1992 (4) TMI 4 - SC - Income Tax

Appellants entitled to partial tax exemption under Section 15C where leased building wasn't essential to formation of undertaking

SC held that the appellants were entitled to claim partial tax exemption under section 15C because merely taking on lease a building previously used for ... Partial exemption under section 15C - Formation 'not formed by' transfer requirement - Transfer of building, plant or machinery previously used - Lease versus transfer - Substantiality test for formation by transfer - Liberal and purposive construction of tax incentives - 'Previously used in any other business' not confined to the assesseePartial exemption under section 15C - Lease versus transfer - Formation 'not formed by' transfer requirement - Substantiality test for formation by transfer - entitlement to partial exemption under section 15C where the new industrial undertaking was established in premises taken on lease which had been previously used for another business - HELD THAT: - The Court held that clause (i) of sub-section (2) of section 15C must be read in the light of the statutory purpose: the denial of benefit applies where the undertaking is 'formed by' transfer of building, plant or machinery previously used. The emphasis is on formation - i.e., the transfer must have played such a dominant or decisive part in the creation of the new undertaking that but for that transfer the undertaking could not have come into being. A literal rule that any prior use of premises would automatically deny exemption would defeat the object of section 15C, which is to encourage new industrial undertakings. While a lease may, for some purposes, amount to a transfer, that fact alone does not establish that the undertaking was formed by that transfer. On the facts found by the Tribunal, taking the premises on lease did not play the dominant part in formation of the company, and therefore the existence of prior business use of the premises did not disentitle the assessee to the exemption.The undertaking established in premises taken on lease which had been previously used for business was not, on the facts, 'formed by' transfer of the building; the assessee was entitled to partial exemption under section 15C.Partial exemption under section 15C - Transfer of building, plant or machinery previously used - Substantiality test for formation by transfer - Liberal and purposive construction of tax incentives - whether transfer to the new undertaking of tools and implements of nominal value precluded the assessee from claiming the exemption under section 15C - HELD THAT: - The Court reviewed precedent and principle and held that transfers of plant or material of merely nominal or insignificant value, which do not play a substantial part in the formation of the undertaking, should not attract clause (i). The restriction in clause (i) is designed to prevent artificial devices to cloak an existing business as a new undertaking; it was not intended to penalise genuine new undertakings which incorporate only insignificant assets from earlier businesses. On the facts found by the Tribunal (transfer of tools and implements of very small value), such transfer did not result in formation of the undertaking and therefore did not deny the exemption.Transfer of tools and implements of insignificant value did not amount to formation of the undertaking by transfer and did not bar the assessee from claiming partial exemption under section 15C.'Previously used in any other business' not confined to the assessee - Transfer of building, plant or machinery previously used - whether the phrase 'previously used in any other business' in clause (i) is to be narrowly read as referring only to premises used earlier by the assessee itself - HELD THAT: - The Court accepted the view that the expression 'previously used in any other business' cannot be construed so narrowly as to confine it to buildings formerly used by the assessee alone. The Bombay High Court's narrower construction on this point was endorsed to the extent that prior use need not be limited to the assessee's own past use. However, this broader reading must still be applied in conjunction with the requirement that the undertaking be 'formed by' such transfer - i.e., prior use by others does not automatically disentitle a genuine new undertaking unless the transfer materially formed it.The phrase is not confined to the assessee's own prior use, but prior use by others does not by itself deny the exemption unless the undertaking was formed by that transfer.Final Conclusion: The appeals are allowed; on the facts found by the Tribunal the assessee, a new company for assessment year 1960-61, was entitled to partial exemption under section 15C because (i) taking the premises on lease which had been previously used did not amount to formation of the undertaking by transfer, and (ii) transfer of tools and implements of insignificant value did not constitute formation by transfer. The reference is answered in favour of the assessee and against the Revenue. Issues Involved:1. Whether the assessee was entitled to claim partial exemption from payment of tax under section 15C of the Indian Income-tax Act, 1922.2. Whether the industrial undertaking was formed by splitting up or reconstruction of an existing business.3. Whether the industrial undertaking was formed by transfer of building, machinery, or plant previously used in another business.Issue-wise Detailed Analysis:1. Entitlement to Partial Exemption under Section 15C:The primary question was whether the assessee could claim partial exemption under section 15C of the Indian Income-tax Act, 1922, on profits derived from an industrial undertaking established in a leased building previously used for another business. The Tribunal found that the assessee-company was a new undertaking and not a reconstruction of the promoter company. The High Court, however, ruled against the assessee based on the decision in Capsulation Services P. Ltd. v. CIT [1973] 91 ITR 566 (Bom).2. Formation by Splitting Up or Reconstruction of Existing Business:The Income-tax Officer initially rejected the claim, stating that the undertaking was formed by splitting up an existing business. However, this was not supported by facts, as the Tribunal found that the business of the new industrial undertaking did not exist prior to its incorporation and was neither carried on by the promoter company nor any other company. Thus, the claim of reconstruction was not upheld.3. Formation by Transfer of Building, Machinery, or Plant:The main contention revolved around whether the industrial undertaking was formed by the transfer of building or machinery previously used in another business. The Tribunal and appellate authority held that taking premises on lease did not amount to a transfer of the building. The Tribunal further opined that 'lease' could not be equated with 'transfer' and that the industrial undertaking should not be denied the benefit of section 15C merely because it took business premises on lease or used minor implements previously used for business. The High Court, however, disagreed, stating that the use of a previously used building disqualified the assessee from claiming the benefit.Interpretation of Section 15C:Section 15C(1) provided tax exemption on profits derived from any industrial undertaking to which the section applied. Sub-section (2) restricted this benefit to undertakings not formed by splitting up, reconstruction, or transfer of building, machinery, or plant previously used in any other business. The court emphasized that a provision in a taxing statute granting incentives should be construed liberally to promote growth and development. The restrictive clause in sub-section (2) was intended to prevent abuse of the benefit by merely changing labels.Judicial Precedents and Legislative Amendments:The court referred to several High Court decisions and legislative amendments to interpret the provision. It noted that High Courts consistently held that if the value of transferred machinery was nominal, it should not result in denial of benefit. The legislative amendments in 1967 and 1976 to section 80J of the 1961 Act recognized this by excluding previously used buildings taken on lease from the restriction.Conclusion:The court concluded that a literal construction of clause (i) of sub-section (2) would defeat the purpose of section 15C. It emphasized that the formation of the undertaking should not be by such transfer and that the transfer must be substantial and prominent in the formation of the undertaking. The court found that taking the building on lease did not play a dominant role in the formation of the company. Therefore, the High Court's decision was set aside, and the assessee was held entitled to partial exemption under section 15C of the Act.Final Judgment:The appeals were allowed, the High Court's order was set aside, and the question of law raised by the Department was answered against it. The assessee was entitled to partial exemption under section 15C, and the reference before the High Court was answered in favor of the assessee and against the Revenue. The assessee was also entitled to its costs.