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TMI Blog1997 (6) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... o a case where Plant and Machinery is transferred by the assessee from his existing business to a new business. (iv) That a new business even if started with entire old machinery purchased by it is also entitled to deduction under section 80-I. It is therefore prayed that 80-I deduction be granted to the appellant on its business income before deduction of Rs. 1,31,259 under section 32-AB and set off of past years carried forward unabsorbed depreciation and investment allowance, as claimed before the Learned CIT(Appeals). " 3. The assessee has been represented by Shri M.C. Mehta, C.A. and the revenue was represented by Shri G.L. Verma, the learned D.R. The learned representatives of both the parties have been heard. 4. Shri M.C. Mehta, the learned counsel for the assessee did not press the ground relating to grant of deduction under section 80-I on business income before deduction under section 32AB and set off of past years carried forward unabsorbed depreciation and investment allowance. Hence, this part of the grounds of appeal is hereby dismissed as not pressed. The remaining part of the grounds of appeal is taken up for adjudication herein below. 5. The assessee is a priv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for this Company. Reference was made to certain decisions. It was stressed that since the assessee did not use its own machinery, the limit of 20 per cent mentioned in Explanation 2 to section 80-I(2) does not apply. To support its contention the assessee filed details of percentage of old machinery used for Assessment years 1984-85 to 1991-92. The submissions of the assessee did not find favour with the CIT(Appeals). He agreed with that the Assessing Officer's view that the assessee company has been constituted along with other companies by splitting up the business of Bombay Brush Co. (P.) Ltd., Bombay and/or by re-organizing the business of the said company. The assessee has acquired machinery from the said company and area of sales operation has also been limited to Northern & Eastern India. Apparently the other areas have been allotted to other three companies. He observed that if the assessee company was not set up by splitting and/or re-organizing the business of the parent Bombay Co., there could not be any restriction on the sales area of any of these companies. He, therefore, was of the view that the present company is formed by splitting and/or re-organizing the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. 17-39-internal page 21 of the assessee's paper book). He argued that the present assessee has no connection with the parent company but for the fact that only part of the machinery of the parent company was taken by the present assessee-company. He, therefore, argued that the present industrial undertaking is not formed by splitting up of the business of the assessee-company. In support of the above contentions, he referred to the following decisions : (i) CIT v. Gaekwar Foam & Rubber Co. Ltd. [1959] 35 ITR 662 (Bom.); (ii) CIT v. Sainthia Rice & Oil Mills [1971] 82 ITR 778 (Cal.); (iii) Hindustan Malleables & Forgings Ltd. v. ITO [1978] 112 ITR 389 (Pat.); (iv) CIT v. Chanda Diesels [1995] 216 ITR 639/[1994] 75 Taxman 428 (Bom.); and, (v) CIT v. Suessen Textile Bearing Ltd. [1982] 135 ITR 443/[1981] 5 Taxman 170 (Guj.); Shri Mehta further argued that the view of the revenue is that if the assessee has purchased second-hand machinery from others, which is in excess of 20 per cent of new machinery, then there is infringement of the condition prescribed under clause (ii) of sub-section (2) of section 80-I read with Explanation 2. He argued that the expression '20 per cent' u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners of the partnership. The agreement contemplated the sale of the assets of the firm, namely, the building, machinery and plants, as well as the goodwill. Neither the credits and outstandings nor the debts and liabilities of the partnership were to be taken over by the assessee-company. The agreement did not cover the transfer of the stock-in-trade but left the matter to the discretion of the assessee. The right to use the premises occupied by the partnership was also to be transferred. The partnership was also restrained from carrying on a competing business within 100 miles of Bombay. " On the above facts, their lordships held : " that the agreement was both in substance and in form one of out and out sale and the only relation that remained between the partnership and the assessee-company was that the members of the partnership became shareholders in part in the assessee-company; this was not, therefore, a reconstruction of an existing business and the assessee-company was, therefore, entitled to relief from tax under section 15C of the Income-tax Act. " Their lordships laid down the following principles of law : " It is well established