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

Bajaj Tempo Limited Versus Commissioner of Income-Tax

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 ... Entitlement to claim partial exemption from payment of tax under section 15C of the Indian Income-tax Act, 1922, on profits and gains - derived from an industrial undertaking established in a building taken on lease used previously for another business - HELD THAT:- High Courts have consistently taken the view that if the value of transferred machinery was nominal, it could not result in denial of benefit to the assessee. This conclusion was reached by construing the provision either on principles of commercial expediency or practical common sense or to avoid unjust hardship to the assessee. This was legislatively recognised by Explanation 2, to sub-section(4) of section 80J of the 1961 Act. Similarly, the ineligibility due to transfer of building was toned down in the first instance by amending the provision in 1967 and providing that any building used previously for business purposes taken on lease by the new company would not be covered by the mischief in clause (ii) of sub-section (4) of section 80J of the 1961 Act. Later, in 1976, it was deleted, altogether; thus, the restriction of the new undertaking not being formed by transfer to a new business of building used previously for any other business did not disentitle an assessee from claiming the benefit of partial exemption. For instance, an undertaking otherwise entitled to the benefit would fall within the mischief of the sub-clause if it was established in a building which was used for business purposes at any time in the remote past. Or it might have been established in a part of building, earlier used for business purposes due to paucity of accommodation. Denying benefit to such undertaking could not have been intended when the very purpose of section 15C was to encourage industrialisation. It was for this reason that various High Courts evolved the test of commercial expediency or substantial involvement valued in terms of money, etc., to interpret this clause. Adopting a literal construction in such cases would have resulted in defeating the very purpose of section 15C. Therefore, it becomes necessary to resort to a construction which is reasonable and purposive to make the provision meaningful. One could say, as was vehemently urged by learned counsel for the Department, that where the language of the statute was clear, there was no scope for interpretation. If the submission of learned counsel is accepted, then once it is found that the material used in the undertaking was of a previous business, there was an end of the inquiry and the assessee was precluded from claiming any benefit. The words of a statute are undoubtedly the best guide. But, if their meaning gets clouded, then the courts, are required to clear the haze. Sub-section (2) advances the objective of sub-section (1) by including in it every undertaking except if it is covered by clause (i) for which it is necessary that it should not be formed by transfer of building or machinery. The restriction or denial of benefit arises not by transfer of building or material to the new company but that it should not be formed by such transfer. This is the key to interpretation. The formation should not be by such transfer. Use of the negative before the word 'formed' further strengthens it. In other words, building, machinery or plant used previously in other business should not result in the undertaking being formed by it. The transfer, to take the new undertaking out of the purview of sub-section (1), must be such that, but for the transfer, the new undertaking could not have come into being. In our opinion, on the facts found by the Tribunal, the part played by taking the building on lease was not dominant in the formation of the company. The High Court was, therefore, not justified in answering the question in favour of the Revenue. Appeals, accordingly, succeed and are allowed. 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.