# TILE MA~llNERY CORPORATION UMITED, CALCUTTA\ "II v. THE COMJ.\USSIONER OF INCOME-TAX, WEST BENGAL, CALCUTTA

- **Citation:** [1977] 2 S.C.R. 762
- **Court:** Supreme Court of India
- **Decided:** 1977-01-25
- **Bench:** H. R. Khanna, P. K. Goswami, P. S. Kailasam
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/tile-ma-llnery-corporation-umited-calcutta-ii-v-the-comj-ussioner-of-income-tax-7106
- **Pages:** 12

## Headnote

,
Indian Income-tax Act, 1922-S. 15C(2) (i)-Scope of Tests for determining
when benefit of the section available-Reconstruction-Tests for determination.
Section I 5C of the Indian Income-tax Act 1922, which deals with exemption
from tax of newly established industrial undertakings, provides in sub-s. 2(i) that
tl)e sect10n apphes, 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
concern 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 varic;ms divisions of the assessee company. The assessee's
claim for exemption from tax under s. 15C in respect of profits derived from
both the companies was rejected by the Income-tax Officer and its appeal was
rejected by the App_ellate Assistant Commissioner on the ground that the J.mdertakings were an expansion· and reconstruction 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 !SC 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
~ reconstruction of the old bminess.
[768 B-C]
!. (a) In order to 1'• o•titled to the bene11t of s. 15C, the assessee has to
I
eitaltlish :
.
(I)
(2)
(3)
(4)
(5)
the investmut of substantial fresh eapital in the industrial udertaking;
employment of th• requisite labour therein;
manufadure or production of articles in the undertaking;
earning or profits 'Clearfy attrioutable to the new undertaking; and
separate and distinct indentity of the industrial unit set up.
(b) Once the new industrial undertakin¥s. are separate and independent. production units in the sense that the commod1hes produce? or the results ash1eved
are commercially tangible produc~ and the .undertak1!1gs ~an. be earned O!l
11eparately without complete absorpl!on and losmg thelf identity m the old business, they are not to be treated as being formed by reconstruction of the old
business. [772 H, 773 A]
TEXTIL:& llACFL CORP. v. COMM. OP I.T. (Gosw11mi; J.)
763
( c) The object of tit• eection is to encourage the setting up of new industrial
undertakings by offeri.!li tu incentives within a certain period. Sub-section (2)
has a negative as well as a positive aspect. Negatiyely, 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 porduce
.articles at any time within the stipulated period. Thd new und.ertaking must not
be substantially the same as the existing business. The words "the capital employed" are significant, for, fresh capital must be employed in the undertaking
Claiming exemption.
Manufacture or production of articles yielding additional
profits aftributa.ble 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 s. ! 5C.
The fact that by establishing a new industrial undertaking the
assessee expands its existing business would

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:::TILE MA~llNERY CORPORATION UMITED, CALCUTTA\ "II
v.
THE COMJ.\USSIONER OF INCOME-TAX, WEST BENGAL,
CALCUTTA
January 25, 1977
(H. R. KHANNA, P. K. GOSWAMI AND P. S. KAILASAM, JJ.]
,
Indian Income-tax Act, 1922-S. 15C(2) (i)-Scope of Tests for determining
when benefit of the section available-Reconstruction-Tests for determination.
Section I 5C of the Indian Income-tax Act 1922, which deals with exemption
from tax of newly established industrial undertakings, provides in sub-s. 2(i) that
tl)e sect10n apphes, 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
concern 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 varic;ms divisions of the assessee company. The assessee's
claim for exemption from tax under s. 15C in respect of profits derived from
both the companies was rejected by the Income-tax Officer and its appeal was
rejected by the App_ellate Assistant Commissioner on the ground that the J.mdertakings were an expansion· and reconstruction 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 !SC 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
~ reconstruction of the old bminess.
[768 B-C]
!. (a) In order to 1'• o•titled to the bene11t of s. 15C, the assessee has to
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eitaltlish :
.
(I)
(2)
(3)
(4)
(5)
the investmut of substantial fresh eapital in the industrial udertaking;
employment of th• requisite labour therein;
manufadure or production of articles in the undertaking;
earning or profits 'Clearfy attrioutable to the new undertaking; and
separate and distinct indentity of the industrial unit set up.
