PETITIONER: TEXTILE MACHINERY CORPORATION LIMITED, CALCUTTA Vs. RESPONDENT: THE COMMISSIONER OF INCOME-TAX, WEST BENGAL,CALCUTTA DATE OF JUDGMENT25/01/1977 BENCH: GOSWAMI, P.K. BENCH: GOSWAMI, P.K. KHANNA, HANS RAJ KAILASAM, P.S. CITATION: 1977 AIR 1134 1977 SCR (2) 762 1977 SCC (2) 368 CITATOR INFO : MV 1985 SC 421 (50) RF&E 1992 SC1622 (9) ACT: Indian Income-tax Act, 1922--S. 15C(2)(i)--Scope of Tests for determining when benefit of the section available--Reconstruction--Tests for determination. HEADNOTE: Section 15C of the Indian Income-tax Act 1922, which deals with exemption from tax of newly established industri- al 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 indentity 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 commercial- ly 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] 763 (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 substan- tially the same as the existing business. The words "the capital .employed" are significant, for, fresh capital must be employed in the undertaking claiming exemption. Manufac- ture 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 indus- trial 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. Substan- tially the business and the person interested must be the same. [771 C-D] South African Supply and Cold Storage Company Wild v. Same Company, [1904] 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. Commis- sioner 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, [1976] Taxation Law Reports 821, approved. Commissioner of Income-tax v. Naya Sahitya 84 ITR 567, not approved. JUDGMENT:
CIVIL-APPELLATE JURISDICTION: Civil Appeal Nos. 772-773 of
1972.
From the Judgment and Order dated 9th/10th July, 1970
of the Calcutta High Court in I.T.R. No. 158 of 1966.
N. A. Palkhivala, Dr. D. Pal, U.K. Khaitan, S.R. Agar-
wal and Parveen Kumar for the Appellant.
V.P. Raman, Addl. Sol. General, T.A. Ramachandran and
R.N. Sachthey for the Respondents.
764
The Judgment of the Court was delivered by
GOSWAMI, J. These two appeals by certificate are from
the judgment of the Calcutta High Court since reported in
Commissioner Income-tax, West Bengal-I v. Textile Machinery
Corporation(‘). The two appeals relate respectively to two
assessment years 1958-59 (calendar year 1957) and 1959-60
(calendar year 1958). The matter relates to the claim by
the assessee for exemption of tax under section 15C of the
Indian Income-tax Act, 1922 (briefly the Act).
The matter came u13 before the High Court ‘on a refer-
ence under section 66(1) of the Act. The two questions
referred to were as follows :–
“(1) Whether, on the facts and in the
circumstances of the case, the Tribunal was
right in holding that the Steel Foundry
Division was an industrial undertaking to
which section 15C of the. Indian Income-tax
Act, 1922, applied ?
(2) Whether, on the facts and in the
circumstances of the case, the Tribunal was
right in holding that the Jute Mill Division
set up by the assessee-company was an indus-
trial undertaking to which section 15C of the
Indian Incometax Act, 1922, applied ?
The facts may briefly be stated:
The assessee (the appellant herein) is a heavy engineer-
ing concern manufacturing boilers, machinery parts, wagons,
etc. For the assessment years 1958-59 and 1959-60 the
assessee claimed exemption of tax under section 15C of the
Act in respect of the profits and gains derived from its
Steel Foundry Division and a similar-claim for relief under
section 15C in respect of its profits and gains derived from
its Jute Mill Division for the year 1959-60.
