Commercial valuation of inter-unit stock transfers governs exemption computation for a newly established industrial undertaking.

Profits of a newly established industrial undertaking eligible for exemption under section 15C of the Income-tax Act, 1922 had to be computed separately on ordinary commercial principles. Where raw material was transferred from the assessee's existing unit to the new unit, its value for exemption computation was the realizable market value at the time of transfer, not the book cost. The rationale was that the exempt undertaking's true commercial profits could be ascertained only by reflecting the actual value borne by that unit. On that basis, inter-departmental transfers were to be accounted for realistically so that the exempt profits were correctly determined.

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Issues: (i) Whether, for computing the profits and gains of a newly established industrial undertaking exempt under section 15C(1) of the Income-tax Act, 1922, the raw material transferred from the assessee's existing industrial undertaking was to be taken at cost or at market value; (ii) Whether the profits of the new industrial undertaking had to be computed separately on a commercial basis in determining the exemption under section 15C.

Issue (i): Whether, for computing the profits and gains of a newly established industrial undertaking exempt under section 15C(1) of the Income-tax Act, 1922, the raw material transferred from the assessee's existing industrial undertaking was to be taken at cost or at market value.

Analysis: The exemption under section 15C was confined to profits or gains derived from the new industrial undertaking, and those profits had to be computed in accordance with section 10 on ordinary commercial principles. Where one department of the assessee's business transferred stock-in-trade to another department for use in manufacture, the computation had to reflect the true and realistic profits of each unit. A mere book entry at cost would not represent the true value of the raw material to the new undertaking. The realistic figure was the market value at the time of transfer, because that was the amount which the new undertaking effectively bore in computing its profits.

Conclusion: The raw material had to be taken at market value, not at cost, in computing the exempt profits of the new industrial undertaking.

Issue (ii): Whether the profits of the new industrial undertaking had to be computed separately on a commercial basis in determining the exemption under section 15C.

Analysis: Section 15C required the profits of the eligible undertaking to be computed separately, but the computation still had to proceed on commercial accounting principles. The transfer of starch from the old unit to the new unit did not involve a fictitious sale, but the accounts had to present a realistic picture of the profits of both undertakings. The proper basis was therefore the commercial or realizable value of the transferred stock, so that the profits attributable to the exempt undertaking were correctly ascertained.

Conclusion: The profits of the new industrial undertaking were required to be separately computed on a commercial basis, and the market value basis was upheld.

Final Conclusion: The reference was answered against the assessee. The court held that the transferred starch must be valued at market price for section 15C computation, and the second question was answered in the affirmative in favour of the Revenue.

Ratio Decidendi: Where an assessee's profits from a qualifying industrial undertaking are required to be computed separately for exemption, inter-departmental transfers of stock-in-trade must be valued at the realizable market value at the time of transfer so that the accounts reflect true commercial profits.

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