THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN REFERRED CASE Nos.11 and 13 of 1996 % Dated: 03.11.2010 Between: The Commissioner of Income Tax – II, Hyderabad. … Applicant And M/s.I.D.L.Chemicals Limited, Hyderabad ... Respondent ! Counsel for the Petitioner: Sri S.R.Ashok ^Counsel for the Respondent: Sri Y.Ratnakar <Gist: >Head Note: ?Citations: 1. 107 ITR 195 2. 108 ITR 367 3. (1982) 137 ITR 851 4. (1996) 220 ITR 201 5. (1992) 3 SCC 78 : AIR 1992 SC 1622 : (1992) 196 ITR 188 6. (1991) 191 ITR 288 Bom THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN REFERRED CASE Nos.11 and 13 of 1996 November 03, 2010 Between: The Commissioner of Income Tax – II, Hyderabad. … Applicant And M/s.I.D.L.Chemicals Limited, Hyderabad ... Respondent THE HON'BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN REFERRED CASE Nos.11 and 13 of 1996 COMMON ORDER: (Per Hon’ble Sri Justice V.V.S. Rao) These two Income Tax references at the instance of the Revenue require the High Court’s consideration of the following two questions. 1. Whether, on the facts and in the circumstances of the case, the ITAT was correct in law in holding that the assessee was entitled for deduction u/s.80J of the Income Tax Act, 1961, on the PETN Plant? 2. Whether, on the facts and in the circumstances of the case, the ITAT was correct in law in holding that a new industrial undertaking has come into existence and it was not formed by the splitting- up or reconstruction of a business already in existence” The undisputed background of the two references is as follows. The assessee; I.D.L. Chemicals Limited is in the business of manufacture and sale of detonators, explosives and pharmaceuticals having its registered office and factory at Chandanagar, Hyderabad. They have units at Bangalore, Bombay, Calcutta, Delhi and Rurkela. For the assessment year 1982-1983, the assessee filed return on income tax on 28.06.1982 showing the net income of Rs.2,56,87,917/-. Within a month thereafter, they filed revised return showing Rs.2,13,51,290/- as net income. Therein the assessee claimed deduction under Section 80J of the Income Tax Act, 1961 (the Act) to a tune of Rs.67,29,221/- being the cost of imported plant and machinery for construction of PETN (Penta Erythitol Tetra Nitrate) to replace old PETN plant installed in 1969. The Assistant Commissioner of Income Tax finalized the assessment under Section 143(3) of the Act. The deduction was disallowed on the ground that it was reconstruction of the business already in existence falling under the provisions of Section 80J (4)(i) of the Act. On appeal, Commissioner of Income Tax (Appeals) (CIT (A), for brevity) confirmed disallowance. The assessee was, however, successful before Income Tax Appellate Tribunal. The revenue then sought a reference under Section 256(1) of the Act. Referred case No.11 of 1996 is in respect of assessment year 1982- 1983 and No.13 of 1996 is in relation to assessment year 1983-1984. As both the questions are interconnected, it is necessary to consider both of them together. The assessee claimed the benefit under Section 80J of the Act on the modernization of a PETN plant on the ground that a new industrial undertaking has come into existence. The assessing officer issued notice under Section 143(2) of the Act pursuant to which a revised return was filed showing reduced net income of Rs.2,13,51,290/-. In this return, an amount of Rs.67,29,221/- was shown as relief under Section 80J of the Act. By assessment order, dated 15.05.1985, the original authority rejected the claim on the ground that the assessee merely modernized PETN plant by making additions to the plant and machinery during accounting year relevant to assessment year 1982-1983. The assessee assailed the assessment order before CIT (A) contending that there has been substantial investment of fresh capital of Rs.67 lakhs in PETN unit (new distinct undertaking) engaging required amount of labour, which resulted in improving the performance of the unit, that there has been increase of capacity of the plant, besides facilitating the manufacture of Iso-sorbide Nitrite at 40 kg., per hour, in addition to PETN using new technology and new solvents and that the Written Down Value (WDV) of old plant and machinery was negligible at Rs.4.95 lakhs in comparison to the cost of the new PETN plant, which stood at Rs.67 lakhs. The CIT (A) was not impressed with any of these contentions. He came to a conclusion that, “there has been import of technical know-how together with plant and machinery aimed at modifying the production process so as to increase the safety standards, the capacity of the plant and also produced a new by-product”, and that, “mere incidental increase of capacity and utilization for manufacturing new product do not by themselves amount to new industrial undertaking”. The learned Tribunal considered the question of allowance under Section 80J of the Act in the light of the decisions of the Supreme Court in Textile Machinery Corporation Limited v CIT[1] and CIT v Indian Aluminium Company[2] as well as the decision of Delhi High Court in CIT v Hindustan General Industries Limited[3]. They came to the conclusion that, “a new industrial