1. In this appeal by the assessee, only ground taken is that relief under Section 80-1 of the Income-tax Act should have been allowed.
2. Previous year relevant to this appeal comprised of the period of twelve months from 1-5-1980 to 30-4-1981. Assessee-company took over an old rolling mill from 1-7-1979 and claimed that it had scrapped the old plant and machinery and had invested further sums in installing the new plant and machinery. It claimed that the new unit commenced production with effect from 15-4-1981 and hence it became entitled to relief under Section 80-1, being deduction of 25 per cent of the profits of the new unit. The ITO rejected the claim and against that original assessment order, assessee went in appeal to the CIT (Appeals), who restored this aspect of the matter to the file of the ITO with a direction that a speaking order should be passed in regard to the assessee's claim for relief under Section 80-1. The ITO, in pursuance of that appellate order, passed order dated 5-8-1985 rejecting the assessee's claim by mentioning that the items manufactured continued to be the same as in the past and therefore, the manufacturing activities of the company were the same as that of the existing unit only. The CIT (Appeals) in his detailed order dated 14-10-1986 considered the assessee's contentions but ultimately rejected them. Assessee is in appeal before us.
3. Before us, learned Chartered Accountant for the assessee contended that the old unit was manufacturing only paper, cotton and silk covered wires and strips, while a new unit was set up to manufacture copper bus bars and copper profile sections, etc. He drew our attention to the new licence obtained for manufacture of new items, vide letters from the Ministry of Industry, kept on pages 22 and 23 of the paper-book. He gave us facts and figures to show that plant and machinery newly installed was really substantial and the old plant and machinery did not constitute 20 per cent of the total plant and machinery used in the new undertaking. He submitted that in computation of this value of 20 per cent for the old plant and machinery, the written down value should form the basis and on that footing, furnished even revised figures to show that the written down value of the plant and machinery would come to 17.49 per cent.
4. Learned Departmental representative on the other hand, emphasised that there was already existing a unit which was run by a firm in which the assessee-company was a partner. He emphasised that the same building establishment, etc. were used for undertaking the manufacture of these items, though large quantities of new plant and machinery were also installed. He emphasised the aspect of licence also by saying that old licence existed in the name of the firm and it stood transferred to the name of the assessee-company.
5. In the course of hearing, a question arose as to whether for seeing the statutorily laid down limit of 20 per cent for old 'plant and machinery' the description 'plant and machinery' should not include items like vehicles, etc. which are undoubtedly plant and machinery, but are excluded for certain purposes, like grant of investment allowance, etc. Realising this position, the learned Chartered Accountant for the assessee submitted that ordinarily only those items of plant and machinery should be included which are used directly in the process of manufacture and production. He proceeded to submit that even if the vehicles are included in that definition of 'plant and machinery', assessee would not be crossing the laid down limit of 20 per cent and it is on that basis that he has furnished the figure of 17.49 per cent referred to above.
6. We have very carefully considered the rival submissions. Taking up the aspect of industrial licence, first, it is important to note that the original industrial licence existed in the name of the firm, viz.
M/s. Devidayal Rolling Mills. The assessee-company was a partner in that firm. The CIT (Appeals) has mentioned in para-1.4 of his appellate order as follows: 1.4 ...The same licence which was originally granted to M/s.
Devidayal Rolling Mills, a firm in which the assessee was a partner was endorsed in favour of the assessee to enable it to manufacture certain new items. The assessee did not construct any new building nor did it set up any separate establishment for operating enhanced manufacturing capacity. It utilised the same building, licence, tenancy rights, trade name and the existing set up with further additions thereto in order to carry on manufacturing operations with the help of the newly installed capacity....