(b) Once the new industrial undertakin¥s. are separate and independent. production units in the sense that the commod1hes produce? or the results ash1eved
are commercially tangible produc~ and the .undertak1!1gs ~an. be earned O!l
11eparately without complete absorpl!on and losmg thelf identity m the old business, they are not to be treated as being formed by reconstruction of the old
business. [772 H, 773 A]
TEXTIL:& llACFL CORP. v. COMM. OP I.T. (Gosw11mi; J.)
763
( c) The object of tit• eection is to encourage the setting up of new industrial
undertakings by offeri.!li tu incentives within a certain period. Sub-section (2)
has a negative as well as a positive aspect. Negatiyely, 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 porduce
.articles at any time within the stipulated period. Thd new und.ertaking must not
be substantially the same as the existing business. The words "the capital employed" are significant, for, fresh capital must be employed in the undertaking
Claiming exemption.
Manufacture or production of articles yielding additional
profits aftributa.ble 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 s. ! 5C.
The fact that by establishing a new industrial undertaking the
assessee expands its existing business would not deprive it of the benefit under
s. 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 s. 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 por!lon
of 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
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decisive to deny the benefit of s. 15C. There was no formation of any industrial
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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.
Also, there was no difficulty about ascertainment o fthe exempted profit as separate books of accounts were kept and the undertakings were at senarnte places.
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The High Court was not right in holding that the two undertakings were
formed by reconstruction of the existing business of the assesseec
[773 ·B-C]
2. Reconstruction involves that substantially the saine
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 compan,y,
or that,all the shareholders· of the old company shall be shareholders in the new
company. Substantially the business and the person frtterested must be the.same.
·
[771 C-Dl
South African Supply and Cold Storage Company Wild v. Same Con.ipany,
[1904].2 Cb. 268, followed.
Commissioner of Income-tax Bombay City-I v. Gackwar Foam and Rubber
·Co. Ltd. 35 ITR 662, Commi.sioner of Income-tax v. Ganga Sugar
Corpora-
• tion Ltd. 92 ITR 17~, Rajowari Mill" Ltd. v. Commissioner of Income-tax
"-1- Mairas, 50 ITR 2,, N11.garda.T Becharda" & Brother" P. Ltd. v. Commissioner
1 -of Income-tax Gujarat, 10.ol ITR 255,
Commi..,ioner
of Income-tax,
West
I
Bengal-I v. Electric C•n•trttction 11.nd Equipment .company Ltd. 104 ITR 101
1
and Commi"•ioner nf Income-tax v. Hindustan Motor.T Limited, [1976] Taxa-
/
tio• Law Reporu 821, approved.
Commissioner •f Income-tax T. Naya Sahitya 84 ITR 567, not approTed.
CIVIL An•ELLATE JURISDICTION: Civil Appeal Nos. 772-773 of
1972.
.
.
From the Judgment and Order dated .9th/10th July, 1970 of. the
Calcutta High Court in I. T .. R. No. 158 of 1966. .
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N. A. Palkhival11, Dr. D.. Pal, U. K. Khaitan, S. R. A·garwal and
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:Par.v.een Kumar for the Appellant.
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' ' V. P: Rama11, Addi. Sol: G~nual; T. A. Ramachandran and R. ·fl:
Sachthey for ihe llcepondente.
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SUPREME COURT REPORTS
[1977] 2 s.c.R.
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 Commi.1sioner
of Income-tax, West Bengal-I v. 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 rela~es 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 to were
as
follows:-
"(l) 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
whkh
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 1,mdertaking 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 engineering concern
manufacturing boilers, machinery parts, wagons, etc.
For the assessB
ment years 1958-59 and 1959-60 the assessee cl11imed 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 l 5C in respect of i's profits and gains derived from its
Jute Mill Division for the year 1959-60.
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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 manufactur- '
ing 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
good~ worth
Rs. 18,39,433/- were used in connection with the various Divisions
of the company.
In respect of the Jute Mill Division. the Incomctax Officer found that out of the total ~ale~ of Rs. 13,03,509/- sales
to the Boiler Division totalled Rs. 11,89,812/- and sale~ to outside
the Jute Mill Division totalled only a sum of Rs.
1,13.697/-. The
Income-tax Officer and the Anpellate Assistant Commissioner, on the
above facts, held the under'.akings as expansion and reconstruction of
the business already existing and hence the assessee was not entitled
(1) 80 I.T.R. 428.
