1973 (7) TMI 3 - HC - Income Tax

Industrial Undertaking - trial production of material necessary for manufacture - whether it amounts to commencement of business for the purposes of section 15C - Whether assessee is entitled to exemption of tax under section 15C of the Indian Income-tax Act 1922 for the assessment year 1960-61 ?

Summary

Issues Involved:
1. Entitlement to tax exemption under section 15C of the Indian Income-tax Act, 1922, for the assessment year 1960-61.
2. Interpretation of the term "has begun or begins to manufacture or produce articles" under section 15C(2)(ii).

Detailed Analysis:

Issue 1: Entitlement to Tax Exemption under Section 15C
The primary question referred for determination was whether the assessee-company was entitled to exemption of tax under section 15C of the Indian Income-tax Act, 1922, for the assessment year 1960-61. The assessee, a government-held limited company, commenced manufacturing operations for crude penicillin on December 12, 1954, and subsequently sterile penicillin from August 1955. The Income-tax Officer initially rejected the exemption claim, asserting that manufacturing commenced in the accounting year 1954-55. The Appellate Assistant Commissioner reversed this decision, granting the exemption. The Tribunal's Judicial Member disagreed with this view, but the Accountant Member and the President concurred in favor of the assessee, leading to the reference to the High Court.

Issue 2: Interpretation of "Has Begun or Begins to Manufacture or Produce Articles"
The High Court had to interpret the phrase "has begun or begins to manufacture or produce articles" in section 15C(2)(ii). The court examined whether the production of crude penicillin constituted the beginning of manufacturing or if the production of sterile penicillin, the marketable end product, should be considered the start. The revenue argued that the production of crude penicillin in December 1954 should mark the start, making the five-year exemption period end by the assessment year 1959-60. The court, however, held that the term "articles" should be interpreted in light of the objective of section 15C, which aims to encourage new industrial undertakings by granting tax exemptions on profits. The court emphasized that the exemption presupposes the capability of earning profits, which would only be possible once the final marketable product is produced. Therefore, the court concluded that the production of sterile penicillin, which began in August 1955, marked the start of manufacturing for the purposes of section 15C.

Conclusion
The court concluded that the assessee-company began manufacturing articles within the meaning of section 15C(2)(ii) from August 1955, making the first assessment year for exemption 1956-57. Consequently, the company was entitled to claim the exemption for the assessment year 1960-61, as it fell within the five-year period following the commencement of production of the marketable product. The court answered the question in the affirmative, in favor of the assessee, and directed the revenue to pay the costs of the assessee.