ANSAL HOUSING & CONSTRUCTION LTD vs. C.I.T

Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest?

In all these appeals, common question of law which arises for consideration, which relate to interpretation of Section 35-D of the Income Tax Act, 1961 (hereinafter referred to as the „Act‟). For the purpose of convenience, we are taking note of the facts of ITA No. 1261/2008.

The appellant is a widely held public limited company engaged in the business of construction and sale of multi storeyed residential buildings and complexes, promotion and development of residential colonies and other real estate development projects since 1983.

For the previous year relevant to the assessment year 1998-99, the appellant company filed its return of income on 30.11.1998 disclosing total income of Rs.6,57,26,910/-. The assessment was completed under Section 143(3) of the Act on 26.3.2001 wherein the Assessing Officer (AO) disallowed the expenses claimed by the appellant as revenue expenditure.

Being aggrieved by the aforesaid order, the appellant filed an appeal before the Commissioner of Income Tax (Appeal). The CIT(A), vide order dated 7.8.2003, confirmed the action of the AO. The appellant preferred the appeal before the Income Tax Appellate Tribunal (for short, the „Tribunal‟). The Tribunal vide order dated 11.4.2008 held that the appellant is not an „industrial undertaking‟ and, therefore, not entitled to deduction under Section 35-D of the Act. Still dissatisfied, present appeal is preferred under Section 260A of the Act.

In common parlance and as per the accounting standards, the expenditure on issue of shares is treated as capital expenditure since it affects the capital structure of the business. Therefore, such an expenditure, being of capital nature, is not admissible to deduction as business expenditure since the same is not treated as revenue deduction. However, by Taxation Laws (Amendment) Act, 1970, the Legislature introduced Section 35-D of the Act, which came into force with effect from 1.4.1971. It enables amortization of specified preliminary expenses, which are otherwise not admissible deductions. Expenditure on issue of shares of public subscription is one such expenditure. Section 35-D, however, applies in two circumstances:

Circular No. 56 dated 19.7.1971 containing explanatory notes on the Taxation Laws (Amendment) Act, 1970 clarifies the Legislative intent behind insertion of Section 35D of the Act on the statute in the following terms :- “42. Sec. 8 of the Amending Act has introduced two new ss. 35D and 35E, w.e.f. 1st April, 1971. New s. 35D provides for the amortization of certain preliminary expenses incurred by an Indian company or a resident assessee other than a company before the commencement of business or in connection with the extension of an industrial undertaking or the setting up of a new industrial unit. The amortization will be allowed against the profits of the company or other taxpayer in 10 equal instalments over a period of 10 years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation. Such amortization will be allowed only in respect of expenditure incurred after 31st March, 1970 under specified heads. The heads of qualifying expenditure specified for this purpose are the following:

It may be noted that the provision for amortization is not intended to supersede any other provision in the income – tax law under which the expenditure is allowable as a deduction against profits. For instance, where a company which is already in business, incurs expenditure on issue of debentures, and such expenditure is admissible as a deduction against profits of the year in which it is incurred by virute of the decision of the Supreme Court in the case of India Cements Ltd. v. CIT (SC) [1996] 60 ITR 52, s. 35D will not have the effect of bringing that expenditure within the scope of the expenditure to be amortised against profits over a 10-year period. As a corollary to this, where any expenditure has been

The appellant, at the time of incurring the aforesaid expenditure on capital issue, was already in business. Therefore, the said expenses are incurred after the commencement of the business. In such an eventuality, the appellant can claim amortization of the expenses only if it qualifies to be an „industrial undertaking‟. As noted above, the Tribunal has held that the appellant is not an „industrial undertaking‟ within the meaning of Section 35-D of the Act. This finding of the Tribunal is questioned by the appellant in these appeals and in the aforesaid background, these appeals were admitted and heard on the following common substantial questions of law :- “1. Whether on the facts and in the circumstances of the case the Tribunal erred in law in holding that the appellant is not an „industrial undertaking‟ and, therefore, not entitled to deduction under section 35D of the Act?

Whether on the facts and in the circumstances of the case the Tribunal erred in law in not appreciating the amendment to section 35D of the Act, vide Finance Act, 2008 is clarificatory in nature and, therefore, should be applicable retrospectively?”

We now proceed to determine these questions.

Re. – Question No.1

We may state at the outset that the objective with which the aforesaid statutes are enacted is different and in the context thereof the definition to this term is provided by various Act. Therefore, it cannot be safe to rely upon one or the other definition contained in the aforesaid statutes. Notwithstanding the same, one common thread which is found in all these definitions is that those establishments or undertakings are treated as „industrial undertakings‟

In the absence of any definition provided under the Income Tax Act, it would be admissible to find out the scope of this expression by resorting to its meaning in common parlance as understood by common persons or its natural and grammatical manner. Law Lexicon, the Encyclopedia Law Dictionary (1997 Edition), provides the following meaning :- “Industrial Undertaking –

Going by the dictionary meaning as well, one would find that industrial undertakings take their flavour from the manufacturing or production activities carried by factories. The expression „industrial undertaking‟ appears in Section 54-D of the Act as well and the Kerala High Court also had an occasion to expound this term in the case of P. Alikunju M.A. Nazeer Cashew Industries v. CIT, 166 ITR 804. That Court was also of the opinion that natural meaning to the words „industrial undertaking‟ should be given in the absence of any statutory definition.

