1989 (2) TMI 45 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee-company qualifies as an industrial company within the meaning of clause 2(6)(c) of Chapter 11 of the Finance Act, 1970.
2. Whether the profit on the sale of imported chemicals can be attributed to the manufacturing activity of the tannery.
3. Whether the nomination premium received on transfer of export incentive licenses is attributable to the manufacturing activity.
4. Whether the interest apportionable to the manufacturing unit should be excluded in considering the income of the assessee as an industrial company.

Detailed Analysis:

1. Qualification as an Industrial Company:
The primary issue is whether the assessee-company qualifies as an industrial company under clause 2(6)(c) of Chapter 11 of the Finance Act, 1970. An industrial company is defined as one mainly engaged in the business of generation or distribution of electricity, construction of ships, manufacture or processing of goods, or mining. The Explanation to this clause states that a company shall be deemed to be mainly engaged in such activities if the income attributable to these activities is not less than 51% of its total income. The assessee's tannery must generate at least 51% of the total income from manufacturing or processing activities to qualify as an industrial company. The Income-tax Officer found that the tannery income was Rs. 3,29,008, which was less than 51% of the gross total income of Rs. 3,77,639, thus leading to the conclusion that the assessee was not an industrial company.

2. Profit on Sale of Imported Chemicals:
The assessee contended that the profit on the sale of imported chemicals (Rs. 3,501) should be considered part of the manufacturing activity. However, the Appellate Assistant Commissioner and the Tribunal found that this amount could not be attributed to the manufacturing activity of the tannery. The sale of chemicals was unrelated to the manufacturing process and was therefore excluded from the profits of the industrial activity. This view was supported by previous decisions in India Leather Corporation (P.) Ltd. (No. 2) v. CIT and India Leather Corporation (P.) Ltd. (No. 3) v. CIT, where the sale of chemicals was deemed a trading activity, not sufficiently connected to manufacturing.

3. Nomination Premium on Export Incentive Licenses:
The nomination premium of Rs. 1,54,898 received on the transfer of export incentive licenses was also contested. The Appellate Assistant Commissioner found that the exports were made by the assessee in its own name, and there was no direct nexus between the manufacturing activity and the receipt of the export incentive licenses. The Tribunal upheld this finding, noting that the premium received was related to the export activity, not the manufacturing process. The court agreed, stating that the connection between the manufacturing activity and the export incentive was too remote to consider the premium as part of the manufacturing profits.

4. Interest Apportionable to the Manufacturing Unit:
The interest apportionable to the manufacturing unit was another point of contention. The Appellate Assistant Commissioner allocated Rs. 45,371 as the interest liability attributable to the tannery division. This allocation was based on the average rate of interest paid by the assessee on borrowed funds, which were used for both trading and manufacturing activities. The court found this apportionment reasonable and noted that no exceptions were taken to this method of allocation. The interest related to the manufacturing activity was rightly excluded from the computation of the industrial company's income.

Conclusion:
The court concluded that the assessee-company did not qualify as an industrial company under clause 2(6)(c) of Chapter 11 of the Finance Act, 1970. The profit on the sale of imported chemicals, the nomination premium on export incentive licenses, and the interest apportionable to the manufacturing unit were all correctly excluded from the manufacturing profits. The question referred to the court was answered in the affirmative, against the assessee, with the Revenue entitled to its costs.