Ranganathan, J.
1. These are three income-tax references at the instance of the Commissioner of Income-tax. They relate to the assessment years 1962-63, 1963-64 and 1965-66, the relevant previous years being the years which ended on 30th June, immediately preceding. The Commissioner of Income-tax is aggrieved by the decision of the Tribunal that the respondent-assessed is entitled to the exemption provided for in s. 84(1) of the I.T. Act, 1961, for the assessment years above-mentioned. It is common ground that the facts relevant for the decision of the questions are common for all the three assessment years. We shall, thereforee, confine ourselves to the statement of facts as well as the orders of the various authorities in I.T. Ref. NO. 25 of 1971 which relates to the assessment year 1962-63. Our conclusion for that years will equally apply even in respect of the other two assessment years, the question being common except that in I.T. Ref. No. 107 of 1972, the order of the two questions has been reversed. The question for our consideration are :
'1. Whether, on the facts and in the circumstances of the case, the assessed-company is entitled to the exemption under section 84 of the Income-tax Act, 1961
2. Whether, on the facts and in the circumstances of the case, the assessed-company satisfied all the conditions laid down in sub-section (2) of section 84 of the Income-tax Act, 1961 and is entitled to the exemption as contemplated in section 84(1) of the Income-tax Act, 1961 ?'
2. It will be clear that though two questions have been set out there is really one question at issue, namely, as to whether the assessed-company satisfies the conditions for the exemption laid down in sub-s. (2) of s. 84 of the Act. In fact, the question debated before us is even more restricted and that is, as to whether the conditions set out in clause (i) or clause (ii) of s. 84(2) are fulfillled in the present case.
3. The assessed - M/s. Hindustan General Industries Ltd., Nangoli, is a public limited company. It was carrying on the business of manufacture and sale of the following items of goods :
'Steel safes, 4 I.G. can filing machines, wooden stamp boxes, line filters, barrel tanks, barrel racks, brass dip rods, manhole for tanks, roof water tanks, Hibuoys, steel racks,steel cup-boards, etc.'
4. For the above manufacture, the assessed had obtained a license under the Factories Act in 1950. The manufacture of the various items was was being in a factory situated at Nabi Karim, Qutab Road, Delhi.
5. In August, 1957, the Ministry of Railways of the Govt. of India placed an order with the assessed-company for the manufacture and supply of 100 broad-gauge covered wagons of a particular type. From the director's report for the year ending 30th June, 1957, it is seen that in view of the above order, the directors of the company felt that a factory should be constructed on the company's land in Nangoli where siding facilities could be easily procured. It appears that the company had earlier paid for the acquisition of an industrial plot at Kalkaji for setting up a structural factory, but that the proposal did not materialise. The company now, thereforee, proposed to apply to the Delhi Provisional Development Authority to sanction the site at Nangoli and proposed that, as soon as the site was approved, the putting up of a factory building would be taken in hand.
6. The directors report for the subsequent year ending on 30th June, 1958, shows that the company was able to make considerable progress in the matter in the course of the accounting year. On 6th March, 1959, the directors of the company reported to the shareholders as follows :
'The directors report that your company has now put up the factory shed on their land at Nangoli. For want of further funds some works of the shed such a fixing of the glazings, flooring and installation of machinery has been left over. However, some jobs which need more space and cannot be carried out at our city factories are being handled there. The company is trying to arrange a loan of Rs. 2 lakhs from the Punjab Financial Corporation. It is hoped that after the receipt of loan or by making some other alternate arrangement the remaining work will be completed and very shortly the company will start the manufacture of railway goods wagons.'
7. The directors report for the ending 30th June, 1959 was dated 4th March, 1960. It stated :
'As reported to you last year, the new factory of the company at Nangoli occupying over 12 acres of land has made considerable progress. We have made additions to the fixed assets valued at nearly Rs. 3 lakhs, up to the end of the accounting year. Further, substantial additions have been made since the close of year. The manufacture of railway wagons is in hand and we hope to complete the first order of 100 wagons in the near future. We hope we shall have further substantial orders which will increase our turnover very considerably in 1960-61.'
