{"id":209193,"date":"1977-01-25T00:00:00","date_gmt":"1977-01-24T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/textile-machinery-corporation-vs-the-commissioner-of-income-tax-on-25-january-1977"},"modified":"2018-11-16T06:53:25","modified_gmt":"2018-11-16T01:23:25","slug":"textile-machinery-corporation-vs-the-commissioner-of-income-tax-on-25-january-1977","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/textile-machinery-corporation-vs-the-commissioner-of-income-tax-on-25-january-1977","title":{"rendered":"Textile Machinery Corporation … vs The Commissioner Of Income-Tax, … on 25 January, 1977"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Textile Machinery Corporation … vs The Commissioner Of Income-Tax, … on 25 January, 1977<\/div>\n
Equivalent citations: 1977 AIR 1134, \t\t 1977 SCR (2) 762<\/div>\n
Author: P Goswami<\/div>\n
Bench: Goswami, P.K.<\/div>\n
           PETITIONER:\nTEXTILE MACHINERY CORPORATION LIMITED, CALCUTTA\n\n\tVs.\n\nRESPONDENT:\nTHE COMMISSIONER OF INCOME-TAX, WEST BENGAL,CALCUTTA\n\nDATE OF JUDGMENT25\/01\/1977\n\nBENCH:\nGOSWAMI, P.K.\nBENCH:\nGOSWAMI, P.K.\nKHANNA, HANS RAJ\nKAILASAM, P.S.\n\nCITATION:\n 1977 AIR 1134\t\t  1977 SCR  (2) 762\n 1977 SCC  (2) 368\n CITATOR INFO :\n MV\t    1985 SC 421\t (50)\n RF&E\t    1992 SC1622\t (9)\n\n\nACT:\n\t    Indian  Income-tax\tAct,  1922--S.\t15C(2)(i)--Scope  of\n\tTests\tfor   determining  when\t benefit  of   the   section\n\tavailable--Reconstruction--Tests for determination.\n\n\n\nHEADNOTE:\n\t    Section  15C  of the Indian Income-tax Act\t1922,  which\n\tdeals with exemption from tax of newly established industri-\n\tal  undertakings, provides in sub-s. 2(i) that\tthe  section\n\tapplies,  among others, to any industrial undertaking  which\n\tis not formed by the splitting up, or the reconstruction  of\n\tbusiness already in existence.\n\t    The\t assessee (appellant) was a heavy engineering\tcon-\n\tcern  manufacturing boilers. machinery parts and wagons.  In\n\taddition, it had started a Steel Foundry Division and a Jute\n\tMill  Division.\t The bulk of the goods produced in both\t the\n\tdivisions was used in the various divisions of the  assessee\n\tcompany.  The assessee's claim for exemption from tax  under\n\ts. 15C in respect of profits derived from both the companies\n\twas  rejected by the Income-tax Officer and its\t appeal\t was\n\trejected  by  the Appellate Assistant  Commissioner  on\t the\n\tground theft the .undertakings were an expansion and  recon-\n\tstruction of the existing business.\n\t    On appeal, the Appellate Tribunal held that although the\n\tproducts manufactured in the two divisions were used in\t the\n\tassessee's  business,  the Steel Foundry and the  Jute\tMill\n\tDivision  were\tnew  industrial undertakings,  in  that\t the\n\tmachinery used in them was new, they were housed in separate\n\tbuildings,   were: established under separate  licences\t and\n\tthat both the new divisions were maintaining separate  books\n\tof account.\n\t    On reference, the High Court held that it was a case  of\n\treconstruction\tof the existing business because  the  goods\n\tproduced  in  the two divisions were primarily used  in\t the\n\tassessee's engineering concern.\n\tAllowing the appeal.\n\t    HELD: The Tribunal was right in holding in favour of the\n\tassessee.  Section  15C is applicable to an  absolutely\t new\n\tundertaking for the first time started and in order to\tdeny\n\tbenefit of the section, the, new undertaking must be  formed\n\tby reconstruction of the old business.\t[768 B-C]\n\t    1. (a) In order to be entitled to the benefit of s. 15C,\n\tthe assessee has to establish:\n\t   (1)\tthe investment of substantial fresh capital  in\t the\n\tindustrial undertaking;\n\t   (2) employment of the requisite labour therein\n\t   (3)\tmanufacture or production of articles in the  under-\n\ttaking;\n\t   (4)\tearning of profits 'clearly attributable to the\t new\n\tundertaking; and\n\t   (5)\tseparate  and distinct indentity of  the  industrial\n\tunit set up.\n\t    (b)\t Once the new industrial undertakings  are  separate\n\tand  independent  production  units in the  sense  that\t the\n\tcommodities produced or the results achieved are commercial-\n\tly tangible products and the undertakings can be carried  on\n\tseparately  without  complete absorption  and  losing  their\n\tidentity in the old business, they are not to be treated  as\n\tbeing formed by reconstruction of the old business.  [772 H,\n\t773 A]\n\t763\n\t       (c)  The\t object of the section is to  encourage\t the\n\tsetting\t up of new industrial undertakings by  offering\t tax\n\tincentives  within a certain period.  Sub-section (2) has  a\n\tnegative  as  well as a positive aspect. Negatively,  a\t new\n\tundertakings  should  not be formed by splitting up  of\t the\n\tbusiness  already in existence and by the reconstruction  of\n\tbusiness  already  in  existence;  and\tpositively,  a\t new\n\tundertaking must produce results, that is to say, it has  to\n\tmanufacture  or\t produce  articles at any  time\t within\t the\n\tstipulated period.  The new undertaking must not be substan-\n\ttially\tthe same as the existing business.  