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Commissioner of Income-tax v. N.C. Budharaja and Company
Judgment Summary — Reference under s. 256(2) as to entitlement under s. 80HH of the Income‑tax Act, 1961
Factual and Procedural Background
The Income‑tax Appellate Tribunal, Cuttack Bench, on the direction of this Court under s. 256(2) of the Income‑tax Act, 1961, referred a common question for the Court's opinion:
"Whether, on the facts found by the Appellate Tribunal, the assessee is entitled to the benefit provided under section 80HH of the Income‑tax Act, 1961?"
The references concerned assessment years 1974‑75 and 1975‑76. S.J.C. Nos. 97 and 98 of 1975 involved one registered firm which undertook construction of a minor irrigation project in the district of Dhankanal (assessment years 1974‑75 and 1975‑76). S.J.C. No. 99 of 1978 related to another registered firm which undertook erection of the Sundar Irrigation Project for assessment year 1975‑76.
The Income‑Tax Officer (ITO) had originally granted relief under s. 80HH to the firms. The Commissioner of Income‑Tax (CIT), exercising powers under s. 263, set aside that concession on two grounds: (i) the firms were not "industrial undertakings" engaged in manufacture or production of articles; and (ii) the firms were short‑lived and would cease to exist once the specific works were completed, which the CIT considered incompatible with s. 80HH. The CIT directed the ITO to withdraw the relief and to modify the assessments of the firms and their partners.
The assessees appealed to the Appellate Tribunal, which restored the ITO's allowance of s. 80HH relief, finding that the firms' activities constituted industrial/manufacturing activity and that the dam produced was a net product of commercial value. The revenue challenged the Tribunal's decision, prompting the reference.
Legal Issues Presented
- Whether, on the facts found by the Appellate Tribunal, the assessee is entitled to the benefit provided under section 80HH of the Income‑tax Act, 1961.
- Whether clause (i) of sub‑section (2) of s. 80HH — which speaks of an industrial undertaking that "has begun or begins to manufacture or produce articles after the 31st day of December, 1970, in any backward area" — requires that the undertaking be engaged in manufacture or production of articles in a strict sense (and thereby excludes contractor‑firms engaged in construction works such as dams).
- Whether the fact that the firms were of limited duration (intended to dissolve when the works were completed) disqualifies them from the benefit under s. 80HH.
Arguments of the Parties
Revenue (learned standing counsel / Commissioner)
- Submission that the conditions in sub‑section (2) of s. 80HH are cumulative and must all be fulfilled before an assessee can claim the concession under sub‑section (1).
- Specifically, clause (i) of sub‑section (2) requires the undertaking to be "manufactur[ing] or produc[ing] articles" — a contractor engaged in construction of a dam does not manufacture or produce articles and therefore does not satisfy that condition.
- The CIT also contended that short‑lived undertakings (which cease to exist when the work is over) could not have been intended to be covered by the benefit (this formed the second ground on which the CIT vacated the ITO's order).
Assessee (Mr. Rath, counsel for the assessee)
- Argued that sub‑section (2)(i) was not intended to confine the benefit to undertakings engaged only in manufacture or production of articles; rather, clause (i) was meant to emphasise two aspects: the operation must be in a backward area and must have commenced after 31 December 1970.
- Pointed out that an undertaking engaged in construction of an irrigation project may be regarded as an "industrial undertaking" (the concept need not be limited to manufacture/production in a strict, narrow sense).
- Contended there was no warrant for treating a dam as not being an "article" in common parlance; relied on the Shorter Oxford English Dictionary definition of "article" as "a commodity; a piece of goods or property", not confined to movable property.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Addl. Commissioner of Income‑tax v. Farukkabad Cold storage (P.) Ltd. [1977] 107 ITR 816 | Described activities of a kind that amount to "processing". | The Tribunal regarded the assessee's activities as not only "processing" (as in this case) but also amounting to "manufacture" for the purposes of s. 80HH; the Court recorded the Tribunal's reliance on this authority to distinguish mere processing from manufacturing in the particular facts. |
| Commissioner of Income‑tax v. Tata Locomotive Engineering Co. Ltd. [1968] 68 ITR 325 | Authority that treated certain activities as amounting to "manufacture". | The Tribunal and the Court treated this case as supporting the proposition that the engineering and transformative activities in constructing the dam could come within the concept of "manufacture". The Court accepted the Tribunal's factual finding that the activities were of a comparable character and supported entitlement under s. 80HH. |
Court's Reasoning and Analysis
The Court undertook a textual and purposive reading of s. 80HH. It noted the marginal heading of the section ("Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas") and that the provision was inserted by the Direct Taxes (Amendment) Act, 1974 to promote development in backward areas.
