Indian Income-tax Act, 1922–S. 15C(2)(i)–Scope of Tests for determining when benefit of the section available–Reconstruction–Tests for determination.
Section 15C of the Indian Income-tax Act 1922, which deals with exemption from tax of newly established industrial undertakings, provides in sub-s. 2(i) that the section applies, among others, to any industrial undertaking which is not formed by the splitting up, or the reconstruction of business already in existence.
The assessee (appellant) was a heavy engineering con- cern manufacturing boilers. machinery parts and wagons. In addition, it had started a Steel Foundry Division and a Jute Mill Division. The bulk of the goods produced in both the divisions was used in the various divisions of the assessee company. The assessee’s claim for exemption from tax under s. 15C in respect of profits derived from both the companies was rejected by the Income-tax Officer and its appeal was rejected by the Appellate Assistant Commissioner on the ground theft the .undertakings were an expansion and recon-struction of the existing business.
On appeal, the Appellate Tribunal held that although the products manufactured in the two divisions were used in the assessee’s business, the Steel Foundry and the Jute Mill Division were new industrial undertakings, in that the machinery used in them was new, they were housed in separate buildings, were: established under separate licences and that both the new divisions were maintaining separate books of account.
On reference, the High Court held that it was a case of reconstruction of the existing business because the goods produced in the two divisions were primarily used in the assessee’s engineering concern.
Allowing the appeal.
HELD: The Tribunal was right in holding in favour of the assessee. Section 15C is applicable to an absolutely new undertaking for the first time started and in order to deny benefit of the section, the, new undertaking must be formed by reconstruction of the old business. [768 B-C]
1. (a) In order to be entitled to the benefit of s. 15C, the assessee has to establish:
(1) the investment of substantial fresh capital in the industrial undertaking;
(2) employment of the requisite labour therein (3) manufacture or production of articles in the under- taking;
(4) earning of profits ‘clearly attributable to the new undertaking; and
(5) separate and distinct identity of the industrial unit set up.
(b) Once the new industrial undertakings are separate and independent production units in the sense that the commodities produced or the results achieved are commercially tangible products and the undertakings can be carried on separately without complete absorption and losing their identity in the old business, they are not to be treated as being formed by reconstruction of the old business. [772 H, 773 A]
(c) The object of the section is to encourage the setting up of new industrial undertakings by offering tax incentives within a certain period. Sub-section (2) has a negative as well as a positive aspect. Negatively, a new undertakings should not be formed by splitting up of the business already in existence and by the reconstruction of business already in existence; and positively, a new undertaking must produce results, that is to say, it has to manufacture or produce articles at any time within the stipulated period. The new undertaking must not be substantially the same as the existing business. The words “the capital .employed” are significant, for, fresh capital must be employed in the undertaking claiming exemption. Manufacture or production of articles yielding additional profits attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter to earn the benefit from the exemption of tax liability under s. 15C. The fact that by establishing a new industrial undertaking the asses- see expands its existing business would not deprive it of the benefit under s. 15C. If an industrial undertaking produces certain machines or parts which are identifiable units being marketable commodities and the undertaking can exist even after the cessation of the principal business of the assessee, it cannot be anything but a new and separate industrial undertaking to qualify for appropriate exemption under s. 15C. [769 E-H, 770A]
In the instant case, the principal business of the assessee can be carried on even if the two additional undertakings cease to function. The fact that a portion the articles produced in the new undertakings had been sold in the open market to others is a circumstance in favour of the assessee that the new industrial units can function on their own. Use of the articles by the assessee is not decisive 10 deny the benefit of s. 15C. There was no ‘formation of any industrial undertaking out of the existing business since that can take place only when the assets of the old business are transferred substantially to the new undertaking. Also. there ,ins no difficulty about ascertainment of the exempted profit as separate books of accounts were kept and the undertakings were at separate places. [770 B-D. G-H] The High Court was not right in holding that the two undertakings were formed by reconstruction of the existing business of the assessee. [773 B-C]
2. Reconstruction involves that substantially the same business shall be carried on and substantially the same persons shall carry it on. But it does not involve that all the assets shall pass to the new company or resus- citated company, or that all the shareholders of the old company shall be shareholders in the new company. Substantially the business and the person interested must be the same. [771 C-D]
South African Supply and Cold Storage Company Wild v. Same Company,  2 Ch. 268, followed.
Commissioner of Income-tax Bombay City-1 v. Gackwar Foam and Rubber Co. Ltd. 35 ITR 662, Commissioner of Income-tax v. Ganga Sugar Corporation Ltd. 92 ITR 173, Rajeswari Mills Ltd. v. Commissioner of Income-tax Madras, 50 ITR 29, Nagardas Bechardas & Brothers P. Ltd. v. Commissioner Income-tax Gujarat, 104 ITR 255, Commissioner of Income-tax. West Bengal-I v. Electric Construction and Equipment Company Ltd. 104. ITR 101 and Commissioner of Income-tax v. Hindustan Motors Limited,  Taxation Law Reports 821, approved.
Commissioner of Income-tax v. Naya Sahitya 84 ITR 567, not approved.