Mettur
Chemical and Industrial Corporation Limited Vs. Commissioner of Income-Tax,
Madras-1 [1995] INSC 696 (16 November 1995)
Kirpal
B.N. (J) Kirpal B.N. (J) Jeevan Reddy, B.P. (J) Kirpal. J.
CITATION:
1995 SCC Supl. (4) 732 1995 SCALE (6)468
ACT:
HEAD NOTE:
This
is an appeal by way of special leave having been granted against the judgment
of the Madras High Court which had answered the three questions of law referred
to it by Income Tax Tribunal under Section 256(1) of the Income Tax Act, 1961
(hereinafter referred to as `the Act') in favour of the respondent.
The
facts as found by the Tribunal are that the appellant was manufacturing coustic
soda utilising billiter cells and up to the year 1956, its production capacity
was 13.5 tons per day. The appellant felt the need to expand its capacity and
obtained a licence which permitted it to manufacture 20 tons of caustic soda
per day.
In
order to increase the capacity, the appellant gradually replaced billiter cells
with hooker cells. Thirty hooker cells were installed by 31.3.1957 and thirty
more were installed in February, 1958. The installation of the hooker cells
required a change over in the power system and the installation of a rectifier
was completed only in the year ended 31.3.1959. However, the hooker cells were utilised
for the production as and when they were installed by a suitable adjustment in
the power system even before the rectifier was installed. The position, thus,
was that the production for the year 31.3.1957 included certain production
attributable to the use of thirty hooker cells.
All
the sixty hookers cells were installed by the end of 1958 and the installation
of the unit together with the rectifier was also completed in the year ended
31.3.1959. It was clear that the capacity of the unit gradually increased from
the stage of the installation of the hooker cells, though full capacity was
reached only with the installation of all the hooker cells.
Claim
was made by the appellant before Income Tax Officer to the effect that it was entitled
to the relief under Section 84 of the Act in respect of assessment year 1962-63
on the ground that such relief is admissible for five assessment years starting
from the year in which the industrial undertaking begins to manufacture or
produce articles. The contention of the appellant was that it had not claimed
any relief in respect of assessment year 1957- 58, when thirty of the sixty
hooker cells had been installed and, therefore, the period of five years should
commence only with effect from the year 1958-59 by which time the installation
of the sixty hooker cells, as well as the rectifier, had been completed. In the
alternative, it was also contended that the appellant was entitled to relief atleast
in relation to production of the thirty hooker cells which were installed for
the first time in the assessment year 1958-59, as the fifth year for these
hooker cells from the commencement of the production is the assessment year
1962-63.
The
claim had been disallowed by the Income Tax Officer and in appeal by the
Appellate Assistant Commissioner. The Income Tax Tribunal, on the further
appeal, rejected the claim of the appellant by holding that though the
industrial unit ultimately consisted of sixty hooker cells and the rectifier
but it had commenced commercial production in the year ended 31.3.1957 and,
therefore, the five years had to be reckoned from the year 1957-58 and not
1953-59.
Another
contention which was raised before the Revenue Authorities and the Tribunal was
with regard to the deduction of development rebate, which was allowable in
respect of a new industrial undertaking in computing the profits and gains for
the purpose of relief under Section 84 of the Act. In respect of assessment
year 1962-63, the profits and gains from the new industrial unit had been
computed at Rs. 1,08,282 before adjustment for development rebate. The total
amount of development rebate had been determined at Rs.13,69,487/-. Adjusting
the development rebate towards this profit of Rs. 1,08,282/-, the Income Tax
Officer and the Appellate Assistant Commissioner held that there was no income
from the new industrial undertaking on which relief was admissible under
Section 84(1) of the said Act. The contention of appellant was that in arriving
at the business income of industrial undertaking on which the relief under
Section 84(1) of the Act was admissible, the development rebate was not to be
deducted. This claim was not accepted by the Appellate Tribunal. It came to the
conclusion that on the correct interpretation of Section 84 of the Act, the
relief under the said provision was allowable only in case where there was a
positive income of the industrial undertaking after the allowance of
development rebate.
On an
application being filed by the appellant, the Tribunal referred the following
three questions of law to the High Court:
"(1)
Whether the first year in which the assessee was entitled to relief in respect
of the new industrial undertaking was the assessment year 1957-58 and whether
the assessee was entitled to relief in respect of the assessment for 1962-63
under Section 84 ?
(2)
"Even if the assessee is not entitled to the full relief in respect of 60
hooker cells claimed in respect of the assessment for 1962-63 whether it is
entitled to relief in respect of the thirty hooker cells completed during the
previous year for 1958-59 ?
(3)
"Whether development rebate in respect of the new industrial undertaking
established during the previous year for 1962-63 should be deducted in
computing the profits and gains for the purpose of section 84 and whether the assessee
is entitled to any relief under the assessee is entitled to any relief under
that section in respect of this undertaking ?"
The
High Court agreeing with the Tribunal, answered the aforesaid questions of law
in favour of the respondent. On leave to appeal being refused, this Court
granted special leave to appeal. Hence, this appeal.
Taking
the first two questions together, it was contended by Shri Ramachandran,
learned counsel for the appellant, that the new industrial undertaking was
entitled to the benefit of the provisions of Section 84 of the Act
corresponding to Section 15(c) of the Income Tax Act, 1922 in the year 1962-63
because the new industrial undertaking consisted of sixty hooker cells and rectifier
and the same were installed only in the year 1958-59. It was also contended
that in respect of the year 1957-58, no claim was made under the said provision
because the assessee had by then not completed the installation.
