1996 (1) TMI 48 - HC - Income Tax

Leased Factory Not Industrial: Tax Ruling

The Court held that the assessee, engaged in hulling paddy and extracting oil but leasing out its factory, did not qualify as an 'industrial company' ... Concessional Rate, Industrial Company, Manufacture Or Processing Of Goods Issues Involved:1. Whether the assessee-company qualifies as an 'industrial company' under section 2(7)(c) of the Finance (No. 2) Act, 1977, and is eligible for the concessional tax rate of 55% for the assessment years 1977-78 and 1978-79.Detailed Analysis:1. Qualification as an Industrial Company:The core issue is whether the assessee, engaged in the business of hulling paddy and extracting oil but leasing out its factory and earning lease income during the relevant assessment years, qualifies as an 'industrial company' under section 2(7)(c) of the Finance (No. 2) Act, 1977.Assessee's Position:The assessee argued that it should be considered an industrial company eligible for the concessional tax rate of 55% even though it was earning lease income. They relied on the earlier decision in Lakshmi Industries (Private) Ltd. v. CIT [1961] 41 ITR 645 (Mad), which held that rental income from leasing out a factory is business income and thus should qualify for the concessional rate.Department's Position:The Department contended that the assessee was not directly engaged in manufacturing or processing goods during the relevant years, as it had leased out its factory. They argued that the assessee did not meet the criteria under section 2(7)(c) of the Finance (No. 2) Act, 1977, which requires a company to be 'mainly engaged' in manufacturing or processing goods to qualify as an industrial company.Tribunal's Decision:The Tribunal sided with the assessee, holding that it qualified as an industrial company and was entitled to the concessional tax rate. The Tribunal relied on previous decisions, including Lakshmi Industries (Private) Ltd. v. CIT [1961] 41 ITR 645 (Mad), CIT v. National Mills Co. Ltd. [1958] 34 ITR 155 (Bom), and Addl. CIT v. Abbas Wazir (P.) Ltd. [1979] 116 ITR 811 (All).Court's Analysis:The Court examined the relevant provisions and precedents. Section 2(7)(c) of the Finance (No. 2) Act, 1977, defines an 'industrial company' as one mainly engaged in manufacturing or processing goods, among other activities. The Court noted that the assessee was not engaged in manufacturing or processing goods during the relevant years but was earning lease income.Key Precedents Considered:- Lakshmi Industries (Private) Ltd. v. CIT [1961] 41 ITR 645 (Mad): This case was distinguished as it dealt with the set-off of losses under section 24(2) of the Income-tax Act, not the definition of an industrial company.- CWT v. P. T. N. Shenbagamoorthy [1983] 144 ITR 724 (Mad): The Court held that merely owning an asset does not qualify one as being engaged in manufacturing.- Vita Pvt. Ltd. v. CIT [1995] 211 ITR 557 (Bom): The Bombay High Court held that leasing out a factory does not qualify as being engaged in manufacturing.- CIT v. First Leasing Co. of India Ltd. [1995] 216 ITR 455: This case was distinguished as it dealt with investment allowance under section 32A, not the definition of an industrial company.Conclusion:The Court concluded that the assessee was not mainly engaged in manufacturing or processing goods during the relevant assessment years. Therefore, it did not qualify as an industrial company under section 2(7)(c) of the Finance (No. 2) Act, 1977, and was not entitled to the concessional tax rate of 55%. The Tribunal's decision was overturned, and the question was answered in the negative, in favor of the Department. There was no order as to costs.