1975 (11) TMI 33 - HC - Income Tax

Assessment Notice Assessment Proceedings Income Tax Act Notice Of Reassessment Original Assessment Reassessment Proceedings Supreme Court

Issues Involved:
1. Eligibility for concession under section 84 of the Income-tax Act, 1961.
2. Determination of whether the establishment of a new moulding unit constitutes a "reconstruction" of an existing business.

Issue-wise Detailed Analysis:

1. Eligibility for Concession Under Section 84 of the Income-tax Act, 1961:

The core issue was whether the assessee, a private limited company, was entitled to the concession under section 84 of the Income-tax Act, 1961, for the assessment year 1967-68. Section 84, which was in force during the relevant accounting period, provided that income-tax shall not be payable on profits and gains derived from any industrial undertaking to which the section applies, not exceeding 6% per annum on the capital employed in such undertaking. The assessee claimed a concession of Rs. 7,882 based on a net profit of Rs. 31,866 from a newly established moulding unit. However, the Income-tax Officer and the Appellate Assistant Commissioner rejected this claim, leading the assessee to approach the Tribunal, which also dismissed the appeal. The Tribunal based its decision on the premise that the new moulding unit was merely an extension or expansion of the existing business, thus constituting a "reconstruction."

2. Determination of Whether the Establishment of a New Moulding Unit Constitutes a "Reconstruction" of an Existing Business:

The Tribunal's decision was challenged on the grounds that the new moulding unit was a separate and independent industrial undertaking, not a mere reconstruction of the existing business. The Tribunal had relied on the Calcutta High Court's decision in Commissioner of Income-tax v. Textile Machinery Corporation, which treated the establishment of a new unit for manufacturing previously purchased goods as a reconstruction of the existing business.

The High Court examined the meaning of "reconstruction" and concluded that it implies the continuation of the same business in some altered form. The court noted that the assessee's existing business was assembling oil engines using purchased spare parts, and it did not previously manufacture any of these parts. By establishing a separate moulding unit, the assessee created a new business activity that was independent and self-contained, with its own separate books of accounts, machinery, and building. The court emphasized that the new unit's establishment did not involve any reorganization or rationalization of the existing business but introduced a new industrial activity.

The High Court further distinguished the facts of this case from the precedents cited by the revenue, noting that the establishment of a new unit by a running concern does not automatically constitute a reconstruction. The court highlighted that the new unit produced a commercial product with its own market and could operate independently of the existing business. Thus, the nature of the new business was different from the existing one, and it could not be considered a reconstruction.

The court also referenced subsequent decisions by the Calcutta and Delhi High Courts, which had distinguished their earlier rulings in similar cases, supporting the view that the establishment of a new industrial unit does not necessarily amount to a reconstruction of the existing business.

Conclusion:

The High Court concluded that the establishment of the new moulding unit by the assessee did not constitute a reconstruction of its existing business. The court answered the question in the negative, in favor of the assessee, and against the revenue, allowing the assessee to claim the concession under section 84 of the Income-tax Act, 1961. The reference was disposed of, and the applicant was entitled to the costs of the reference from the revenue.

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