ORDER
N.V. Balasubramanian, J.
1. The Income Tax Appellate Tribunal has stated a case, both at the instance of the assessee as well as at the instance of the Revenue and referred the following questions of law under Section 256(i) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
Questions of law referred at the instance of the assessee:-
(i) Whether on the facts and in the circumstances of the case a valid charge or mortgage was created by the deed of hypothecation trust dated 1-4-1979 ?
(ii) Whether on the facts and in the circumstances of the case, the disallowance of interest of Rs.83,292/- in the assessment year 1980-81 and of Rs.1,14,807/- in the assessment year 1981-82 under Section 40A(8) of the Income Tax Act, 1961 are justified in law ?
Questions of law referred at the instance of the Revenue:-
(i) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee company is entitled to a deduction of Rs.1,60,699/- for the assessment year 1979-80, Rs.3,47,944/- for the assessment year 1980-81 and Rs.7,74,846/- for the assessment year 1981-82 under Section 80J of the Income-Tax Act, 1961 in respect of its new unit ‘B’ at Kirikera, Hindupur District, Andhra Pradesh ?
(ii) Whether on the facts and circumstances of the case the Appellate Tribunal was right in law in holding that Section 40(c)(ii) and not Section 40A(5) should be applied in allowing the deduction in respect of salary, perquisites etc. to the Managing Director of the assessee company in the assessment year 1980-81 ?
2. Learned counsel appearing for both the parties submitted and agreed that the amount Rs.1,14,807/- mentioned in the second question referred at the instance of the assessee is not a correct amount and the correct figure is Rs.42,173/- and the said figure shall be substituted in the place of a sum of Rs.1,14,807/-. Accordingly, the sum of Rs.42,173/- shall be substituted in the second question referred at the instance of the assessee in the place of Rs.1,14,807/-.
3. We will take up the reference at the instance of the assessee first. The questions relate to the interpretation of section 40A(8) of the Act. The assessee claimed certain interest payments on deposits received by it as business expenditure. The Income Tax Officer has disallowed a portion of the interest payments on the ground that no charge or mortgage was created over the properties of the assessee company at the time of receipt of the fixed deposits and the portion of interest paid on the fixed deposits was liable to be disallowed under Section 40A(8) of the Act and accordingly, he disallowed a sum of Rs.83,292/- for 1980-81 and Rs.1,14,807/- for 1981-82. The Commissioner of Income Tax (Appeals), on appeal, took a different view and held that a floating charge was created by the hypothecation of the properties of the assessee company and security was created in favour of the deposit holders and the said charge was also registered with the Registrar of Companies as provided under the Companies Act, 1956. He therefore held that the security was available to the deposit holders and the disallowance of interest was not sustainable as per Section 40A(8) of the Act. However, he held that a sum of Rs.42,173/- should be disallowed in any event for the assessment year 1981-82 on the score that the security created by the assessee did not cover the entire amount of fixed deposits received by it. The Commissioner of Income-tax (Appeals) therefore partly allowed the appeals preferred by the assessee.
4. The Appellate Tribunal, on appeal by the Revenue, reversed the orders of the Commissioner of Income Tax (Appeals) holding that a first mortgage of the immovable properties was created in favour of a nationalised bank and there could not be any valid second mortgage. The Tribunal also held that the deed of hypothecation was not registered with the Registrar of Assurance, and without registration under the Registration Act, it was of the view that no charge was created on the assets of the assessee’s company. The Tribunal further held that the registration under the provisions of the Companies Act would not be sufficient for the creation of charge over the properties of the company and accordingly, allowed the appeal preferred by the Revenue. As against the order of the Tribunal, the present reference has been made at the instance of the assessee.
5. Heard Mr.G.Sarangan, learned counsel appearing for the assessee and Mr.T.C.A.Ramanujam, learned counsel for the Revenue. It is fairly admitted by the counsel for both the parties that the issue raised in the questions is covered in favour of the assessee and against the Revenue by two decisions of this Court reported in (i) L.G.BALAKRISHNAN BROS.LTD. Vs. C.I.T. (MAD.)(245 I.T.R. 743) and (ii) C.I.T. Vs. L.G.BALAKRISHNAN & BROS.LTD. (MAD.) (247 I.T.R. 131) wherein this Court has held that the registration of the charge with the Registrar of Companies under Section 125 of the Companies Act, 1956, is sufficient to create a valid charge over the immovable properties of the company and once there is a valid charge which was registered under the relevant provisions of the Companies Act, the assessee-company would be satisfying the requirements of sub-clause (ix) of clause (b) of Section 40A(8) of the Act. There is no dispute that there was a hypothecation deed and there was a registration of the charge with the Registrar of Companies. We are of the view that the absence of registration under the Registration Act is immaterial as the assessee had created a charge on its plants and machineries by entering into a trust deed with the Directors, and also registered charge with the Registrar of Companies as required under the Companies Act and that would suffice to create a charge over the plants and machineries of the assessee’s company. We hold that once there is a valid charge over the properties of the company, the disallowance of the interest payments is not correct. Accordingly, we answer the questions of law referred at the instance of the assessee in favour of the assessee subject to the qualification that in so far as the assessment year 1980-81 is concerned, the disallowance of Rs.42,173/- made by the Commissioner of Income Tax has become final and that requires to be sustained.
