Textile Machinery Corporation Limited,
Calcutta Vs. The Commissioner of Income-Tax, West Bengal, Calcutta [1977] INSC
27 (25 January 1977)
GOSWAMI, P.K.
GOSWAMI, P.K.
KHANNA, HANS RAJ KAILASAM, P.S.
CITATION: 1977 AIR 1134 1977 SCR (2) 762 1977
SCC (2) 368
CITATOR INFO:
MV 1985 SC 421 (50) RF&E 1992 SC1622 (9)
ACT:
Indian Income-tax Act, 1922--S.
15C(2)(i)--Scope of Tests for determining when benefit of the section
available--Reconstruction--Tests for determination.
HEADNOTE:
Section 15C of the Indian Income-tax Act
1922, which deals with exemption from tax of newly established industrial
undertakings, provides in sub-s. 2(i) that the section applies, among others,
to any industrial undertaking which is not formed by the splitting up or the
reconstruction of business already in existence.
The assessee (appellant) was a heavy
engineering concern manufacturing boilers. machinery parts and wagons. In
addition, it had started a Steel Foundry Division and a Jute Mill Division. The
bulk of the goods produced in both the divisions was used in the various
divisions of the assessee company. The assessee's claim for exemption from tax
under s. 15C in respect of profits derived from both the companies was rejected
by the Income-tax Officer and its appeal was rejected by the Appellate
Assistant Commissioner on the ground theft the .undertakings were an expansion
and reconstruction of the existing business.
On appeal, the Appellate Tribunal held that
although the products manufactured in the two divisions were used in the
assessee's business, the Steel Foundry and the Jute Mill Division were new
industrial undertakings, in that the machinery used in them was new, they were
housed in separate buildings, were: established under separate licences and
that both the new divisions were maintaining separate books of account.
On reference, the High Court held that it was
a case of reconstruction of the existing business because the goods produced in
the two divisions were primarily used in the assessee's engineering concern.
Allowing the appeal.
HELD: The Tribunal was right in holding in
favour of the assessee. Section 15C is applicable to an absolutely new
undertaking for the first time started and in order to deny benefit of the
section, the, new undertaking must be formed by reconstruction of the old
business. [768 B-C]
1. (a) In order to be entitled to the benefit
of s. 15C, the assessee has to establish:
(1) the investment of substantial fresh
capital in the industrial undertaking;
(2) employment of the requisite labour
therein (3) manufacture or production of articles in the undertaking;
(4) earning of profits 'clearly attributable
to the new undertaking; and (5) separate and distinct indentity of the
industrial unit set up.
(b) Once the new industrial undertakings are
separate and independent production units in the sense that the commodities
produced or the results achieved are commercially tangible products and the
undertakings can be carried on separately without complete absorption and
losing their identity in the old business, they are not to be treated as being
formed by reconstruction of the old business. [772 H, 773 A] 763 (c) The object
of the section is to encourage the setting up of new industrial undertakings by
offering tax incentives within a certain period. Sub-section (2) has a negative
as well as a positive aspect. Negatively, new undertakings should not be formed
by splitting up of the business already in existence and by the reconstruction
of business already in existence; and positively, a new undertaking must
produce results, that is to say, it has to manufacture or produce articles at
any time within the stipulated period. The new undertaking must not be substantially
the same as the existing business. The words "the capital .employed"
are significant, for, fresh capital must be employed in the undertaking
claiming exemption. Manufacture or production of articles yielding additional
profits attributable to the new outlay of capital in a separate and distinct
unit is the heart of the matter to earn the benefit from the exemption of tax
liability under s. 15C. The fact that by establishing a new industrial
undertaking the assessee expands its existing business would not deprive it of
the benefit under s. 15C. If an industrial undertaking produces certain
machines or parts which are identifiable units being marketable commodities and
the undertaking can exist even after the cessation of the principal business of
the assessee, it cannot be anything but a new and separate industrial
undertaking to qualify for appropriate exemption under s. 15C. [769 E-H, 770A]
In the instant case, the principal business of the assessee can be carried on
even if the two additional undertakings cease to function. The fact that a
portion the articles produced in the new undertakings had been sold in the open
market to others is a circumstance in favour of the assessee that the new
industrial units can function on their own.
