ORDER
Per Mehta, A.M. – This appeal is directed against the order passed by the Commissioner of Income-tax (Appeals) raising for the consideration of the Tribunal various grounds which are being disposed of as under :
The appellant in this case is an Individual, deriving income from the manufacture and sale of insulated wires in respect of a proprietary concern, run under the name and style of Khandelwal Wires. The first two grounds in the appeal pertain to the claim for deduction under sections 80HH and 80-I and in respect of which the following common facts emerge from the order of the Assessing Officer :
It was found during the course of the assessment proceedings that the assessee had claimed deductions under the aforesaid section amounting Rs. 4,28,295 each, i.e., 20 per cent of the profit from the alleged newly established industrial undertaking in a backward area. To consider the aforesaid claims the Assessing Officer proceeded to verify the records of the preceding assessment years as also the various facts emerging there from. It appeared that up to assessment year 1980-81, the assessee was partner in a registered firm, namely, M/s. Khandelwal Associates, Mathura and the said firm came to be dissolved on 31st March, 1980. Subsequently, with effect from 10-5-1980 the assessee started his proprietory manufacturing concern under the name of “Khandelwal Electricals” for which the accounts were closed for the first time on 31-12-1980. As the aforesaid manufacturing concern was operating in a backward area the assessee claimed deductions under sections 80-HH and 80-I of the Income-tax Act and these were being regularly allowed to him. The aforesaid concern, namely, M/s. Khandelwal Electricals was stated to have been closed on 31st March, 1989, but prior to that during the previous year 1988-89 relevant to assessment year 1989-90 the assessee is stated to have started a new concern under the name of “M/s. Khandelwal Wires” with effect from 1-6-1988. It was claimed that machineries worth Rs. 1,64,164 had been installed in the said unit. As the said concern was following the financial year as its previous year the first assessment year under the Income-tax Act was 1989-90 and for which the assessee reflected a net loss of Rs. 6,499 and after adjusting the same with the profit of M/s. Khandelwal Electricals as also after adjusting various order deductions income was returned at a figure of Rs. 4,62,102. The records reveal that no deduction under sections 80HH and 80-I were claimed for assessment year 1989-90 in respect of the alleged new unit, namely, M/s. Khandelwal Wires. It is also a matter of record that the return for assessment year 1989-90 was processed under section 143 (1)(a).
2. The Assessing Officer asked the assessee vis-a-vis the assessment year under appeal to substantiate his claim under the aforesaid two sections and a questionnaire dated 22-12-1992 was specifically issued for the said purpose. The assessee appeared personally on 8th January, 1993 along with his counsel and filed a written reply dated 8-1-1993 in which he made the following submissions and which we extract from the order of the Assessing Officer :-
“(a) The concern, M/s. Khandelwal Electricals (hereinafter mentioned as old concern) was installed in rented premises at H. M. Somani Marg, Vrindaban whereas the concern, M/s. Khandelwal Wires (hereinafter mentioned as the New concern) started business at Ram Reti Vrindaban. The distance between the two places is 3 K.Ms.
(b) The new concern was started on 1-6-1988 and the old one was closed w.e.f. 31-3-1989.
(c) Raw material consumed by the two concerns is different.
(d) Products manufactured by the two units are also different.
(e) The machineries used in old concern were unusable whereas new machineries were purchased for the new unit.
(f) There was no doubt transfer of other assets of which WDV of old unit was Rs. 1,21,673 but transfer of any machinery from the old concern to new concern is denied.
(g) The manufacturing process of the two units was different.
(h) The sales prospects of the New Unit were far better in comparison to old Unit.
(i) The reasons for staring new units were stated to be on account of better chances of growth due to huge market demand; own invented high technical product. It is submitted that there are no chances of future growth in old concern since local suppliers started dealing with his customers with the result the future was dark in old concern;
(j) The new unit was granted sales-tax exemption under section 4A/2A of Sales-tax Act, 1948 being new unit and no such exemption was available to the old concern according to conditions of the Scheme;
(k) As regards, the assessees customers in old as well as new concern, it was mentioned in the Annexure (Col. 15) that they were quite different in new concern then those of old concern.
However, during the course of hearing when the assessees contention was invited to the fact that looking to his records most of the customers of the old and new concerns were same and even his main commission agents were same, he changed his earlier submission and admitted vide his reply dated 15-1-1993 that many customers of old concern were also customers in alleged new concern.”
3. On the basis of the aforesaid submissions it was urged that since the conditions laid down in sections 80-HH and 80-I were duly complied with the alleged new unit, viz., M/s. Khandelwal Wires constituted with effect from 1-6-1988 be allowed the claims as made.
4. The Assessing Officer considered the submissions of the assessee with reference to the material on record and, at the outset, proceeded to summarise the conditions laid down by the aforesaid sections and these being (a) the unit claiming the deductions was not found by the splitting up or the reconstruction of the business already in existence; & (b) it was not formed by the transfer of machinery or plant previously used for any purpose.
