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Case Number

Tax Case No. 209 of 1959

Attorney(S)

For the Appellant: V. Balasubramaniam, Advocate.
For the Respondent: S. Ranganathan, Advocate.

Judges

Jagadisan
Srinivasan, JJ.

Acts

SECTION 27 WEALTH TAX ACT
SECTION 2 INCOME TAX ACT
provision for exemption). Section 5(1):Wealth
S. 3.Section 2(q):Valuation
INDIAN INCOME TAX ACT
Indian Companies Act
Regulation) Act, 1951.

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Smart Summary

Structured Summary of the Opinion delivered by Jagadisan, J.

Factual and Procedural Background

This reference was made under Section 27 of the Wealth Tax Act (Act 27 of 1957). The specific question referred to the Court was whether an asset outlay of Rs. 1,43,727 was exempt under Section 5(1)(xxi) read with the second proviso of the Wealth Tax Act.

Relevant factual background (as stated in the opinion):

The assessee is a public limited company incorporated in 1939, engaged in the manufacture and sale of absorbent cotton wool.
At a board meeting on 3-3-1955 the company resolved to establish a new spinning unit ("Sundarsanam Spinning Mills") with 6,000 spindles.
The company applied on 25-4-1955 for a licence to establish the spinning unit under the Industries (Development and Regulation) Act, 1951; the licence was granted on 17-8-1955.
Orders for machinery and equipment were placed in January and February 1956 with several suppliers; construction was completed sometime in December 1957; erection of machinery commenced in June 1957; machinery installed and the factory fully equipped to go into operation only in the accounting year 1957–1958; permission to work the mill was obtained in June 1958.
By 30-9-1956 the company had incurred Rs. 1,43,727 for the new spinning unit (detailed itemization appears in the opinion).
The Wealth Tax Act came into force on 1-4-1957; the first assessment year under the Act was 1-4-1957 to 31-3-1958.
In response to a notice, the company filed a return admitting net wealth of Rs. 6,07,001 and claimed exemption for the Rs. 1,43,727 outlay under Section 5(1)(xxi).

Procedural history:

The Wealth Tax Officer disallowed the exemption, holding that the exemption applies only for units set up after 1-4-1957 and that the unit in question was set up prior to that date.
The assessee appealed to the Appellate Assistant Commissioner of Wealth Tax, Madurai. The appellate authority held that although the grammatical meaning of “set up” favoured the assessee, the second proviso cut down that meaning and since operations for establishment had commenced prior to 1-4-1957 the exemption could not be invoked.
The assessee further appealed to the Income-tax Appellate Tribunal, which agreed with the department and the appellate authority and negatived the assessee’s claim, observing that Parliament intended to grant the exemption only to units in regard to whose establishment the company commences operations after 1-4-1957.
The reference to the Court arises under Section 27 of the Wealth Tax Act to resolve the stated question.

Legal Issues Presented

Whether the expenditure of Rs. 1,43,727 in creating the new spinning unit is exempt under Section 5(1)(xxi) of the Wealth Tax Act read with its second proviso.
What is the proper meaning of the statutory expression "set up" in Section 5(1)(xxi) — specifically whether "set up" means the date when preliminary steps commence, the date when the plant and machinery are installed and the unit is ready to commence business, or the date when the unit actually begins production.
How the second proviso to Section 5(1)(xxi) (which limits the exemption to five successive assessment years commencing with the assessment year next following the date on which the company commences operations for the establishment of such unit) affects the interpretation of the phrase "set up" and the period for which exemption is available.

Arguments of the Parties

Assessee's Arguments

The opinion records that the assessee claimed exemption for the outlay under Section 5(1)(xxi). The appellate authority noted that the grammatical meaning of "set up" would support the assessee's contention (i.e., that the ordinary/grammatical sense of "set up" should apply).
The factual case presented by the assessee was that the unit was a new and separate unit created by substantial expansion and that the factory was put in a state ready to commence business after the commencement of the Act.

Revenue's (Department's) Arguments

The Wealth Tax Officer's position was that the exemption applies only to units set up after the commencement of the Act (after 1-4-1957) and that the unit in question was set up before that date, so the exemption did not apply.
The Appellate Assistant Commissioner and the Tribunal relied on the second proviso, treating "set up" as effectively meaning the commencement of operations for the establishment of the unit; because operations for establishment had commenced before 1-4-1957, they concluded the exemption could not be claimed.
The Tribunal observed that Parliament intended to grant the exemption only to new units in regard to whose establishment a company commences operations after 1-4-1957 (as recorded in the opinion).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Western India Vegetable Products Ltd. v. Commissioner of Income-tax, Bombay City, 1954-26 ITR 151 (AIR 1955 Bom 13)	The distinction between the expressions "set up" (or "setting up") and "commence" — holding that "setting up" means to place on foot or to establish and, in contrast to "commence", indicates readiness to commence business: when a business is established and ready to commence it can be said to be "set up".	The Court relied on the cited passage from Chagla C.J.'s observation in that case to adopt the meaning of "set up" as "ready to commence business" for the interpretation of Section 5(1)(xxi) of the Wealth Tax Act.

