TMI Blog1972 (3) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal was justified in holding that section 15C of the Indian Income-tax Act, 1922, was applicable to the new production units added to the existing production units of the assessee at Belur, Alupuram and Muri in respect of buildings, plants and machineries and directing exemption to be granted under the aforesaid section accordingly ?" The relevant assessment year is 1960-61, the corresponding previous year being the calendar year ended on December 31, 1959. The assesseecompany is a manufacturer of aluminium ingots from ores. In the earlier years it had four manufacturing centres at Belur, Kalwa, Alupuram, and Hirakud. In the present accounting year one more was added at Muri and also there were additional extensions to the existing factories at Belur and Alupuram. In connection with the assessment year 1960-61 the assessee company had claimed relief under section 15C before the Income-tax Officer in respect of fresh capital outlay at Muri as well as additional investment in the form of extension to the existing factory premises, installation of new plants and machineries, etc., at Alupuram and Belur. The Income-tax Officer discussed the relief under section 15C in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any other business; ...... Provided 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. Relying on Commissioner of Income-tax v. Textile Machinery Corporation, Mr. Pal, on behalf of the revenue, has strenuously argued that, in the facts and circumstances of the present case, the three units at Belur, Alupuram and Muri of the assessee-company in respect of which the reliefs under section 15C have been claimed are only expansions of the assessee's original business and, as such, they are industrial undertakings which are formed by the " reconstruction " of the assessee-company's earlier business within the meaning of section 15C(2)(i). Exemption under section 15C of the Act, Mr. Pal has therefore argued, cannot be granted to the extensions of original business of the assessee at Belur, Alupuram and Muri. Mr. Banerjee, on behalf of the assessee, has however, argued that the proposition of law laid down in Commissioner of Income-tax v. Textile Machinery Corporation is a judgment of a court of co-ordinate jurisdiction and, as such, not binding upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nings of the word " reconstruction " in the Shorter Oxford Dictionary are as follows : (a) The action or process of reconstructing. (b) An instance or example of reconstructing. (c) A thing reconstructed. Similarly, the word " reconstruct " has been mentioned in the said dictionary as " construct anew ". As in the present case the controversy centres round the, point as to whether the word " reconstruction " includes the word " expansion ", the dictionary meaning of " expansion " is also relevant, which is mentioned in the said dictionary as follows : (a) The action or process of expanding or spreading out; the state of being expanded or spread out. (b) Development. (c) Anything that is spread out. (d) An extension of business transactions, an increase of the circulating medium. According to Mr. Pal the word " reconstruction " includes expansion of the original existing business. He concedes that a new industrial undertaking cannot be called a " reconstruction of business already in existence ", within the meaning of section 15C(2)(i). He has relied upon the observations of the learned Chief Justice in Commissioner of Income-tax v. Textile Machinery Corporation w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's original business, the assessee is entitled to get exemption of tax. If, however, we come to the contrary conclusion the decision has to be made in favour of the department. Section 15C(1) provides for a general exemption from tax under the circumstances stated therein, to all assessees in respect of profits or gains derived from the particular class of industrial undertaking mentioned therein, which is commenced or established subsequent to the existence of the original business. Thus, obviously, the words " industrial undertaking " referred to in section 15C(1) must refer to a newly established industrial undertaking. But, this " newly established industrial undertaking " may be an independent separate entity or one which is formed by the splitting up or the reconstruction of the assessee's original business or by the transfer of building, machinery or plant to such new business. Thus, for the purpose of getting advantage of section 15C the sine qua non is that there must be the assessee's original business and that the assessee has established or commenced a new undertaking, which may take the shape of reconstitution, re-formation, reincorporation on the one hand or new p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovement. Again, the expansion, in a wide sense, may also include new production unit, manufacturing, producing or even selling products which may or may not be entirely different from the nature of the original business. Al] these questions arise because the assessee happens to be the owner, proprietor or controlling authority of both its original business and its expanded business. Thus, we shall have to find out to what extent or limit the principle of expansion should be applied to the exemption clause under section 15C(2)(i). In my view the plain meaning or the dictionary meaning of the word " reconstruction of business already in existence " gives some indication of the intention of the legislature. The juridical meaning of the said word will be spelt out from the dictionary meaning if however the dictionary meaning is not inconsistent with other legal principles. The additional reasons why dictionary meaning should be accepted may now be discussed. Section 15C provides for a statutory relief to an assessee who has an original business but establishes