Reconstruction doctrine: sale of business to outsiders is not reconstruction; purchaser qualifies for tax relief under section 15C.

Whether the assessee qualifies for relief under section 15C turned on whether the arrangement constituted a 'reconstruction' of an existing industrial undertaking. The applicable legal principle is that reconstruction requires continuation of substantially the same business by substantially the same persons; a mere sale of assets (including goodwill) to outsiders who carry on the business does not amount to reconstruction. On the facts the transaction was in substance a sale, the vendor ceased business, and there was no continuity of personnel or identity; accordingly the purchaser is not a reconstructed undertaking and is entitled to relief under section 15C.

---

---

Issues: Whether, on the facts and in the circumstances of the case, the assessee company is entitled to relief from tax under section 15C of the Income-tax Act.

Analysis: Clause (i) of sub-section (2) of section 15C excludes industrial undertakings formed by reconstruction of a business already in existence. The legal concept of "reconstruction" requires that substantially the same business continue to be carried on by substantially the same persons; it involves continuation, not mere transfer by sale. A sale of assets, even including goodwill, to an outsider who thereby carries on the business does not amount to reconstruction of the vendor's business. Relevant factors include whether the transaction is in substance a sale, whether liabilities and personnel remain substantially the same, and whether the original undertaking continues to function with its identity preserved. On the facts, the agreement was in substance a sale of plant, machinery, premises and goodwill; the vendor firm ceased to carry on business; the purchasers (the assessee company) had a larger capital and the vendors received a limited allotment of shares. There was no finding that substantially the same persons continued to carry on the same business in a manner constituting reconstruction.

Conclusion: The assessee company is not a newly established industrial undertaking formed by reconstruction of a business already in existence and is entitled to the relief under section 15C of the Income-tax Act.

---