2006 (3) TMI 93 - HC - Income Tax

Industrial company concessional rate of tax - 1. Whether, Tribunal was right in holding that the assessee should be treated as an industrial company because it was carrying on business mainly as a manufacturing concern, although a considerable amount of income arose out of rent received on leasing of its manufacturing unit to a sister concern and in that view in cancelling the order passed by the CIT under section 263 in which a direction had been given to the Assessing Officer to treat the assessee as a non-industrial company? - Merely because, it had let out one unit while retaining the other two units where manufacturing activity is mainly being carried out, it cannot be said that the assessee is not mainly engaged in the business of manufacturing - we answer the question of law referred for our opinion in the affirmative, i.e., in favour of the assessee and against the Revenue.

Issues Involved:
1. Classification of the assessee as an industrial company.
2. Applicability of concessional tax rate based on income from manufacturing activities.
3. Interpretation of the term "industrial company" under section 2(8)(c) of the Finance Act.
4. Validity and binding nature of Circular No. 103 issued by the Central Board of Direct Taxes (CBDT).

Detailed Analysis:

1. Classification of the Assessee as an Industrial Company:
The primary issue was whether the assessee should be treated as an industrial company, given that it leased out its manufacturing unit to a sister concern but retained other manufacturing units. The Tribunal held that the assessee should be considered an industrial company because it was mainly engaged in manufacturing activities, despite a significant portion of its income arising from lease rent.

2. Applicability of Concessional Tax Rate Based on Income from Manufacturing Activities:
The Commissioner revised the original assessment order, directing that the assessee be charged a higher tax rate of 65% instead of 60%, arguing that the income from actual manufacturing was less than 51% of its gross total income. The Tribunal, however, concluded that the definition of an industrial company includes income "attributable" to manufacturing activities, which has a broader scope than "derived from." Consequently, the Tribunal ruled that the assessee was entitled to the concessional tax rate.

3. Interpretation of the Term "Industrial Company" under Section 2(8)(c) of the Finance Act:
The Finance Act, 1984, and 1985, define an "industrial company" as one mainly engaged in specific activities, including manufacturing or processing goods. The Tribunal, supported by Circular No. 103, interpreted that a company could be classified as an industrial company if it is mainly engaged in manufacturing activities, regardless of the exact percentage of income derived from such activities.

4. Validity and Binding Nature of Circular No. 103 Issued by the CBDT:
The Tribunal relied on Circular No. 103, which clarified that a company could be considered an industrial company even if its income from manufacturing activities is less than 51% of its total income, provided it is mainly engaged in such activities. The Supreme Court's decision in UCO Bank v. CIT reinforced that CBDT circulars, issued under section 119 of the Act, are binding on tax authorities and can mitigate the law's rigour to ensure fair enforcement. The circular was deemed clarificatory and beneficial, thus binding on the authorities.

Conclusion:
The Tribunal's decision was upheld, confirming that the assessee should be treated as an industrial company entitled to the concessional tax rate of 60%. The Tribunal's interpretation of the term "industrial company" and reliance on CBDT Circular No. 103 was deemed correct. The Supreme Court judgments cited by the Revenue were found inapplicable to the case at hand. The question of law was answered in favor of the assessee, and the reference was disposed of without any order as to costs.

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