TMI Blog1973 (5) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company owns a paper mill and manufactures paper and sells it in the market. In the previous year relevant to the present assessment year it had set up an electrolysis plant for the purpose of manufacturing caustic soda which is an essential chemical for use in the process of manufacture of paper. The assessee-company obtained a separate licence for the manufacture of caustic soda and the plant was housed in a separate building. In assessing the company for the relevant year the Income-tax Officer held that the plant was ancillary to the main manufacturing unit and was not, therefore, a new industrial undertaking as contemplated under section 15C of the Indian Income-tax Act, 1922. The Income-tax Officer also held that as no part of the caustic soda manufactured was sold to any outsider no profit had been derived from the said plant and, therefore, no relief under section 15C was allowable to the assessee. There was an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner observed that the business of manufacture of caustic soda was merely a process of reconstruction of the existing business of manufacture of paper. The Appellate Assista ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Bihar . The Tribunal noted that the assessee had produced before the Tribunal the computation showing the profit of the plant at Rs. 8,24,224 out of which exemption was being claimed on Rs. 2,37,711 being 6 per cent. of the capital employed. The Tribunal was of the opinion that, prima facie, the computation appeared to be in order and, therefore, directed the Income-tax Officer to grant requisite relief to the assessee after verifying the figures and allowed the appeal of the assessee. Upon this an application having been made, the aforesaid question has been referred to this court under section 66(2) of the Indian Income-tax Act, 1922. The facts found in this case lie in a very short compass. These are as follows: (1) Caustic soda is a chemical; (2) Such caustic soda is essential in the process of manufacturing paper; it is a raw material needed for the manufacture of paper; (3) The assessee has obtained a separate licence for the manufacture of caustic soda; (4) The plant for manufacture of caustic soda had been housed in a separate building; (5) Previously the assessee used to purchase caustic soda from the market for use in the process of manufacture; (6) Cau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other parts of the section. No controversy as to the applicability or non-applicability has been urged in this reference on any other ground. The other conditions stipulated in clauses (ii) and (iii) of sub-section (2) of section 15C must obviously have been fulfilled. The only argument that was urged in this reference was that this undertaking, viz., the undertaking or the plant set up for production of caustic soda, was formed by reconstruction of the business already in existence it was urged that the assessee's business was production of paper. In doing that business the assessee in the past was buying caustic soda from the market and instead of doing that it is now produced by the assessee in the plant or factory set up for that purpose. It was, therefore, urged that the business had remained the same and as such the only thing that had happened was that there was reconstruction of the business or different method of carrying on the same business. In support of this reliance was placed on a Division Bench decision of this court in the case of Commissioner of Income-tax v. Textile Machinery Corporation. There, it was held that the words "industrial undertaking" in the India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parts, forgings and castings from outside, that the business of the new industrial undertaking was to manufacture spare parts and this could not be said to be formed out of the existing business, and that even though the manufactured products of the new industrial undertaking were mostly used in the assessee's other business of manufacturing wagons, etc., the element of profit was there and the extent of the same could be ascertained as the assessee was maintaining separate books of account. It was held by the High Court on a reference that on an interpretation of section 15C of the Act, the industrial undertaking must be such where some capital was employed and which was separate to the extent as to show how much a six 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 was 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in particular the business of manufacturing wagons and boilers. In doing that business, castings and forgings were necessary ingredients. The assessee had to have those castings and forgings but it bought them from outside. In so far as it started producing and manufacturing these, the assessee was doing the same thing which was only a reconstruction of the business already in existence. The assessee had not shown that the number of persons employed in the business or the percentage of profits fell within the limit s specified in section 15C. The newness of the machinery in the steel 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 division and jute mill division might be parts of reconstruction of the same business and did not necessarily indicate a new industrial undertaking. The grant of a special licence for the steel foundry division did not make it an industrial undertaking to qualify for exemption from the tax under section 15C, because the licence was for expansion of the existing industrial undertaking and the licence did not cover the jute mill division. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. The far-reaching implication of this argument is that the canopy of charter spreads so that not 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 busness within its charter but then the charter contains usually numerous objects in the memorandum and the 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 of articles. Therefore, if it starts an industrial undertaking, no doubt within its objects and charter, then it can, in an appropriate case, claim exemption under section 15C of the Indian Income-tax Act, 1922, and say that it is not business already in existence but it is permitted by the charter but which had not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition that in case of raw material which is used for finished products if an assessee sets up an independent plant or machinery for the production of that raw material that by itself would not merit exemption under section 15C of 'the Indian Income-tax Act, 1922. This question was also considered by another decision of this court in the case of Commissioner of Income-tax v. Indian Aluminium Co. Ltd. There it was held that for the purpose of getting advantage of section 15C, the sine qua non was that the assessee had established or commenced a new undertaking, which might either take the shape of reconstitution, reformation, reincorporation, on the one band, or a new production unit or separate business, on the other. It was observed that the separate business need not be a different kind of business. The commodity which the original produced, manufactured or sold might be a relevant factor in finding out whether the subsequent business was an extended business or an independent business. The court referred to the legal meaning of the term " reconstruction " and observed that it was' a mixed question of law and fact and it would be incorrect to say that reconstruction must include o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business already in existence" must be understood in broad commercial sense from a commonsense point of view. In order to appreciate the meaning of these expressions one should bear in mind the purpose of section 15C of the Act to encourage setting up of new industries. The other conditions in clause (iv) of sub-section (2) of section 15C are also significant. Reconstruction of the business or splitting, up of the business already in existence must be in relation to the new industrial undertaking. Further, the new industrial undertaking must not be by transferring building, plant or machinery of the existing business. Sub-section (1) requires separate capital but not new or different capital. But whether a new industrial undertaking is entitled to exemption under section 15C of the Act must depend upon the facts and circumstances of each case. We have set out the essential facts of this case. It was the case of an assessee beginning to produce raw materials of a type which was capable of being available in the market independently and which was also capable of being sold in the market and the assessee has set up a new and separate unit for the same in a separate building and has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y established industrial undertaking and entitled to exemption from tax under section 15C(2). It was held that since the assessee was already carrying on business of publishing books in the earlier years and the only change that took place in the relevant year was that, instead of getting its books printed in some other press, the assessee printed them in its own press, that was a case of an industrial undertaking formed by the reconstruction of a business already in existence and the exemption under section 15C(2) was not available to the assessee. It seems that the Division Bench of the Delhi High Court had proceeded on the basis that the business of printing and publishing was an integral part of the business. If that be the principle upon which the Delhi High Court had proceeded then of course the facts of that case will be entirely different from the facts of the instant case. But, if the principle be that production of something which was necessary for the production of the ultimate goods and the production is taken up by a separate and independent plant and unit, even then it would be reconstruction, with great respect, we are unable to agree. For the reasons mentioned her ..... X X X X Extracts X X X X X X X X Extracts X X X X
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