JUDGMENT
Ratnam, J.
1. The assessee is a limited company in which the public are not substantially interested and it carries on the business of manufacturing tiles and other clay products from 1946 onwards. For the assessment year 1971-72, though there was a loss from business, there was unabsorbed depreciation of the earlier years to be carried forward and long-term capital gains had also to be computed and that resulted in a total income of Rs. 22,33,145. Likewise, in respect of the assessment year 1973-74, though there was a loss in the business of manufacturing tiles, etc., on the computation of long-term capital gains, it resulted in a high total income of Rs. 32,94,810. In respect of the assessment year 1971-72, the distributable surplus after deduction of tax was Rs. 8,93,269 and the assessee was liable to distribute 90 per sent, of the surplus as dividend to is shareholders as required by section 104 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), read with section 109(2). For the assessment year 1973-74 also, the distributable surplus was Rs. 16,56,575 and the assessee was liable to distribute 90 per cent. thereof as dividend. Since for both assessment years no distribution was made, a notice was issued to the assessee calling for its objections as to why an order under section 104 of the Act should not be passed. Before the Inspecting Assistant Commissioner, to whom the matter was referred, the assessee claimed that section 104(4)(a) of the Act would apply to it and that the Explanation happened cannot at all be applied to the assessee. Rejecting the contention of the assessee that its case is governed by section 104(4)(a) of the Act, the Income-tax Officer invoking section 104 of the Act, levied additional income-tax of Rs. 6,69,943 and Rs. 8,28,287, respectively. On appeals by the assessee before the Appellate Assistant Commissioner, referring to and relying upon Board’s Circular No. 103, dated February, 1973 (see [1973] 88 ITR (St.) 80), it was held that as the assessee’s only business activity is the manufacturing activity and it had continued to be engaged in the manufacture of fields and clay products, section 104 of the Act would not stand attracted and, therefore, the order passed by the Income-tax Officer levying additional income-tax were unsustainable. On further appeals before the Tribunal at the instance of the Revenue, the Tribunal took the view that as it had not been disputed that the assessee had been carrying on business as manufacturer of tiles, potteries, etc., from 1946 onwards, it would fall under section 104(4)(a) of the Act and the Explanation would be inapplicable, as the case of the assessee would fall within the main provision, section 104(4)(a) of the Act. On the view so taken, the departmental appeals were dismissed and that is how the following common question of law has been referred to this court for its opinion under section 256(1) of the Act at the instance of the Revenue :
“Whether, on the facts and in the circumstances of the case, additional income-tax of Rs. 6,69,943 and Rs. 8,28,287 were leviable under section 104 of the Income-tax Act for the assessment years 1971-72 and 1973-74, respectively ?”
2. Learned counsel for the Revenue contended that in order to enable the assessee-company to fall outside section 104 of the Act it would be necessary for the assessee to satisfy not only the requirements of section 104(4)(a) of the Act, but also the Explanation to clause (a) of section 104(4) of the Act. Reliance was also sought to be placed in this connection upon the decision in India Leather Corporation (P.) Ltd. (No. 1) v. CIT . On the other hand, learned counsel for the assessee submitted that if the nature of the business activities of a company would fall under section 104(4)(a) of the Act, there was no need whatever for resorting to the Explanation and, as in this case, the only business of the assessee is the manufacture and processing of goods, there is no question whatever of the assessee fulfilling the requirements of the explanation as well for the purpose of taking the case of the assessee out of the ambit of the provision of section 104 of the Act. Reference, in this connection was also made to the deeming provision incorporated in the Explanation to establish that the Explanation was intended only to expand or clarity and not to restrict or subtract from the scope of section 104(4)(a) of the Act. Attention in this connection was also drawn to the decision in Cochin Co. v. CIT .
3. There is no dispute that the assessee in this case, during the relevant accounting years, had been manufacturing and processing tiles and other clay products and continued to do so. Section 104(4) of the Act, in so far as it is relevant for purposes of these references, runs as follows :
“(4) Without prejudice to the provisions of section 108, nothing contained in this section shall apply to –
(a) an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power;”
4. Clauses (b) and (c) of section 104(4) are not relevant for these reference. The Explanation applicable to section 104(4)(a) reads as follows :
“Explanation. – For the purposes of clause (a) of this sub-section, the business of a company shall be deemed to consist mainly in the construction of ship or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, if the income attributable to any of the aforesaid activities included in its gross total income for the relevant previous years is not less than fifty-one per cent. of such total income.”
