
CIT v. Hindusthan Motors Ltd. (this Bench)	Referred to the Cambay observation and emphasised that reliefs are allowed where profits are attributable (not necessarily derived) to the operations contemplated by the Schedule.	Used to reinforce that the "attributable to" concept permits inclusion of receipts connected to specified transactions; supported the Court's acceptance that profits from lime can be attributable to limestone manufacture in an integrated operation.
CIT v. Universal Radiators (Madras High Court)	Interpretation: the relief can be granted where there is some direct nexus between the income and the priority industry; remote connections do not qualify.	The Court agreed with the emphasis that a direct nexus is required but found that in the present case the nexus between limestone production and lime production was direct and close (not remote), supporting allowance of relief for lime.
Indian Steel and Wire Products Ltd. v. CIT (this Court)	Construction of Schedule language: use of a word in conjunction (e.g., "metal") indicated legislative intent to treat the word as an article; articles made from such an article would not automatically fall within the same item.	The Court noted this precedent but distinguished it because it concerned different items and was not addressing the "attributable to" concept in the same factual context as the present case.
CIT v. West India Steel Co. Ltd. (Full Bench, Kerala High Court)	Full Bench did not accept the view in Indian Steel and Wire Products Ltd.; presented a contrary position on construction of Schedule items.	The Court recorded the existence of this conflicting authority but observed that subsequent Division Bench decisions of this Court had reviewed the matters; it did not apply the Kerala Full Bench decision to negate the Tribunal's factual finding here.
Indian Aluminium Co. Ltd. v. CIT (this Court)	Division Bench reiterated its earlier view (as in Indian Steel and Wire Products Ltd.) regarding construction of Schedule items.	The Court observed that these decisions concerned different items and were not directly on the point of the attribution/distinction between "attributable to" and "derived from" in the factual circumstances found by the Tribunal.
CIT v. Sainthia Rice & Oil Mills (this Court)	Principle: provisions granting exemption must be strictly complied with but the statute should be construed reasonably in the context of the purpose for which it was introduced.	The Court relied on this principle to support a purposive, reasonable construction of Section 80-I (to encourage priority industries) in the present factual matrix.
CIT v. Gaekwar Foam & Rubber Co. Ltd. (Bombay High Court)	Observation that provisions aimed at encouraging industrial growth should be liberally construed to provide sufficient incentive.	Used to support the Tribunal's and this Court's view that Section 80-I ought to be construed with the object of encouraging specified industries, consistent with the integrated-process finding.

Court's Reasoning and Analysis

The Court proceeded in stages, applying statutory language, factual findings of the Tribunal, dictionary/technical meanings and judicial precedent:

Statutory framework: the Court identified the relevant provisions in force at the time — Section 80B(7) (definition of "priority industry"), Section 80-I (deduction for profits and gains from priority industries), and item 3 of Schedule VI (which listed "limestone" among minerals but did not list "lime").
Factual finding: the Tribunal had found as a fact that the assessee produced lime by calcining its own limestone and that production of lime was an extension/integrated part of the quarrying/manufacturing operations. The Court noted this is a finding of fact that was not challenged as perverse or unsupported by evidence; therefore the Court accepted it.
Meaning of statutory phrase: the Court emphasised the distinction between "attributable to" and "derived from", relying on the Supreme Court's decision in Cambay which explained that "attributable to" is wider in import. The Court accepted that if lime production formed part of an integrated process of producing limestone, profits from lime could be "attributable to" the manufacture/production of the article listed in the Schedule (limestone).
Technical/dictionary support: the Court referred to standard reference works (Encyclopaedia Britannica and Shorter Oxford Dictionary) to show (as accepted within the opinion) that lime is obtained by calcining limestone — providing factual/technical support for the Tribunal's finding of integration.
Consideration of counter-argument: the Revenue pointed to scientific authorities indicating different chemical compositions of limestone and lime; the Court accepted that compositions may differ but held that it is indisputable that lime can be (and in this case was) produced from limestone and so can arise from an integrated production process. Thus the chemical-difference argument did not defeat attribution when there was an integrated process and close nexus.
Precedential and purposive construction: the Court reviewed authorities emphasising that exemption provisions intended to foster industrial growth should be reasonably (and where appropriate liberally) construed. Applying these principles, and given the Tribunal's unchallenged factual finding of an integrated process and the close nexus between the limestone quarrying and lime production, the Court concluded that profits from sale of lime were attributable to the production of the articles mentioned in item 3 (limestone) and therefore eligible for Section 80-I relief.
On the separate issue of profits from goods manufactured by other concerns for the assessee, the Tribunal had found lack of evidence of control or supervision and absence of written agreements; the Court accepted the Tribunal's view (as reported) that in the absence of such evidence the assessee could not be treated as the manufacturer for Section 80-I purposes. (This aspect was not the subject of the question referred under Section 256(1) which concerned the lime issue.)

