Meaning of “Industrial undertaking”

The meaning of industrial undertaking under section 54D of the Income Tax Act is not defined in the act itself. But we can take guidance from decisions by various high courts. Here are excerpts of courts orders in which the Hon’ble High Court tried to explain the meaning of industrial undertaking.

Meaning of industrial undertaking defined by court

The phrase ‘industrial undertaking’ used in section 54D of the Income Tax Act came up before various high courts as detailed under :

1. Hon’ble Kerala High Court explained the meaning of ‘industrial undertaking’ while delivering judgment in P. Alikunju Vs. CIT [1987] 34 TAXMAN 169/166 ITR 804 (KER.) as under :

Meaning : 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 be ‘an 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. This is the meaning that is intended by the parliament is clear from the context in which these words have been used in the section.

The words ‘industrial undertaking’, therefore, should be understood to have been used in section 54d in a wide sense, taking in 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.

2. Hon’ble Andhra Pradesh High Court explained the meaning of ‘industrial undertaking’ while delivering judgment in CIT Vs. Hemsons Industries [2001] 118 TAXMAN 903/251 ITR 693 (AP) as under :

Meaning : Section 54d, granting an exemption, must be construed liberally and the expression “industrial undertaking” occurring therein must be given its popular meaning. An undertaking mentioned in section 54d must be one maintained by a person for the purpose of carrying on his business.

The demonstrative objective “industrial” qualifying the word “undertaking” unmistakably and with precision shows that the undertaking must be one, which partakes of the character of a business. The word “business” connotes some real, substantial and systematic or organised course of activity with a set purpose.

Since the word “business” is of wide import, the words “industrial undertaking” 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.

3. Hon’ble ITAT-Delhi explained the meaning of ‘industrial undertaking’ while delivering judgment in ITO Vs. Delhi Press Samachar Patra (P.) Ltd. [1990] 32 ITD 650 (DELHI-TRIB.) as under :

Section : 80J

Meaning: The term ‘industrial undertaking’ would mean any venture or enterprise which a person undertakes to do, which has relation to some industry.

4. Hon’ble ITAT-Chandigarh explained the meaning of ‘industrial undertaking’ while delivering judgment in Longowalia Poultry Farm Vs. Dy. CIT [1998] 67 ITD 45 (CHD. – TRIB.) as under :

Section : 80-I

Meaning: The expression ‘industrial undertaking’ in sections 80-i and 80hh has not been defined under the statute and should, therefore, be understood in the sense in which it is used in the world of trade and commerce. An assessee engaged in the production of eggs and hatching of chicks on a large scale by adopting modern scientific and technological methods would necessarily constitute an industrial undertaking.

5. Hon’ble ITAT-Ahmedabad explained the meaning of ‘industrial undertaking’ while delivering judgment in Dy. CIT Vs. Mira Industries [2003] 87 ITD 475 (AHD. – TRIB.) as under :

Section : 80-I

Meaning : The term ‘industrial undertaking’ is not specifically defined in the act though it appears in various other places including these two sections, and various other enactments. In a common parlance, it may mean any and every ‘enterprise’, ‘venture’, ‘engagement’ whatsoever.

6. Hon’ble Karnataka High Court explained the meaning of ‘industrial undertaking’ while delivering judgment in Shankar Construction Co. Vs. CIT [1991] 56 TAXMAN 98 (KAR.) as under :

Section : 32A

Meaning : It is too late in the day to say that the expression ‘industrial undertaking’ has not fallen for judicial consideration. It is possible to refer to numerous decisions. But it would be most useful to refer to the decisions of the supreme court in bangalore water supply & sewerage board v. A. Rajappa air 1978 sc 548 wherein the words ‘industry’ and ‘undertaking’ fell for consideration and certain other earlier decisions were specifically overruled.

It suffices for one to extract the following passage to drive home the meaning of the expression ‘industrial undertaking’ occurring in sub-clause (iii) of clause (b) of sub-section (2) of section 32a and it is as follows : “‘industry’ as defined in section 2(j) has a wide import”.