an industrial undertaking which is not formed by the splitting up or the reconstruction of business already in existence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustrial undertaking does not necessarily exclude all cases of expansion or extension of the original business. To illustration where the original business is only extended or expanded or developed by the assessee in the same building or enclosure with a proportionately smaller, or where the transactions for the original business and the extentd business are of such a nature that they are dependent on one another or where the requirements of the original business are subserved substantially by the product of subsequent undertakings, it may be said that such expansions cannot have the benefit of exemption under section 15C. But where the assessee invests large sums of money and establishes new production units of similar or different nature as a result of which the original business of the assessee does not intrinsically alter its original character or continues to produce, manufacture or carry on the original activity in the same way even after the establishment of subsequent undertakings, the latter may be called extensions of such a nature which may be called a kind of new industrial undertaking which is entitled to get tax relief. Thus whether the term " reconstruction " would in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " There is another reason why the legal concept of " reconstruction should not include " substantial expansion " of the assessee's existing business. Section 15C was incorporated in the Income-tax Act of 1922 in 1949. Within 2 years the Industries (Development and Regulation) -Act was passed. Section 13(1)(d) of the Act substantially provides that no owner of an industrial undertaking other than the Central Government shall effect its " substantial expansion " except under a licence issued by the Central Government or under permission of the State Government. An Explanation is added to section 13, which reads as follows : " For the purposes of this section, ' substantial expansion ' means the expansion of an existing industrial undertaking which substantially increases the productive capacity of the undertaking, or which is of such a nature as to amount virtually to a new industrial undertaking but does not include any such expansion as is normal to the undertaking having regard to its nature and the circumstances relating to such expansion. Similarly in 1957 the Wealth-tax Act came into effect and under section 5(1)(xxi) of the Act, the taxpayer was granted tax relief in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Wealth-tax Act, 1957, read with section 5(1)(xxi), the legislature did not choose to make the necessary amendments by adding any proviso or Explanation to section 15C(2)(i) of the Indian Income-tax Act, 1922. Reference has been made to Anil Starch Products Ltd. v. Commissioner of Income-tax by the counsel for the revenue. But, that case is not helpful inasmuch as there the parties admittedly proceeded on the basis that section 15C is applicable to the facts of that case. The only question that was mooted there was whether the starch produced in the original undertaken and used as raw materials in the new unit should be taken up at market price for the purpose of computing profits and gains of the new undertaking under section 15C of the Indian Income-tax Act, 1922. For the reasons stated above I hold that substantial expansion of an assessee's original business cannot be called " reconstruction " within the meaning of section 15C(2)(i), unless there is a finding of fact that the subsequent industrial undertaking is really a fresh formation, resuscitation, reorganization, revival of or resumption to the assessee's earlier business, or that the expansions are of normal a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constructed in an area of 21,360 sq. ft. Ten different categories of machinery were set up and used for which the Government of India granted import licences also and released foreign exchange. In the same way at Muri also we find that the new extension took place in three different buildings in an area of 19,000 sq ft. with six different categories of machinery for which import licence was granted and foreign exohange were released by the Government of India. The capital employed was also Rs. 55,70,000. It is true that the assessee's original business and the business at Belur, Alupuram and Muri were manufacturing the same products. It is also true that each one of the findings of fact mentioned above does not by itself lead to the conclusion that they are extensions of such a nature which can be called a new industrial undertaking. But, taking into consideration all the facts together the extensions are of a very substantial nature which lead me to come to no other conclusion than to hold that they are new industrial undertakings of the assessee. Secondly, unlike the case of Commissioner of Income tax v. Textile Machinery Corporation , the undertakings at Belur, Alupuram and M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mill division in holding them as new industrial undertakings. Fourthly, in the case of Commissioner of Income-tax v. Textile Machinery Corporation , the Appellate Assistant Commissioner found that the parts manufactured by the steel foundry division and the jute mill division being essential for the boiler division of the assessee's original business the former two divisions were set up by the assessee so as to avoid purchasing such parts from outside. He also recorded the fact to the effect that the steel foundry and the jute mill divisions were set up with a view to manufacture parts for being used in the manufacture of boilers which was existing business of the assessee. The learned Chief Justice in the said decision accepted the finding of the Appellate Assistant Commissioner there and has made