1978 (9) TMI 24 - HC - Income Tax

Dissolution Of Firm, Income Tax Act, Industrial Undertaking, Partner In Firm, Splitting Up, Tax Concession

Summary

Issues:
1. Entitlement to claim exemption under section 84 (now replaced by section 80J) of the Income-tax Act, 1961 for a new industrial undertaking.

Analysis:
The case involved a question of law referred by the Income-tax Appellate Tribunal, Patna Bench, regarding the entitlement of the assessee to claim exemption under the repealed section 84 (now replaced by section 80J) of the Income-tax Act, 1961. The assessee, a partner of a trading company, acquired a saw mill after the dissolution of the firm. The claim for exemption was based on the argument that the saw mill constituted a new industrial undertaking. The assessing officer contended that the new industrial undertaking was formed upon the splitting up of the business of the trading company, thus denying the exemption. The Appellate Tribunal and the AAC, however, held in favor of the assessee, leading to the reference to the High Court.

The primary contention before the Tribunal was whether the acquisition of the saw mill constituted a splitting up or reconstruction of an existing business. Section 84 (now section 80J) of the Income-tax Act provides for exemption to newly established undertakings not formed by splitting up or reconstruction of an existing business. The interpretation of the term "reconstruction" was crucial in determining the applicability of the exemption. The Supreme Court's decision in Textile Machinery Corporation Ltd. v. CIT clarified that reconstruction involves a transfer of assets and a change in ownership, indicating continuity in the business entity.

The High Court analyzed the facts and circumstances of the case to determine whether the saw mill acquisition amounted to splitting up of an existing business. It was established that the saw mill installation was incomplete at the time of dissolution of the partnership, and the assessee had no interest in the ongoing business post-dissolution. The Court emphasized that the new business was unconnected with the earlier partnership business, as the saw mill was not operational. The Court concluded that the business establishment did not constitute a splitting up of an existing business, as it was a new venture unrelated to the prior business activities.

In light of the factual findings and legal interpretations, the High Court ruled in favor of the assessee, affirming the decisions of the Appellate Tribunal and the AAC. The Court held that the business establishment did not meet the criteria of splitting up an existing business, entitling the assessee to claim exemption under section 84 (now section 80J) of the Income-tax Act, 1961. The reference was answered in favor of the assessee, who was awarded costs and a hearing fee.