My factory land was compulsorily acquired and I put the money into a lodging house. The department says a lodging house is not an 'industrial undertaking', so s.54D is out. Is that right?
No, on this Kerala decision. 'Industrial undertaking' is not defined in the Act and must be given its popular, natural meaning — any project or business a person undertakes that partakes of the character of a business. Running a lodge therefore qualifies, and the exemption in s.54D was allowed.
Decided by the High Court (K.P. Radhakrishna Menon J (the indiankanoon header instead names T. Kochu Thommen)) on 1987-02-16, reported as [1987] 166 ITR 804 (Ker), as printed in the report retrieved; income-tax reference at the instance of the assessee, Tribunal Cochin Bench. It bears on section 54D, section 33B, section 80J of the Income Tax Act 1961, in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters.
Section 54D has almost no case law, and the single most likely ground of refusal is exactly this one: the officer imports the definition of 'industrial undertaking' from s.33B or s.80J, which requires manufacture or production of articles, and denies relief to any business that does not make something. This judgment holds that importation to be wrong, and gives the reason — those sections carry their own express definitions precisely because 'industrial undertaking' is otherwise wide, and the legislature had to name ships and hotel business separately to bring them inside those narrower schemes. The point cuts both ways in practice: it widens what the ORIGINAL undertaking can be, and it widens what the assessee may set up with the compensation, since s.54D(1) permits 'setting up another industrial undertaking' and not merely re-establishing the old one.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee, an individual, owned an ice factory called Beena Ice Factory. During assessment year 1976-77 the Government compulsorily acquired the land and building forming part of the factory. The land value was fixed at Rs 5,000 and the value of machinery and plant at Rs 29,988; capital gains were assessed at Rs 23,325, reduced after statutory deduction to a long-term capital gain of Rs 13,844. The assessee had used the capital gain to construct a lodging house, and claimed s.54D on the footing that running a lodge is an industrial undertaking. That the capital gain had been so used, and that s.54D would apply if a lodge were an industrial undertaking, were both beyond dispute. The Appellate Assistant Commissioner and then the Appellate Tribunal held a lodge was not an 'industrial undertaking' within s.54D, and the question came to the High Court on a reference at the assessee's instance.
The question was answered in the negative and against the Revenue. The words 'industrial undertaking' in s.54D bear their popular meaning and take in any project or business a person may undertake; the running of a lodge is therefore an industrial undertaking within s.54D, and the assessee, satisfying the section's requirements, was not liable to tax on the capital gain (paras 8 and 15). The Tribunal's contrary finding was erroneous (para 16).
The Act defines neither 'undertaking' nor 'industrial undertaking', so the Court applied the rule that words in a statute dealing with matters affecting the public generally bear their ordinary meaning — loquitur ut vulgus — citing Unwin v Hanson [1891] 2 QB 115 and Rao Bahadur Ravulu Subba Rao v CIT [1956] 30 ITR 163 (para 5). 'Undertaking' means an enterprise, venture or engagement, and the adjective 'industrial' shows only that it must partake of the character of a business, a reading confirmed by the section's own reference to use 'for the purposes of the business of the said undertaking' (para 6). 'Business' is defined in the Act and has been construed broadly by the Supreme Court in Narain Swadeshi Weaving Mills v CEPT [1954] 26 ITR 765 and Mazagaon Dock Ltd. v CIT [1958] 34 ITR 368 (para 7). The Court rejected the Revenue's attempt to import the narrower sense from ss.10A, 33B, 80J, 80K and 80M, observing that a provision for exemption or relief should be construed liberally in favour of the assessee (Maharajadhiraj Sir Kameshwar Singh v CIT [1957] 32 ITR 587), and that those sections contain their own express definitions — s.33B's Explanation confines the rehabilitation allowance to undertakings mainly engaged in generation or distribution of power, shipbuilding, manufacture or processing of goods, or mining (paras 11 and 12). The Revenue's argument from the collocation 'industrial undertakings, ships, hotel business' was turned against it: those categories had to be named separately precisely because ships and hotels neither manufacture nor produce anything, which shows there can be industrial undertakings that do neither (para 13).
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.
