TMI Blog1970 (7) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... e mill division set up by the assessee-company was an industrial undertaking to which section 15C of the Indian Income-tax Act, 1922, applied ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the claim for deduction or wealth-tax paid during the accounting year was admissible in computing the assessee's profits from its business ? " We can straightaway dispose of the third question as we find it is already covered by the decision in Travancore Titanium Products Ltd. v. Commissioner of Income-tax, where the Supreme Court held that the amount of wealth-tax paid by an assessee on his net wealth under the Wealth-tax Act, 1957, was not a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. Following that decision we answer the third question in the negative and in favour of the revenue. We are, therefore, left with the first two questions. The Central controversy in these two questions is about the meaning to be given to the expression " industrial undertaking " in section 15C of the Indian Income-tax Act, 1922, and, in particular, the meaning to be given to the words " reconstruction of business a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or the jute mill division were utilised by the other divisions of the assessee when considering relief under section 15C. The emphasis then put by the assessee was that so long as the steel foundry division and the jute mill division were separate independent units of machinery, building, etc., the provisions of section 15C were attracted. The Appellate Assistant Commissioner dismissed the appeal of the assessee. He came to the conclusion that the business remained the same and all that had happened was " some re-construction in the business, re-construction in the sense that, instead of purchasing some parts from outside, the appellant started producing the same itself ". He was of the view that the industrial undertaking for exemption under section 15C must be a new industrial undertaking and must be a separate business. The Appellate Assistant Commissioner considered also the decisions in Ashok Motors Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Standard Motor Products of India Ltd., on which the assessee relied. When the matter came up in appeal before the Tribunal, the Tribunal allowed the appeal of the assessee and set aside the decisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found by the Income-tax Officer are that, out of the total sales of Rs. 13,03,509, sales to the boiler division amounted to Rs. 11,89,812. These sales consisted of the job work only and nothing else. The raw materials were supplied by the boiler division and, after machining and forging, the parts were given to the boiler division. The only sales to outside consisted of parts in respect of jute mills and amounting to Rs. 1,13,697. It is recorded that the assessee admitted that, so far as the products of the jute mill parts were concerned, the company was in an initial and an experimental stage only and whatever profit was earned under the jute mill division is in respect of the work done on behalf of the boiler division. The Appellate Assistant Commissioner found the following facts. The assessee is a heavy engineering concern manufacturing boilers, etc. The parts manufactured by the steel foundry division and the jute mill division being essential for the boiler division, these two divisions, viz., the steel foundry and the jute mill divisions, were set up by the assessee so as to avoid purchasing such parts from outside. He, therefore, records the fact that these two units of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions from income-tax ". Its marginal note or headnote is under the title " exemption from tax of newly established industrial undertakings ". The expression " newly established " is not to be found as such in the body of the section or its sub-sections. The relevant parts of section 15C, for the purposes of a decision in this reference, read, inter alia, as follows : " (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 used in a business which was being carried on before the 1st day of April, 1948 (now amended as " previously used in any other business ". The amendment applies retrospectively by the Finance Act of 1959) ; . . . . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecialising itself in diverse and divergent fields and there are many industrial statutes, in the absence of any industrial code, which speak in different voices and in different languages not only on the same subjects but also on cognate subjects. For instance, the problem here has been argued whether the meaning of the expression " industrial undertaking " in the Indian Income-tax Act would be the same as an industrial undertaking under the Industrial Disputes Act or in many other pieces of industrial legislation such as the Industries (Development and Regulation) Act, 1951, which we will have to consider in this reference. Time perhaps is coming fast for a more coherent and co-ordinated picture of these concepts on common problems of law and economic concepts such as these in an industrial code. Pursuing the interpretation of the word "undertaking", and particularly " industrial undertaking ", we have been shown dictionary meanings which we do not propose to quote here. Normally, anything undertaken to be done is an undertaking. An industrial undertaking, therefore, would normally be, in its ordinary acceptation, some industrial concern or enterprise or adventure which is under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . " The words " industrial undertaking " in the Indian Income-tax Act, 1922, should, in our view, be interpreted to mean any venture or enterprise which a person undertakes to do and which has relation to some industry or has some industrial consequences. The notion of an undertaking basically means that it has got to be a concrete and tangible venture in the path of industry to make it an industrial undertaking. Pursuing the course of interpretation of section 15C of the Income-tax Act, 1922, it appears to us that the industrial undertaking must be such where some capital is employed and which is separate to the extent as to show how much a 6 per cent. return on it would be in order to merit or qualify for the exemption from tax under section 15C. In other words, this industrial undertaking should not be such where it would be difficult to find the capital employed or where it is a part and parcel of the general capital employed otherwise by the assessee. This employment of the capital need not be formal in the sense of actually raising the capital and putting it into the new industrial undertaking, but, nevertheless, there must be a definite employment of capital in that unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. It was a part of the business of the assessee to run its business and, for that purpose, if necessary, to get its goods even from outside. The business, therefore, remained the same. The method of procurement of the goods has changed. Instead of procuring from outside, they were being