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TMI Blog2012 (3) TMI 267X X X X Extracts X X X X X X X X Extracts X X X X ..... ive the new undertaking the status of a separate and distinct identity. See Textile Machinery Corporation Ltd. v. CIT (1977 - TMI - 6503 - Supreme Court) – Relief u/s 80I to be granted – Decided in favor of assessee. - INCOME TAX REFERENCE No. 141 of 1991 - - - Dated:- 12-3-2012 - MR.BHASKAR BHATTACHARYA, MR.JUSTICE J.B.PARDIWALA, JJ. MR JP SHAH for Applicant(s) MR KM PARIKH for Respondent(s) CAV JUDGMENT (Per : HONOURABLE MR.JUSTICE J.B.PARDIWALA) The Income Tax Appellate Tribunal, Ahmedabad Bench 'C' has referred the following question for the opinion of this Court under Section 256(1) of the Income Tax Act, 1961 (for short, 'the Act') : Whether on the facts and circumstances of the case the Income-tax Appellate Tribunal was right in holding that the applicant is not entitled to relief u/s.80-I. Facts shortly stated are as under :- The Assessment Year concerned is 1982-83. The relevant Accounting Year being Financial Year 1981-82. The assessee is a public limited company engaged in the business of manufacturing caustic soda primarily and other chemicals. The production in plant was 34000 M.Tonnes. The assessee acquired a new industrial lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as merely an expansion of the old unit to which 72 cells were added to increase the production capacity substantially. The working of claim u/s.80I has been made by the assessee in respect of profit from additional 72 cells put into operation from October 1981 as per the following calculations : Original cells installed 26 x 12 = 312 Additional cells installed in 1981-82 12 x 6 = 72 ----- 384 === Cells Cells Assessable profit 384 72 Rs.297.71 lakhs = Rs.55.82 lakhs claim u/s.80I at 25% of Rs.55.82 lakhs = 13.96 lakhs i.e. = 14.00 lakhs The correspondence contained in application for grant of licence and necessary permission from various concerning departments also reveal that all these authorities considered it a case of substantial expansion of the existing unit. It has not been established by the assessee by bringing conclusive and clinching evidence to prove that the said new unit could independently produce the goods without taking the assistance of the existing plant and machinery of the old unit. The CIT(A) has given detailed reasons in support of his conclusion that the said expansion only envisaged the maximum utilization of the existing plant and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relief on the ground that it cannot be treated as a new unit. Learned counsel would further contend that if the assessee establishes a separate independent unit increasing the overall production by just about 10% only of the capacity of the existing units, then in that case, it would be entitled to the relief but, in a case of substantial expansion of almost double the quantity in the existing units, then in that case, the relief is being refused. According to the learned counsel, the interpretation which is sought to be made by the authorities in this regard is completely contrary to the policy of the department. Learned counsel Mr.Shah invited our attention to Circular No.68(1)-D.T./50 issued by the Central Board of Revenue, New Delhi dated 1st April 1950, wherein the Chairman of the Board pointed out: ... ... I have honour to state that it is the policy of the Government to give an interpretation to the words New Industrial Undertaking in Section 15C of the Income-tax Act, so that in all bona fide cases the concession would be admissible ... ... The question is largely one of facts of each particular case. The broad principle which will, however, be borne in mind in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Income Tax v. Gwalior Rayon Silk Manufacturing Co. Ltd. [1992] 196 ITR 149 (SC) II. Contentions on behalf of the Revenue : Learned advocate Mr.K.M.Parikh appearing for the Revenue submitted that the assessee is not entitled to relief claimed under Section 80-I of the Act. He would submit that during the assessment proceedings the Chartered Accountant of the assessee Company conceded that the new project commissioned during the year would not be able to function on its own and it was merely an extension of the old unit by addition of 72 new cells, as a result of which, the production capacity of the company has increased substantially. Mr.Parikh would also submit that mere increase in production capacity or expansion of caustic soda expansion project-I cannot be said to be new industrial undertaking and, therefore, on this ground alone the assessee is not entitled to relief under Section 80-I of the Act. He would submit that substantial expansion claimed by the assessee cannot be equated with new industrial undertaking as contended by the assessee. He would submit that even if it is accepted that the expansion has been substantial, then also such expansion is not an indepen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner provided in clause (i) of section 15C(2). By that clause, the Legislature intended to control any attempt or effort to abuse the benefit intended for new undertakings by changing of label. The intention was not to deny the benefit to genuine new industrial undertakings but to control the mischief which might have otherwise taken place. Adopting a literal construction would result in defeating the very purpose of section 15C. Therefore, it becomes necessary to resort to a construction which is reasonable and purposive to make the provision meaningful. The initial exercise, therefore, should be to find out whether the undertaking was new. Once this test is satisfied, then clause (i) should be applied reasonably and liberally keeping in view the spirit of section 15C(1). In the same judgment, the Supreme Court has also held that a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it. The Supreme Court has held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the benefit contemplated under sub-section (1). Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it, too, has to be construed so as to advance the objective of the section and not to frustrate it. But that turned out to be the unintended consequence of construing the clause literally, as was done by the High Court, for which it cannot be blamed, as the provision is susceptible of such construction if the purpose behind its enactment, the objective it sought to achieve and the mischief it intended to control are lost sight of. IV. Analysis : Section 80-I, as is relevant for the present, reads as under: 80-I. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof: Provided that in the case of an assessee, being a company, the provisions of this sub-section shall ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t formed by the transfer to a new business of machinery or plant previously used for any purpose; clause (iii) requires the industrial undertaking to manufacture or produce any article or thing, except an article or thing specified in the list in the Eleventh Schedule, (rest of the part of the clause not being material for the present); and clause (iv) requires an industrial undertaking to employ ten or more workers in a manufacturing process carried on with the aid of power, or employ twenty or more workers in a manufacturing process carried on without the aid of power. It appears that the only ground which weighed with the Commissioner of Income Tax (Appeals) and the Tribunal is that the assessee has not been able to lead any evidence to show that the new unit is capable of independently producing the goods without the aid of the existing plant and machinery of the old unit. It also appears that the authorities relied on the judgment of the Bombay High Court in the case of Associated Cement Company (supra), wherein the Hon'ble Bombay High Court has taken the view that the establishment of a new industrial unit as a part of an already existing industrial establishment may result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 15C . Regarding the effect of substantial expansion, the court observed, the true test is not whether the new industrial undertaking connotes expansion of an existing business of the assessee, but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under section 15C or not . In the case of CIT v. Indian Aluminium Co. Ltd. [1977] 108 ITR 367, the Supreme Court upheld the claim of the assessee for benefits under section 15C of the Indian Income-tax Act, 1922, inter alia, in respect of expansion of its existing factories by setting up units side by side with the old units and adding to the respondent's total output. In the case of CIT v. Orient Paper Mills Ltd. [1989] 176 ITR 110, the apex court upheld the decision of the Calcutta High Court which had held that the assessee which had set up a plant for the manufacture of caustic soda housed in a separate building after obtaining a separate industrial licence was entitled to relief under section 15C of the Indian Income-tax Act, 1922. In the case of Mun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained are all factors which along with other relevant factors cumulatively determine the extent of time within which the expansion can be completed. All these factors are no doubt relevant even when a new undertaking is established for the first time by the newly constituted legal entity or by an individual who proceeds to set up a new industrial undertaking. The fact that the expansion is completed in stages by adding spindles to existing spinning mills does not on that score alone render such addition incapable of being regarded as part of the establishment of an industrial undertaking for the purpose of section 80J of the Act. The addition though made in stages is part of a larger plan of substantial expansion which plan is implemented in stages over a period of time having regard to the various factors which affect the installation of new machinery and the addition of the facilities required such as factory buildings, godowns, etc. In this case, the industrial licence was obtained by the assessee for a substantial expansion on August 20, 1975. The licence enabled the assessee to increase the number of spindles which was apparently less than 20,000 as on the date of that licenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule in the section: 1. investment of substantial fresh capital in the industrial undertaking set up, 2. employment of requisite labour therein, 3. manufacture or production of articles in the said undertaking, 4. earning of profits clearly attributable to the said new undertaking, and 5. above all, a separate and distinct identity of the industrial unit set up. We are of the view that so far as the fifth test is concerned i.e. a separate and distinct identity, only because to a certain extent the new undertaking is dependent on the