TMI Blog1981 (2) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... apply even in respect of the other two assessment years, the questions raised being common except that in I.T. Ref. No. 107 of 1972, the order of the two questions has been reversed. The questions for our consideration are: " 1. Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to the exemption under section 84 of the Income-tax Act, 1961 ? 2. Whether, on the facts and in the circumstances of the case, the assessee-company satisfied all the conditions laid down in sub-section (2) of section 84 of the Income-tax Act, 1961, and is entitled to the exemption as contemplated in section 84(1) of the Income-tax Act, 1961 ? " It will be clear that though two questions have been set out there is really one question at issue, namely, as to whether the assessee-company satisfies the conditions for the exemption laid down in sub-s. (2) of s. 84 of the Act. In fact, the question debated before us is even more restricted and that is, as to whether the conditions set out in cl. (i) or cl. (ii) of s. 84(2) are fulfilled in the present case. The assessee-M/s. Hindustan General Industries Ltd., Nangloi, is public limited company. It was carryin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It stated: " As reported to you last year, the new factory of the company at Nangloi occupying over 12 acres of land has made considerable progress. We have made additions to the fixed assets valued at nearly Rs. 3 lakhs, up to the end of the accounting year. Further, substantial additions have been made since the close of year. The manufacture of railway wagons is in hand and we hope to complete the first order of 100 wagons in the near future. We hope we shall have further substantial orders which will increase our turnover very considerably in 1960-6l." In the accounting year 1959-60, there was further progress. The assessee had produced a prototype wagon, but this had not been approved by the Government. In the meantime, in order that the investments made in the new factory may not remain unutilized, the company appears to have started some manufacturing operations at Nangloi. This appears from the fact that in the statement filed by the assessee for the subsequent year, which is the subject-matter of reference in I.T. Ref. No. 25 of 1971, the Nangloi factory showed an opening stock of finished goods and semifinished goods as on 1st July, 1960. The directors' report for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being so, the ITO was of the opinion that the assessee was not entitled to relief under s. 15C for the assessment year 1962-63, and the provisions of s. 84 did not apply to the assessee's case. The ITO also observed that no new business had been started by the assessee nor had it been newly set up or formed as per the words used in the section. In his opinion the business of the company was to carry on the manufacture of iron and steel equipments and to secure contracts of the products on manufacturing basis and it was this business that was being carried on at Nangloi also. For these two reasons, the ITO rejected the assessee's claim under s. 84 of the Act of 1961. The AAC confirmed the order of the ITO. On the facts, the AAC found that the goods which were being manufactured at the Nangloi factory were the following: " Railway goods wagons, storage tanks, steel trusses, steel ladders, test house and other structural items. " In other words, he appears to have agreed with the appellant's representative that the Nangloi factory was producing articles which were different from those that were being produced at Qutab Road factory. However, he was also of the opinion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was in these circumstances that the factory at Nangloi was put up. It was contended that the only ground on which the assessee's claim was rejected was that the condition laid down in s. 84(2)(ii), that the new industrial undertaking should not be formed by the transfer to a new business of building, machinery or plant previously used for any purpose, had not been fulfilled. But it was pointed out that under s. 84 a new Explanation had been added, which had not been there in s. 15C of the Act of 1922, which laid down that this condition would also be considered to be fulfilled if the total value of the machinery, building and plant transferred from the business already in existence to the new undertaking did not exceed 20 per cent. of the total value of the building, machinery and plant used for the new business. It was pointed out by reference to the relevant balance-sheets that as against the value of fixed assets of the new undertaking which came to Rs. 9,04,353, the written down value of the assets transferred from the Qutab Road factory was only Rs. 1,07,304. This was as on 30th June, 1960. Similarly as on 30th June, 1961, the total value of the fixed assets was Rs. 11,51,481 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 15C for the assessment year 1961-62, would be entitled to exemption under s. 84(1) for the assessment years 1962-63 to 1965-66. But these questions need not detain us as they are not before us in these references. It is in the above circumstances that the Commissioner, aggrieved by the order of the Tribunal holding that the assessee was entitled to exemption under s. 84, has come up before us in a reference on the two questions which have earlier been set out. As mentioned at the outset, the controversy before us is very limited and is restricted to an interpretation of cls. (i) and (ii) of sub-s. (2) of s. 84. In order to appreciate the precise scope of the section, it is better to mention that sub-s. (1) of s. 84 grants an exemption from income-tax in respect of so much of the profits and gains derived from the industrial undertaking as does not exceed 6 per cent. per annum on the capital employed therein provided the undertaking fulfils the conditions set out in sub-s. 2 of s. 84. Sub-s. (2) runs as follows: " (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely : (i) it is not formed by the splitting up, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the assessee already in existence, and (2) whether it can be said to have been formed by the transfer to the new business of the building, machinery or plant previously used for any purpose. From the narration of facts given earlier, it would be seen that at the earlier stages the condition laid down in cl. (ii) of sub-s. (2) of s. 84 loomed large. Before the ITO it assumed great importance because the ITO was under the impression that the assessee's claim for exemption had to be judged by the terms of s. 15C of the Act of 1922 and since the Explanation was not there in the old section, he considered it sufficient to reject the assessee's claim on the point to say that there had been some transfer of building, machinery or plant from the old undertaking to the new one. The AAC, who corrected the ITO's impression and considered the terms of s. 84, did not