that the words which express a lega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the newly started mill. It was for this reason that the ITO rejected the assessee's claim under section 15C in the assessment year 1959-60 as also 1960-61. The AAC upheld the order of the ITO. On second appear, the Tribunal accepted the position that under section 15C(2) of the Income-tax Act of 1922, if an industrial undertaking has been formed by the transfer to the new business of such machinery or plant which had already been used in a business which was being carried on before the 1st April, 1948, the exemption would not be applicable, but at the same time the Tribunal interpreted the word " transfer " to be a transfer of a going concern by one to the other and not purchase in the open market. The Tribunal was, therefore, of the opinion that the assessee was entitled to the benefit under section 15C of the Income-tax Act, 1922. At the instance of the revenue, the Tribunal referred the following question to the High Court : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in interpreting the meaning of the word 'transfer' as appearing in clause (i) of sub-section (2) of section 15C, to mean only transfer of used machinery in the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he deduction under section 84. " 10.4 In Suessen Textile Bearing Ltd.'s case, the assessee was a limited company engaged in manufacture of ball-bearings and other machineries used in textile spinning department. The assessment year involved was 1962-63. The claim of the assessee for benefit under section 84 was negatived on the ground that the assessee had taken on hire a building for office purpose and it had also taken on rent a shed for installing machinery and that both the office space and the shed where machinery was installed had been used by other persons for their own purposes prior to the renting of these spaces --- office space and the shed --- by the assessee. When the matter went up before the Hon'ble Gujarat High Court, the court observed, thus : " Section 15C of the Act 1922, section 84 of the Act of 1961 and section 80J (which has now replaced section 84) are all parts of the scheme to give tax holiday to new industrial undertakings and unless this object of encouraging the setting up of new industrial undertakings by giving tax relief with reference to the investment of capital in the new business is borne in mind, it is not possible to interpret the conditions l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nes. It subsequently purchased machinery worth Rs. 79,726 for manufacturing fuel injection pipes for diesel engines. It claimed deduction under section 80HH. The ITO rejected the claim but the Tribunal allowed the claim. When the matter came before the Hon'ble Bombay High Court, their lordships held that there was no question of formation of " industrial undertaking " by the splitting up of the business already in existence, since there was no such activity before. For the same reason, there was no question of formation of an industrial undertaking by transfer to a new business of machinery previously used for any purpose. Hence, conditions No. (ii) & (iii) in sub-section (2) of section 80HH were also fulfilled. The assessee was entitled to deduction under section 80HH. 10.6 In Electronic Corpn. of India Ltd.'s case, the issue related to relief under section 80J. The assessee-company which manufactured various electronic components was floated by the Government of India with a share capital of Rs. 10 crores with an initial subscription of a sum of Rs. 80 lakhs. Some of the stores, machinery, plant, equipments and manufactured goods worth about Rs. 23.86 lakhs, which were with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lief under section 80J. During the previous year relevant to the Assessment year 1972-73, the assessee established a cement plant with new assets worth Rs. 4,65,160 and some second-hand machinery worth Rs. 74,580 purchased from another. The assessee claimed deduction under section 80J, which was negatived by the ITO, on the ground that the assessee had purchased some second-hand machinery for setting up a new unit and the condition laid down under section 80J(4)(ii) was not satisfied. When the matter came up before the Hon'ble Bombay High Court at the instance of the revenue, the Hon'ble High Court observed that the percentage of new and old assets was 86 per cent : 14 per cent as found by the Tribunal. Affirming the decision of the Tribunal, their lordships held that the old assets constituted only a small fraction and they were also not assets which belonged to the assessee. They were second-hand assets purchased from outside and as far as the assessee was concerned, it was going to use the machinery for the first time : in essence, they were new to the assessee. The Tribunal was right in concluding that the assessee was entitled to the relief under section 80J. 11. Presently we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary/February 1981. The assessee-company, namely, Bombay Brush (Indore) (P.) Ltd. was formed in 1984 along with three other companies at Belgaon, Nagpur and Baroda by four brothers of Sariya family, the sons of Shri Mahipal Jaychand Sariya. All these four companies carried on the same business as that of the old company i.e.,. The Bombay Brush Co. (P.) Ltd., Bombay. The assessee-company started manufacturing activities in 1985. 