1976 (7) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Whether the industrial undertaking of the assessee-company satisfied the requirement of section 15C(2)(i) of the Indian Income-tax Act, 1922, namely, that it was not formed by the transfer, to a new business, of building, machinery, or plant, previously used in any other business.

Detailed Analysis:

Background:
The case pertains to the assessment year 1961-62, with the corresponding previous year ending on March 31, 1961. The assessee, a private limited company, commenced manufacturing operations on October 2, 1958. The company claimed exemption under section 15C of the Indian Income-tax Act, 1922, on the grounds that it was an industrial undertaking whose profits qualified for exemption. The Income-tax Officer initially accepted this claim, but the Commissioner of Income-tax later directed the withdrawal of the exemption, arguing that the undertaking was formed by the transfer of second-hand machinery.

Tribunal's Findings:
The Tribunal held that the company was entitled to the relief under section 15C because it could not be said to be an undertaking formed by the transfer of previously used machinery. The Tribunal found that although reconditioned machinery formed part of the company's block, it was not the nucleus around which the new undertaking was formed. The preponderance of entirely new machinery continued year after year, even in the relevant assessment year.

Revenue's Argument:
Mr. Joshi, representing the revenue, contended that the reconditioned machinery formed an important part of the company's block, and without it, the company would not have been able to manufacture its products. He relied on the decision in Capsulation Services Pvt. Ltd. v. Commissioner of Income-tax [1973] 91 ITR 566 (Bom), arguing that the acquisition of such reconditioned machinery was essential for the formation of an industrial undertaking.

Court's Analysis:
1. Interpretation of Findings:
- The court noted that the Tribunal's finding was that the reconditioned machinery, though important, was not the nucleus around which the new undertaking was formed. The preponderance of new machinery was significant, and even in the relevant assessment year, the reconditioned machinery formed a smaller part of the total block.

2. Valuation Perspective:
- The court emphasized that all lower authorities and the Tribunal had proceeded on the basis of valuation. The figures from the reconciliation statement indicated that the new machinery was valued at Rs. 17,22,682, while the reconditioned machinery was valued at Rs. 14,95,715. Thus, from a valuation perspective, the new machinery formed a substantial part of the undertaking.

3. Section 80J Comparison:
- Mr. Joshi's reliance on section 80J of the Income-tax Act, 1961, was rejected. The court noted that the Explanation in section 80J, which fixed a certain percentage for the valuation of used machinery, was not present in section 15C(2)(i) of the 1922 Act. Therefore, the question had to be considered generally, and the figures indicated that the new machinery was substantial.

4. Interpretation of "Machinery or Plant Used in a Business":
- The court adopted the interpretation of the Punjab and Haryana High Court in Commissioner of Income-tax v. Hindustan Milk Food Manufacturers Ltd. [1972] 84 ITR 230 (Punj), which held that the machinery must have been used in a business in India. The court found no material on record to show that the reconditioned machinery had been previously used either in the U.K. or in India before its installation in the assessee's factory.

Conclusion:
The court concluded that the assessee-company satisfied the requirement of section 15C(2)(i) and was entitled to the relief. The question referred to the court was answered in the affirmative and in favor of the assessee. The department was directed to pay the costs of the reference to the assessee.