TEXTILE MACH. CORP. v. COMM. OF I.T. (Goswami, J.)
765
to exemption under section l SC of the Act. ·The Income~tax Appellate Tribunal, however, allowed the appeal of the assessee and accepted the claim for exemption under section 1 SC.
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 undertakings 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 the Tata Iron and Steel Co.
Ltd.
and Others v. State of Bihar(') also held that even though the manufactured products of the new industrial undertakings were mostly used
in the assessee's 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 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
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
assessee'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 manufacturing themselves, the
assessee was doing something which was only a reconstruction of the business already in existence. . . . . . . .
·
The newness of the machinery of the steel foundry division and the- jute mjll 1livision 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 1 SC,
because the licence was for expansion of the existing industrial undertaking and the licence did not cover the jute mill
division".
(1) 48 I.T.R. 123.
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SUPRi:MI COUAT lllPORTS
[1977] 2 s.c.R.
It is, however, admitted before us that both the units were covered
by licence8.
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The controversy in these appeals centres round the true con~truc
tion of section 15C(2) (i) of the Act and in particular 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 contrary conclusion
reached by the Tribunal ?
Before we proceed further, we will read section 15C as it stood
during the material time :
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"15C. Exemption from tax of newly established 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 indsutrial 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
whichundertaking
(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 begin~ to manufacture or producs
article~ in any part of taxable territories at any
time within a period of thirteen years from tht
1st day of April 1948, or ~uch further period
a~ the Central Government may, by notificatioa
in the Oflicial Gazetto, ~ity with reference ~
any particular indu~trial undertaking;
(iii) employs ten or more
worker~ in a manufacturing proce~~ carried on with the aid
of
power, or employ~ twenty or more workers ill
a manufacturin1 proeces carried on without the
aid of power;
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I
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Provided that the Central Government may, by !!.oti~ea~
tion in the Official Gazette, direct that the exemption collferred by thi~ section shall not apply to any particular iDdustrial lilndortaking.
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TEXTIL~ MACH. OOR;. v. COMM .. OF~-~·· (Goswami,/.)
767
(3)
(4)
The profits or· gains of an industrial undertaki~g .to
which this section applies shall
be computed . in
accordance with the provisions of section 10.
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 section.
(5) Nothing in this section shall affect the application of
section 23A iri relation to the profits or gains of an
industrial undertaking 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 which the assessee begins to manufacture or produce articles and for the four
as~essments immediately succeeding''..
·
We are principally concerned in these appeals with clause (i) of
sub-section (2) of section 1 SC 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 15C(2) 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 undertaking.
He further emphasises
i
that production of the articles in the S:eel 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
15C(2) (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 15C(2) (i) only excludes three categories
of
indu~trial
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 (2) (i), namely, an industrial underB·
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768
SUPREME COURT REPORTS
(1977] 2 S.C.ll.
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 granted under
this section is a partial benefit so far as the quantum of the exempted
profi,s of the new industrial undertaking 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 reconst~uction 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 specified therein.
This section was inserted in the Act in 1949 by section 13 of the Taxation Laws (Extensio11
to Merged States and Am~ndment) Act, 1949 (Act 67 of 1949)
extending the benefit to the actual manufacture or production of articles 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 progressively 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
of 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 business which was
being
carried on before April 1, 1948.
We agree that it is not possible to exclude any new industrial undertaking other than the three categories mentioned above.
TEXTILE MACH. CORP. y. COMM. OF ,I.T. ,(Goswami, J.)
769
We are concerned in these appeals with the type No. (2) · mentioned· above. · Positively, the new industrial undertaking must pro-
.duce 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 per-
.sonnel in the undertaking, namely, that ten or .more workers have to
work in the manufacturing process carired on wich 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 pro-
·cess 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
is 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 rsc are significant, for fresh capital must be employed in the
new undertaking claiming exemption.
There must be a new under-
·taking where substantial 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 commodities different from those
-which it has been manufacturing or producing in its existing business.
Manufacture of 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
i
·every particular case depends upon the peculiar faets and conditions
'- . ·of the new industrial undertaking on account of which the assessee
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' 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 iay down an inexorable test to deterffiine 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
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770
SUPREM~ ·toURT 1rn·PO!tTS
[1977]' 2•s.C.R.
must be a new emergence of a physically separate industrial unit i>hich
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 under;.
takings 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, identifiable m:::s 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 un.dertaking to qualify for appropriate exemption under section 1 SC.