5. The Assessing Officer on the facts of the case opined that the claims were not tenable as the assessee did not fulfill the aforesaid two conditions. No doubt the Assessing Officer recorded detailed reasons in rejecting the claim, but for the purposes of disposing of the present appeal, we consider it appropriate to summarise the same :
(i) Both the undertakings, viz., M/s. Khandelwal Wires and M/s. Khandelwal Electricals were engaged in manufacturing insulated wires etc., and this fact emerging from part III of the return relevant to the assessment year under consideration. A similar note has been appended in the return for assessment year 1989-90. By this it was inferred that the business/manufacturing activities carried on by the assessee in the name of M/s. Khandelwal Wires were existing earlier as well;
(ii) There was no significant difference in the raw material used by the old and the new concern and so was the position in respect of the products manufactured;
(iii) The new concern had been formed by the splitting up of the business of the old concern and this became apparent from the fact that the new concern was started with machinery worth Rs. 1,64,164 and electric fittings worth Rs. 1,575. Further in the subsequent period no additions to electrical fittings had been shown and it was not believable that a factory with such a large production would be able to run on such electrical fittings and installations. A reference was also made to the value of electrical fittings in the alleged old concern which was of a higher figure;
(iv) The creditors and debtors of the old concern, namely, M/s. Khandelwal Electricals stood reduced and most of them found a place in the balance-sheet of the alleged new concern. By this a reference was also made to the transfer to the new concern of the computer, car, scooter, etc., belonging to the alleged old concern;
(v) Due to day-to-day introduction of new electrical appliances in machinery different kinds of gadgets appeared in the market, but this did not mean that every marginal change in design of the product manufactured by a unit could be treated as the manufacture and production of a new unit;
(vi) The taking over of the creditors, debtors, assets, etc., of the old concern by the new concern showed that the new concern was formed by the splitting up of the business of the old concern and this tantamounted to a mere reconstruction of the business already in existence;
(vii) There was no substance in the assessees contention that the machinery used in the old concern was unusable and new machineries were purchased for the alleged new unit. A reference was made to the details of machineries installed by the alleged old concern during the period of 9 years since the date of its formation and the total thereof coming to a figure of Rs. 2,07,050. On being asked to explain the position of the machineries it was stated by the assessee that the only machinery available was valued at Rs. 10,000 and odd and the same was also found unusable. The Assessing Officer referred to the fact that the assessee had only given an explanation with reference to the WDV of the machinery of the old concern and there was no mention of the machineries on which 100 per cent depreciation had been claimed and allowed. Further the term “value” denoted market value and not WDV. That it was surprising that machineries which had given substantial production in the immediately preceding assessment year vis-a-vis the alleged old concern had been found to be useless in the immediately succeeding assessment year. That there was no evidence regarding the sale/disposal of the machinery purchased and used by the old concern and an inference could be drawn that the said machinery was also being used by the assessee in the alleged new concern; and
(viii) Both the old and the new concerns were being managed by the same persons and even the senior staff members were the same as also the commission agents. Further the assessee had not furnished the detail of new electrical gadgets and the telephone numbers of the alleged new concern. By this it was inferred that the new unit was part of the old concern.
6. On the basis of the aforesaid line of reasoning with reference to the material and facts on records, the Assessing Officer concluded that inasmuch as the alleged new concern had been formed by the splitting up and reconstruction of a business already in existence and further there being a transfer of machinery and plant previously used in the alleged old concern there was no justification to accept the claim for deduction under sections 80-HH and 80-I vis-a-vis the new concern. She, however, proceeded to allow on a different ground the claim for deduction under section 80-HH, namely, the assessment year under consideration being the 10th year of the old business, but denied the claim under section 80-I. The Assessing Officer in coming to the conclusion that she did proceed to rely on the judgment of the Honble Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148.
7. Being aggrieved the assessee came up in appeal before the Commissioner of Income-tax (Appeals) and at which stage detailed arguments were advanced by both the parties, namely, the assessee as also the Assessing Officer. The assessee, at the outset, filed written submissions in support of the arguments advanced appending thereto relevant facts and figures in support of the claim and the first appellate authority in turn and figures in support of the claim and the first appellate authority in turn called for a report/reply from the Assessing Officer vis-a-vis the written submissions of the assessee. The reply received from the Assessing Officer was in turn confronted to the assessee, who once again replied point by point the issues raised by the Assessing Officer. However, the net result of the entire exercise resulted once again in the rejection of the assessees claim and the confirmation of the order of the Assessing Officer by the CIT (Appeals). It is in the aforesaid circumstances that the present appeal has been preferred to the Tribunal.
8. We have heard both the parties at considerable length and have perused the material on record which is contained in the various compilations filed by the assessees counsel during the course of the hearing as also subsequently as directed by Tribunal. The learned Departmental Representative has also been given adequate opportunity in perusing the aforesaid material and offering his comments thereto vis-a-vis the case of the Revenue. The case of the assessee can be culled out from the written submissions addressed to the Commissioner of Income-tax (Appeals) on more than one occasion and which include the reply to the points made by Assessing Officer in the course of the appellate proceedings. We would, at the outset, refer to the written submission to the Commissioner of Income-tax (Appeals) at serial No. 2 of the paper-book stated to be furnished by the assessee and which have also been filed before us. These written submissions span pages 2 to 34 along with various annexures which are contained at the subsequent pages, namely 35 to 111. This is what the assessee has stated at pages 3 to 6 of the written submissions :-
“(i) That M/s. Khandelwal Electricals, referred to as Old Concern was established in a rented premises at H. M. Somani Marg, Vrindavan whereas M/s. Khandelwal Wires referred to new concern was installed in the appellants premises on Raman Reti Vrindavan at an admitted distance of 3 Kilometers.
(ii) That the new concern was started with effect from 1-6-1988, i.e., at a time when the old concern was carrying on its business and was subsequently closed on 31-3-1989.
(iii) That the new unit was as stated above, established on 1-6-1988 and the machinery installed therein at that time costed Rs. 1,64,164. None of the machineries or plant in use in the old unit was transferred to the new concern at the time of start of manufacturing. Even no machinery or plant was transferred from old concern to new concern during the subsequent year except Car, Scooter, Computer and office furniture. These items did not come within the purview of Plant and Machinery. Moreover the relevant point of time to consider whether the new Industrial Undertaking has come into existence or not was the date when it had been established and when it started the production.
(iv) The manufacturing process of the two units is quite different which is explained in Annexure A. Similarly the raw material used in the old concern and new concern is quite different as would be evident from Annexure B. It appears that on account of lack of technical know-how, it has been inferred that the raw material used and the process is the same while in fact it is not so. For example, ghee is an essential item, whether sweets are prepared, vegetables are prepared, food is prepared or other items like pakwan, jalebi, kachori, so on and so forth.
