TaxTMI 
TaxTMI 
1970 (7) TMI 15
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....omputing the assessee's profits from its business ? " We can straightaway dispose of the third question as we find it is already covered by the decision in Travancore Titanium Products Ltd. v. Commissioner of Income-tax, where the Supreme Court held that the amount of wealth-tax paid by an assessee on his net wealth under the Wealth-tax Act, 1957, was not a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. Following that decision we answer the third question in the negative and in favour of the revenue. We are, therefore, left with the first two questions. The Central controversy in these two questions is about the meaning to be given to the expression " industrial undertaking " in section 15C of the Indian Income-tax Act, 1922, and, in particular, the meaning to be given to the words " reconstruction of business already in existence " in section 15C(2)(i) of the Income-tax Act, 1922. To appreciate the controversy and its different aspects it will be necessary to set out the relevant facts. The assessee is the Textile Machinery Corporation Ltd., which is a heavy engineering concern manufacturing boilers, machinery parts, wagons, etc. The ass....
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....e attracted. The Appellate Assistant Commissioner dismissed the appeal of the assessee. He came to the conclusion that the business remained the same and all that had happened was " some re-construction in the business, re-construction in the sense that, instead of purchasing some parts from outside, the appellant started producing the same itself ". He was of the view that the industrial undertaking for exemption under section 15C must be a new industrial undertaking and must be a separate business. The Appellate Assistant Commissioner considered also the decisions in Ashok Motors Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Standard Motor Products of India Ltd., on which the assessee relied. When the matter came up in appeal before the Tribunal, the Tribunal allowed the appeal of the assessee and set aside the decisions of the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal came to the conclusion that the assessee had established that the steel foundry division was a new industrial undertaking, not formed by the splitting up or re-construction of an already existing business. The Tribunal also held that profits could be earned ....
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....ion. The only sales to outside consisted of parts in respect of jute mills and amounting to Rs. 1,13,697. It is recorded that the assessee admitted that, so far as the products of the jute mill parts were concerned, the company was in an initial and an experimental stage only and whatever profit was earned under the jute mill division is in respect of the work done on behalf of the boiler division. The Appellate Assistant Commissioner found the following facts. The assessee is a heavy engineering concern manufacturing boilers, etc. The parts manufactured by the steel foundry division and the jute mill division being essential for the boiler division, these two divisions, viz., the steel foundry and the jute mill divisions, were set up by the assessee so as to avoid purchasing such parts from outside. He, therefore, records the fact that these two units of steel foundry and jute mill divisions were set up with a view to manufacturing parts for being used in the manufacture of boilers, etc., which was the existing business of the appellant. His conclusion, therefore, was that the business remained the same and all that had happened was reconstruction as mentioned above. The Tri....
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....is reference, read, inter alia, as follows : " (1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking, computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue. (2) This section applies to any industrial undertaking which- (i) is not formed by the splitting up, or the reconstruction of, business already in existence or by the transfer to a new business of building, machinery or plant used in a business which was being carried on before the 1st day of April, 1948 (now amended as " previously used in any other business ". The amendment applies retrospectively by the Finance Act of 1959) ; . . . . . (iii) employs 10 or more workers in a manufacturing process carried on with the aid of power, or employs 20 or more workers in a manufacturing process carried on without the aid of power . . . . " The dominant requirements of section 15C as quoted above and so far as are relevant for the purposes of this reference....
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.... of the expression " industrial undertaking " in the Indian Income-tax Act would be the same as an industrial undertaking under the Industrial Disputes Act or in many other pieces of industrial legislation such as the Industries (Development and Regulation) Act, 1951, which we will have to consider in this reference. Time perhaps is coming fast for a more coherent and co-ordinated picture of these concepts on common problems of law and economic concepts such as these in an industrial code. Pursuing the interpretation of the word "undertaking", and particularly " industrial undertaking ", we have been shown dictionary meanings which we do not propose to quote here. Normally, anything undertaken to be done is an undertaking. An industrial undertaking, therefore, would normally be, in its ordinary acceptation, some industrial concern or enterprise or adventure which is undertaken to be done by the person concerned. Whether the industrial undertaking means only the physical assets or the human assets involved in it or the principles of organisation which cover it are to a certain extent unrealistic because we are of the view that industrial undertakings cover a complex of ideas both....
