Full Text
ITA No. 1278 of 2008 ITA No. 1287 of 2008 ITA No. 1402 of 2008
Ms. Kavita Jha and Mr. Sriram Krishna, Advocates
THE HON‟BLE MR. JUSTICE VALMIKI J. MEHTA
JUDGMENT
1. 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? A.K. SIKRI, J.
1. 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.
2. The appellant is a widely held public limited company engaged in the business of construction and sale of multi storeyed residential 2009:DHC:4558-DB During the assessment year 1994-95, the appellant came out with two issues of shares for public subscription to augment its working capital, namely, a right issue (48,21,300 equity shares of Rs.10/- each @ a premium of Rs.12.50/- each, aggregating to Rs.10,84,79,250/-) and a public issue (24,19,900 equity shares of Rs.10/- each @ a premium of Rs.15/- each aggregating to Rs.6,14,97,500/-). Expenditure of Rs.49,13,479.85 was incurred towards the right issue and Rs.75,06,601.80 towards the public issue.
3. 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.
4. 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 2009:DHC:4558-DB
5. 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: (a) pre-business expenses, i.e. expenses incurred before the commencement of business, and (b) expenses incurred in connection with the extension of industrial undertaking or in connection with setting up a new industrial unit by an establishment which is already in business. These are the expenses which are incurred even after the commencement of business, but are admissible only to a business which is an „industrial undertaking‟. This becomes manifest from the reading of Section 35-D of the Act, which is reproduced below:- “35D Amortisation of certain preliminary expenses – (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub- 2009:DHC:4558-DB
(ii) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit. the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous 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……..”
6. 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:-
7. 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:-
8. We now proceed to determine these questions.
9. Re. – Question No.1 The appellant company is in the business of construction and sale of multiple storey buildings and complexes and in real estate. 2009:DHC:4558-DB defined under the Act. However, some other enactments contain the definition of this term. These, among others, are:
(i) Section 2(f) of the Sick Industrial Companies (Special
Provisions) Act, 1985. “(f) “industrial undertakings” means any undertaking pertaining to a scheduled industry carried on in one or more factories by any company but does not include-
(i) an ancillary industrial undertaking as defined in clause (aa) of section 3 of the Industries (Development and Regulation) Act, 1951 (65 of 1951); and
(ii) a small scale industrial undertaking as defined in clause (j) of the aforesaid section 3;”
(ii) Section 2(d) of the Industries Development and Regulation
(iii) The Industrial Disputes Act, 1947 also contains the definition of „industry‟ in Section 2(j) as well as „industrial undertaking‟ in Section 2(ka). As per Section 2(ka), „industrial undertaking‟ means – “an establishment or undertaking in which any industry is carried on.”
10. 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 2009:DHC:4558-DB in each of the aforesaid statutes, which are „factories‟ and carrying on some manufacturing activity.
11. 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 – To be an industrial undertaking, the work of manufacture or production should be carried on in one or more factories by person or authority including Government.” Likewise, Wharton‟s Law Lexicon (Dictionary) (15th Edition) defines this expression as – “any undertaking pertaining to a scheduled industry carried on in one or more factories by any company but does not include-
(i) An ancillary industrial undertaking as defined in clause
(ii) a small scale industrial undertaking as defined in clause
(j) of the aforesaid section 3. [Sick Industrial Companies (Special Provision) Act, 1985 (1 of 1986), section 3(1)(f)] Means any undertaking pertaining to a scheduled industry and includes an undertaking engaged in any other industry, or in any trade, business or service which may be regulated by Parliament by law. [Central Industrial Security Force Act, 1968 (50 of 1968) section 2(1)(b)]. Means any undertaking pertaining to a scheduled industry carried on in one or more factories by any person or authority including Government. [Industrial (Development and Regulation) Act, 1951 (65 of 1951), section 3(d)].” 2009:DHC:4558-DB
12. 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.
13. 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:-
14. 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……..”
15. 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 2009:DHC:4558-DB as an „industrial undertaking‟ and this submission of the assessee was accepted by the Court.
16. 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. At the same time, we have to bear in mind that the expression is to be construed in the context of Section 35-D of the Act and it is to be further discerned as to whether the business of construction activity would be treated as an „industrial undertaking‟ or not.
17. 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. 2009:DHC:4558-DB „industrial undertakings‟ which are involved in „manufacturing activity‟.
19. The activity of construction can, by no stretch of imagination, be treated as manufacturing activity as it does not amount to manufacture or production of an article or a thing. Law in this behalf stands settled by the judgment of the Supreme Court in the case of Commissioner of Income Tax, Orissa & Ors. v. M/s. N.C. Budharaja & Company & Ors., 204 ITR 412. Following this judgment, the Supreme Court in S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals), Chandigarh & Anr., 289 ITR 26, held that the business of civil construction would not amount to carrying on any manufacturing activity. Even this Court in Ansal Housing & Estates (P) Ltd. v. Commissioner of Income Tax, 1999 (77) DLT 765, opined that the business of construction of building will not fall within the ambit of industrial company. This appears to be a case of sister concern of the present assessee itself, but, unfortunately, our attention was not even drawn to this judgment by the counsel on either side. In these circumstances, we answer Question No. 1 formulated above against the assessee and in favour of the Revenue.
20. Re. – Question No.2 Since the appellant does not qualify to be an industrial undertaking, whether amendment to Section 35D of the Act is 2009:DHC:4558-DB bearing. Therefore, it is not necessary to decide this question in the facts of this case.
21. Accordingly, these appeals preferred by the assessee are dismissed with costs of Rs.15,000/- in each of the four appeals.
(A.K. SIKRI) JUDGE (VALMIKI J. MEHTA) JUDGE October 30, 2009 nsk 2009:DHC:4558-DB * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA No. 1278 of 2008 % Reserved on: September 17, 2009 Pronounced on: October 30, 2009 Ansal Housing & Construction Ltd.... Appellant through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Sriram Krishna, Advocates
VERSUS
JUSTICE A.K. SIKRI THE HON‟BLE MR.
JUSTICE VALMIKI J. MEHTA
1. 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? A.K. SIKRI, J. For orders, see ITA No. 1261/2008.
(A.K. SIKRI) JUDGE (VALMIKI J. MEHTA) JUDGE October 30, 2009 nsk 2009:DHC:4558-DB * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA No. 1287 of 2008 % Reserved on: September 17, 2009 Pronounced on: October 30, 2009 Ansal Housing & Construction Ltd.... Appellant through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Sriram Krishna, Advocates
VERSUS
JUSTICE A.K. SIKRI THE HON‟BLE MR.
JUSTICE VALMIKI J. MEHTA
1. 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? A.K. SIKRI, J. For orders, see ITA No. 1261/2008.
(A.K. SIKRI) JUDGE (VALMIKI J. MEHTA) JUDGE October 30, 2009 nsk 2009:DHC:4558-DB * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA No. 1402 of 2008 % Reserved on: September 17, 2009 Pronounced on: October 30, 2009 Ansal Housing & Construction Ltd.... Appellant through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Sriram Krishna, Advocates
VERSUS
JUSTICE A.K. SIKRI THE HON‟BLE MR.
JUSTICE VALMIKI J. MEHTA
1. 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? A.K. SIKRI, J. For orders, see ITA No. 1261/2008.
(A.K. SIKRI) JUDGE (VALMIKI J. MEHTA) JUDGE October 30, 2009 nsk