TRA VANCORE-COCHIN CHEMICALS (P.) LTD. v.

COMMISSIONER OF WEALTH-TAX, KERALA April 6, 1967

[J. C. SHAH, S. M. SIKRI AND V. RAMASWAMI, JJ.J

Wealth Tax Act (27 of 1957), s. 45(d), proviso-Company incorpo- B rated on one date and commencing business on a later date-When "'estab/ished"-Meaning of "estab/ishetf'.

The appellant, which was a private limited company, was formed and registered under the Indian Companies Act, 1913, on 8th November,

1951. The erection and construction of its factory was completed in December 1953 and production conunenced from 1-1·1954. On the question whether the company was established on 8th November, 1951, C the date of its incorporation and was therefore liable to pay wealth tax for the assessment years 1957-58, 1958-59 and 1959-60, on the basis that the exemption from payment of wealth tax under the proviso to s. 45d) was only for five successive assessment years commencing with the assessment year next following the date on which the company was established.

HELD: A comparison of clauses (d) and (f) of s. 45 shows that D the word "established" in cl. (d) and its proviso, does not mean "in corporated". The word "established" bas the same meaning it has in s. 5 ( 1 )(xxi) of the Act, namely, that the Company has been put into such a shape that it can start functioning as a business or a manufacturing organisation.

So construed, the appellant was established within s. 45(d) only in December, 1953,, or 1st January 1954, and the five assessment years next following would be 1954-55, 1955-56, 1956-57, 1957-58 and

1958·59. Therefore, the appellant would be entitled to exemption for E tho assessment years 1957-58 and 1958-59 but not for 1959-60. [451F;

452D-E; 453B-C] Commissioner of Wealth Tax, Madras v. Ramaraju Surgical Cotton Mills Ltd. [1967] I S.C.R. 761, followed.

Thomas !. Davidson v. W. L. Lanier, 18 'L.Ed. 377, 379, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 405- F 407 of 1966.

Appeals by special leave from the judgment and order dated March 9, 1964 of the Kerala High Court in Income Tax Referred Case No. 4 of 1963.

S. T. Desai and G. L. Sangh1', for the appellant (in all the appeals).

G T. V. Vishwanatha l, ver, Gopal Singh, S, P. Nayyar and R. N.

Sachthey, for the respondent (in all the appeals).

The Judgment of the Court was delivered by Sikrl, J. These appeals by special leave are directed against the judgment of the High Court of Kerla in a reference made H to it by the Income-Tax Appellate Tribunal, Madras Bench, under s. 27(1) of the Wealth Tax Act, 1957, hereinafter referred to as the Act. The reference was made a• the instance of the

Commissioner of Wealth Tax, Kerala, and the question referred was as follows :-

"Whether the exemption from tax for the assessment years 1957-58, 1958-59 and 1939-60 was not rightly granted."

The High Court held that the exemption from tax granted to the assessee under s. 45 ( d) of the Act for the assessment years 1957-58, 1958-59 and 1959-60 was not rightly granted and answered the question against the assessee.

The relevant facts are as follows :-The appellant, Travancore Cochin Chemicals

(P) Ltd., hereinafter called the assessee, was formed and registered under the Indian Companies Act on November 8,

1951. The prior history of the Company is given in the statement of the case as follows :-

"On 22-7-1949, a partnership was formed between two public limited companies, viz., Fertilisers & Chemical Travancore Ltd., Alwaye, and the Mettur Chemical & Industrial Corporation Ltd., Mettur, for establishing a Caustic Soda Factory with an estimated capital of Rs. one crore. The firm could not function due to lack of finance.

The Government of Travancore was approached for necessary finance to complete the purchase of plants and machinery which had been started in August 1949, and that Government entered the Company and subscribed a large share capital and a new private limited company was formed and registered under the Indian Companies Act on 8-11-1951." Further facts given in the statement of the case are as follows :-

"This new company took over the plant, machinery, buildings, construction stores, materials, etc., at different stages of erection and also all book debts and liabilities.

The erection and construction of the factory was completed in December, 1953, and production commenced from 1-1-1954. The trading accounts were closed for the first time on 31-3-1954. There was a loss of Rs. 16,04,212/- incurred." For the assessment year 1957-58 (the relevant date of valuation being March 31, 1957) the asessee claimed before !he Wealth Tax Officer that it was not liable to pay wealth tax dunng the year of account as it was exempted from wealth tax under

s. 45(d) of the Act. The Wealth Tax Officer rejected the claim on the ground that the assessee was established within the meaning of s. 45(d) and the proviso thereto, in November 1951, a!ld consequently the period of five years exemption was over with the assessment year 1956-57.

SUPREME COURT REPORTS

(1967) 3 S.C.R.

The relevant portion of s. 45 of the Act reads as follows :-

"45. The provisions of this Act shall not apply to- (a) (b) ( c) any company established with the object of financing, whether by way of making Joans or advances to, or subscribing to the capital of, private industrial enterprises in India, in any case where the Central Government has made or agreed to make to the company a special advance for the purpose or has guaranteed or agreed to guarantee the payment of moneys borrowed by the company from any institution outside India; ( d) any company established with the object of carrying on an industrial undertaking in India in any case where the company is not formed by the splitting up, or the reconstruction of a business already in existence or by the transfer to a new business of any building, machinery or plant used in a business which was being previously carried on : Provided that the exemption granted by clause (d) shall apply to any such company as is referred to therein only for a period of five successive assessment years commencing with the assessment year next following the date on which the company is established, which period shall, in the case of a company established before the commencement of this Act, be computed in accordance with this Act from the date of its establishment as if this Act had been in force on and from the date of its establishment; Explanation.- ( e) ..... .

