TMI Blog1977 (1) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... he two questions referred 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 Income-tax 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 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 inexistence............ 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 divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. (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, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 incentives 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 (Extension 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 alread ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 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 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaking 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad them, are equally illuminating in the context of reconstruction of a business already in existence in the case of a newly established industrial undertaking. The Delhi High Court also in Commissioner of Income-tax v. Ganga Sugar Corporation Ltd. [1973] 92 ITR 173 (Delhi) accepted the above concept of reconstruction in the following passage (page 179, 180) : 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, 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. 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 uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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. [1973] 92 ITR 173 (Delhi), Rajeswari Mills Ltd. v. Commissioner of Income-tax [1963] 50 ITR 29 (Mad), Nagardas Bechardas Brothers P. Ltd. v. Commissioner of Income-tax [1976] 104 ITR 255 (Guj), Commissioner of Income-tax v. Electric Construction and Equipment Co. Ltd. [1976] 104 ITR 101 (Cal) and Commissioner of Income-tax v. Hindustan Motors Ltd. [1977] 107 ITR 164 (Cal). The decision in Commissioner of Income-tax v. Naya Sahitya [1972] 84 ITR 567 (Delhi) does not represent the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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