1966 (10) TMI 41 - SC - Wealth-tax

Whether the aforesaid asset of ₹ 1,43,727 is exempt under section 5(1)(xxi) read with the second proviso thereunder of the Wealth-tax Act ? Held that - In the Wealth-tax Act, assessment year has been defined to mean the year for which tax is chargeable under section 3 of that Act. Since the Act came into force on 1st April, 1957, the financial year 1957-58 was the first assessment year for which tax became chargeable, and, consequently, for purposes of the second proviso to section 5(1)(xxi), the assessment year following the commencement of operations for establishment of the unit in the case of any company which commenced the operations any time before the 1st April, 1957, will be the assessment year 1957-58. Prior to the year 1957-58, there was no assessment year as defined under the Act, and, consequently, the first assessment year for which exemption could be claimed was this assessment year 1957-58. The respondent which had commenced operations for establishment of its new unit prior to 1st April, 1957, was rightly allowed exemption in respect of the amount that had been invested by them up to the relevant valuation date. The answer returned by the High Court was, therefore, correct. Appeal dismissed.

Issues Involved:
1. Interpretation of section 5(1)(xxi) of the Wealth-tax Act.
2. Determination of the date when the unit was "set up".
3. Applicability of the second proviso to section 5(1)(xxi).
4. Whether the respondent's claim for exemption was valid.

Issue-wise Detailed Analysis:

1. Interpretation of section 5(1)(xxi) of the Wealth-tax Act:
The primary issue revolved around the interpretation of section 5(1)(xxi) of the Wealth-tax Act, which exempts that portion of the net wealth of a company employed in a new and separate unit set up after the commencement of the Act by way of substantial expansion of its undertaking. The court emphasized that the main provision of clause (xxi) should be interpreted in conjunction with the second proviso to give a harmonious construction to both parts of the provision. The court relied on the principle that a section or enactment must be construed as a whole, with each portion throwing light on the rest.

2. Determination of the date when the unit was "set up":
The court had to determine when the respondent's new spinning unit was "set up." The High Court had held that a unit cannot be said to have been set up unless it is ready to discharge the function for which it is being established. The court agreed with the High Court's view that the unit was set up only when it was ready to commence business. The court referred to the Bombay High Court's decision in Western India Vegetable Products Ltd. v. Commissioner of Income-tax, which defined "set up" as "ready to commence business."

3. Applicability of the second proviso to section 5(1)(xxi):
The second proviso to section 5(1)(xxi) states that the exemption shall apply for a period of five successive assessment years commencing with the assessment year next following the date on which the company commences operations for the establishment of the unit. The court clarified that "operations for the establishment of a unit" signify steps taken to establish the unit and must precede the actual setting up of the unit. The court rejected the Commissioner's argument that the operations for establishment and the setting up of the unit were simultaneous.

4. Whether the respondent's claim for exemption was valid:
The respondent claimed an exemption for the assessment year 1957-58, arguing that the amount of Rs. 1,43,727 should be deducted as it was laid out in setting up the new unit. The Wealth-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal had disallowed the claim, stating that the unit was set up before the Wealth-tax Act came into force on 1st April, 1957. However, the High Court and the Supreme Court found that the unit was not ready to go into business until after 1st April, 1957. Consequently, the condition laid down in the principal clause of section 5(1)(xxi) was satisfied, and the company was entitled to the exemption.

The court dismissed the Commissioner's argument that the exemption was claimed for a period not covered by the second proviso. The court held that the respondent had commenced operations for establishing the unit before 1st April, 1957, and the first assessment year for which exemption could be claimed was 1957-58. The court concluded that the High Court's answer was correct, and the appeal was dismissed with costs.

Conclusion:
The Supreme Court upheld the High Court's decision, confirming that the respondent was entitled to the exemption under section 5(1)(xxi) of the Wealth-tax Act for the assessment year 1957-58. The court emphasized the importance of interpreting the main provision and the proviso harmoniously and clarified the distinction between "setting up" a unit and "commencing operations for the establishment" of a unit. The appeal was dismissed with costs.

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