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Nagardas Bechardas and Brothers P. Ltd. Vs. Commissioner of Income-tax, Gujarat - Court Judgment

SooperKanoon Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 58 of 1974
Judge
Reported in[1976]104ITR255(Guj)
ActsIncome Tax Act, 1961 - Sections 80J, 84 and 84(2); Income Tax Act, 1922 - Sections 15C
AppellantNagardas Bechardas and Brothers P. Ltd.
RespondentCommissioner of Income-tax, Gujarat
Appellant Advocate J.P. Shah, Adv.
Respondent Advocate H.K. Kaji, Adv.
Cases ReferredCommissioner of Income Tax v. Textile Machinery Corporation. In
Excerpt:
.....section 84 for newly started business denied - denial on account of alleged reconstruction of existing unit - new unit separate from existing one - it can operate without depending on existing unit - such unit cannot be considered as reconstruction of existing business - denial of exemption untenable. - - however, during the accounting period, the assessee-company started a separate moulding department for the manufacture of spares like mouldings blocks, etc. thus,according to the revenue, the first condition of sub-section (2) of section 84 is not satisfied. could that person have been denied the concession contemplated by section 84, provided other requirements of this section were satisfied ? most certainly not. if that be so, it cannot be said that the condition..........that the establishment of the moulding unit was nothing but an extension or expansion of the existing business of the assessee. the finding of the income-tax officer was confirmed by the appellate assistant commissioner in appeal with the result that the assessee approached the tribunal in second appeal. the tribunal found that the establishment of a separate unit of manufacturing mounlding amounted to merely a reconstruction of the business which the assessee-company was conducting because, while previously the assessee-company used to purchase these mouldings from the market, by the establishment of a separate moulding unit, it began to manufacture these mouldings and take them in use for the purpose of assembling engines. for taking this view, the tribunal has relied upon the.....
Judgment:

T.U. Mehta, J.

1. The only question which is involved in this reference is whether the applicant-assessee, which is a private limited company, is entitled to the concession contemplated by section 84 of the Income-tax Act, 1961, for the assessment year 1967-68. This section 84 was deleted by Finance (No. 2) Act of 1967 with effect from April 1, 1968, but so far as the accounting period in question is concerned, the same was in force.

2. Short facts of the case, which form the back ground of the above referred contention, are that the assessee-company carries on business of assembling oil engines. Up to the assessment year 1966-67, it used to purchase all the spare parts needed for the purpose of assembling oil engines from open market. One of the spare parts so purchased was moulding. However, during the accounting period, the assessee-company started a separate moulding department for the manufacture of spares like mouldings blocks, etc. In fact, it is found to have established a separate moulding unit in a separate building situated at a distance of about 4 miles from its existing factory premises. It installed new machinery after obtaining a separate licence for establishing this unit. It is not in dispute that it maintains separate books of accounts for this separately started moulding unit. It is further found that during the accounting period, mouldings worth Rs. 4,00,000 and odd were manufactured in this separate unit and were entirely used by the assessee-company in the manufacture of oil engines. It is further found that as per separate account books kept by the assessee-company for the moulding unit, the assessee made a net profit of Rs. 31,866. The assessee-company, therefore, claimed concession, contemplated by section 84 of the Act, of Rs. 7,882. The Income-tax Officer rejected the assessee's contention to obtain this exemption under section 84 on the ground that the establishment of the moulding unit was nothing but an extension or expansion of the existing business of the assessee. The finding of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner in appeal with the result that the assessee approached the Tribunal in second appeal. The Tribunal found that the establishment of a separate unit of manufacturing mounlding amounted to merely a reconstruction of the business which the assessee-company was conducting because, while previously the assessee-company used to purchase these mouldings from the market, by the establishment of a separate moulding unit, it began to manufacture these mouldings and take them in use for the purpose of assembling engines. For taking this view, the Tribunal has relied upon the decision given by the Calcutta High Court in Commissioner of Income Tax v. Textile Machinery Corporation. In support of this findings, the Tribunal also observed that against the total investment of machinery, etc., in the entire business to the extent of Rs. 3,00,000, the investment of machinery in the moulding department was hardly of Rs. 44,000 and as against the total sales of more than Rs. 40,00,000, in the main business, the sales of moulding was hardly to the tune of Rs. 4,00,000. The Tribunal, therefore, found that the establishment of the moulding unit was nothing but the reconstruction of the original business which the assessee carried on. The Tribunal, therefore, agree with the view taken by th e department and dismissed the appeal filed by the assessee. The assessee feeling aggrieved by this decision of the Tribunal has preferred this reference, in the following question is referred to us for our opinion :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to the concession under section 84 of the Income-tax Act, 1961 ?'