Holding and Implications

Holding: The question was answered in the affirmative and in favour of the assessee: the Tribunal was right in holding that manufacture of lime by the assessee out of limestone produced in its quarries was a priority industry (within the meaning relied upon) and that the assessee was entitled to relief under Section 80-I in respect of profits and gains derived from such manufacture of lime.

Implications:

Direct effect on the parties: the assessee is entitled to Section 80-I deduction (as applicable) on the profits derived from the sale of lime manufactured by it from its own limestone quarries. The Tribunal's direction to the ITO to grant relief under Section 80-I for such profits is upheld.
On goods manufactured by other concerns for the assessee: the Tribunal's negative finding (no relief) based on lack of evidence of control/supervision was accepted in the Tribunal's decision; the Court's reference does not overturn that finding.
Broader precedent-setting: the opinion applies existing principles (particularly the wider meaning of "attributable to" and purposive construction of exemption provisions) to the particular factual finding of integration; the judgment does not announce a new statutory test beyond applying these authorities to the facts found by the Tribunal.
Costs: parties were directed to pay and bear their own costs.

This summary is strictly limited to the statements and materials contained in the provided opinion. No information beyond the opinion's text has been added.

Show all summary ...

1. The assessee is a public limited company engaged in the production of limestone and it is a public limited company having a large turnover and assessed for over Rs. 5,40,000 for the assessment year 1970-71. This reference relates to the deduction given by the ITO under Section 80-I in respect of the priority industry run by the assessee. The assessee manufactures limestone in its own quarries and, subsequently, produces lime for sale. In order to meet demands it also gets manufactured these goods through two other concerns, namely, Sanderson & Co. and Dewan Lime Co. The said concerns manufactured limestone and lime on the assessee's account according to the specifications and instructions, of the clients of the assessee. The assessee claimed relief under Section 80-I on profits derived from it from the three following items :

(i) profits derived from the manufacture and sale of limestone on its own quarries ;

(ii) profits derived from the manufacture of lime on its own; and

(iii) profits derived from the manufacture of lime and limestone through Sanderson & Co. and Dewan Lime Co.

2. As the assessee ran a priority industry as covered by item 3 of Schedule VI to the I.T. Act, 1961, the ITO granted to the assessee relief under Section 80-I on the profits from the manufacture of limestone. He, however, did not extend this relief or concession to two other items. The AAC approved the reasoning and conclusion of the ITO on appeal. He was of the opinion that at best the profits from the manufacture of limestone alone were entitled to concession under Section 80-I, The profits derived by the assessee from the manufacture of lime, either quicklime or slaked lime, were not covered by item 3 of Schedule VI or, for that matter, by any other item in that Schedule. The AAC was, therefore, of the opinion that relief under Section 80-I could not be extended to such profits. He was also of the opinion that the profits on the sale of limestone and lime manufactured or sold for the assessee were not eligible for the concession under Section 80-I of the Act as the assessee itself did not manufacture these items. It merely got these manufactured through others. In the result, the ITO's conclusion were upheld.