On the CIT's second ground (that short‑lived undertakings are not within s. 80HH), the Court rejected that view as having no foundation. The Court explained that s. 80HH grants a concession for a total period of ten years beginning with the relevant assessment year; if an undertaking ceases to exist before completion of the ten‑year period, the remaining years' benefit simply does not recur, but there is no textual basis to exclude short‑lived undertakings from claiming the concession in the first place. The Court therefore did not pursue that ground further.
The central point of contention was the meaning of "industrial undertaking" and the scope of clause (i) of sub‑section (2) (the requirement that it "has begun or begins to manufacture or produce articles after the 31st day of December, 1970, in any backward area").
The Court observed that "industrial undertaking" has no statutory definition in the Act. Where no definition exists, the Court said it is open to look to definitions in sister legislation and, failing that, common parlance. It noted that a contractor engaged in construction of an irrigation project would be an "industrial undertaking" for purposes of the Industrial Disputes Act, indicating that the concept need not be confined strictly to manufacture/production of articles.
The Court accepted the Tribunal's factual findings that the assessees' activities involved excavation, transport and transformation of materials, breaking boulders, and a variety of engineering processes culminating in the production of a dam which had commercial value and for which heavy payment was received. The Tribunal had observed that although the net product (the dam) comprised components, its commercial use and value were entirely different from those components — an observation the Court accepted.
On statutory construction, the Court reasoned that clause (i) of sub‑section (2) should be read as specifying the temporal and territorial conditions (i.e., began after 31 December 1970 and in a backward area) rather than delineating the precise nature of operations that qualify. The Court considered that if Parliament had intended to restrict the benefit to only those undertakings that manufacture/produce articles in a narrow sense, it would have provided a definition or an explanation to that effect. This supported the assessee's contention that clause (i) was not meant to exclude contractor‑type industrial activities.
The Court also accepted the Dictionary meaning of "article" as including a commodity or piece of property and held there was no justification to exclude a dam from that sense.
The Court noted that there was no direct precedent on the precise question and therefore did not find it necessary to examine authorities cited by the Commissioner or the Appellate Tribunal beyond those the Tribunal itself relied upon.
Holding and Implications
Holding: The Court answered the referred question in favour of the assessees: the Tribunal was right in holding that the assessees were entitled to the benefit as provided under s. 80HH of the Income‑tax Act, 1961.
Direct consequences and immediate implications:
- The Tribunal's order vacating the CIT's direction and restoring the s. 80HH relief granted by the ITO stands.
- The assessees are entitled to the costs of the references; the consolidated hearing fee was assessed at rupees two hundred.
- The judgment, as recorded, affirms that undertakings engaged in major construction/engineering projects (such as dams) can qualify as "industrial undertakings" for the purposes of s. 80HH on the facts relied upon by the Tribunal — particularly where the activities involve transformative engineering processes resulting in a commercially valuable net product.
The opinion does not elaborate further on any broader doctrinal changes or purport to lay down an exhaustive rule for all contractor activities; the Court relied on the Tribunal's factual findings and on a purposive construction of the statutory language.
Disposition: Assessees allowed; costs awarded; consolidated hearing fee fixed at Rs. 200. (N.K. Das J. concurred.)
JUDGMENT
R.N. Misra, J. - The Income-tax Appellate Tribunal, Cuttack Bench, has stated these cases as directed by this court on the applications of the revenue under s. 256(2) of the Income-tax Act, 1961 (hereafter referred to as "the Act") and has referred the following common question for opinion of the court:
"Whether, on the facts found by the Appellate Tribunal, the assessee is entitled to the benefit provided under section 80HH of the Income-tax Act, 1961?"