12.1 As per information supplied by the assessee, the plant and machinery previously used by the old company was transferred to the assessee company and the said plant and machinery constituted the following proportion vis-a-vis the new plant and machinery acquired by the assessee-company. -------------------------------------------------------------------------------------------------------------------------------------------------- As an Value of new Value of old Total value of plant and plant & plant and machinery machinery or machinery used value of in the business previously used plant & machinery -------------------------------------------------------------------------------------------------------------------------------------------------- (1) (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its manufacturing activity vide Board's resolution dated 18-12-1980 passed by the said company to the above effect and the said company closed down its factory w.e.f. 23-2-1981. Shri Mehta submitted that the assessee-company which was formed in the year 1984 cannot be said to have been constituted by splitting up of the business of M/s. Bombay Brush Co. (P.) Ltd., Bombay. Further, relying on the decision in Suessen Textile Bearing Ltd's case, he built up the argument that the new industrial undertaking of the assessee-company has not been formed by the splitting up of the business of the assessee already in existence nor it is formed by reconstruction of the business of the assessee already in existence. 15. We have given our anxious thought to the above arguments of Shri Mehta. It is now well established that the provisions of section 80-I known as 'tax holiday provisions' are intended to provide an incentive for investment in certain desired directions and promote industrial growth. If that be so, we have to bear in mind the following observations of the Hon'ble Supreme Court in CIT v. Straw Board Mfg. Co. Ltd. [1989] --- Suppl. (2) SCC 523 : " It is necessary to remember that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see-company in whose case the deduction under section 80-I in respect of an industrial undertaking is claimed before the revenue? The obvious reply is in the negative. It is the Bombay Brush (Indore) (P.) Ltd., Indore, which is the assessee-company, an industrial undertaking of which is claiming deduction under section 80-I before the revenue. It is an admitted position that the assessee-company came into being in the year 1984 and its industrial undertaking commenced manufacturing activities in the year 1985. The question of its having any business prior to its coming into existence does not arise at all. The law laid down by the Hon'ble Supreme Court in Textile Machinery Corpn. Ltd.'s case as explained by the Hon'ble High Court of Gujarat in the case of Suessen Textile Bearing Ltd. is that when the existing business of an assessee is split up then only it can be said that a new industrial unit has been formed by the splitting up of the business of the assessee, which is already in existence. It is only in cases where the business has been formed by the splitting up of the business of the assessee, which is already in existence or by re-construction of the same business as before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M/s. Bombay Brush Co. (P.) Ltd., Bombay. Therefore, if the instant industrial undertaking is formed by the transfer of such machinery, it will infringe the condition imposed in clause (ii) of sub-section (2) of section 80-I. The said condition shall be deemed to have not been infringed if as per Explanation 2 the value of the machinery so transferred does not exceed 20 per cent of the total value of the machinery used in the business of the assessee-company. The total value of machinery used in the business of the assessee-company, the value of previously used machinery as also the percentage of new machinery and previously used machinery are given in para 12.1 at page 19 ante. It will be observed therefrom that in the initial assessment year the percentage of previously used machinery was 14.53 per cent of the total value of machinery used in the business of the assessee. In the immediately succeeding assessment year the value of previously used machinery exceeded 20 per cent (being 20.81 per cent) of the total value of machinery used in the business. In further two succeeding assessment years including the assessment year under consideration before us, the percentage of prev ..... 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