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Ashok Motors Ltd. v. Commissioner Of Income-Tax, Madras.

Madras High Court

Oct 4, 1960

Judgment

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Case Summary: Judgment delivered by Srinivasan, J. — Ashok Motors Ltd.

Factual and Procedural Background

Messrs. Ashok Motors Ltd., a public limited company and dealer in Austin cars, trucks and spares, began importing parts and assembling cars in 1949. For the assessment year 1951-52 (account year ending 31 December 1950) an amount of Rs. 2,48,483 was carried forward as unabsorbed depreciation. The assessee claimed that this depreciation should be set off against total income of Rs. 4,44,462 and that the balance should be exempt from tax under section 15C of the Income-tax Act. For assessment year 1953-54 the assessee similarly claimed exemption under section 15C to the extent of six per cent of capital employed though the income was not entirely derived from the industrial undertaking.

The Department took the view that the assessee's income was not solely derived from the industrial undertaking but partly from other activities (purchase and sale of cars and spare parts and commissions from foreign companies). The assessee did not keep separate accounts for the industrial undertaking and its non-industrial activities, but did furnish figures that the Department accepted as representing profits under the two heads. Appeals to the Assistant Commissioner and to the Tribunal were unsuccessful. On the assessee's application, two questions were referred to the Court.

Legal Issues Presented

Whether, where an assessee trades in imported motor vehicles and in vehicles assembled in India from imported parts in an industrial undertaking, the whole of its total income for assessment years 1951-52 and 1953-54 — being less than six per cent of its capital — is exempt under section 15C?
If the answer to the first question is negative, whether the carry forward of Rs. 2,48,483 for assessment year 1950-51 is a deduction only against the profits of the succeeding year 1951-52 identifiable as from the industrial undertaking section?

Arguments of the Parties

Appellant's Arguments

The assessee contended that the industrial undertaking should be treated as the unit of assessment for the purpose of section 15C. Accordingly, the assessee argued that no distinction should be made between different parts of the business attributable to the industrial undertaking and other business activities; the exemption should apply to the whole of the assessee's total income so long as the assessee had an industrial undertaking falling within section 15C(2).
As applied to the facts, the assessee argued that the entire net amount after setting off unabsorbed depreciation (Rs. 1,95,979 = Rs. 4,44,462 − Rs. 2,48,483) was less than six per cent of capital employed and therefore wholly exempt under section 15C.
In support of treating related activities together, counsel argued that activities such as trading in spare parts were intimately connected with and necessary for the industrial undertaking (assembling cars) and therefore should be regarded as part of the same industrial undertaking.

Respondent (Department) Position

The Department proceeded on the basis that the assessee's income was not wholly derived from the industrial undertaking; parts of income arose from non-industrial activities such as purchase and sale of cars and spare parts and commissions from foreign companies.
The Department accepted the assessee's furnished figures separating profits attributable to the industrial undertaking and to non-industrial activities, and treated the unabsorbed depreciation as attributable to the industrial undertaking when computing the profits of that undertaking.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court undertook a textual and purposive construction of section 15C. The analysis unfolded as follows:

The Court set out the statutory text: section 15C exempts "so much of the profits or gains derived from any industrial undertaking" as do not exceed six per cent per annum on the capital employed; subsection (6) limits the duration (five years from commencement of working).
From the language of the section and comparison with other exemption provisions (sections 14, 15, 15B), the Court emphasized the distinction between the assessee and an industrial undertaking: the exemption is granted to an assessee in respect of profits "derived from" an industrial undertaking, not to the undertaking as an independent unit of assessment.
The Court rejected the assessee's primary argument that the industrial undertaking is the unit of assessment such that profits from other parts of the assessee's business would automatically benefit from section 15C. It concluded that the assessee, not the undertaking, is the unit of assessment and that the exemption applies only to profits derived from the industrial undertaking itself.
The Court considered the assessee's subsidiary contention that allied activities (e.g., trade in spare parts) should be aggregated with the industrial undertaking where the allied activity is intimately connected with the industrial undertaking's success. The Court acknowledged that allied activities may be relevant but held that there must be limits: if the allied (non-industrial) business is large in scale relative to the industrial undertaking, it cannot be treated as part of the industrial undertaking for exemption purposes. Ultimately, the Court restated that, on the terms of the statute, exemption cannot apply to profits derived from sources other than the industrial undertaking.
On the second question (mechanics of unabsorbed depreciation), the Court accepted that unabsorbed depreciation (Rs. 2,48,483) admitted to relate to the industrial undertaking must be set off under section 10 in computing profits and gains of business. The Court affirmed the method used by the Income-tax Officer: compute profits of the industrial undertaking by applying section 10 (including deduction of the unabsorbed depreciation referable to that undertaking), then apply section 15C to exempt up to six per cent of capital employed.
The Court explained that computing the industrial undertaking's profits under section 10 and then applying section 15C may involve a notional appearance of deducting the unabsorbed depreciation more than once, but in practical effect the allowance is applied only once in determining taxable profits of the composite business.
The Court specifically described the factual arithmetic used by the Income-tax Officer: profits of the industrial undertaking were computed at Rs. 2,53,190; applying the unabsorbed depreciation to that undertaking left a balance of Rs. 4,715, which was less than six per cent of capital employed and therefore exempted. The non-industrial portion of profits (Rs. 1,91,264) was taxed in full.

