1973 (5) TMI 9 - HC - Income Tax

Industrial undertaking - Splitting up or reconstruction of the existing business - Whether electrolysis plant set up by the assessee-company was a new industrial undertaking within the meaning of section 15C of the Indian Income-tax Act 1922 and as such the necessary relief under that section was admissible to the assessee? - question referred to this court must therefore be answered in the affirmative and in favour of the assessee

Issues Involved:
1. Whether the electrolysis plant set up by the assessee-company qualifies as a new industrial undertaking under section 15C of the Indian Income-tax Act, 1922.
2. Whether the profits derived from the electrolysis plant are eligible for tax exemption under section 15C.

Issue-wise Detailed Analysis:

1. Qualification as a New Industrial Undertaking:
- Facts: The assessee-company, which owns a paper mill, set up an electrolysis plant to manufacture caustic soda, a chemical essential for paper production. The plant was housed in a separate building, and a separate license was obtained for its operation.
- Income-tax Officer's Decision: The plant was deemed ancillary to the main manufacturing unit and not a new industrial undertaking. As no caustic soda was sold externally, no profit was derived from the plant, thus no relief under section 15C was allowable.
- Appellate Assistant Commissioner's Decision: The manufacture of caustic soda was seen as a reconstruction of the existing paper manufacturing business. The plant was set up to avoid purchasing caustic soda from outside, thus it did not qualify as a new industrial undertaking.
- Tribunal's Decision: The Tribunal disagreed with the revenue's argument that profits must be directly derived from the sale of the product. It noted that the computation of profit from the plant appeared in order and directed the Income-tax Officer to grant the necessary relief after verifying the figures.

2. Eligibility for Tax Exemption under Section 15C:
- Relevant Legal Provisions: Section 15C provides tax exemption for profits derived from new industrial undertakings, provided they are not formed by splitting up or reconstruction of existing businesses or by transferring previously used building, machinery, or plant.
- Arguments and Precedents:
- Commissioner of Income-tax v. Textile Machinery Corporation: The court held that an industrial undertaking must be a separate business with a definite employment of capital to qualify for exemption. The mere replacement of purchasing goods from outside with internal production was considered reconstruction of the existing business.
- Commissioner of Income-tax v. Indian Aluminium Co. Ltd.: The court emphasized that the separate business need not be different in kind but must be distinct and independent.
- Rajeswari Mills Ltd. v. Commissioner of Income-tax: The court held that different operations within the same industry (e.g., spinning and weaving) could qualify as separate industrial undertakings.
- Commissioner of Income-tax v. Naya Sahitya: The court ruled that merely shifting the production process internally did not constitute a new industrial undertaking.

Court's Conclusion:
- The court noted that the electrolysis plant was set up in a new building, obtained a separate license, and produced caustic soda, which could be sold independently in the market. The plant was not an essential part of the paper manufacturing process but a separate unit producing raw material.
- The court emphasized avoiding anomalous results where the plant would qualify for exemption if the caustic soda was sold externally but not if used internally.
- The expressions "splitting up or reconstruction of business already in existence" should be understood in a broad commercial sense. The new plant was not a result of re-fitting existing machinery but was an independent unit capable of operating separately from the paper manufacturing business.

Final Judgment:
- The court answered the question in the affirmative, ruling that the electrolysis plant set up by the assessee-company qualifies as a new industrial undertaking under section 15C of the Indian Income-tax Act, 1922.
- The assessee is entitled to the necessary relief under section 15C.
- No order as to costs was made.

Separate Judgments:
- Both judges, Sabyasachi Mukharji and Hazra, concurred in the judgment.

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