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 1 SC.
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Section 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 l SC is app_licable 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 ether distinct marketable products, even commodities which may feed the old business.
These products may be con-
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sumed 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 1 SC the industrial units set up must be new in the ~ense 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 1 SC the new undertaking must be formed by reconstruc'ion 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 tnmsferred substantially to the new undertaking.
There is no such transfer of assets in the two cases with which we are concerned.
TEXTILE MACH. CORP. v. COMM. OF I.T. (Goswumi, J.)
771
We will now deal with the question whether the two undertakings
A
of the assessee are formed by reconstruction of the existing 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 v. Sarne Company('), Buckley, J. dealing with the
meaning of the word 'reconstruction' in a company matter observed as
follows:-
.•
"What does 'reconstruction' mean?
To my
mind it
means this.
An undertaking of some deffnite kind is being
carried on, and the conclusion is arrived at that it
is
not
clesirnble 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 docs
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
resuscitated 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 v. Gaekwar.
Foam aiul Rubber Co. Ltd.('), dealing with section l SC of the Act.
While adverting to the passage which we have just quoted the Bombay
High Court observed as follows in the above decision :
"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, a're equally
illuminating in the context of
reconstruction
of business
already in existence in the case of a newly established industrial undertaking" .
. The Delhi Higμ Court also in Commissioner of Income-tax
v.
Ganga Sugar Corporation Ltd. (3), 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 Dartial 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 imperative that there should be continuity and
preservation of the old undertaking though in an
altered form,
-o)r19041 2 ch, 26s.
(2) 35 T.T.R. 662.
(3) 92 T.T.R. 173.
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772
SUPREME COURT REPORTS
[1977) 2 S.C.R.
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
industrial unit would not los~ 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 substantially the
same persons carrying on substantially the saine business.
It is stated
on behalf of the Revenue that the same company in the instant case
..JI
continues to do the same business of heavy engineering-·no matter
'1111111111
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certain spare parts neccssaty as components to completion of the cndproduct 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 s·etting up new industrial undertakings and
from claiming benefit under section 15C if that section is otherwise
applicable.
However, in order to be entitled to the benefit
under
section 15C, the following facts have to be established by the assesscc,
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subject always to the time-schedule in the section :-
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( 1) investment of substantial fresh capital in the industrial undertaking set up,
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( 2) employment of requisite labour therein,
(3) manufacture or production of articles in the
said
undertaking,
( 4) earning of profits clearly attributable 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 ungertaking 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
.
"'
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TEXTILE MACH. CORP. 'v. COMM. OF I.T. (Goswami, J.)
773
:separately without complete absorption and l?sing their identity in the
old business, they are not to be treated as bemg formed by reconstruction of the old business.
The business of the assessee is of heavy engineering. The two
;new undertakings are independently producing articles which ruay 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
lSC. The High Court is--not right in holding the two undertakings
.as formed by reconstructiori 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 Income-tax v. Ganga
.Sugar Corporation Ltd. ·(supra); Rajeswari Mills Ltd. v.
Commissioner of income-tax, Madras('); Nagardas Bechardas & Brothers P
Ltd. v. Commissioner of Income-tax Gujarat (2); Commissioner of
Income-tax, West Bengal-I v. Electric Construction and Equipment
·Company Ltd. (3); Commissioner
of
Income-tax
v.
Hindusthan
Motors Limited ( 4). The decision in Commissioner of Income-tax
v. Naya Sahitya(') 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 quant\Uil of exemption of six per cent of the profit on the capital
~mployed. If difficulties are insurmountable and; ·therefore, profit
-cannot be ascertained, that wiH -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 lSC. In
ihe 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 ~igh Court i~ not right in answering the two questions in the
-negative and agamst 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 answred in the
-affirmative.
The judgment of-the High Court, is, therefore set aside
and the appeals are ·allowed- with costs. -
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Appeals allowed.
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(1) 50 lT.R. 29.
(2) 104 lT.R. 255. ·
·(3) 104 :1'r:R. ·101.
(4) (1976] Taxation Law Reports. 821.
(5) 84 I.T.R. :67.
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