undertaking has come into existence and that it was not formed by splitting up or re-construction of a business already in existence” and that, “the value of the out-moded machinery of the old business … … was less than 10% of the total value of the plant and machinery”. The Tribunal also observed that there is no material to show that without the old machinery, the new plant could not have become functional, and that the assessee has satisfied the requirements of Section 80J(4)(iv) of the Act. The appeal was accordingly allowed directing the assessing officer to allow the relief under Section 80J of the Act. The Junior Standing Counsel for Revenue submits that the assessee has put up a new PETN plant utilizing the old machinery and made improvements to the existing plant. Therefore, it is an industrial undertaking formed by splitting-up and reconstruction of the existing business, which disentitles the assessee to the relief. He strongly relies on the fact that the assessee utilized some of the old machinery whose WDV was about Rs.4.95 lakhs in setting up a new PETN plant and contends that no new unit was set up, and therefore, the assessee does not fall within the ambit of sub-section (4) of Section 80J of the Act. He relies on an unreported Judgment of this Court in R.C.No.103 of 1995, dated 22.03.2006 in CIT, Visakhapatnam v M/s.Srinivasa Sea Foods Limited and Travancore Rayons Limited v CIT[4]. The counsel for assessee submits that WDV of the old machinery being less than 10% of the WDV plant, the plea of splitting-up or reconstruction of already existing business cannot be accepted. According to him, the new plant enables the manufacture of not only PETN but also another product by using new technical know-how and new solvents and therefore, a new industrial undertaking has come into existence which enables assessee to claim relief under Section 80J(1) of the Act. He would urge that the provisions of Section 80J of the Act should be interpreted liberally in favour of the assessee. He relies on Bajaj Tempo Limited v CIT[5] and CIT v Metropolitan Springs (Private) Limited[6]. Section 80J(1) enables an assessee to claim reduction from profits and gains from industrial undertaking calculated @ 6% per annum on the capital employed in the industrial undertaking in respect of the previous year relevant to the assessment year. Section 80J(4) lays down conditionalities subject to which an industrial undertaking can claim the relief. It is necessary to quote Section 80J(4) as it stood prior to Finance (No.2) Act, 1996, which omitted it with effect from 01.04.1989. 80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases. (1) to (3) omitted (4) This section applies to any industrial undertaking which fulfils all the following conditions, namely: (i) it is not formed by splitting up, or the reconstruction, of a business already in existence; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces articles, or operates one or more cold storage plant or plants, in any part of India, and has begum or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of thirty-three next following the 1st of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking; (iv) in a case where the industrial undertaking manufactures or produces articles, the undertaking 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 condition in clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in Section 33B, in the circumstances and within the period specified in that section: Provided further that, where any building or any part thereof previously used for any purpose is transferred to the business of the industrial undertaking, the value of the building or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking. Provided also that in the case of an industrial undertaking which manufactures or produces any article specified in the list in the Eleventh Schedule, the provisions of clause (iii) shall have effect as if for the words, “thirty-three years”, the words “thirty-one years” had been substituted. Explanation 1: For the purposes of clause (ii) of this sub-section, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely: (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the Indian Income Tax Act, 1922 (11 of 1922), or this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee. Explanation 2: Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with and the value of the machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking. Section 80J gives the relief of deduction of specified profits and gains to an industrial undertaking subject to certain disqualifications. Be it also noted that the Section is couched in language as that of Section 15C of the Income Tax Act, 1922, which provided for exemption from tax to newly established industrial undertakings. When an industrial undertaking incurs disqualification to claim the relief under Section 80J (1) of the Act? First, when an industrial undertaking is formed by the splitting-up or reconstruction of a business already in existence. As per the proviso to sub-section (4), this shall not, however, apply in respect of any industrial undertaking which is formed as a result of re- establishment, reconstruction