3. For the reasons which follows, out answer to this question is in the negative.

4. Section 84, under which the concession is claimed, contemplates that income-tax shall not be payable by an assessee on so much of the profits and gains derived from an industrial takings to which the section applies as does not exceed 6% per annum on the capital employed in such undertakings computed in the prescribed manner. Sub-section (2) of that section prescribes certain conditions which must be fulfilled by an industrial undertaking which intends to get the advantages of the above-stated concession. One of these conditions is that the industrial undertaking in question should already in existence.'

5. It is contended by the revenue that in this case the assessee was previously purchasing mouldings from the market for its business of manufacturing oil engines and now it itself manufactures these mouldings for the same business of manufacturing engines and hence what is changed is only the method of procurement of goods, which amounts merely to the reconstruction of the existing business. Thus,according to the revenue, the first condition of sub-section (2) of section 84 is not satisfied.

6. As already stated,the first condition of sub-section (2) of section 84 contemplates that an industrial should not be formed by 'reconstruction of a business a;ready in existence.' The word 'reconstruction' postulates something which is already constructed in a particular manner because where there is no construction, therer cannot be any question of reconstruction'. Webster's Dictionary, 2nd edition, explains the word 'reconstruction 'as 'the act of constructing again'. It is for this reason that clause(i) of sub-section (2) of 'a business already in existence'. Therefore, while considering the question whether a particular business is or is not 'reconstruction' it is first necessary to inquire what was the nature of the business which was already in existence. Was the nature of the business, which was already in existence, the same as the nature of the business which acquired a new shape If the answer is in the negative, in our opinion, there is no scope for holding that there is any 'reconstruction' of the existing business, because 'reconstruction' implies the continuation of the same business in some altered form. This alteration may assume the form of changing the manner of method of carrying on the same business;it may involve change or rationalism of the administrative set up or business organisation. But when its basic nature changes, it cannot be said that the business is 'reconstructed'. The High Court of Bombay has illustrated 'reconstruction'of a business in Commissioner of Income-tax v. Gaekwar Foam and Rubber Co., Ltd., as under at page 670 :

'On the other hand, reorganization of the business on sounder lines or alternation in the mode or method or scope of the activities of the business or in its personnell or infusion of new blood in the management or control of the business which may 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.'

7. If we examine the facts of this case in the light of what is stated above, can we say that the nature of the business of the newly set up unit for the manufacsture of mouldings is the same as the nature of the assessee's business which was already in existence when the new unit was set up unit was set up Surely, the asseessee's existing business was to prepare engines by assembling the spare parts. It had no business of manufacturing any of the spare parts used in the engines prepared by it. By establishing a sepaerate, self contained and independent unit in the market, and as such useful to other dealers, the assessee undertook a concsrete and tangible venture in the path of industry,and gave a new orientation to the nature of its existing business. It has not 'reconstructed' anything which was already there. In its business which was already in existence,it did not do anything which was already having the manufacture moulding. It is not that the assessee was already having the business of manufacturing mouldings and established a new sepaerate business of manufacturing mouldings and established a new and separate unit in an attempt to reconstruct that existing business of manufacturing mouldings. What it has done is to bring into existence a thing which was never there; and it is incomprehensible to have 'reconstruction' of a thing which is never there.

8. Let us look at the problem from a different angle. Suppose some person other than the assessee had set up a new factory to manufacture these mouldings, and the assessee purchased these mouldings from him. Could that person have been denied the concession contemplated by section 84, provided other requirements of this section were satisfied Most certainly not. If that is so, what difference would it make if the assessee itself set up the said factory and utilised its product for its own consumption The object of the legislature in providing for the concession contemplated by section 84 is obviously to encourage new industrial undertakings so that production of a particular type would increase. This object is achieved even if a new undertaking is established by a person who is already in the line. Therefore, to reject the claim to such concessions of the persons who are already in the line on the narrow ground that the establishment of the new unit is a mere 'reconstruction' of their existing business, without taking into consideration the nature of the existing business and the new one, would result in defeating the very object with which the section was framed. Khanna C.J. (as he then was) has, therefore, rightly observed as under in Commissioner of Income-tax v. Ganga Sugar Corporation Ltd. :

'The concept of reconstruction of business would not be attracted when a company which is already running one industrial unit sets up another industrial unit. The new industrial unit would not lose its separate and independent identity even though it has been set up by a company which is already running an industrial unit before the setting up of the new unit. The object of section 15C of the Act (Act of 1922) is to provide an incentive for the setting up of new industries so as to accelerate the process of industrialisation. It does not appear to have been the intention of the legislature, as envisaged by section 15C of the Act, that the benefit of the said section would be confined to the industrial undertakings of those parties who had not already set up such undertakings in the past but would not be extended to parties who have past experience of running similar undertakings.'

