New industrial unit exemption depends on separate identity; internal use of output does not by itself mean reconstruction.

Section 15C of the Indian Income-tax Act, 1922 granted exemption to newly established industrial undertakings but excluded units formed by splitting up or reconstruction of an existing business. The controlling test was whether the concern was merely an expansion of the old business or a separate industrial unit with its own physical identity, fresh capital, labour, manufacturing activity and ascertainable profits. Use of the new unit's products in the existing business did not by itself amount to reconstruction. On that reasoning, the steel foundry division and the jute mill division were treated as distinct units, not reconstructions of the assessee's old business, and the exemption was available.

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Issues: Whether the steel foundry division and the jute mill division were formed by reconstruction of the assessee's existing business so as to be excluded from the benefit of section 15C of the Indian Income-tax Act, 1922.

Analysis: Section 15C granted a limited tax exemption to newly established industrial undertakings, but excluded undertakings formed by splitting up, reconstruction of existing business, or transfer of previously used building, machinery or plant. The controlling inquiry was whether there was merely an expansion of the old business or a new and identifiable industrial unit with separate physical identity, fresh capital, requisite labour, manufacture of articles, and ascertainable profits. The fact that the products of the new units were largely used in the assessee's existing business did not by itself amount to reconstruction. Reconstruction, for this purpose, involved substantially the same business being carried on in altered form with continuity of the old undertaking, not the setting up of a separate industrial unit with new plant and machinery.

Conclusion: The steel foundry division and the jute mill division were not formed by reconstruction of the assessee's existing business, and the assessee was entitled to the benefit of section 15C.

Ratio Decidendi: A newly set up industrial unit is not disqualified from section 15C merely because its products are used in the assessee's existing business; it is excluded only when it is formed by reconstruction of the old business, meaning continuity of the same undertaking rather than the establishment of a separate and distinct unit with fresh capital and independent identity.

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