The assessee had previously in the earlier years bought
from outside the castings manufactured in the Steel Foundry
Division which was started in the assessment year 1958-59
and continued thereafter. Again, similarly in the year
‘1959-60, in addition to the manufacturing of castings in
the Steel Foundry Division the assessee started the Jute
Mill Division where the parts made out of the raw material
supplied by the Boiler Division by machining and forging
them were given to the Boiler Division of the assessee. It
was found that out of a total sale of Rs.28,23,127/- of
steel castings goods worth Rs.18,39,433/- were used in
connection with the various Divisions of the company. In
respect of the Jute Mill Division, the Incometax Officer
found that out of the total sales of Rs.13,03,509/- sales.
to the Boiler Division totalled Rs.11,89,812/- and sales to
outside the Jute Mill Division totalled only a sum of
Rs.1,13,6971/-. The Income-tax Officer and the Appellate
Assistant Commissioner, on the above facts, held the under-
takings as expansion and reconstruction of the business
already existing and hence the assessee was not entitled
(1) 80 I.T.R. 428.
765
to exemption under section 15C of the Act. The Income-tax
Appellate Tribunal, however, allowed the appeal of the
assessee and accepted the claim for exemption under section
15C. According to the Tribunal both the Steel Foundry and
the Jute Mill Division of the assessee were new industrial
undertakings. The above conclusion was reached on the
basis of several facts found by the Tribunal. These arc that
the machinery was new, was housed in a separate building and
that industrial licences had to be obtained, for manufactur-
ing the parts in question. According to the Tribunal the
existing business of the assessee consisted of manufacturing
boilers, wagons, etc. and for that purpose the assessee was
purchasing the spare parts, forgings and castings from
outside. The Tribunal came to the conclusion that the
business of the new industrial undertakings was to manufac-
ture those very spare parts. Hence the Tribunal concluded
that it could not be said that the undertakings were formed
out of the existing ‘business to come within the mischief of
the exclusion clause in section 15C(2)(i). The Tribunal
rightly relying upon the Tara Iron and Steel Co. Ltd. and
Others v. State of Bihar(1) also held that even though the
manufactured products of the new industrial undertakings
were mostly used in the assessee’s other business of manu-
facturing boilers, wagons, etc. the element of profit was
there and the extent of the same could be ascertained as the
assessee was maintaining separate books of account.
In the reference at the instance of the Department the
High Court answered both the questions in the negative and
against the assessee. The High Court held as follows :–
“The goods which the steel foundry
division and the jute mill division began
producing for the assessee were also previous-
ly used by the assessee in its business, but
they were purchased from outside and this
purchase from outside was replaced by produc-
tion or manufacture from within the asses-
see’s own business. This change of producing
one’s own goods systematically used in the
existing business instead of buying them from
outside would only be a reconstruction of a
business already in existence …… In so
far as they started producing and manufactur-
ing themselves, the assessee was doing some-
thing which was only a reconstruction of the
business already in existence ……..
The newness of the machinery of the
steel foundry division and the jute mill
division could not by itself make them new
industrial undertakings. Separate housing of,
and separate accounts for, the steel foundry
division and jute mill division may be only
parts of reconstruction of the same business
and did not necessarily indicate a new indus-
trial undertaking. The grant of a special
licence for the steel foundry division did
not make it an industrial undertaking to
qualify for exemption from tax under section
15C, because the licence was for expansion of
the existing industrial undertaking and the
licence did not cover the jute mill division”.
(1) 48 I.T.R. 123.
766
It is, however, admitted before us that both the units
were covered by licences.
The controversy in these appeals centres round the true
construction of section 15C(2)(i) of the Act and in particu-
lar with regard to the scope and ambit of the expression
therein, namely, the reconstruction of business already in
existence. Is the High Court right in holding that the
two industrial undertakings, namely, the Steel Foundry and
the Jute Mill Division, are formed by reconstruction of
the business already in existence differing from the con-
trary conclusion reached by the Tribunal ?
Before we proceed further, we will read section 15C as
it stood during the material time:
“15C. Exemption from tax of newly estab-
lished industrial undertakings.
(1) Save as otherwise hereinafter provided,
the tax shall not be payable by an assessee on
so much of the profits or gains derived from
any industrial undertaking to which this
section applies as do not exceed six per cent
per annum on the capital employed in the
undertaking computed in accordance with such
rules as may be made in this behalf by the
Central Board of Revenue.