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....it has got to be a concrete and tangible venture in the path of industry to make it an industrial undertaking. Pursuing the course of interpretation of section 15C of the Income-tax Act, 1922, it appears to us that the industrial undertaking must be such where some capital is employed and which is separate to the extent as to show how much a 6 per cent. return on it would be in order to merit or qualify for the exemption from tax under section 15C. In other words, this industrial undertaking should not be such where it would be difficult to find the capital employed or where it is a part and parcel of the general capital employed otherwise by the assessee. This employment of the capital need not be formal in the sense of actually raising the capital and putting it into the new industrial undertaking, but, nevertheless, there must be a definite employment of capital in that undertaking and that is one of the requirements of the statute. The idea is that this factor of capital being employed in that undertaking to qualify for exemption under section 15C is to introduce a kind of separateness to that undertaking which can be taken by itself apart from the general context of the bus....
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....from within by the assessee itself under these two divisions. Taking a broad view of the expression " reconstruction ", it is difficult to hold that this change of producing one's own goods systematically used in the existing business instead of buying them from outside would not be reconstruction of a business already in existence. There is one other aspect of this expression " business already in existence ". It is being argued from the bar on behalf of the assessee that this business of producing these goods, castings and forgings were not there. That is true, but business does not only mean actual production of the goods in question but also includes the business of getting the goods even from outside so long as these goods had all along been employed in the existing business of the assessee. At the same time it would be necessary to indicate certain other aspects of the interpretation of the expression " business already in existence " in section 15C(2)(i) of the Income-tax Act, 1922. We shall call this aspect as the feeder principle or the canopy principle. In the course of argument it was suggested by the learned counsel for the revenue that any industrial undertaking whi....
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....bt an assessee, which is a company doing business under its charter of incorporation, when it wants to establish a new industrial undertaking, it must be well within its objects, otherwise such an industrial undertaking will be ultra vires the company. While, therefore, these extreme propositions advanced by the learned counsel for the revenue cannot be accepted, yet there is a residue of consideration which may be effective in appropriate cases and the present case is one such appropriate case. The expression " business already in existence " must be given its ordinary commercial meaning. The business already in existence in this case is the business of heavy engineering and in particular the business of manufacturing wagons and boilers. In doing that business castings and forgings are necessary ingredients. In fact the assessee had to have these castings and forgings but they bought them from outside. In so far as they started producing and manufacturing themselves, the assessee, in this case, therefore, was doing something which was reconstruction of the business already in existence and to that extent the feeding principle may be invoked but no more, and to that extent the c....
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....t. of the capital employed. The unfortunate part is that, even though the Income-tax Officer said so, the higher appellate authorities including the Appellate Assistant Commissioner or the Tribunal did not check or verify the facts or find the facts on this point. Lastly, there is no finding as to the workers employed in this instance in order to see whether the test laid down by section 15C(2)(iii) has been satisfied. We expect that in future the statement of facts and the findings of facts will be more carefully drawn up in the light of the sections discussed. We have indicated that one of the requirements of section 15C is quantification of the " profits derived from an industrial undertaking ". Learned counsel for the revenue has urged before us that there is no profit in this case. This is only a case of inter-departmental sales. There are two aspects of this argument. The facts already mentioned above would show that, so far as the steel foundry division is concerned, roughly about 1/3rd of the output is sold outside and 2/3rds are consumed by the assessee's boiler division. With regard to the jute mill division more than 90 per cent. is consumed by the assessee in its own bu....