The\t words\t\"the\n\tcapital .employed\" are significant, for, fresh capital\tmust\n\tbe employed in the undertaking claiming exemption.  Manufac-\n\tture  or production of articles yielding additional  profits\n\tattributable to the new outlay of capital in a separate\t and\n\tdistinct unit is the heart of the matter to earn the benefit\n\tfrom the exemption of tax liability under s. 15C.  The\tfact\n\tthat by establishing a new industrial undertaking the asses-\n\tsee  expands its existing business would not deprive  it  of\n\tthe  benefit  under s. 15C.  If\t an  industrial\t undertaking\n\tproduces  certain machines or parts which  are\tidentifiable\n\tunits  being marketable commodities and the undertaking\t can\n\texist even after the cessation of the principal business  of\n\tthe  assessee, it cannot be anything but a new and  separate\n\tindustrial undertaking to qualify for appropriate  exemption\n\tunder s. 15C.  [769 E-H, 770A]\n\tIn the instant case, the principal business of the  assessee\n\tcan  be carried on even if the two  additional\tundertakings\n\tcease  to  function. The fact that a  portion  the  articles\n\tproduced  in the new undertakings had been sold in the\topen\n\tmarket to others is a circumstance in favour of the assessee\n\tthat  the  new industrial units can function on\t their\town.\n\tUse of the articles by the assessee is not decisive 10\tdeny\n\tthe benefit of s. 15C. There was no 'formation of any indus-\n\ttrial  undertaking out of the existing business\t since\tthat\n\tcan  take place only  when the assets of the  old   business\n\tare transferred substantially to the new undertaking.  Also.\n\tthere ,ins no difficulty about ascertainment of the exempted\n\tprofit\tas  separate  books of accounts were  kept  and\t the\n\tundertakings were at separate places. [770 B-D. G-H]\n\t       The High Court was not right in holding that the\t two\n\tundertakings  were formed by reconstruction of the  existing\n\tbusiness of the assessee.   [773 B-C]\n\t       2.  Reconstruction  involves that  substantially\t the\n\tsame   business\t shall\tbe carried on and substantially\t the\n\tsame  persons  shall carry it on.  But it does\tnot  involve\n\tthat all the assets shall pass to the new company or  resus-\n\tcitated\t company,  or that all the shareholders of  the\t old\n\tcompany shall be shareholders in the new company.   Substan-\n\ttially\tthe business and the person interested must  be\t the\n\tsame. [771 C-D]\n\tSouth  African Supply and Cold Storage Company Wild v.\tSame\n\tCompany, [1904] 2 Ch. 268, followed.\n\t      Commissioner  of Income-tax Bombay City-1\t v.  Gackwar\n\tFoam  and  Rubber  Co.\tLtd. 35\t ITR  662,  Commissioner  of\n\tIncome-tax  v.\tGanga Sugar  Corporation Ltd.<\/a>  92  ITR\t173,\n\tRajeswari Mills Ltd. v. Commissioner  of  Income-tax Madras,<\/a>\n\t50 ITR 29, Nagardas Bechardas & Brothers P. Ltd. v.  Commis-\n\tsioner\tIncome-tax Gujarat, 104 ITR 255,   Commissioner\t  of\n\tIncome-tax.   West  Bengal-I v.\t Electric  Construction\t and\n\tEquipment  Company  Ltd.<\/a> 104. ITR 101  and  Commissioner  of\n\tIncome-tax v. Hindustan Motors Limited,<\/a> [1976] Taxation\t Law\n\tReports 821, approved.\n\tCommissioner  of Income-tax v. Naya Sahitya 84 ITR 567,\t not\n\tapproved.\n\n\n\nJUDGMENT:\n<\/pre>\n
\tCIVIL-APPELLATE\t JURISDICTION: Civil Appeal Nos. 772-773  of
\n\t1972.\n<\/p>\n
\t       From the Judgment and Order dated 9th\/10th July, 1970
\n\tof the Calcutta High Court in I.T.R. No. 158 of 1966.\n<\/p>\n
\t     N. A. Palkhivala, Dr. D. Pal, U.K. Khaitan, S.R.  Agar-
\n\twal  and Parveen Kumar for the Appellant.\n<\/p>\n
\t      V.P. Raman, Addl. Sol. General, T.A. Ramachandran\t and
\n\tR.N. Sachthey for the Respondents.\n<\/p>\n
\t764<\/span><\/p>\n
\tThe Judgment of the Court was delivered by
\n\tGOSWAMI,  J.   These two appeals by certificate\t  are\tfrom
\n\tthe  judgment of the Calcutta High Court since\treported  in
\n\tCommissioner Income-tax, West Bengal-I v. Textile  Machinery
\n\tCorporation(‘).\t The two appeals relate respectively to\t two
\n\tassessment  years 1958-59 (calendar year 1957)\tand  1959-60
\n\t(calendar  year\t 1958).\t The matter relates to the claim  by
\n\tthe  assessee for exemption of tax under section 15C of\t the
\n\tIndian Income-tax Act, 1922 (briefly the Act).
\n\t    The\t matter came u13 before the High Court ‘on a  refer-
\n\tence  under  section 66(1) of the Act.\t The  two  questions
\n\treferred to were  as follows :–\n<\/p>\n
\t\t\t    “(1)  Whether, on the facts and  in\t the
\n\t\t      circumstances  of the case, the  Tribunal\t was
\n\t\t      right  in\t holding  that\tthe   Steel  Foundry
\n\t\t      Division\twas  an\t industrial  undertaking  to
\n\t\t      which  section 15C of the.  Indian  Income-tax
\n\t\t      Act, 1922, applied ?\n<\/p><\/blockquote>\n
\t\t\t    (2)\t Whether,  on the facts and  in\t the
\n\t\t      circumstances  of the case, the  Tribunal\t was
\n\t\t      right in holding that  the  Jute Mill Division
\n\t\t      set  up by the assessee-company was an  indus-
\n\t\t      trial undertaking to which section 15C of\t the
\n\t\t      Indian Incometax Act, 1922, applied ?