(v) That the new unit was granted Sales-tax exemption under section 4A/2A of the Sales-tax Act, 1948. The assessee is submitting herewith photocopy of the relevant provisions of the Sales-tax Act (Annexure C) according to which exemption from Sales-tax can be allowed to new units. The new unit has been defined as the industrial undertaking set up by a dealer on or after October 1, 1982 but not later than March, 1980, and that the new unit is formed by using machinery, accessories or components not already used or acquired for use in any other factories or workshop in India.
The appellant is also filing herewith a photo copy of the letter of Joint Director of Industries, Agra Division addressed to STO, Sector I, Mathura Annexure D which clearly mentions as under :-
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(vi) That the telephone connections as well as electrical connections are quite separate as both the buildings are admittedly situated at a distance of three kilometers. The Annexure E shows the telephone number and electric connections numbers of both the units.
(vii) The factory buildings, plant & machinery of both the units are separate and situated at two different places. The separate physical existence of the two units has also been admitted by the learned AO. Moreover, there is no transfer of plant or machinery or any other asset from the old unit to the new Industrial Undertaking at the time of establishment or even the start of manufacture and sale of manufactured goods.
4. The case of the appellant is fully established even from the admitted facts stated above. He is fully entitled to the deductions claimed under sections 80HH and 80-I, based on the facts which have been duly admitted by the learned AO.”
9. At pages 124 to 126 of the paper-book, the assessee has summarised the distinguishing features between the old unit and the new unit and for purposes of appreciating the submissions of the learned counsel, we consider it appropriate to make these as a part of our order and mark them as Annexure “A”. Along with the aforesaid written submissions, the assessee forwarded various details in the form of Annexures and these primarily contain the particulars of raw material used in both the units, the copy of the letter of Joint Director of Industries, relevant extracts from the U.P. Sales-tax Law, details of telephone connections of both the units, the items manufactured in the two units, details of agents of both the units, list of debtors and creditors of the units as also details of assets transferred from the old unit to the new unit such as car, scooter, computer and furniture. The bills and other relevant evidence for purchase of various items of plant and machinery and other assets were also furnished.
10. The Commissioner of Income-tax (Appeals) forwarded the aforesaid written submissions along with the annexures to the Assessing Officer seeking her comments thereto and which were given vide letter dated 27th July/4th August, 1993 addressed to the Commissioner of Income-tax (Appeals) and copy thereto appended at pages 154 to 174 of the assessees compilation. The following points in rebuttal were made by the Assessing Officer :-
(i) The change of premises could not lead to the conclusion that a “new unit” had come into existence within the meaning of sections 80HH and 80-I of the Income-tax Act, 1961;
(ii) There was no cogent evidence on record regarding the new unit having been started with effect from 1-6-1988 as against which the certificate issued by the District Industry Centre, Mathura, reflected the date of commencement of production as 1-2-1989;
(iii) The bills of machinery purported to have been purchased revealed that none of the items were available with the alleged new unit on 1-6-1988 that being the date on which the assessee claimed to have started the undertaking. Furthermore the purchase of the machinery was “not free from doubt” as none of the bills bore the stamps of the Sales-tax check post which was mandatory under the Sales-tax Rules in respect of goods received form a station outside. U.P. The inference which was required to be drawn was that the alleged new unit was carrying on the manufacturing process by utilising the entire machinery of the old concern which was a disqualification for allowing deductions under sections 80HH and 80-I of the Act;
(iv) That it was the assessees claim that the new unit had come into existence in the immediately preceding assessment year, viz., 1989-90, but the facts revealed that there was no indication on the part of the assessee in the return filed for the said preceding assessment year and neither had any claim been made under the aforesaid sections and even the auditors report prescribed by the said sections had not been filed;
(v) That the plant and machinery purported to have been installed for the new units was purchased out of the profit of the old unit. Further there was no substance in the assessees contention that no item of plant and machinery had been transferred from the old unit since the admitted facts were that car, scooter, computer and office furniture had been so transferred and computer squarely came under the definition of “plant”;
(vi) With regard to the submission of the assessee that the position had to be examined vis-a-vis the relevant point of time when the new industrial undertaking had come into existence the facts revealed that assessment for assessment for assessment year 1989-90 was processed under section 143(1) (i) (a) at a loss of Rs. 6,499 and no deduction under sections 80HH and 80-I had been claimed. In other words, the test of eligibility to be applied in the initial assessment year was not applicable on the facts of present case.
(vii) There was no material difference in the consumption of raw material in the old and the new unit;
(viii) The exemption issued by the Sales-tax Department was not binding upon the Income-tax authorities as the provision in both the enactments were quite different;
(ix) That the date of commencement of production was not certain in the light of the difference in the dates mentioned by the Joint Director of Industries, Agra, in his letter dated 16th June, 1992 and the certificate issued by the General Manager, Distt. Industries Centre, Mathura. Further there was nothing on record to show that they had in fact inspected the alleged new unit;
(x) That the material on record revealed that the telephone of the old unit was being used by the alleged new unit as well and this proved that there was a common establishment in respect of the two units. Further the same telephone numbers were also being used by the firm M/s. Khandelwal Associates, in which the wife of the assessee was a partner;
(xi) That the situation of the factory buildings of the two units at different places did not alter the situation. Further it was not possible to accept the stand of the assessee to the effect that the machineries of the old unit were unusable and for working the new unit, new machineries had been purchased. A reference was made to the purchased of the machinery by the unit over the period beginning assessment year 1981-82 and ending with assessment year 1989-90 and further reference being made to the value of the machinery rather than the WDV. That the machinery purchased in the old unit consisted of a diesel generating set, the cost of which was Rs. 62,980 and the new machineries purchased by the alleged new unit did not show the existence of a generator which was an absolute necessity taking note of the power position in the State of U.P. particularly in backward areas;
(xii) That the details of the raw material used and the items manufactured by both the units did not assessees point that the articles produced were dis-similar;
(xiii) That the senior staff members of the two units were the same, the main commission agents were also the same and the technology being used was also identical. Further the installation of a new power connection in the new unit was not a deciding factor since any manufacturer would have to obtain a new connection as per the electricity rules in case it required an increased load due to the expansion of the unit and the addition of new machineries;
(xiv) The material on record pointed out to the fact that the new unit could not achieve the huge turnover as it had done in the assessment year under appeal only on the basis of the new plant and machinery and the electrical fittings shown without utilising the machineries of the old unit as also the electrical installations belonging to the said old unit;
(xv) That the facts discussed in the preceding paras as also the activities brought out clearly showed that there was a uniformity of control in regard to the two business, i.e., the earlier one and the new one. That the intention of the assessee was not to expand the industry and employment opportunities by installing the new unit as he had reduced the business activities in the old unit and gradually transferred everything to the new unit including the funds, the creditors, the debtors as also the fixed assets.
