Case: Textile Machinery Corporation Limited, Calcutta Vs. The Commissioner Of Income-Tax, West Bengal,Calcutta

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 up before the High Court on a reference under section 66(1) of the Act. The two questions referred 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 industrial undertaking to which section 15C of the Indian Income-tax Act, 1922, applied ? "The facts may briefly be statedThe assessee (the appellant herein) is a heavy engineering 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 1959-60The assessee had previously in the earlier years bought from outside the castings manufactured in the steel foundry division which was started in the assessment year 1958-59 and continued thereafter. Again, similarly in the year 1959-60, in addition to the manufacturing of castings in the steel foundry division the assessee started the jute mill division where the parts made out of the raw material supplied by the boiler division by machining and forging them were given to the boiler division of the assessee. It was found that out of a total sale of Rs. 28, 23, 127 of steel castings goods worth Rs. 18, 39, 433 were used in connection with the various divisions of the company. In respect of the jute mill division, the Income-tax Officer found that out of the total sales of Rs. 13, 03, 509, sales to the boiler division totalled Rs. 11, 89, 812 and sales to outside the jute mill division totalled only a sum of Rs. 1, 13, 697. The Income-tax Officer and the Appellate Assistant Commissioner, on the above facts, held the undertakings as expansion and reconstruction of the business already existing and hence the assessee was not entitled 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 are that the machinery was new, was housed in a separate building and that industrial licences had to be obtained for manufacturing 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 undertaking was to manufacture those very spare parts. Hence the Tribunal concluded that it could not be said that the undertakings were formed out of the existing business to come within the mischief of the exclusion clause in section 15C(2)(i). The Tribunal, rightly relying upon Tata Iron and Steel Co. Ltd. v. State of Bihar [1963] 48 ITR (SC) 123, also held that even though the manufactured products of the new industrial undertakings were mostly used in the assessees other business of manufacturing 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 accountIn 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 previously used by the assessee in its business, but they were purchased from outside and this purchase from outside was replaced by production or manufacture from within the assessees own business. This change of producing ones 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 manufacturing themselves, the assessee was doing something which was only a reconstruction of the business already inexistence............ 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 industrial 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. "

Reasoning: 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 commodities different from those which it has been manufacturing or producing in its existing business. Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter, to earn benefit from the exemption of tax liability under section 15C. Sub-section (6) of the section also points to the same effect, namely, production of articles. The answer, in every particular case, depends upon the peculiar facts and conditions of the new industrial undertaking on account of which the assessee claims exemption 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 expansion 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 expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing 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 must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking 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 distinctIt 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 produces certain machines or parts which are, by themselves, 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. The principal business of the assessee can be carried on even if the said two additional undertakings cease to function. Again, the converse 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 industrial 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 15CSection 15C partially exempts from tax a new industrial 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 applicable 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 carried 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 produced 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 recognisable 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 business. For the purpose of section 15C the industrial units set up must be new in the sense that new plants and machinery 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 reconstruction 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 concernedWe will now deal with the question whether the two undertakings of the assessee are formed by reconstruction of the existing business. The word "reconstruction" is not defined in the Act but has received judicial interpretationIf 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 in 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 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 businessThe business of the assessee is of heavy engineering. The two new undertakings are independently producing articles 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 assesseeWe 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 profits on the capital employed. If difficulties are insurmountable and, therefore, profit, cannot be ascertained, that will be a different question in the course of practical application of the section. That kind of a possible 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 placesIn 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 affirmative.