New industrial undertaking exemption upheld where separate sugar factory was not treated as reconstruction of the old business.

Section 15C exemption applied because the new industrial undertaking was a separate and self-contained sugar factory with distinct plant, power source and much larger crushing capacity, so it was not formed by reconstruction of the existing business. The continued separate identity of the new unit, even though both units operated for some time, meant the statutory bar in section 15C(2)(i) was not attracted. The use of some old scrap and material was held insignificant and insufficient to amount to a disqualifying transfer of previously used building, machinery or plant. The exemption was therefore available to the assessee-company.

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Issues: Whether the assessee-company was entitled to exemption from tax under section 15C of the Indian Income-tax Act, 1922 in respect of the profits or gains derived from the new industrial undertaking, or whether the undertaking was disqualified as being formed by the reconstruction of an existing business or by the transfer of previously used building, machinery or plant.

Analysis: The statutory conditions in section 15C(2)(i) required that the industrial undertaking should not be formed by splitting up or reconstruction of an existing business, or by transfer to a new business of previously used building, machinery or plant. The new unit was found to be a separate and self-contained sugar factory, operating on electricity with a substantially larger crushing capacity, while the old unit had operated on steam and had a much smaller capacity. Both units ran simultaneously for some time, and the new undertaking retained its separate identity. The use of some scrap and old material from the earlier factory was held to be insignificant in relation to the total cost of the new plant and insufficient to amount either to reconstruction or to a disqualifying transfer of used assets.

Conclusion: The assessee-company was entitled to the exemption under section 15C of the Indian Income-tax Act, 1922; the question referred was answered in the affirmative and in favour of the assessee.

Ratio Decidendi: A new industrial undertaking is not formed by reconstruction merely because it is established by an existing business house or uses a small fraction of old materials or assets; the decisive test is whether the new unit preserves the identity and continuity of the old business, and where the new unit is distinct and substantial, the exemption is not denied.

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