(2) This section applies to any industrial
undertaking which–
(i) is not formed by the splitting up,
or the reconstruction of, business already in
existence or by the transfer to a new business
of building, machinery or plant, previously
used in any other business;
(ii) has begun or begins to manufacture
or produce articles in any part of taxable
territories at any time within a period of
thirteen years from the 1st day of April 1948,
or such further period as the Central Govern-
ment may, by notification in the Official
Gazette, specify with reference to any partic-
ular industrial undertaking;
(iii) 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;
Provided that the Central Government may, by notifica-
tion in the Official Gazette, direct that the exemption
conferred by this section shall not apply to any particular
industrial undertaking.
767
(3) The profits or gains of an industrial
undertaking to which this section applies
shall be computed in accordance with the
provisions of section 10.
(4) The tax Shall not be payable by a
shareholder in respect of so much of any
dividend paid or deemed to be paid to him by
an industrial undertaking as is attributable
to that part of the profits or gains on
which the tax is not payable under this sec-
tion.
(5) Nothing in this section shall affect
the application of section 23A in relation to
the profits or gains of an industrial under-
taking to which this section applies.
(6) The provisions of this section shall
apply to the assessment for the financial
year next following the previous year in
which.the assessee begins to manufacture or
produce articles and for the four assessments
immediately succeeding”.
We are principally concerned in these appeals with
clause (i) of sub-section (2) of section 15C and that also
only with one part of it, namely, whether the industrial
undertakings, Steel Foundry and the Jute Mill Division, are
not formed by the reconstruction of the business already in
existence.
The learned Additional Solicitor General submits that
these two undertakings are not entitled to exemption under
section 15C(2) as rightly so held by the High Court since
they were formed by the reconstruction of the assessee’s
business already in existence, namely, the business of heavy
engineering. He submits that setting up of a separate unit
to do something in the course of pre-existing manufacturing
process to aid the production of the same article as was
being produced by the pre-existing industrial undertaking
would not amount to starting of a new industrial undertak-
ing. He further emphasises that production of the articles
in the Steel Foundry and in the Jute Mill Division is only
ancillary activity to the main business of the assessee
and since the articles produced in these two supplemental
undertakings help in producing the identical article which
has been the end-product of the assessee’s main business,
section 15C(2) (i) cannot come to the aid of the assessee.
According to Mr, Raman these two industrial undertakings
cannot be said to be not formed out of the reconstruction of
the business already in existence.
Section 15C(2)(i) only excludes three categories of
industrial undertakings from the benefit of the section
without referring to clauses (ii) and (iii) of that sub-
section and other limiting provisions of the section which
are not applicable in the instant case.
It is contended by Mr. Palkhivala that acceptance of the
Additional Solicitor General’s submission will amount to
adding a fourth category of cases in sub-section (2)(i),
namely, an industrial under-
768
taking which is an ancillary undertaking manufacturing
certain articles to supplement the principal industrial
activity. This, says Mr. Palkhivala, will be adding
something to the section.
Section 15C is an exemption section. The benefit grant-
ed under this section is a partial benefit so far as the
quantum of the exempted profits of the new industrial under-
taking as also for a limited period or periods as specified
in the section. If the two industrial undertakings, about
the existence of which there can be no controversy, as found
by the Tribunal, cannot be held to. be formed by the recon-
struction of the business already in existence, the benefit
of section 15C will be available to the assessee.
The principal object of section 15C is to encourage
setting up of new industrial undertakings by offering tax
incentive within a period
of 13 years from April 1, 1948. Section 15C provides
for a fractional. exemption from tax of profits of a newly
established undertaking for five assessment years as speci-
fied therein. This section was inserted in the Act in 1949
by section 13 of the Taxation Laws (Extensions to Merged
States and Amendment) Act, 1949 (Act 67 of 1949) extending
the benefit to the actual manufacture or production of arti-
cles commencing from a prior date, namely, April 1, 1948.