(f) any company registered under section 25 of the Companies Act, 1956." The Wealth Tax Officer followed the same reasoning for the assessment years 1958-59 and 1959-60. The Appellate Assistant Commissioner of Wealth Tax upheld the orders of the Wealth Tax Officer.

The Income Tax Appellate Tribunal, however, allowed the appeals of the assessee. It held that the woFd "established" in s. 45 ( d) was used in contradistinction to the word "incorporated". It observed :

"It seems to us that this 'establish' (sic) can be inferred only wh1n the object with which the company was formed or incorporated is begun to be achieved."

T. C. CHBM. LTD, v. COMMR. W. TAX (Sikri, J.) 451

A It further held :

"To attract tax under sec. 3 there must be an assessment year as defined in sec. 2(d). In this case, the assessment has commenced for the first time in 1954-55 and having regard to Part II of the Scliedule to the Wealth Tax Act, the first year 1954-55 having ended in a loss, the assessment year can be said to commence only from 1955-56. For five years from then, the asseo; see would be entitled to the exemption."

As mentioned above, the Appellate Tribunal referred the question at the instance of the Commissioner, and the High Court answered the question against the assessee. The assessee having obtained leave from the High Court, the aru>eal is now before us.

The learned counsel for the assessee contends that the word "eStablished" in s. 45 ( d) has the same me.an'ing ils it has in s. 5 ( l) ( xxi) of the Act, which was inrpreted by this Court in

Commissioner of Wealth Tax, Madras v. Ramaraju Surgical Cott0rt Mills Ltd. ( 1) He says that the w11rd "established" cannot be equated with the word "incorporated''. The learned counsel for the respondent, on the other harid, contend• that the word "established" ins. 4S(d) has a different meaning to that in s. S(l)(xxi), ass. 45(d) deals with a company being established while s. 5 (l )( xxi) deals with a unit being established. Bhargava, J., speaking for the Court, in Commissioner of Wealth Tax, Madras v. Ramaraju Surgical Cotton Mills Ltd.,(') observed:

'A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when tho unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up. The expression used in the proviso, under which the period for which the exemption is available is to be determined, is not the same as that used in the principal clause. In the proviso, the period of five successive years of exemption has to commence with the assessment year next following the date on which the company commences operations for the

establishment of the unit. Operations for the establishment of a unit, from the very nature of that expression, can oy signify i; teps that have to be fali:en to establish tho unit. The word 'set up' in the principal clause, in our opinion, is equivalent to the word established', but operations for establishment cannot be equated with the establishment of the unit itself or its setting up. The applicability of the proviso has, therefore, to be decided

(I) [~967) I.S.C.R. 761, 7114 : 63 l.T.R. 478, 481-482.

LSSup CJ/67-16

452 SUP.IU!MB COURT .RBPOJtTS [1967] 3 s.c.R.

by finding out when the company commenced operations for establishment of the unit, which operation must be antecedent to the actual date on which the company is held to have been set up for purposes of the principal clause.

This is also the meaning that the Bombay High Court derived in the case in Western India Vegetable Products Ltd.,(') where that Court was concerned with the interpreta .ion of the expression 'set up' as used in section 2 ( 11 ) of the Income-tax Act.

Th.at court held : 'It seems to us that the expression setting up means, as is defined in the Oxford English Dictionary,-to place on foot or to establish, and in oontradistinction to commence. Tho distinction is this that when a business is established and is ready to eommence

business, then it can be said of that business that it is set up. But before it is ready to oommence business it is not set up.

This view was expressed when that Court was considering the difierence between the meaning of the expression setting up a business and oommencing of a business." It seems to us that the same meaning must be given to tho word "established" ins. 45(d) as ins. 5(l)(xxi). Ii would be noticed that s. 45 uses tho word "established" in cl ( c) and in tho proviso to cl. ( d), while the word "formed" is also used, apart from the word "established" in cl. ( d); and in cl. (f) the word "registered" is used.

Thero is a clear distinction between tho word "registered" or "inoorporated" and the word "established".

If the Legislature was thinking of inoorporation of a oompany, then we fail .to understand why this word was not used instead of the word "established". Further, if we look at cl. (d), it excludes certain industrial undertakings from the benefit of s. 45; wha:t artl -excluded are oompanies "formed by tho splitting up, or tho :reconstruction of a business already in existence or by the transfer to a new business of any buildin~. machinery or plant used in a business which was being previously carried _on." Ordinarily the date of incorporation of a company has nothing to do with the transfer qf a machinery or plant to it.

The case of Thomas I. D11Vidso11 v. W. L. Lanier(") also

Jen~ support to the interpretation which we have placed on the word "established" .. Chase, C.J .. Observed:

"What is meant by. putting in operation ()r esiablishing a Banking Company ?

We think that this Ian guage has a much wider. import than mere commen<; cment of business. To establish a company for any business means complete and -permane!lt provision for

. (I) 26 I.T.R. 151.

(2) 18 L. Ed. 377, 379 • . •

carrying on that bu5iness, and putting a company in operation may well include its continued as well as its first or original operation." We may mention that no other poirit was debated before us.

In the result w~ hold that the assessee was established within s. 45 ( d) of the Act in December 1953, or January 1, 1954. The first llSSC$Sment year following the date of establishment of the Company was 1954-55, and the next four assessment years would

be 1955-56, 1956-57, 1957-58 and 1958-59. The only assessment year in dispute that is not covered is 1959-60. Consequently the answer to question referred is that the exemption for the

:wessment years 1957-58 and 1958-59 was wrongly withheld while the exemption for the year 1959-60 was rightly not granted.

We accordingly accept the appeals and answer the question as indicated above. There will be ao order to costs.

V.P.S.

Appeal allowed In part.