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TMI Blog1992 (4) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness. Messrs. Bachhraj Trading Corporation (in brief "the Corporation"), incorporated on September 29, 1945, carried on a business of import-export in various items. In 1957, it was granted licence for manufacturing tempo 400cc three-wheeled transporters. It entered into an agreement with a foreign collaborator who agreed to grant the licensee the knowhow rights for the manufacture, in India, of tempo commercial three-wheeler vehicles, against payment of German marks. Accordingly, the assessee-company, Messrs. Bajaj Tempo Ltd., Bombay (in short "the company"), was formed for exploiting the manufacturing licence issued by the Government, 32% of the share capital of which was subscribed by the foreign collaborators and the remaining 68% share capital was issued to the shareholders of the Corporation. The assessee-company entered into an agreement with the Corporation which was the promoter company, to secure and take over from the promoter company the rights under the licence to manufacture tempo vehicles and to take over the factory registered under the name of Auto Rickshaw Engineering Factory as going concern with its assets, liabilities, machinery, power, quotas, etc. Clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king to be covered under the mischief of clause (i) of sub-section (2) of section 15C should have been "formed" by transfer of building, plant or machinery which was substantial and prominent in the formation of the undertaking. In other words, the part played by such transfer should have been such that the industry, without it, could not have come into being. According to the Tribunal, it could not stand to reason that a big industrial undertaking should be denied the benefit of section 15C only because it took the business premises on lease or used implements and tools worth a small amount previously used for the purposes of business. On further reference made by the Department in the High Court, the question of law raised by the Department was answered in its favour and against the assessee without any discussion, only in view of the decision in Capsulation Services P. Ltd. v. CIT [1973] 91 ITR 566 (Bom). The finding of the Tribunal, thus, that the assessee-company cannot be said to have been formed by the reconstruction of the promoter company as "the business of the new industrial undertaking established by the assessee company did not exist prior to its incorporation and was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turing Co. Ltd. [1989] 177 ITR 431 (SC), it was held that the law providing for concession for tax purposes to encourage industrial activity should be liberally construed. The question before the court was whether strawboard could be said to fall within the expression "paper and pulp" mentioned in the Schedule relevant to the respective assessment years. The court held that since the words "paper and pulp" were mentioned in the Schedule, the intention was to refer to the paper and pulp industry and since the strawboard industry could be described as forming part of the paper and pulp industry, it was entitled to the benefit. The section, read as a whole, was a provision directed towards encouraging industrialisation by permitting an assessee setting up a new undertaking to claim the benefit of not paying tax to the extent of six per cent. in a year on the capital employed. But the Legislature took care to restrict such benefit only to those undertakings which were new in form and substance by providing that the undertaking should not be "formed" in any manner provided in clause (i) of sub-section (2) of section 15C. Each of these requirements, namely, formation of the undertaking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir approach. Various decisions which were placed before us leave no room. Some related to transfer of machinery to the new business and others to the building. In respect of machinery, the High Courts appear to be nearly unanimous that, where the value of transferred machinery was low or meagre, the assessee should not be denied the benefit. For instance, the Calcutta High Court, in CIT v. Sainthia Rice and Oil Mills [1971] 82 ITR 778, did not find any reason to deny the benefit to the assessee where the undertaking was formed by acquisition of part of the machinery the second hand from the open market. But the decision which became a leading decision on transfer of machinery was rendered by the Delhi High Court in CIT v. Ganga Sugar Corporation Ltd. [1973] 92 ITR 173. It has been followed in nearly all the decisions given subsequently as it was approved by this court. It was held that use of scrap and material of the old unit of the value of a small fraction of the expenditure involved in the setting up of the new unit did not attract the concluding words of clause (i) of section 15(2). The Calcutta High Court, in CIT v. Electric Construction and Equipment Co. Ltd. [1976] 104 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y rented premises, then, the third negative condition cannot be said to be violated." Thus so far as transfer of machinery is concerned, High Courts have consistently taken the view that if the value of transferred machinery was nominal, it could not result in denial of benefit to the assessee. This conclusion was reached by construing the provision either on principles of commercial expediency or practical common sense or to avoid unjust hardship to the assessee. This was legislatively recognised by Explanation 2, to sub-section(4) of section 80J of the 1961 Act. Similarly, the ineligibility due to transfer of building was toned down in the first instance by amending the provision in 1967 and providing that any building used previously for business purposes taken on lease by the new company would not be covered by the mischief in clause (ii) of sub-section (4) of section 80J of the 1961 Act. Later, in 1976, it was deleted, altogether; thus, the restriction of the new undertaking not being formed by transfer to a new business of building used previously for any other business did not disentitle an assessee from claiming the benefit of partial exemption. Sri Ramamurthy, learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral construction in such cases would have resulted 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 if the undertaking was a new one. Once this test is satisfied, then clause (i) should be applied reasonably and liberally in keeping with the spirit of section 15C(1) of the Act. While doing so, various situations may arise, for instance, the formation may be without anything to do with any earlier business. That is, the undertaking may be formed without splitting up or reconstructing any existing business or without transfer of any building, material or plant of any previous business. Such an undertaking undoubtedly would be eligible to the benefit without any difficulty. On the other extreme may be an undertaking, new in its form but not in substance. It may be new in name only. Such an undertaking would obviously not be entitled to the benefit. In between the two, there may be various other situations. Difficulty arises only in such cases. For instance, a new company may be formed, as in this case a fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rued to mean that the undertaking should not be a continuation of the old but emergence of a new unit. Therefore, even if the undertaking is established by transfer of building, plant or machinery, but it is not formed as a result of such transfer, the assessee could not be denied the benefit. Reverting to the Bombay decision on which the High Court relied for answering the question against the assessee, we would assume for purposes of this case that the lease of the building amounted to transfer. Yet what is significant is that the High Court did not examine the impact of the word "formed". It proceeded on the basis that once the lease amounted to a transfer, the assessee became ineligible from claiming any exemption. The court further repelled the contention advanced on behalf of the assessee on the strength of the Calcutta decision in CIT v. Sainthia Rice and Oil Mills [1971] 82 ITR 778 (Cal), that transfer of building to the new business to disentitle the undertaking should have been of the assessee himself. In our opinion, this aspect of the Bombay decision was correctly decided and the Tribunal was not justified in deciding in favour of the assessee on this ground. We, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X
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