8. In the accounting year 1959-60, there was further progress. The assessed had produced a prototype wagon, but this had not been approved by the Government. In the meantime, in order that the investments made in the new factory may not remain unutilized, the company appears to have started some manufacturing operations at Nangoli. This appears from the fact that in the statement filed by the assessed for the subsequent year, which is the subject-matter of reference in I.T. Ref. No. 25 of 1971, the Nangoli factory showed an opening stock of finished goods and semi finished goods as on 1st July, 1960. The directors' report for the year ending 30th June, 1960, which is dated 7th April, 1961, refers to the fact that the assessed had started 'shifting our factory' from the city premises to Nangoli in January, 1960, resulting in a certain amount of dislocation and loss of production. It also points out that the production of wagons could not be taken in hand during the year of account because the prototype was not passed. Due to delay in regular production of wagons, it was said that huge investments in raw materials and components for wagons had to remain unproductive and had resulted in a loss of overheads. However, it was stated that subsequent to the year of account the prototype wagons had been approved by the government and bulk manufacture had been taken in hand. It was excepted that with the receipt of wheels for the wagons which were expected from the Government, the production would go ahead.
9. During the accounting year which ended on 30th June, 1961, the assessed had been able to manufacture and sell railways wagons of the value of Rs. 92,904 but sales of other goods and articles which were already being manufactured amounted to Rs. 19,33,081. Of this, sales of Rs. 14,54,998 were in respect of goods manufactured at Nangoli while the balance of sales of Rs. 4,79,083 was in respect of goods manufactured at Qutab Road Factory. It also appears that some of the assets previously used for business at Qutab Road factory were transferred to the unit started at Nangoli.
10. for the assessment year 1962-63, the ITO rejected the assessed's claim under s. 84 of the Act. His primary reason for doing so was that according to him the company had started the manufacturing operations in the factory at Nangoli given in the accounting year which ended on 30th June, 1960, relevant to the assessment year 1961-62. For that year, the assessed's claim had to be considered under s. 15C of the Indian I.T. Act, 1922. Under that Act the benefit of s. 15C was not available to an assessed if any assets, namely, buildings, machinery or plant, used in an existing business were transferred to a new industrial undertaking. The ITO observed that in this case the assessed transferred substantial parts of its machinery from the old factory to the new factory as it appeared from the director's report for the year ending 30th June, 1960, that the shifting of the factory had commenced in January, 1960. This being so, the ITO was of the opinion that the assessed was not entitled to relief under s. 15C for the assessment year 1962-63, and the provisions of s. 48 did not apply to the assessed's case. The ITO also observed that no new business had been started by the assessed not had it been newly set up or formed as per the words used in the section. In his opinion the business of the company was to carry on the manufacture of iron and steel equipments and to secure contracts of the products on manufacturing basis and it was this business that was being carried on at Nangoli also. For these two reasons, the ITO rejected the assessed's claim under s. 84 of the Act of 1961.
11. The AAC confirmed the order of the ITO. On the facts, the AAC found that the goods which were being manufactured at the Nangoli factory were the following :
'Railway goods wagons, storage tanks, steel trusses, steel ladders, test house and other structural items.'
12. In other words, he appears to have agreed with the appellant's representatives that the Nangoli factory was producing articles which were different from those that were being produced at Qutab Road factory. However, he was also of the opinion that the assessed was not entitled to exemption under s. 84(1) because 'the new undertaking is a reconstruction of a business already in existence'. After referring to the observation so the Bombay High Court in the case of CIT v. Gaekwar Foam and Rubber Co. Ltd. : [1959]35ITR662(Bom) , the AAC came to the conclusion that in the present case there was no new undertaking, but only a reconstruction or expansion of an existing business. His reasons for coming to this conclusion appear to have been the following :
1. The appellant was carrying on the business under the name and style of M/s Hindustan General Industries Ltd., in which name it continued its business even at the new factory.
