TMI Blog1978 (1) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... gs within the meaning of section 15C of the Indian Income-tax Act, 1922, in respect of which the assessee was entitled to exemption from tax to the extent indicated in the Tribunal's order ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that the sum of Rs. 10,47,422 was allowable as a bad debt under section 10(2)(xi) of the Indian Income-tax Act, 1922 ? " The facts admitted and/or found in the proceedings are that Rohtas Industries Ltd., Dalmianagar, the assessee, is a public limited company. It carries on the manufacture of paper, cement, sugar, chemicals, etc. In its assessment for income-tax for the assessment year 1955-56, it claimed relief under s. 15C of the Indian I.T. Act, 1922, by way of rebate in respect of two new undertakings, namely, paper machine No. 2 and a cement factory. The assessee also claimed to have written off a bad debt of Rs. 10,47,398 due from one Rohtas Quarries Ltd. The ITO disallowed the claim under s. 15C on the ground that past depreciation in respect of the said new undertakings would have been carried forward had the same not been set off against the profit of other units to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO as also on the further grounds that no separate profit had been worked out for the new industrial units and that the paper machine No. 2 was not a new industrial unit. The AAC held that the assessee had been manufacturing papers all along and had introduced the new machinery for use in the final stage of production of paper. The machine No. 2 was connected with the production effected by the old machinery. Similarly, in the case of the cement factory, new machinery purchased were found to have augmented the production of cement which was being carried on previously and it was held that the machinery for the factory did not constitute a new industrial unit. It was found that the receipts and expenses of the new cement factory had not been accounted for separately. The disallowance of the bad debt was also upheld by the AAC following the order of the Tribunal for the assessment year 1953-54 on the ground that the said debt had not been written off in the books during the relevant year. In the appeal relating to the assessment year 1956-57, the AAC recorded the assessee's claim for relief under s . 15C in respect of the paper machinery, as follows : Rs. 1. Loan 2,37,59 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rohtas Quarries Ltd. were wiped out by its losses in 1950, it closed its business in 1952 and went into voluntary liquidation in 1955 and no attempts were made by the assessee to recover its debt. By reason of the aforesaid, the AAC held that the amounts were advanced for extra-commercial considerations and did not constitute trading debt. He confirmed the disallowance. Being aggrieved by the orders of the AAC, the assessee preferred further appeals to the Income-tax Appellate Tribunal. In the appeal relating to the assessment year 1955-56, statements were filed by the assessee showing additions in building and machinery in the years ending the 31st October, 1951, and 31st October, 1954, and depreciation in the value thereof. It was pointed out that the new paper machines acquired produced a type of paper out of raw material which was different from the type of paper produced by the older machines which also used different raw materials. It was contended further that the new cement unit consisted of imported machinery from Denmark which were of a different make from the machinery in the old unit. The Tribunal remanded the matter to the ITO for further investigation into the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was the same as that of the existing old unit. Photographs were produced before the Tribunal to show that the power house and the cement factory were housed in new buildings. For the paper factory, photographs were produced to show that there were new constructions and the digester house, the pulp factory and the machine No. 2 had been put up in the new building. On these facts, the Tribunal held that the new power house, the chemical factory, the new cement unit and the paper plants Nos.2 and 3 all constituted new industrial undertakings and qualified for relief under s. 15C of the Act. The Tribunal further held that these units were not set up by transfer of building or machinery or plant previously used in the old units of production. The Tribunal also held that the chemical factory could be regarded as a part of the new paper unit and the new power house was a part of the new paper and cement units. The contention of the revenue that separate accounts had not been kept for the new industrial undertakings was rejected by the Tribunal on the ground that it was not a requirement of s. 15C, that separate accounts had to be kept for new industrial units. The Tribunal fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g up new quarries. The Tribunal held further that advances made in 1949-50 onwards were wholly for business purposes of the assessee in the absence of any material to the contrary and the said debt represented a trade debt and qualified for bad debt, in the year under appeal and that the same was allowable under s. 10(2)(xi). The appeals of the assessee were accordingly allowed. At the hearing Mr. B. L. Pal, learned counsel for the revenue, has drawn our attention to the decision of the Supreme Court in Textile Machinery Corporation Ltd. v. CIT[1977] 107 ITR 195. He submitted that the Supreme Court has laid down tests to determine whether an undertaking would be a new undertaking within the meaning of s. 15C of the Act. He submitted that a new undertaking must be a new and identifiable undertaking, separate and distinct from the existing business. A new undertaking must also be an undertaking which could be carried on independently of the old unit. Mr. Pal contended that in the instant case the units or undertakings in respect of which the assessee claimed relief under the said section did not