3. There was a further appeal before the Tribunal. The Tribunal after referring to the rival contentions observed, inter alia, as follows:

" 7. As regards the profits derived by the assessee from the sale of items manufactured through others, we find that no written agreements are available showing any measure of control or supervision, if any, exercised by the assessee over the production of the said items by the other two concerns. The Tribunal's decision relied upon by the assessee in support of its stand on this issue is distinguishable as in that case there was a written agreement and the assessee in that case was associated with each and every stage of production. In this case before us, the assessee merely got the goods manufactured from the other two concerns, according to specifications and instructions of its clients or customers. In the absence of any evidence as regards the control and supervision, if any, exercised by it over the production of these items through others, we are not in a position to extend relief Under Section 80-I to the assessee in respect of these profits derived by it from the sale of items manufactured through others. In the absence of necessary evidences, we cannot say that in this matter the assessee itself was a manufacturer. The basic conditions having not been satisfied the assessee fails on this point.

8. As regards relief Under Section 80-I to the profit derived by the assessee from the sale of lime, we find that the assessee has a good case. Lime is nothing but calcined limestone and the production of lime is but an extension of the quarrying of limestone. The production of lime and the production of, limestone are integrated, composite parts of one productive activity of the assessee. Both of them form part land parcel of the assessee's integrated business. We have, moreover, to see the purpose for which relief is granted Under Section 80-I for a priority industry. This relief is meant to provide sufficient incentive for the growth of specified industries. It has been held more than once by the High Courts that provisions relating to exemption, particularly in respect of industrial growth, have to be liberally construed. A narrow and constricted view of the items would not be apposite for our purpose."

4. Thereafter, the Tribunal referred to certain decisions of the Calcutta and Bombay High Courts and directed the ITO to grant relief under Section 80-I to the assessee on the profits derived from the sale of lime manufactured by it.

5. In the premises, under Section 256(1) of the I.T. Act, the following question has been referred to us :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the manufacture of lime by the assessee out of limestone produced in its quarries was a priority industry within the meaning of Section 80B(7) of the Income-tax Act; 1961, read with item 3 of the Sixth Schedule to the said Act and in that view holding that the assessee was entitled to relief under Section 80-I of the said Act in respect of the profits and gains derived from such manufacture of lime ?

6. In order to appreciate this question it would be necessary to refer to Section 80B(7) of the I.T. Act, 1961, which was omitted by the Finance Act, 1972, with effect from April 1, 1973, but which at the relevant time was as follows :

"(7) 'Priority industry' means the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Sixth Schedule or the business of any hotel where such business is carried on by an Indian company and the hotel is for the time being approved in this behalf by the Central Government."

7. Section 80-I which was in force at the relevant time was to the following effect :

" 80-1. Deduction in respect of profits and gains from priority industries in the case of certain companies.--(1) In the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such profits and gains of an amount equal to eight per cent. thereof, in computing the total income of the company.

(2) This section applies to a domestic company, save in a case where such company is a company which is referred to in Section 108 and has a gross total income of fifty thousand rupees or less.

(3) Whom a company to which this section applies is entitled also to the deduction under section 80h, the deduction under sub-section (1) of the section shall be allowed with reference to the amount of the profits and gains attributable to the priority industry or industries as reduced by the deduction under Section 80H in relation to such profits and gains,"

8. The Schedule VI of the I.T. Act, 1961, which was deleted with effect from April 1, 1973, contained a list of articles and item 3 was as follows :

" 3. Coal, lignite, iron ore, bauxite, manganese ore, dolomite, limestone, magnesite and mineral oil."