9. We find that the expression 'business already in existence' must be given its ordinary commercial meaning. In its ordinary commercial meaning, is it possible to say that manufacturing of moulding was the assessee's business 'already in existence' before it established the new factory for the same The only answer which could be given to this question is in the negative. If that be so, it cannot be said that the condition contemplated by clause (i) of sub-section (2) of section 84 has not been satisfied.

10. The revenue puts strong reliance upon the decision given by the Calcutta and Delhi High Courts respectively in Commissioner of Income-tax v. Textile Machinery Corporation and Commissioner of of Income-tax v. Naya Sahitya. These decisions do give support to the stand taken by the revenue. We, however, find that the same High Courts have, in subsequent cases, distinguished these decisions on facts which were much similar to the facts of the case under our consideration. This will be clear by reference to the decisions of the Calcutta High Court in Commissioner of Income-tax v. Indian Aluminium Co., Ltd. and Commissioner of Income-tax v. Orient Paper Mills Ltd. and the decision of the Delhi High Court in Commissioner of Income-tax v. Ganga Sugar Corporation Ltd. In the earlier decision of the Calcutta High Court in Textile Machinery Corporation, the Tribunal held that the steel foundry division and jute mill division of the assessee were industrial undertakings to which section 15C of the Indian Income-tax Act, 1922, applied. The facts of that case show that the goods which the steel foundry division and jute mill began producing for the assessee were also previously used by the assessee in its business, but they were purchased from outside and this purchase from outside was replaced by production or manufacture from within the assessee's own business. The High Court was of the opinion that the assessee-company being itself a big engineering concern, such expansion of activities was in the normal process of the business which did constitute a new industrial undertaking within the meaning of section 15C and ultimately observed that this change of producing one's own goods systematically used in the existing business instead of buying them from outside would only be a reconstruction of a business already in existence. The High Court further observed that the expression 'business already in existence', in the context, must necessarily mean and include the purchase of goods in the outside market for the simple reason that they were used for the business of the assessee. It was a part of the business of the assessee to run its business and for that purpose, if necessary, to get its goods even from outside. In the opinion of the High Court, the business, therefore, remained the same. The method of procurement of the goods had changed. Instead of procuring them from outside, they were being manufactured from within by the assessee itself under those two divisions. This decision was, as already stated above, considered the same High Court in Commissioner of Income-tax v. Indian Aluminium Co., Ltd. The facts of this latter decision were that the assessee-company was a manufacturer of aluminium ingots formerly. In the earlier year, it had four manufacturing centres at Belur, Kalwa, Aiupuram and Hirakud. In the accounting year relevant to the assessment year 1960-61, one more was added at Muri and there were also extensions to the existing factories at Belur and Alupuram. In the assessment year 1960-61, the company claimed relief under section 15C of the Indian Income-tax Act, 1922, in respect of the fresh capital outlay at Muri as well as the additional investments in the form of extensions to the existing factory premises, installation of new plant and machinery, etc., at Belur and Alupuram. On these facts the High Court held that the newness of the subsequent industrial undertaking did not necessarily exclude all cases of expansion or extension of the original business, and that where the assessee invests large sums of money and establishes new production units of similar or different nature as a result of which the original business of the assessee does not intrinsically alter its original character or continues to produce, manufacture or carry on the original activity in the same way even after the establishment of subsequent undertakings, the latter may be called extensions of such a nature which may be called a kind of new industrial undertaking which is entitled to get the tax relief. Thus, this decision is based on 'substantial expansion' of the assessee's original business. Such a substantial expansion cannot, in the opinion of the high Court, be called 'reconstruction' within the meaning of section 15C of the Act. The previous decision given by the same High Court in Textile Machinery Corporation was thus distinguished. In a still later decision given in the case of Orient Paper Mills Ltd., the facts were more similar to the facts of the case under our consideration. There the assessee owned a paper mill. In the previous year relevant to the assessment year 1959-60, it set up a plant for the manufacture of caustic soda, an essential chemical for use in the process of manufacture of paper. The assessee obtained a separate licence for the manufacture of caustic soda and the plant was housed in a separate building. On these facts the High Court held that the plant was set up in a new building and there was no refitting of any existing plant. The High Court further observed that the material produced in the plant was a raw material and its production could continue irrespective of the paper manufacturing business of the assessee, and that the plant for manufacture of caustic soda was, therefore, a newly established industrial undertaking within the meaning of section 15C and was entitled to the relief under that section. Explaining the expression ' new industrial undertaking' and ' splitting up or reconstruction of business already in existence' appearing in section 15C, the High Court held that these expressions must be understood in broad commercial sense from a common sense point of view. It also observed that, in interpreting the expression, the purpose of the provision, i.e., to encourage the setting up of new industries, must be borne in mind. Explaining the previous decision in Textile Machinery Corporation, the High Court has observed as under at page 82 of the report :

'Therefore, it appears to us that it would not be correct to say that the Division Bench was laying down a proposition that in case of raw material which is used for finished products if an assessee sets up an independent plant or machinery for the production of that raw material that by itself would not merit exemption under section 15C of the Indian Income-tax Act, 1922.'