the following observations at page 438: " Now, reconstruction is again a very general and wide term. The fact here is that the goods which this jute mill division and the steel foundry division are producing now for the assessee were also previously used by the assessee in its business but they were purchased from outside and what has happened now is that this purchase from outside i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of parts in respect of jute mills and amounting to Rs. 1,13,697. It is recorded that the asessee 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 also in that case found the following facts at page 432 : ". . . The business remained the same and all that bad happened was some reconstruction in the business, reconstruction in the sense that, instead of purchasing some parts from outside, the appellant started producing the same itself." Further, he has stated at page 434: " ... 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 ... these two units of steel foundry and jute mill divisions were set up with a view to manufacturing parts for b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over Rs. 50,00,000 at Belur and about the same figure or a little more at Alupuram. In view of the nature of installation, which in their character and value are substantial, it cannot be said that the units were not new industrial units by themselves. These new units have come up side by side with the old ones and have added to the assessee's total output of aluminiuin ingots. Producing the same material, however, does not mean that the new units should be taken as mere additions to the old undertakings. The test does not lie in the commodity produced but whether it is the whole undertaking in itself or not." Thus, the ratio of the decision in the case of Commissioner of Income-tax v. Textile machinery Corporation cannot be applied to the facts of the present case. Here the additions or extensions in the subsequent undertakings at Belur, Alupuram and Muri are not establishments for the purpose of running the assessee's original business and, as such, it cannot be said that they are not new industrial undertakings. It is true that in a sense it cannot be said to be an absolutely independent industrial undertaking nor can it be urged that the said subsequent extensions at Belur, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee in respect of the unit at Hirakud. Being aggrieved, the assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner in his order held : " The first contention in the appeal is regarding the relief under section 15C of the Act. The company had claimed relief under section 15C in respect of the Alupuram, Belur and Muri expansion units. The Income-tax Officer did not discuss the claim in detail in the assessment order. In the appeal also this contention was not argued in detail. I find from records that in the earlier years also the assessee had claimed under section 15C relief in respect of the Belur and Alupuram units. In the earlier years relief under section 15C was not allowed and in the appeal also this disallowance was upheld. In this year for the same reasons relief under section 15C in respect of the Alupuram and Belur units will not be allowed. As regards Muri unit the matter was not argued in detail. Here also I find that the assessee has already a manufacturing unit at Muri . This unit was expanded in the accounting year. Therefore, section 15C relief is not admissible on the expansion made in an existing unit. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of the assessee after considering the total cost of the building, plant and machinery, etc., which formed part of the new unit and the substantial increase in the output since the initial outlay. The Tribunal also took into consideration the nature of the plant and machinery installed at Muri. The Tribunal in its order held: " In the expansion of the new unit at Muri, the facts are that it has been pressed into action in the year 1959, and the total cost of the building, plant and machinery is a sum of Rs. 42,00,000, besides a working capital of Rs. 13,70,000, The output of aluminium has since increased by 8,000 to 10,000 tonnes from the previous production at this place. The plant and machinery for the new units are more or less of the same nature as has been mentioned in our order relating to the preceding years mentioned above. The facts and circumstances relating to the assessment year in question being the same as that prevailing during those years, which came in appeal before the Tribunal, the decision arrived at by the Tribunal then must prevail even now for this unit. In the result we order that the capital employed now in the units at the three places have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ays down the proposition that any extension or expansion, however substantial the same may be and whatever may be the nature and character of such extension or expansion of the existing business of the assessee, is not entitled to any relief under section 15C, as the industrial undertakings set up by the assessee for such extension or expansion are undertakings formed by reconstruction of the business of the assessee already in existence. Mr. Banerjee, learned counsel appearing on behalf of the assessee, has submitted that the Tribunal's decision is perfectly justified, as all the requirements of section 15C are satisfied in the instant case. Mr. Banerjee has drawn our attention to the facts found by the Tribunal in the instant case. Mr. Banerjee has pointed out that the Tribunal in its order has recorded the following findings: A-In respect of undertaking at Belur- (i) There are six different buildings (ii) Total accommodation is 27,560 sq. ft. (iii) 12 different categories of machinery (iv) Capital employed over Rs. 50,00,000 (v) Production went up by double (vi) Government of India granted import licence and released foreign