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....rvations at page 136 of the report of that case, where it was said : " But what we are now concerned to point out is that if it is capable of dismemberment of disintegration into its components, it would not be correct use of language to designate the profit so apportioned and ascertained as attributable to each line of activity any the less real than the aggregate profit realised from all the ventures . . . . . . Undoubtedly, in order to ascertain the profits from the mine there would have to be a disintegration of the gross profits which finally emerge from the sale of the finished steel or steel products. What we desire to point out is that this involves no disintegration of the business affording scope for the contention based upon the principle that a person cannot trade with himself, but the one far removed from it, viz., whether when a profit has been made as a conjoint result of different but integrated operations, the profits so derived could be broken up so as to permit the attribution of specific amounts of profit to each or any of the several operations or activities. " Therefore, Dr. Pal for the assessee argues that, although it is inter-departmental sales, the i....
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....w undertaking ? " Therefore, the question whether section 15C at all applied was not in issue in that case. The second distinction is that the theory of raw material being processed into a finished product taken with the analogous theory of primary product, intermediate product and end product, is not, in our view, relevant or appropriate to the facts in the present reference. There starch was the raw material for dextrose and we are not convinced that castings and forgings in the present reference could be described as raw materials for boilers and wagons. One can understand, as is already indicated in the Tata case, that the original mined ore is the raw material for the finished steel products, but surely that analogy does not apply to the facts in the present reference before us. Here, at this stage, we shall notice one or two more decisions on the interpretation of section 15C of the Indian Income-tax Act, 1922. One is a Division Bench decision of this court in Industrial Gases Ltd. v. Commissioner of Income-tax. The first principle it lays down is that the exemption under section 15C has to be strictly construed. The second principle it lays down is that the unit of ass....
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.... of the income of an industrial undertaking and was not entitled to exemption under section 15C of the Income-tax Act, 1922. We need only emphasise the observations made by the Madras High Court in the Standard Motor case at page 818 of that report, which read as follows : " For purposes of section 15C there can be no merger of several business activities into the industrial undertaking, however much they may be closely allied to or intimately associated with the latter. The exemption has to be strictly construed, and the language of the enactment prevents the extension of the benefits to income which is merely incidental or ancillary to the industrial undertaking but which does not arise from and out of it. The protection is only to the income from the undertaking and not to other income from the satellites in its orbital system. " Drawing this analogy, Mr. Pal for the revenue has said that the jute mill division and the steel foundry division are " satellites in the orbital system " in this case. The next point of construction of section 15C of the Income-tax Act, 1922, relates to the question whether the industrial undertaking must mean that there must be some manufactu....
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....etation of section 15C(2)(i), it would be noticeable that the word " form " is used in that provision. " Form " indicates some kind of structure or establishment indicating organisation with a shape and a pattern. The section implies that an industrial undertaking may be " formed " in that sense by the splitting up or the reconstruction of business already in existence or by the transfer as mentioned therein. Therefore, every " form " of an industrial undertaking is not necessarily entitled to claim exemption under this provision because if an industrial undertaking is formed by the splitting or reconstruction or by transfer as mentioned therein, it will not be entitled to the exemption. But the word " form " appears to indicate some kind of a shape or a separate concretisation. Beyond that it would be inappropriate to impose any limitation or rigid qualification on the word " form ". Reverting back to the interpretation of the word " reconstruction " in section 15C(2)(i) of the Indian Income-tax Act, 1922, we have to notice the decision of the Bombay High Court in Commissioner of Income-tax v. Gaekwar Foam & Rubber Co. Ltd. The ratio of that decision is that, in the facts of th....
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....ompany or resuscitated company. Substantially, the business and the persons interested must be the same. Does it make any difference that the new company or resuscitated company does or does not take over the liabilities? I think not. I think it is nonetheless a reconstruction because from the assets taken over some part is excepted provided that substantially the business is taken, and it is immaterial whether the liabilities are taken over by the new or the resuscitated company or are provided for by excepting from the scheme of reconstruction a sufficient amount to answer them. It is not, therefore, vital that either the whole assets should be taken over or that the liabilities should be taken over. You have to see whether substantially the same persons carry on the same business ; and if they do, that, I conceive, is a reconstruction. " Now, the above observations of Buckley J. were made in connection with company law. That learned judge, a great authority on company law, expressed the view in that case that reconstruction had no definite legal meaning and it was a commercial and not a legal term and even as a commercial term it had no exact or definite meaning. The conce....