Holding and Implications

Core Ruling: The Court answered both referred questions against the assessee. In particular:

The exemption under section 15C is confined to profits or gains actually derived from the industrial undertaking; the industrial undertaking is not treated as a separate unit of assessment whose entire profit (including unrelated or large non-industrial businesses) will automatically qualify for the exemption.
The unabsorbed depreciation of Rs. 2,48,483 attributable to the industrial undertaking was properly set off in computing the profits of that undertaking; only the portion of those industrial profits not exceeding six per cent of capital employed (in the factual instance, Rs. 4,715) was exempted. The assessee's claim that the entire net sum of Rs. 1,95,979 be exempted was rejected.

Direct consequences for the parties:

The assessee's contentions were rejected on both referred questions; the Income-tax Officer's treatment was upheld in substance.
The assessee was ordered to pay the Department's costs; counsel's fee was fixed at Rs. 250.

No broader implications or new precedent was discussed in the opinion beyond the application of section 15C to the facts; the decision addressed the referred questions and the specific computation for the assessment year in issue.

Disposition: Reference answered accordingly; questions decided against the assessee and costs awarded to the Department.

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The Judgment of the Court was delivered by

Srinivasan, J.:— Messrs. Ashok Motors Ltd., Madras, is a public limited company which commenced its business as a dealer in Austin cars and trucks and spares. Early in 1949, it commenced to import parts from abroad and assembled cars at its factory. In respect of the assessment year 1951-52, for which the account year ended on December 31, 1950, an amount of Rs. 2,48,483 was carried forward as depreciation allowance. It was claimed before the Income-tax Officer that this allowance should be set off against the total income of Rs. 4,44,462 and that the balance should be wholly exempted from tax under section 15C of the Act. In a similar manner, for the assessment year 1953-54, the claim was made by the assessee that out of the total business income of Rs. 6,91,549 exemption should be granted under section 15C of the Act to the extent of six per cent. of the capital employed in the industrial undertaking, though the above said income was not entirely derived from the industrial undertaking. It may be mentioned that the Department proceeded on the basis that the assessee did not derive the income solely from the industrial undertaking but that it was in part derived also from activities such as trade in purchase and sale of cars and spare parts and certain commission received from foreign companies who also supplied the goods to the assessee under the contract of agency. The assessee did not, however, maintain separate accounts for the industrial undertaking, and its non-industrial activity. But certain figures were furnished by the assessee which were accepted by the Department as correctly representing the profits under the two heads.

2. Appeals to the Assistant Commissioner and to the Tribunal failed. On the application of the assessee, the following questions have been referred to us:

(1) The assessee trading in imported motor vehicles as also in such vehicles assembled in India out of imported parts in an industrial undertaking, whether the whole of its total income for assessment years 1951-52 and 1953-54, being less than six per cent. of its capital is exempt under the provisions of section 15C?

(2) If the answer to the above question is in the negative, whether the carry forward of Rs. 2,40,483 for assessment year 1950-51 is not a deduction only against the profits of the succeeding year 1951-52, identifiable as from the industrial undertaking section?