After the country had gained independence in 1947 it was
most essential to give fillip to trade and industry from
all quarters. That seems to be the background for insertion
of section 15C.
It is also significant that the limit of the number of
years for the purpose of claiming exemption has been pro-
gressively raised from the initial 3 years in 1949 to 6
years in 1953, 7 years in 1954, 13 years in 1956 and 18
years in 1960. The incentive introduced in 1949 has been
thus stepped up ever since and the only object is that which
we have already mentioned.
Under sub-section (1) of section 15C the tax shall not
be payable by an assessee on profits not exceeding six per
cent per annum on the capital employed in the new industrial
undertaking from the profits which alone exemption is
claimed. Sub-section (2) of section 15C has a negative as
well as a positive aspect. Negatively, the new industrial
undertaking of the assessee should not be formed-
(1) by the splitting up of the business
already in existence,
(2) by the reconstruction of business
already in existence, or
(3) by the transfer to a new business of
building, machinery or plant used in a busi-
ness which was being carried on before April
1, 1948.
We agree that it is not possible to exclude any new indus-
trial undertaking other than the three categories mentioned
above.
769
We are concerned in these appeals with the type No. (2)
mentioned above. Positively, the new industrial undertaking
must produce result, that is to say, it has to manufacture
or produce articles at any time within a period of 13 years
from April 1, 1948. The further requirement under sub-
section (2) is with regard to the personnel in the under-
taking, namely, that ten or more workers have to work in the
manufacturing process carried on with the aid of power -or
twenty or more workers have to carry on work without the aid
of power. The above element with regard to the number of
workers engaged in the undertaking would go to. show that
even small industrial undertakings, newly started, are
within the exemption clause, where, for example, twenty
workers may complete the industrial process without the aid
of power. There is no controversy about the .positive
aspects in ‘these appeals.
Again, the new undertaking must not be substantially the
same old existing business. The third excluded category
mentioned above significant. Even if a new business is
carried on but by piercing the veil of the new business it
is found that there is employment of the assets of the old
business, the benefit will be not available. From this it
clearly follows that substantial investment of new capital
is imperative. The words “the capital employed” in the
principal clause of section 15C are significant, for fresh
capital must be employed in the new undertaking claiming
exemption. There must be a new under.taking where substan-
tial investment of fresh capital must be made in order to
enable earning of profits attributable to that new capital.
The assessee continues to be the same for the purpose of
assessment. It has its existing business already liable to
tax. It produced in the two concerned undertakings commodi-
ties different from those which it has been manufacturing or
producing in its existing business. Manufacture of produc-
tion of articles yielding additional profit attributable to
the new outlay of capital in a separate and distinct unit is
the heart of the matter, to earn benefit from the exemption
of tax liability under section 15C. Sub-section (6) of the
section also points to the same effect, namely, production
of articles. The answer, in every particular case depends
upon the peculiar/acts and conditions of the new industrial
undertaking on account of which the assessee claims exemp-
tion under section 15C. No hard and fast rule can be laid
down. Trade and industry do not run in earmarked channels
and particularly so in view of manifold scientific and
technological developments. There is great scope for expan-
sion of trade and industry. The fact that an assessee by
establishment of a new industrial undertaking expands his
existing business, which he certainly does, would not, on
that score, deprive him of the benefit under section 15C.
Every new creation in business is some kind of expan-
sion and advancement. The true test is no.t whether the
new industrial undertaking connotes expansion of the exist-
ing business of the assessee but whether it is all the same
a new and identifiable undertaking separate and distinct
from the existing business. No particular decision in one
case can lay down an inexorable test to determine whether a
given case comes under section 15C or not. In order that
the new undertaking -can be said to be not formed out of the
already existing business, there
770
must be a new emergence of a physically separate industrial
unit which may exist on its own as a viable unit. An
undertakings is formed out of the existing business if the
physical identity with the old unit is preserved. This
has not happened here in the case of the two undertakings
which are separate and distinct.