Where there is (i) systematic activity, (ii) organized by co-operation between employer and employee (the direct and substantial element is chimerical, (iii) for the production and/or distribution of goods and services calculated to satisfy human wants and wishes (not spiritual or religious but inclusive of material things or services geared to celestial bliss,

e.g., Making, on a large scale, prasad or food), prima facie, there is an ‘industry’ in that enterprise. Absence of profit motive or gainful objective is irrelevant, be the venture in the public, joint, private or other sector. The true focus is functional and the decisive test is the nature of the activity with special emphasis on the employer-employee relations. If the organization is a trade or business, it does not cease to be one because of philanthropy animating the undertaking.

Although section 2(j) uses words of the widest amplitude in its two limbs, their meaning cannot be magnified to overreach itself. ‘Undertaking’ must suffer a contractual and associational shrinkage as explained in air 1953 sc 58, so also, service, calling and the like.

This yields the inference that all organised activities possessing the triple elements above mentioned, although not trade or business, may still be industry provided the nature of the activity, viz., The employer-employee basis, bears resemblance to what is found in trade or business.

This takes into the fold of ‘industry’ undertakings, callings and services, adventures analogous to the carrying on of trade or business. All features, other than the methodology of carrying on the activity, viz., In organizing the co-operation between employer and employee, may be dissimilar. It does not matter, if on the employment terms there is analogy.” (P. 549)

7. Hon’ble ITAT-Hyderabad explained the meaning of ‘industrial undertaking’ while delivering judgment in Sangam Enterprises Vs. ITO [1986] 15 ITD 300 (HYD. – TRIB.) as under :

Section : 32A

Meaning : The industrial undertaking must be in a business of construction, manufacture or production of any article or thing. Therefore, an industrial undertaking has to satisfy a test that it manufactures or produces something. If it does not, it is not an industrial undertaking.

8. Hon’ble ITAT-Kolkata explained the meaning of ‘industrial undertaking’ while delivering judgment in French Motor Car Co. Ltd. Vs. Dy. CIT [1999] 68 ITD 176/64 TTJ (CAL. – TRIB.) 442 as under :

Section : 32A

Meaning : As regards the condition stipulated in sub-section (2)(b)(ii) and (iii) of section 32a the new machinery or plant installed after 31-3-1976, should be ‘for the purposes of business of manufacture or production’ of any article or thing as contained in sub-clause (ii) in respect of a small scale industrial undertaking and ‘for the purpose of business of construction, manufacture or production’ of any article or thing, in respect of any other industrial undertaking as contained in sub-clause (iii).

The expression ‘for the purposes of’ used above in sub-clauses (ii) and (iii) implies that the machinery or plant specified and mentioned in this provision should be of the aforesaid specified category. This also does not import into sub-section (1) a requirement by way of condition necessitating the commencement of actual user for manufacture or production so as to make the deduction in respect of investment allowance available under section 32a.

9. Hon’ble Madras High Court explained the meaning of ‘industrial undertaking’ while delivering judgment in CIT Vs. Essar Bulk Carriers Ltd. [1998] 145 CTR (MAD.) 289 as under :

Section : 80HH

Meaning : Though the term ‘industrial undertaking’ is capable of wider definition, and the word ‘industry’ has a very large ambit ‘industrial undertaking’ used in section 80hh(1), having regard to the requirements set out in section 80hh(2)(i), is limited to industries which manufacture or produce articles.

10. Hon’ble Madhya Pradesh High Court explained the meaning of ‘industrial undertaking’ while delivering judgment in CIT Vs. Paras Oil Extraction Ltd. [1998] 96 TAXMAN 234/230 ITR 266 (MP) as under :

Section : 80HH

Meaning : Expression ‘industrial undertaking’, used in sections 80hh and 80-i, has to be considered to mean essential trade activity of the assessee and not otherwise. The word ‘derive’ means derived from industrial activity and industrial activity means business in which industry is involved.

11. Hon’ble ITAT-Ahmedabad explained the meaning of ‘industrial undertaking’ while delivering judgment in Dy. CIT Vs. Mira Industries [2003] 87 ITD 475 (AHD. – TRIB.) as under :

Section : 80HH

Meaning : The term ‘industrial undertaking’ is not specifically defined in the act though it appears in various other places including these two sections, and various other enactments. In a common parlance, it may mean any and every ‘enterprise’, ‘venture’, ‘engagement’ whatsoever.