Use of the articles by the assessee is not
decisive 10 deny the benefit of s. 15C. There was no 'formation of any industrial
undertaking out of the existing business since that can take place only when
the assets of the old business are transferred substantially to the new
undertaking. Also.
there ,ins no difficulty about ascertainment
of the exempted profit as separate books of accounts were kept and the
undertakings were at separate places. [770 B-D. G-H] The High Court was not
right in holding that the two undertakings were formed by reconstruction of the
existing business of the assessee. [773 B-C]
2. Reconstruction involves that substantially
the same business shall be carried on and substantially the same persons shall
carry it on. But it does not involve that all the assets shall pass to the new
company or resuscitated company, or that all the shareholders of the old
company shall be shareholders in the new company. Substantially the business
and the person interested must be the same. [771 C-D] South African Supply and
Cold Storage Company Wild v. Same Company, [1904] 2 Ch. 268, followed.
Commissioner of Income-tax Bombay City-1 v.
Gackwar Foam and Rubber Co. Ltd. 35 ITR 662, Commissioner of Income-tax v.
Ganga Sugar Corporation Ltd. 92 ITR 173, Rajeswari Mills Ltd. v. Commissioner
of Income-tax Madras, 50 ITR 29, Nagardas Bechardas & Brothers P. Ltd. v.
Commissioner Income-tax Gujarat, 104 ITR 255, Commissioner of Income-tax. West
Bengal-I v. Electric Construction and Equipment Company Ltd. 104. ITR 101 and
Commissioner of Income-tax v. Hindustan Motors Limited, [1976] Taxation Law
Reports 821, approved.
Commissioner of Income-tax v. Naya Sahitya 84
ITR 567, not approved.
CIVIL-APPELLATE JURISDICTION: Civil Appeal
Nos. 772-773 of 1972.
From the Judgment and Order dated 9th/10th
July, 1970 of the Calcutta High Court in I.T.R. No. 158 of 1966.
N. A. Palkhivala, Dr. D. Pal, U.K. Khaitan,
S.R. Agarwal and Parveen Kumar for the Appellant.
V.P. Raman, Addl. Sol. General, T.A.
Ramachandran and R.N. Sachthey for the Respondents.
764 The Judgment of the Court was delivered
by GOSWAMI, J. These two appeals by certificate are from the judgment of the
Calcutta High Court since reported in Commissioner Income-tax, West Bengal-I v.
Textile Machinery Corporation('). The two appeals relate respectively to two
assessment years 1958-59 (calendar year 1957) and 1959-60 (calendar year 1958).
The matter relates to the claim by the assessee for exemption of tax under
section 15C of the Indian Income-tax Act, 1922 (briefly the Act).
The matter came u13 before the High Court 'on
a reference under section 66(1) of the Act. The two questions referred to were
as follows :-"(1) Whether, on the facts and in the circumstances of the
case, the Tribunal was right in holding that the Steel Foundry Division was an
industrial undertaking to which section 15C of the. Indian Income-tax Act,
1922, applied ? (2) Whether, on the facts and in the circumstances of the case,
the Tribunal was right in holding that the Jute Mill Division set up by the
assessee-company was an industrial undertaking to which section 15C of the
Indian Incometax Act, 1922, applied ? The facts may briefly be stated:
The assessee (the appellant herein) is a
heavy engineering concern manufacturing boilers, machinery parts, wagons, etc.
For the assessment years 1958-59 and 1959-60 the assessee claimed exemption of
tax under section 15C of the Act in respect of the profits and gains derived
from its Steel Foundry Division and a similar-claim for relief under section
15C in respect of its profits and gains derived from its Jute Mill Division for
the year 1959-60.
