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The Commissioner Of Income Tax v. Mahaan Foods Ltd.
Case Summary — Single-Judgment Disposal (Appeals Relating to Section 80IA Claim)
Factual and Procedural Background
The assessed (taxpayer) is engaged in the manufacture of dairy whitener and skimmed milk powder. The assessed claimed deduction under Section 80IA of the Income Tax Act, 1961 from assessment year 1995-96 onwards.
For assessment year 1995-96 no scrutiny assessment under Section 143(3) was made and the return was processed under Section 143(1)(a); the deduction claim was not initially objected to. During scrutiny assessment for assessment year 1996-97, the Assessing Officer (AO) asked the assessed to justify the Section 80IA claim. The assessed asserted that a new industrial undertaking had commenced commercial production on 1 January 1995 following a modernization/expansion involving new technology and investment, and that the old plant and machinery constituted less than 20% of the total.
The AO concluded that the activity was merely modernization-cum-expansion of an existing undertaking and that no separate and independent industrial unit had come into existence; accordingly, the AO disallowed the deduction under Section 80IA(2)(i).
The assessed appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who allowed the appeals. The Revenue appealed to the Income Tax Appellate Tribunal (Tribunal), which dismissed the Revenue's appeal. The Revenue then filed the present appeal to this Court.
Legal Issues Presented
- Whether, for purposes of Section 80IA of the Income Tax Act, the industrial activity carried on by the assessed after the 1994–95 modernization amounted to a "new industrial undertaking" distinct from the pre-existing undertaking, or whether it was merely an expansion/reconstruction of the old undertaking (including whether the identity of the earlier business continued).
- Whether the new undertaking (if any) was disqualified under Section 80IA(2)(ii) because plant or machinery previously used in the old business was transferred to the new business in a proportion exceeding 20% of the total value of plant and machinery used in the new business.
Arguments of the Parties
Revenue's Arguments
- The assessed had merely introduced new technology and new plant and machinery for two items while continuing to use earlier machines for other processes; thus, most production was still carried out using old plant and machinery.
- The changes constituted expansion of the old industrial undertaking rather than creation of a new and separate undertaking; the assessed continued to manufacture the same products and to operate the old machinery and plant.
Assessed's Arguments
- Following collaborations with M/s Rotacom Industries BV (Netherlands) and M/s Seppo Ralli OY (Finland), the industrial unit's "entire complexion" changed due to fresh investment (Rs. 104.88 lacs) in new plant and machinery and adoption of new technology, leading to higher efficiency and product quality.
- The old unit became unviable and was absorbed by the new industrial undertaking; for a period both units co-existed but the old unit gradually faded after the new unit's commencement, showing the existence of a distinct new industrial undertaking rather than a mere reconstruction or splitting up.
- In support of these contentions, the assessed relied on the Supreme Court decision in Textile Machinery Corporation Ltd. v. CIT (1997) 107 ITR 195 (SC).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Textile Machinery Corporation Ltd. v. CIT (1997) 107 ITR 195 (SC) | Definition of "reconstruction": identity of the business should not be lost; the test is whether the new undertaking is a new and identifiable undertaking separate and distinct from the existing business. | The Court relied on the principle to test whether the assessed's post-collaboration unit retained the identity of the earlier business or constituted a new and identifiable undertaking; the Court quoted and applied this test in concluding that a distinct new undertaking had come into existence. |
| CIT v. Hindustan General Industries Ltd. | Definition of "splitting up of the business already in existence": integrity of a business is broken up and different sections previously conducted are carried on independently. | The Court used this definition to evaluate whether the assessed's activities amounted to a splitting up of the old business; the analysis supported the view that there was no mere splitting up in the present facts. |
| CIT v. Gaekwar Foam and Rubber Co. Ltd. | That reconstruction implies continuation of the same business by substantially the same person; if alterations are substantial, the emergence of a reconstruction is less likely. | The Court referenced this authority for the proposition that reconstruction presupposes continuation of the original business; it applied the reasoning to find that the assessed's changes were substantial and pointed away from the concept of reconstruction of an existing undertaking. |
Court's Reasoning and Analysis
The Court proceeded by first setting out the statutory conditions in Section 80IA(2), which disqualify an industrial undertaking from deduction in specified situations: (i) if formed by splitting up or reconstruction of a business already in existence, and (ii) if formed by transfer to a new business of plant or machinery previously used where the old plant/machinery so transferred exceeds 20% of the total value of plant or machinery used in the business.
The Court reviewed authorities defining "splitting up" and "reconstruction." It noted (citing Hindustan General Industries Ltd.) that "splitting up" involves breaking the integrity of an earlier business into independently carried on activities. It also relied on the Textile Machinery decision's articulation that "reconstruction" implies the identity of the business is not lost and that the true test is whether the new industrial undertaking is a new and identifiable undertaking separate and distinct from the existing business.