9. It would be apparent from this that though limestone was mentioned but lime was not mentioned. Therefore, it was urged that inasmuch as the assessee manufactured lime and profits were derived from such manufacture, such profits were not attributable to the manufacture of articles and things as contemplated by Section 80-I read with Schedule VI to the I.T. Act, 1961, which could be treated as priority industry. In this connection we have noted the findings of the Tribunal. The Tribunal has categorically observed that lime is nothing but calcined limestone and the production of lime in that case is an extension of the quarrying of limestone. The Tribunal has gone on further to say that the production of lime and the production of limestone are "integrated composite parts of one productive activity of the assessee. Both of them form part and parcel of the assessee's integrated business". There are cases where an assessee in a particular case might produce or manufacture limestone and not manufacture any lime. But in this case the assessee did and the Tribunal has found as a fact that the assessee did that by an integrated process. This is a finding of fact that it was done by an integrated process and that finding of fact has not been challenged as being perverse or based on no evidence. It, therefore, automatically follows that if that is so, then the profits earned from sale of lime even though it might not have been derived from production or manufacture of limestone would certainly be said to be attributable to their being part of an integrated process as has been found by the Tribunal. The expression "attributable to" has certainly a much wider import than the expression "derived from" as was explained by the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. Cit ., , where at p. 93, the Supreme Court reiterated that as regards the expression "attributable to" occurring in the phrase "profits and gains attributable to the business of" the specified industry, it would be relevant to observe that the Legislature had deliberately used the expression "attributable to" and not the expression "derived from". The Supreme Court was of the view that it could not be disputed that the expression "attributable to" was certainly wider in import than the expression "derived from". Learned advocate for the assessee sought to rely on several decisions where this expression "attributable to" had been referred to cover many transactions. But for our present purpose it is not necessary to refer to the same.

10. We may, however, incidentally refer to the decision of this Bench in the case of CIT v. Hindusthan Motors Ltd., [1981] 127 ITR 210, where referring to this observation of the Supreme Court, it was observed at p. 216 as follows :

" The second aspect that has to be borne in mind is that though on profits and gains certain reliefs and rebates were allowed, the rebates and reliefs are allowed not in respect of the profits and gains made mainly or solely or exclusively from certain types of operations. The profits and gains had to be attributable and not derived from the operation contemplated by the Schedule, but the distinction is important because as emphasised by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. Cit ., , where the Supreme Court expressed the view that the expression attributable had a wider amplitude than the expression derived from, thereby intending to cover receipts from sources other than the actual conduct of the business of the specified industry. Therefore, whatever the total profits the assessee-company was making was certainly attributable to one of the types of transaction contemplated by the Schedule."

11. However, our attention was drawn to certain observation of the Division Bench of the Madras High Court in the case of CIT v. Universal Radiators, [1981] 128 ITR 531. In that case, referring to the observations of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. Cit ., , which we have referred to hereinbefore, Sethuraman J., at p. 537 of the report, observed as follows :

The last sentence in the passage from the Supreme Court's judgment extracted above cannot be understood to mean that any income received from sources other than the actual conduct of the business of the priority industry would qualify for the relief, however remote the connection of such income may be. This passage has to be understood in the sense that it would envisage the relief being granted in all cases where there is some direct nexus between the income and the priority industry. The nature of the source would be immaterial. For instance, in the present case, even if the income from the lease of the factory had been assessed under the head 'Other sources', the above passage could support the view that it is eligible for the concession. It need not emanate from the actual running of the factory by the assessee. It is in that sense that the last sentence of the Supreme Court's judgment has to be understood.

12. In so far as the learned judge emphasised that the passage had to be understood in the sense that it would envisage the relief being granted in all cases, where there was some direct nexus between the income and the priority industry, we are in respectful agreement. We are also in agreement that the passage must mean that the income received from sources other than the actual conduct of the business of the priority industry would not qualify for the relief, if the connection is remote. But in this case, as we have noted before, because of the nature of the two articles produced and the nature of the operations which have been considered to be and found as a fact to be an integrated process in this case, there was a very direct and close nexus and not a remote connection.

13. Our attention was drawn to a decision of this court in the case of Indian Steel and Wire Products Ltd. v. CIT, [1977] 108 ITR 802, where construing item No. 1 of Schedule VI of the I.T. Act, 1961, which was "Iron and steel (metal), ferro-alloys and special steels", the Division Bench observed that the Legislature had used the word "metal" in conjunction with "iron and steel", in item No. 1 of Schedule V of the I.T. Act, 1961, with a specific intention. There, the other items in Schedule V were so inter-linked, that the expression "metal" was specially signified and in that context the observation was made that in item No. 1, "iron and steel (metal)", was to be considered separately as a thing or an article, but articles made or produced from such a "thing" or an "article" would not come within the same item. This view, however, was not accepted by the Full Bench of the Kerala High Court in the case of CIT v. West India Steel Co. Ltd., .