\n\t\t      The facts may briefly be stated:\n<\/p><\/blockquote>\n
\t    The assessee (the appellant herein) is a heavy engineer-\n<\/p><\/blockquote>\n
\ting concern manufacturing boilers, machinery parts,  wagons,
\n\tetc.   For  the\t assessment years 1958-59  and\t1959-60\t the
\n\tassessee  claimed exemption of tax under section 15C of\t the
\n\tAct  in respect of the profits and  gains derived  from\t its
\n\tSteel Foundry Division and a similar-claim for relief  under
\n\tsection 15C in respect of its profits and gains derived from
\n\tits Jute Mill Division for the year 1959-60.
\n\t    The assessee had previously in the earlier years  bought
\n\tfrom outside the castings manufactured in the Steel  Foundry
\n\tDivision  which was started in the assessment  year  1958-59
\n\tand  continued\tthereafter.  Again, similarly  in  the\tyear
\n\t‘1959-60,  in addition to the manufacturing of\tcastings  in
\n\tthe  Steel  Foundry Division the assessee started  the\tJute
\n\tMill  Division where the parts made out of the raw  material
\n\tsupplied  by  the Boiler Division by machining\tand  forging
\n\tthem were given to the Boiler Division of the assessee.\t  It
\n\twas found that out of  a total sale  of\t Rs.28,23,127\/-\t  of
\n\tsteel\tcastings  goods\t worth Rs.18,39,433\/- were  used  in
\n\tconnection  with the various Divisions of the  company.\t  In
\n\trespect\t of the Jute Mill Division, the\t  Incometax  Officer
\n\tfound  that out of the total sales of Rs.13,03,509\/-  sales.
\n\tto the Boiler Division totalled Rs.11,89,812\/- and sales  to
\n\toutside\t the  Jute  Mill Division totalled  only  a  sum  of
\n\tRs.1,13,6971\/-.\t  The Income-tax Officer and  the  Appellate
\n\tAssistant Commissioner, on the above facts, held the  under-
\n\ttakings\t as  expansion and reconstruction  of  the  business
\n\talready existing and hence the assessee was not entitled
\n\t(1) 80 I.T.R. 428.\n<\/p>\n
\t765<\/span><\/p>\n
\tto  exemption under section 15C of the Act.  The  Income-tax
\n\tAppellate  Tribunal,  however,\tallowed the  appeal  of\t the
\n\tassessee and accepted the claim for exemption under  section
\n\t15C.  According\t to  the Tribunal both the Steel Foundry and
\n\tthe Jute Mill Division of  the assessee were new  industrial
\n\tundertakings.\tThe  above  conclusion was  reached  on\t the
\n\tbasis of several facts found by the Tribunal. These arc that
\n\tthe machinery was new, was housed in a separate building and
\n\tthat industrial licences had to be obtained, for manufactur-
\n\ting  the parts in question.  According to the  Tribunal\t the
\n\texisting business of the assessee consisted of manufacturing
\n\tboilers, wagons, etc. and for that purpose the assessee\t was
\n\tpurchasing  the\t spare\tparts, forgings\t and  castings\tfrom
\n\toutside.   The\tTribunal  came to the  conclusion  that\t the
\n\tbusiness of the new industrial undertakings was to  manufac-
\n\tture  those very spare parts. Hence the\t Tribunal  concluded
\n\tthat it could not  be said that the undertakings were formed
\n\tout of the existing ‘business to come within the mischief of
\n\tthe  exclusion\tclause in section  15C(2)(i).  The  Tribunal
\n\trightly\t relying upon the Tara Iron and Steel Co.  Ltd.\t and
\n\tOthers\tv. State of Bihar(1) also held that even though\t the
\n\tmanufactured  products\tof the new  industrial\tundertakings
\n\twere  mostly used in the assessee’s other business of  manu-
\n\tfacturing  boilers, wagons, etc. the element of\t profit\t was
\n\tthere and the extent of the same could be ascertained as the
\n\tassessee was maintaining separate books of account.
\n\t    In\tthe reference at the instance of the Department\t the
\n\tHigh  Court answered both the questions in the negative\t and
\n\tagainst the assessee. The High Court held as follows :–\n<\/p>\n
\t\t\t    “The  goods\t which\tthe  steel   foundry
\n\t\t      division\t and  the jute mill  division  began
\n\t\t      producing for the assessee were also previous-
\n\t\t      ly  used by the assessee in its business,\t but
\n\t\t      they  were  purchased from  outside  and\tthis
\n\t\t      purchase from outside was replaced by  produc-
\n\t\t      tion or manufacture  from\t within\t the  asses-
\n\t\t      see’s own business.  This change of  producing
\n\t\t      one’s  own goods systematically used  in\t the
\n\t\t      existing\tbusiness instead of buying them from
\n\t\t      outside  would only be a reconstruction  of  a
\n\t\t      business\talready in existence  ……  In  so
\n\t\t      far as they started producing and\t manufactur-
\n\t\t      ing  themselves, the assessee was doing  some-
\n\t\t      thing  which was only a reconstruction of\t the
\n\t\t      business already in existence  ……..
