Per A.Kalyanasundharam, A. M. - This appeal has been preferred by the assessee, a registered firm, aggrieved by the order of the CIT (A) dt. 14-10-1986 and has raised three issues in this appeal. - (1.) THE main grievance of the assessee to the refusal of the claim of deduction under section 80-1 of the Act, with reference to its business, viz., construction of building, treating it as an industrial company. THE other two issues relate to the disallowance of car maintenance expenses and the guarantee commission paid to bank, for issuing guarantee to its contractees.
(2.) Shri S. K. Mehta, the counsel of the assessee, submitted that, the assessee is a firm carrying on the activity of construction of buildings and that, in respect of its building construction activity, had lodged its claim u/s. 80-1 before the ITO, but was denied the deduction on the reasoning that, construction activity could not be treated as an industrial activity. In appeal before the CIT (A), the assessee had laid emphasis on the words used in section 80-1, viz., manufacture or production of any article or thing and that building is very much an "article" or "thing", as it undergoes several processes, before getting to the final shape as a building. The learned CIT (A), however, did not accept the contention of the assessee and relied on the decision of the Delhi High Court in CIT v. Minocha Bros. (P.) Ltd. [1986] 160 ITR 134, wherein, the issue raised was relate to the question, whether buildings constituted "goods" and the decision was that buildings could constitute manufacture and pleaded that, since the claim of the assessee was that it was producing or manufacturing an article or thing, the decision of the Delhi High Court (supra) could not operate against the assessee on the facts of its case. He drew our attention to the decision of the Orissa High Court in CIT v. N. C. Budharaja & Co. [1980] 121 ITR 212, wherein it was observed that, the term "article" was not confined to movable property alone and that the main point was whether the end-product was distinct from its components and had to be engaged in industrial activity. He further drew our attention to the decision of the Delhi High Court in National Projects Construction Corpn. Ltd. v. CWT [1969] 74 ITR 465, wherein, it was held that, the nature of an industrial undertaking does not change by the use of various manufactured items, such as processing steel, crushing stones, etc., in the construction of buildings, as the term "engaged in an industrial activity" indicates the predominant activity and not one of the many activities, viz., construction activity. He then drew our attention to the decision of the Bombay High Court in CIT v. Pressure Piling Co. (1) (P.) Ltd. [1980] 126 ITR 333, in which case the nature of activity, viz., pressure piling operations for laying foundations for the construction of buildings carried on by that company was examined and it was observed that, the technique involved considerable specialisation, processes of concrete mixture being subjected to pressure along with iron bars at site, all indicated manufacturing operations, and a new and an independent product "pile" was brought into existence and hence the company was an industrial company. He then referred to the Finance Act, 1983, wherein, "industrial company" has been defined to include "execution of projects" well. Referring to the Tribunal decisions in Shapoorji Pallonji & Co. (P.) Ltd. v. ITO [1986] 18 ITD 1 (Bom.), ITO v. N. K. Patel & Co. [1987] 20 ITD 220 (Ahd.) and Elemech Industrial Constructions v. ITO [1988] 26 ITD 148 (Hyd.), he argued that a building would be included in the term "article or thing". His plea was that, since sec. 80-1 uses the term "article or thing", which term is much than the term "article and not confined to the term "goods", the claim of the assessee firm was justified. Sh. Khosla, the DR, argued that, sec. 80-1 refers to any article or thing not specified in the Eleventh Schedule, which meant that the article or thing should be similar in nature to those specified in that Schedule though not the same. He submitted that to extend the meaning of the term "article or thing" beyond this would be stretching of the provisions beyond the limit to which it was intended by the Legislature and therefore, the claim of the assessee could not be accepted. He further submitted that, the Finance Act, 1983, defined "industrial company" for the limited purpose of rate of tax to be levied and therefore, that definition could not be imported into sec. 80-1. He finally argued that, construction concerns had not been specifically considered to be eligible for claiming relief under sec. 80-1 and if it were so intended the Legislature would have specifically provided for their inclusion.