or revival by the assessee of the business of any industrial undertaking, which is victim of extensive damage or destruction due to floods, riots, civil disobedience, enemy action etc. Secondly, an industrial undertaking, which is formed by transfer to a new business of machinery or plant previously used for any purpose. This is again subject to the condition as stipulated in the second proviso. Thirdly, if an industrial undertaking manufactures or produces articles with ten or more workers with the aid of power, or employs twenty or more workers without the aid of power. Explanation II to sub- section (4) is to the effect that if the value of the machinery or plant or part transferred to new undertaking does not exceed twenty per cent of the total value of the new machinery or plant, the same is not barred from claiming the relief. In Bajaj Tempo, the Supreme Court was dealing with a case of partial exemption from payment of tax under Section 15C of the Income Tax Act, 1922. Therein, the appellant secured manufacturing rights from M/s.Bachhraj Trading Corporation (which had a know-how agreement with a foreign collaborator for manufacturing tempo vehicles in India). Under relevant clause, the appellant got possession of Bachhraj premises of the factory as a lessee and also licencee to use tools and implements valued at Rs.3,500/-. For the assessment year 1960-1961, they claimed the benefit of partial exemption from tax under Section 15C of the Income Tax Act, 1922. The Tribunal ultimately held that as the business of the new industrial undertaking did not exist prior to its incorporation, it cannot be said to have been formed by reconstruction of Bachhraj. The High Court, however, took a view favouring revenue holding that Bajaj Tempo was not a new industrial undertaking. The Supreme Court reversed the High Court and held that when once the eligibility clause under Section 15C(1) is satisfied, the provisions should be interpreted liberally, keeping in view the spirit of the provisions of Section 15C(2A)[7]. While referring to Section 80J(4) of the Act and Textile Machinery Corporation, the Supreme Court observed (paras 8 and 9 of SCC): For instance an undertaking otherwise entitled to benefit would fall within mischief of the clause if it was established in a building which was used for business purposes at any time in the remote past. Or it might have been established in part of building, earlier used for business purposes due to paucity of accommodation. Denying benefit to such undertaking could not have been intended when the very purpose of Section 15-C was to encourage industrialisation. It was for this reason that various High Courts evolved the test of commercial expediency or substantial involvement valued in terms of money etc. to interpret this clause. Adopting literal construction in such cases would have resulted in defeating the very purpose of Section 15-C. Therefore it becomes necessary to resort to a construction which is reasonable and purposive to make the provision meaningful. (emphasis supplied) The approach of the Court in a case of doubt regarding application of Section 80J of the Act, was indicated as below (Para 9 of SCC). Initial exercise, therefore, should be to find out if the undertaking was new. Once this test is satisfied then clause (i) should be applied reasonably and liberally in keeping with spirit of Section 15-C(1) of the Act. While doing so various situations may arise for instance the formation may be without anything to do with any earlier business. That is the undertaking may be formed without splitting up or reconstructing any existing business or without transfer of any building material or plant of any previous business. Such an undertaking undoubtedly would be eligible to benefit without any difficulty. On the other extreme may be an undertaking new in its form but not in substance. It may be new in name only. Such an undertaking would obviously not be entitled to the benefit. In between the two there may be various other situations. The difficulty arises in such cases. For instance a new company may be formed, as was in this case a fact which could not be disputed, even by the Income Tax Officer. But tools and implements worth Rs.3,500 were transferred to it of previous firm. Technically speaking it was transfer of material used in previous business. One could say as was vehemently urged by the learned counsel for the department that where the language of statute was clear there was no scope for interpretation. If the submission of the learned counsel is accepted then once it is found that the material used in the undertaking was of a previous business there was an end of inquiry and the assessee was precluded from claiming any benefit. Words of a statute are undoubtedly the best guide. But if their meaning gets clouded then courts are required to clear the haze. Sub-section (2) advances the objective of sub- section (1) by including in it every undertaking except if it is covered by clause (i) for which it is necessary that it should not be formed by transfer of building or machinery. The restriction or denial of benefit arises not by transfer of building or material