Delhi High Court

Ansal Housing & Construction Ltd. vs Commissioner Of Income Tax on 30 October, 2009

Author: A.K.Sikri

                             Reportable
*             IN THE HIGH COURT OF DELHI AT NEW DELHI

+                             ITA No. 1261 of 2008
                                ITA No. 1278 of 2008
                                ITA No. 1287 of 2008
                                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
Commissioner of Income Tax                                      . . . Respondent
                    through :                        Mr. Subhash Bansal, Advocate

CORAM :-
    THE HON‟BLE MR. 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.

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

buildings and complexes, promotion and development of residential

colonies and other real estate development projects since 1983.

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

of the Act.

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- section (2). -

(i) before the commencement of his business, or

(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 :-

"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:

xxx xxx xxx

45. 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

included for the purpose of amortization under s. 35D on a claim being made by the assessee in that behalf, „Such expenditure will not qualify for deduction under any other- provision of the Act for the same or any other assessment year vide sub-s. (6) of s. 35D."

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 :-

"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?

2. 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?"

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.

Whether such a company can be treated as „industrial undertaking‟ is

the question. This term „industrial undertaking‟ has nowhere been

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

Act.

(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

establishments or undertakings are treated as „industrial undertakings‟

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 (aa) of section 3 of the Industries (Development and Regulation) Act, 1951; and

(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)]."

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 :-

"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).

6. "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 :

".........being land or building or any right in land or building, forming part of an industrial undertaking belonging to the assessee which, in the two years immediately preceding the date on which the transfer took place, was being used by the assessee for the purposes of the business of the said undertaking....... " (emphasis supplied)

is profitable. The word "business" has been denned in the Income-tax Act. The definition reads :

" 'Business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture."

7. 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 word 'business' is, as has often been said, one of wide import and in fiscal statutes it must be construed in a broad rather than a restricted sense."

8. 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."

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

computers for production of articles and things it could be regarded

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.

18. Therefore, we are of the opinion that common sense approach will

have to be adopted and those undertakings would qualify as

„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

clarificatory in nature or applies retrospectively will not have any

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

* 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 Commissioner of Income Tax . . . Respondent through : Mr. Subhash Bansal, Advocate

CORAM :-