Decided on March 03,1994



S. Bandyopadhyay, Accountant Member - (1.) BOTH these appeals have been filed by the assessee against the orders passed by the CIT under Section 263 of the Act for two successive years. For the sake of convenience, the appeals are being consolidated and a combined order is being passed.
(2.) The CIT mentions in the impugned orders passed by him under Section 263 that on going through the relevant records and statement of accounts accompanying the returns as filed by the assessee, it was noticed by him that the income of the assessee from its manufacturing activities was less than 51% of the gross income from all sources for both the assessment years and hence the ITO should therefore have levied income-tax at the rate of 65% as applicable to a non-industrial company, whereas the ITO had actually levied tax at the rate of 60% treating the assessee-company thereby as an industrial company. After discussing the facts of the case and taking into consideration the various case-laws as put forward by the assessee before him, the CIT finally set aside the assessments for both the years with a direction to the Assessing Officer to pass fresh orders by treating the assessee as a non-industrial company. It was found out during the course of the hearing of the proceedings before us that the assessee-company, much earlier was engaged in the business of manufacture of liquor and leased out its plant and machineries to a sister concern some time in the year 1976-77. However, the assessee still retained for itself a bottling unit at Pondicherry and also another unit engaged in manufacturing of stationery goods at Bangalore. The learned counsel for the assessee stressed on the point that the liquor plant of the assessee had been leased out to a sister concern simply for the sake of convenience and also as a temporary measure only. In support of this contention he pointed out that the assessee-company still went on maintaining the labels relating to the liquors as approved by the Excise Commissioner by incurring sufficient amount of costs. The right to the labels is stated to have been maintained by the assessee under the Patents and Copyrights Acts with the purpose that it would be in a position to revive its old activities in a short time. It has thus been argued that the income received by the assessee by way of lease rent etc., must therefore be considered as business income accruing on exploitation of its commercial assets relating to manufacturing process. In support of this contention, the learned counsel for the assessee relied on the decisions of the Karnataka High Court at Addl. CIT v. Hindustan Machine Tools Ltd. [1980] 121 ITR 798, of Supreme Court at Commissioner, Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451, of Delhi High Court at CIT v. Super Fine Cables (P.) Ltd. [1985] 154 ITR 532 and also of the Madras High Court at CIT v. B. Nagi Reddy [1984] 147 ITR 337. The assessee also contended very strongly that in view of the Circular issued by the Central Board of Direct Taxes in Circular No. 103, dated 17-2-1973, it was not necessary for the assessee to have 51% or more of its total income to be attributable to the income from manufacturing activities inasmuch as the assessee-company has got to be treated as one which is mainly engaged in the business of manufacture or processing of goods. Further argument was also placed by the learned counsel for the assessee that the Fixed Deposits had to be maintained by the assessee-company, against loans taken by it from bank for acquiring its plant and machineries and, therefore, the considerable amount of interest income on the FDs will have to be considered to be directly connected with its manufacturing activities. Finally, he argued that the treatment meted out to the assessee at the original assessment stage by way of treating it as an industrial company, was correct and therefore, the CIT had rightly invoked the provisions of Section 263.
(3.) THE learned DR on the other hand strongly contended that the counsel for the assessee had engaged the major portion of his arguments in trying to establish that the other income of the assessee by way of interest on loans and FDs and also by way of lease rent should be treated as business income. He argued that actually that is not the issue. THE question is whether the assessee can be considered as an industrial company, within the definition of such company and whether the assessee can be considered as mainly engaged in manufacturing activities. In support of his contentions he relied on the decision of the Supreme Court as reported at Minocha Bros. (P.) Ltd. v. CIT and of the Madras High Court at Addl. CIT v. Chillies Export House Ltd. [1978] 115 ITR 73.;

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