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Handle my notice → Ask a CA on WhatsAppNo, on this Kerala decision. 'Industrial undertaking' is not defined in the Act and must be given its popular, natural meaning — any project or business a person undertakes that partakes of the character of a business. Running a lodge therefore qualifies, and the exemption in s.54D was allowed. This was decided by the High Court (K.P. Radhakrishna Menon J (the indiankanoon header instead names T. Kochu Thommen)) and bears on section 54D, section 33B, section 80J of the Income Tax Act 1961. It is reported as [1987] 166 ITR 804 (Ker), as printed in the report retrieved; income-tax reference at the instance of the assessee, Tribunal Cochin Bench. Section 54D has almost no case law, and the single most likely ground of refusal is exactly this one: the officer imports the definition of 'industrial undertaking' from s.33B or s.80J, which requires manufacture or production of articles, and denies relief to any business that does not make something. This judgment holds that importation to be wrong, and gives the reason — those sections carry their own express definitions precisely because 'industrial undertaking' is otherwise wide, and the legislature had to name ships and hotel business separately to bring them inside those narrower schemes. The point cuts both ways in practice: it widens what the ORIGINAL undertaking can be, and it widens what the assessee may set up with the compensation, since s.54D(1) permits 'setting up another industrial undertaking' and not merely re-establishing the old one. If it applies to you, the first step is this: Do not concede the point because the business does not manufacture anything. Argue the popular meaning of 'industrial undertaking' from this judgment and put the Revenue to proof of why a narrower meaning applies in s.54D.
The assessee, an individual, owned an ice factory called Beena Ice Factory. During assessment year 1976-77 the Government compulsorily acquired the land and building forming part of the factory. The land value was fixed at Rs 5,000 and the value of machinery and plant at Rs 29,988; capital gains were assessed at Rs 23,325, reduced after statutory deduction to a long-term capital gain of Rs 13,844. The assessee had used the capital gain to construct a lodging house, and claimed s.54D on the footing that running a lodge is an industrial undertaking. That the capital gain had been so used, and that s.54D would apply if a lodge were an industrial undertaking, were both beyond dispute. The Appellate Assistant Commissioner and then the Appellate Tribunal held a lodge was not an 'industrial undertaking' within s.54D, and the question came to the High Court on a reference at the assessee's instance. The matter was decided on 1987-02-16 by the High Court (K.P. Radhakrishna Menon J (the indiankanoon header instead names T. Kochu Thommen)). On those facts the High Court held as follows. The question was answered in the negative and against the Revenue. The words 'industrial undertaking' in s.54D bear their popular meaning and take in any project or business a person may undertake; the running of a lodge is therefore an industrial undertaking within s.54D, and the assessee, satisfying the section's requirements, was not liable to tax on the capital gain (paras 8 and 15). The Tribunal's contrary finding was erroneous (para 16).
The Act defines neither 'undertaking' nor 'industrial undertaking', so the Court applied the rule that words in a statute dealing with matters affecting the public generally bear their ordinary meaning — loquitur ut vulgus — citing Unwin v Hanson [1891] 2 QB 115 and Rao Bahadur Ravulu Subba Rao v CIT [1956] 30 ITR 163 (para 5). 'Undertaking' means an enterprise, venture or engagement, and the adjective 'industrial' shows only that it must partake of the character of a business, a reading confirmed by the section's own reference to use 'for the purposes of the business of the said undertaking' (para 6). 'Business' is defined in the Act and has been construed broadly by the Supreme Court in Narain Swadeshi Weaving Mills v CEPT [1954] 26 ITR 765 and Mazagaon Dock Ltd. v CIT [1958] 34 ITR 368 (para 7). The Court rejected the Revenue's attempt to import the narrower sense from ss.10A, 33B, 80J, 80K and 80M, observing that a provision for exemption or relief should be construed liberally in favour of the assessee (Maharajadhiraj Sir Kameshwar Singh v CIT [1957] 32 ITR 587), and that those sections contain their own express definitions — s.33B's Explanation confines the rehabilitation allowance to undertakings mainly engaged in generation or distribution of power, shipbuilding, manufacture or processing of goods, or mining (paras 11 and 12). The Revenue's argument from the collocation 'industrial undertakings, ships, hotel business' was turned against it: those categories had to be named separately precisely because ships and hotels neither manufacture nor produce anything, which shows there can be industrial undertakings that do neither (para 13). In the words reproduced by the source cited on this page: "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." The decision followed or applied Unwin v. Hanson [1891] 2 QB 115 (CA) — applied; Rao Bahadur Ravulu Subba Rao v. CIT [1956] 30 ITR 163 (SC) — applied; Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC) — applied; Mazagaon Dock Ltd. v. CIT [1958] 34 ITR 368 (SC) — applied; Maharajadhiraj Sir Kameshwar Singh v. CIT [1957] 32 ITR 587 (SC) — applied; CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC) — relied on by the Revenue, not accepted as governing; CIT v. Casino (Pvt.) Ltd. [1973] 91 ITR 289 (Ker) — relied on by the Revenue, distinguished in effect.