The relevant assessment years are 1974-75 and 1975-76. S.J.C. Nos. 97 and 98 of 1975 relate to one registered firm which had undertaken construction of a minor irrigation project in the district of Dhankanal. The first reference is with respect to the assessment year 1974-75 and the other for the subsequent assessment year. S.J.C. No. 99 of 1978 relates to assessment year 1975-76 and the assessee therein, another registered firm, undertook erection of the Sundar Irrigation Project. According to the assertion of the revenue, the firms had come into existence for execution of the particular works and were to stand dissolved when the works were over. The ITO while assessing the firms conceded relief under s. 80HH of the Act to both the assessees. The CIT in exercise of powers under s. 263 of the Act came to hold:
"The concession provided u/s. 80HH is available to an industrial undertaking which manufactures or produces articles.. It would thus appear that to constitute manufacture or produce articles it is necessary that the material subjected to manufacture should be changed or modified and something tangible should come out as a result of manufacturing process to make it capable of being sold..... In short the firm cannot be held as an industrial undertaking merely because it has to undertake certain manufacturing process in the course of construction of the irrigation project."
and directed the ITO to withdraw the relief and modify the assessments of the firms as also the partners. The assessees appealed to the Appellate Tribunal. The Tribunal found :
"The assessee before us is engaged in the construction of a dam which is an irrigation project of considerable magnitude. It employed considerable labour, machinery and capital as is apparent from its balance-sheet and profit and loss account. The work was done for a considerable period of time. The net product is only one, i.e., a particular dam. The product became the property of the contractee as soon as it was brought into existence. For the purpose of building the dam, the assessee had to excavate, bring big boulders, break them into small ones and engage in a variety of engineering activities. In other words, it displaced certain materials from the site of the dam and brought other materials to the said site and performed various engineering processes. It is true that the net product is composed of its components but the commercial use and value of the net product is completely different from those of its components. These activities are not only 'processing' as held in the case of Addl. Commissioner of Income-tax v. Farukkabad Cold storage (P.) Ltd. [1977] 107 ITR 816 , but also come within 'manufacture' as held in the case of Commissioner of Income-tax v. Tata Locomotive Engineering Co. Ltd. [1968] 68 ITR 325 . The article finally produced had considerable commercial value for which a heavy payment was received by the assessee. Taking all the facts and circumstances of the case into consideration, we have no doubt in our mind that the assessee was engaged in 'industrial activities' as opposed to 'trading activities' or 'agricultural operations' in a backward area within the meaning of section 80HH of the Act."
Accordingly, the Tribunal vacated the order of the Commissioner and restored the benefit extended by the ITO. The revenue challenges the action of the Tribunal -
Section 80HH, as far as relevant, provides:
"(1)
Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent. thereof.
(2)
This section applies to any industrial undertaking which fulfils all the following conditions, namely -
(i)
it has begun or begins to manufacture or produce articles after the 31st day of December, 1970, in any backward area:;
(ii)
it is not formed by the splitting up or the reconstruction, of a business already in existence in any backward area:.....;
(iii)
it is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area;
(iv)
it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power......"
The marginal heading of this section reads thus:
"Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas."
and the provision was inserted by the Direct Taxes (Amend.) Act of 1974 with a view to boosting of development activities in backward areas. Sub-section (1) provides the concession which extends to an industrial undertaking as also to the business of a hotel. Sub-section (2) lays down the conditions which an industrial undertaking has to fulfil in order to entitle itself to the concessional benefit while sub-s. (3) provides the conditions which are to be fulfilled in respect of business of any hotel to come within the purview of the section. The CIT had used two grounds for vacating the order of the ITO, namely:
(i)
the assessee was not an industrial undertaking engaged in manufacture or production of articles; and
(ii)
the assessee-firms were short-lived ones and were to cease to exist the moment the works were completed. In view of sub-s. (4) of s. 80HH, the benefit could not have been contemplated to apply to such short-lived undertakings. While calling for a statement of the case a Bench of this court had indicated;
"The second ground advanced by the Commissioner seems to be wholly without any basis. There is no foundation for the view entertained by the Commissioner that the relief provided under section 80HH is connected with the longevity of the industry. The benefit is available for a total period of ten years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles and the rate of relief is indicated in sub-section (1) . In case, the industrial undertaking ceases to exist within the period of ten years, there would be no recurring benefit for the remaining period out of the ten years. There is no basis for the assumption of the Commissioner that the benefit is not admissible to an undertaking which does not last for a minimum period of ten years."
