1998 (8) TMI 21 - HC - Income Tax

Summary

Issues:
Whether the assessee qualifies as an industrial company under the Finance (No. 2) Act, 1977 based on the income derived from construction and manufacturing activities.

Analysis:
The judgment addresses the issue of whether an assessee engaged in construction and manufacturing activities can be considered an industrial company under the Finance (No. 2) Act, 1977. The definition of "industrial company" under section 2(7)(c) includes companies mainly involved in the generation or distribution of power, ship construction, manufacturing, or mining. The Explanation clarifies that a company must derive at least 51% of its income from these activities to qualify as an industrial company.

The assessee claimed to meet the 51% income threshold from manufacturing activities, specifically from works such as casting cement slabs. The Commissioner initially accepted this claim based on data showing 72.53% of the total value of work as manufacturing-related. However, the Revenue challenged this decision, arguing that construction companies cannot be considered industrial companies as construction is not manufacturing. They cited precedents and the lack of a similar Explanation in the Wealth-tax Act.

The court rejected the Revenue's argument, emphasizing that the Explanation in the Finance Act sets the criteria for determining industrial company status. The judgment highlighted a Supreme Court case where a construction company was considered industrial if it met the 51% income requirement from manufacturing. The court stressed that the issue is about evidence of income sources, not inherent ineligibility of construction companies.

The court found discrepancies in the Commissioner's reasoning and directed a fresh assessment. It noted the lack of detailed evidence supporting the 72.53% manufacturing income claim and the Revenue's focus on disqualifying construction companies. The court emphasized that if the assessee can demonstrate 51% or more income from manufacturing, they can be recognized as an industrial company, irrespective of construction involvement.

In conclusion, the court set aside previous orders and instructed the Assessing Officer to conduct a new assessment based on evidence provided by both parties. The decision on industrial company status hinges on proving the income percentage derived from manufacturing activities. The court underlined the importance of factual evidence and directed a timely reassessment within six months.