FINANCE ACT, 1966 – SECTION 2(7)(d ) – INDUSTRIAL COMPANY

1476. Meaning of industrial company under Explanation to section 2(7)(d)

1. Under sub-section (7)(d ) of section 2 of the Finance Act, 1966, an “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 construction of ships or in the manufacture or processing of goods or in mining. According to the Explanation to clause (d) of sub-section (7) of section 2, 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 construction of ships or in the manufacture or processing of goods or in mining, if the income attributable to any of the aforesaid activities included in its total income for the previous year is not less than fifty-one per cent of such total income.

2. The question as to the exact meaning of the Explanation to sub-section (7)(d) of section 2, came up for the consideration and the Board are advised that an “industrial company” would mean–

(a)    a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, even if its income from such activities is less than 51 per cent of its total income; and

(b)    a company which, even though not mainly so engaged, derives in any year 51 per cent or more of its total income from such activities.

Circular : No. 103 [F. No. 166/1/73-IT(A-I)], dated 17-2-1973.

JUDICIAL ANALYSIS

EXPLAINED IN – In CIT v. N.U.C. (P.) Ltd. [1980] 126 ITR 377 (Bom.), the above circular was explained with the following observations :

“Shri Khatri then referred to the circular dated February 17, 1973, of the Central Board of Direct Taxes to contend that although the assessee-company was engaged in the business of construction of buildings, it was also at the same time manufacturing or processing window frames, door frames, cement beams and slabs, and the income derived from such manufacture constituted a larger portion of the total income derived by it from its overall business of construction. Hence, he contended, that in terms of the said circular which has sought to interpret the Explanation to clause (d) of sub-section (7) of section 2 of Chapter II of the Finance Act, 1966, the assessee-company will be an industrial company. We fail to understand how this circular helps the assessee-company. Apart from the fact that there is nothing on record to show separately the income derived by the assessee from its so-called different activities, one of constructing buildings and the other of manufacturing frames and beams, we have already held that the assessee-company was not carrying on the said activity of manufacturing frames, etc., independently of or otherwise than in the process of, the construction of the buildings. It is not, therefore, permissible to divide its activity into the said two segments to compare the income from one with the other. The assessee-company’s only business is that of construction and repairing of buildings and there are no two activities carried on by it as contended by Shri Khatri. We are, therefore, not impressd by the contention advanced by Shri Khatri and taking into consideration the said extended meaning given in the said circular the assessee-company would fall within the definition of an industrial company …. ” (pp. 381-382)

EXPLAINED IN – In S.P. Jaiswal Estates (P.) Ltd. v. CIT [1994] 73 Taxman 320 (Cal.), it was observed that in Board’s Circular No. 103, dated 17-2-1973 it was stated that a company which, even though not mainly so engaged, derived in any year 51 per cent or more of its total income from such activities like manufacture or processing of goods, it could be held to be an industrial company.

EXPLAINED IN – In Vishal International Production (P.) Ltd. v. IAC [1993] 46 ITD 312 (Delhi-Trib.), it was observed that it is apparent that in Circular No. 103, the provisions of section 2(7)(d) of Finance Act, 1966 read with Explanation were being considered and these are not in any way different to the corresponding provisions of the Finance Act, 1980.

EXPLAINED IN – In Nova Bharat Enterprises (P.) Ltd. v. CIT (1983) 143 ITR 804 (AP), this circular was referred to, and the High Court observed as follows :

“We are of the opinion that the construction placed by the Central Board of Direct Taxes upon the definition represents the correct view. Adopting the view contended for by the Department would result in anomalous and inequitable results. . .” (p. 812)

EXPLAINED IN – The above circular was applied in ITO v. Hedavkar Mechanical Works (P.) Ltd. (1984) Taxation 72(6) – 48 (ITAT – Bom.), and on the facts of the case, it was held that the respondent-assessee was not an industrial company, since it was not covered under either of the two alternatives mentioned in the circular.

