Industrial undertaking relief and income estimation: pre-1948 used machinery bars section 15C, and arbitrary profit computation cannot stand.

Relief under section 15C was unavailable because the industrial undertaking was formed with machinery previously used in a business carried on before 1 April 1948, bringing the statutory exclusion into play. The proviso to section 13 was also attracted because the assessee's accounting records, including the absence of a proper daily consumption record and stock register, did not provide a reliable basis for determining true profits. Even where a different basis of computation is justified, any income estimate must rest on some material and cannot be arbitrary or conjectural; the impugned computation was therefore unsustainable for want of supporting material.

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Issues: (i) Whether the assessee's industrial undertaking was disentitled to relief under section 15C because it was formed by transfer to a new business of machinery used in a business carried on before 1 April 1948; (ii) Whether the proviso to section 13 was attracted on the facts, and whether there was material on record to support the basis adopted for computing the assessee's income.

Issue (i): Whether the assessee's industrial undertaking was disentitled to relief under section 15C because it was formed by transfer to a new business of machinery used in a business carried on before 1 April 1948.

Analysis: Relief under section 15C is available only to an industrial undertaking that is not formed by splitting up or reconstruction of existing business or by transfer to a new business of building, machinery or plant used in a business carried on before 1 April 1948. The undertaking here commenced manufacturing with old machinery, including machinery previously used before that date, and the relevant condition for exclusion was therefore satisfied.

Conclusion: The question was answered in the negative and the assessee was not entitled to the relief under section 15C.

Issue (ii): Whether the proviso to section 13 was attracted on the facts, and whether there was material on record to support the basis adopted for computing the assessee's income.

Analysis: The method of accounting did not furnish a reliable basis for deducing true profits because there was no proper daily consumption record or stock register and the purchases were allocated on an ad hoc basis. The proviso to section 13 was therefore attracted. However, the basis adopted for estimation still had to rest on some material, and an arbitrary or purely conjectural addition could not be sustained. In the absence of reliable material supporting the final basis of computation, the additions could not stand.

Conclusion: The proviso to section 13 was held to be attracted, but there was no material on record for the basis adopted by the Income-tax Officer or the Tribunal for computing the income of the assessee.

Final Conclusion: The reference was disposed of by answering the section 15C issue against the assessee, holding the proviso to section 13 applicable, and setting aside the income computation for want of supporting material.

Ratio Decidendi: Relief under section 15C is unavailable where the undertaking is formed by transfer of pre-1948 used machinery, and though the proviso to section 13 may permit a different basis of computation, any estimation of income must rest on some material and cannot be arbitrary or conjectural.

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