It was decided by the High Court on 1987-02-16 and is reported as [1987] 166 ITR 804 (Ker), as printed in the report retrieved; income-tax reference at the instance of the assessee, Tribunal Cochin Bench. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 54D, section 33B, section 80J, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The question was answered in the negative and against the Revenue. The words 'industrial undertaking' in s.54D bear their popular meaning and take in any project or business a person may undertake; the running of a lodge is therefore an industrial undertaking within s.54D, and the assessee, satisfying the section's requirements, was not liable to tax on the capital gain (paras 8 and 15). The Tribunal's contrary finding was erroneous (para 16). It arises in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters, on section 54D, section 33B, section 80J of the Income Tax Act 1961, and was decided by K.P. Radhakrishna Menon J (the indiankanoon header instead names T. Kochu Thommen). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Meet the Revenue's s.33B/s.80J/s.80HH argument head on with paras 11 to 13: those sections contain express Explanations and named categories, which is itself the proof that the unqualified phrase is wider. Verify the two-year use condition independently — the land or building must have been used for the business of the undertaking in the two years immediately preceding the transfer. That condition was 'beyond dispute' here and so was not tested; it is where a real case will be fought. Confirm the transfer was by way of compulsory acquisition under a law. Section 54D does not apply to a negotiated sale, however coerced it feels. Diarise the three-year window from the date of acquisition for purchasing land or a building, or constructing a building, and note the forfeiture if the new asset is transferred within three years of its purchase or construction. Read this together with CIT v Hemsons Industries (AP, 2001), which adopts the same construction and adds that setting up the new undertaking on leased land does not by itself defeat the claim.
Still good law. A citedby search returns 15 later citing documents. The Calcutta High Court applied it in Andaman and Nicobar Islands Forest and Plantation Development Corporation v CIT (28 January 2005): at para 6.3.1 the Bench set it out - 'This question cropped up in P. Alikunju, M.A. Nazeer Cashew Industries v. CIT. In the said decision, the Kerala High Court dealing with Section 54D of the IT Act, 1961 took the following view' - quoted the Kerala reasoning on what makes an industrial undertaking at length, and then held 'Applying the said test the establishment of the assessee is definitely an industrial undertaking', allowing the appeal and the deductions under ss.32A, 80HH and 80J. The test has therefore been carried across from s.54D to the incentive provisions by another High Court. The Kerala High Court returned to the same ground in CIT v Bhageeratha Engineering Ltd (3 May 1991). Nothing overruling, doubting or confining it was found. One caution: in Commissioner of Trade and Taxes, Delhi v Schneider Electric India Pvt Ltd (Delhi High Court, 1 May 2019) the judgment appears at para 41 only as one of a string of dictionary and case authorities on the word 'undertaking', and the Bench decided on the statutory language of Rule 11(XII), so that is not an application. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The indiankanoon header of this report is internally inconsistent: it gives 'Author: T. Kochu Thommen' and 'Bench: T. Kochu Thommen', but the judgment as printed is delivered by 'K.P. Radhakrishna Menon, J.' and speaks in the first person plural. Treat the authorship line in the header as unreliable. The equivalent citation is printed in the report itself as [1987]166ITR804(KER). The Court's paraphrase of s.54D(1) in para 4 uses 'in the two years immediately preceding the date of transfer' while the quotation in para 6 uses 'in the two years immediately preceding the date on which the transfer took place'; the second is the statutory wording, as the reproduction in CIT v Hemsons Industries confirms. The document was fetched once. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question was answered in the negative and against the Revenue. The words 'industrial undertaking' in s.54D bear their popular meaning and take in any project or business a person may undertake; the running of a lodge is therefore an industrial undertaking within s.54D, and the assessee, satisfying the section's requirements, was not liable to tax on the capital gain (paras 8 and 15). The Tribunal's contrary finding was erroneous (para 16).
TaxSphere, “P. Alikunju, M.A. Nazeer Cashew Industries v CIT”, https://taxnotice.vittsphere.com/caselaw/case/p-alikunju-nazeer-cashew-54d-industrial-undertaking/ (validity last checked 2026-09-08)
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