exchange. B--In respect of underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said to have been formed by the reconstruction of the business of the assessee already in existence. Mr. Banerjee has argued that the stage to be considered is the stage of formation of the industrial undertaking and not any stage subsequent thereto and the end product of the undertaking or what the undertaking produces is not a material consideration. It is the argument of Mr. Banerjee that to fall within the mischief of section 15C(2) in the instant case, it has to be established that the newly set up units at Belur, Alupuram and Muri which are indisputably industrial undertakings were formed by the reconstruction of business already in existence. Mr. Banerjee argues that the business of the assessee remained as it was at the time of formation of these new units and even after formation the said business had continued to remain. It is the argument of Mr. Banerjee that before the formation of these units in question at Belur, Alupuram and Muri, the assessee was carrying on its business of manufacturing aluminium ingots from ores in the other units of production which were already in existence then and the said old units of production remained the same and were not in any way a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of this court to followed the said decision, so long as the said decision is not set aside by any appropriate higher authority. If, for some reason or other, this court feels unable to agree with and follow the said decision, it will be the duty of this court to refer the said decision to a larger Bench. If, however, the said decision of the Division Bench is distinguishable and does not cover the dispute involved in the instant reference, no such question of either following the said decision or referring the same to a larger Bench will naturally arise. I have to note that in the present reference it is not contended before us that the new production units set up by the assessee are not industrial undertakings within the meaning of section 15C of the Act. It is not in dispute and it has not been disputed before us that the new units which have been set up by the assessee constitute industrial undertakings within the meaning of section 15C of the Act. It has been contended before us that these undertakings which have. been set up by the assessee are not entitled to any benefit under section 15C of the Act, as these undertakings of the assessee, though they are industrial under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business already in existence or by transfer of building, machinery and plant used in the assessee's business to a new business. (5) The industrial undertaking must employ ten or more workers in the manufacturing process carried on with the aid of power or 20 or more persons in the manufacturing process carried on without the aid of power. It is to be noted that in the instant reference before us there is no dispute with regard to the fulfilment of the requirements enumerated above in (1), (2), (3) and (5) and it has not been contended that the said requirements have not been satisfied. The only dispute relates to the fourth requirement as to whether the industrial undertakings in question of the assessee are not formed by the reconstruction of business already in existence and the only contention is that these industrial undertakings of the assessee are not entitled to the benefit of section 15C as these undertakings have been formed by the reconstruction of business already in existence and section 15C has, therefore, no application to these undertakings of the assesme. I now proceed to consider the decision of the Division Bench in the case of Commissioner of Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 happened was " some reconstruction in the business, reconstruction 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. 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 Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal came to the conclusion that the assessee had established that the steel foundry division was a new industrial undertaking, not formed by the splitting up or reconstruction of an already existing business. The Tribunal also held that profits could be earned by the steel foundry division even though its manufacturing products were mos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself a big heavy engineering concern, such expansion of activities is in the normal process of the business which need not constitute a new industrial undertaking Within the meaning of section 15C of the Income-tax Act, 1922. In respect of the jute mill division the records show that the profit of Rs. 1,85,337 for which exemption was claimed under section 15C of the Income-tax Act, 1922, the relevant facts 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 mill division 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essary requirements which had to be satisfied by the assessee to enable the assessee to claim the benefit of the relief under the said section. The learned Chief Justice then proceeded to consider very elaborately whether the said requirements had been satisfied in the facts of the case. The learned Chief Justice came to the conclusion that the industrial undertakings of the assessee in question before him were formed by the reconstruction of the assessee's business already in existence. It is with this aspect of the decision that we are mainly concerned in the present reference.The observations of the learned Chief Justice while considering the other requirements of the section are not very material in the present case, as in the present case it is not disputed that all other requirements are complied with. The learned Chief Justice observed at pages 438-440 : " The next step in the interpretation is of the word reconstruction and of the expression business already in existence used in