l Appeal Nos
772 773 of 1972
From the Judgment and Order dated 9th10th July 1970 of the Calcutta High Court in ITR No 158 of 1966
N A Palkhivala Dr D Pal UK Khaitan SR Agar wal and Parveen Kumar for the Appellant
VP Raman Addl
General TA Ramachandran and RN 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 vs 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 661 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 Rs2823127 of steel castings goods worth Rs1839433 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 Rs1303509 sales
to the Boiler Division totalled Rs1189812 and sales to outside the Jute Mill Division totalled only a sum of Rs1136971 
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 1 765 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 15C2i
The Tribunal rightly relying upon the Tara Iron and Steel Co Ltd and Others vs State of Bihar1 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
1 766 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 15C2i 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 whichthe 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 15C2 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 15C2 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 15C2i 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 2i 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 undertaking 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 peculiaracts 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 not 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 vs Same Company1 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 vs 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 vs Gangs Sugar Corpora tion Ltda 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 3 772 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 vs Ganga Sugar Corporation Ltd supra Rajeswari Mills Ltd vs Commissioner of income tax Madras1 Nagar das Bechardas  Brothers P Ltd vs Commissioner of Income tax Gujarat 2 Commissioner of Income tax West Bengal I vs Electric Construction and Equipment Company Ltd3 Commissioner ofIncome tax vs Hindusthan Motors Limited4
The decision in Commissioner of Income tax vs Naya Sahitya5 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
PBR Appeals allowed
1 2 3 4 1976 Taxation Law Reports


Summary:
Section 15C of the Indian Income tax Act 1922 which deals with exemption from tax of newly established industri al undertakings provides in sub section
2i 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 section 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 section 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 section 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 section 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 section 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 section 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
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 vs Same Company  followed
Commissioner of Income tax Bombay City 1 vs Gackwar Foam and Rubber Co Ltd  Commissioner of Income tax vs Ganga Sugar Corporation Ltd  Rajeswari Mills Ltd vs Commissioner of Income tax Madras  Nagardas Bechardas  Brothers P Ltd vs Commis sioner Income tax Gujarat  Commissioner of Income tax
West Bengal I vs Electric Construction and Equipment Company Ltd and Commissioner of Income tax vs Hindustan Motors Limited 1976 Taxation Law Reports 821 approved
Commissioner of Income tax vs Naya Sahitya  not approved