2. The nature of the assessed's business was that it was fabricating steel structural, manufacturing security equipments and machine tools and sanitary goods. This appeared from the letter-head of the company as well as an application it had made for tax clearance certificate where it had described its line of business as being that of :
'structural & mechanical engineer, railway wagon builders, manufactures of tructurals such as storage tanks sheds trusses and steel furniture for hospitals offices and household.' In other words, both at the old and the new factory, the appellant was doing essentially the same business and manufacturing the same or similar articles.
3. Some of the plant and machinery used in the new factory was transferred by the appellant from its old factory situated at Qutab Road. Work which could not be handled at the old factory was transferred to the new factory. This also indicated that essentially the same jobs were being done in the new factory as at the old factory.
13. For these three reasons, the AAC upheld the order of the ITO.
14. The assessed filed an appeal to the Tribunal. It was urged on behalf of the assessed that the industrial undertaking at Nangoli had not been formed by the splitting up of reconstruction of a business already in existence. It was pointed out that the assessed already had a factory for the manufacture of various items at Qutab Road factory. It was trying to go in for fresh lines of business. When the order for the manufacture of railway wagons was received, it was felt that a factory could be more suitable constructed on the company's land in Nangoli where sliding facilities could be easily procured and it was in these circumstances that the factory at Nangoli was put up. It was contended that the only ground on which the assessed's claim was rejected was that the condition laid down in s. 84(2)(i), that the new industrial undertaking should not be formed by the transfer to a new business of building, machinery or plant previously used for any purpose, had not been fulfillled. But it was pointed out that under s. 84 a new Explanationn had been added, which had not been there in s. 15C of the Act of 1922, which laid down that this condition would also be considered to be fulfilled it the total value of the machinery, building and plant transferred from the business already in existence to the new undertaking did not exceed 20 per cent. of the total value of the building, machinery and plant used for the new business. It was pointed out be reference to the relevant balance-sheet that as against the value of fixed assets of the new undertakings which came to Rs. 9,04,353, the written down value of the assets transferred from the Qutab Road factory was only Rs. 1,07,304. This was as on 30th June, 1960. Similarly a on 30th June, 1961 the total value of the fixed assets was Rs. 11,51,481 as against which, the written down value of the assets, previously used for the purpose of the business, which had been transferred, came to only Rs. 96,574. This was far less than the percentage of 20 mentioned in the Explanationn. It was, thereforee, contended that the assessed was entitled to exemption under s. 84.
15. The arguments put forward on behalf of the department in rebutting the assessed's contention appear to have been somewhat restricted. From para. 6 of the Tribunal's order, it is seen that the principal point made by the departmental representative was that during the previous year which ended on 30th June, 1961, the sale of railway wagons amounted only to rs. 92,904 as against sales of other goods and articles to the extent of Rs. 19 lakhs. It was thus urged that the sale of railway wagons was a very small part of the entire turnover, and the sale of goods manufactured at Qutab Road were of considerable amount. There was noting to justify the assessed's contention that the factory at Nangoli was a new industrial undertaking entitled to exemption. This point was meant by the Tribunal by pointing out that s. 84(2) does not require that the turnover in the new industrial undertaking should form a fixed proportion of the total turnover. In any event, it was pointed out, the turn over of railway wagons had increased from year to year and for the assessment year 1965-66, the turnover of wagons formed 70 percent. of the total turnover and that of another item of aircraft refuellers for which the assessed had subsequently obtained a contract amounted to 18per cent. The other point on which the departmental representative relied was that a part of the plant and machinery previously used had been shifted from the Qutab Road factory to the new undertaking. Accepting the figures put forward on behalf of the assessed, the Tribunal found as a fact that the value of the assets transferred from the old undertaking to the new was considerably less than 20 per cent. of the total value of the building machinery or plant used in the new business. The Tribunal, thereforee, came to the conclusion that the assessed had fulfillled the conditions laid down in s. 84(2) of the Act. It proceeded to discuss a contention regarding the respective applicability of s. 15C/s. 84 and also a point as to whether the assessed, not having claimed exemption under s. 15C for the assessment year 1961-62, would be entitled to exemption under s. 84(1) for the assessment years 1962-63 to 1965-66. But these questions need not detain us as they are not before us in these references.