Actually, this position is quite clear even from pages 22 and 23 of the assessee's paper-book to which our attention was drawn. It appears that: there were two licences, one dated 10-7-1957 and the other dated 2-3-1961. Presumably, the first mentioned licence was in the name of the firm M/s. Devidayal Rolling Mills and the second mentioned was in the name of the assessee-company. From the letters of 2-9-1983 kept on pages 22 and 23 of the paper-book, it is further obvious that the four items which are claimed to be such for which new licences were granted, were deleted from the licence dated 10-7-1957 and were added to the licence dated 2-3-1961. It means that those four items were included in the licence of the firm and subsequently they were deleted from the licence of the firm and added to the licence of the assessee-company.
It was otherwise also natural because the manufacturing unit of the firm was taken over by the assessee-company. So, it is not a case of new licence being granted for new items to the assessee-company. It is really a case of already existing items in the licence of the firm being deleted from that licence, but added to the licence of the assessee-company. As already mentioned, this was but natural because the manufacturing unit or the undertaking of the firm was taken over by the assessee-company admittedly from 1 -7-1979. It is also important to note that these letters of the Ministry of Industry, Department of Industrial Development are dated 2-9-1983. So, even the transfer is intimated after the end of the previous year. Assessee has not shown that even this transfer of four items of licence took place in point of time before the end of the previous year, i.e., before 30-4-1981. Of course, assessee's request was contained in its letter dated 29-1-1981, referred to in the letter on page 22 of the assessee's paper-book. But, as already explained, it was certainly not a case of new licence being granted.
7. This brings us to the assessee's contentions regarding the four conditions are prescribed for availability of relief under Section 80-1, vide Sub-section (2). The first condition is contained in Clause (i) of Sub-section (2) of Section 80-1, which is in the following terms : (i) it is not formed by the splitting up, or the reconstruction, of a business already in existence; The learned Chartered Accountant for the assessee contended that this condition actually stood satisfied. But, we agree with the learned Departmental Representative that in this particular case, this condition was not satisfied. The point is that the reference in Sub-section (2) of Section 80-1 is to the industrial undertaking rather than to the ownership of the industrial undertaking. This very industrial undertaking was being run by the firm in which the assessee-company was a partner and it has been taken over by the assessee-company. So, the basic condition of the industrial undertaking not formed either by the splitting up or by reconstruction of a business already in existence is not satisfied. More so, because the buildings and other establishment, etc. including furniture and fixtures remain the same.
8. Be that as it may, the second condition prescribed under Section 80-1(2) is certainly not satisfied. We would now go into the details thereof. That condition is in the following terms : (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; This statutory condition has to be read with Explanation (2) below that sub-section, which is in the following terms: Explanation 2: Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of Clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with.
For showing that the old plant and machninery was less than 20% of total plant and machinery, the assessee has furnished statements on three sheets. On page 16 of the paper-book, there are Annexures-A & B in the following terms:4.
Factory equipments 41,727 Total : 4,54,589 Details of New Machinery installed at the new unit Value (Rs.)(a) Plant & machinery 23,87,087(b) Plant & Machinery Rolls 9,072(c) Factory equipments 4,981 As already mentioned, according to this working, the (sic) 15.91 per cent. These figures are sought to be reconciled with the figures of balance sheet, by furnishing yet another statement in the following terms : STATEMENT SHOWING RECONCILIATION OF W.D. V. OF PLANT & MACHINERY TRANSFERRED TO NEW UNIT VIS-A-VIS BOOK VALUE1. BOOK VALUE OF PLANT & MACHINERY RS. 6,62,901 LESS : VALUE OF R & D MACHINERY RS. 1,43,518 Then comes the last statement showing the revised percentage at 17.49 per cent which is furnished after the date of hearing and the relevant figures thereof are as follows : unit (Annexure A) Rs. 4,54,589 Add : Written down value of the at the new unit (Annexure B) Rs. 28,55,729 Add : Written down value of the Vehicles Rs. 54,272 (II) Rs. 29,10,001 Now, reading all these three statements together, the position that emerges is that book value of the plant and machinery excluding electrical installations, vehicles or air-conditioning machines, etc.
is Rs. 6,62,901, as appearing on page 15 of the printed balance-sheet.