According
to Section 84 of the Act, income tax is not payable by an assessee on so much
of the profits and gains, inter alia, derived from any industrial undertaking
to which the Section applies, as does not exceed 6% per annum on the capital
employed in such undertaking. Sub-section (2) of Section 84 provides the
conditions which should be specified so as to enable the assessee to enjoy the
benefit of the said provision. It is not in dispute that these conditions are
satisfied but what we are concerned in this case is with regard to the
applicability of sub-section (7) of Section 84 of the Act which reads as
follows:
"The
provisions of this section shall, in relation to an industrial undertaking,
apply to the assessment-- (i) for the assessment year relevant to the previous
year in which the undertaking begins to manufacture or produce articles or, as
the case may be, operate the cold storage plant or plants, and (ii) where the assesee
is a co-operative society, for the six assessment years immediately succeeding,
and where the assessee is any other person, for the four assessment years
immediately succeeding." It is found as a fact that the appellant had
begun to manufacture or produce articles in the previous year ended on
31.3.1957 with the help of thirty hooker cells. It is true that rectifier had
not been installed in the year 1957- 58 but it not in dispute that with
suitable adjustment being made to the power system, the thirty hooker cells
which had been installed were utilised. The use of these new hooker cells had
resulted in the capacity of the unit gradually increasing and the production so
made was not experimental but was commercial. This being so, the appellant's
undertaking must be regarded as having been newly established when it had begun
to manufacture or produce articles by 31.3.1957. As 1957-58 was the first
assessment year in which the relief under Section 15(C) of the Income Tax Act,
1922 corresponding to Section 84 of the Act could have been claimed, the four
succeeding years would end by 1961-62 with the result that the appellant would
not be entitled to any relief in the year 1962-63 which was rightly regarded as
the sixth assessment year. In answer to question No. 1, the High Court,
therefore, rightly come to the conclusion that the first year in which the
relief could be claimed was the assessment year 1957-58.
As
regards question No. 2 is concerned, it was alternatively submitted that thirty
hooker cells and the rectifier were installed in the year 1958-59 and,
therefore, benefit under Section 84 of the Act with regard to these thirty
hooker cells should be available in the year 1962-63.
This
is a case where the manufacturing capacity of the appellant was increased on a licence
being granted from 13.5 tons per day to 20 tons per day. In other words, these
hooker cells were installed and the billiter cells were gradually replaced. The
new industrial undertaking came into existence when the initial lot of thirty
hooker cells were installed in the year 1957-58 which had resulted in enhanced
commercial production. The Tribunal and the High Court, in our opinion, rightly
came to the conclusion that the undertaking could function with thirty hooker
cells in the year 1957-58 and further numbers were added in the subsequent
year. The undertaking having, thus, started the commercial manufacture in the
year 1957-58 could not claim the benefit of provisions of Section 84 of the Act
because the unit as such had commenced in the year 1957-58 notwithstanding the
fact that there had been an expansion thereto in the subsequent year. There was
no scope for allowing a partial relief or splitting up of the relief as and
when fresh cells came to the added. The question No. 2, therefore, was thus
rightly answered in the negative and in favour of the revenue.
Coming
to the third question, the relevant fact as already stated is that the profit
with reference to the additional unit of sixty hooker cells which was called
caustic soda plant No. 2 was worked out by the appellant at Rs. 1,08,282/-
before allowing the allowing the development rebate. The development rebate
pertaining to this second plant came to Rs. 12,15,055/-. If the development
rebate was adjusted against the sum of Rs. 1,08,282/- then the net result would
be a loss of Rs. 11,06,773/-. There would, thus be no profit which would be
eligible for the relief under Section 84 of Act. In order to avail of this
relief, the submission of the appellant is that the development rebate should
not be deducted in arriving at the business income because it had no bearing on
the business profits of the industrial undertaking.
In
view of the decision of this Court in the case of of Income-tax, Gujarat-II,
113 ITR 84, this question is no longer res integra. Dealing with a similar
provision i.e.80 E of the Act prior to its amendment by the Finance (No. 2)
Act, 1967, this Court came to the conclusion that in computing the profits of
the assessee for the purpose of the special deduction provided under Section 80
E, items of unabsorbed depreciation and unabsorbed development rebate, carried
forward from earlier years, will have to be deducted before arriving at the
figure from which the 8% contemplated by Section 80E is to be deducted.
In an
effort to distinguish the aforesaid decision, it was submitted by Mr. Ramachandran
that under Section 33(2) of the Act, development rebate is deducted from the
total income of an assessee and it is not a component or a ingredient for
determining profits and gains. In other words, in Computing the profits and
gains under Section 84(5) of the Act, there must first be a deduction under
Section 84(1) of the Act of 6% per annum an the capital employed on the caustic
soda plant No. 2 and it is only thereafter the development rebate should be
deducted from the total income. In support thereof, reliance was placed on the
judgment of the Punjab & Haryana High Court in Mills Co. P. Ltd., 127 ITR
301. As already observed in Cambay Electric Supply Industrial Company"s
case (supra) while interpreting a provision similar to Section 84(5) of the
Act, this Court has held that the profits and gains from an industrial
undertaking to which Section applies, have to be computed in accordance with
the provisions contained in Chapter IV(d) of the Act and development rebate has
first to be deducted from the total income and it is only thereafter, if any
profits and gains remain from this business, that the benefit under Section
84(1) of the Act would be applicable.
It
appears that the aforesaid decision of this Court in Cambay Electric Supply
Industrial Company's case (supra) was not brought to the notice of Punjab &
Haryana High Court in the aforesaid case of Patiala Flour Mills case (supra).
It is clear that the decision of Patiala Flour Mills case (supra) is no longer
a good law. We, accordingly, hold that the third question of law was also
rightly answered in favour of the Revenue.
For
the aforesaid reasons, this appeal is dismissed, but in the circumstances,
parties are left to bear their won costs.
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