1970 (7) TMI 15 - HC - Income Tax

New industrial undertaking - exemption - an existing business started to manufacture goods in their industry which were earlier being purchased from others - it is just reconstruction of business already in existence - tribunal was not right in holding that the steel foundry division and jute mill division set up by the assessee-company was an industrial undertaking to which section 15C of the Indian Income-tax Act, 1922, applied

Issues Involved:
1. Applicability of Section 15C to the steel foundry division.
2. Applicability of Section 15C to the jute mill division.
3. Admissibility of wealth-tax deduction in computing business profits.

Detailed Analysis:

Issue 1: Applicability of Section 15C to the Steel Foundry Division
The central issue was whether the steel foundry division constituted an "industrial undertaking" under Section 15C of the Indian Income-tax Act, 1922. The Income-tax Officer (ITO) found that the steel castings were used internally by the assessee's other divisions, and thus, did not qualify as a new industrial undertaking. The Tribunal, however, concluded that the steel foundry was a new industrial undertaking, not formed by splitting up or reconstruction of an existing business. The Tribunal's decision was based on the fact that new machinery was housed in a separate building, and industrial licenses were obtained.

The High Court emphasized that the term "industrial undertaking" should have a technical and economic content and must involve tangible and intangible considerations. The Court noted that the steel foundry division was essentially a reconstruction of an existing business, as it replaced the purchase of castings from outside with internal production. The Court held that this change constituted a reconstruction of the existing business, thereby disqualifying the assessee from claiming exemption under Section 15C.

Issue 2: Applicability of Section 15C to the Jute Mill Division
Similar to the steel foundry division, the ITO found that the jute mill division's activities were primarily job-work for the boiler division, and thus, it was not a new industrial undertaking. The Tribunal disagreed, stating that the jute mill division was a new industrial undertaking, relying on the same factors as for the steel foundry division.

The High Court reiterated that the jute mill division was also a reconstruction of an existing business. The jute mill division's products were primarily used internally, and the business remained the same, only the method of procurement changed. The Court held that this constituted a reconstruction of the existing business, disqualifying the assessee from claiming exemption under Section 15C.

Issue 3: Admissibility of Wealth-Tax Deduction
The third issue was whether the wealth-tax paid during the accounting year was admissible as a deduction in computing the assessee's business profits. The Court referred to the Supreme Court decision in Travancore Titanium Products Ltd. v. Commissioner of Income-tax, which held that wealth-tax was not a permissible deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922. Therefore, the Court answered this question in the negative, in favor of the revenue.

Conclusion:
1. The Tribunal was not right in holding that the steel foundry division was an industrial undertaking to which Section 15C applied. The first question was answered in the negative, in favor of the revenue.
2. The Tribunal was not right in holding that the jute mill division set up by the assessee-company was an industrial undertaking to which Section 15C applied. The second question was answered in the negative, in favor of the revenue.
3. The wealth-tax paid by the assessee was not a permissible deduction under Section 10(2)(xv). The third question was answered in the negative, in favor of the revenue.

The assessee was ordered to pay the costs of the reference.

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