C.I.T. LUDHIANA vs. M/S BHAGYODAY INVESTMENT P LTD.

This reference has arisen from the order of the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh dated 9.3.1995 in ITA No.411 of 1990 relating to assessment year 1985-

The question referred is as under:- “Whether, on the facts and in the circumstances of the case, the ITAT was right in law in holding that the assessee be treated as industrial company and that the tax be charged at low rate applicable to an industrial company?”

The assessee company derives income from dealing in shares, inter-alia, of M/s Munjal Castings, which is engaged in manufacture and processing of goods. The assessee took the plea that its income from shares exceeding 51% being from the shares of a company which was engaged in the manufacture, the assessee should be treated as an ‘industrial company’ for which rate of tax was lower than non industrial company. The Assessing officer did not accept this plea. On appeal of the assessee, it was argued that the Assessing Officer had wrongly charged tax at rate applicable to non industrial company. The revenue contested this plea by submitting that the assessee could not be considered to be industrial company as per definition in the Finance Act, as it was not engaged in the business of generation or distribution of electricity or any other form of power or in the carriage of passengers or goods by roads or inland waterways or any other activity specified therein. The assessee was merely a dealer in the shares of M/s Munjal Castings on which basis it could not be treated to be an industrial company. The CIT(A) upheld the plea of the assessee only on the basis of its earlier order for the assessment year 1984-85. The Tribunal also upheld the same for the same reason.

Learned counsel for the assessee points out that in the order of assessment, there was no discussion and the order of the CIT(A) was based on its earlier order for the assessment year 1984-85. Similarly, order of the Tribunal was also based on the order for the earlier year from which a reference was made to this Court and was answered against the revenue being ITR No.287 of 1995(Commissioner of Income Tax (Central) Ludhiana v. M/s Bhagyoday Investment Pvt. Limited, Ludhiana) decided on 21.5.2008. 4. Learned counsel for the revenue points out that the earlier decision of this Court is based on an erroneous concession made by him with regard to the matter being covered by judgment of Delhi High Court in CIT Delhi I v. Bharat Ram Charat Ram P Limited, (1986) 157 ITR 199, as he was not having record with him and he stands by the statement made by the departmental representative before the CIT(A) that the assessee was not engaged in business of generation or otherwise so as to fall in the definition under Section 2(8)(c) of the Finance Act, 1984 or Explanation appended thereto.

The definition of ‘industrial company’ in the above provision is as under:- “Industrial company” means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the carriage by road or inland waterways, of passengers or goods or in the construction of ships or in the execution of projects or in the manufacture or processing of goods or in mining”. “Explanation: for the purpose of this clause i) a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in the carriage by road or inland waterways, of passengers or goods or in the construction of share or in the execution of projects or in the manufacture or processing of goods or in mining, if the income attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making deduction under Chapter VIA of the Income Tax Act) is not less than fifty one percent of such total income.”

It is settled law that order on a question of law based on erroneous concession of counsel cannot be accepted as a precedent (see: P.Nallamalli v. State, 1999(6) SCC 554, para 7, Union of India and others v. Mohanlal Likumal Punjabi and others, (2004) 3 SCC 628, paras 8, 9).

A perusal of the above definition shows that to qualify as industrial company, the assessee itself must be engaged in the nature of business specified in the definition i.e. generation or distribution of electricity or carriage of passengers or goods or construction of ships or in mining. It has nowhere been stated that the assessee is engaged in any such type of activity. The statement made before the CIT(A) as noted in para 3.1 was not factually disputed by the assessee. The same is extracted below:- “I have no objection to the entertainment of the additional ground of appeal in case the assessee is able to convince your honour as to why this ground of appeal could not be taken up in the original memo of appeal. However, on merits the assessee has no case since the present company cannot be considered to be an industrial company in view of the definition of the industrial company given in the Finance Act for the year under consideration. The assessee Co., is not engaged in the business of generation or distribution of electricity or any other form of power or in the carriage of passengers or goods or in the manufacture or processing of goods or in mining. Simply because the assessee company happens to be a partner in M/s Munjal Castings, Ludhiana, it does not follow that by this process the company itself becomes an industrial company. The only provision in the Income Tax Act is that the share income from the firm would be treated as the business income of the assessee and would be assessed as such and nothing further follows from this.”

Only plea taken by the assessee was that it was having income from shares of a company which may qualify to be an industrial company.

Thus, the question is whether merely because an assessee derives income from shares of a manufacturing company, it will become industrial company on that ground.

In view of clear language of the statute, we are unable to hold that merely by having share income from an industrial company, the assessee receiving such income will become industrial company.

We may now refer to judgment of the Delhi High Court relied upon on behalf of the assessee. In that case, a finding was recorded that the assessee was a partner with a manufacturing company and on that ground, it was industrial company. Relevant observations are as under:- “4. The Tribunal in the course of its decision stated that this question was common for assessment years 1967-68 and 1970-71 and had depended on whether income derived by the assessee from a partnership with M/s Electrical Industries Corporation was to be used as a qualification. We have examined the definition and find that a company is deemed to be an ‘industrial company’ if its income from manufacture is more than 50 percent. As the finding is that at least 51 percent of the income was from the partnership which was concerned with the manufacture of super-enamelled cooper wire, we find that there is no error in the conclusion of the Tribunal and we accordingly answer question No.3 referred to us in the affirmative on the ground that the company was an ‘Industrial Company’ even if the said 51 percent or more of the income came from a manufacture in partnership. Whether that income came from partnership or not makes no difference.”

In the present case, share income cannot be treated as equal to income of a partner or a manufacturer. The assessee cannot, thus, be held to be an industrial company.

Accordingly, the question referred is answered in favour of the revenue and against the assessee.

The reference is disposed of accordingly. (Adarsh Kumar Goel) Judge August 7, 2009