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....ogressing from day-to-day and the old machinery has often to be replaced by new ones not merely on the ground of depreciation and wearing out but on the ground of replacement by the modern improved machinery. New machinery may also be needed to improve the quality and quantity and speed of production of goods. In these circumstances, the newness of the machinery may well be a feature of " reconstruction " of business. Secondly, it has been also argued that these two divisions of the assessee, namely, the jute mill division and the steel foundry division, are housed separately although in the same campus. Separate housing, again, in our view, is not by itself decisive on the point of a new industrial undertaking. Better arrangement might dictate separate housing. Many other considerations of business convenience and expediency may require separate housing which will not avoid the fact of separate housing being a part of reconstruction of business already in existence. Similarly, keeping separate accounts of these two divisions by itself may not also be decisive on the point of being an industrial undertaking. Better business methods and accounting and auditing arrangements might dic....
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....reads as follows : " An application No. Nil dated the 27th January, 1953, for a licence having been received from M/s. Textile Machinery Corpn. Ltd. for effecting a substantial expansion to their existing industrial undertaking, namely, Textile Machinery Corpn. Ltd., under rule 7 of the Registration and Licensing of Industrial Undertakings Rules, 1952, the Central Government, in exercise of the powers conferred by rule 15 of the said rules, hereby grants this licence to effect a substantial expansion to their existing industrial undertaking, subject to the following conditions : (1) Effective steps as defined in rule 2(ii) of the Registration and Licensing of Industrial Undertakings Rules, 1952, shall be taken for effecting this substantial expansion within the period of six months from the date of issue of the licence. (2) This substantial expansion shall be effected within a period of 18 months from the date of issue of this licence. (3) This substantial expansion shall constitute a new electric furnace of 3 ton per charge capacity for the manufacture of steel castings and special alloy steels. (4) The undertaking shall make its own arrangements for the raw materia....
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....ted in section 80J of the Income-tax Act, 1961. The Income-tax Act does not refer to a " business expansion "-substantial or otherwise-in dealing with the case of an industrial undertaking under section 15C of the Income-tax Act, 1922. The next statute within two years was the Industries (Development and Regulation) Act, 1951. The preamble of that statute says that it was " an Act to provide for the development and regulation of certain industries ". In Chapter 3 of that statute of Industries (Development and Regulation) Act, 1951, dealing with " regulation of scheduled industries " certain sections like sections 11, 11A and 13 appear. Section 11 deals with licensing of new industrial undertakings. Section 11A deals with licence for producing or manufacturing new articles. It is section 13 of that statute which is relevant for the purpose of this reference. We shall consider this provision in some detail. Section 13(1)(d) of the Industries (Development and Regulation) Act, 1951, provides, inter alia, that : " No owner of an industrial undertaking, other than the Central Government shall--. . . . . (d) effect any substantial expansion of an industrial undertaking which has ....
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....ial expansion " and the necessary licensing mentioned in the Industries (Development and Regulation) Act, 1951. The Income-tax Act has been amended even after 1951 but even these subsequent amendments do not make any reference to the Industries (Development and Regulation) Act of 1951. It is noticeable that this very section 15C of the Income-tax Act, 1922, has been amended in 1953, 1956, 1959, 1960 and 1961. It is plain from that fact that the concept of licensing of substantial expansion under the Industries (Development and Regulation) Act, 1951, has not been extended to the Income-tax Act and its exemption under section 15C thereof. The last branch of the argument of Dr. Pal on this point for the assessee was based on the Wealth-tax Act, 1957, and its provisions. The relevant sections of the Wealth-tax Act, 1957, on this point are section 5(1)(xxi) and section 45(d) with its Explanation. We shall briefly notice these provisions of the Wealth-tax Act. Section 5(1)(xxi) of the Wealth-tax Act excludes " that portion of the net wealth of a company established with the object of carrying on an industrial undertaking in India within the meaning of the Explanation to clause (d) of ....