11. It is thus obvious that the Calcutta High Court has itself distinguished its own decision in Textile Machinery Corporation in subsequent two cases.

12. Coming to the Delhi decision, in Naya Sahitya, the facts were that prior to the assessment year 1961-62, the assessee was getting its books printed in some other printing press. The assessee installed a new printing press for the first time in the accounting period relevant to the assessment year 1961-62 and printed its books in that new press. The question which arose before the High Court was whether the assessee's business of printing and publishing books was a new established industrial undertaking entitled to exemption from tax under section 15C. The High Court held that since the assessee was already carrying on the business of publishing books in the earlier years and the only change that took place in the relevant year was that instead of getting its books printed in some other press the assessee printed them in its own press, this was a case of an industrial undertaking formed by the reconstruction of a business already in existence and the tax exemption under section 15C(2) was not available to the assessee. Even this decision is, as already stated above, considered in the subsequent decision given by the same High Court in Ganga Sugar Corporation. The facts of this case were that the assessee-company carried on business of manufacturing sugar, and had a plant operated by steam for manufacturing sugar, which in 1955 had a crushing capacity of 1,050 tons of sugarcane per day. In the accounting period relevant to the assessment year 1957-58, the company installed at a cost of Rs. 1,10,000 a new plant operated by electricity for manufacturing sugar with a daily crushing capacity of 4,000 tons. The old building was completely overhauled and new buildings were constructed for housing this plant on land which was acquired in 1934. The value of scrap and material of the old unit used in the erection of the new plant was a small fraction, i.e., about one per cent. of the expenditure involved in the setting up of the new plant. The question was whether the assessee-company was entitled to the benefit of partial exemption from tax under section 15C of the Indian Income-tax Act, 1922, in respect of the profits and gains derived from the plant and machinery installed by it at a cost of Rs. 1,10,000. On these facts the High Court held that the new industrial unit was not formed by the reconstruction of the business already in existence. The previous decision given by the same High Court in Naya Sahitya was distinguished on facts.

13. Thus, in view of the fact that the same High Courts have distinguished their previous decisions on which the revenue has put reliance in this case, we do not find it necessary to devote time in pointing out the distinguishing features of those cases. We have, however, no hesitation in observing that if the Calcutta and Delhi decisions, on which the revenue has put reliance, are construed as laying down a ratio that whenever a running concern establishes a new industrial unit to manufacture one of the spare parts used by it in its existing business, it amounts to a reconstruction of the existing business, with great respect to the learned judges, we do not find it possible to accept that ratio as laying down a correct legal proposition. We are also of the opinion that any such interpretation of the words 'reconstruction' and the expression 'a business already in existence' runs counter to the very object of section 84.

14. There cannot be any strait jacket formula for the interpretation of these terms because much depends on the facts of each case. The Tribunal has decided the question of 'reconstruction' on the comparative data of the existing business and the business done by the new unit and its annual turnover is very small as compared to the establishment cost and annual turnover of the previously running business, the former should be considered merely a result of the 'reconstruction' of the latter. This approach is, in our opinion, wrong, as it misses to take into consideration various other important facts such as the change introduced in the nature of the activity conducted by the running business, establishment of a complete, independent and self contained unit in a different locality under a separate licence, production of a commercial product which has its own independent market, and the establishment of a manufacturing business which can be continued even if the main existing business comes to a stop and which can be expanded on its own. Comparison between the cost of the establishment and the totality of turnover of the new undertaking and of the previously running business may assume importance in some cases as it did in the Calcutta case of the Indian Aluminium Co. That, however, does not provide a proper guideline in every case. Though every case must necessarily depend upon its own peculiar facts, we are of the opinion that we can arrive at a broadly correct solution of the question whether a particular business is reconstructed, by asking ourselves two basic questions : viz., (1) whether there was any activity in the existing business which could have been reconstructed and could have assumed a new form on such reconstruction, and (2) whether the nature of the business which has assumed a new form as a result of the change which is introduced, is the same as the nature of the business which was existing before the change was introduced. If the earlier of these questions is answered in the negative, there would be a prima facie case to believe that there is no 'reconstruction' which would attract clause (i) of section 84(2) of the Act. Since in the present case both the questions are answered in the negative and since there are no other facts which would induce us to believe that the establishment of the moulding unit is a mere reconstruction of the existing business, we answer the question referred to us in the negative, i.e., in favour of the assessee and against the revenue.

15. This reference is accordingly disposed of and it is ordered that the applicant shall be entitled to the costs of this reference from the revenue.

16. Question answered in the negative.


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