manufactured from within by the assessee itself under these two divisions. Taking a broad view of the expression " reconstruction ", it is difficult to hold that this change of producing one's own goods systematically used in the existing business instead of buying them from outside would not be reconstruction of a business already in existence. There is one other aspect of this expression " business already in existence ". It is being argued from the bar on behalf of the assessee that this business of producing these goods, castings and forgings were not there. That is true, but business does not only mean actual production of the goods in question but also includes the business of getting the goods even from outside so long as these goods had all along been employed in the existing business of the assessee. At the same time it would be necessary to indicate certain other aspects of the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose it does, it will be within its objects and in that event if it otherwise satisfies the requirements of the statute then such a new industrial undertaking of ship-building, within the charter of objects, will be entitled to claim exemption under section 15C of the Indian Income-tax Act, 1922. No doubt an assessee, which is a company doing business under its charter of incorporation, when it wants to establish a new industrial undertaking, it must be well within its objects, otherwise such an industrial undertaking will be ultra vires the company. While, therefore, these extreme propositions advanced by the learned counsel for the revenue cannot be accepted, yet there is a residue of consideration which may be effective in appropriate cases and the present case is one such appropriate case. The expression " business already in existence " must be given its ordinary commercial meaning. The business already in existence in this case is the business of heavy engineering and in particular the business of manufacturing wagons and boilers. In doing that business castings and forgings are necessary ingredients. In fact the assessee had to have these castings and forgings but they bou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be seen that the profits derived from that undertaking do not exceed 6 per cent. of the capital employed in that undertaking. So, the situation may well arise that an undertaking is an industrial undertaking in the ordinary sense of the term, but that the profits claimed are in excess of 6 per cent. of the capital employed. The unfortunate part is that, even though the Income-tax Officer said so, the higher appellate authorities including the Appellate Assistant Commissioner or the Tribunal did not check or verify the facts or find the facts on this point. Lastly, there is no finding as to the workers employed in this instance in order to see whether the test laid down by section 15C(2)(iii) has been satisfied. We expect that in future the statement of facts and the findings of facts will be more carefully drawn up in the light of the sections discussed. We have indicated that one of the requirements of section 15C is quantification of the " profits derived from an industrial undertaking ". Learned counsel for the revenue has urged before us that there is no profit in this case. This is only a case of inter-departmental sales. There are two aspects of this argument. The facts alre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilised this observation to advance his argument that the products manufactured by the steel foundry and the jute mill divisions, viz., the castings and the forgings were a kind of raw material like the one in that case before the Supreme Court. Having done that, Dr. Pal then relied on the observations at page 136 of the report of that case, where it was said : " But what we are now concerned to point out is that if it is capable of dismemberment of disintegration into its components, it would not be correct use of language to designate the profit so apportioned and ascertained as attributable to each line of activity any the less real than the aggregate profit realised from all the ventures . . . . . . Undoubtedly, in order to ascertain the profits from the mine there would have to be a disintegration of the gross profits which finally emerge from the sale of the finished steel or steel products. What we desire to point out is that this involves no disintegration of the business affording scope for the contention based upon the principle that a person cannot trade with himself, but the one far removed from it, viz., whether when a profit has been made as a conjoint result of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains derived from its newly established industrial undertaking, which are exempt under section 15C(1) of the Income-tax Act, 1922, is entitled to claim the actual cost to it rather than the market value of the raw materials manufactured by its existing industrial undertaking and used by the new undertaking ? " Therefore, the question whether section 15C at all applied was not in issue in that case. The second distinction is that the theory of raw material being processed into a finished product taken with the analogous theory of primary product, intermediate product and end product, is not, in our view, relevant or appropriate to the facts in the present reference. There starch was the raw material for dextrose and we are not convinced that castings and forgings in the present reference could be described as raw materials for boilers and wagons. One can understand, as is already indicated in the Tata case, that the original mined ore is the raw material for the finished steel products, but surely that analogy does not apply to the facts in the present reference before us. Here, at this stage, we shall notice one or two more decisions on the interpretation of section 15C of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the business in spare parts was essential to the subsistence of the industrial undertaking of the assessee and a failure or cessation to carry on such business would not put an end to the undertaking itself and that the profits on the sale of spare parts did not form part and parcel of the income of an industrial undertaking and was not entitled to exemption under section 15C of the Income-tax Act, 1922. We need only emphasise the observations made by the Madras High Court in the Standard Motor case at page 818 of that report, which read as follows : " For purposes of section 15C there can be no merger of several business activities into the industrial undertaking, however much they may be closely allied to or intimately associated with the latter. The exemption has to be strictly construed, and the language of the enactment prevents the extension of the benefits to income which is merely incidental or ancillary to the industrial undertaking but which does not arise from and out of it. The protection is only to the income from the undertaking and not to other income from the satellites in its orbital system. " Drawing this analogy, Mr. Pal for the revenue has said that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we have