16. It is the above circumstances that the Commissioner, aggrieved by the order of the Tribunal holding that the assessed was entitled to exemption under s. 84, has come up before us in a reference on the two questions which have earlier been set out.
17. As mentioned at the outset, the controversy before us is very limited and is restricted to an interpretation of cls. (i) and (i) of sub-s (2) of s. 84. In order to appreciate the precise scope of the section, it is better to mention that sub-s (1) of s. 84 grants an exemption from income-tax in respect of so much of the profits and gains derived from the industrial undertaking as does not exceed 6per cent. per annum on the capital employed therein provided the undertaking fulfills the conditions set out in sub-s. 2 of s. 84. Sub-s. (2) runs as follows :
'(2) This section applies to any industrial underrating which fulfills all the following conditions, namely :-
(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence;
(i) it is not formed by the transfer to a new business of building, machinery or plant used for new purposes;
(iii) it manufactures or produces articles or operates one or more clod storage plants, in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of twenty-three years next following in the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official, Gazette, specify with reference to any particular industrial undertaking;
(iv) in a case where the industrial undertaking manufactures or produces it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power :
Provided that the condition in clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessed of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section :
Provided further that the condition in clause (ii) shall be deemed not to have been contravened if the industrial undertaking is set up in rented premises.....
Explanationn. - Where -
(a) in the case of an industrial undertaking, any building, machinery or plant, or any part thereof, previously used for nay purpose, or.. is, in either case, transferred to a new business and the total value of the building, machinery or pant or part so transferred does not exceed twenty per cent. of the total value of the building, machinery or plant use din the business, then, for the purposes of clause (ii) of sub-section (2) and clause (a) of subsection (3), the condition specified therein shall be deemed to have been complied with and the total value of the building, machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking or the business of the hotel.'
18. Before us, the only question for consideration are : (1) whether it can be said that the industrial undertaking at Nangoli had been formed by the splitting up or reconstruction of the business of the assessed already in existence, and (2) whether it can be said to have been formed by the transfer of the new business of the building, machinery or plant previously used for any purpose.
19. From the narration of facts given earlier, it would be seen that at the earlier stages the conditions laid down in clause (ii) of sub-s. (2) of s. 84 loomed large. Before the ITO it assumed great importance because the ITO was under the impression that the assessed's claim for exemption had to be judged by the terms of s. 15C of the Act of 1922 and since the Explanationn was not there in the old section, he considered it sufficient to reject the assessed's claim on the point to say that there had bee some transfer of building, machinery or plant from the old undertaking to the new one. The AAC, who corrected the ITO's impression and considered the terms of s. 84, did not rely upon clause (ii) apparently in view of the Explanationn, but treated in his case on the ground that the new undertaking had been formed by the reconstruction of the old one. But once again before the Tribunal, the departmental representatives seems to have repeated the reliance on clause (ii) because his argument as we have set out earlier, primarily turned on the question of the transfer of assets from the old undertaking to the new one. But so far as this contention is concerned there can hardly be any doubt that the Tribunal's conclusion, that clause (ii) cannot be said to be unfulfilled, is correct, because, reading clause (ii) with the Explanationn, the assessed can be denied the exemption only where the assets transferred to the new undertaking constitute more than 20 per cent. of the total value of the assets used in the new business. This is essentially a question of fact. The Tribunal has looked into the figures of the balance-sheets and has correctly came to the conclusion that the assets transferred constitute less than 20 per cent. of the total value of the assets of the new undertaking. Condition NO. 2, thereforee, is fulfilled in the present case and need no detain us any longer.
