New industrial undertaking relief and bad-debt deduction allowed where separate business units and trade advances were established

A physically separate unit set up with fresh capital, distinct plant and process, different raw materials and outputs, and capable of independent operation was treated as a new industrial undertaking; the fact that its products were used in the existing business or that separate accounts were not kept did not negate relief under section 15C. An advance made in the course of business to secure raw material supply was treated as a trade debt arising from business operations, so its write-off was deductible as a bad debt rather than a capital loss.

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Issues: (i) whether the paper plants, power house, chemical factory and cement unit constituted new industrial undertakings entitled to relief under section 15C of the Indian Income-tax Act, 1922; (ii) whether the amount advanced to the supplier concern and written off was allowable as a bad debt under section 10(2)(xi) of the Indian Income-tax Act, 1922.

Issue (i): whether the paper plants, power house, chemical factory and cement unit constituted new industrial undertakings entitled to relief under section 15C of the Indian Income-tax Act, 1922.

Analysis: The units were found to have been established with fresh capital, in physically separate form, with different plant, process, raw materials and outputs, and to be capable of functioning as independent industrial units. The mere fact that the products were used in the assessee's existing business, or that separate accounts were not maintained, did not negate the existence of a new and identifiable undertaking. The units were not formed by reconstruction of the existing business.

Conclusion: The issue was answered in the affirmative and in favour of the assessee; relief under section 15C was allowable.

Issue (ii): whether the amount advanced to the supplier concern and written off was allowable as a bad debt under section 10(2)(xi) of the Indian Income-tax Act, 1922.

Analysis: The advances were made to secure supply of raw materials and were held to arise out of and as an incident of the assessee's business. The debt was therefore a trade debt, and its loss was not a capital loss. The fact that the assessee was not in the business of money-lending was immaterial where the advances were made for commercial purposes in the course of business.

Conclusion: The issue was answered in the negative as to the revenue's challenge and in favour of the assessee; the write-off was allowable as a bad debt.

Final Conclusion: The reference was disposed of by upholding the assessee's entitlement to section 15C relief and to the bad-debt deduction on the facts found.

Ratio Decidendi: A physically separate and commercially viable industrial unit established with fresh capital, producing articles in an identifiable and distinct manner, is a new industrial undertaking for the purpose of section 15C; and an advance made in the course of business to secure raw material supply constitutes a trade debt, the loss of which is deductible when written off as bad debt.

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