taken that it is the business already in existence within the meaning of section 15C(2)(i) of the Income-tax Act, 1922, so as to disqualify the assessee on the facts of the present reference from claiming an exemption under that section. Proceeding further with the interpretation of section 15C(2)(i), it would be noticeable that the word " form " is used in that provision. " Form " indicates some kind of structure or establishment indicating organisation with a shape and a pattern. The section implies that an industrial undertaking may be " formed " in that sense by the splitting up or the reconstruction of business already in existence or by the transfer as mentioned therein. Therefore, every " form " of an industrial undertaking is not necessarily entitled to claim exemption under this provision because if an industrial undertaking is formed by the splitting or reconstruction or by transfer as mentioned therein, it will not be entitled to the exemption. But the word " form " appears to indicate some kind of a shape or a separate concretisation. Beyond that it would be inappropriate to impose any limitation or rigid qualification on the word " form ". Reverting back t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tially 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. Does it make any difference that the new company or resuscitated company does or does not take over the liabilities? I think not. I think it is nonetheless a reconstruction because from the assets taken over some part is excepted provided that substantially the business is taken, and it is immaterial whether the liabilities are taken over by the new or the resuscitated company or are provided for by excepting from the scheme of reconstruction a sufficient amount to answer them. It is not, therefore, vital that either the whole assets should be taken over or that the liabilities should be taken over. You have to see whether substantially the same persons carry on the same business ; and if they do, that, I conceive, is a reconstruction. " Now, the above observations of Buckley J. were made in connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . One is that the machinery was new in the present case in respect of the steel foundry division and the jute mill division of the assessee. The newness of a machinery cannot, in our opinion, by itself constitute an industrial undertaking. Machinery as part of technology is progressing from day-to-day and the old machinery has often to be replaced by new ones not merely on the ground of depreciation and wearing out but on the ground of replacement by the modern improved machinery. New machinery may also be needed to improve the quality and quantity and speed of production of goods. In these circumstances, the newness of the machinery may well be a feature of " reconstruction " of business. Secondly, it has been also argued that these two divisions of the assessee, namely, the jute mill division and the steel foundry division, are housed separately although in the same campus. Separate housing, again, in our view, is not by itself decisive on the point of a new industrial undertaking. Better arrangement might dictate separate housing. Many other considerations of business convenience and expediency may require separate housing which will not avoid the fact of separate housing being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This industrial licence shows that it was given in Form F prescribed under rule 15 of the Registration and Licensing of Industrial Undertakings Rules, 1952. It is issued by the Government of India, Ministry of Commerce and Industry, New Delhi, dated the 7th May, 1953. It reads as follows : " An application No. Nil dated the 27th January, 1953, for a licence having been received from M/s. Textile Machinery Corpn. Ltd. for effecting a substantial expansion to their existing industrial undertaking, namely, Textile Machinery Corpn. Ltd., under rule 7 of the Registration and Licensing of Industrial Undertakings Rules, 1952, the Central Government, in exercise of the powers conferred by rule 15 of the said rules, hereby grants this licence to effect a substantial expansion to their existing industrial undertaking, subject to the following conditions : (1) Effective steps as defined in rule 2(ii) of the Registration and Licensing of Industrial Undertakings Rules, 1952, shall be taken for effecting this substantial expansion within the period of six months from the date of issue of the licence. (2) This substantial expansion shall be effected within a period of 18 months from the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1951, and (3) the Wealth-tax Act, 1957, and Dr. Pal for the assessee has advanced his arguments on all these three statutes. Section 15C of the Income-tax Act, 1922, came into the statute book in 1949. Analogous, though not similar, provisions are repeated in section 80J of the Income-tax Act, 1961. The Income-tax Act does not refer to a " business expansion "-substantial or otherwise-in dealing with the case of an industrial undertaking under section 15C of the Income-tax Act, 1922. The next statute within two years was the Industries (Development and Regulation) Act, 1951. The preamble of that statute says that it was " an Act to provide for the development and regulation of certain industries ". In Chapter 3 of that statute of Industries (Development and Regulation) Act, 1951, dealing with " regulation of scheduled industries " certain sections like sections 11, 11A and 13 appear. Section 11 deals with licensing of new industrial undertakings. Section 11A deals with licence for producing or manufacturing new articles. It is section 13 of that statute which is relevant for the purpose of this reference. We shall consider this provision in some detail. Section 13(1)(d) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very well be discrimination between the cases of new industrial undertakings set up and old industrial undertakings making substantial expansion. Whatever may be the reason, no notice has been taken by the Income-tax Act of this doctrine of " substantial expansion " and the necessary licensing mentioned in the Industries (Development and Regulation) Act, 1951. The Income-tax Act has been amended even after 1951 but even these subsequent amendments do not make any reference to the Industries (Development and Regulation) Act of 1951. It is noticeable that this very section 15C of the Income-tax Act, 1922, has been amended in 1953, 1956, 1959, 1960 and 1961. It is plain from that fact that the concept of licensing of substantial expansion under the Industries (Development and Regulation) Act, 1951, has not been extended to the Income-tax Act and its exemption under section 15C thereof. The last branch of the argument of Dr. Pal on this point for the assessee was based on the Wealth-tax Act, 1957, and its provisions. The relevant sections of the Wealth-tax Act, 1957, on this point are section 5(1)(xxi) and section 45(d) with its Explanation. We shall briefly notice these provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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