1993 (2) TMI 147 - AT - Income Tax

Manufacture Or Processing Of Goods, Retrospective Operation, Sales Tax, Undistributed Profits

Summary

Issues Involved:
1. Classification of the hotel business as an industrial undertaking.
2. Reasonableness of non-declaration of dividends due to potential sales-tax liabilities.
3. Timeliness of the second order passed under section 104 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Classification of the Hotel Business as an Industrial Undertaking:
The primary issue was whether the hotel business conducted by the assessee could be classified as an industrial undertaking, which would exempt it from the provisions of section 104 of the Income-tax Act. The assessee argued that their hotel was recognized as an industrial undertaking by the Government of India for purposes of section 32(1)(v) and section 80J, and thus should be exempt under section 104(4)(a). The Tribunal referenced several decisions, including the A.P. High Court's decision in P. Laxmanrao & Sons v. Addl. Inspector of Factories, which held that establishments preparing food and drinks could be considered as engaged in manufacturing processes. Additionally, the Tribunal cited the Delhi Bench decision in Orient Express Co. (P.) Ltd. v. IAC, which recognized hotels as industrial undertakings involved in the production of articles or things. The Tribunal concluded that the hotel's activities involved manufacturing or processing of goods, thus qualifying it as an industrial undertaking exempt from section 104.

2. Reasonableness of Non-declaration of Dividends Due to Potential Sales-tax Liabilities:
The assessee contended that the non-declaration of dividends was reasonable due to the potential liability for sales-tax on services rendered, which could be imposed with retrospective effect. The Tribunal noted that the Supreme Court's decisions in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi had established the potential for such liabilities. The assessee had documented its concerns in board resolutions and had reasonably anticipated significant sales-tax liabilities. The Tribunal found that, given the heavy sales-tax demands and the losses incurred in previous years, the decision not to declare dividends was reasonable under section 104(2).

3. Timeliness of the Second Order Passed Under Section 104:
The assessee argued that the second order passed under section 104 on 16-3-1988 was time-barred, as it was beyond the two-year limit prescribed by section 106 of the Income-tax Act. However, the Tribunal held that the second order was not a suo motu order but was passed in compliance with the directions of the Commissioner (Appeals), which meant that the time limit did not apply. The Tribunal referenced the Supreme Court's decisions in Director of Inspection of Income-tax v. Pooran Mall & Sons and CIT v. National Taj Traders, which established that orders made pursuant to appellate directions were not subject to the same time limitations as original orders. Consequently, the Tribunal dismissed the contention that the second order was time-barred.

Conclusion:
The Tribunal ultimately held that the hotel business qualified as an industrial undertaking, making section 104 inapplicable. It also found the non-declaration of dividends reasonable due to potential sales-tax liabilities and confirmed that the second order under section 104 was valid and not time-barred. Therefore, the additional tax levied under section 104 was quashed, and the appeal was allowed.