The assessee had previously in the earlier
years bought from outside the castings manufactured in the Steel Foundry
Division which was started in the assessment year 1958-59 and continued
thereafter. Again, similarly in the year '1959-60, in addition to the
manufacturing of castings in the Steel Foundry Division the assessee started
the Jute Mill Division where the parts made out of the raw material supplied by
the Boiler Division by machining and forging them were given to the Boiler
Division of the assessee. It was found that out of a total sale of
Rs.28,23,127/of steel castings goods worth Rs.18,39,433/were used in connection
with the various Divisions of the company. In respect of the Jute Mill
Division, the Incometax Officer found that out of the total sales of
Rs.13,03,509/sales.
to the Boiler Division totalled Rs.11,89,812/and
sales to outside the Jute Mill Division totalled only a sum of Rs.1,13,6971/-.
The Income-tax Officer and the Appellate Assistant Commissioner, on the above
facts, held the undertakings as expansion and reconstruction of the business
already existing and hence the assessee was not entitled (1) 80 I.T.R. 428.
765 to exemption under section 15C of the
Act. The Income-tax Appellate Tribunal, however, allowed the appeal of the
assessee and accepted the claim for exemption under section 15C. According to
the Tribunal both the Steel Foundry and the Jute Mill Division of the assessee
were new industrial undertakings. The above conclusion was reached on the basis
of several facts found by the Tribunal. These are that the machinery was new,
was housed in a separate building and that industrial licences had to be
obtained, for manufacturing the parts in question. According to the Tribunal
the existing business of the assessee consisted of manufacturing boilers,
wagons, etc. and for that purpose the assessee was purchasing the spare parts,
forgings and castings from outside. The Tribunal came to the conclusion that
the business of the new industrial undertakings was to manufacture those very
spare parts. Hence the Tribunal concluded that it could not be said that the
undertakings were formed out of the existing 'business to come within the
mischief of the exclusion clause in section 15C(2)(i). The Tribunal rightly
relying upon the Tara Iron and Steel Co. Ltd. and Others v. State of Bihar(1)
also held that even though the manufactured products of the new industrial
undertakings were mostly used in the assessee's other business of manufacturing
boilers, wagons, etc. the element of profit was there and the extent of the
same could be ascertained as the assessee was maintaining separate books of
account.
In the reference at the instance of the
Department the High Court answered both the questions in the negative and
against the assessee. The High Court held as follows :-"The goods which
the steel foundry division and the jute mill division began producing for the
assessee were also previously used by the assessee in its business, but they
were purchased from outside and this purchase from outside was replaced by
production or manufacture from within the assessee's own business. This change
of producing one's own goods systematically used in the existing business
instead of buying them from outside would only be a reconstruction of a
business already in existence ...... In so far as they started producing and
manufacturing themselves, the assessee was doing something which was only a
reconstruction of the business already in existence ........
The newness of the machinery of the steel
foundry division and the jute mill division could not by itself make them new
industrial undertakings. Separate housing of, and separate accounts for, the
steel foundry division and jute mill division may be only parts of
reconstruction of the same business and did not necessarily indicate a new
industrial undertaking. The grant of a special licence for the steel foundry
division did not make it an industrial undertaking to qualify for exemption
from tax under section 15C, because the licence was for expansion of the
existing industrial undertaking and the licence did not cover the jute mill
division".
(1) 48 I.T.R. 123.
766 It is, however, admitted before us that
both the units were covered by licences.
The controversy in these appeals centres
round the true construction of section 15C(2)(i) of the Act and in particular
with regard to the scope and ambit of the expression therein, namely, the
reconstruction of business already in existence. Is the High Court right in
holding that the two industrial undertakings, namely, the Steel Foundry and the
Jute Mill Division, are formed by reconstruction of the business already in
existence differing from the contrary conclusion reached by the Tribunal ?
Before we proceed further, we will read section 15C as it stood during the
material time:
"15C. Exemption from tax of newly established
industrial undertakings.
(1) Save as otherwise hereinafter provided,
the tax shall not be payable by an assessee on so much of the profits or gains
derived from any industrial undertaking to which this section applies as do not
exceed six per cent per annum on the capital employed in the undertaking
computed in accordance with such rules as may be made in this behalf by the Central
Board of Revenue.