It is clear that the principal business of the assessee
is heavy engineering in the course of which it manufactures
boilers, wagons, etc. If an industrial undertaking produce
certain machines or parts which are, by themselves, identi-
fiable units being marketable commodities and the undertak-
ing 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 appropri-
ate exemption under section 15C. The principal business of
the assessee can be carried on even if the said two addi-
tional undertakings cease to function. Again, the con-
verse is also true. The fact that the articles produced by
the two undertakings are used by the Boiler Division of the
assessee will not weigh against holding that these are new
and separate undertakings. On the other hand the fact that
a portion of the articles produced in these two new indus-
trial 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 to deny the benefit
of section 15C.
Section 15C partially exempts from tax a new industri-
al unit which is separate physically from the old one, the
capital of which and the profits thereon are ascertainable.
There is no difficulty to hold that section 15C is applica-
ble to an absolutely new undertaking for the first time
started by an assessee. The cases which give rise to
controversy are those where the old business is being car-
ried on by the assessee and a new activity is launched by
him by establishing new plants and machinery by investing
substantial funds. The new activity may produce the same
commodities of the old business or it may produce some other
distinct marketable products, even commodities which may
feed the old business. These products may be consumed by
the assessee in his old business or may be sold in the open
market. One thing is certain that the new undertaking must
be an integrated unit by itself wherein articles are pro-
duced and at least a minimum of ten persons with the aid of
power and a minimum of twenty persons without the aid of
power have been employed. Such a new industrially recognisa-
ble unit of an assessee cannot be said to be reconstruction
of his old business since there is no transfer of any
assets of the old business to the new undertaking which
takes place when there is reconstruction of the old busi-
ness. For the purpose Of section 15C the industrial units
set up must be new in-the sense that new plants and machin-
ery are erected for producing either the same commodities or
some distinct commodities. In order to deny the benefit
of section 15C the new undertaking must be formed by recon-
struction of the old business. Now in the instant case
there is 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. There is no such transfer of assets
in the two cases with which we are concerned.
771
We will now deal with the question whether the two undertak-
ings the assessee are formed by reconstruction of the exist-
ing business. The word ‘reconstruction’ is not defined in
the Act but has received judicial interpretation. In re
South African Supply and Cold Storage Company, Wild v. Same
Company(1), Buckley, J. dealing with the meaning of the
word ‘reconstruction’ in a company matter observed as fol-
lows :–
“What does ‘reconstruction’ mean ? To
my mind it means this. An undertaking of
some definite’ kind is being carried on, and
the conclusion is arrived at that it is not
desirable to kill that undertaking, but that
it is desirable to preserve it in some form,
and to do so, not by selling it to an outsider
who shall carry it on–that would be a mere
sale–but in some altered form to continue the
undertaking in Such a manner as that the
persons now carrying it on will substantially
continue to carry it on. It involves, I
think, 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 resuscitated company, or that
all the shareholders of the old company shall
be shareholders in the new company or resusci-
tated company. Substantially the business and
the persons interested must be the same”.
This concept of reconstruction was accepted by the
Bombay High Court in the Commissioner of Income-tax, Bombay
City-I v. Gaekwar Foam and Rubber Co. Ltd. (1), dealing with
section 15C of the Act. While adverting to the passage which
we have just quoted the Bombay
“Now fully appreciating the distinction
which counsel for the Revenue has sought to
make between the case of a reconstruction
of a company and the case of reconstruction of
a business, these observations, as we read
them, are equally illuminating in the context
of reconstruction of business already in
existence in the case of a newly established
industrial undertaking”.
The Delhi High Court also in Commissioner
of Income-tax v. Gangs Sugar Corpora-
tion Ltd.(a), accepted the above concept of
‘reconstruction’ in the following passage :-
“We have given the matter our earnest
consideration and are of the view that in
the reconstruction of business, as 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 none the less impera-
tive that there should be continuity and
preservation of the old undertaking though in
an altered form.