section 15C(2)(i) of the Income-tax Act, 1922. Now, reconstruction is again a very general and wide term. The fact here is that the goods which this jute mill division and the steel foundry divisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... randum and articles of association. The far-reaching implication of this argument is that the canopy of charter spreads so that no industrial undertaking started by such a company can at all claim exemption because it is only carrying on business within its charter of incorporation and, therefore, is a ' business already in existence ' within the meaning of section 15C. We have no hesitation in rejecting these two arguments advanced on behalf of the revenue in their extreme form. No doubt an assessee which is a company doing its business under its memorandum of objects and articles of association has to do its business within its charter but then the charter contains usually numerous objects in the memorandum and articles and it is common knowledge that such a company often carries on business only in one or two or even more objects of the company and not in other objects stated in the memorandum or articles. Therefore, if it starts an industrial undertaking, no doubt within its objects and charter, their it can, in an appropriate case, claim exemption under section 15C of the Indian Income-tax Act and say that it is not business already in existence but it is permitted by the char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruction " with reference to various decisions. While on this the learned Chief Justice also took into consideration the concept of reconstruction of a company in company law and the learned Chief Justice observed at page 448 : " Reconstruction of a company with its limited concept is not the same thing as reconstruction of a business. If Mr. Justice Buckley was right that even the concept of reconstruction in company law had no definite legal meaning and was only a commercial term and which even as a commercial term had no definite connotation, then it will be all the more so when we are considering the reconstruction of a business and not the reconstruction of a company. Here, the commercial content of reconstruction is much wider when we are considering the reconstruction of a business. Such reconstruction need not be occasioned by any embarrassment with a company's creditors or members but may involve, as a matter of commercial development or commercial expediency, many considerations as of improvement, rationalization, prevention of waste or delay in the work of the business itself, or automation on mechanisation." Dealing with the provisions of the Industries (Developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exiscence." The decision of the learned Chief Justice rested mainly on the aforesaid findings. The observations of the learned Chief Justice at page 440 to the effect that if the Textile Machinery Corporation started manufacturing ships, it would be well within the objects of the company and if the undertaking formed for manufacturing ships satitsfied the requirements of the statute, the Textile Machinery Corporation would be entitled to claim exemption under section 15C of the Indian Income-tax Act, 1922, were made in dealing with the extreme contention of the revenue that no industrial undertaking started by a company carrying on its existing business could at all claim exemption because it would be only carrying on business within its charter of incorporation and would, therefore, be a " business already in existence ". The example of Textile Machinery Corporation starting the business of manufacturing ships was given by the learned Chief Justice to meet the argument of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licensing of substantial expansion under the Industries (Development and Regulation) Act, 1951, has not been extended to the Indian Income-tax Act, 1922, and the Wealth-tax Act, 1957. The learned Chief Justice himself has observed at page 452 : " 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. " It may also be noticed that under the Wealth-tax Act, specific provision has been made with regard to substantial expansion and the learned Chief Justice at page 453 has noticed the same. The learned Chief Justice, at page 453, has observed : " We shall briefly notice these provisions of the Wealth-tax Act. Section 5(1)(xxi) of the Wealth-tax Act excludes ' that portion of the net wealth of a company established with the object of carrying on an industrial undertaking in India within the meaning of the Explanation to clause (d)section 45, as is employed by it in a new and seperate unit set up after the commencement of this Act by way of substantial expansion of its undertaking. " I have earlier noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed 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 retrospectively by the Finance Act of 1959 as " previously used in any other business "). In the facts of the instant case the industrial undertakings in question cannot be said to have been formed by the reconstruction of business already in existence only because the newly set up units manufacture and produce the same commodity, viz., aluminium ingots. The ultimate end product of the industrial undertaking is not of any material consequence in judging whether the industrial undertaking has been formed by the reconstruction of business already in existence. The stage which is relevant and has to be considered is the stage of formation of the industrial undertaking and not the stage when the industrial undertaking goes into manufacture. On the facts found by the Tribunal in the instant case I have no hesitation in coming to the conclusion that the industrial undertakings in question were not formed by the reconstruction of business already i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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