(2) This section applies to any industrial
undertaking which-(i) is not formed by the splitting up, or the reconstruction
of, business already in existence or by the transfer to a new business of
building, machinery or plant, previously used in any other business;
(ii) has begun or begins to manufacture or
produce articles in any part of taxable territories at any time within a period
of thirteen years from the 1st day of April 1948, or such further period as the
Central Government may, by notification in the Official Gazette, specify with
reference to any particular industrial undertaking;
(iii) employs ten or more workers in a
manufacturing process carried on with the aid of power, or employs twenty or
more workers in a manufacturing process carried on without the aid of power;
Provided that the Central Government may, by
notification in the Official Gazette, direct that the exemption conferred by
this section shall not apply to any particular industrial undertaking.
767 (3) The profits or gains of an industrial
undertaking to which this section applies shall be computed in accordance with
the provisions of section 10.
(4) The tax Shall not be payable by a
shareholder in respect of so much of any dividend paid or deemed to be paid to
him by an industrial undertaking as is attributable to that part of the profits
or gains on which the tax is not payable under this section.
(5) Nothing in this section shall affect the
application of section 23A in relation to the profits or gains of an industrial
undertaking to which this section applies.
(6) The provisions of this section shall
apply to the assessment for the financial year next following the previous year
in which.the assessee begins to manufacture or produce articles and for the
four assessments immediately succeeding".
We are principally concerned in these appeals
with clause (i) of sub-section (2) of section 15C and that also only with one
part of it, namely, whether the industrial undertakings, Steel Foundry and the
Jute Mill Division, are not formed by the reconstruction of the business
already in existence.
The learned Additional Solicitor General
submits that these two undertakings are not entitled to exemption under section
15C(2) as rightly so held by the High Court since they were formed by the
reconstruction of the assessee's business already in existence, namely, the
business of heavy engineering. He submits that setting up of a separate unit to
do something in the course of pre-existing manufacturing process to aid the
production of the same article as was being produced by the pre-existing
industrial undertaking would not amount to starting of a new industrial
undertaking. He further emphasises that production of the articles in the Steel
Foundry and in the Jute Mill Division is only ancillary activity to the main
business of the assessee and since the articles produced in these two
supplemental undertakings help in producing the identical article which has
been the end-product of the assessee's main business, section 15C(2) (i) cannot
come to the aid of the assessee.
According to Mr, Raman these two industrial
undertakings cannot be said to be not formed out of the reconstruction of the
business already in existence.
Section 15C(2)(i) only excludes three categories
of industrial undertakings from the benefit of the section without referring to
clauses (ii) and (iii) of that subsection and other limiting provisions of the
section which are not applicable in the instant case.
It is contended by Mr. Palkhivala that
acceptance of the Additional Solicitor General's submission will amount to
adding a fourth category of cases in sub-section (2)(i), namely, an industrial
under768 taking which is an ancillary undertaking manufacturing certain
articles to supplement the principal industrial activity. This, says Mr.
Palkhivala, will be adding something to the section.
Section 15C is an exemption section. The
benefit granted under this section is a partial benefit so far as the quantum
of the exempted profits of the new industrial undertaking as also for a limited
period or periods as specified in the section. If the two industrial
undertakings, about the existence of which there can be no controversy, as
found by the Tribunal, cannot be held to. be formed by the reconstruction of
the business already in existence, the benefit of section 15C will be available
to the assessee.
The principal object of section 15C is to
encourage setting up of new industrial undertakings by offering tax incentive
within a period of 13 years from April 1, 1948. Section 15C provides for a
fractional. exemption from tax of profits of a newly established undertaking
for five assessment years as specified therein. This section was inserted in
the Act in 1949 by section 13 of the Taxation Laws (Extensions to Merged States
and Amendment) Act, 1949 (Act 67 of 1949) extending the benefit to the actual
manufacture or production of articles commencing from a prior date, namely,
April 1, 1948.
After the country had gained independence in
1947 it was most essential to give fillip to trade and industry from all
quarters. That seems to be the background for insertion of section 15C.
