Travancore-Cochin Chemicals (P.) Ltd.
Vs. Commissioner of Wealth-Tax, Kerala  INSC 95 (6 April 1967)
06/04/1967 SIKRI, S.M.
CITATION: 1967 AIR 1534 1967 SCR (3) 448
Wealth Tax Act (27 of 1957) s. 45(d),
proviso-Company incorporated on one date and commencing business an a later
dateWhen "established"-Meaning of "established".
The appellant, which was a private limited
company, was formed and registered under the Indian Companies Act, 1913, on 8th
November, 1951. The erection and construction of its factory was completed in
December 1953 and production commenced from 1-1-1954. On the question-whether
the company was established on 8th November, 1951, the date of its
incorporation and was therefore liable to pay wealth tax for the assessment
years 1957-58, 1958-59 and 1959-60, on the basis that the exemption from
payment of wealth tax under the proviso to s. 45d) was only for five successive
assessment years commencing with the assessment year next following the date on
which the company was established.
HELD : A comparison of clauses (d) and (f) of
s. 45 shows that the word "established" in cl. (d) and its proviso,
does not mean "incorporated". The word "established" has
the same meaning it has in s. 5(1) (xxi) of the Act, namely, that the Company
has been put into such a shape that it can start functioning as a business or a
manufacturing Organisation. So construed, the appellant was established within
s. 45(d) only in December, 1953, or 1st January 1954, and the five assessment
years next following would be 195455, 1955-56, 1956-57, 1957-58 and 1958-59.
Therefore, the appellant would be entitled to exemption for the assessment
years 1957-58 and 1958-59 but not for 1959-60. [451F; 452DE; 453B-C]
Commissioner of Wealth Tax, Madras v. Ranzaraju Surgical Cotton Mills Ltd.
 1 S.C.R. 761, followed.
Thomas J. Davidson v. W. L. Lanier, 18 L.Ed.
377, 379, referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 405407 of 1966.
Appeals by special leave from the judgment
and order dated March 9, 1964 of the Kerala High Court in Income Tax Referred
Case No. 4 of 1963.
S. T. Desai and G. L. Sanghi, for the
appellant (in all the appeals).
T. V. Vishwanatha Iyer, Gopal Singh, S. P.
Nayyar and R.
N. Sachthey, for the respondent (in all the
The Judgment of the Court was delivered by
Sikri, J. These appeals by special leave are directed against the judgment of
the High Court of Kerala in a reference made to it by the Income-Tax Appellate
Tribunal, Madras Bench, under S. 27(1) of the Wealth Tax Act, 1957, hereinafter
referred to as the Act. The reference was made at the instance of the 449
Commissioner of Wealth Tax, Kerala, and the question referred was as follows :"Whether
the exemption from tax for the assessment years 1957-58, 1958-59 and 1939-60
was not rightly granted." The High Court held that the exemption from tax
granted to the assessee under s. 45(d) of the Act for the assessment years
1957-58, 1958-59 and 1959-60 was not rightly granted and answered the question
against the assessee. The relevant facts are as follows :-The appellant,
Travancore Cochin Chemicals (P) Ltd., hereinafter called the assessee, was
formed and registered under the Indian Companies Act on November 8, 1951. The
prior history of the Company is given in the statement of the case as follows :"On
22-7-1949, a partnership was formed between two public limited companies, viz.,
Fertilisers & Chemical Travancore Ltd., Always, and the Mettur Chemical
& Industrial Corporation Ltd., Mettur, for establishing a Caustic Soda
Factory with an estimated capital of Rs. one crore. The firm could not function
due to lack of finance. The Government of Travancore was approached for
necessary finance to complete the purchase of plants and machinery which had
been started in August 1949, and that Government entered the Company and
subscribed a large share capital and a new private limited company was formed
and registered under the Indian Companies Act on 8-11-1951." Further facts
given in the statement of the case are as follows buildings, construction
stores, materials, etc., at different stages of erection and also all book
debts and liabilities. The erection and construction of the factory was
completed in December, 1953, and production commenced from 1-1-1954. The
trading accounts were closed for the first time on 31-3-1954. There was a loss
of Rs. 16,04,212/incurred." For the assessment year 1957-58 (the relevant
date of valuation being March 31, 1957) the assessee claimed before the Wealth
Tax Officer that it was not liable to pay wealth tax during the year of account
as it was exempted from wealth tax under s. 45 (d) of the Act. The Wealth Tax
Officer rejected the claim on the ground that the assessee was established
within the meaning of s. 45(d) and the proviso thereto, in November 1951, and
consequently the period of five years exemption was over with the assessment
450 The relevant portion of S. 45 of the Act
reads as follows "45. The provisions of this Act shall not apply to (a)
(b) (c) any company established with the object of financing, whether by way of
making loans or advances to, or subscribing to the capital of', private
industrial enterprises in India, in any case where the Central Government has
made or agreed to make to the company a special advance for the purpose or has
guaranteed or agreed to guarantee the payment of moneys borrowed by the company
from any institution outside India;
(d) any company established with the object
of carrying on an industrial under-taking in India in any case where the
company is not formed by the splitting up, or the reconstruction of a business
already in existence or by the transfer to a new business of any building,
machinery or plant used in a business which was being previously carried on :
Provided that the exemption granted by clause
(d) shall apply to any such company as is referred to therein only for a period
of five successive assessment years commencing with the assessment year next
following the date on which the company is established, which period shall, in
the case of a company established before the commencement of this Act, be
computed in accordance with this Act from the date of its establishment as if
this Act had been in force on and from the date of its establishment;
Explanation.(e) (f) any company registered
under section 25 of the Companies Act, 1956." The Wealth Tax Officer
followed the same reasoning for the -assessment years 1958-59 and 1959-60. The
Appellate Assistant Commissioner of Wealth Tax upheld the orders of the Wealth
Tax Officer. The Income Tax Appellate Tribunal, however, allowed the appeals of
the assessee. It held that the word "established" in S. 45(d) was
used in contradistinction to the word "incorporated". It observed :
"It seems to us that this 'establish'
(sic) can be inferred only when the object with which the company was formed or
incorporated is begun to be achieved." 451 It further held :
"To attract tax under sec. 3 there must
be an assessment year as defined in sec. 2 (d). In this case, the assesssment
has commenced for the first time in 1954-55 and having regard to Part 11 of the
Schedule to the Wealth Tax Act, the first year 1954-55 having ended in a loss,
the assessment year can be said to commence only from 1955-56. For five years
from then, the assessee would be entitled to the exemption." As mentioned
above, the Appellate Tribunal referred the question at the instance of the
Commissioner, and the High Court answered the question against the assessee.