The Tribunal's factual findings were then considered. The Tribunal had found that the old undertaking no longer existed as an identifiable independent unit and had been completely submerged in the new industrial undertaking; that the key processes for which technological collaborations were entered into constituted the core manufacturing processes, while other processes were of a preparatory nature; and that the assessed had introduced almost entirely new manufacturing technology and processes.
Applying the legal tests to the factual findings, the Court analyzed whether the changes amounted to reconstruction or mere expansion. The Court observed that the concept of reconstruction presupposes continuation of the original business; if alterations are substantial, it is difficult to describe the result as a reconstruction. The Court also noted that the statute contemplates the absorption of an old smaller industrial undertaking by a new larger one.
On the statutory 20% test, the Court considered the investment figures stated in the record: fresh investment in new plant and machinery of Rs. 104.88 lacs and value of old plant and machinery of Rs. 20.86 lacs. The Court found that the value of plant and machinery utilized in the new undertaking from the old business was less than 20% of the total investment, so Section 80IA(2)(ii) did not disqualify the assessed.
Weighing these points together, the Court accepted the Tribunal's factual findings (that the old unit had been submerged and that new technology and processes formed the core of the new undertaking) and applied the legal tests from authority and statute to conclude that the assessed had brought into existence a new industrial undertaking qualifying under Section 80IA.
Holding and Implications
Holding: The appeals filed by the Revenue are DISMISSED.
The Court held that the assessed satisfied the statutory conditions for deduction under Section 80IA in respect of the profits of the new industrial undertaking: the activity did not amount to a splitting up or reconstruction that retained the identity of the old business, and the value of old plant and machinery used in the new undertaking was less than 20% of total plant and machinery value. The Tribunal's order dismissing the Revenue's appeal was found to be without infirmity.
Implications: The direct consequence is that the assessed remains entitled to the Section 80IA deduction for the new industrial undertaking. The Court expressly stated that "no substantial question of law arises for consideration," indicating that this decision does not purport to lay down a new principle of law beyond applying established authorities and the statutory tests to the facts of this case.
All statements in this summary are drawn exclusively from the provided opinion and do not add or infer facts beyond that text.
1. By way of this common judgment, all the above five appeals are being disposed of since the common question of law is involved in all these case.
2. Brief facts leading to dispute are that the assessed is engaged in the business of manufacturing of dairy whitener and skimmed milk powder. The assessed claimed deduction under Section 80IA of the Income Tax Act, 1961 (for short as 'Act') from assessment year 1995-96 onwards. The assessed's claim of deduction was initially not objected to for the assessment year 1995-96 as no scrutiny assessment under Section 143(3) of the Act was made and only processing of the return of income was done under Section 143(1)(a) of the Act. During the course of the assessment proceedings under Section 143(3) of the Act for assessment year 1996-97, the Assessing Officer asked the assessed to justify its claim of deduction under Section 80IA of the Act. The assessed submitted that during the period relevant to assessment year 1995-96 and thereafter he had set up a new project with the state of art technology for multiplying the production capacity and enhancing the product quality. The new technology was aimed at improving the productivity, operational efficiency, saving in energy cost and significant improvement in the product quality. As a result, the output increased substantially and there was a better product mix with more value added products. The assessed stated that for this purpose it had entered into arrangements for acquiring new technology know-how as well as plant and machinery from M/s Rotacom Industries BV, Netherlands and M/s Seppo Ralli OY, Finland, who were the pioneer in providing technology for dryer and evaporators, which were main process equipments in the manufacture of dairy whitener and milk powder. As a result, on 31st December, 1994 the assessed's plant and machinery was of the value of Rs. 125.74 lacs as against the old plant and machinery of Rs. 20.86 lacs. Thus, old plant and machinery was less than 20% permissible under provisions of Section 80IA of the Act.
3. During the course of assessment proceedings for the assessment year 1996-97, the assessed claimed that a new industrial undertaking has come into existence which has commenced commercial production from 1st January, 1995.
4. The Assessing Officer held that the assessed was engaged in the production of dairy whitener and milk powder. Prior to 1st January, 1995 also the assessed was manufacturing the same products. All that the assessed had done was to undertake a modernization-cum-expansion programme of the existing undertaking. For this, the Assessing Officer relied upon the extract from the Directors' report for the year 1993-94. It was further held by the Assessing Officer that no separate and independent industrial unit came into existence and it was only absorption of the old business and so-called new industrial undertaking was nothing but modernization of the existing unit and as such the assessed's case was hit by the provisions of Section 80IA(2)(i) of the Act. The Assessing Officer, therefore, disallowed the claim of the assessed under Section 80IA of the Act.
5. Against the assessment order, the assessed filed appeals before the Commissioner of Income Tax (Appeals) [for short CIT(A)], and the CIT(A) allowed the appeals of the assessed.
6. Being aggrieved with the order of CIT(A), the Revenue preferred an appeal before the Income Tax Appellate Tribunal (for short as 'Tribunal') and vide the impugned order, the appeal filed by the Revenue was dismissed by the Tribunal. Thus, the Revenue has filed an appeal before this Court.
