COMMISSIONER OF INCOME-TAX vs. PRABHUDAS KISHORDAS TOBACCO PRODUCTS PVT LTD

ITR/99/1995HC GujaratGJHC24022424199502 February 2006Author: HONOURABLE MR. JUSTICE D.A.MEHTA,HONOURABLE MS. JUSTICE HARSHA DEVANI18 pages
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What were the facts?

The assessee, Prabhudas Kishordas Tobacco Products Pvt Ltd, is a private limited company engaged in the business of buying tendu leaves and tobacco, which are then given to contract workers to roll bidis. The company sells these bidis under its brand name. For assessment years 1984-85 and 1985-86, the assessee claimed relief under Sections 80HH and 80I of the Income Tax Act, 1961. The Assessing Officer denied this relief, stating the assessee was not an industrial undertaking and lacked plant and machinery. He also argued that for Section 80I, the assessee was manufacturing goods listed in the Eleventh Schedule and, to claim relief, had to be a small-scale industrial unit, which he determined it was not by including assets like cars, trucks, and pumps in the cost of the project. The Commissioner (Appeals) and the Income Tax Appellate Tribunal (ITAT) ruled in favour of the assessee.

What did the High Court hold?

The High Court held that the assessee company is an industrial undertaking engaged in the manufacture of bidis, entitling it to relief under Sections 80HH and 80I. The Court reasoned that the activity of rolling bidis, even if done by contract workers, transforms the raw materials (tendu leaves and tobacco) into a new and distinct article with a separate commercial identity and market. The Court emphasized that the identity of the raw material is lost in the final product. It was also held that whether the assessee carries out the manufacturing activity itself or gets it done through contract workers does not make a difference, citing the principle that the real test is whether the agreement is for personal labour and if the outside agency works under the assessee's supervision and control. Regarding the second issue, the Court confirmed that for determining if an undertaking is small-scale, only the aggregate value of the machinery and plant installed and used for the business of the undertaking, based on its actual cost, should be considered, not all business assets. Therefore, the inclusion of cars, trucks, etc., by the Assessing Officer was incorrect.

What were the issues?

1. Whether the Appellate Tribunal is right in law and on facts in holding that the assessee company is an industrial undertaking for the purposes of Section 80HH and 80I of the Income Tax Act, 1961? The revenue contended that the assessee's activity of buying raw materials and getting bidis rolled by contract workers, followed by marketing, does not constitute manufacturing. It argued that the assessee did not carry on any activity itself and lacked an industrial enterprise or plant and machinery. The assessee argued, relying on various High Court decisions, that its activity amounted to manufacturing bidis and that it was an industrial undertaking. 2. Whether the Appellate Tribunal is right in law and on facts in confirming the order made by the CIT (A) whereby he had held the cars, trucks, dead stock, pumps etc. are not plant and machinery for the purpose of determining the cost of project for treating the assessee as small scale industrial undertaking? The revenue argued that these assets should be included to determine if the assessee qualified as a small-scale industrial unit. The assessee contended that the Assessing Officer's approach was contradictory, as he denied the existence of plant and machinery but then included a broad definition of 'plant' to disqualify the assessee as a small-scale unit. The CIT(A) and Tribunal agreed that only the actual cost of plant and machinery installed and used for the undertaking should be considered.

Which sections of the Income-tax Act were involved?

Section 80HH,Section 80I,Section 80HHA,Section 256(1)

AI-generated summary — verify with the full judgment below

ITR/99/1995 1/18 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 99 of 1995 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA HONOURABLE MS.JUSTICE H.N.DEVANI ============================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ============================================================== COMMISSIONER OF INCOME-TAX - Applicant(s)

Versus PRABHUDAS KISHORDAS TOBACCO PRODUCTS PVT LTD - Respondent(s) ============================================================== Appearance : MR BB NAIK for Applicant MR SN SOPARKAR, Sr. Advocate with MRS SWATI SOPARKAR for Respondent ================================================================== CORAM :  HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MS.JUSTICE H.N.DEVANI Date : 09/01/2006 ORAL JUDGMENT (Per : HONOURABLE

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