(3.) WE have given our very careful consideration to the rival submissions and also to the decisions referred to above. The crux of the issue is whether the term "article or thing" as referred to in sec. 80-1 could be said to include a building ? 4.1 Section 80-1 states that, an assessee whose gross total income includes any profits and gains derived from an industrial undertaking, to which this section applies, then in accordance with and subject to the provisions of this section, would be allowed in computing his total income, deduction from such profits and gains of the industrial undertaking of an amount equal to twenty per cent thereof. Sub-section (2) of this section specifies the following four conditions which need to be satisfied so as to qualify it as an industrial undertaking. (1) the undertaking must not be formed by spitting up or reconstruction of a business already in existence; (2) the undertaking must not be formed by the transfer to a new business of machinery or plant previously used for any purpos : (3) the undertaking manufactures or produces any article or thing, not being an article or thing specified in the list in the Eleventh Schedule or begins to manufacture or produce articles or things, at any time within the period of nine years next following 31st Mar., 1981; (4) the undertaking which manufactures or produces articles or things, must employ ten or more workers if it uses power for its manufacturing processes or if it does not use power, then it must employ twenty or more workers. The words used in the sub-section are "manufactures or produces any article or thing not being an article or thing specified in the list in the Eleventh Schedule". The Twentieth Century Chambers Dictionary, 1972 edition defines "article" to mean a particular object or commodity, an item; the word "thing" as an inanimate object; the word "manufacture" as to make, originally by hand, now usually by machinery and on a large scale, to fabricate; the word "make" as to construct, to bring into being, to convert or turn, to bring into any state or condition; the word "production" as the act of producing, that which is produced, product, bringing out, creation of values. Sub-section, it would read "make either by hand or by use of machinery or partly by hand and partly by the use of machinery, construct, bring into being convert or turn, bring into any state or condition, produce, bring out, create of value, a particular object or an item or an inanimate object, which object, item, article, produce is not listed in the Eleventh Schedule". The article or thing must be other than those listed in the Eleventh Schedule. The term "other than" has been stated to mean different from or not the same as the one in question. This clearly indicates that the undertaking must manufacture or produce those items which could be classified as articles or things, but, such items must not be the same as are listed in the Eleventh Schedule. The words "article or things" as is generally understood or accepted in common parlance, as per the definitions brought out above, are related to any article or thing which could be brought into existence or that which has changed its shape or condition. The term "build" is defined by the dictionary (supra) to mean to erect, as a house, to construct, to from and the word "construct" has been defined to mean to put together parts of, to make. Construction of building, etc., always involve putting of various parts together, making of something new from various materials, such as cement, steel, mortar, stones, bricks, sand and several other items, some of which could be prefabricated or merely brought into existence. The Legislature has used the term "article or thing" realizing the fact that, the term "goods" is narrower in its content and scope than the term "article or thing". Since the Legislature intended to allow industrial growth with checks had provided for exclusion of certain categories of articles or things, which if manufactured or produced, the undertakings carrying on the manufacture or production of such article or thing, would be allowed the benefit or rebate from out of its business income. Therefore, for being eligible for the rebate under this section, the requirement is that, the manufactured or produced item, must be capable of being treateds an article or thing and the same should not be listed in the Eleventh Schedule. Since building is not included in the list specified in the Eleventh Schedule, we are of the view that, the construction of a building could be said to be manufacture or production of an article or thing and the claim of the assessee accordingly it justified. 4.2 The argument of the assessee that, the Finance Act, 1983, has included in the definition of "industrial company", execution of projects, which has been defined to include construction of buildings is also relevant even though, this definition occurs for purpose of specifying the rate of tax, since the expression "industrial company" has not been defined elsewhere in the Income-tax Act, 1961. 4.3 In the case of Minocha Brothers (supra), the Delhi High Court at page 139 examined the construction activity in comparison to the manufacturing of goods and did observe that the construction of building could be loosely said to be a manufactures or produces an article or thing is justified. The case of National Projects Construction Corporation (supra) also supports the claim of the assessee for in that case the assessee was found to carry on several activities such as crushing of stones, fabrication of steel structures which were used by it in the construction of buildings and it was in connection with such of the activities, the claim was for being treated as industrial company under section 45 of the WEalth-tax Act was upheld. The Orissa High Court in N. C. Budharaja & Co. (supra) was confronted with the term "articles" as defined in sec. 80HH and whether "Dam" would be an article or not and the High Court had held that the Dam is commercially viable product and is an article. In Pressure Piling Co. (I) (P.) Ltd.s case (supra), the Bombay High Court was examining whether the pressure piling activity involves any manufacturing activity or not in relation to the provision of sec. 84(2) (ii) of the Act. This section used the term "manufacture or production of article". The Court held that, though the pressure piling resulted in laying of the foundation of buildings, but in view of the technology involved, etc., came to hold that, the activity was a manufacturing of an article. Therefore, these two judgments also support the claim of the assessee. The three Tribunal decisions relied upon by the assessee, were considering the granting of investment allowance, under sec. 32A of the Act, containing the words, "the business of construction", and have been used in conjunction with the words "article or thing". Though the words "the business of construction" is not contained in sec. 80-I, but having regard to the fact that the Tribunal Decisions (supra) have held that building is an article or thing, the absence of the words "the business of construction", in our opinion would not make any material difference. 5 to 7 [These paragraphs are not reproduced here as they involve minor issues.];