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TMI Blog1979 (1) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee-company, one S. A. Patel, was paid the total remuneration of Rs. 18,000 by the company. Of this remuneration, the ITO disallowed Rs. 9,000 in the following circumstances. The company was incorporated on 14th September, 1960, and initially it was incorporated as a private limited company. 49% of its shares were held by Sawyer's Inc., U.S.A., and the remaining shares were held by Shri Patel and his friends. On 28th March, 1961, the company fulfilled the conditions of s. 4(7) of the Companies Act, 1956, and, therefore, was deemed to be a subsidiary of a public limited company and the remuneration paid by it to the managing director came to be governed by s. 309 of the Companies Act, 1956. The remuneration of the managing director, S. A. Patel, was Rs. 1,500 per month ; he was also drawing a salary of Rs. 750 per month from the connected concern, viz., M/s. Patel India (Private) Ltd. Necessary reference was made to the Government for sanction of remuneration paid to the managing director, and in reply to this reference, the Company Law Board by its letter dated 30th May, 1964, directed that the managing director, S. A. Patel, should be given remuneration at the rate of Rs. 1,500 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Law Board given to the assessee-company to waive the excess remuneration as irrelevant and not germane to the matter under consideration. The assessee, thereafter, carried the matter to the Income-tax Appellate Tribunal, where it was urged on its behalf that the managing director was a well qualified person, that he was a graduate in industrial engineering and business administration, that he received his training at the University of Michigan, after which he had received practical training in the factories of Sawyer's Inc. of Portland, U.S.A., and Geavart Limited of U.S.A. It was pointed out that a new item of manufacture was started by the assessee-company under the supervision and control of the managing director, and for all these reasons the remuneration actually paid to the managing director was commercially justified. On behalf of the department the arguments which found favour with the ITO and the AAC were repeated. The Tribunal upheld the contentions of the company and allowed its appeal. It considered the technical qualifications of the managing director and the new activities undertaken by the company. It was of the view that once the correct position was realised, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was one which manufactures or produces articles, should employ ten or more workers if the manufacturing process was carried out with the aid of power. Now, the assessee-company had imported machinery valued at Rs. 1,80,000. Prior to the commencement of the total manufacture of " view masters " in India, viz., of both the outer shell (of the implement) and the photographic material (reels), the sister concern of the assessee, viz., Patel India (Private) Ltd., was manufacturing the moulds for the outer shell (case) for which purpose it had imported machinery worth Rs. 46,272. The assessee-company had taken on hire the moulding machines from M/s. Patel India (Private) Ltd., and it had agreed to pay hire charges to M/s. Patel India (Private) Ltd., for the user of those moulding machines. The ITO took the view that the machinery used in the manufacture of " view masters " was not wholly owned by the assessee-company but was partially the property of its sister concern, viz., M/s. Patel India (Private) Ltd., which machinery the assessee had taken on hire. Similarly, he found that the building taken as factory and the office premises also belonged to the said sister concern. The ITO als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company by M/s. Patel India (Private) Ltd. (actually taken on hire by the assessee from its sister concern) formed a very small fraction of the complex of machinery utilised by the assessee-company for its undertaking. Bearing that aspect in mind, the Tribunal opined that the machinery obtained from M/s. Patel India (Private) Ltd. could not be said to have contributed to the formation of the new undertaking. The Tribunal was of the view, therefore, that the assessee could be said to have satisfied the condition imposed by s. 84(2)(ii). Mr. Joshi very fairly pointed out that this aspect has been considered in two decisions of this High Court, viz., CIT v. Asbestos, Magnesia Friction Materials Ltd. [1977] 106 ITR 286 and CIT v. Kopran Chemical Co. Ltd. [1978] 112 ITR 893, and in view of these decisions, which we are required to follow, it would not be possible to urge as far as this court was concerned that the view taken by the Tribunal as far as s. 84(2)(ii) was concerned was based on any improper construction or application of the statutory provisions. He, however, submitted that the view taken by the Tribunal on the satisfaction by the assessee-company of the conditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a few days the assessee-company had employed ten or more workers. For the purpose of understanding the rival arguments it is necessary to set out the statutory provisions under consideration. Section 84(2)(iv) provides as follows : " 84. Income of newly establish industrial undertakings or hotels.-- (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :--... (iv) in a case where the industrial undertaking manufactures or produces articles it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power. " The words which we are required to consider and construe are underlined. In view of the arguments urged at the bar on behalf of the assessee, we may also draw attention to the language employed in s. 80H. It will be sufficient, however, to extract the provisions contained in s. 80H(2)(iv) only as there is a similarity between the language employed in ss. 80H(2)(iv) and 80H(2)(v). Section 80H(2)(iv) reads as follows : " 80H. Deduction in case of new industrial undertakings employing dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day of the preceding twelve months exceeds ten or twenty, as the case may be (depending upon whether power is used or not). However, as far as the latter provisions, viz., the Industrial Disputes Act and the Factories Act are concerned, there is specific phraseology utilised which is absent in the statutory provision we are required to consider, and, hence, these two enactments would appear to be almost of no assistance to us. Under the Factories Act, if the number of workmen exceeds the prescribed number even for one single day, the premises are required to be considered as a factory. Similarly, under the Industrial Disputes Act, s. 25A permits a method of calculating the number of workmen by an averaging process. It would not be fair nor proper to read any such provision in s. 84(2)(iv). We find that even the adoption of the principle or method of averaging, which the ITO found attractive, appears to be unwarranted. We have the case here of a fairly simple and straightforward language of the statutory provision which requires the following question to be posed whilst considering the claim of the assessee to relief under s. 84. In the case of such an assessee, who claims for re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is clear that the condition prescribed by s. 84(2)(iv) has not been complied with and the assessee must be denied relief ; in the latter case, however, in the absence of the words " throughout the year " the assessee must be deemed to have substantially complied with the requirement of s. 84(2)(iv) and cannot be denied relief merely because on a few occasions in the relevant period being considered the quota of workers employed in the manufacturing process falls below ten. In between these two cases, however, there may exist several different situations and whether or not the condition can be said to have been complied with or violated would depend upon various circumstances which may be indicated. First and foremost consideration will have to be afforded to the number of days on which the quota of workers employed in the manufacturing process is ten or more. If on a fair appraisal it could be said that the assessee employed the prescribed number of workers substantially throughout the period for which relief is claimed, then the condition prescribed in s. 84(2)(iv) must be held to have been complied with. There may be a borderline case involving some difficulty. But merely beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with for the first three days only and not complied with for the remaining four days. An argument was advanced at the bar which may be indicated with our view thereon to repel such arguments being advanced before the Tribunal. This was that on certain days the assessee was not able to employ the three casual labourers who were required but not available on the day. It has not been prescribed anywhere that a particular undertaking employs regular and casual labourers in a particular ratio or quota. If a particular manufacturing concern does not wish to employ on a regular basis ten or more workers, then, in our opinion, it must take the risk of violating this condition on such days as casual labourers are not available to make up the prescribed number. It may be pointed out further at this juncture that the provisions talk of employment of workers and not of their actual working. It may be that a particular employer has ten or more workers on his muster roll, a few of whom may not report for work on a particular day. This is not the case of the assessee before us, and we are not required to consider any such case and the question whether such employer can be said to have satisfie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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