20. This leaves us with the question as to whether the new undertaking can be said to have been formed by splitting up of the reconstruction of a business already in existence. We do not think that the present case comes within the words, 'splitting up of the business already in existence'. This expression indicates a case where the integrity of a business earlier in existence is broken up and different sections of the activities previously conducted are carried on independently. In the present case, there is no finding that the unity and integrity of the business or undertaking which had been established at Qutab Road factory suffered in any manner as a result of the establishment of the new unit. It may be that, when the new factory was set up and before it could start producing wagons, the assessed used it to manufacture some of the items that were being previously manufactured at Qutab Road. But soon the new factory concentrated principally on wagon and reguelers and there has been no suggestion at any stage that the two factories together were now doing only what the old factory had been doing. Indeed, no contention has been raised at any stage that this is a case of splitting up an existing undertaking. We need not say anything more about it.
21. On the question of reconstruction we find that there is no specific discussion or clear finding in the order of the Tribunal. Partly this is due to the fact that this aspect of the matter does not appear to have been emphasised before the Tribunal. The emphasis was placed only on the fact that the turnover in the new undertaking was very small in the first year of its existence and this was clearly of no importance. However, the AAC had given a very clear finding that this is only a case of reconstruction or expansion and it must, thereforee, be taken that, on the material before it, the Tribunal had reversed this finding of the AAC. In fact the assessed's counsel had raised a specific contention that the industrial undertaking at Nangoli had not been formed by splitting up or reconstruction of the business already in existence and the Tribunal has stated in para. 7 that it accepted the assessed's contention that the conditions laid down under s. 84(2) ar satisfied. We shall, thereforee, proceed on the footing that the Appellate Tribunal has given a finding that the new undertaking was not formed by the reconstruction of the existing undertaking and we shall advert to the material and the arguments placed before us to challenge this finding of the Tribunal.
22. On behalf of the department, it was contended that the new undertaking was only manufacturing articles of the same nature as were covered by the earlier undertaking. It was said that the business of the company was to carry on the manufacture of iron and steel equipment and this was the business which was conducted at both prices. It was urged that when the new factory was set up, some of the articles which were being manufactured in the original factory began to be manufactured in the new factory. Again, it is pointed out that some machinery and plant form the old factory (according to the ITO, a very substantial amount of plant and machinery) was transferred to the new undertaking. It was argued that unlike the position in regard to clause (ii), there is no Explanationn which restricts the scope of clause (i) and it is contended that the mere fact that a part of the plant and machinery from the already existing unit was transferred to the new unit is sufficient to convert the case into one of reconstruction. Learned counsel for the department, in support of his contention, strongly relied on the observations in the three decision. He first invited our attention to the Bombay case in Gaekwar Foam and Rubber Co. Ltd. : [1959]35ITR662(Bom) , after considering the legal concept of reconstruction, the court observed :
'The reconstruction of a business or an industrial undertaking must necessarily involve the concept that the original business or undertaking is not to cease functioning, and its identity is not to be set to be lost or abandoned. The concept essentially rests on changes but the changes must be constructive and not destructive. There must be something positive about the whole matter as opposed to negative. The underlying idea of a reconstruction evidently must be - and this is brought out by the section itself - of a 'business already in existence'. There must be a continuation of the activities and business of the same industrial undertaking. The undertaking must continue to carry on the same business though in some altered or varied form. If the alternation and changes are substantial, there would be little scope for describing what emerges as a reconstruction of the business. Thus, for instance if the ownership of a business or an undertaking changes hands not absolutely but in reality and effectively, that would not be reconstruction or if the very nature of the business is changed, that again would not be reconstruction. On the other hand, reorganization of the business on sounder lines or alternation is the mode or method or scope of the activities of the business or in its personnel or infusion of new blood in the management or control of the business which nay even be by some changes in the constitution of persons interested in the undertaking would certainly be no more than reconstruction of the business if it is substantially the same business carried on by substantially the same persons.'
23. The learned counsel strongly relied on the underlined words in the above passage. He also referred to a decision of this court in CIT v. Ganga Sugar Corporation Ltd. : [1973]92ITR173(Delhi) . After referring to the decision of the Chancery Division in South African Supply and Cold Storage Co. Ltd. In re [1904] 2 Ch 268 (Ch D) and the Bombay High Court decision ( : [1959]35ITR662(Bom) ) (earlier referred to), Khanna C.J. observed :
'We have given the matter our earnest consideration and are of the view that in the reconstruction of a business, as in the reconstruction of a company, there is an element of transfer of assets and of some change, however, need not be, of ownership of the asset. The transfer, however, need not be of all assets. It is none the imperative that the assets. The transfer however, partial or restricted it may be of owner ship of the assets. The Transfer however need not be of all the assets. It is none the less imperative that there should be continuity and preservation of the old undertaking though in an altered form.'