7. It has been contended by learned Counsel for the Revenue that assessed had merely introduced new technology and new plant and machinery for two items, whereas for other things, the earlier machines were being used. Further, most of the production was being carried out by using the old plant and machinery and merely capacity of the assessed unit was increased which goes on to show that it was the case of expansion of old industrial undertaking with some modifications and no new industrial undertaking came into existence and the assessed continued to manufacture same products and continued to operate the old machinery and plant.
8. On the other hand, it has been contended by learned Counsel for the assessed that after collaboration with two international pioneers in the field of dairy whitener and milk powder, the entire complexion of the assessed's industrial unit was changed. The assessed had made fresh investment in plant and machinery amounting to Rs. 104.88 lacs. Further, the old unit became unviable with coming into existence of new industrial undertakings backed with latest technology, higher efficiency and better quality product. The Assessing Officer himself has stated that there was a complete absorption of the old business by the new unit and this absorption makes it all the clear that in certain part of the year, both the units existed independently simultaneously and the old unit gradually faded away after coming into the existence of new industrial unit. All these facts goes on to show that the new unit set up by the assessed was not formed either by splitting up of the existing industrial undertaking or formed by reconstruction or rehabilitation of an undertaking. In support of his contention, learned Counsel for the assessed has cited a decision of the Supreme Court reported as Textile Machinery Corporation Ltd. v. CIT (1997) 107 ITR 195 (SC).
9. Section 80IA(2) of the Act applies to any industrial undertaking which fulfillls all the following conditions, namely:
(i) It is not formed by splitting up, or the reconstruction, of a business already in existence.
(ii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose and in case it is transferred then the total value of the old machinery or plant or part so transferred does not exceed 20% of the total value of the machinery or plant used in the business.
(iii) It manufactures or produces any article or thing, not being any article specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India.
10. The term "splitting up of the business already in existence" indicates a case where the integrity of a business earlier in existence is broken up and different sections of the activities previously conducted are carried on independently. CIT v. Hindustan General Industries Ltd. .
11. As observed by Supreme Court in Textile Machinery v. CIT (1997) 107 ITR 19(SC)
"The term 'reconstruction' implies that the identity of the business should not be lost, and substantially the same business should be carried on by substantially the same person. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessed but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business".
12. As per findings of fact recorded by the Tribunal, it has been stated that
"in the present case the old undertaking no longer existed and remained identifiable. It was completely submerged in the new industrial undertaking of the assessed. The provisions of Section 80IA of the Act with reference to Explanation 2, do not require that new industrial undertaking should be raised on separate plot of land leaving the earlier undertaking totally untouched. We find that the processes for which the assessed entered into technological collaborations with M/s Rotacom Industries, B.V., Netherlands and M/s Seppo Ralli OY, Finland were the key processes of the assessed's industrial undertaking and other processes such as storage of milk in stainless steel storage tanks, pre-warming, pre-heating, pasteurization were only of preparatory nature for the manufacturing of the product of the assessed. The assessed appears to have introduced almost entirely new manufacturing technology and processes."
13. The reconstruction of a business or an industrial undertaking must necessarily involve the concept that the original business or undertaking is not to cease functioning, and its identity is not to be set to be lost or abandoned. The concept essentially rests on changes but the changes must be constructive and not destructive. There must be something positive about the whole matter as opposed to negative. The underlying idea of a reconstruction evidently must be - and this is brought out by the section itself - of a 'business already in existence'. There must be a continuation of the activities and business of the same industrial undertaking. The undertaking must continue to carry on the same business though in some altered or varied form. If the alteration and changes are substantial, there would be little scope for describing what emerges as a reconstruction of the business. (See CIT v. Gaekwar Foam and Rubber Co. Ltd. )
14. From the perusal of Section 80IA of the Act it is clear that the statute itself has envisaged and approved of a situation in which an old existing smaller industrial undertaking is absorbed by a new much bigger industrial undertaking.
15. In the present case, only capacity was increased and there was expansion of old business with some modifications. As for 'reconstruction' of the business, it is nowhere evident that the old industrial unit was split up or damaged or destroyed that was supposedly reconstructed as a new unit by the assessed. What the assessed has done is to set up an industrial undertaking with latest technology and with increased capacity and of course, with a fairly good amount of fresh investment.
16. The formation of the new undertaking is not as a consequence of the transfer of the plant or machinery of the old business. The value of the plant and machinery utilized in the new undertaking has been less than 20% of the total investment. Thus, the assessed's case also does not get disqualified under this provision.
Investment in new plant and machinery was Rs. 104.88 Lacs.
Investment in old plant and machinery was Rs. 20.86 Lacs.
17. Therefore, in this view of the matter, the conclusion is inevitable that the assessed was entitled to deduction under Section 80IA in respect of the profits of the new industrial undertaking having satisfied the conditions.
18. Thus no infirmity can be found with the impugned order of the Tribunal.
19. In view of the above, no substantial question of law arises for consideration.
20. The appeals are accordingly dismissed.
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