We are in accord with the view indicated and, therefore, do not propose to deal with that aspect of the matter. The only question which arises for consideration is whether the assessee qualifies for the concession available under s. 80HH of the Act.
At the hearing the learned standing counsel contends that in order to be entitled to the benefit as provided under sub-s. (1) of s. 80HH of the Act, the conditions indicated in sub-s. (2) thereof have to be fulfilled. There can be no dispute so far as this submission goes. Counsel for the revenue next contends that the assessee must not only be an "industrial undertaking" as referred to in sub-s. (1) but must be manufacturing or producing articles as indicated in sub-s. (2) (i) of the Act. A firm of contractors engaged in the construction of a dam does not manufacture or produce articles and as such it does not satisfy one of the tests in sub-s. (2) . Since all the conditions in sub-s. (2) are to be satisfied as a condition precedent to availing the concession, the Tribunal went wrong in extending the concession to the assessee.
Mr. Rath for the assessee, on the other hand, has argued that it was not the legislative intention in sub-s. (2) (i) to confine the benefit under sub-s. (1) to industrial undertakings engaged only in manufacture or production of articles. Condition No. (i) in sub-s. (2) was intended to emphasise upon two aspects, namely, that the operation should be in a backward area and the business should have commenced after 31 st of December, 1970.
"Industrial undertaking" has no statutory definition. Law is fairly settled that where there is an absence of a statutory definition, it would be open to look for the meaning by referring to the definitions in sister legislations and failing that, to adopt the common parlance meaning. There can be no dispute that the business of a contractor who has undertaken the construction of an irrigation project would be an industrial undertaking for the purposes of the Industrial Disputes Act. The concept of industrial undertaking need not necessarily be confined to manufacture and production of articles. Even in the absence of either of them, in the strict sense there could be an industrial undertaking. The Tribunal in the instant case has clearly recorded a finding of fact that the assessee had undertaken manufacture of certain materials which it ultimately utilised in the construction of the dam and it worked for the ultimate production of a dam. Assessee's counsel has canvassed that there is no warrant for the submission of learned standing counsel that a dam would not be an article. "Article". according to the Shorter Oxford English Dictionary, means "a commodity; a piece of goods or property". It need not be confined to movable property. There would be no justification to hold that a dam is not an article in that sense of the term. We would reiterate here that there is considerable force in Mr. Rath's argument that it was not the intention of Parliament in sub-s. (2) (i) to exclude industrial undertakings which did not manufacture or produce articles, from the benefit and even if one was an industrial undertaking not engaging itself in manufacture or production of articles, it could as well have the benefit if the work had begun after 31st of December, 1970, in a backward area. Clause (i) of sub-s. (2) was connected with the period and the area where the operation was to be undertaken and not the nature of operation. If the legislative intention was restriction with reference to the nature of the operation, clear provision would certainly have been made either by providing a definition or adding an Explanation. Learned counsel for both the parties have indicated to us that there is no direct precedent on the point. We have not, therefore, considered it necessary to refer to the authorities cited by the Commissioner or the Appellate Tribunal.
We are of the view that the finding of the Tribunal that each of the assessees was entitled to, in the respective years, the benefit under s. 80HH of the Act is unexceptionable. Our answer to the question referred, therefore, is that the Tribunal was right in holding that the assessees were entitled to the benefit as provided under s. 80HH of the Act.
Assessees shall have the costs of these references. Consolidated hearing fee is assessed at rupees two hundred.
N.K. Das J. - I agree.
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