It is also significant that the limit of the
number of years for the purpose of claiming exemption has been progressively
raised from the initial 3 years in 1949 to 6 years in 1953, 7 years in 1954, 13
years in 1956 and 18 years in 1960. The incentive introduced in 1949 has been
thus stepped up ever since and the only object is that which we have already
mentioned.
Under sub-section (1) of section 15C the tax
shall not be payable by an assessee on profits not exceeding six per cent per
annum on the capital employed in the new industrial undertaking from the
profits which alone exemption is claimed. Sub-section (2) of section 15C has a
negative as well as a positive aspect. Negatively, the new industrial
undertaking of the assessee should not be formed(1) by the splitting up of the
business already in existence, (2) by the reconstruction of business already in
existence, or (3) by the transfer to a new business of building, machinery or
plant used in a business which was being carried on before April 1, 1948.
We agree that it is not possible to exclude
any new industrial undertaking other than the three categories mentioned above.
769 We are concerned in these appeals with
the type No. (2) mentioned above. Positively, the new industrial undertaking
must produce result, that is to say, it has to manufacture or produce articles
at any time within a period of 13 years from April 1, 1948. The further
requirement under subsection (2) is with regard to the personnel in the undertaking,
namely, that ten or more workers have to work in the manufacturing process
carried on with the aid of power -or twenty or more workers have to carry on
work without the aid of power. The above element with regard to the number of
workers engaged in the undertaking would go to show that even small industrial
undertakings, newly started, are within the exemption clause, where, for
example, twenty workers may complete the industrial process without the aid of
power. There is no controversy about the .positive aspects in 'these appeals.
Again, the new undertaking must not be
substantially the same old existing business. The third excluded category
mentioned above significant. Even if a new business is carried on but by
piercing the veil of the new business it is found that there is employment of
the assets of the old business, the benefit will be not available. From this it
clearly follows that substantial investment of new capital is imperative. The
words "the capital employed" in the principal clause of section 15C
are significant, for fresh capital must be employed in the new undertaking
claiming exemption. There must be a new undertaking where substantial
investment of fresh capital must be made in order to enable earning of profits
attributable to that new capital.
The assessee continues to be the same for the
purpose of assessment. It has its existing business already liable to tax. It
produced in the two concerned undertakings commodities different from those
which it has been manufacturing or producing in its existing business.
Manufacture of production of articles yielding additional profit attributable
to the new outlay of capital in a separate and distinct unit is the heart of
the matter, to earn benefit from the exemption of tax liability under section
15C. Sub-section (6) of the section also points to the same effect, namely,
production of articles. The answer, in every particular case depends upon the
peculiar/acts and conditions of the new industrial undertaking on account of
which the assessee claims exemption under section 15C. No hard and fast rule
can be laid down. Trade and industry do not run in earmarked channels and
particularly so in view of manifold scientific and technological developments.
There is great scope for expansion of trade and industry. The fact that an
assessee by establishment of a new industrial undertaking expands his existing
business, which he certainly does, would not, on that score, deprive him of the
benefit under section 15C.
Every new creation in business is some kind
of expansion and advancement. The true test is No.1 whether the new industrial
undertaking connotes expansion of the existing business of the assessee but
whether it is all the same a new and identifiable undertaking separate and
distinct from the existing business. No particular decision in one case can lay
down an inexorable test to determine whether a given case comes under section
15C or not. In order that the new undertaking -can be said to be not formed out
of the already existing business, there 770 must be a new emergence of a
physically separate industrial unit which may exist on its own as a viable unit.
An undertakings is formed out of the existing business if the physical identity
with the old unit is preserved. This has not happened here in the case of the
two undertakings which are separate and distinct.
It is clear that the principal business of
the assessee is heavy engineering in the course of which it manufactures
boilers, wagons, etc. If an industrial undertaking produce certain machines or
parts which are, by themselves, identifiable units being marketable commodities
and the undertaking can exist even after the cessation of the principal
business of the assessee, it cannot be anything but a new and separate
industrial undertaking to qualify for appropriate exemption under section 15C.
The principal business of the assessee can be carried on even if the said two
additional undertakings cease to function. Again, the converse is also true.