\n\t\t\t    The\t newness  of the  machinery  of\t the
\n\t\t      steel  foundry  division\tand  the  jute\tmill
\n\t\t      division could  not by  itself  make them\t new
\n\t\t      industrial undertakings.\tSeparate housing of,
\n\t\t      and  separate accounts for, the steel  foundry
\n\t\t      division\tand  jute mill division may be\tonly
\n\t\t      parts of reconstruction  of  the same business
\n\t\t      and did not necessarily indicate a new  indus-
\n\t\t      trial  undertaking.   The grant of  a  special
\n\t\t      licence  for  the steel foundry  division\t did
\n\t\t      not  make\t it  an\t industrial  undertaking  to
\n\t\t      qualify  for exemption from tax under  section
\n\t\t      15C, because the licence was for expansion  of
\n\t\t      the  existing industrial undertaking  and\t the
\n\t\t      licence did not cover the jute mill division”.\n<\/p><\/blockquote>\n
\t(1) 48 I.T.R. 123.\n<\/p>\n
\t766<\/span><\/p>\n
\t    It\tis, however, admitted before us that both the  units
\n\twere covered by licences.\n<\/p>\n
\t    The controversy in these appeals centres round the\ttrue
\n\tconstruction of section 15C(2)(i) of the Act and in particu-
\n\tlar  with  regard to the scope and ambit of  the  expression
\n\ttherein,  namely, the reconstruction of business already  in
\n\texistence.   Is the High Court\tright  in holding  that\t the
\n\ttwo  industrial undertakings, namely, the Steel Foundry\t and
\n\tthe  Jute  Mill Division, are formed by\t reconstruction\t  of
\n\tthe  business already in existence differing from  the\tcon-
\n\ttrary  conclusion reached by the Tribunal ?\n<\/p>\n
\t    Before  we proceed further, we will read section 15C  as
\n\tit  stood during the material time:\n<\/p>\n
\t\t\t    “15C. Exemption from tax of newly estab-
\n\t\t      lished industrial undertakings.
\n\t\t\t (1) Save as otherwise hereinafter provided,
\n\t\t      the tax shall not be payable by an assessee on
\n\t\t      so much  of  the profits or gains derived from
\n\t\t      any  industrial  undertaking  to\twhich\tthis
\n\t\t      section applies as do not exceed six per\tcent
\n\t\t      per  annum  on  the capital  employed  in\t the
\n\t\t      undertaking  computed in accordance with\tsuch
\n\t\t      rules  as\t may be made in this behalf  by\t the
\n\t\t      Central Board of Revenue.\n<\/p><\/blockquote>\n
\t\t\t (2) This section applies to any  industrial
\n\t\t      undertaking which–\n<\/p><\/blockquote>\n
\t\t\t    (i)\t is not formed by the splitting\t up,
\n\t\t      or the  reconstruction of, business already in
\n\t\t      existence or by the transfer to a new business
\n\t\t      of   building, machinery or plant,  previously
\n\t\t      used   in\t any other business;\n<\/p><\/blockquote>\n
\t\t\t    (ii) has begun or begins to\t manufacture
\n\t\t      or  produce  articles in any part\t of  taxable
\n\t\t      territories  at  any time within a  period  of
\n\t\t      thirteen years from the 1st day of April 1948,
\n\t\t      or such further  period as the Central Govern-
\n\t\t      ment  may,  by notification  in  the  Official
\n\t\t      Gazette, specify with reference to any partic-
\n\t\t      ular industrial undertaking;\n<\/p><\/blockquote>\n
\t\t\t   (iii) employs ten or more  workers  in  a
\n\t\t      manufacturing process carried on with the\t aid
\n\t\t      of power, or employs twenty or more workers in
\n\t\t      a manufacturing process carried on without the
\n\t\t      aid of power;\n<\/p><\/blockquote>\n
\t      Provided that the Central Government may, by notifica-\n<\/p><\/blockquote>\n
\ttion  in  the Official Gazette, direct\tthat  the  exemption
\n\tconferred by this section shall not apply to any  particular
\n\tindustrial undertaking.\n<\/p>\n
\t767<\/span><\/p>\n
\t\t\t (3)  The profits or gains of an  industrial
\n\t\t      undertaking  to  which  this  section  applies
\n\t\t      shall   be  computed  in accordance  with\t the
\n\t\t      provisions of section 10.\n<\/p>\n
\t\t\t (4)  The  tax\tShall not be  payable  by  a
\n\t\t      shareholder  in  respect\tof so  much  of\t any
\n\t\t      dividend\tpaid or deemed to be paid to him  by
\n\t\t      an industrial undertaking\t as is\tattributable
\n\t\t      to  that\tpart of the profits  or\t  gains\t  on
\n\t\t      which  the tax is not payable under this\tsec-
\n\t\t      tion.\n<\/p>\n
\t\t\t (5)  Nothing in this section  shall  affect
\n\t\t      the application of section 23A in relation  to
\n\t\t      the  profits or gains of an industrial  under-
\n\t\t      taking to which this section applies.\n<\/p>\n
\t\t\t (6)  The provisions of this  section  shall
\n\t\t      apply   to  the assessment for  the  financial
\n\t\t      year  next  following  the  previous  year  in
\n\t\t      which.the\t assessee begins to  manufacture  or
\n\t\t      produce articles and for the four\t assessments
\n\t\t      immediately succeeding”.\n<\/p>\n
\t    We\tare  principally  concerned in\tthese  appeals\twith
\n\tclause\t(i) of sub-section (2) of section 15C and that\talso
\n\tonly  with  one part of it, namely, whether  the  industrial
\n\tundertakings, Steel Foundry and the Jute Mill Division,\t are
\n\tnot formed by the reconstruction of the business already  in
\n\texistence.\n<\/p>\n
\t    The\t learned Additional Solicitor General  submits\tthat
\n\tthese  two undertakings are not entitled to exemption  under
\n\tsection\t 15C(2) as rightly so held by the High\tCourt  since
\n\tthey were  formed  by  the reconstruction of the  assessee’s
\n\tbusiness already in existence, namely, the business of heavy
\n\tengineering.  He submits that setting up of a separate\tunit
\n\tto do something in the course of pre-existing  manufacturing
\n\tprocess\t to  aid the production of the same article  as\t was
\n\tbeing  produced by the pre-existing  industrial\t undertaking
\n\twould  not amount to starting of a new industrial  undertak-
\n\ting.  He further  emphasises that production of the articles
\n\tin the Steel Foundry and in  the Jute Mill Division is\tonly
\n\tancillary  activity to the main business  of   the  assessee
\n\tand since the articles produced in these  two\tsupplemental
\n\tundertakings  help in producing the identical article  which
\n\thas   been the end-product of the assessee’s main  business,
\n\tsection\t  15C(2) (i) cannot come to the aid of the assessee.
