Deduction under section 80-J case of expansion of an existing industrial unit. - Income Tax - 1116/CBDT

INSTRUCTION NO. 1116/CBDT Dated : November 15, 1977 Section(s) Referred: 80J Statute: Income - Tax Act, 1961 Attention is invited to the Board's Instruction No.904* (F.No.178/68/75-IT(AI) dated the 16th December, 1975 wherein it was clarified that in a case of expansion of an existing industrial unit, deduction under section 80-J should be allowed only if it is established that a new industrial undertaking has been formed. 2. The Supreme Court in the case of Textile Machinery Corporation Ltd. Vs. CIT., West Bengal (107-ITR-195) has laid down the criteria for deciding whether the relief under section 15C of the Indian Income-tax Act, 1922 (corresponding to Section 80-J of the Income-tax Act, 1961) is allowable in case of expansion of an existing activity. The Supreme Court at page 204 has observed as under:- " Section 15C partially exempts from tax a new industrial unit which is separate physically from the old one, the capital of which and the profits thereon are ascertainable. There is no difficulty to hold that section 15C is applicable to an absolutely new undertaking for the first time started by an assessee. The cases which give rise to controversy are those where the old business is being carried on by the assessee and a new activity is launched by him by establishing new plant and machinery by investing substantial funds. The new activity may produce the same commodities as the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. These products may be consumed by the assessee in his old business or may be sold in the open market. One thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced and atleast a minimum of ten persons with the aid of power and a minimum of twenty persons without the aid of power have been employed." 3. According to this decision an undertaking would be entitled to the benefit under sec.80-J of the Income-tax Act, 1961 if the following facts are established:- (i) investment of substantial fresh capital in the industrial undertaking set-up; (ii) employment of requisite labour therein; (iii) manufacture or production of articles in the said undertaking; (iv) earning of profits clearly attributable to the said new undertaking; and (v) above all, a separate and distinct identity of the industrial unit set-up. 4. In order that the new undertaking can be said to be formed, there must be an emergence of a physically separate new industrial unit distinct from the existing business and which may exist on its own as a viable unit. Viability does not mean complete independence from the existing business. It means that the new unit can exist even after the cessation of the existing activity of the assessee. The dependence of the new unit on existing business for inputs is not relevant so long as the new undertaking is manufacturing an identifiable and marketable product. It is also not relevant that the said product is consumed by the existing business. The items produced in the new unit can be the same as those produced by the existing unit. But an expansion of the existing unit howsoever extensive which becomes an inextricable part thereof does not amount to setting up of a new unit since a new identifiable and separate unit does not come into existence. However, more proximity of the new unit does not make the expansion an inextricable part of the existing unit. 5. Investment of fresh capital means new outlay of capital in a separate or distinct unit. The source of the outlay of capital can be from internal resources or from sources such as issue of fresh shares, etc. 6. It may, however, be stated that the question whether a new industrial undertaking has been formed or not has to be decided on the facts of each case bearing in mind the tests laid down by the Supreme Court. 7. Board's Instruction No.904 dated the 16th December, 1975 may, therefore, be treated as modified to above extent.