The fact that the articles produced by the two undertakings are used by the
Boiler Division of the assessee will not weigh against holding that these are
new and separate undertakings. On the other hand the fact that a portion of the
articles produced in these two new industrial undertakings had been sold in the
open market to others is a circumstance in favour of the assessee that the new
industrial units can function on their own. Use of the articles by the assessee
is not decisive to deny the benefit of section 15C.
Section 15C partially exempts from tax a new
industrial unit which is separate physically from the old one, the capital of
which and the profits thereon are ascertainable.
There is no difficulty to hold that section
15C is applicable to an absolutely new undertaking for the first time started
by an assessee. The cases which give rise to controversy are those where the
old business is being carried on by the assessee and a new activity is launched
by him by establishing new plants and machinery by investing substantial funds.
The new activity may produce the same commodities of the old business or it may
produce some other distinct marketable products, even commodities which may
feed the old business. These products may be consumed by the assessee in his
old business or may be sold in the open market. One thing is certain that the
new undertaking must be an integrated unit by itself wherein articles are produced
and at least a minimum of ten persons with the aid of power and a minimum of
twenty persons without the aid of power have been employed. Such a new
industrially recognisable unit of an assessee cannot be said to be reconstruction
of his old business since there is no transfer of any assets of the old
business to the new undertaking which takes place when there is reconstruction
of the old business. For the purpose Of section 15C the industrial units set up
must be new in-the sense that new plants and machinery are erected for
producing either the same commodities or some distinct commodities. In order to
deny the benefit of section 15C the new undertaking must be formed by reconstruction
of the old business. Now in the instant case there is no formation of any
industrial undertaking out of the existing business since that can take place
only when the assets of the old business are transferred substantially to the
new undertaking. There is no such transfer of assets in the two cases with
which we are concerned.
771 We will now deal with the question
whether the two undertakings the assessee are formed by reconstruction of the
existing business. The word 'reconstruction' is not defined in the Act but has
received judicial interpretation. In re South African Supply and Cold Storage
Company, Wild v. Same Company(1), Buckley, J. dealing with the meaning of the
word 'reconstruction' in a company matter observed as follows :-"What does
'reconstruction' mean ? To my mind it means this. An undertaking of some
definite' kind is being carried on, and the conclusion is arrived at that it is
not desirable to kill that undertaking, but that it is desirable to preserve it
in some form, and to do so, not by selling it to an outsider who shall carry it
on--that would be a mere sale--but in some altered form to continue the
undertaking in Such a manner as that the persons now carrying it on will
substantially continue to carry it on. It involves, I think, that substantially
the same business shall be carried on and substantially the same persons shall
carry it on. But it does not involve that all the assets shall pass to the new
company or resuscitated company, or that all the shareholders of the old
company shall be shareholders in the new company or resuscitated company.
Substantially the business and the persons interested must be the same".
This concept of reconstruction was accepted
by the Bombay High Court in the Commissioner of Income-tax, Bombay City-I v.
Gaekwar Foam and Rubber Co. Ltd. (1), dealing with section 15C of the Act.
While adverting to the passage which we have just quoted the Bombay "Now
fully appreciating the distinction which counsel for the Revenue has sought to
make between the case of a reconstruction of a company and the case of
reconstruction of a business, these observations, as we read them, are equally
illuminating in the context of reconstruction of business already in existence
in the case of a newly established industrial undertaking".
The Delhi High Court also in Commissioner of
Income-tax v. Gangs Sugar Corporation Ltd.(a), accepted the above concept of
'reconstruction' in the following passage :"We have given the matter our
earnest consideration and are of the view that in the reconstruction of business,
as in the reconstruction of a company, there is an element of transfer of
assets and of some change, however partial or restricted it may be, of
ownership of the assets. The transfer, however, need not be of all the assets.
It is none the less imperative that there should be continuity and preservation
of the old undertaking though in an altered form.
(1) [1904] 2 Ch. 268. 35 I.T.R. 662.
(3) 92 I.T.R. 173.