3. It would be desirable at the outset to determine exactly the scope of the exemption section provided under section 15C before dealing with the contentions of the assessee. Under section 15C of the Act, which is headed “Exemption from tax of newly established industrial undertakings,” the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking. Sub-section (2) defines the nature of the industrial undertaking to which the section will apply. It contains a proviso enabling the Central Government to direct by notification that the exemption shall not apply to any particular undertaking. The other parts of the section are not immediately relevant. The object of this section is obvious—to encourage new industrial undertakings by providing that a certain part of the income should be exempt from tax. This exemption is made available by sub-section (6) for a period of five years from the commencement of the working of the industrial undertaking. The scope of the exemption appears to be perfectly clear; the section states that where any profits or gains are derived from any industrial undertaking, that portion of it to the extent of six per cent. on the capital employed in the undertaking shall be exempt from tax. Firstly, the profit in question must be derived from the industrial undertaking, and secondly, the maximum limit of the exemption is also provided. It is clear that before an assessee can be eligible for any exemption, there should be profits. If there are no profits, no question of granting the exemption arises. It is equally clear that the profit in respect of which any exemption is available should be derived from the undertaking. The exemption cannot operate in respect of any profit derived by the assessee from any trade or business other than the industrial undertaking.

4. The principal ground that has been advanced before us is (which also appears to have been advanced before the Department though not with such clearness) that the industrial undertaking is the unit of assessment for the purpose of the Act and that being so, the section does not call for any distinction being made between the various parts of the business that might be carried on by the industrial undertaking or for the separation of that portion of the profits or gains referable to the industrial operations. In short, the learned counsel on behalf of the assessee contends that so long as there is an industrial undertaking which comes within the description contained in section 15C(2) of the Act, it is not open to the Department to question the source of the profits or gains, whether such profits or gains are derived from the industrial part or from other parts of the business carried on. On the question whether an industrial undertaking per se is the unit of assessment, there can hardly be any room for two opinions. It is not. Section 14 and the following sections of the Act deal with different classes of exemptions. Each one of these sections starts somewhat in this manner:

“The tax shall not be payable by an assessee in respect of any sum which he receives…” [section 14(1)].

“The tax shall not be payable in respect of any sums paid by an assessee to effect an insurance……” [section 15].

“The tax shall not be payable by an assessee in respect of any sums paid by him……. as donations…” [section 15B].

5. In precisely the same manner, section 15C lays down:

“….the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking….”

6. Clearly, therefore, a distinction is made between an assessee and the industrial undertaking. It is the assessee that is granted the exemption on the profits or gains derived by him. It is not the industrial undertaking which is granted the exemption contained in the section treating such industrial undertaking as a separate unit of assessment. This conclusion is reinforced by sub-section (6) which reads:

“The provisions of this section shall apply to the assessment for the financial year next following the previous year in which the assessee begins to manufacture or produce articles and for the four assessments immediately succeeding.”

7. It is clearly seen that it is the assessee that is treated as the unit of assessment and it is his commencing of the manufacture or the production of the articles that is referred to here as marking the point of time for the application of this exemption. The argument that the industrial undertaking should be regarded as the unit for assessment fails on a proper construction of this and other provisions in which also other classes of exemptions are envisaged.