existing unit, will not deprive the new undertaking the status of a separate and distinct identity. It all depends on the nature of the technology and the mechanism of production. We cannot ignore the fact that new machinery and new plant have been installed at an investment of Rs.7 crore some time in the year 1982-83 i.e. almost three decades back and also the fact that the production has gone from 34000 M.Tonnes to almost 75000 M.Tonnes. As very strong reliance has been placed on the Division Bench judgment of the Bombay High Court by Mr.Parikh appearing for the Revenue, we shall look into the judgment in detail so as to decide as to whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing aspects while answering the question in favour of the assessee : 1. The new kiln at each factory worked independently of the old kilns and if on account of lack of demand, production would be curtailed, any of the kilns, whether old or newly erected, would be stopped; 2. Statement attached to the certificate also disclosed the additional capacity of the new kilns as compared with the existing works. In respect of the kilns at four centres referred to above, the capacity of the new kilns was shown to be 1,00,000 tons, 1,65,000 tons, 1,00,000 tons and 1,00,000 tons, respectively; 3. In respect of the new erected kiln at place Kistna, the capacity of the newly constructed kiln alone was much more than the capacity of the entire factory which was shown to be only 90,000 tons. Bench was made available a table which showed several amounts running into several lakhs spent in the construction of buildings, purchase of plant and machinery, construction of water works and railway siding and tram lines, purchase of rolling stock and expenses of electric installation necessitated by the construction of the new kilns at each of the four factories. Taking into consideration the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a new kiln, each new kiln by itself would, in our view, clearly constitute a new industrial undertaking within the meaning of s.15C of the Indian I.T. Act, 1922. The Tribunal was, therefore, right in taking the view that the assessee was entitled to the benefit of s.15C of the Indian I.T.Act, 1922. Thus, if the judgment of the Bombay High Court is read as a whole, the judgment does not lay down an absolute principle of law that if the new unit is to a certain extent dependent on the existing unit, that by itself would be sufficient to deny the benefit of concession. Judgment has to be read as a whole and an observation during the course of reasoning in the judgment should not be divorced from the context in which it was used. We have noticed that this judgment of the Bombay High Court in the case of Associated Cement Company (supra) has been referred to in a Division Bench judgment of Calcutta High Court in the case of Commissioner of Income-Tax, West Bengal-IV v. Harinkhola Ice and Cold Storage Ltd., reported in 1982 (134) ITR 540. In the case before the Calcutta High Court, the assessee erected new unit of cold storage in new building with new plant and machinery. Some old m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fuel injection pipes for diesel engines by making nipples and giving shapes at both the ends of the tubes which were used as raw-material in the process. While denying the benefit under Section 80HH, the Revenue took the stand that there existed no industrial undertaking and it was formed by the splitting up or reconstruction of a business already in existence and/or by the transfer to a new business of machinery previously used. In the said case, as the facts would reveal, the Chanda Diesels, when taken over by the assessee, had neither any machinery nor was it making any fuel injection pipes. It was carrying on only the business of selling of diesel engines. Its business assets were only worth Rs.35,066=00. The assessee made investment to the tune of Rs.79,726=00 in purchasing new machinery for the purposes of making fuel injection pipes for diesel engines by making nipples and giving shape at both the ends of the tubes. The Bench held that the Income Tax Act does not define the term industrial undertaking . Section 80HH being intended to encourage setting up new industrial enterprises and hence, should be construed liberally in a broad commercial sense, keeping its object in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the old undertaking for the purpose of production in its new undertaking is not a decisive test in construing Section 80-I of the Act. The new undertaking must not be substantially the same old business. Substantial investment of new capital is imperative and in the present case, there has been a huge substantial investment of around Rs.7 crore almost three decades ago. The words the capital employed in the principal clause of Section 80-I of the Act are significant, for fresh capital must be employed in the new undertaking claiming exemption. Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is essential to earn the benefit of Section 80-I. The fact that an assessee by establishment of a new industrial undertaking expands his existing business which he certainly does, would not on that score deprive him of the benefit under Section 80-I. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is a new identifiable endevour where substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X
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