772 The concept of reconstruction of business
would not be attracted when a company which is already running one industrial
unit sets up another industrial unit. The new industrial unit would not lose
its separate and independent identity even though it has been set up by a
company which is already running an industrial unit before the setting up of
the new unit".
We endorse the above views with regard to
reconstruction of business.
Reconstruction of business involves the idea
of substantially the same persons carrying on substantially the same business.
It is stated on behalf of the Revenue that the same company in the instant case
continues to do the same business of heavy engineering---no matter certain
spare parts necessary as components to completion of the end product are now
manufactured in the business itself. The fact that the assessee is carrying on
the general business of heavy engineering will not prevent him from setting up
new industrial undertakings and from claiming benefit under section-15C if that
section is otherwise applicable. However, in order to be entitled to the
benefit under' section 15C, the following facts have to be established by the
assessee. subject always to the time-schedule in the section :-(1) investment
of substantial fresh capital in the industrial undertaking set up, (2)
employment of requisite labour therein, (3) manufacture or production of
articles in the said undertaking, (4) earning of profits clearly attributable
to the said new undertaking, and (5) above all, a separate and distinct
identity of the industrial unit set up.
We may add that there is no bar to an
assessee carrying on a particular business to set up a new industrial
undertaking on account of which exemption of tax under section 15C may be
claimed.
The legislature has advisedly refrained from
inserting a definition of the word 'reconstruction' in the Act. Indeed, in the
infinite variety of instances of restructuring of industry in the course of
strides in technology and of other developments, the question has to be left
for decision on the peculiar facts of each case.
If any undertaking is not formed by
reconstruction of the old business that undertaking will not be denied the
benefit of section 15C simply because it goes to expand the general business of
the assessee on some directions. As in the instant case, once the new industrial
undertakings are separate and independent production units' in the sense that
the commodities produced or the results achieved are commercially tangible
products and the undertakings can be carried on 773 separately without complete
absorption and losing their identity in the old business, they are not to be
treated as being formed by reconstruction of the old business.
The business of the assessee is of heavy
engineering.
The two new undertakings are independently
producing articles which may be of aid to the principal business but yet the
undertakings are distinct and not reconstruction out of the existing business
of the assessee. Use by the assessee of the articles produced in its existing
business or the concept of expansion are not decisive tests in construing
section 15C. The High Court is not right in holding the two undertakings as
formed by reconstruction of the existing business of the assessee.
Several decisions have been cited at the bar
before us. We approve of the conclusions in Commissioner of Income-tax v. Ganga
Sugar Corporation Ltd. (supra); Rajeswari Mills Ltd. v. Commissioner of
income-tax, Madras(1); Nagardas Bechardas & Brothers P Ltd. v. Commissioner
of Incometax Gujarat (2); Commissioner of Income-tax, West Bengal-I v. Electric
Construction and Equipment Company Ltd.(3);
Commissioner ofIncome-tax v. Hindusthan
Motors Limited(4).
The decision in Commissioner of Income-tax v.
Naya Sahitya(5) does not represent the correct legal position and, hence,
cannot be approved.
We may observe that we are not required to
consider in these appeals how profit will be actually calculated in order to
determine the quantum of exemption of six per cent of the profit on the capital
employed. If difficulties are insurmountable and, therefore, profit cannot be
ascertained, that will be a different question in the course of practical
application of the section. That kind of a possible difficulty should not weigh
in the true construction of section 15C. In the present case the assessee
claimed profit and there was no difficulty about ascertainment of the exempted
profit as separate books of accounts were kept and the undertakings were at
separate places.
In view of the foregoing discussion, we are
clearly of opinion that the High Court is not right in answering the two
questions in the negative and against the assessee.
On the other hand. the Tribunal was right in
answering the two questions in the affirmative and against the Department.
The two questions referred stand answered in
the affirmative. The judgment of the High Court, is, therefore, set aside and
the appeals are allowed with costs.
P.B.R. Appeals allowed.
(1) 50 I.T.R. 29.
(2) 104 I.T.R. 255.
(3) 104 I.T.R. 101.
(4) [1976] Taxation Law Reports. 821.
(5) 84 I.T.R. 567.
Back