This figure is as at the beginning of the previous year relevant to this appeal.
9. From the second statement furnished by the assessee and extracted above, it is obvious that the assessee wants us to exclude the figure of Rs. 1,43,518, which is the value of Research & Development machinery. Assessee's contention for this is that since deduction for the total cost of this machinery has been allowed in the quantification of total income (i.e., under Section 35), the written down value of the plant and machinery should be taken at 'Ml' and hence it should be excluded from the total book value of the plant and machinery. In our opinion, this is not an acceptable position. In the decisions cited on behalf of the assessee, it is held that for the purposes of Section 80J, while applying this condition of 20 per cent, written down value should be adopted. This is a principle of common sense and practical approach. This cannot be extended to the extent that for R & D machinery, the total value should be excluded only because the total cost was allowed as deduction by way of an incentive in quantification of total income. Therefore, this item of Rs. 1,43,518 cannot be excluded.
10. The assessee has yet another problem. This is in respect of the figure of Rs. 1,20,556 shown as value of machinery scrapped, in the second statement furnished by the assessee and extracted above. A reference to the final accounts and Schedule A of the fixed assets appearing on pages 14 and 15 of the printed balance-sheet shows that from the gross block at cost, deductions during the year are of Rs. 1,29,323. It means that the original cost of the items of plant and machinery was Rs. 1,29,323. It is not clear how the written down value of that plant and machinery whose original cost was Rs. 1,29,323, would be as high as Rs. 1,20,556. The point is that even if 10 per cent or 15 per cent depreciation per year is allowed, which is allowable for user even for a single day, the written down value would be less than Rs. 1,20,556, and assessee has not furnished how this figure of Rs. 1,20,556 is arrived at for the written down value of the plant and machinery scrapped, whose cost was shown at Rs. 1,29,323.
11. Yet another problem is about the air-conditioning machines shown at Rs. 6,400. They are certainly 'plant and machinery' and for applying the test laid down in Explanation 2 below Sub-section (2) of Section 80-1 they would constitute plant and machinery. Therefore, they would be part and parcel of old plant and machinery also. With these items in view, if we examine the three statements furnished on behalf of the assessee, it is obvious that even if there is addition of only Rs. 1 lakh to the value of the old plant and machinery, the total value of old plant and machinery would come to Rs. 6,08,861 and the total value of the whole plant and machinery would come to Rs. 30,10,001. As indicated in the third statement furnished on behalf of the assessee and extracted above, both the figures would be increased by Rs. 1 lakh for the old plant and machinery and for the total plant and machinery.
Obviously, Rs. 6,08,861 is more than 20 per cent of Rs. 30,10,001. We have mentioned the margin of Rs. 1 lakh in spite of the fact that the figure for the cost of R & D Machinery is Rs. 1,43,518 and there is unexplained position of the written down value being shown at Rs. 1,20,556 for the scrapped plant and machinery whose original cost was shown at Rs. 1,29,323, and further that there is written down value of the old air-conditioning machines of Rs. 6,400 as per the printed balance-sheet. These three items taken together would certainly give a figure of not less than Rs. 1 lakh, which we have considered above and on that basis the value of old plant and machinery exceeds 20 per cent of the total value of the plant and machinery. Thus, condition [ii] under Sub-section (2) of Section 80-1 was also not satisfied.
12. The learned Chartered Accountant for the assessee also mentioned that the old machinery was oil-fired, while the new machinery was run on electricity. In our opinion, this circumstance does not make any difference. He has of course, drawn our attention to the list of item-wise cost of new plant and machinery totalling Rs. 23,87,088 kept on pages 28 to 30 of the assessee's paper book. As we have accepted this figure, this does not call for any further comments. He has further referred to the public notice given in some news-papers. In our opinion, that also does not make any difference. Our attention is also drawn to some certificate given by the General Manager - Operations, kept on page 34. The averments therein also do not make any difference in the application of legal principles and the figure work set out above.