11. On the basis of the aforesaid submission made to the Commissioner of Income-tax (Appeals), the Assessing Officer opposed the arguments advanced on behalf of the assessee and urged that the rejection of the claims in question be maintained. It was, however, pointed out that claim under section 80HH had already been allowed although on a different ground.
12. After receiving the aforesaid written submissions of the Assessing Officer, the Commissioner of Income-tax (Appeals) once again asked the assessee to file a reply to the written comments of the Assessing Officer and which the assessee proceeded to do (see pages 21 to 52 of the compilation including the enclosures). This is how the assessee meet the various points made by the Assessing Officer :
(i) That the Assessing officer had not brought on record any new facts or evidence in support of the conclusions drawn earlier in the assessment order and the comments were a mere repetition of the assessment order;
(ii) There was no basis for the Assessing Officer to allege that shifting of the unit from one place to another would not tantamount to a new unit coming into existence since the accepted fact was that the new unit was situated at a distance of three kilometers from the old unit and even in the assessment year under appeal both the units had been working separately and had given rise to separate income;
(iii) There was no basis for the Assessing Officer to state that there was no cogent evidence except the submission of the assessee to the effect that the “new unit” had started functioning with effect from 1-6-1988. That this allegation was not correct firstly because of the distance between the old and the new unit and secondly the installation of the machinery worth Rs. 1,64,164 in the new unit and the non-transfer of any plant and machinery from the old unit to the new unit. Further the transfer of a computer to a new unit did not tantamount to transfer of machinery as the computer had nothing to do with the production and it was highly doubtful whether a computer could fall under the category of plant and machinery;
(iv) That the Assessing Officer had referred to the date of commencement of production as 1-2-1989 whereas the certificate issued by the Distt. Industries Officer, Mathura, categorically gave the said date as one on which the first sale had been effected and that by no stretch of imagination could be considered as the date of production;
(v) That the certificate given by the Joint Director of Industries, Govt., of U.P. had in unambiguous terms certified that the facts stated by the industries unit, i.e., the assessee had been verified and he was totally satisfied that the new unit was entitled to the exemption of Sales-tax;
(vi) That the various items of plant and machinery had been purchased on the basis of genuine bills and all necessary formalities required by the Sales-tax Laws had been duly complied with;
(vii) That there was no basis with the Assessing Officer to hold that in case the new unit had started with effect from 1-6-1988 the entire machineries of the old unit had been utilised in the new unit and such an inference being without any evidence;
(viii) That the observation of the Assessing Officer to the effect that the assessee had not claimed under sections 80HH and 80-I an asstt. year 1989-90 was of no relevance as such deduction could be claimed only if there were profits and in the said assessment year there was a loss;
(ix) There was no basis for the Assessing Officer to hold that the machinery installed in the new unit cannot be purchased out of the profit of the old unit as this proposition was not supported by any law. That an assessee could utilise the income of both the units for purchase of machinery for the new unit;
(x) That the question of exemption under the aforesaid sections had to be considered in the initial assessment year and not in any subsequent assessment year and that the assessee had not concealed the fact of his having established a new unit in the preceding assessment year;
(xi) That the raw material used in both the units was basically different and the Assessing officer in opining that the raw material was the same had ignored relevant material on record as also the submission made at various stages of the proceedings.
(xii) That the exemption granted by the Sales-tax Department had evidentiary value and it could not be brushed aside or ignored by the Assessing Officer while completing the assessment under the Income-tax Act. That the grant of exemption by the Sales-tax Department was not only after necessary verification, but also with reference to the procedure and law laid down. That such an exemption was granted only to a new unit and after ascertaining the relevant facts and being fully satisfied;
(xiii) That the date of first sale and the date of production cannot be equated as had been done by the Assessing Officer. Further the Assessing Officer had refereed to the non-mention of the date on which the concerned authority of the U.P. Government inspected the new unit whereas the assessee was not empowered to compel the Government authorities to mention the date of inspection on the certificate and further there was no such requirement either under the law or the procedure laid down. That in case there was doubt in the mind of the Assessing officer nothing prevented her from summoning the records of the Deptt. Concerned and ascertaining the facts;
(xiv) The objection of the Assessing Officer regarding the installation of telephones was not correct as both the units were situated at a distance of three kilometers and had got separate telephones at both the places. Further the assessee was the sole proprietor of both the units as it was in that capacity that he had got typed out the telephone Nos. of both the units on his letter-pads;
(xv) That it was not a mere case of change in the building, but it was a case in which a totally new unit had been established carrying on the production of a different item altogether;
(xvi) That the observations of the Assessing Officer regarding the generator of the old unit were not valid and justified as the assessee had not at all used the generator of the old unit in the new new and it in fact had purchased the generator for the new unit in the subsequent year on availability of funds;
(xvii) That the assessee had brought on record sufficient material and evidence to prove that the new unit had been established with effect from 1-6-1988 wherein new machinery had been installed and further the first sale of the production of the said unit was made on 10th February, 1989, the said date having been certified by the Joint Director of Industries. That it was improper to draw adverse an inference in the face of the certificates of the Sales-tax authorities and the Joint Director of Industries both these being independent bodies under the U.P. Government.
