2000 (6) TMI 145 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee qualifies as an industrial company entitled to a concessional rate of tax under section 2(8)(c) of the Finance Act, 1976.
2. The applicability of section 41(2) of the Income Tax Act in determining the nature of income from the sale of machinery and its impact on the tax rate.
3. Classification of lease rent income and its impact on the tax rate applicable to the assessee.

Detailed Analysis:

1. Qualification as an Industrial Company:

The primary issue is whether the assessee, M/s. Coimbatore Insulation Tapes Pvt. Ltd., qualifies as an industrial company entitled to a concessional rate of tax under section 2(8)(c) of the Finance Act, 1976. The assessee was previously engaged in the manufacture of rubber products, which qualifies as an industrial activity. However, during the assessment years 1976-77 and 1977-78, the company had discontinued its business and was not engaged in manufacturing activities. Instead, the company earned income from leasing out its factory premises and from the sale of machinery.

The Finance Act, 1976, defines an "industrial company" as one mainly engaged in manufacturing or processing of goods. The explanation to section 2(8)(c) states that a company will be deemed to be engaged in such activities if at least 51% of its total income is attributable to these activities.

2. Applicability of Section 41(2):

Section 41(2) of the Income Tax Act deals with the taxation of profits from the sale of machinery, plant, or furniture previously used for business. The Assessing Officer computed a profit of Rs. 1,18,539 under section 41(2) for the sale of machinery in the assessment year 1976-77. The assessee argued that this profit should be considered as income from the business of manufacturing rubber products, thus qualifying it as an industrial company.

The Tribunal noted that section 41(2) creates a legal fiction that the business is deemed to be in existence for the purpose of assessing the profit from the sale of machinery. The assessee contended that this fiction should extend to treating the income as attributable to the business of manufacturing rubber products. The Tribunal referred to case laws, including the Allahabad High Court's decision in CIT v. Rampur Timber & Turnery Co. Ltd. and the Kerala High Court's decision in CIT v. Official Liquidator, New Era Mfg. Co. Ltd., which supported the view that the profit under section 41(2) should be treated as income from the business.

3. Classification of Lease Rent Income:

The assessee also received Rs. 75,000 as lease rent, which was taxed under the head 'other sources'. The Department contended that since the assessee was not engaged in manufacturing during the relevant years, it did not qualify as an industrial company. The Tribunal agreed that lease rent income could not be considered as income from an industrial activity, as supported by the Madras High Court's decision in CIT v. Lakshmi Industries (P.) Ltd.

Conclusion:

For the assessment year 1976-77, the Tribunal held that the profit of Rs. 1,18,539 under section 41(2) should be treated as income attributable to the business of manufacturing rubber products. This income, being more than 51% of the total income, qualified the assessee as an industrial company entitled to a concessional tax rate. The Tribunal directed the Assessing Officer to levy tax at the concessional rate for this year.

For the assessment year 1977-78, the Tribunal noted that the income comprised mainly of lease rent, which did not qualify for the concessional rate. The Tribunal directed the Assessing Officer to apply the correct rate of tax based on the income composition for this year.

Final Order:
The appeals by the assessee were partly allowed, with the Tribunal reversing the revenue authorities' decision for the assessment year 1976-77 and directing a concessional tax rate. For the assessment year 1977-78, the Tribunal upheld the higher tax rate due to the nature of the income.