24. Learned counsel further contended that certain observations of the Supreme Court in Textile Machinery Corporation Ltd. v. CIT : [1977]107ITR195(SC) also support his contention. He referred to the observations at p. 203.
25. In short, the argument on behalf of the department is that since the old business so continuing with only some change in the actual items of production and further a transfer of some portion of the plant and machinery belonging to the old unit has been made, it must be treated as a case of reconstruction.
26. On the other hand, on behalf of the assessed, it is contended that the interpretation of the expression 'splitting up or reconstruction' does not involve any question of law at all. It is pointed out that cls. (ii) to (iv) lay down various factual tests to entitle an assessed to exemption. It is contended that likewise clause (i) also requires a factual investigation as to whether the new undertaking is one that has been set up with new capital, new machinery and plant new personnel and so on that it is not merely a bifurcation or change in structure organisation of a unit that is already in existence. Learned counsel contends that the findings of the Tribunal in this regard should be treated as findings of fact, which should not be interfered with by this court. Apart from this submission, learned counsel also contended that this is not really a case of reconstruction, on appropriate interpretation of the term s explained by the decision in Textile Machinery Corporations case : [1977]107ITR195(SC) , in the Karnataka High Court decision in International Instruments P. Ltd. v. CIT [1980] ITR 11 (Kar), and the two decisions of this court in Ganga Sugar Corporation Ltd. : [1973]92ITR173(Delhi) , as well as in the case of CIT v. Gedore Tools India Pvt. Ltd. : [1980]126ITR673(Delhi)
27. We are of the opinion that it is difficult to accept the contention of the learned counsel for the assessed that the question whether a new undertaking is formed by a reconstruction of an existing business is a question of fact. It is clearly a mixed question of law and fact. After the relevant facts have been found, a proper inference should be drawn by a correct interpretation of the legal concept underlying a reconstruction. It is, thereforee, not possible to accept the contention of the learned counsel that the conclusion of the Tribunal that the assessed is entitled to exemption should be treated as conclusive.
28. We, however, agree with the learned counsel that it is difficult to say that in the present case there has been a reconstruction of a business already in existence. The expression 'reconstruction' was discussed by the Bombay High Court in a different context altogether. In that case there was a transfer of the assets of a partnership to a limited liability company by way of sale including the goodwill. However, the agreement of transfer did not cover the stocks-in-trade and certain credits and outgoings as well as debits and liabilities of the partnership were also not taken up be the new company. It was held that the agreement in substance as well as in form was one of out and out sale and that it could not be described as a reconstruction in that case we looked at from the point of view of the ownership of the business and the decisions of the court was that where there was a real and effective change in the ownership of the business that could not be reconstruction. In the course of the discussion, however, certain observations have been made by the Bombay High Court (which have been underlined earlier) to indicate the circumstances in which a reorganisation of a business can be taken to involve a reconstruction. But it is not very alteration in the mode, method or scope of the activities of a business and it is not every transfer of assets from one unit to another that will involve reconstruction. The expression in no doubt very wide but it does not take in a case of a company setting up or establishing a totally independent and viable industrial unit for carrying on the same or similar business even though it might be so set up be may of expanding the already exiting business. The emphasis in s. 84 is not on business but on the undertaking. The exemption is granted to new undertakings and the essence of the exemption is that it is a new industrial unit that is established and that it is not merely a rehash of an already existing unit.