\n\tAccording  to  Mr,  Raman these two industrial\tundertakings
\n\tcannot be said to be not formed out of the reconstruction of
\n\tthe business already in existence.\n<\/p>\n
\t    Section  15C(2)(i)\tonly excludes three  categories\t  of
\n\tindustrial  undertakings  from the benefit  of\tthe  section
\n\twithout\t referring  to clauses (ii) and (iii) of  that\tsub-
\n\tsection\t and other limiting provisions of the section  which
\n\tare not applicable in the instant case.\n<\/p>\n
\t    It is contended by Mr. Palkhivala that acceptance of the
\n\tAdditional  Solicitor General’s submission will\t amount\t  to
\n\tadding\t a  fourth category of cases in sub-section  (2)(i),
\n\tnamely, an industrial under-\n<\/p>\n
\t768<\/span><\/p>\n
\ttaking\twhich  is  an  ancillary  undertaking  manufacturing
\n\tcertain\t articles  to supplement the  principal\t  industrial
\n\tactivity.   This,   says   Mr. Palkhivala,  will  be  adding
\n\tsomething to the section.\n<\/p>\n
\t    Section 15C is an exemption section.  The benefit grant-
\n\ted  under  this section is a partial benefit so far  as\t the
\n\tquantum of the exempted profits of the new industrial under-
\n\ttaking as also for a limited period or periods as  specified
\n\tin the section.\t If the two industrial\tundertakings,  about
\n\tthe existence of which there can be no controversy, as found
\n\tby the Tribunal, cannot be held to. be formed by the  recon-
\n\tstruction of the business already in existence, the  benefit
\n\tof section  15C will be available to the assessee.
\n\t    The\t principal  object of section 15C  is  to  encourage
\n\tsetting\t up of new industrial undertakings by  offering\t tax
\n\tincentive within a period
\n\t    of\t13 years from April 1, 1948.  Section  15C  provides
\n\tfor  a\tfractional. exemption from tax of profits of a newly
\n\testablished undertaking for five assessment years as  speci-
\n\tfied therein.  This section was inserted in the Act in\t1949
\n\tby  section  13 of the Taxation Laws (Extensions  to  Merged
\n\tStates and Amendment) Act, 1949 (Act 67\t of  1949) extending
\n\tthe benefit to the actual manufacture or production of arti-
\n\tcles  commencing from a prior date, namely, April  1,  1948.
\n\tAfter  the  country had gained independence in 1947  it\t was
\n\tmost   essential  to give fillip to trade and industry\tfrom
\n\tall quarters.  That seems to be the background for insertion
\n\tof section 15C.\n<\/p>\n
\t    It\tis also significant that the limit of the number  of
\n\tyears  for  the purpose of claiming exemption has been\tpro-
\n\tgressively  raised  from the initial 3 years in\t 1949  to  6
\n\tyears  in  1953, 7 years in 1954, 13 years in  1956  and  18
\n\tyears  in 1960.\t The incentive introduced in 1949  has\tbeen
\n\tthus stepped up ever since and the only object is that which
\n\twe have already mentioned.\n<\/p>\n
\t    Under  sub-section (1) of section 15C the tax shall\t not
\n\tbe  payable by an assessee on profits not exceeding six\t per
\n\tcent per annum on the capital employed in the new industrial
\n\tundertaking  from  the\tprofits\t which\talone  exemption  is
\n\tclaimed.   Sub-section (2) of section 15C has a negative  as
\n\twell  as a positive aspect.  Negatively, the new  industrial
\n\tundertaking of the assessee should not be formed-\n<\/p>\n
\t\t\t  (1)  by the splitting up of  the  business
\n\t\t      already in existence,
\n\t\t\t  (2)  by  the\treconstruction\tof  business
\n\t\t      already in existence, or
\n\t\t\t  (3)  by the transfer to a new business  of
\n\t\t      building,\t machinery or plant used in a  busi-
\n\t\t      ness which was  being carried on before  April
\n\t\t      1, 1948.\n<\/p><\/blockquote>\n
\tWe  agree that it is not possible to exclude any new  indus-
\n\ttrial undertaking other than the three categories  mentioned
\n\tabove.\n<\/p>\n
\t769<\/span><\/p>\n
\t    We are concerned in these appeals with the type No.\t (2)
\n\tmentioned above.  Positively, the new industrial undertaking
\n\tmust  produce result, that is to say, it has to\t manufacture
\n\tor produce articles at any time within a period of 13  years
\n\tfrom  April  1, 1948.  The further  requirement\t under\tsub-
\n\tsection (2) is with regard  to\tthe  personnel in the under-
\n\ttaking, namely, that ten or more workers have to work in the
\n\tmanufacturing  process carried on with the aid of power\t -or
\n\ttwenty or more workers have to carry on work without the aid
\n\tof  power.  The above element with regard to the  number  of
\n\tworkers\t engaged in the undertaking would go to.  show\tthat
\n\teven  small  industrial\t undertakings,\tnewly  started,\t are
\n\twithin\tthe  exemption\tclause, where, for  example,  twenty
\n\tworkers may complete the industrial process without the\t aid
\n\tof  power.   There is no controversy  about   the  .positive
\n\taspects in ‘these appeals.\n<\/p>\n
\tAgain,\tthe  new undertaking must not be  substantially\t the
\n\tsame  old  existing business.  The third  excluded  category
\n\tmentioned  above  significant.\tEven if a  new\tbusiness  is
\n\tcarried\t on but by piercing the veil of the new business  it
\n\tis  found that there is employment of the assets of the\t old
\n\tbusiness,  the benefit will be not available.  From this  it
\n\tclearly\t follows that substantial investment of new  capital
\n\tis  imperative.\t  The words “the capital  employed”  in\t the
\n\tprincipal clause  of section 15C are significant, for  fresh
\n\tcapital\t must  be employed in the new  undertaking  claiming
\n\texemption.  There must be a new under.taking where  substan-
\n\ttial  investment of fresh capital must be made in  order  to
\n\tenable earning of profits attributable to that new capital.