to the new company but that it should not be formed by such transfer. This is the key to the interpretation. The formation should not be by such transfer. The emphasis is on formation not on use. (emphasis supplied) I n Metropolitan Springs, the assessee engaged in the manufacture of springs used in automobile industry, set up project for production of axle shafts and torsion bars by importing machinery worth about Rs.10 lakhs. As they had no spine-milling and hobbing machines, assessee was doing forging and getting the forges drilled, splined and cut elsewhere on job work. Subsequently, it installed magnetic crack detector and other machines for manufacturing axle shafts at one place. They claimed deduction under Section 84 and 80J for assessment year 1967–1968. The appellate Assistant Commissioner as well as Income Tax Appellate Tribunal agreed with assessee’s contention. In the reference at the instance of revenue, the Division Bench of Bombay High Court answered the question in favour of the assessee holding thus: We have been taken through the statement of case, paragraph 10 of the appellate Assistant Commissioner for the assessment year 1967-68, which is the basis of the Appellate Assistant Commissioner’s order for the year and the Tribunal’s order for the year under reference. From the facts stated in the order of the Appellate Assistant Commissioner and found by the Tribunal, we are satisfied that the assessee had set up a new industrial undertaking which is a finding of fact. Once, we agree with the Tribunal that the particular unit constitutes an industrial undertaking within the meaning of Section 80J of the Income Tax Act, the result must follow that the assessee is entitled to deduction under Section 80J. The mere fact that a part of the premises used by the old undertaking was used for the new industrial undertaking or that some members of the staff were common does not, in our opinion, make any material difference in the situation. (emphasis supplied) We have perused the two authorities relied on by the junior standing counsel. Those are the decisions which have no bearing on the factual background of this case nor they differ from above referred view of the Supreme Court. In this case, the admitted facts are as follows. The assessee engaged in manufacturing and marketing of detonators and explosives and has factories at six places in India including Hyderabad. The basic material for making detonators and detonating fuses is PETN. For manufacturing the same, the assessee installed unit in 1969 with the then available technology. The unit became outmoded and suffered corrosion. During assessment year 1982-1983, assessee invested Rs.67.29 lakhs for importing brand new machiney and plant and also latest technical know-how for production of PETN and Iso-sorbide Nitrite as well. In addition, the PETN production capacity of 100 Kg per hour increased to 180 Kg per hour. A few pieces of plant and machinery of old PETN plant whose WDV was about Rs.4.95 lakhs were also used in the new plant. It is also admitted that the old plant was used only Acetone as solvent whereas the new plant can use Acetone as well as Methyl Ethyl Ketone. It was also found as a matter of fact by the Tribunal that there was nothing on record to show that assessee could not have put the new plant to use but without use of few pieces of plant and machinery of old plant. Applying the tests laid down by Supreme Court in Bajaj Tempo and adopting the reasoning of Bombay High Court in Metropolitan Springs, it cannot be said that the assessee incurs any ineligibility to claim benefit under Section 80J of the Act. The mere use of old machinery whose WDV is less than 10% of the investments made in the new plant cannot amount to reconstruction. This is made clear by explanation II to Section 80J(4) of the Act. If the total value of machinery or plant or part so transferred to new industrial undertaking does not exceed 20%, the same does not amount to splitting-up or reconstruction of the business already in existence. ‘Reconstruction’ denotes “the transfer of the undertaking or part of the undertaking of an existing company to a new company with substantially the same persons as members of the new company as were members of the old company” (see Advanced Law Lexicon by Ramanath Iyer, Book 4, p.3993). It is nobody’s case that the assessee company is disentitled under any of the other clauses of sub-section (4) of Section 80J of the Act, and therefore, we need not deal with other aspects. In the result, for the above reasons, we answer the reference in the affirmative in favour of the assessee and against the revenue. The two referred cases shall stand disposed of accordingly. No costs. _______________ (V.V.S.RAO, J) ______________________________ (RAMESH RANGANATHAN, J) 03.11.2010 Note: LR copy be marked. (By order) pln [1] 107 ITR 195 [2] 108 ITR 367 [3] (1982) 137 ITR 851 [4] (1996) 220 ITR 201 [5] (1992) 3 SCC 78 : AIR 1992 SC 1622 : (1992) 196 ITR 188 [6] (1991) 191 ITR 288 Bom [7] 15C(2A): This section applied to any hotel which- (a) starts functioning on or after the 1st day of April, 1961, and 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;