5. From the provisions referred to above, it is seen that if the business of the company consists mainly in the manufacture or processing of goods, then it will fall outside section 104 of the Act. In other words, under section 104(4)(a) of the Act, all companies engaged in one particular line of business activity as mentioned in section 104(4)(a) of the Act would fall within that provision rendering it unnecessary to resort to the explanation. Though the word “mainly” is used in section 104(4)(a), the use of that expression is not with a view to exclude companies which are engaged only in the type of the manufacturing activities contemplated under section 104(4)(a). The expression “mainly” would denote entirely engaged in the business activities of the description specified in section 104(4)(a) and would cover cases of the principal or the predominant activity. It, therefore, follows that if the main and the only business activity of a company is the manufacture and processing of goods, as in this case, it would be covered by section 104(4)(a) of the Act. The object with which the Explanation has been introduced is to make it plain or explain or clarify or to expand and not restrict or subtract. We are of the view that the Explanation has been introduced only for the purpose of clarifying how in respect of the companies engaged in a plurality of business activities and not only one main activity, the criterion of being mainly engaged in any of the specified business activities enumerated in section 104(4)(a) has to be applied to determine whether a case could be taken out of section 104 of the Act. The Explanation serves only this limited purpose and cannot, therefore, be understood as whittling down the main sweep of section 104(4)(a) of the Act. We may also point out that the Explanation incorporates a fiction in that notwithstanding a company is not that particular kind of company contemplated under section 104(4)(a), nevertheless, for the purposes of the Act, it is deemed to be such a company. In other words, what is not in reality is required to be treated as it were under the provisions of the Act.
6. We may also visualise the purpose for which the Explanation had been added. There may be companies having several lines of business activities, some of which may be with the variety mentioned ins section 104(4)(a) and some other falling outside those activities. In such a case, it may be that its gross total income may be different with reference to different types or lines of business activities undertaken by the company. Even in such a case, the company shall, under the Explanation, be deemed to be mainly engaged in the business of the description mentioned in section 104(4) of the Act, if the income attributable to such activity included in the total income for the precious year was not less than fifty one percent of such total income. It is thus seen that the Explanation really expands the types of cases that would fall outside section 104 of the Act. In other words, where, as in this case, the one and only business activity of the assessee had been and continues to be the manufacture or processing of tiles and other clay products, section 104(4)(a) of the Act would straightaway apply and there is, therefore, no need for the assess to further satisfy the requirements of the Explanation.
7. We are fortified in this view of ours by the decision in Cochin Co. v. CIT . In that case, the assessee-company during the relevant accounting year was engaged solely in the business of processing and export of fish and it also satisfied the requirement of “industrial company” contained in section 2(7) (d) of the Finance Act, 1966, resulting in a concessional rate of tax of 55 per cent. However, the Tribunal took the view that it was not entitled to the concessional rate of tax since though the assessee-company fulfilled the requirements of the main part of the definition of “industrial company”, it had also to satisfy the requirements of the Explanation and as the income from the business of manufacture or processing of goods during the relevant accounting period was less than 51 per cent. of its total income for the relevant assessment year, the assessee was not entitled to the concessional rate of tax. In rejecting this approach as well as the interpretation of the Explanation, the court pointed out that the word “mainly” necessarily means only “principally” and that all companies which are exclusively engaged in the business of the types referred to therein and also companies engaged in a plurality of business of which the main business is of the type referred to in the definition clause, and that the Explanation was added only with a view of clarify how in respect of companies engaged in more than one type of business, the criterion of being “mainly” engaged in any of the specified businesses laid down in the body of the definition clause is to be applied and only for that limited purpose, the Explanation “deemed” a company to be mainly engaged in the business of the description mentioned in the body of the section if the income attributable to such activity included in the total income of the company for the previous year was not less than fifty-one per cent. It was also further pointed out that the Explanation has no applications to all where the sole business activity carried on by the company is of the type referred to in the definition clause and a company which fulfills the requirement of the main definition has to be automatically regarded as an “industrial company” for the purposes of section 2 and the First Schedule to the Finance Act, 1966. We are of the view that the reasoning of the aforesaid decision would be applicable to these references as well.
8. We may now refer to the decision in India Leather Corporation (P) Ltd. (No. 1) v. CIT [1989] 179 ITR (Mad), relied on by learned counsel for the Revenue. Unlike the present case, the assessee therein was carrying on a plurality of business activities, viz., manufacturing activities, trading activities like dealing and trafficking in import entitlements, etc. In order to ascertain whether having regard to the nature of the business activities of the assessee in that case, it could be treated as an “industrial company” for the purpose of concessional levy of tax, this court considered the nature of the activities of the assessee and also whether the Explanation was satisfied in that its forms total income attributable to any of the enumerated activities included in its gross total income was not less than fifty-one per cent. of such total income. Such a situation does not at all arise on the facts of this case, as it had been accepted before all the authorities below and also before us that the only line of business activity pursued by the assessee had been and continues to be the manufacture of tiles and processing of clay products, and, therefore, the decision relied on by learned counsel for the Revenue cannot at all have any application in this case.
9. Thus, on a careful consideration of the facts and the relevant statutory provisions, we uphold the conclusion of the Tribunal that the case of the assessee would fall under section 104(4)(a) of the Act and, therefore, no additional income-tax could at all be levied on the assessee. We, therefore, answer the common question referred to us in the negative and against the Revenue. The assessee will be entitled to the cases of these references. Counsel’s fee Rs. 500 (one set).