14. However, both these cases were again reviewed by the same Division Bench of this court in the case of Indian Aluminium Co. Ltd. v. CIT, [1980] 122 ITR 660, where the Division Bench of this court reiterated its earlier view. But, as mentioned hereinbefore, the Division Bench was concerned with the different items and not in the context of the facts as found by the Tribunal in this case nor was the Division Bench concerned with the expression "attributable to" in contradistinction to "derived from".

15. It is common ground that lime comes out of limestone. This position would be clear if one refers to the meaning of "lime" as well as "limestone" in Encyclopaedia Britannica, Vol. 14, pp. 38 and 39. There it has been explained that "limestone" is a rock containing at least 50% calcium carbonate, but generally not 'including such rocks that have been re-crystallized and chemically altered by metamorphism. "Lime" can be said to be soluble in cold dilute acids and to have a certain specific gravity which is riot necessary for us to mention. These are soft, for, calcite is the most abundant mineral constituent, and are white to cream-coloured unless stained yellow. In Shorter Oxford Dictionary (3rd Edn.) at p. 1215, one of the meanings of "lime" is given as usually coupled with stone, mortar or cement used in building ; the alkaline earth which is the chief constituent of mortar ; calcium oxide. It is obtained by calcining limestone (carbonate of lime), the heat driving off the carbonic acid and leaving a brittle white solid, which is pure lime (or quicklime); it is powerfully caustic, and combines readily with water, evolving great heat in the process, and forming hydrate of lime (slaked lime); the CALX of metals ; any alkaline earth. Similarly, limestone is said to be a rock which consists chiefly of carbonate of lime and yields lime when burnt.

16. Learned advocate for the Revenue drew our attention to the dictionary meaning of "limestone" and "lime" in Webster's Third New International Dictionary (1966 Edn., p. 1312, vol. 2), to Rogers Industrial Chemistry (6th Edn.), vol. 1, p. 865, and to College Course of Inorganic Chemistry by J.R. Partington, p. 49, and contended that from the analysis of the aforesaid authors it appeared that the chemical compositions of both limestone and lime were different. Learned advocate for the Revenue was right to the extent that the chemical composition might be different. But it is indisputable that lime and limestone could come out of the same process and if limp does come out of an integrated process or production or manufacture of limestone which in the context of this being rock and only being a quarry of lime, then the profits derived from such production of lime could certainly be said to be attributable to production or manufacture of the "things" and "articles" mentioned in item No. 3 of Schedule VI of the I.T. Act, 1961, as it stood at the relevant, time. It is well settled that in order to be entitled to exemption an assessee must strictly come within the terms of the provisions under which such exemption is being claimed, but in construing the provisions of this section, vis., Section 150 of the Indian I.T. Act, 1922, one must construe the said section reasonably in the context of the purpose for which the section has been introduced. (See in this connection, the observations of this court in the ease of CIT v. Sainthia Rice & Oil Mills, [1971] 82 ITR 778, at p. 781). And the purpose of provisions like Section 80-I, which was to encourage development or growth of priority industry, should be reasonably construed. Reliance may be placed, in this connection, on the observation of the Division Bench of the Bombay High Court in the case of CIT v. Gaekwar Foam & Rubber Co. Ltd., [1959] 35 ITR 662 at p. 672.

17. Having regard to these principles, in our opinion, in the background of the facts found by the Tribunal, the Tribunal was right in granting relief under Section 80-I to the assessee on the profits derived from the sale of lime manufactured by it.

18. In the premises, the question is answered in the affirmative and in favour of the assessee.

19. In the facts and in the circumstances of the case, parties will pay and bear their own costs.

Sudhindra Mohan Guha , J.

20. I agree.