9911796707
TMI Blog1988 (4) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing of goods having been reduced to nil, the assessee could not be termed as a manufacturing company and as the income from other sources was the only source on which tax was levied, the assessee-company should be termed as an investment company. 2. The assessee is registered as M/s. Dalmia Agencies engaged in mining china clay, silicon sand and granite stones. It was also manufacturing and selling asbestos cement pipes at Dalmiapuram and was also processing the china clay and silica sand at Rajmahal inBihar. It was also exporting the granite stones after their mining. In the accounting year under appeal the total income from this activity of manufacture or mining as per profit and loss account came to Rs. 5,11,192 after allowing deduction of Rs. 20,282 u/s. 80HH of the Income-tax Act. In other words, the income was Rs. 5,31,484 from its manufacturing activities. There was an unabsorbed depreciation and carry forward loss relating to the assessment years 1976-77 to 1979-80 of much more than the income shown and out of that a sum of Rs. 5,11,192 was set off so as to bring the income from manufacturing activities to nil. Besides this income from manufacturing activities, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer. According to him even though there was substantial income from the manufacturing activities of Rs. 5,11,192, that amount became nil consequent on the adjustment of carry forward loss and unabsorbed depreciation. He held that the expression 'gross total income' used in section 104 was defined as the total income computed in accordance with the provisions of this Act before making any deduction under Chapter VI-A, which meant that the gross total income as computed after giving effect to the provisions of the Income-tax Act must be taken into consideration and if so done the gross total income computed was only an amount of Rs. 2,16,230 which consisted only of income from other sources and not any income from manufacturing activities. On the question of inadequacy of profits the Commissioner (A) held that the general reserve of the assessee-company was as high as Rs. 25 lakhs and the company could not therefore complain that it had no profits much less inadequate profits. 4. The point raised before us was, as was done earlier before the authorities below, as to whether the assessee-company could be regarded as a company engaged in the manufacture or processing of goods or in mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of this Act before making any deduction under Chapter VI-A. " That is to say that if the gross total income as computed in accordance with the provisions of this Act but before making any deduction under Chapter VI-A, includes any income referable to the manufacturing activities and if that income was more than 51 per cent of the total income, then the assessee-company could be said to be carrying on business consisting mainly in the manufacture or processing of goods or mining. As we have mentioned earlier the authorities below have consistently taken the view that since the income from manufacturing activities was reduced to nil by process of set off of the carried forward loss and unabsorbed depreciation, the total income of the assessee could not be said to include the income from manufacturing activities and therefore the gross total income of the assessee-company did not consist of any income from that activity. 5. The learned counsel for the assessee first argued that the Explanation does not apply. For this purpose he relied upon the observations made at page 35 of Law of Income-tax by Sampat Iyengar, Seventh Edition, where principles of construction of statutes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stress was laid upon the definition of gross total income in section 109(iv) to submit that for the case to be taken out of the ambit of section 104, there must be income from manufacturing activity included in the gross total income and if there was no income included in the gross total income from manufacturing activity, the assessee-company would cease to be a company, whose activity consists mainly of manufacturing and processing and once that results, it becomes an investment company liable to be taxed at 50 per cent. He also relied upon the existence of huge reserves to disprove the theory that inadequacy of profits could not be the reason not to declare any dividends. 7. To our mind it is not necessary for us to deal with the purpose of an Explanation as much as to find out whether the Explanation applies or not. In our view it cannot be said that we can read section 104 without the Explanation to understand its meaning and purport, its scope and ambit and its applicability to the facts of the case. One thing is true, namely, that the assessee-company was incorporated as a manufacturing company and not as an investment company. The income from investments arose because of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading companies to declare dividends more than the statutory percentage of its income on pain of penal tax providing however for exception in the case of company referred to in clause (a) of sub-section (4) provided the income from that activity is more than the income from other sources. This clearly means that even if the companies referred to in clause (a) of sub-section (4) solely exist for the manufacture or processing of goods or for mining or for construction of ships or generation and distribution of electricity, still they would not be entitled to get out of the reach of section 104 if the income from the main activity of manufacture does not produce income and income was derived only from the other activity of investment. In other words, the Legislature appears to have contemplated that the company engaged in the construction of ships or in the manufacture or processing of goods or mining, etc., would also be having income from other sources and as it would be unwise to force those companies to declare dividends out of their profits, thereby depleting them of their resources, an exception is provided that those companies need not declare the dividends as provided for in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity but by reason of the fact that the income from other activity, namely, manufacture turned out to be nil. In such an event the rate of tax applicable would be perhaps as provided for in sub-section (1)(c) of section 104, namely 25 per cent. In other words, in the case of a company referred to in clause (a) of sub-section (4) of section 104 if the income from those activities happens to be less than 51 per cent of the total income, then the rate of tax to be applied in case the other conditions of section 104 are satisfied is 25 per cent and not 50 per cent treating the company as an investment company. 9. It is also possible to argue that the expression "included in the gross total income" is a process of computation of income and even though it may result eventually in loss, the fact that the income was processed and included in the total income could not be lost sight of and if the gross total income in that manner included the income from manufacturing activities and if that income happens to be more than 51 per cent, the company would be out of the reach of section 104. This argument may not be tenable for the reason that the income from each head has to be separately compu ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