\n\t    The assessee continues to be the same for the purpose of
\n\tassessment.  It has its existing business already liable  to
\n\ttax.  It produced in the two concerned undertakings commodi-
\n\tties different from those which it has been manufacturing or
\n\tproducing  in its existing business. Manufacture of  produc-
\n\ttion of articles yielding additional profit attributable  to
\n\tthe new outlay of capital in a separate and distinct unit is
\n\tthe heart of the matter, to earn benefit from the  exemption
\n\tof  tax liability under section 15C.  Sub-section (6) of the
\n\tsection\t also points to the same effect, namely,  production
\n\tof articles.  The  answer,  in every particular case depends
\n\tupon the peculiar\/acts and conditions of the new  industrial
\n\tundertaking on account of which\t the  assessee claims exemp-
\n\ttion  under section 15C.  No hard and fast rule can be\tlaid
\n\tdown.  Trade and industry do not run in\t earmarked  channels
\n\tand  particularly  so  in view of  manifold  scientific\t and
\n\ttechnological developments.  There is great scope for expan-
\n\tsion  of trade and industry.  The fact that an\tassessee  by
\n\testablishment  of a new\t industrial undertaking expands\t his
\n\texisting  business, which he certainly\tdoes, would not,  on
\n\tthat  score, deprive him of the benefit under  section\t15C.
\n\tEvery  new creation in business\t is  some  kind\t of   expan-
\n\tsion   and advancement.\t The true test is no.t\twhether\t the
\n\tnew industrial undertaking connotes expansion of the  exist-
\n\ting business of the assessee but whether it is all the\tsame
\n\ta  new\tand identifiable undertaking separate  and  distinct
\n\tfrom  the existing business.  No particular decision in\t one
\n\tcase can lay down an inexorable test to determine whether  a
\n\tgiven  case comes under section 15C or not.  In\t order\tthat
\n\tthe new undertaking -can be said to be not formed out of the
\n\talready existing business, there
\n\t770<\/span>
\n\tmust be a new emergence of a physically separate  industrial
\n\tunit  which  may  exist on its own as a\t viable\t unit.\t  An
\n\tundertakings  is formed out of the existing business if\t the
\n\tphysical  identity with the old\t unit  is  preserved.\tThis
\n\thas  not happened here in the case of the  two\tundertakings
\n\twhich are separate and distinct.\n<\/p>\n
\t    It is clear that the principal business of the  assessee
\n\tis  heavy engineering in the course of which it manufactures
\n\tboilers, wagons, etc.  If an industrial undertaking  produce
\n\tcertain machines or parts which are, by themselves,  identi-
\n\tfiable units being marketable commodities and the  undertak-
\n\ting  can exist even after the cessation\t of   the  principal
\n\tbusiness  of the assessee, it cannot be anything but  a\t new
\n\tand separate industrial undertaking to qualify for appropri-
\n\tate exemption under section 15C.  The principal business  of
\n\tthe  assessee can be carried on even if the said  two  addi-
\n\ttional\tundertakings  cease  to function.  Again,  the\tcon-
\n\tverse is also true.  The fact that the articles produced  by
\n\tthe two undertakings are used by the Boiler Division of\t the
\n\tassessee will not weigh against holding that these are\t new
\n\tand separate undertakings.  On the other hand the fact\tthat
\n\ta  portion of the articles produced in these two new  indus-
\n\ttrial\tundertakings   had been sold in the open  market  to
\n\tothers is a circumstance in favour of the assessee that\t the
\n\tnew  industrial units can function on their own. Use of\t the
\n\tarticles by the assessee is not decisive to deny the benefit
\n\tof section 15C.\n<\/p>\n
\t    Section 15C partially  exempts from tax a new  industri-
\n\tal  unit which is separate physically from the old one,\t the
\n\tcapital of which and the profits thereon are  ascertainable.