The assessee having obtained leave from the High Court, the appeal is now
before usThe learned counsel for the assessee contends that the word
"established" in s. 45(d) has the same meaning as it has in s.
5(1)(xxi) of the Act, which was interpreted by this Court in Commissioner of
Wealth Tax, Madras v. Ramaraju Surgical Cotton Mills Ltd.(1) He says that the
word "established" cannot be equated with the word
"incorporated". The learned counsel for the respondent, on the other
hand, contends that the word "established" in s. 45(d) has a
different meaning to that in s. 5 (1) (xxi), as s. 45 (d) deals with a company
being established while s. 5(1)(xxi) deals with a unit being established.
Bhargava, J., speaking for the Court, in Commissioner of Wealth Tax, Madras v.
Ramaraju Surgical Cotton Mills Ltd.,(1) observed:
"A unit cannot be said to have been set
up unless it is ready to discharge the function for which it-is being set up.
It is only when the unit has been put into such a shape that it can start
functioning as a business or a manufacturing Organisation that it can be said
that the unit has been set up. The expression used in the proviso, under which
the period for which the exemption is available is to be determined, is not the
same as that used in the principal clause. In the proviso, the period of five
successive years of exemption has to commence with the assessment year next
following the date on which the company commences operations for the
establishment of the unit. Operations for the establishment of a unit, from the
very nature of that expression, can only signify steps that have to be taken to
establish the unit. The word 'set up' in the principal clause, in our opinion,
is equivalent to the word 'established', but operations for establishment
cannot be equated with the establishment of the unit itself or its setting up.
The applicability of the proviso has, therefore, to be decided (1) 
I.S.C.R. 761, 764 : 63 I.T.R. 478, 481-482.
L5Sup CI/67--16 452 by finding out when the
company commenced operations for establishment of the unit, which operation
must be antecedent to the actual date on Which the company is held to have been
set up for purposes of the principal clause. This is also the meaning that the
Bombay High Court derived in the case in Western India Vegetable Products
Ltd.,(1) where that Court was concerned with the interpretation of the
expression set up' as in section 2 (II) of the Income-tax Act. That court held:
'it seems to us that the expression setting up means, as is defined in the
Oxford English Dictionary,-to place on foot or to establish, and in
contradistinction to commence. The distinction is this that when a business is
established and is ready to commence business, then it can be said of that
business that it is set up. But before it is ready to commence business it is
not set up.
This view was expressed when that Court was
considering the difference between the meaning of the expression setting up a
business and commencing of a business." It seems to us that the same
meaning must be given to the word "established" in s. 45 (d) as in s.
5 ( 1 ) (xxi). It would be noticed that s. 45 uses the word
"established" in cl. (c) and in the proviso to cl. (d), while the
word "formed" is also used, apart from the word
"established" in cl. (d); and in cl. (f) the word "registered"
There is a clear distinction between the word
"registered" or "incorporated" and the word
"established". If the Legislature was thinking of incorporation of a
company, then we fail to understand why this word was not used instead of the
word "established". Further, if we look at cl. (d), it excludes
certain industrial undertakings from the benefit of s. 45; what are -excluded
are companies "formed by the splitting up, or the reconstruction of a
business already in existence or by the transfer to a new business of any
building, machinery or plant used in a business which was being previously
carried on." Ordinarily the date of incorporation of a company has nothing
to do with the transfer of a machinery or plant to it.
The case of Thomas J. Davidson v. W. L.
Lanier 2 ) also lends support to the interpretation which we have placed on the
word "established". Chase, C.J., observed :
"What is meant by putting in operation
or establishing a Banking Company ? We think that this language has a much
wider import than mere commencement of business. To establish a company for any
business means complete and permanent provision for (1) 26 I.T.R. IS 1.
(2) 18 L. Ed. 377, 379.
453 carrying on that business, and putting a
company in operation may well include its continued as well as its first or original
operation." We may mention that no other point was debated before us.
In the result we hold that the assessee was
established within s. 45(d) of the Act in December 1953, or January 1, 1954. The first year following the date of establishment of the Company was 1954-55, and
the next four assessment years would be 1955-56, 1956-57, 1957-58 and 1958-59.
The only assessment year in dispute that is not covered is 1959-60.
Consequently the answer to question referred
is that the exemption for the assessment years 1957-58 and 1958-59 was wrongly
withheld while the exemption for the year 1959-60 was rightly not granted. We
accordingly accept the appeals and answer the question as indicated above.
There will be no order to costs.
V.P.S. Appeal allowed in part.