(xviii) That it was not a case of re-construction of the business already carried on, but it was the case of establishment of a new unit unconnected with the old unit, old machinery and building as also the old set of workers;
(xix) That the assessee had placed sufficient material on record to prove that the articles manufactured by the two units were quite different and there was no bar in law in the unit using certain names which were the same or identical to those used by the old unit;
(xx) There was no basis on the part of the Assessing Officer to presume that thee new unit could not function without the use of the machinery of the old unit as also its generator. That this presumption was rebutted by undisputed evidence brought on record and similarly there was no basis to presume that the new unit could not function without the generator due to power shortage. That a request was made to the Assessing Officer to pay a visit to the spot and verify necessary facts and this was not acceded to. That the Assessing Officer, on the one hand, had observed that no machineries had been purchased for installation on or before 1-6-1988 whereas he had observed to the contrary that the new machineries had been purchased much earlier than the date of production as given in the certificate of the Joint Director of Industries, but the same had been used in the old unit during the intervening period. This showed that the stand of the Revenue was two-sided;
(xxi) That the machineries of the old unit which had been purchased from 1980 onwards continued to be installed in the said old unit. Further these machineries depreciated from year to year and after a period of 10 years could have only scrap value. That the presumption of the Assessing Officer that the value of machinery should have been Rs. 5,00,000 as against the WDV of Rs. 10,000 was improper and based entirely on surmises, conjectures and imagination;
(xxii) That it was incorrect to observe that the staff members of both the units were the same since it was a matter of record that out of the 14 persons, who had been employed in the new unit only 2 persons had earlier been employed in the old unit and who had been taken on account of their experience and sincerity. Further there was no bar for allowing the deductions claimed by the assessee;
(xxiii) That it was improper on the part of the Assessing Officer to draw an adverse inference vis-a-vis the old power connection since a new power connection was taken for the new unit. Further the assessee had purchased a building for the new unit and which already included electrical fittings and after the said purchase the assessee had incurred further expenditure on electrical fittings;
(xxiv) That the material on record did not show that it was the old unit which was shifted to the new premises, but the material on record categorically proved that a new unit independent of the earlier one had been established;
(xxv) That the observation of the Assessing Officer to the effect that the old unit was intended to be shifted to the industrial area was not correct inasmuch as the new premises purchased by the assessee were not in the industrial area, but located in a residential locality totally unconnected with the industrial area;
(xxvi) That it was incorrect on the part of the Assessing Officer to state that the name had been changed with a view to obtain necessary relief as the said relief was being claimed by the assessee purely on facts and in accordance with the relevant provisions of law. That it was not proper to draw adverse inference on the ground that the assessee was the sole proprietor of both the units and he was perfectly within his rights to control both the units and claim the deduction under sections 80HH and 80-I;
(xxvii) That the starting of a new unit was not a device to avoid tax as alleged by the Assessing Officer and the assessee in fact had started the new unit with a view to manufacture an article quite different from the one which had been manufactured by the old unit and that the decision of the Honble Supreme Court Court in the case of McDowell & Co. Ltd. (supra) was not applicable;
(xxviii) That there was no basis for the Assessing Officer to allow deduction under section 80HH on the ground that it would be the 10th year of the new concern being treated as the old concern. That there was no basis on the part of the Assessing Officer to treat both the units as a case of amalgamation or reconstruction;
(xxix) That the Assessing Officer had at no stage of the proceedings asked the assessee to produce the details pertaining to the Registration of Trade Marks of the new concern, but these were being produced for the perusal of the Commissioner of Income-tax (Appeals);
(xxx) That the debit of the car expenses could not be a relevant factor for deciding whether a new unit had come into existence since the assessee was the sole proprietor of both the units and the car expenses had been debited in the accounts accordingly.
13. In addition to the aforesaid submissions, the assessee sought to distinguish the various decisions relied upon by the Assessing Officer in support of the case of the Revenue.
14. The Commissioner of Income-tax (Appeals) considered the submissions on the part of the assessee as also the arguments advanced by the Assessing Officer. In the final analysis, he proceeded to uphold the action of the Assessing Officer in rejecting the claims in question on the basis of the arguments advanced. We have perused the order of the Commissioner of Income-tax (Appeals) and do find that while rejecting the claims he has referred to various decisions relied upon before him.
15. It is in the aforesaid circumstances that the assessee is presently in appeal before the Tribunal. We have heard both the parties at length and have also perused the orders passed by the tax authorities. The material on record, to which our attention was invited has also been duly considered as also the decisions cited at the bar by both the parties. The arguments of the learned counsel for the assessee were quit identical to those tendered before the authorities below, but he highlighted the following for our consideration :-
(i) That in the preceding assessment year the new unit had worked only for a period of two months and as there was a loss, no claim had been made. Further the matter was not discussed in the assessment order as the same had been framed under section 143(1);
(ii) Whereas the Assessing Officer had proceeded on the ground that it was a case of re-construction and that machineries from the old unit had been transferred exceeding 20 per cent of the value thereof the CIT (Appeals) had imposed another condition, namely, the number of workers being less than 10. That it was not necessary to have the stipulated number of workers, viz., 10 at all points of time during the previous year under consideration and further the assessee himself was a qualified person and he had not been included while calculating the number of workers;
(ii) That there was no connection between the old product and the new product although both of them were cables since in the new unit the wiring which was being manufactured was water-proof and could be used even below the water unlike, the cables manufactured by the old unit;
(iv) That the various State Government authorities before granting exemption to the assessee had undertaken necessary verification and inspection and it was only thereafter that they had opined that the unit was a new one entitled for necessary relief on account of Sales-tax etc.; and
(v) That the items which had been transferred from the old unit to the new unit was not those of plant and machinery and even if it was to be assumed that this was so then the value of the items transferred was less than 20 per cent of the total value of machinery and the provisions of the section in question were not at all applicable.