\n\tThere is no difficulty to hold that section 15C is  applica-
\n\tble  to\t an absolutely new undertaking for  the\t first\ttime
\n\tstarted\t by  an assessee.  The cases which  give   rise\t  to
\n\tcontroversy  are those where the old business is being\tcar-
\n\tried  on by the assessee and a new activity is\tlaunched  by
\n\thim by\testablishing  new plants and machinery by  investing
\n\tsubstantial  funds.  The  new activity may produce the\tsame
\n\tcommodities of the old business or it may produce some other
\n\tdistinct  marketable  products, even commodities  which\t may
\n\tfeed  the old business.\t These products may be\tconsumed  by
\n\tthe assessee in his old business or may be sold in the\topen
\n\tmarket.\t One thing is certain that the new undertaking\tmust
\n\tbe  an integrated unit by itself wherein articles  are\tpro-
\n\tduced and at least a minimum of ten persons with the aid  of
\n\tpower and a  minimum   of twenty persons without the aid  of
\n\tpower have been employed. Such a new industrially recognisa-
\n\tble unit of an assessee cannot be said to be  reconstruction
\n\tof  his\t old  business since there is no  transfer  of\t any
\n\tassets\tof  the old business to the  new  undertaking  which
\n\ttakes  place when there is reconstruction of the  old  busi-
\n\tness.\tFor the purpose Of section 15C the industrial  units
\n\tset up must be new in-the sense that new plants and  machin-
\n\tery are erected for producing either the same commodities or
\n\tsome  distinct commodities.  In order to  deny\tthe  benefit
\n\tof section 15C the new undertaking must be formed by  recon-
\n\tstruction  of  the old business.  Now in  the  instant\tcase
\n\tthere  is no formation of any industrial undertaking out  of
\n\tthe  existing business since that can take place  only\twhen
\n\tthe assets of the old business are transferred substantially
\n\tto the new undertaking.\t There is no such transfer of assets
\n\tin the two cases with which we are concerned.\n<\/p>\n
\t771<\/span><\/p>\n
\tWe will now deal with the question whether the two undertak-
\n\tings the assessee are formed by reconstruction of the exist-
\n\ting  business. The word ‘reconstruction’ is not\t defined  in
\n\tthe  Act  but has received judicial interpretation.   In  re
\n\tSouth African Supply and Cold Storage Company, Wild v.\tSame
\n\tCompany(1),  Buckley, J. dealing  with\tthe meaning  of\t the
\n\tword  ‘reconstruction’ in a company matter observed as\tfol-
\n\tlows :–\n<\/p>\n
\t\t\t    “What  does ‘reconstruction’ mean ?\t  To
\n\t\t      my   mind it means this.\t An  undertaking  of
\n\t\t      some  definite’ kind is being carried on,\t and
\n\t\t      the conclusion is arrived at that it  is\t not
\n\t\t      desirable\t to kill that undertaking, but\tthat
\n\t\t      it  is desirable to preserve it in some  form,
\n\t\t      and to do so, not by selling it to an outsider
\n\t\t      who shall carry it on–that would be  a\tmere
\n\t\t      sale–but in some altered form to continue the
\n\t\t      undertaking  in  Such  a manner  as  that\t the
\n\t\t      persons now carrying it on will  substantially
\n\t\t      continue\tto  carry  it on.   It\tinvolves,  I
\n\t\t      think,  that substantially the  same  business
\n\t\t      shall be carried on and substantially the same
\n\t\t      persons  shall carry it on.  But it  does\t not
\n\t\t      involve that all the assets shall pass to\t the
\n\t\t      new  company or resuscitated company, or\tthat
\n\t\t      all the shareholders of  the old company shall
\n\t\t      be shareholders in the new company or resusci-
\n\t\t      tated company.  Substantially the business and
\n\t\t      the persons interested must be the same”.<\/p><\/blockquote>\n
\t    This  concept  of  reconstruction was  accepted  by\t the
\n\tBombay High Court in the Commissioner of Income-tax,  Bombay
\n\tCity-I v. Gaekwar Foam and Rubber Co. Ltd. (1), dealing with
\n\tsection 15C of the Act. While adverting to the passage which
\n\twe have just quoted the Bombay
\n\t\t\t     “Now fully appreciating the distinction
\n\t\t      which  counsel for the Revenue has  sought  to
\n\t\t      make  between the\t case  of  a  reconstruction
\n\t\t      of a company and the case of reconstruction of
\n\t\t      a\t business,  these observations, as  we\tread
\n\t\t      them, are equally illuminating in the  context
\n\t\t      of   reconstruction   of business\t already  in
\n\t\t      existence\t in the case of a newly\t established
\n\t\t      industrial undertaking”.\n<\/p>\n
\t\t\t The  Delhi High Court also in\tCommissioner
\n\t\t      of Income-tax\t    v.\tGangs Sugar Corpora-<\/a>\n<\/p>\n
\t\t      tion Ltd.(a), accepted the  above\t concept  of
\n\t\t      ‘reconstruction’ in the following passage :-
\n\t\t\t “We  have  given  the\tmatter\tour  earnest
\n\t\t      consideration    and are of the view  that  in
\n\t\t      the  reconstruction of business, as    in\t the
\n\t\t      reconstruction  of  a company, there   is\t  an
\n\t\t      element\t of transfer of assets and  of\tsome
\n\t\t      change, however partial or
\n\t\t      restricted  it  may be, of  ownership  of\t the
\n\t\t      assets.  The transfer, however, need not be of
\n\t\t      all  the assets.\tIt is none the less  impera-\n<\/p>\n
\t\t      tive  that  there\t should\t be  continuity\t and
\n\t\t      preservation of the old undertaking though  in
\n\t\t      an  altered  form.\n<\/p>\n
\t\t\t  (1) [1904] 2 Ch. 268. 35 I.T.R. 662.\n<\/p>\n
\t\t\t  (3) 92 I.T.R. 173.\n<\/p>\n
\t\t      772<\/span><\/p>\n
\t\t      The  concept  of\treconstruction\tof  business
\n\t\t      would  not  be attracted when a company  which
\n\t\t      is already  running  one industrial unit\tsets
\n\t\t      up another industrial  unit.  The\t new  indus-
\n\t\t      trial  unit  would not lose its  separate\t and
\n\t\t      independent  identity even though it has\tbeen
\n\t\t      set  up by a company which is already  running
\n\t\t      an  industrial unit before the setting  up  of
\n\t\t      the new unit”.\n<\/p>\n
\tWe endorse the above views with regard to reconstruction  of
\n\tbusiness.\n<\/p>\n
\t    Reconstruction of business involves the idea of substan-
\n\ttially\tthe same persons carrying on substantially the\tsame
