1977 (1) TMI 3 - SC - Income Tax

Industrial Undertaking - Reconstruction Of Business - there is no transfer of any assets of the old business to the new unit - How the end products are used is immaterial. Therefore the assessee is entitled to the relief under s. 15C of the 1922 Act - Assessee s appeal is allowed

Summary

Issues involved:

1. Whether the Steel Foundry Division qualifies as an industrial undertaking under Section 15C of the Indian Income-tax Act, 1922.
2. Whether the Jute Mill Division qualifies as an industrial undertaking under Section 15C of the Indian Income-tax Act, 1922.

Issue-wise detailed analysis:

1. Steel Foundry Division as an Industrial Undertaking:

The primary question was whether the Steel Foundry Division of the assessee was an industrial undertaking eligible for tax exemption under Section 15C of the Indian Income-tax Act, 1922. The Tribunal found that the Steel Foundry Division was a new industrial undertaking, based on several facts such as the use of new machinery, separate housing, and the requirement for industrial licenses for manufacturing parts. The Tribunal concluded that this division was not formed by the reconstruction of the existing business, as it produced spare parts that were previously purchased from outside. The High Court, however, held that the Steel Foundry Division merely replaced the purchase of goods from outside with internal production, which constituted a reconstruction of the existing business. The Supreme Court disagreed with the High Court, emphasizing that the new division was a separate and distinct unit, producing marketable commodities, and was not a reconstruction of the existing business.

2. Jute Mill Division as an Industrial Undertaking:

Similar to the Steel Foundry Division, the issue was whether the Jute Mill Division qualified as a new industrial undertaking under Section 15C. The Tribunal held that the Jute Mill Division was a new industrial undertaking, separate from the existing business, as it involved new machinery, separate housing, and the requirement for industrial licenses. The High Court, however, found that the Jute Mill Division was an expansion of the existing business, as it produced goods that were previously purchased from outside. The Supreme Court disagreed, stating that the Jute Mill Division was a separate and distinct unit, producing marketable commodities, and was not merely a reconstruction of the existing business.

Analysis of Section 15C:

The Supreme Court analyzed Section 15C, which provides tax exemption for newly established industrial undertakings. The Court emphasized that the section aims to encourage the setting up of new industrial undertakings by offering tax incentives. The Court noted that the section excludes undertakings formed by the splitting up or reconstruction of existing businesses or by the transfer of assets from existing businesses. The Court held that for an undertaking to qualify for exemption, it must involve substantial fresh capital investment, employ requisite labor, manufacture or produce articles, and have a separate and distinct identity from the existing business.

Reconstruction of Business:

The Court discussed the concept of "reconstruction" of business, which involves the idea of substantially the same persons carrying on substantially the same business. The Court held that the establishment of new industrial undertakings, even if they expand the existing business, does not constitute reconstruction if the new undertakings are separate and distinct units. The Court noted that the new undertakings in this case were physically separate units, producing marketable commodities, and could exist independently of the existing business.

Conclusion:

The Supreme Court concluded that both the Steel Foundry Division and the Jute Mill Division were new industrial undertakings, separate and distinct from the existing business, and were not formed by reconstruction. Therefore, the assessee was entitled to the tax exemption under Section 15C for both divisions. The Court set aside the judgment of the High Court and allowed the appeals with costs.