16. In support of the various arguments advanced the learned counsel reiterated reliance on the authorities cited earlier before the tax authorities as also various other decisions, and these being as under :-
(i) CIT v. Ganga Sugar Corpn. Ltd. [1973] 92 ITR 173 (Delhi);
(ii) CIT v. Hindustan General Industries Ltd. [1982] 137 ITR 851 (Delhi);
(iii) CIT v. Indian Oxygen Ltd. [1978] 113 ITR 109 (Cal.);
(iv) T. Satish U. Pai v. CIT [1979] 119 ITR 877 (Kar.);
(v) CIT v. Batala Engg. Co. Ltd. [1979] 120 ITR 683 (Punj. & Har.);
(vi) Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 (SC);
(vii) Indian Aluminium Co. Ltd. v. CIT [1983] 140 ITR 114 (Cal.);
(viii) CIT v. Indian Aluminium Co. Ltd. [1977] 108 ITR 367 (SC);
(ix) CIT v. Associated Cement Co.s Ltd. [1979] 118 ITR 406 (Bom.);
(x) CIT v. Hind Lamps Ltd. [1980] 122 ITR 451 (All.);
(xi) CIT v. Hindustan Motors Ltd. [1977] 107 ITR 164 (Cal.);
(xii) CIT v. A. K. Silk & Woollen Mills (P.) Ltd. [1986] 158 ITR 462 (Delhi);
(xiii) Oswal Woollen Mills Ltd. v. CIT [1982] 138 ITR 338 (Punj. & Har.);
(xiv) CIT v. Nippon Electronics (India) (P.) Ltd. [1990] 181 ITR 518 (Kar.);
(xv) CIT v. Ambur Co-operative Sugar Mills Ltd. [1981] 127 ITR 495 (Mad.);
(xvi) Addl. CIT v. Hutti Gold Mines Co. Ltd. [1981] 128 ITR 476 (Kar.);
(xvii) Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC);
(xviii) Textile Machinery Corpn. Ltd.s case (supra);
(xix) CIT v. K. G. Yediyurappa & Co. [1985] 152 ITR 152 (Kar.);
(xx) Addl. CIT v. Suessin Textile Ball Bearings Ltd. [1987] 163 ITR 582 (Bom.); and
CIT v. Dandeli Ferro Alloys (P.) Ltd. [1995] 212 ITR 1 (Bom.).
17. The learned Departmental Representative, on the other hand, supported the order passed by the Commissioner of Income-tax (Appeals) and the subsequent arguments advanced by him were a reiteration of the reasons recorded by the first appellate authority in upholding the order passed by the Assessing Officer vis-a-vis the claims under sections 80HH and 80-I.
18. We have examined the rival submissions and have also perused the material on record to which our attention was invited during the course of the hearing. The decisions cited at the bar have also been duly considered.
19. At the outset, we must highlight that the provisions of sections 80HH and 80-I envisage a similar type of scheme for allowing deduction at a stipulated percentage, of the profits and gains derived from an industrial undertaking. Even the conditions to be fulfillled are quite identical viz. :
(i) manufacture or produce of articles before a specified date;
(ii) should not be formed by the splitting up, or the reconstruction of a business already in existence;
(iii) not formed by the transfer to a new business of machinery or plant previously used; and
(iv) employs ten or more workers in a manufacturing process carried on with the aid of power or employs twenty or more workers in a manufacturing process carried on without the aid of power.
20. Both the sections have a number of explanations and provisos and one explanation is to the effect that where the machinery or plant previously used is transferred to a new business and if the value thereof does not exceed twenty per cent of the total value of the machinery used in the said new business then condition (iii) above shall be deemed to be satisfied.
21. The aforesaid explanation was referred to by the learned counsel for the petitioner that even if it was to be assumed although nor admitting that “plant & machinery” from the old unit had been transferred to the new unit then the value thereof did not exceed 20 per cent of the total value of the plant & machinery of the new unit. The main submission was, however, to the effect that no item of plant & machinery had been transferred and the items taken over were in the nature of “office appliances” such as computer, car, scooter, furniture, etc., valued at Rs. 1,21,673. As against this, the balance sheet of the “new unit” as on 31-3-1990 reported fixed assets at Rs. 11,10,932 before deduction for depreciation and the figure of plant and machinery alone stood at Rs. 6,24,348 and whichever way the matter was looked at the transferred assets did not exceed 20 per cent of the total whether it be of the plant & machinery or the whole or the assets of the new unit.
22. Another exception had been taken this time by the Commissioner of Income-tax (Appeals) as to the fact that number of workers was less than ten “initially” viz., in April and May, 1989, although he did not dispute that the limit was exceeded in the subsequent months. In our opinion it is sufficient compliance with the condition if the workers remain ten or more during a substantial part of the year and which is a fact in the present case. The total number of workers are ten and more throughout the year if office workers are included and exceeds the stipulated number for all the months with the exception of April and May, 1989 in case office workers are excluded.
23. On coming to the other aspects of the matter we find ourselves in agreement with the submissions made by the learned counsel vis-a-vis the establishment of a “new unit” at a place admittedly different than the old unit, and manufacturing an item different to the one manufactured earlier although both come under the category of “wires and cables”. In annexure A to the present order the points of distinction have been drawn up on behalf of the assessee and these do aptly support the view-point canvassed by the learned counsel and there being no effective challenge or material in rebuttal placed on record by the Revenue represented by the Departmental Representative. Much stress has been laid by the Revenue on the similarity between the customers, employers and the commission agents of the old and the new units but in our opinion these on the facts of the present case are not at all valid, since the assessee in operating a “new unit” has to fall back on his old contacts, customers as well as employers. The law does not create a bar on these aspects to deny a rightful claim.