Court's Reasoning and Analysis

The Court proceeded in a structured manner, applying textual interpretation, dictionary meanings, statutory definitions, precedent and the factual matrix presented:

The Court noted the valuation date relevant to the assessment was 30th September 1956 and acknowledged that the Wealth Tax Act came into force on 1st April 1957 (first assessment year 1-4-1957 to 31-3-1958).
The Court stated the statutory condition for exemption under Section 5(1)(xxi): the exemption applies to "that portion of the net wealth of a company established with the object of carrying on an industrial undertaking in India ... as is employed by it in a new and separate unit set up after the commencement of this Act by way of substantial expansion of its undertaking." The Court accepted that the disputed unit was a new and separate unit created by substantial expansion (this fact was not disputed by the department).
Therefore, the only point in controversy was whether the new and separate unit was "set up" after the commencement of the Act. The Court examined ordinary dictionary meanings of "set up" (Oxford Concise, Chambers) and highlighted the ambiguity when applied to a multi-stage process of creating a factory.
The Court held that preliminary steps (board resolutions, orders for machinery, licences) are necessary but are merely initial stages and, alone, do not amount to "setting up" the factory. Likewise, the Court observed that the factory need not actually be in production to be "set up"; rather "setting up" is a stage anterior to commencement of production — essentially when the factory is erected and plants and machinery are installed and is ready to commence business.
The Court relied on the Bombay High Court decision in Western India Vegetable Products Ltd. to support the proposition that "set up" should be understood as "ready to commence business." It adopted that meaning for Section 5(1)(xxi).
The Court then considered the second proviso to Section 5(1)(xxi), which limits the exemption to five successive assessment years commencing with the assessment year next following the date on which the company commences operations for the establishment of such unit. The Tribunal had interpreted this proviso to mean that "set up" must equate to the commencement of operations; the Court rejected this reasoning as a misconstruction.
The Court analyzed the statutory definition of "assessment year" (a financial year) and explained that where operations for establishment commenced prior to the Act, the assessment year next following that date would be the first assessment year under the Act (1-4-1957 to 31-3-1958). Thus, the effect of the proviso is to limit the period of exemption (five assessment years) measured from the appropriate assessment year, but the proviso does not change the ordinary meaning of "set up" in the main provision.
Applying the adopted meaning of "set up" to the facts, the Court concluded that the new unit was put in a ready stage to go into production only after the commencement of the Act; consequently, the unit was "set up" after the Act for the purposes of Section 5(1)(xxi).
On that basis the Court held that the assessee's claim for exemption should have been allowed and answered the reference in favour of the assessee. The Court also ordered that the department pay the costs to the assessee and allowed counsel's fee of Rs. 250 (as stated in the opinion).

Holding and Implications

Holding: The reference question is answered in favour of the assessee. The Court held that the new and separate unit was "set up" after the commencement of the Wealth Tax Act because it was put into a state ready to commence business only after the Act came into force; accordingly the outlay of Rs. 1,43,727 is exempt under Section 5(1)(xxi) of the Wealth Tax Act, subject to the second proviso.

Direct consequences and implementation (as indicated in the opinion):

The exemption is available to the assessee in respect of the Rs. 1,43,727.
In view of the language of the second proviso, the benefit of the exemption will be available only for five successive assessment years commencing from 1st April 1957 (the first assessment year under the Act), as explained by the Court.
The department was directed to pay the costs to the assessee; counsel's fee of Rs. 250 was allowed.

No broader policy pronouncements or explicit statement that a new precedent was established beyond the statutory interpretation performed by the Court are contained in the provided opinion; the ruling is applied to the facts of this reference and the period of exemption is determined in accordance with the second proviso.

Disposition: Reference answered in favour of the assessee; costs awarded to the assessee; counsel's fee fixed at Rs. 250.

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Ramaraju Surgical Cotton Mills Ltd. v. Commissioner Of Wealth Tax

The Judgment of the Court was delivered by

Jagadisan, J.:— This is a reference application arising under Section 27 of the Wealth Tax Act (Act 27 of 1957) and the question raised is “whether the asset of Rs. 1,43,727 is exempt under Section 5(1)(xxi) read with the second proviso thereunder of the Wealth Tax Act?”

