R. Jayasimha Babu, J. - (1.) THE assessee is a construction company which also manufactures articles such as steel windows and doors, etc. It claims that the making of reinforced concrete beams and slabs amounts to manufacture of these articles. For the assessment years in question, that is, 1979-80 to 1983-84, it claimed the status of an industrial company for the purpose of deriving the benefit of the lower rate of taxation accorded to industrial companies under the Finance (No. 2) Act, 1977. It also claims investment allowance under Section 32A of the Income-tax Act, 1961, on the ground that it was an industrial undertaking engaged in the manufacture of articles. That claim though negatived by the assessing authority has been upheld by the Tribunal. THE Revenue has therefore, come up before this court with this reference. THE question referred to us is as to whether the assessee should be treated as an industrial company for the purpose of assessment at a lower rate of tax and also for grant of investment allowance under Section 32A of the Act. In so far as the first part of this question is concerned.
(2.) THE Explanation to Section 2(7)(c) of the Finance (No. 2) Act of 1977, formulates the tests for determining as to when a company is an industrial company. If the income attributable to any one or more of the activities, included in its total income of the previous year is not less than fifty one per cent, of such total income derived from the activity of manufacture or processing, the company is to be regarded as an industrial company. It is the claim of the assessee that it meets the tests and that is what the Commissioner of Income-tax (Appeals) also had held. This court while examining such a claim for another assessment year in T. C. Nos. 1186 to 1189 of 1988 (CIT v. K. S. Venkataraman and Co. Pvt. Ltd. [2000] 243 ITR 314), decided on August 3, 1998 remanded the matter to the assessing authority to consider that question afresh as to whether the assessee meets the requirements set out in Explanation to Section 2(7)(c) of the Finance (No. 2) Act, 1977. The assessee is entitled to a similar order in this case as well. The Tribunal held in favour of the assessee on the ground that the judgment of the Orissa High Court in CIT v. N.C. Budharaja and Company [1980] 121 ITR 212, was in favour of the assessee, as in that case, the view taken by the court was that a construction company can also be an industrial company. The Supreme Court (see [1993] 204 ITR 412), has since reversed that decision, but that reversal however was not on the ground that a construction company cannot be an industrial company for the purpose of the Explanation to Section 2(7)(c) of the Finance (No. 2) Act, 1977, which lays down the test for determining the claim of a company for being regarded as an industrial company. It is in the interest of justice that the assessee as also the Revenue should have an opportunity to address themselves to that question before the assessing authority, paying due attention to the requirements of the Explanation to Section 2(7)(c) of the Finance (No. 2) Act, 1977. As regards the latter part of the question viz., the grant of investment allowance claimed by the assessee under Section 32A(2) of the Act, it must be held that if the assessee is able to demonstrate that the machinery or plant in respect of which the allowance is claimed are used in the manufacturing or processing of articles, in which the assessee is engaged, the assessee may claim the benefit of investment allowance, as in our view it is possible for a construction company also to be regarded as an industrial undertaking to the limited extent of its role as the manufacturer or processor of goods and articles. Counsel for the Revenue, however, sought to contend otherwise. She placed heavy reliance on the observations of the Supreme Court in the case of CIT v. N. C. Budharaja and Co. [1993] 204 ITR 412, more particularly the passage at the end of page 424, which reads thus : "It may be that the respondent is himself manufacturing some of the articles like gates, windows and doors which go into the construction of a dam but that makes little difference to the principle. The petitioner is not claiming the deduction provided by Section 80HH on the value of the said manufactured articles but on the total value of the dam as such. In such a situation, it is immaterial whether the manufactured articles which go into the construction of a dam are manufactured by him or purchased by him from another person. We need not express any opinion on the question what would be the position if the respondent had claimed the benefit of Section 80HH on the value of the articles manufactured or produced by him which articles have gone into/consumed in the construction of the dam." Counsel for the Revenue also placed strong reliance on the passage at page 434 of the report wherein the apex court has held : We are, therefore, of the opinion that Sub-clause (iii) of Clause (b) of Sub-Section (2) of Section 32A does not comprehend within its ambit construction of a dam, a bridge, a building, a road, a canal and other similar constructions."
(3.) HAD the assessee made a claim for investment allowance on the building constructed by the assessee, the assessee clearly would be out of court. The claim, however, was not for the building constructed, but was in respect of machinery or plant, used for the manufacture of windows, gates, doors, etc. The amount of the allowance claimed is but a small fraction of the total income of the assessee, which income itself was derived from a turnover which was several times the amount of the income. The income reported by the assessee was about Rs. 3 lakhs. The decision of the Supreme Court in N. C. Budharaja and Co's case [1993] 204 ITR 412, is on the question as to whether a dam, bridge, a building or other similar construction can be regarded as an item of manufacture. The court has not held that if the person, who constructs a bridge or building also happens to be engaged in the manufacture of articles such as doors and windows no allowance can be claimed in respect of machinery or plant used in the manufacture of such articles. Though counsel made strenuous efforts to persuade us that there is no scope for argument by any construction company that it is eligible to claim investment allowance, in the light of the decision of the Supreme Court in JV. C. Budharaja and Co.'s case [1993] 204 ITR 412, we are not persuaded that such a prohibition has been laid down by the Supreme Court in that judgment. Counsel for the Revenue further submitted that what is material is the principal activity and if that principal activity is that of a construction, the incidental activity or the manufacture of articles required for the use of any such construction would not be sufficient to render what is a construction company into an industrial undertaking. There can be no manner of doubt that if an item can be regarded as an item of manufacture made as a result of the process of the manufacture, the undertaking which manufactures that article is eligible to be regarded as an industrial undertaking in so far as the activity of manufacturing is concerned. A composite undertaking which is an industrial undertaking in one part and non-industrial undertaking in another part does not by that reason cease to capable of being regarded as an industrial undertaking to the limited extent of its claim for the benefits under the Act, in relation to the activity which can properly be regarded as a manufacturing activity carried on by such an undertaking. Section 32A of the Act which confers the benefit of investment allowance is a provision, which is obviously meant to encourage industries to instal new plant and machinery where such plant and machinery is utilised for the manufacture or process of articles and goods. The ownership of the industry is not the material factor. It is the bringing into existence of a manufactured article with the aid of plant and machinery that is material. Such manufacturing activity is required to be carried out by an industrial undertaking. The two things are interconnected. An undertaking wherein that activity of manufacturing takes place is an industry, if it meets the well known tests for determining the existence of an industry. The activity should be an organised activity and there should be co-operation between the labourer and the employer. It must be systematic. The industrial undertaking must be engaged in bringing into existence articles or things by a process of manufacture, and if these tests are met, an industrial undertaking can be recognised as being in existence. The fact that the owner of that undertaking is also engaged in other activity, which cannot be regarded as an industrial activity, would not disentitle the undertaking or the owner thereof from claiming the benefits provided under Section 32A(2) of the Act, if all other conditions as set out in that section are met by the assessee. ;