24. Then again the Revenue has alleged that the machinery & plant of the old unit has been utilised by the new unit and has also laid much stress on the value of the old machinery. In our opinion there is no material on record for the said allegation and something more was required to be proved on the part of the Revenue and which has not been done. We, therefore, accept that the items other than those which had been transferred from the old to the new unit were not used or utilised by the new unit in its manufacturing process. The onus to prove so was on the Revenue. Then again the exemptions granted by various State Govt. authorities cannot be ignored. These do prove the assessees case that a “new unit” came into existence.
25. In coming to the various decisions relied upon by the learned counsel, we can state that these aptly support the view-point canvassed, but for purposes of disposing of the appeal, we need only refer to the following :-
(I) Hindustan General Industries Ltd.s case (supra) :
“It is not every alteration in the mode, method or scope of the activities of a business and it is not every transfer of assets from one unit to another that will involve reconstruction. The expression is no doubt very wide but it does not take in a case of company setting up or establishing a totally independent and viable industrial unit for carrying on the same or similar business even though it might be so set up by way of expanding the already existing business. It is no doubt true that in a case of reconstruction there might be a transfer of assets from the old to the new undertaking. But the converse is not true that, in every case, where there is a transfer of such assets, there is necessarily a case of reconstruction. The real test of finding out whether there is a reconstruction or not, is not whether as a result of the setting up of a new industrial undertaking, the assessee has expanded its business in the same or similar articles.
The mere fact that while setting up this factory, a small amount of plant and machinery was transferred from the previous business cannot be conclusive to come to the conclusion that it is a reconstruction.
The assessee was manufacturing certain articles at its factory. Subsequently, as a result of the order placed by the Central Government, it had to embark on the construction of railway wagons. For this purpose, the existing factory was found to be totally inadequate. Fresh land was acquired, fresh capital was invested, fresh machinery and plant were installed and the new factory came into existence after more than a couple of years. In the initial stages, the new factory also turned out articles, perhaps of the same type as those manufactured in the earlier undertaking. Later, the new undertaking started the manufacture of railway wagons and aircraft refuellers. The Tribunal found as a matter of fact that this was a new undertaking. Held that the Tribunal was justified.”
(II) Nagardas Bechardas & Bros. (P.) Ltd. v. CIT [1976] 104 ITR 255 (Guj.) :
“Where the assessee had established a separate unit to manufacture parts used by itself in the construction of engines, which parts it earlier purchased from the market and the Tribunal on the comparative data of the existing business and the business done by the new unit as regards the cost of establishment and the annual turnover, concluded that since the cost of establishment of the new unit and its annual turnover was very small as compared to the establishment cost and annual turnover of the previously running business, the former should be considered merely a result of the reconstruction of the latter :
Held that the approach of the Tribunal was wrong. As it missed to take into consideration various other important facts such as the change introduced in the nature of the activity conducted by the running business, establishment of a complete, independent and self-contained unit in a different locality under a separate license, production of a commercial product which had its own independent market and the establishment of a manufacturing business which could be continued even if the main existing business came to a stop and which could be expanded on its own.”
(iii) Ganga Sugar Corpn. Ltd.s case (supra) :
“The word reconstruction is a commercial term used in company law and has been distinguished from amalgamation. In the reconstruction of a company, there is an element of transfer of assets and of some change, however, partial or restricted it may be, of ownership of the assets. The transfer, however, need not be of all the assets. It is nonetheless imperative that there should be continuity and preservation of the old undertaking though in an altered form. The concept of reconstruction of business would not be attracted when a company which is already running one industrial unit sets up another industrial unit. The new industrial unit would not lose its separate and independent identity even though it has been set up by a company which is already running an industrial unit before the setting up of the new unit. The object of section 15C of the Act is to provide an incentive for the setting up of new industries so as to accelerate the process of industrialisation. It does not appear to have been the intention of the Legislature, as envisaged by section 15C, that the benefit of the said section would be confined to the industrial undertakings of those parties who had not already set up such undertakings in the past but would not be extended to parties who have past experience of running similar undertakings.
Where the assessee, a sugar manufacturing company established a new factory run by electricity, whereas earlier it was running its factory on steam, and also constructed buildings to house the new plant, it was held that, though a negligible portion of scrap and materials from the old factory was utilised in the new factory, it would not amount to reconstruction of business and that the assessee was entitled to relief on the new unit.
Note : Approved by the Supreme Court in Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195.”
(iv) Associated Cement Co.s Ltd.s case (supra) :
“Establishment of a new industrial unit as a part of an already existing industrial establishment may result in an expansion, but if the newly established unit is itself an integrated independent unit in which new plant and machinery is put up and is itself, independent of the old unit, capable of production of goods, then it could be classified as a newly established industrial undertaking.
Thus, where the assessee, already engaged in the business of manufacture of cement, claimed relief qua new kilns commissioned by it by investing huge amount of machinery, and supported its claim on the basis of a certificate from an engineer which disclosed that each kiln, worked independently of the old kilns, and that the new kilns were completely integrated units which could be put into production independently of the other units, or production there from could be stopped, without affecting production from old units, it was held that each new kiln constituted a new industrial undertaking, within the meaning of section 15C.”
26. Respectfully following the aforesaid judgments, we accept the arguments of the learned counsel vis-a-vis the claims the under sections 80HH and 80-I both of the Income-tax Act, 1961. No doubt, the tax authorities have accepted the assessees claim under section 80HH, but we do so on a ground different to the one as adopted by the tax authorities and on acceptance of the submissions of the learned counsel. Before we part with this ground, we would like to state that decisions cannot be decisive and the facts of two cases can never be absolutely identical. Each case has to be decided on its own facts and it is the ratios of the judgments of the Honble High Courts and Supreme Court which have to be applied. As we have already observed the decisions relied upon by the learned counsel support his case whereas on the facts the decisions relied upon by the Revenue are quite distinguishable. The Assessing Officer is directed to allow necessary relief subject to all other conditions being fulfillled.