EXPLAINED IN – The above circular was explained in ITO v. Kalima Plastics (P.) Ltd. (1990) 38 TTJ (Delhi) 535, with the following observations :

“The Explanation to clause (c) of section 2( 7) of the Finance Act, 1982, contains a deeming provision as a result of which a company which, in fact, is not mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in the mining shall be deemed to be engaged in such activities if the income attributable to any one or more of such activities included in its total income is not less than 51% of such total income. It is precisely for this reason that the Board has clarified in its Circular No. 103 that a company which is mainly engaged in one or more of the activities enumerated in the Explanation would be an industrial company even if its income from such activities is less than 51% of its total income. Here, it may be pointed out that definition of an industrial company in sub-section (7)(d) of section 2 of the Finance Act, 1966, and the Explanation thereto are in pari materia  with clause (c) of section 2(7) of the Finance Act, 1982 and the Explanation to clause (c). The Board’s circular further makes it clear that a company which is even though not mainly so engaged in one of the aforesaid activities, derives in any year 51% or more of its total income from such activities, would be an industrial company. It is, therefore, not correct to say that it is only when income derived by a company from one or more activities enumerated in clause (c) of section 2(7) of the Finance Act, 1982, is not less than 51% of its total income that it can be treated as an industrial company for the purpose of applying the concessional rate of tax at 55%. Explanation to clause (c) applies only to cases where a company, in fact, is not mainly engaged in one of the activities enumerated in clause (c) but by legal fiction it is deemed to be mainly engaged in one or more such activities provided its income from such activities is not less than 51% of such total income. If an industrial company is mainly engaged in one or more of the activities enumerated in clause (c) it would be an industrial company within the meaning of clause (c) of section 2(7) and in such a case the Explanation is not at all called into play. The Board’s Circular No. 103 makes the position quite clear.” (pp. 538-539)

EXPLAINED IN – The above circular was explained  in Khoday Industries Ltd. v. ITO (1994) 51 ITD 18 (Bang.), in the following words :

“. . .The Supreme Court has held in its recent decision in the case of Minocha Brothers (P.) Ltd. [1994] 74 Taxman 466 (SC) that the assessee failed to discharge the burden that lay upon him to adduce evidence to establish that income attributable to manufacturing activity undertaken by him was not less than 51% of the total income. As regards  reliance placed by the assessee’s counsel on the CBDT’s circular dated 17-2-1973 (supra), the Supreme Court simply stated that construction of buildings is not one of the activities mentioned in the said circular and, hence, it was unnecessary to express any opinion whether the said circular runs contrary to the Explanation to the definition of ‘industrial company’, in the Finance Acts and if so, whether it can be acted upon. Thus, it is clear that the Supreme Court has not exactly passed any opinion that the circular of the CBDT, as rightly pointed out by the learned counsel for the assessee, cannot be acted upon to get at the real meaning of an ‘industrial company’.” (p. 23)

“. . . The circular issued by the CBDT, if it is favourable to the assessee, is purely binding on the departmental authorities unless and until such circular is specifically repealed . . . .” (p. 24)

“It is clear from above that in the said circular, the CBDT has recognised that for being given the benefit of a lower tax rate as an industrial company, it is not necessary for a company to have its income from manufacturing activities to be actually 51% or more of its total income in any particular year provided the company be found to be mainly engaged in manufacturing business. . . .” (p. 25)

EXPLAINED IN – The above circular was explained in CIT v. Beehive Engg. Co. and Allied Industries (P.) Ltd. [1996] 221 ITR 561 (AP), in the following words :

“From the above extract (of the Circular), two things are clear, viz., (i) that for a company to be an “industrial company” within the meaning of the abovesaid provision, it is enough if the company is carrying on manufacturing of goods, and (ii) that the application of the Explanation would arise only in a case where the company is not mainly an industrial company; in such a case if the income of that company from manufacture of goods exceeds 51 per cent, it would be treated as industrial company. . . . ” (pp. 566-567)

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