12. Hon’ble ITAT-Chandigarh explained the meaning of ‘industrial undertaking’ while delivering judgment in Longowalia Poultry Farm Vs. Dy. CIT [1998] 67 ITD 45 (CHD. – TRIB.) as under :

Section : 80HH

Meaning : The expression ‘industrial undertaking’ in sections 80-i and 80hh has not been defined under the statute and should, therefore, be understood in the sense in which it is used in the world of trade and commerce. An assessee engaged in the production of eggs and hatching of chicks on a large scale by adopting modern scientific and technological methods would necessarily constitute an industrial undertaking.

13. Hon’ble ITAT-Madras explained the meaning of ‘industrial undertaking’ while delivering judgment in Pondicherry Distilleries Ltd. Vs. ITO [1984] 8 ITD 39/20 TTJ 410 (MAD. – TRIB.) as under :

Section : 80HH

Meaning : There is no definition of ‘industrial undertaking’ in the provisions of the act. Therefore, the expresion ‘industrial undertaking’ has to be given the normal meaning. The term ‘undertaking’ envisages not only the activity of manufacture or production of goods or articles but the entire set up including all the paraphernalia, the various assests, liabilities, i.e., The entire set up with which the business of manufacture or production of goods is carried on.

14. Hon’ble ITAT-Kolkata explained the meaning of ‘industrial undertaking’ while delivering judgment in Shaw Scott Distilleries (P.) Ltd. Vs. Asstt. CIT [2001] 76 ITD 89 (CAL. – TRIB.) (SB) as under :

Section : 80HH

Meaning : From section 80hh(2) it is clear that the act has not given any definition of the expression ‘industrial undertaking’. The requirement of section 80hh(2) is that to be eligible, the industrial undertaking should be one which is engaged in the manufacture or production of an article or thing. Therefore, the expression can be understood by looking upto the meaning as understood in common parlance or by making a reference to its definition in cognate legislation.

15. Hon’ble ITAT-Mumbai explained the meaning of ‘industrial undertaking’ while delivering judgment in Bank Of Baroda Vs. Jt. CIT [2005] 2 SOT 804 (MUM. – TRIB.) as under :

Section : 36

Meaning : The words ‘industrial undertaking’ or ‘industrial unit’ have not been defined under the act, but the meaning and purport of such terms can be understood by referring to various other provisions contained in the act.

The term ‘industrial undertaking’ has also been used in sections 80hh and 80-i, etc., Which entitles the assessee to certain deductions if the profits and gains are derived from the industrial undertaking. In these sections, it is stipulated that the industrial undertaking must engage in the manufacture or production of an article or a thing.

If there is no specific definition of the term in the act, the meaning of such term for the purposes of any sections of the act can be understood by reference to other sections of the act or even provisions contained in other direct taxes acts like the wealth-tax act.

16. Hon’ble ITAT-Mumbai explained the meaning of ‘industrial undertaking’ while delivering judgment in Bank Of Baroda Vs. Jt. CIT [2005] 2 SOT 804 (MUM. – TRIB.) as under :

Section : 36

Meaning : The words ‘industrial undertaking’ or ‘industrial unit’ have not been defined under the act, but the meaning and purport of such terms can be understood by referring to various other provisions contained in the act.

The term ‘industrial undertaking’ has also been used in sections 80hh and 80-i, etc., Which entitles the assessee to certain deductions if the profits and gains are derived from the industrial undertaking. In these sections, it is stipulated that the industrial undertaking must engage in the manufacture or production of an article or a thing.

If there is no specific definition of the term in the act, the meaning of such term for the purposes of any sections of the act can be understood by reference to other sections of the act or even provisions contained in other direct taxes acts like the wealth-tax act.

Section 54D of Income Tax Act

Capital gain on compulsory acquisition of lands and buildings not to be charged in certain cases.

54D. (1) Subject to the provisions of sub-section (2), where the capital gain arises from the transfer by way of compulsory acquisition under any law of a capital asset, 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 (hereafter in this section referred to as the original asset), and the assessee has within a period of three years after that date purchased any other land or building or any right in any other land or building or constructed any other building for the purposes of shifting or re-establishing the said undertaking or setting up another industrial undertaking, then, instead of the capital gain being charged to income-tax as the income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

(i) if the amount of the capital gain is greater than the cost of the land, building or right so purchased or the building so constructed (such land, building or right being hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.

(2) The amount of the capital gain which is not utilised by the assessee for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in,

and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—

(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

Explanation.—[Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]

In this article, you can get guidance from high courts on the meaning of industrial undertaking under section 54D of the Income Tax Act.

Updated up to Finance Act 2021