2. The assessee is a public limited company incorporated under the Indian Companies Act in the year 1939. It is carrying on business in the manufaciure and sale of absorbent cotton wool. The Board of Directors of the company resolved, on 3-3-1955, at a duly constituted meeting, to establish a new spinning unit with 6,000 spindles under the name of “Sundarsanam Spinning Mills”. On 25-4-1955, the company applied to the Government of India for licence to establish the spinning ??? under the Industries (Development and Regulation) Act, 1951. The license was granted by the Government on 17-8-1955. In the months of January and February 1956, the Company placed orders with Machinery Manufacturers' Corporation Ltd., Bombay, and with Voltas Ltd., Madras, for the purchase of certain items of plants and machinery. Orders were placed, in February 1956, with P.S.G and Sons, Charity Industrial Institute, Coimbatore, and with Textool Co., Ltd., Coimbatore, for other items of machineries. The company then began constructing the necessary buildings and the construction was completed sometime in December 1957. The erection of the machinery and plant of this spinning Unit was, of course, done in several stages, commencing from June 1957. The Government of India extended the time for completion of the project till 17-3-1959. The machinery was installed and the factory was fully equipped to go into operation-only in the accounting year 1957-1958. Permission to work the spinning mill was obtained in June 1958. The company had laid out a total sum of Rs. 1,43,727 till 30-9-1956 in the construction of the new spinning unit, as per details set out below:

Spinning buildings. Rs. 11,129-14-0 Textool Co., Ltd. 21,009-0-0 Parrys Engineering Department 4,186-0-0 Spinning initial expenses 4,401-2-0 P.S.G and Sons Charitable Industrial institute 6,560-0-0 Voitas Ltd., Madras 75,000-0-0 Machinery Manufacturers Corporation 21,450-0-0 Total Rs. 1,43,727-00

3. The Wealth Tax Act came into force on 1-4-1857. The first assessment year was 1st April 1957 to 31st March 1958. In response to a notice issued by the Wealth Tax Officer, Virudhunagar, the company submitted a return admitting a net wealth of Rs. 6,07,001. The company claimed exemption for the outlay of Rs. 1,43,727 the details of which we have set out above, under S. 5(1)(xxi) of the Act. The officer disallowed the claim holding as follows;

“This exemption applies only for the new unit set up after commencement of this Act, i.e, after 1-4-1957. As the unit in question was set up prior to the above date, the assessee is not entitled to the exemption”.

The assessee preferred an appeal to the Appellate Assistant Commissioner of Wealth tax, Madurai. The appellate authority held that though the grammalical meaning of the expression “set up” in S. 5(1)(xxi) would warrant the contention of the assessee, the proviso of that section would cut down its real meaning, and that as the operation of the establishment of the factory had commenced prior to 1-4-1957, the exemption cannot be invoked.

4. The assessee went up on further appeal to the Income-tax Appellate Tribunal, the proper appellate authority under the Wealth Tax Act also. The Tribunal was also of the opinion that the proviso to S. 5(1)(xxi) should govern the interpretation of the main provision. It self, and negatived the assessee's claim. The Tribunal observes:

“We have no doubt that the clear intention of Parliament is to grant exemptions to new units, in regard to the establishment of which a company commences operations after the date of commencement of the Act, namely, 1st, April 1957”.

5. We shall first refer to the relevant provisions of the Act. Section 2(d) defines “assessment year”:

“‘Assessment year’ means the year for which tax is chargeable under S. 3”.

Section 2(q):

“‘Valuation date’ in relation to any year for which an assessment is to be made under this Act, means the last day of the previous year as defined in clause (II) of Section 2 of the Income tax Act if an assessment were to be made under that Act for that year…….”

Section 3 is the charging section:

“Subject to the other provisions contained in this Apt, there shall be charged for every financial year commencing on and from the first day of April 1957 a tax (hereinafter referred to as wealth tax) in respect of net wealth on the correspondending valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule”.

Section 5 (is the provision for exemption). Section 5(1):

“Wealth tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee—

(xxi) that portion of the net wealth of a company established with the object of carrying on an industrial undertaking in India within the meaning of the Explanation to clause (d) of S. 45, as is employed by it in a new and separate unit set up after the commencement of this Act by way of substantial expansion of its undertaking;

Provided that—

(a) separate accounts are maintained in respect of such unit; and (b) the conditions specified in clause (d) of S. 45 are complied with in relation to the establishment of such unit;

Provided further that this exemption shall apply to any such company only for a period of five successive assessment years commencing with the assessment year next following the date on which the company commences operations for the establishment of such unit”.