(1) [1904] 2 Ch. 268. 35 I.T.R. 662.
(3) 92 I.T.R. 173.
772
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 indus-
trial 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”.
We endorse the above views with regard to reconstruction of
business.
Reconstruction of business involves the idea of substan-
tially the same persons carrying on substantially the same
business. It is stated on behalf of the Revenue that the
same company in the instant case continues to do the same
business of heavy engineering—no matter certain spare
parts necessary as components to completion of the end-
product are now manufactured in the business itself. The
fact that the assessee is carrying on the general business
of heavy engineering will not prevent him from setting up
new industrial undertakings and from claiming benefit under
section-15C if that section is otherwise applicable. Howev-
er, in order to be entitled to the benefit under’ section
15C, the following facts have to be established by the
assessee. subject always to the time-schedule in the section
:–
(1) investment of substantial fresh capi-
tal 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 attributa-
ble to the said new undertaking, and
(5) above all, a separate and distinct
identity of the industrial unit set up.
We may add that there is no bar to an assessee carrying on a
particular business to set up a new industrial undertaking
on account of which exemption of tax under section 15C may
be claimed.
The legislature has advisedly refrained from inserting a
definition of the word ‘reconstruction’ in the Act. Indeed,
in the infinite variety of instances of restructuring of
industry in the course of strides in technology and of
other developments, the question has to be left for decision
on the peculiar facts of each case.
If any undertaking is not formed by reconstruction of
the old business that undertaking will not be denied the
benefit of section 15C simply because it goes to expand the
general business of the assessee on some directions. As in
the instant case, 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
773
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.
The business of the assessee is of heavy engineering.
The two new undertakings are independently producing arti-
cles which may be of aid to the principal business but yet
the undertakings are distinct and not reconstruction out of
the existing business of the assessee. Use by the assessee
of the articles produced in its existing business or the
concept of expansion are not decisive tests in construing
section 15C. The High Court is not right in holding the two
undertakings as formed by reconstruction of the existing
business of the assessee.
Several decisions have been cited at the bar before
us. We approve of the conclusions in Commissioner of In-
come-tax v. Ganga Sugar Corporation Ltd. (supra); Rajeswari
Mills Ltd. v. Commissioner of income-tax, Madras(1); Nagar-
das Bechardas & Brothers P Ltd. v. Commissioner of Income-
tax Gujarat (2); Commissioner of Income-tax, West Bengal-I
v. Electric Construction and Equipment Company Ltd.(3);
Commissioner ofIncome-tax v. Hindusthan Motors Limited(4).
The decision in Commissioner of Income-tax v. Naya
Sahitya(5) does not represent the correct legal position
and, hence, cannot be approved.
We may observe that we are not required to consider in
these appeals how profit will be actually calculated in
order to determine the quantum of exemption of six per cent
of the profit on the capital employed. If difficulties are
insurmountable and, therefore, profit cannot be ascer-
tained, that will be a different question in the course of
practical application of the section. That kind of a possi-
ble difficulty should not weigh in the true construction of
section 15C. In the present case the assessee claimed
profit and there was no difficulty about ascertainment of
the exempted profit as separate books of accounts were
kept and the undertakings were at separate places.
In view of the foregoing discussion, we are clearly of
opinion that the High Court is not right in answering the
two questions in the negative and against the assessee.
On the other hand. the Tribunal was right in answering the
two questions in the affirmative and against the Department.
The two questions referred stand answered in the affirma-
tive. The judgment of the High Court, is, therefore, set
aside and the appeals are allowed with costs.
P.B.R. Appeals allowed.
(1) 50 I.T.R. 29.
(2) 104 I.T.R. 255.
(3) 104 I.T.R. 101.
(4) [1976] Taxation Law Reports. 821.
(5) 84 I.T.R. 567.
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