1958 (10) TMI 18 - HC - Income Tax

Deductions - Profits and gains from new industrial undertakings,- Reconstruction as occurring in section 15C of Indian Income-tax Act, 1922.

Issues Involved:
1. Interpretation of Section 15C of the Income-tax Act.
2. Determination of whether the assessee company qualifies for tax exemption under Section 15C.
3. Analysis of whether the assessee company was formed by the reconstruction of an existing business.

Issue-wise Detailed Analysis:

1. Interpretation of Section 15C of the Income-tax Act:
The primary issue revolves around the interpretation of Section 15C of the Income-tax Act, specifically sub-section (2) clause (i). The relevant part of the section states that the exemption applies to any industrial undertaking which "is not formed by the splitting up, or the reconstruction of business already in existence or by the transfer to a new business of building, machinery or plant used in a business which was being carried on before the 1st day of April, 1948." The court had to determine whether the assessee company met these criteria.

2. Determination of whether the assessee company qualifies for tax exemption under Section 15C:
The assessee company claimed exemption under Section 15C on the grounds that it was a newly established industrial undertaking. The Income-tax Officer rejected this claim, arguing that the company was formed by the reconstruction of an existing business. The Appellate Assistant Commissioner and the Tribunal, however, supported the assessee's claim, stating that the business of Coral & Co. was transferred to a new business post-1st April, 1948, and thus qualified for the exemption. The Tribunal emphasized that the exemption is attached to the business and not to the assessee, and as long as the industrial undertaking commenced business after 1st April, 1948, it should be entitled to the benefit of Section 15C.

3. Analysis of whether the assessee company was formed by the reconstruction of an existing business:
The court analyzed whether the assessee company was formed by the reconstruction of Coral & Co.'s business. It was highlighted that the agreement between Coral & Co. and the assessee company was an outright sale of assets, including goodwill, but excluded credits, outstandings, debts, and liabilities. The court noted that for reconstruction to occur, the original business must continue in some form, and there must be a continuation of the same business by substantially the same persons. The court found no evidence that the same persons were carrying on the business of the assessee company.

The court referred to the legal conception of "reconstruction," emphasizing that it involves the continuation of the original business, albeit in an altered form, and not a complete cessation or sale. The court cited observations from South African Supply and Cold Storage Co., In re [1904] 2 Ch. 268, where it was stated that reconstruction involves substantially the same business carried on by substantially the same persons, and distinguished this from a mere sale of assets.

The court concluded that the transaction was a sale and not a reconstruction, as the vendors' business ceased after the sale of its machinery, plant, and goodwill. The vendors only retained a shareholder interest in the assessee company, which did not amount to reconstruction.

Conclusion:
The court answered the reference in the affirmative, stating that the assessee company was entitled to relief from tax under Section 15C of the Income-tax Act. The decision was based on the finding that the assessee company was not formed by the reconstruction of an existing business but was a newly established industrial undertaking formed by the sale of assets from Coral & Co.

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