8. It is indeed difficult in principle to accept the argument that an industrial undertaking must be entitled to the exemption contained in section 15C of the Act, whether or not its profits are wholly derived from the industrial undertaking. We have already stated that upon the clear language of the section, the exemption must be confined to the profits or gains derived from the undertaking. To hold otherwise and to agree with the assessee that where an assessee who has commenced an industrial undertaking and also engages in other kinds of business yielding income, section 15C of the Act extends to granting exemption in respect of profits or gains derived from sources other than the industrial undertaking, would not only be against the clear intendment of the section but would also be opposed to any principle that we can conceive. We have pointed out that the object of granting this exemption is to encourge the establishment of new industrial undertakings. That would be wholly defeated if the exemption is to be granted in respect of the profits derived from business of other kinds even though the same assessee conducts such businesses side by side with the industrial undertaking. When questioned further on this aspect of the matter, the learned counsel was compelled to concede that the argument he advances cannot be applied in its full amplitude. For instance, suppose an assessee who assembles cars, as in the present case, which business is an industrial undertaking, also buys and sells shares, and derives profits or gains from such business as well, a business which is wholly disassociated and has indeed no concern whatsoever with the business of the industrial undertaking, and assuming further that there is a loss in the industrial undertaking while a profit accrues in respect of the other business, the learned counsel was compelled to agree that it would be too much to apply his argument in a case where the associated business is not an allied business to the industrial undertaking. But he would contend that in the present case what the assessee has been doing is to import and sell spare parts. He argues that the business of the industrial undertaking itself would not be advanced unless it trades in spare parts as well. He would suggest, therefore, that since this business is intimately connected with the industrial undertaking, the advancement of which cannot be secured except by its engaging in this additional business, the two should be treated as forming part and parcel of the same industrial undertaking. We are not satisfied that his argument is correct. Even conceding it for argument's sake it is obvious that there should be certain limits set to such an allied undertaking. It would be anomalous to concede the full, effect of such an argument in a case where an assessee has the minimum requirements of an industrial underking as required by section 15C(2) but conducts a very large business in the so-called allied business of buying and selling spare parts. In other words, assuming that he assembles and sells 1,000 cars of a particular make in the course of a year in the functioning of his industrial undertaking, but he purchases and sells spare parts needed for 10,000 or more cars, his main business would really be that of buying and selling spare parts, rather than the pursuit of the industrial undertaking. In such an event, the argument that the industrial undertaking could not be carried on successfully except by engaging in the buying and selling of spare parts loses much of its point. More than all, as we have pointed out, the exemption cannot in the terms of the section be available in respect of any profits or gains derived from sources other than the industrial undertaking. The conclusion is irresistible that in the case of even such composite business carried on by the assessee, it is only the profits of the industrial undertaking that would be eligible for the exemption.

9. The first question that has been referred to us which in general terms deals with this aspect be answered accordingly and against the assessee.

10. The second question involves the examination of what may be called the mechanics of the section. It raises the question of how the unabsorbed depreciation of the previous year should be dealt with. It is admitted that in the previous assessment year a sum of Rs. 2,48,483, was left over as unabsorbed depreciation to be carried forward. In the next assessment year 1951-52, the total profit of the composite business of the assessee came to Rs. 4,44,462. It is undeniable that this depreciation has to be set off against the profits of the later year in computing the profits and gains of business under section 10 of the Act. What has been done by the Income-tax Officer is to apply this unabsorbed depreciation, which, it is admitted, relates to the industrial undertaking, against the profits from the industrial undertaking which was computed at Rs. 2,53,190. That left a balance of profits of Rs. 4,715, which, being less than six per cent. of the capital employed in the industrial undertaking, was exempted from tax. The other portion of the profit of the business of the assessee, that is, from the non-industrial and other activities, was computed at Rs. 1,91,264, which was brought to tax in its entirety. Now, it is seen from section 15C itself, sub-section (3) thereof, that the profits or gains of an industrial undertaking to which this section applies shall be computed in accordance with the provisions of section 10. This provision accordingly contemplates the determination of the profits or gains of the industrial undertaking as a separate part of the business and the computation of such profits and gains by the application of section 10. If we take the total profits of the composite business, the unabsorbed depreciation allowance has to be deducted therefrom in order to arrive at the taxable profits. Once again, in computing the profits or gains of the industrial undertaking, section 10 has to be applied and the taxable profits and gains have to be computed by deducting the unabsorbed depreciation referable to the industrial undertaking from the total profits and gains of the undertaking. After arriving at this figure, that portion of it which does not exceed six per cent. of the capital employed will have to be exempted from tax. It accordingly involves the notional deduction of the unabsorbed depreciation more than once but in effect such deduction is effected only once in ascertaining the taxable profits of the composite business. Even once the principle is settled that only that portion of the profits and gains derived from the industrial undertaking is eligible for the exemption to the maximum limit provided in the section, the procedure adopted is in conformity with the section. What the assessee demanded of the Department was that the entire sum of Rs. 1,95,979 (that is the total profits of Rs. 4,44,462 minus the unabsorbed depreciation of Rs. 2,48,483), being less than six per cent. of the capital employed in the industrial undertaking should be exempted from tax. That point we have already decided against the assessee. It follows that the exemption granted to the limit of Rs. 4,715 alone is in order. Question (2) is also answered against the assessee.

11. The assessee will pay the costs of the Department. Counsel's fee Rs. 250.

12. Reference answered accordingly.