1994 (3) TMI 132 - AT - Income Tax

Assessment Year, Earned Income, Industrial Company, Lease Rent, Orders Prejudicial To Interests, Plant And Machinery, Total Income

Issues Involved:
1. Whether the assessee should be classified as an industrial company.
2. Whether the income from lease rent, interest on loans, and fixed deposits should be considered as business income.
3. Applicability of Circular No. 103 issued by the Central Board of Direct Taxes (CBDT).

Issue-wise Detailed Analysis:

1. Classification as an Industrial Company:
The primary issue is whether the assessee qualifies as an industrial company under the relevant Finance Acts for the two assessment years. The CIT observed that the assessee's income from manufacturing activities was less than 51% of its gross income, leading to the conclusion that the assessee should be taxed at a higher rate applicable to non-industrial companies. The CIT directed the Assessing Officer (AO) to reassess the tax liability by treating the assessee as a non-industrial company.

The definition of an 'industrial company' as provided in the relevant Finance Acts states that a company is considered industrial if it is "mainly engaged in the business of generation or distribution of electricity or any other form of power or in the manufacture or processing of goods." The explanation further clarifies that a company is deemed to be mainly engaged in such activities if at least 51% of its total income is attributable to these activities.

2. Income from Lease Rent, Interest on Loans, and Fixed Deposits:
The assessee argued that the lease rent, interest on loans, and fixed deposits should be considered business income, citing various case laws. The Karnataka High Court in Hindustan Machine Tools Ltd. held that lease rent from industrial sheds constructed for ancillary units should be treated as business income. However, the issue of whether such income is attributable to manufacturing operations was not addressed.

The Supreme Court in Shri Lakshmi Silk Mills Ltd. and the Delhi High Court in Super Fine Cables (P.) Ltd. dealt with the nature of rental income but did not address its attribution to manufacturing activities. The Madras High Court in B. Nagi Reddy also focused on the nature of business income from leasing but did not consider its relevance to manufacturing operations.

The assessee's contention that interest payments on loans should be set off against interest receipts was accepted. The Tribunal noted that the receipt and payment of interest are intertwined, and only the net figure should be considered as income.

3. Applicability of CBDT Circular No. 103:
The assessee relied on Circular No. 103 issued by the CBDT, which states that an industrial company need not have 51% or more of its income from manufacturing activities in a particular year to qualify for lower tax rates. The Tribunal agreed that the circular is binding on departmental authorities unless specifically repealed.

The Tribunal also referred to decisions by the Kerala High Court in Cochin Company v. CIT and the Allahabad High Court in Addl. CIT v. Abbas Wazir (P.) Ltd., which supported the broader interpretation of 'industrial company.' The Kerala High Court held that the term 'mainly' includes companies principally engaged in specified business types, while the Allahabad High Court emphasized that 'attributable' has a wider import than 'derived from.'

Conclusion:
The Tribunal concluded that the assessee should be considered mainly engaged in manufacturing activities. The lease rent and interest income, being side incomes, do not alter the primary engagement in manufacturing. The CBDT circular and relevant case laws support this view. Consequently, the CIT's orders under section 263 were found to be unwarranted, and the appeals filed by the assessee were allowed.

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