29. In Ganga Sugar Corporation Ltd.'s case : [1973]92ITR173(Delhi) , the learned Chief Justice pointed out that the concept of reconstruction of business is not attracted when a company which is already running one industrial unit sets up another industrial unit. The new industrial unit, it was pointed out, would not lose its separate and independent identity even though it has been set up be a company which is already running an industrial unit. It was further pointed out that the object of s. 15C of the Act of 1922 (now s. 84) is to provide an incentive for the setting up up of new industries so as to accelerate the process of industrialisation and that it does not appears to have been the intention of the Legislature that the benefit of the section would be confirmed only to parties who had not already set up such a industrial undertakings and not to parties who had past experience of running similar industrial undertakings. It appears to is that the principle has also been approved by the decision of the Supreme Court in Textile Machinery Corporation Ltd.'s case : [1977]107ITR195(SC) , earlier referred to. At p. 203, dealing with the purpose and scheme of s. 15C the court observed :
'The assessed continues to be the same for the purpose of assessment. It has its existing business already liable to tax. It produced in the two concerned undertakings commodities different from those which it has been manufacturing or producing in its existing business. Manufacturer or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter, to earn benefit from the exemption of tax liability under section 15C. Sub-section (6) of the section also points to the same effect, namely, production of articles. The answer, in every particular case depends upon the peculiar facts and conditions of the new industrial undertaking on account of which the assessed claim exemption under section 15C. No hard and fast rule can be laid down. Trade and industry do not run in earmarked channels and particularly so in view of the manifold scientific and technological developments. There is great scope for expansion of trade and industry. The fact that an assessed by establishment of a new industrial undertaking expands his existing business, which he certainly does, would not, on that score, deprive him of the benefit under section 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessed but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. '
30. In the case before the Supreme Court, the appellant-company was a heavy engineering concern manufacturing boilers, machinery parts and wagons, etc. It set up two new units, a steel foundry division and a jute mill division. The steel foundry divisions started manufacturing some castings, which the appellant was previously buying from the market and the castings manufactured were mostly used by the other existing unit of the appellant itself. The jute mill division received raw materials from the boiler division of the appellant and after machining and forging the parts were given back by the jute mill division to the boiler division. In other words, if one literally applied the observations used in the Bombay decision, it could be said that this was a case where the assessed had effected alternations in the mode, method or scope where the assessed had effected alternations in the mode, method or scope of activities of the business, and thereforee, it was merely a case for reconstruction. But this conclusion was negatived by the Supreme Court. It was pointed out that reconstruction of a business involved the idea of substantially the same persons carrying substantially business. In that case it was argued on behalf of the revenue that the company was doing the same business of heavy engineering. But this, it was held, did nor prevent it from setting up a new industrial undertaking and from claiming benefits under s. 15C. Similarly, in the present case, the attempt of the AAC and the departmental counsel to forge out a general classification for the assessed's business as one of manufacturing steel structural does not prevent the assessed form claiming that the factory set up at Nagoli wa a newly established industrial undertaking. The supreme Court also emphasised that if any undertaking is not formed by the reconstruction of the old business it goes to expand the general business of the assessed in the same direction. It was pointed out that once the new industrial undertakings are found to be separate and independent production units in the sense that the commodities produced out the results achieved are commercial tangible products and the undertakings can be carried on separately without complete absorption and losing the identity of the old business, they could not be treated as being formed by the reconstruction of the old business. A little earlier, the Supreme Court also approved of the observations of Khanna C.J. in the Ganga Sugar Corporations Ltd.'s case : [1973]92ITR173(Delhi) , to the effect that the concept of reconstruction is to attracted when a company which his already running one industrial unit sets up another industrial unit.