Section 45(d):……. Explanation:

For the purpose of clause (d), ‘industrial undertaking’ means an undertaking engaged in the manufacture, production or processing of goods or articles or in the mining or in the generation or distribution of electricity or any other form of power;

6. There is no dispute that the “valuation date” in the present case is 30th September 1956. As stated already, the Act came into force on 1st April 1957. It is clear that the exemption under Sec. 5(1)(xxi) can be claimed only in respect of a new and separate unit set no after the commencement of the Act by way of substantial expansion of the undertaking. That the assessee erected 6000 spindles as a new and separate unit by way of substantial expansion of its original undertaking has not been denied by the department. The only point of controversy is whether the new and separate unit has been “set up” after the commencement of the Act. The expression “set up” is assigned the following meaning in the Oxford Concise Dictionary: start (institution, business); establish oneself in some capacity. The Chambers Dictionary gives the following meaning: no erect, to put up and set him up to begin, to Begin a career. The words “set up” are quite familiar and common place. But in the special context of the exempting provision of Sec. 5(1) (xxi) of this Act, they present some complexity, creating a Stubborn indefiniteness. When can a business, undertaking or factory, be said to be “set up”? is it the date ‘of the very commencement when the preliminaries are put through or is it one or other of the several intermediate stages that have to be passed through before a factory can become a fait accompli or is it the final act which puts it in gear?

7. One thing however seems to be fairly clear and it is this: Unless a factory is erected and the plants and machinery installed therein, it cannot be said to have been set up. The resolutions of the Board of Directors, the orders placed for purchasing the machinery, the licence obtained from the Government for constructing the factory, are merely initial stages towards setting up, however necessary, and essential they may be to further the achievement of the end. It is not, however, the actual functioning of the factory or its going into production that can alone be called setting up of the factory. The setting up is perhaps a stage anterior to the commencement of the factory.

8. We may, at this stage, refer to the decision of the Bombay High Court in Western India Vegetable Products Ltd. v. Commr. of Income-tax, Bombay City, 1954-26 ITR 151: ((S) AIR 1955 Bom 13), which dealt with a case arising under the Indian Income-Tax Act. The following observation of Chagla C.J at page 158 though in a different context, seems to be quite apposite:

“It is important to consider whether the expression used in the Indian statute for setting up a business is different from the expression Mr. Justice Rowlatt was considering, viz., ‘commencing of the business’. It seems to us, that the expression ‘setting up’ means, as is defined in the Oxford English Dictionary “to place on foot’ or ‘to establish’, and in contradistinction to “commence”. The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up.” In our opinion, the proper meaning to be assigned to the expression ‘set up’ in S. 5(1)(xxi) would be “ready to commence business.”

9. We shall now examine the language of the second proviso to Sec. 5(1)(xxi), as the department and the Tribunal have laid great emphasis on the wording of the proviso and used it as a key to the interpretation of the main provisions. The proviso states that the exemption shall apply to any company only for a period of five successive assessment years commencing with the assessment year next following the date on which the company commences operations for the establishment of such unit it is pointed out by the Tribunal that if the exemption were to last and subsist only for a period of five assessment years from the date on which the Company commences operations for establishment, “setting up” must mean only the commencement of the operation. This reasoning of the Tribunal is based upon the gross misconstruction of the proviso. Assessment year, as defined under the Act, is the financial year commencing from 1st April 1957. The definition of “assessment year” is that it means the year for which tax is chargeable.

10. The first assessment year under the Act is 1st April 1957 to 31st March 1958. The next assessment year would be 1st April 1958 to 31st March 1959. This must go on in succession from year to year. It is only the financial year that is the assessment year under the Act. In cases where the company had commenced operations for the establishment of the unit prior to the advent of the Act, the assessment year next following that date would be the first assessment year under the Act, namely, 1st April 1957 to 31st March 1958. This means that the exemption will be available to the assessee only for a period of first five assessment years under the Act, where, though the unit is set up after the Act, the operations for the establishment commenced earlier than the Act. It seems to us that the scope of the second proviso is quite clear and that there is no need to strain the expression “set up” occurring in Sec. 5(1)(xxi) because of the language of the proviso.

11. In this case, the new and separate unit was put in a ready stage to go into production only after the commencement of the Act, and that, therefore, it was set up after the Act within the meaning of the said expression in S. 5(1)(xxi). In view of the language of the second proviso, the benefit of exemption will be available to the assessee only for the first five successive assessment years commencing from 1st April 1957. The assessee's claim for exemption should, therefore, have been allowed. The question-is answered in favour of the assessee. The department will pay the costs to the assesses.

12. Counsel's fee Rs. 250.

IF/M/K.S.B

13. Reference answered accordingly.

Ramaraju Surgical Cotton Mills Ltd. v. Commissioner Of Wealth Tax

Structured Summary of the Opinion delivered by Jagadisan, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's (Department's) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Ramaraju Surgical Cotton Mills Ltd. v. Commissioner Of Wealth Tax

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