1971 (3) TMI 46 - HC - Income Tax

Assessee was running an old sugar factory operated by steam. It erected a new factory run by electricity - Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to exemption from tax on the profits or gains derived from the plant and machinery installed by it at a cost of Rs. 1,10,00,000 under section 15C of the Indian Income-tax Act, 1922 ?

Issues Involved:
1. Entitlement to exemption from tax under section 15C of the Indian Income-tax Act, 1922.
2. Whether the new industrial unit was formed by the reconstruction of business already in existence.
3. Whether the new industrial unit was formed by the transfer to a new business of building, machinery, or plant previously used in any other business.

Detailed Analysis:

Issue 1: Entitlement to Exemption from Tax under Section 15C of the Indian Income-tax Act, 1922

The primary question referred to the court was whether the assessee-company is entitled to exemption from tax on the profits or gains derived from the plant and machinery installed at a cost of Rs. 1,10,00,000 under section 15C of the Act. The court noted that the assessee-company, engaged in the business of manufacturing sugar, had installed a new plant with a daily crushing capacity of 4,000 tons of sugarcane, operated by electricity, at a significant cost. The Income-tax Officer initially disallowed the exemption, arguing that the new machinery was merely an expansion and replacement of old machinery. However, the Tribunal found that the new unit was a distinct and self-contained entity, separate from the old unit, and thus entitled to the exemption under section 15C.

Issue 2: Reconstruction of Business Already in Existence

The revenue contended that the new unit was formed by the reconstruction of business already in existence. The court examined the commercial term "reconstruction" and concluded that it involves the transfer of assets and some change in ownership, but with continuity and preservation of the old undertaking. The court cited the case of Commissioner of Income-tax v. Gaekwar Foam and Rubber Co. Ltd., which emphasized that reconstruction involves constructive changes without ceasing the original business. The court found that the new unit, with a substantially higher capacity and different operational mode (electricity vs. steam), was distinct and not merely a continuation or reconstruction of the old business.

Issue 3: Transfer to a New Business of Building, Machinery, or Plant Previously Used

The revenue alternatively argued that the new unit was formed by the transfer of building, machinery, or plant previously used in another business. The court noted that only a small fraction (about 1%) of the old unit's material was used in the new unit, which was not substantial enough to constitute a transfer under clause (i) of sub-section (2) of section 15C. The court referenced sub-section (6) of section 80J of the Income-tax Act of 1961, which specifies that the transferred assets should not exceed 20% of the total value of the new unit's assets, reinforcing that the minimal use of old materials did not affect the new unit's eligibility for exemption.

Conclusion:

The court concluded that the new industrial unit was neither a reconstruction of the existing business nor formed by the transfer of substantial assets from the old unit. Therefore, the assessee-company was entitled to the exemption from tax on the profits or gains derived from the new industrial undertaking under section 15C of the Act. The question referred to the court was decided in the affirmative and in favor of the assessee, with each party bearing its own costs.

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