6. Now, we will take up the reference of the Revenue. The first question arises in relation to the assessment years 1979-80, 1980-81 and 1981-82 and the question deals with the eligibility of the claim of the assessee for the deduction under Section 80J of the Act. The assessee claimed that a new industrial undertaking was set up by the assessee at Kirikera, Hindupur District, Andhra Pradesh and claimed deduction under section 80J of the Act. The Income Tax Officer rejected the claim on the ground that there was only an expansion of existing industrial unit and therefore the assessee was not entitled to deduction. On appeal by the assessee, the Commissioner of Income Tax (Appeals) allowed the appeal holding that the assessee was entitled to deduction under Section 80J of the Act and that order of the Commissioner of Income Tax (Appeals) was confirmed by the Appellate Tribunal. The brief facts to consider the eligibility of deduction under Section 80J of the Act are that the assessee had established a unit at Kirikera, Hindupur District, Andhra Pradesh and it was found on materials available on record that there was a substantial expansion of the unit and a new industrial undertaking separate and distinct from the existing unit was established by the assessee. There was a fresh capital inflow in the establishment of the new unit and there was a substantial expansion in the manufacturing capacity of the assessee and it was found on facts that separate industrial unit has came into existence. The only objection of Mr.T.C.A.Ramanujam, learned counsel appearing for the revenue was that the product manufactured by the assessee in the new unit are the same which was manufactured in the existing unit and therefore, the assessee is not entitled to claim exemption. We are unable to accept this submission. The Supreme Court in TEXTILE MACHINERY CORPORATION LTD. CALCUTTA Vs. I.T. COMMR. W.B. held that the assessee, in order to get benefit under Section 80J of the Act should fulfil the following conditions:
“(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.”
We find that all the requirements under Section 80J of the Act are fully satisfied as there was a substantial investment of the fresh capital in the new unit set up by the assessee and there was employment of requisite labourers and the assessee manufactured and produced articles and the assessee has established an industrial undertaking to earn profit. In effect, a separate and distinct industrial unit was set up by the assessee. In our view the nature of the product manufactured is not decisive in considering the question of eligibility of claim under section 80J of the Act, and what has to be seen is whether there emerged a new industrial undertaking with fresh capital, investment, employment of labourer and manufacture or production of articles. We find that a separate and new industrial unit was formed by the establishment of a new unit at Kirikera, Hindupur District, Andhra Pradesh. We therefore hold that the Tribunal has come to a correct conclusion in holding that the assessee is entitled to the deduction under Section 80J of the Act. Accordingly, we answer the first question of law against the Revenue and in favour of the assessee.
7. As far as the second question is concerned, we find that the issue raised is directly covered against the Revenue by the decision of this Court in McDOWELL AND CO. LTD. Vs. C.I.T. (MAD.) (246 ITR, 529). Further, this Court in COMMISSIONER OF INCOME-TAX Vs. PREMIER COTTON MILLS LTD. (240 ITR, 434), following the Supreme Court decision in the case of C I T Vs. INDIAN ENGINEERING AND COMMERCIAL CORPORATION P. LTD. held that if both Sections 40(c) and 40A(5) of the Income Tax Act, 1961 apply, the higher of the two ceilings mentioned in those provisions would apply. It was found as a matter of fact that Section 40(c)(ii) would apply as the ceiling prescribed therein is higher than the ceiling limit fixed in Section 40A(5) of the Act. Viewed from any angle, we hold that the order of the Tribunal is legally correct and does not warrant any interference. Accordingly, the second question of law referred to us is also answered against the Revenue and in favour of the assessee.
8. In the result, in so far as the questions of law referred to us at the instance of the assessee are concerned we answer two questions in favour of the assessee subject to the qualification that a sum of Rs.42,173/- is liable to be disallowed as far as the assessment year 1981-82 is concerned. In so far as T.C.Nos.65 to 67 of 1989 are concerned both the questions are answered against the Revenue and in favour of the assessee. There will be no order as to costs.