satisfy such tests. The paper machines Nos. 2 and 3 could not be stated to be new o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that it was the duty of the ITO to determine the total income of the assessee and the tax payable thereon even if the income could not be deduced from the books due to the method of accounting employed. Difficulty of computation could not be a ground for rejecting a claim. Under s. 84 the assessee did not have to pay tax on 6% of the capital employed in the undertaking and this exemption must be granted. In order to appreciate the respective contentions of the parties it is necessary to consider the two Supreme Court decisions. In the case of Textile Machinery Corporation Ltd. [1977] 107 ITR 195 (SC) the assessee was a heavy engineering concern and manufactured boilers, machinery parts, wagons, etc. In the assessment years in question the assessee claimed exemption from tax under section 15C of the Act in respect of profits and gains derived from its steel foundry division which was started in the assessment year 1958-59 and continued thereafter. In the assessment year 1959-60, the assessee had also started a jute mill division where the parts made out of the raw materials supplied by the boiler division by machining and forging were given back to the boiler division of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a limited period or periods as specified in the section. If the two industrial undertakings, about the existence of which there can be no controversy, as found by the Tribunal, cannot be held to be formed by the reconstruction of the business already in existence, the benefit of section 15C will be available to the assessee ...... Again the new undertaking must not be substantially the same old existing business ...... Even if a new business is carried on but by piercing the veil of the new business it is found that there is employment of the assets of the old business, the benefit will not be available. From this it clearly follows that substantial investment of new capital is imperative. The words 'the capital employed' in the principal clause of section 15C are significant, for fresh capital must be employed in the new undertaking claiming exemption. There must be a new undertaking where substantial investment of fresh capital must be made in order to enable earning of profits attributable to that new capital...... 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject always to 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 undertaking, (4) earning of profits clearly attributable to the said new undertaking, and (5) above all, a separate and distinct identity of the industrial unit set up." In our opinion, the matter is entirely covered by the above decision of the Supreme Court. It appears to us that from the facts found by the Tribunal which are not challenged, it is clear that the undertakings on which the assessee has claimed exemption under s. 15C of the Indian I.T. Act, 1922, fulfil all the tests laid down by the Supreme Court. It has been found that the new paper machinery, the chemical factory, the power house and the cement factory of the assessee are engaged in manufacture or production of articles yielding additional profit and these undertakings have been set up by fresh outlay of capital in separate and distinct units. The Tribunal has specifically found the amount of fresh capital employed for the setting up of these particular units. The Tribunal has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . After adjusting the amounts which were in the hands of the assessee on account of foreign principal against the taxes paid there was a debit balance. The assessee treated this amount in the subsequent year as a bad debt and claimed it as a deductible loss to be set off against the profits. The ITO and the AAC disallowed this claim. The Tribunal and the High Court, however, held it to be a bad debt and allowed the deduction. The Supreme Court set aside the judgment of the High Court and held that s. 10(2)(xi) of the Indian I.T. Act, 1922, did not apply in the facts. The Supreme Court observed as follows (page 551) : " It was next contended that the matter falls within section 10(2)(xi) of the Act, i.e., it is in respect of the business. This contention has even less substance than the claim of deduction under section 10(1). Under clause (xi) also a debt is only allowable when it is a debt and arises out of and as an incident to the trade. Except in money-lending trade, debts can only be so described if they are due from customers for goods supplied or loans to constituents or transactions of a similar kind. In every case the test is, was the debt due as an incident to the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rries Ltd., by way of advance towards the price for supply of raw material and, therefore, this was in the nature of a revenue expenditure and could be claimed as a bad debt in the year it was written off. It has been found by the Tribunal in this case that the advances made by the assessee were for the purpose of securing raw materials and that the same were advanced wholly and exclusively for the purpose of the assessee's business. The Tribunal has found further that there was nothing unusual in the assessee making such advances when the entire output of Rohtas Quarries Ltd. was being supplied to the assessee. These findings have not been challenged. Therefore, the conclusion is inescapable that the said amounts were a debt due to the assessee from Rohtas Quarries Ltd., and the same arose out of and as an incident of the business of the assessee. On the authority of Abdullabhai Abdulkadar's case [1961] 41 ITR 545 (SC), it must be held that the loss of this sum was not a capital loss. The contention of Mr. Pal for the revenue that the assessee could not claim this amount to be a bad debt as it was not the business of the assessee to lend money is of little substance. It is nob ..... X X X X Extracts X X X X X X X X Extracts X X X X
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