TMI Blog1977 (7) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... sly used plant and machinery together with licences, stock-in-trade, etc., under an agreement dated April 16, 1962, for a total consideration of Rs. 65,588. The assessee started its manufacturing activity on June 1, 1962, with the aid of the machinery so purchased. It appears that the assessee, after starting its manufacturing activity, purchased a fully automatic Swiss lathe and also an extrusion press from Germany for manufacture of brass pins and aluminium containers. A fully automatic vacuum machine was also installed to increase the output of fluorescent starters and switches with minimum wastage of labour. Having regard to the new machinery purchased and installed as aforesaid, the assessee for the first time claimed the relief of tax-holiday under section 84 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), in the course of proceedings for its assessment to income-tax for the aforesaid two assessment years. The main contention of the assessee was that having regard to the acquisition and installation of new machinery, the provisions of section 84(2)(ii) read with the Explanation to sub-section (3) were satisfied in the years of account and that as such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y before its transfer to the assessee ; (ii) the land and building purchased by the assessee from M/s. Equitorial Pvt. Ltd. were, however, not used by the transferor-company prior to their transfer to the assessee ; (iii) in the year in which the assessee started its manufacturing activity, that is to say, in the year 1962, the assessee was not entitled to claim benefit under section 84 inasmuch as the value of the previously used transferred asset exceeded the statutory percentage ; (iv) in the years of assessment, however, the assessee fulfilled the conditions laid down in section 84(2)(ii) read with the Explanation to sub-section (3) inasmuch as the total value of the transferred machinery in those years fell below the statutory percentage and the assessee was, therefore, entitled to such relief ; (v) the assessee's alternative contention that it must be taken to have started its manufacturing activity for the first time during the year of account and that it was entitled to relief under section 84 on that basis was not acceptable because the evidence on record clearly established that the manufacturing activity really commenced in the year 1962; and (vi) the matter wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill, therefore, proceed to consider the said question in the first instance. Let us first read the relevant parts of section 84 as it stood at the material time: "84. Income of newly established industrial undertakings or hotels.- (1) Save as otherwise hereinafter provided, income-tax shall not be payable by an assessee on so much of the profits and gains derived from any industrial undertaking or business of a hotel or from any ship, to which this section applies, as does not exceed six per cent. per annum on the capital employed in such undertaking or business or ship, computed in the prescribed manner. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :-... (ii) it is not formed by the transfer to a new business of a building, machinery or plant previously used for any purpose; (iii) it manufactures or produces articles or operates one or more cold storage plants, in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of twenty-three years next following the 1st day of April, 1948, or such further period as the Central Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he total value of the building, machinery or plant used in the business, then, for the purposes of clause (ii) of sub-section (2) and clause (a) of sub-section (3), the industrial undertaking or hotel to which the transfer has been made shall be deemed to have complied with the condition specified therein and the total value of the building, machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking or hotel." We have made this position clear only with a view to citing the correct provisions. So far as the point involved in these references is concerned, however, the change in the statutory scheme or language makes no difference because the material provisions, namely, clause (ii) of sub-section (2) and the Explanation to sub-section (3) have, for all intents and purposes, retained their verbal structure. In order to appreciate the true legal effect of this provision, it would be necessary to refer first to the legislative history. A provision substantially similar to section 84, which offers tax incentive in the form of fractional exemption from tax on profits of a newly established undertaking for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative intent behind the enactment of this provision was to provide what is conveniently and aptly called a "tax holiday" to a newly established industrial undertaking. The section is an exemption section and it grants certain partial benefit so far as the profits of a new industrial undertaking are concerned for a limited period. The principal object of the provision, as observed in Textile Machinery Corporation's case [1977] 107 ITR 195 (SC), is to encourage setting up of new industrial undertakings by offering tax incentives. After the country gained independence in 1947, it was most essential to give fillip to trade and industry from all quarters and this seems to be the background for the enactment of old section 15C and its continuance in the statute book in one form or the other thereafter till this date with progressive amendments made from time to time with a view to extending its benefit for a longer period. Be it noted, in this connection, that not only has the legislature extended the time limit from time to time, but it has also made at least two further concessions in favour of new industrial undertakings since its initial enactment : first, from clause (ii) of sub-sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sub-section (1), should not be formed: (i) by the splitting up of a business already in existence; (ii) by reconstruction of a business already in existence ; or (iii) by the transfer to a new business of building, machinery or plant previously used for any purpose. Positively, the said sub-section provides that the industrial undertaking must produce result, that is to say, it must manufacture or produce articles at any time within a period of 23 years next following the first of April, 1948, or such further period as the Central Government may by notification in the official Gazette specify with reference to any particular industrial undertaking. The further positive requirement under sub-section (2) is with regard to the personnel employed in the undertaking, namely, that ten or more workers have to work in manufacturing process carried on with the aid of power or twenty or more workers must carry on work in a manufacturing process carried on without the aid of power. This provision shows that even small industrial undertakings, newly started, are within the exemption clause. The first proviso to sub-section (2) relaxes the second negative condition mentioned above in certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volved in the setting up of the new industrial undertaking and the benefit of tax holiday should be denied to such undertaking, only if it finds that the value of such transferred asset does not bear reasonable proportion to the total cost of the formation of the new industrial undertaking. In fact, in Webbing Belting Factory P. Ltd. v. Commissioner of Income-tax [1961] 43 ITR 234, the Punjab High Court took the view on the plain terms of clause (ii) of sub-section (2) of section 15C that a provision of that kind, which was intended to encourage the setting up of new industrial enterprises, must be construed liberally and on that view of the matter, the opening of the factory in that case was held to be a new enterprise although about 35% of the machinery or plant used in the factory was previously used. It appears that it was for the reason presumably for avoiding uncertainty that the legislature intervened when it enacted the Explanation to sub-section (3) pursuant to the report of the Select Committee which considered the bill that later became the 1961 Act. The Select Committee had recommended in its report that where a minor part, not exceeding 20% of the assets of a new ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o apply to the assessment for the assessment year relevant to the previous year in which the industrial undertaking began to manufacture or produce articles and that it was to be available for the immediately succeeding four assessment years in case the assessee is a person other than a co-operative society and, in the case of a co-operative society, for the six assessment years immediately succeeding. The scheme, therefore, was to make available the benefit of tax holiday for a period of five consecutive years, the commencing point of such period being the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles. Bearing in mind these provisions, let us proceed to consider the submissions made on behalf of the revenue before us. It was urged, in the first place, that on a true construction of section 84(2)(ii) read with the Explanation to sub-section (3) and sub-section (7), the taxing authority was required to determine whether in the year of its formation, that is to say, coming into existence by incorporation or otherwise, the newly established industrial undertaking satisfied the conditions for the applicabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... productive apparatus of a newly established industrial undertaking or, in the case of a pre-existing industrial undertaking, that of its new business, is formed of, that is to say, consists of previously used building, machinery or plant transferred to such new undertaking or business. The point of time for the applicability of section 84 is prescribed in sub-section (7) and, accordingly, in relation to a new industrial undertaking, the said section is first attracted in the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles. Therefore, it is in the course of assessment to income-tax for such assessment year that the taxing authority will have to consider for the first time whether the new industrial undertaking was, during the relevant previous year, formed by transfer of building, machinery or plant which were previously used for any purpose, and, if so, whether the condition as to statutory percentage prescribed in the proviso to sub-section (3) was satisfied. A new business, at the stage of its coming into existence and long before the manufacture or production commences, might have acquired or be possessed of previ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (ii) of sub-section (2). In other words, according to the legislative scheme, it is apparent that in each assessment year commencing from the assessment year relevant to the previous year in which such new industrial undertaking begins manufacture or production the taxing authority will have to consider whether the industrial undertaking was formed by the transfer to its new business of building, machinery or plant previously used for any purpose, and, if so, whether the total value of such transferred asset exceeded 20% of the total value of the building, machinery or plant used in the business of such undertaking during the relevant year. If the new industrial undertaking, which has not satisfied such test in any one of the earlier assessment years comprised in the five-year period, acquires new building, machinery or plant during any one of the succeeding assessment years and as a result of such acquisition the condition prescribed in clause (ii) of sub-section (2) is fulfilled, then, as from the assessment year in which such condition is satisfied, the benefit of tax holiday will be available to it for the remaining period of the five-year term. This appears to us to be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is not satisfied in those assessment years ? It is well settled that even if the language of a statute in its ordinary meaning and grammatical construction leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentences (See Tirath Singh v. Bachittar Singh, AIR 1955 SC 830). This is not a case where the meaning of the word is to be modified or the structure of the sentence is to be changed to achieve the legislative object. At the highest, this is a case where the language employed by the legislature might be capable of bearing more than one construction and, in such a case, in arriving at the true meaning, regard must be had to the fact that such construction is not adopted which defeats the very purpose for which the enactment was made. In our opinion, therefore, even the alternative submission made on behalf of the revenue must be rejected. The revenue sought to reinforce its submission by invoking the aid of rule 19 of the Income-tax Rules, 1962, which provides fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereafter on fulfilment of the requisite conditions. In other words, if the assessee satisfies the conditions prescribed in section 84(2)(ii) read with the Explanation to sub-section (3) at any time during the five-year period commencing from the assessment year 1963-64 and ending with the assessment year 1967-68, it could legitimately claim the relief. The assessment years with which we are concerned herein are assessment years 1966-67 and 1967-68. In our opinion, therefore, the Tribunal was right in the view that it took so far as the question in Income-tax Reference No. 107 of 1976 is concerned. The answer to the said question will, therefore, have to be in the affirmative, that is to say, in favour of the assessee and against the revenue. That takes us to Income-tax Reference No. 54 of 1975. It is conceded on behalf of the revenue that the controversy which is sought to be raised by the question in the said reference is covered by the decision of this court in Elecon Engineering Co. Ltd.'s case [1976] 104 ITR 510 (Guj). Following our decision in the said case, therefore, we must answer the question in the said reference also in the affirmative, that is to say, in favour of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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