31. The principles of the decision of the Textile Machinery Corporation Ltd.'s case : [1977]107ITR195(SC) were applied by the Karnataka High Court in the decision earlier referred to and by this Bench in the decision in Gedore Tools India Pvt. Ltd. : [1980]126ITR673(Delhi) . In that case the assessed-company set up a second factory housed in a newly constructed building wherein new machinery was installed. The claim for exemption was rejected on the ground that no fresh capital had been invested in the new unit and also on the ground that the new unit was producing the same items as were being manufactured by the old unit. But, on appeals, the AAC and the Tribunal held that it was not necessary that additional capital should be employed where there were adequate internal resources and that the new factory was a well-defined viable unit independent of the old unit which remained intact. In the circumstances, it was held that it was not a reconstruction of an existing unit. Applying the principles of the decision of the Supreme Court to the facts of that case, this Bench held that the new unit had not been formed by the splitting up of reconstruction of the existing business, the second unit had not derived anything from the old unit either by way of equipment or by way of factory buildings, no assets of the old unit had been transferred to the new unit, nor had the identity of the first unit had been impaired in any way. The mere fact that the second unit manufactured some of the items which were manufactured by the first, did not make it an integral part of the first unit as it could survive independently of the first unit. The new factory was a viable unit, could run by itself, and had a separate and distinct personality. The further discussion in that case is irrelevant for our purpose. There is no doubt distinction between the case considered by this court in Gedore Tools India Pvt. Ltd.'s case : [1980]126ITR673(Delhi) , and the present case. The distinction is that whereas in the earlier case no assets of the old unit had been at all transferred to the new unit, there is, in the present case, a finding that a small part of the assets had been so transferred. Though the ITO was of the opinion that substantial assets had been transferred, the ultimate finding of the Tribunal based, as already pointed out, on adequate material is that only a very small proportion or percentage of the assets have been so transferred. The question for our consideration is whether the transfer of such a minor part of the plant and machinery of the earlier undertaking to the new one will have the effect of making this a case of reconstruction. Mr. Wazir Singh vehemently contended that since the terms of the Explanationn are inapplicable in respect of clause (i), we should hold that if there is any transfer of assets from the old to the new undertaking, it should be taken as a case of reconstruction. We are unable to accept this contention. It is no doubt true that in a case of reconstruction there might be a transfer of assets from the old to the new undertaking. But the converse is not true that, in every case, where there is a transfer of such assets, there is necessarily a case of reconstruction. As pointed out by the Supreme Court, the real test of finding out whether there is a reconstruction or not is not whether as a result of the setting up of a new industrial undertaking, the assessed has expanded its business in the same or similar articles. The real test is to find out whether the unit which has been set up separately is new in the sense that new plant and machinery are erected and a new independent and viable unit has come to existence for producing either the same commodities or some distinct commodities. In this case the facts clearly show that the assessed was manufacturing certain articles at its Qutab Road factory. Subsequently, as a result of the order placed by the Central Govt., it had to embark on the construction of railway wagons. For this purpose, the existing factory was found to be totally inadequate. Fresh land was acquired, fresh capital was invested, fresh machinery and plant were installed and the new factory came into existence after more than a couple of years. It is no doubt true that in the initial stages, the new factory also turned out articles, perhaps of the same type as those manufactured in the earlier undertaking. But by degrees, the new undertaking started the manufacture of railway wagons and aircraft refuellers. The Tribunal has found as a matter of fact that this was a new undertaking. There is nothing to show that as a result of the setting up of this undertaking, the integrity, unity or the continuity of the business transaction in the earlier undertaking were in any manner adversely affected. This was a new, independent and viable unit which produced similar, if not the same, commodities as were produced by the earlier factory. The mere fact that while setting up this factory, as small amount of plant and machinery was transferred from the previous business cannot, in our opinion, be conclusive to come to the conclusion that it is a reconstruction. In fact, the contention of the learned counsel for the Revenue that the transfer even to an insignificant extent of assets by way of machinery and plant from the old to the new undertaking will result in reconstruction may render clause (ii) completely otiose. In our opinion, thereforee, clause (i) cannot be construed in such a way. The concept of reconstruction should be looked at from a substantial point of view and for the reasons already stated the present case cannot be said to be one or reconstruction.
32. We, thereforee, answer the reference by saying that the assessed-company satisfied all the conditions laid down in sub-s. (2) of s. 84 of the I.T. Act, 1961, and is, thereforee, entitled to the exemption contemplated in s. 84(1) of the Act. The same answer is given to the question referred to us in the other two matters as well. As the assessed has succeeded, it will be entitled to the costs of these references. Counsel's fee (one set) Rs. 500.