27. to 33. These paras are not reproduce here as they involve minor issues.
ANNEXURE “A”
Distinction Statement
Khandelwal Wires
Khandelwal Electricals
1. Place of Factory
138 Raman Reti, Vrindaban – 281 124
H. M. Somani Marg, Vrindaban – 281 121.
2. Distance between these places
3 Kilometers
3 Kilometers.
3. ownership of factory building
Own
Rented from Rangji Temple Trust
4. Date of Starting/ Closing
Starting Date : 1st June, 1988
Closing Date : 31st March, 1989.
5. Raw Materials used
Bare Copper Wire, Polyester Film
Tinned Copper Wire, & B.O.PP. Films Fibreglass, Polyester yarn, Insulating Varnishes, Polyester Film.
6. Product Manufactured
Winding wire for submersible motor pumps
Heat Resistant Fibreglass Cables, Refrigerant resistant – Cabled, Sleeves cords.
7. Machines used
All new purchased
Most of them become unusable.
8. Machines Transferred
Nil
Nil
9. Other-assets Transferred
Office Equipments, ect., on Dt. 22-7-89
Computer
23,575.00
Car
90,670.00
Scooter
4,622.00
Office Furtniture
2,806.00
1, 21,673.00
10. Process of manufacturing
Wrapping of plastic films over bare copper conductor & then cured
Bunched tinned copper conductor than Fibreglass Braiding & Varnishing
11. Sale prospects
10-02-89 to 31-03-1989 Rs. 2,10,965.42
88-89 (15 Months) Rs. 24,75,500
89-90 Rs. 74,08,514.00
1987 Rs. 23,90,248
12. Reasons for diversification
Better Chances of growth due to huge Market demand & only one manufacturer was in the competition. Own invented high tech product. Sales from replacement market will be expected in future.
No chances of further growth. Local suppliers arrived at customers end so our future was in dark. Our machine becomes old & unusable wages will be higher, so our cost of production was higher than the competitors.
13. Sales Tax Reg.
Nos. U.P.S.T.
MT – 0116507, w.e.f.
MT – 0075178, w.e.f.
24-06-88
10-05-1980
C.S.T.
MT – 5067199, w.e.f.
MT – 5043544, w.e.f.
29-06-88
17-05-1980
14. Sales tax exemption
Granted as new unit after proper enquiries by the department.
Not available according to conditions of the scheme.
15. Customers
Quite different than those of Khandelwal electricals.
MAHESH CHAND GUPTA, VRINDABAN
1990-91
Compliance of requirements u/s 143(3) as noted on 15-01-1993 :
KHANDELWAL ELECIRICALS KHANDELWAL WIRES UNIT A UNIT B
(1) Nature of work (Technology) Bunching of tinned copper 1. Winding wire for wire, Polyester Film submersible motors : Wrapping & Fibreglass/ Polyester & B.O.P.P. Pdyester Yarn Braiding Tape Wrapped over and varnishing. copper conductor than cured
Patent Pending No. 218/DEL/88, dt. 18-3-1988.
(Braiding is a slow 2. FG/Polyester Covered process, 1 Machine Cables : produces only 100 MTs/8HR.) Yarn Braiding Replaces with Yarn Lapping
(A Fast process, covered 2400 MTS./8 Hrs.)
(2) List of customers Enclosed Enclosed
(3) Commission agents 1. M/s. Khandelwal Sales 1. Same Syndicate, Vbn. 2. M/s. Khandelwal 2. Same Agencies, Coimbatore. 3. M/s. Oriental Insulators 3. M/s. Balkrishna Engg. Faridabad. Co., Rajkot. 4. M/s. Jai Steel Corporation, Bombay 5. Mr. V. Bhatia, Faridabad.
Explanations :
Relating to (1) Nature of work (Technology) :
In broadly speaking the nature of work is Manufacturing of cables & wires but the manufacturing technology adopted in the two units is different according to distinct variety. Electrical Goods is a very wide term, cables & wires comes under it. Cables & wires have many varieties and their applications in different work are also very wide. Generally, for each such product, an identical name is given according to commercial practice by a manufacturer. But in case of the both units cables & wires were manufactured by different method and technology as expressed in the above chart. In electrical sphere new & improved Technologies are creeping up day by day according to applications of expert minds. As such in Unit B a newly developed Technology was adopted and mostly a special type of winding wire was manufactured and the same is being appreciated by the customers.
Relating to customers of the two units :
Ordinarily, a dealer particularly in the sphere of electrical goods, usually deals in several types and varieties of one commodity along with other various commodities according to demand of the market. Resulting some customers may naturally be identical. In unit A there are 34 customers while in unit B number of customers is 156 and in majority there are different that of unit A. In previous submitted distinction chart in relation to customers, we simply mentioned quite different under impression of current customers of unit B. So our that submission may be considered accordingly.
As stated above, that one type of cable or wire has its various applications by users, so it is very difficult to guess the exact work for actual use. However, according to our common sense, we have mentioned a probable work use by users.
Relating to commission agents :
M/s. Khandelwal Sales Syndicate & M/s. Khandelwal Agencies are our main agents working for us since last several years and then performance remains very satisfactory and is an integral part of our progress. Both the concerns have distinct standings, experiences, approaches, touches, means & well versed in the field of Electric Cables & Wires. Generally, an agent perform according to specific directions and guidance of his Principal who teaches his agent in details about the speciality of his products and the agent accordingly creates the market. Therefore, it is not essential to change the agents according to change of products. So is our case.