rely upon cl. (ii) apparently in view of the Explanation, but rested his case on the ground that the new undertaking had been formed by the reconstruction of the old one. But once again before the Tribunal, the departmental representative seems to have repeated the reliance on cl. (ii) because his argument, as we ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal. The emphasis was placed only on the fact that the turnover in the new undertaking was very small in the first year of its existence and this was clearly of no importance. However, the AAC had given a very clear finding that this is only a case of reconstruction or expansion and it must, therefore, be taken that, on the material before it, the Tribunal has reversed this finding of the AAC. In fact the assessee's counsel had raised a specific contention that the industrial undertaking at Nangloi had not been formed by splitting up or reconstruction of the business already in existence and the Tribunal has stated in para. 7 that it accepted the assessee's contention that the conditions laid down under s. 84(2) are satisfied. We shall, therefore, proceed on the footing that the Appellate Tribunal has given a finding that the new undertaking was not formed by the reconstruction of the existing undertaking and we shall advert to the material and the arguments placed before us to challenge this finding of the Tribunal. On behalf of the department, it was contended that the new undertaking was only manufacturing articles of the same nature as were covered by the earlier undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method or scope of the activities of the business or in its personnel or infusion of new blood in the management or control of the business which may even be by some changes in the constitution of persons interested in the undertaking would certainly be no more than reconstruction of the business if it is substantially the same business carried on by substantially the same persons." (emphasis is ours). The learned counsel strongly relied on the underlined words in the above passage. He also referred to a decision of this court in CIT v. Ganga Sugar Corporation Ltd. [1973] 92 ITR 173, at p. 179. After referring to the decision of the Chancery Division in South African Supply and Cold Storage Co. Ltd., In re [1904] 2 Ch 268 (Ch D) and the Bombay High Court decision ([1959] 35 ITR 662) (earlier referred to), Khanna C.J. observed: " We have given the matter our earnest consideration and are of the view that in the reconstruction of a 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, mod not be of all the assets. It is none the less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derlying a reconstruction. It is, therefore, not possible to accept the contention of the learned counsel that the conclusion of the Tribunal that the assessee is entitled to exemption should be treated as conclusive. We, however, agree with the learned counsel that it is difficult to say that in the present case there has been a reconstruction of a business already in existence. The expression " reconstruction " was discussed by the Bombay High Court in a different context altogether. In that case there was a transfer of the assets of a partnership to a limited liability company by way of sale including the goodwill. However, the agreement of transfer did not cover the stock-in-trade and certain credits and outgoings as well as debts and liabilities of the partnership were also not taken up by the new company. It was held that the agreement in substance as well as in form was one of out and out sale and that it could not be described as a reconstruction of an existing business. In other words, the expression " reconstruction " in that case was looked at from the point of view of the ownership of the business and the decision of the court was that where there was a real and effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the two concerned undertakings commodities different from those which it has been manufacturing or producing in its existing business. Manufacture or 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. Subsection (6) of the section also points to the same effect, namely, production of articles. The answer, in every particular case, depends upon the peculiar facts 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 the 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 not whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucts and the undertakings can be carried on separately without complete absorption and losing the identity of the old business, they could not be treated as being formed by the reconstruction of the old business. A little earlier, the Supreme Court also approved of the observations of Khanna C.J. in the Ganga Sugar Corporation Ltd.'s case [1973] 92 ITR 173 (Delhi), to the effect that the concept of reconstruction is not attracted when a company which is already running one industrial unit sets up another industrial unit. The principles of the decision of the Textile Machinery Corporation Ltd.'s case [1977] 107 ITR 195 (SC) were applied by the Karnataka High Court in the decision earlier referred to and by this Bench in the decision in Gedore Tools India Pvt. Ltd. [1980] 126 ITR 673. In that case the assessee-company set up a second factory housed in a newly constructed building wherein new machinery was installed. The claim for exemption was rejected on the ground that no fresh capital had been invested in the new unit and also on the ground that the new unit was producing the same items as were being manufactured by the old unit. But, on appeals, the AAC and the Tribunal held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng. But the converse is not true that, in every case, where there is a transfer of such assets, there is necessarily a case of reconstruction. As pointed out by the Supreme Court, the real test of finding out whether there is a reconstruction or not is not whether as result of the setting up of a new industrial undertaking, the assessee has expanded its business in the same or similar articles. The real test is to find out whether the unit which has been set up separately is new in the sense that new plant and machinery are erected and a new independent and viable unit has come into existence for producing either the same commodities or some distinct commodities. In this case the facts clearly show that the assessee was manufacturing certain articles at its Qutab Road factory. Subsequently, as a result of the order placed by the Central Govt., it had to embark on the construction of railway wagons. For this purpose, the existing factory was found to be totally inadequate. Fresh land was acquired, fresh capital was invested, fresh machinery and plant were installed and the new factory came into existence after more than a couple of years. It is no doubt true that in the initial stag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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