TMI Blog2014 (11) TMI 319X X X X Extracts X X X X X X X X Extracts X X X X ..... registration number and PAN number - The new unit cannot be even presumed as reconstruction of the old existing business, much less the formation of the undertaking by splitting up the existing undertaking - The shifting of the employees would not affect the constitution of the new firm to avail the benefit u/s 80IC - If surplus reserve capital is available with the assessed company it can utilize a specific amount of this capital for the purchase of the plant and machinery, buildings and other assets of the new undertaking - it cannot be said that the same persons were carrying on substantially the same business - the business of the assessee could not be said to be reconstruction of a business already in existence - it is not necessary to define as to what the expression " splitting up of a business " means – thus, the assessee was entitled to the benefit of Section 80IC – Decided against revenue. - ITA No. 4002 of 2013. - - - Dated:- 28-10-2014 - Rajiv Sharma And Sureshwar Thakur,JJ. For the appellant: Mr. Gaurav Sharma, Advocate, vice Ms. Vandana Kuthiala, Advocate. For the respondent: Mr. Vishal Mohan, Advocate. ORDER Justice Rajiv Sharma, J. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le M/S Yash Electricals, which constitutes merely 1.31% of the total value of the plant and machinery. This investment was in conformity with Section 80 1C(4) of the Income Tax Act and Explanation appended thereto. The investment under plant and machinery of the erstwhile Yash Electricals, as on 31.3.2007, stood at ₹ 14,23,832/- vis- -vis investment in plant and machinery of the new unit at ₹ 1,64,82,152/-. The new undertaking made an investment of ₹ 10,20,000/- for the purchase of land and ₹ 1,41,73,219/- for construction of the new building. The installed capacity of the new undertaking was 13 lac fans. However, the installed capacity of the erstwhile firm was 6 lacs. The assessee firm had different PAN number, separate registration under the H.P. State Industrial Development Corporation and Department of Industries, Solan, as Small Scale Industry, at different location on a different plot No. 3. 6. The new undertaking has different customers. The Assessing Officer has erred in law by coming to the conclusion that the new undertaking was formed by splitting up of business, already in existence. For all intents and purposes, the assesseefirm is a new Uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 sub-section (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 exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 15-C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking 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 produces 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 15-C. The principal business of the assessee can be carried on even if the said two additional undertaking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transferred substantially to the new undertaking. There is no such transfer of assets in the two cases with which we are concerned. . . 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 15-C if that section is otherwise applicable. However, in order to be entitled to the benefit under Section 15-C, 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s apparent that a substantial employment of new capital is imperative. Section 80J of the Act is intended to encourage, inter alia, the setting up of new industrial undertakings. This is obviously with a view to expand industry, employment opportunities and production of goods. The section provides for a deduction from the profits and gains derived from the new industrial undertaking to the extent it does not exceed six per cent per annum on the capital employed in the industrial undertaking calculated in the prescribed manner. It is, therefore, clear that the employment of capital is a condition precedent to attract the exemption under section 80J of the Act. However, the question posed is, must fresh capital be issued or raised by the assessed-company for the new unit or can it employ the surplus reserves which are available with it ? It would appear to us that it is not necessary for the employment of the capital to be formal in the sense of actually raising the captial and putting it into the new industrial undertaking. Employment of capital in a new industrial undertaking is different from the capital belonging to the assessedcompany. If surplus reserve capital is availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany, there is an element of transfer of assets and of some change, however partial or restricted it may be, of ownership of the assets. After endorsing the above view, the Supreme Court observed (p. 206) : Reconstruction of business involves the idea of substantially the same persons carrying on substantially the same business. It is thus clear that, in view of the facts stated, it cannot be said that the same persons were carrying on substantially the same business in this case. It is also clear that the business of the assessee could not be said to be reconstruction of a business already in existence. In view of these decisions, learned standing counsel for the department did not seriously press the alternative argument which was canvassed before the Tribunal. What was, however, pressed more seriously was the argument that the business of the assessee was formed on the splitting up of a business already in existence. Learned counsel referred to the decision of the Kerala High Court in Chembra Peak Estates Ltd. v. CIT [1972) 85 ITR 401 but it must be stated at once that this decision is of not much assistance as, in this case, on the facts, the Tribunal found that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The initial exercise, therefore, should be to find out if the undertaking was new. Once this test is satisfied then clause (1) should be applied reasonably and liberally in keeping with spirit of Section 15C(I) of the Act. While doing so various situation may arise for instance the formation may be without anything to do with any earlier business. That is the undertaking may be formed without splitting up or reconstructing any existing business or without transfer of any building material or plant of any previous business. Such an undertaking undoubtedly would be eligible to benefit without any difficulty. On the other extreme may be an undertaking new in its form but not in substance. It may be new in name only. Such an undertaking would obviously not be entitled to the benefit. In between the two there may be various other situations. The difficulty arises in such cases. For instance a new company may be formed, as was in this case a fact which could not be disputed, even by the Income-tax Officer, but tools and implements worth ₹ 3,500/- were transferred to it of previous firm. Technically speaking it was transfer of material used in previous business. One could say as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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