\n\tbusiness.   It is stated on behalf of the Revenue  that\t the
\n\tsame  company in the instant case continues to do  the\tsame
\n\tbusiness  of  heavy engineering—no  matter  certain  spare
\n\tparts  necessary  as components to completion  of  the\tend-
\n\tproduct\t are  now manufactured in the business\titself.\t The
\n\tfact  that the assessee is carrying on the general  business
\n\tof  heavy engineering will not prevent him from\t setting  up
\n\tnew industrial undertakings and from claiming benefit  under
\n\tsection-15C if that section is otherwise applicable.  Howev-
\n\ter, in order to be entitled to the  benefit  under’  section
\n\t15C,  the  following  facts have to be\testablished  by\t the
\n\tassessee. subject always to the time-schedule in the section
\n\t:–\n<\/p>\n
\t\t\t  (1) investment of substantial fresh  capi-
\n\t\t      tal in the industrial undertaking set up,
\n\t\t      (2) employment of requisite labour therein,
\n\t\t\t  (3) manufacture or production of  articles
\n\t\t      in the\t\t\t said  undertaking,
\n\t\t\t  (4) earning of profits clearly  attributa-
\n\t\t      ble to the said new undertaking, and
\n\t\t\t  (5)  above  all, a separate  and  distinct
\n\t\t      identity\tof  the industrial unit set up.\n<\/p><\/blockquote>\n
\tWe may add that there is no bar to an assessee carrying on a
\n\tparticular  business to set up a new industrial\t undertaking
\n\ton account  of which exemption of tax under section 15C\t may
\n\tbe claimed.\n<\/p>\n
\t    The legislature has advisedly refrained from inserting a
\n\tdefinition of the word ‘reconstruction’ in the Act.  Indeed,
\n\tin   the  infinite variety of instances of restructuring  of
\n\tindustry  in  the  course  of strides in technology  and  of
\n\tother developments, the question has to be left for decision
\n\ton the peculiar facts of each case.\n<\/p>\n
\t    If\tany undertaking is not formed by  reconstruction  of
\n\tthe  old  business that undertaking will not be\t denied\t the
\n\tbenefit of section  15C simply because it goes to expand the
\n\tgeneral business of the assessee on some directions.  As  in
\n\tthe  instant case, once the new industrial undertakings\t are
\n\tseparate  and  independent production units’ in\t  the  sense
\n\tthat  the commodities produced or the results  achieved\t are
\n\tcommercially  tangible products and the undertakings can  be
\n\tcarried\t on
\n\t773<\/span>
\n\tseparately  without  complete absorption  and  losing  their
\n\tidentity in the old business, they are not to be treated  as
\n\tbeing formed by reconstruction of the old business.
\n\t    The\t business of the assessee is of\t heavy\tengineering.
\n\tThe  two new undertakings are independently producing  arti-
\n\tcles  which may be of aid to the principal business but\t yet
\n\tthe undertakings are distinct and not reconstruction out  of
\n\tthe existing business of  the  assessee. Use by the assessee
\n\tof  the\t articles produced in its existing business  or\t the
\n\tconcept\t of expansion are not decisive tests  in  construing
\n\tsection 15C.  The High Court is not right in holding the two
\n\tundertakings  as  formed by reconstruction of  the  existing
\n\tbusiness of the assessee.\n<\/p>\n
\t    Several  decisions have been cited at the\tbar   before
\n\tus.   We approve of the conclusions in Commissioner  of\t In-
\n\tcome-tax v. Ganga Sugar Corporation Ltd. (supra);  Rajeswari
\n\tMills Ltd. v.  Commissioner of income-tax, Madras(1); Nagar-
\n\tdas  Bechardas & Brothers P Ltd. v. Commissioner of  Income-
\n\ttax Gujarat (2); Commissioner  of Income-tax, West  Bengal-I
\n\tv.  Electric  Construction and\tEquipment  Company  Ltd.<\/a>(3);
\n\tCommissioner  ofIncome-tax v. Hindusthan Motors\t Limited(4).
\n\tThe   decision\tin  Commissioner  of  Income-tax   v.\tNaya
\n\tSahitya(5)  does  not represent the correct  legal  position
\n\tand, hence, cannot be approved.\n<\/p>\n
\tWe  may\t observe that we are not required  to  consider\t  in
\n\tthese  appeals\thow profit will be  actually  calculated  in
\n\torder to determine the quantum of exemption of six per\tcent
\n\tof the profit on the capital employed.\tIf difficulties\t are
\n\tinsurmountable\tand,   therefore,  profit cannot  be  ascer-
\n\ttained,\t that will be a different question in the course  of
\n\tpractical application of the section.  That kind of a possi-
\n\tble difficulty should not weigh in the true construction  of
\n\tsection\t 15C.\tIn  the present case  the  assessee  claimed
\n\tprofit\tand there was no difficulty about  ascertainment  of
\n\tthe  exempted profit as\t separate  books  of  accounts\twere
\n\tkept and the undertakings were at separate places.
\n\t    In\tview of the foregoing discussion, we are clearly  of
\n\topinion\t that the High Court is not right in  answering\t the
\n\ttwo  questions\tin  the negative and against  the  assessee.
\n\tOn  the other hand. the Tribunal was right in answering\t the
\n\ttwo questions in the affirmative and against the Department.
\n\tThe  two questions referred stand answered in  the  affirma-
\n\ttive.\tThe judgment of the High Court, is,  therefore,\t set
\n\taside and the appeals are allowed with costs.\n<\/p>\n
\tP.B.R.\t\t\t\t\t   Appeals allowed.\n\t   (1) 50 I.T.R. 29.\n\t   (2) 104 I.T.R. 255.\n\t   (3) 104 I.T.R. 101.\n\t   (4) [1976] Taxation Law Reports. 821.\n\t   (5) 84  I.T.R.  567.\n\t112 SCI\/77--GIPF\n\t774<\/span>\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Textile Machinery Corporation … vs The Commissioner Of Income-Tax, … on 25 January, 1977 Equivalent citations: 1977 AIR 1134, 1977 SCR (2) 762 Author: P Goswami Bench: Goswami, P.K. 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>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-209193","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nTextile Machinery Corporation ... vs The Commissioner Of Income-Tax, ... on 25 January, 1977 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/textile-machinery-corporation-vs-the-commissioner-of-income-tax-on-25-january-1977\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Textile Machinery Corporation ... vs The Commissioner Of Income-Tax, ... on 25 January, 1977 - 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