TMI Blog1975 (11) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... t. One of the spare parts so purchased was moulding. However, during the accounting period, the assessee-company started a separate moulding department for the manufacture of spares like moulding blocks, etc. In fact, it is found to have established a separate moulding unit in a separate building situated at a distance of about 4 miles from its existing factory premises. It installed new machinery after obtaining a separate licence for establishing this unit. It is not in dispute that it maintains separate books of accounts for this separately started moulding unit. It is further found that during the accounting period, mouldings worth Rs. 4,00,000 and odd were manufactured in this separate unit and were entirely used by the assessee-company in the manufacture of oil engines. It is further found that as per separate account books kept by the assessee-company for the moulding unit, the assessee made a net profit of Rs. 31,866. The assessee-company, therefore, claimed concession, contemplated by section 84 of the Act, of Rs. 7,882. The Income-tax Officer rejected the assessee's contention to obtain this exemption under section 84 on the ground that the establishment of the moulding u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial undertaking which intends to get the advantage of the above-stated concession. One of these conditions is that the industrial undertaking in question should not have been formed by the splitting up, or reconstruction of a business already in existence. " It is contended by the revenue that in this case the assessee was previously purchasing mouldings from the market for its business of manufacturing oil engines and now it itself manufactures these mouldings for the same business of manufacturing engines and hence what is changed is only the method of procurement of goods, which amounts merely to the reconstruction of the existing business. Thus, according to the revenue, the first condition of sub-section (2) of section 84 is not satisfied. As already stated, the first condition of sub-section (2) of section 84 contemplates that an industrial undertaking should not be formed by to reconstruction of a business already in existence ". The word " reconstruction " postulates something which is already constructed in a particular manner because where there is no construction, there cannot be any question of " reconstruction ". Webster's Dictionary, 2nd edition, explains t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee undertook a concrete and tangible venture in the path of industry, and gave a new orientation to the nature of its existing business. It has not " reconstructed " anything which was already there. In its business which was already in existence, it did not do anything to manufacture moulding. It is not that the assessee was already having the business of manufacturing mouldings and established a new and separate unit in an attempt to reconstruct that existing business of manufacturing mouldings. What it has done is to bring into existence a thing which was never there ; and it is incomprehensible to have " reconstruction " of a thing which is never there. Let us look at the problem from a different angle. Suppose some person other than the assessee had set up a new factory to manufacture these mouldings, and the assessee purchased these mouldings from him. Could that person have been denied the concession contemplated by section 84, provided other requirements of this section were satisfied ? Most certainly not. If that is so, what difference would it make if the assessee itself set up the said factory and utilised its product, for its own consumption ? The object of the leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax v. Naya Sahitya. These decisions do give support to the stand taken by the revenue. We, however, find that the same High Courts have, in subsequent, cases, distinguished these decisions on facts which were much similar to the facts of the case under our consideration. This will be clear by reference to the decisions of the Calcutta High Court in Commissioner of Income-tax. v. Indian Aluminium Co. Ltd. and Commissioner of Income-tax v. Orient Paper Mills Ltd. and the decision of the Delhi High Court in Commissioner of Income-tax v. Ganga Sugar Corporation Ltd. In the earlier decision of the Calcutta High Court in Textile Machinery Corporation, the Tribunal held that the steel foundry division and jute mill division of the assessee were industrial undertakings to which section 15C of the Indian Income-tax Act, 1922, applied. The facts of that case show that the goods which the steel foundry division and jute mill 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. The High Court wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacture 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 the tax relief. Thus, this decision is based on " substantial expansion " of the assessee's original business. Such a substantial expansion cannot, in the opinion of the High Court, be called " reconstruction " within the meaning of section 15C of the Act. The previous decision given by the same High Court in Textile Machinery Corporation was thus distinguished. In a still later decision given in the case of Orient Paper Mills Ltd., the facts were more similar to the facts of the case under our consideration. There the assessee owned a paper mill. In the previous year relevant to the assessment year 1959-60, it set up a plant for the manufacture of caustic soda, an essential chemical for use in the process of manufacture of paper. The assessee obtained a separate licence for the manufacture of caustic soda and the plant was housed in a separate building. On these facts the High Court held that the plant was set up in a new building an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of an industrial undertaking formed by the reconstruction of a business already in existence and the tax exemption under section 15C(2) was not available to the assessee. Even this decision is, as already stated above, considered in the subsequent decision given by the same High Court in Ganga Sugar Corporation . The facts of this case were that the assessee-company carried on business of manufacturing sugar, and had a plant operated by steam for manufacturing sugar, which in 1955 had a crushing capacity of 1,050 tons of sugarcane per day. In the accounting period relevant to the assessment year 1957-58, the company installed at a cost of Rs. 1,10,000 a new plant operated by electricity for manufacturing sugar with a daily crushing capacity of 4,000 tons. The old building was completely overhauled and new buildings were constructed for housing this plant on land which was acquired in 1934. The value of scrap and material of the old unit used in the erection of the new plant was a small fraction, i.e., about one per cent. of the expenditure involved in the setting up of the new plant. The question was whether the assessee-company was entitled to the benefit of partial exemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of a manufacturing business which can be continued even if the main existing business comes to a stop and which can be expanded on its own. Comparison between the cost of the establishment and the totality of turnover of the new undertaking and of the previously running business may assume importance in some cases as it did in the Calcutta case of the Indian Aluminium Co. That, however, does not provide a proper guideline in every case. Though every case must necessarily depend upon its own peculiar facts, we are of the opinion that we can arrive at a broadly correct solution of the question whether a particular business is reconstructed, by asking ourselves two basic questions : viz., (1) whether there was any activity in the existing business which could have been reconstructed and could have assumed a new form on such reconstruction, and (2) whether the nature of the business which has assumed a new form as a result of the change which is introduced, is the same as the nature of the business which was existing before the change was introduced. If the earlier of these questions is answered in the negative, there would be a prima facie case to believe that there is no " reconstr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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