To this extent, there is no quarrel. However, Mr. Ajay Vohra, learned counsel for the appellant submitted that wide meaning should be given to the expression „industrial undertaking‟ as was done by the Kerala High Court, which is clear from the following discussion contained in the said judgment :- “5. What then is an "industrial undertaking"? The Income-tax Act does not define what is "an undertaking" or what is an "industrial undertaking". It has, therefore, become necessary to construe these words. Words used in a statute dealing with matters relating to the general public are presumed to have been used in their popular rather than their narrow, legal or technical sense. Loquitur ut vulgus, that is, according to the common understanding and acceptation of the terms, is the doctrine that should be applied in construing the words used in statutes dealing with matters relating to the public in general. In short, if an "Act is directed to dealings with matters affecting everybody generally, the words used have the meaning attached to them in the common and ordinary use of language." (Vide Unwin v. Hanson [1891] 2 QB 115 , per Lord Esher M. R. at page 119). That the Income-tax Act is of general application, is beyond dispute. It, therefore, follows that the meaning that should be given to these words "industrial undertaking" must be the natural meaning. It is all the more so because the Income-tax Act is one consolidating and amending the law relating to income-tax and super tax. (See Rao Bahadur Ravulu Subba Rao v. Commissioner of Income tAx (1956) 30 ITR 163 (SC) at 169).

"Undertaking" in common parlance means an "enterprise", "venture", "engagement". It can as well mean "the act of one who undertakes or engages in a project or business" (Webster), An undertaking mentioned in Section 54D must be one maintained by a person for the purpose of carrying on his business. "Undertaking" for the purpose of this section, however, must bean "industrial undertaking". The demonstrative adjective "industrial" qualifying the word "undertaking" unmistakably and with precision shows that the undertaking must be one which partakes of the character of a business. That that is the meaning that is intended by Parliament is clear from the context in which these words have been used in the section. A reference in this connection to the following clause, namely :

Construing this word "business", the Supreme Court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax [1954]26ITR765(SC) has observed that "the word "business" connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose." Endorsing this construction, the Supreme Court in a later decision in Mazagaon Dock Ltd. v. Commissioner of Income Tax (1958) 34 ITR 368 has observed (at page 376) :

The words "industrial undertaking" therefore, should be understood to have been used in Section 54D in a wide sense, taking in its fold any project or business a person may undertake. The "running of a lodge", by the assessee, therefore, can be said to be an "industrial undertaking" within the meaning of Section 54D of the Income-tax Act.”

Mr. Vohra also referred to the judgment of the Bombay High Court in Ship Scrap Traders v. Commissioner of Income Tax, 251 ITR 806. This case concerns with the deductions under Section 80HHA and 80IA of the Act, which are available to an „industrial undertaking‟ engaged in manufacture or production of an article or a thing. While holding that the assessee would be entitled to deduction under the aforesaid provision as it was engaged in the activity of ship breaking and was, thus, an „industrial undertaking‟, the Court observed as under :- “The Income-tax Act does not define the expression "industrial undertaking". Therefore, reference to its definition in similar enactments or adoption of its ordinary meaning is inevitable. Considering the object of the enactment of the provision under consideration, the said expression will have to be construed liberally in a broader commercial sense, keeping its object in mind. There is not much debate on this aspect of the matter. The concept of industrial undertaking need not necessarily be confined to manufacture and production of articles and even in the absence of either of them there could be an industrial undertaking……..”

Mr. Vohra also relied upon another judgment of the Bombay High Court in the case of Commissioner of Income Tax v. Emirates Commercial Bank Ltd., 262 ITR 55. In that case, the Bombay High Court held that the branch of a foreign bank existing in India was entitled to investment allowance under section 32A of the Act with respect to computers installed in the bank. The deduction under the said section is available to an “industrial undertaking” engaged in manufacture or production of an article or a thing. The assessee‟s submission in that case was that as long as the assessee used these computers for production of articles and things it could be regarded

From the discussion up to now, it follows that: (a) industrial undertaking is to be given the meaning which is understood in common parlance, and (b) which should be interpreted widely.

In P. Alikunju M.A. Nazeer Cashew Industries (supra), the Kerala High Court rightly pointed out that an „undertaking‟ must be one which partakes the character of a business. However, what we find is that though the demonstrative adjective „industrial‟ which qualifies the word „undertaking‟ was taken note of while answering the question, no significance was attached to the said expression „industrial‟ and the case is decided by relying upon the meaning of the expression „undertaking‟ alone. Interestingly, in the two judgments of the Bombay High Court, taken note of above, the Court came to the conclusion that the activities involved in those cases amounted to manufacture or production of an article or a thing. 18. Therefore, we are of the opinion that common sense approach will have to be adopted and those undertakings would qualify as

Re. – Question No.2

Accordingly, these appeals preferred by the assessee are dismissed with costs of Rs.15,000/- in each of the four appeals.

Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest?

Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest?

Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest?