- Bookmark
- Share
- CaseIQ
M/S. International I... v. Commissioner Of Inco...
Legal Opinion Summary (Venkataramiah, J.)
Factual and Procedural Background
The assessee in these matters is International Instruments Private Limited, Bangalore. The assessments under challenge relate to the assessment years 1967-1968 and 1968-1969. The assessee operated a factory in Bangalore manufacturing dashboard instruments under a collaboration/licence agreement dated 30 September 1959 with the German company VDO Tachometer Werke Adolf Schindling GmbH.
Until the assessment year 1966-1967 the assessee claimed relief under Section 84 of the Income-tax Act, 1961 treating the entire unit as one new industrial undertaking. For 1967-1968 the assessee reorganised its relief claims, asserting that seven distinct shops/units (Press Shop 1962; Machine Shop 1963; Dial Printing Shop 1964/1965; Plastic Moulding Shop 1965; Cable Shop 1962; Others (assembling, plating etc.) 1961; Die-casting Shop 1966) commenced operations in the years indicated and that each should be treated as a new industrial undertaking eligible for relief under Section 84. For 1968-1969 the assessee claimed deduction under Section 80J (introduced in place of Section 84) in respect of the same units.
The assessee also claimed development rebate under Section 33 in both assessment years for specified assets. The Income-tax Officer rejected the reliefs under Section 84 and Section 80J, disallowed development rebate on certain small-value assets and denied the remainder on the ground that the required development rebate reserve had not been created. The assessee appealed to the Appellate Assistant Commissioner (who upheld the refusal of relief under Section 84/80J but directed fresh consideration of the development rebate in view of Central Board of Direct Taxes' instructions), and both parties further appealed to the Income-tax Appellate Tribunal (the Tribunal). The Tribunal dismissed the assessee's appeals on Sections 84/80J and set aside the Appellate Assistant Commissioner's direction on development rebate. The Tribunal then referred questions to this Court under Section 256(1) of the Act.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the assessee was entitled to any deduction under Section 84 in the assessment for 1967-1968?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the allowance of development rebate on the assets of the value of Rs. 66,735 (1967-1968)?
- Whether, on the facts and in the circumstances of the case, the assessee was entitled to any deduction under Section 80J in the assessment for 1968-1969?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the allowance of development rebate on the assets of the value of Rs. 1,55,346 (1968-1969)?
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The undertaking comprised several distinct units/shops that commenced operation in the years specified, and each such unit was a separate and new industrial undertaking eligible for relief under Section 84 (and later Section 80J).
- Each unit required fresh capital investment, installation of fresh machinery and engagement of fresh labour, and produced marketable commodities which had previously been imported or purchased for use in manufacture of finished dashboard instruments.
- Each unit manufactured the relevant articles and used them in the manufacture of dashboard instruments; thus each should be treated as established in the year claimed and eligible for relief.
- With respect to development rebate, the assessee relied on an earlier-created development rebate reserve (created in 1965-1966) that it said sufficed to cover the claims in the assessment years in question and made a representation to the Central Board of Direct Taxes seeking instructions to allow the rebate on that basis.
Respondent's (Revenue / Income-tax Officer / Tribunal) Arguments
- The Income-tax Officer's position was that the entire plant and machinery constituted a single industrial undertaking which had commenced operation much earlier (as early as assessment year 1962-1963) when the assessee began producing dashboard instruments largely by assembling imported parts.
- The Tribunal relied on the lack of separate accounts for the alleged units, absence of inter-departmental sales, non-segregation of production costs by stage and the composite nature of the 1959 collaboration agreement to conclude the asserted units were not separate industrial undertakings eligible for relief.
- On development rebate, the Tribunal concluded that Board instructions previously favourable to the assessee had been withdrawn (in light of the Supreme Court decision in Indian Overseas Bank Ltd. v. C.I.T. and the Gujarat High Court decision in Surat Textile Mills Ltd.), and therefore the Appellate Assistant Commissioner should not have directed allowance of the rebate.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income Tax v. Textile Machinery Corporation (80 ITR 428) — Calcutta High Court | Denial of relief under the corresponding provision where facts were similar (Calcutta High Court had denied relief in similar circumstances). | The Tribunal relied upon this Calcutta High Court decision to support denial of relief; the High Court in the present opinion notes the Calcutta High Court decision was later reversed by the Supreme Court, undermining its use as decisive authority here. |
| Commissioner of Income Tax v. India Aluminium Co. Ltd. (86 ITR 257) — Calcutta High Court | Held that substantial expansion could bring into existence a new industrial undertaking (facts involved factories at different places and found substantial expansion). | The present Court observed that India Aluminium was a later Calcutta High Court decision recognizing that substantial expansion may create a new undertaking; it is distinguished from the present facts where such substantial expansion of that nature was not found. |
| Rajeswari Mills Ltd. v. Commissioner Of Income-Tax, Madras (50 ITR 29) | A precedent considered in the context of what constitutes a new industrial undertaking (details as cited in the opinion). | The opinion states this case is clearly distinguishable from the present facts; the Appellate Assistant Commissioner had rightly distinguished it. |
| Anil Starch Products Ltd. v. Commissioner of Income Tax (59 ITR 514) | A precedent concerning the interpretation of what constitutes a new industrial undertaking. | The opinion treats this decision as distinguishable on the facts and notes the Appellate Assistant Commissioner had so distinguished it. |
| Textile Machinery Corporation v. C.I.T., West Bengal (Supreme Court) | Supreme Court rule: a new industrial undertaking may exist though adjunct to existing business; key tests include production of identifiable marketable commodities, physical separateness/viability, new plant and machinery, ascertainable capital and profits, and not being a reconstruction by transfer of assets. | The Court relied on the Supreme Court's reasoning to conclude the Tribunal's grounds for denial (single collaboration agreement, common management, lack of separate accounts) were irrelevant; applied the tests to hold the assessee's units could be new industrial undertakings and thus entitled to relief. |
| Indian Overseas Bank Ltd. v. C.I.T. (77 ITR 512) — Supreme Court | The Supreme Court held that a reserve under another statute (e.g., Section 17 of the Banking Companies Act) was not a substitute for the specific development rebate reserve required by the Income-tax Act; the statutory reserve contemplated under the Income-tax Act had to be independently created and account entries were material. | This decision led the Central Board to re-examine its earlier circular and withdraw part (a) of that circular. The Tribunal relied on the proposition that Board instructions had been withdrawn; the High Court explains the withdrawal affected only part (a) and not the other parts of the circular relevant to condonation. |
| Surat Textile Mills Ltd. (80 ITR 1) — Gujarat High Court | Decision used alongside Indian Overseas Bank to justify withdrawal of parts of an earlier board circular. | The Board cited this decision together with Indian Overseas Bank as reasons for withdrawing the earlier circular to the extent it conflicted; the Tribunal treated this as a withdrawal of all helpful instructions, which the High Court found to be a misinterpretation. |
| Tata Iron and Steel Co. Ltd. v. N.C. Upadhyaya (96 ITR 1) — Bombay High Court | Decision striking down rectificatory orders under Section 154 in related contexts (used in Board's re-examination of its earlier instructions). | The Board relied on later developments including this decision in re-examining and clarifying that parts (b) and (c) of its earlier circular remained applicable; the High Court noted these developments in explaining why the Tribunal's interpretation was incorrect. |
| Indian Oil Corporation Ltd. v. Rajagopalan (92 ITR 241) — Bombay High Court | Another Bombay High Court decision considered in the Board's re-examination of its earlier circular and practice regarding development rebate reserve. | The Board took this decision into account in its re-examination and clarification; the High Court relied on the Board's clarified position to reject the Tribunal's conclusion that instructions had wholly been withdrawn. |
Court's Reasoning and Analysis
The Court first identified the principal grounds on which the Tribunal denied relief under Section 84 / Section 80J: (i) the units arose under a single collaboration agreement; (ii) the assessee's manner of functioning and accounting showed absence of independent units because no separate accounts were kept for each unit; (iii) no inter-departmental sales and costs by stage had not been separately ascertained; and (iv) reliance on the Calcutta High Court decision in C.I.T. v. Textile Machinery Corporation.
The Court then examined whether these grounds compelled denial of relief. It observed that the Tribunal had not denied that each of the seven units had been established in the respective years or that articles were being manufactured in them; nor did it disbelieve that the assessee earlier imported those articles. The Court found that, in light of the Supreme Court's subsequent reversal of the Calcutta High Court in Textile Machinery Corporation v. C.I.T., the reasons the Tribunal relied upon were not determinative.
The Court extracted and applied the principles laid down by the Supreme Court in Textile Machinery Corporation v. C.I.T., which include:
- The appropriate test is whether there is a new and identifiable undertaking separate and distinct from the existing business, and whether the new undertaking can exist on its own as a viable unit.
- Production of identifiable, marketable commodities in a new unit is indicative of a new industrial undertaking even if those commodities are used by the assessee's main business; marketability and independent viability count in favour of a finding of a new undertaking.
- Physical separateness, erecting new plants and machinery, and ascertainable capital and profits for the new unit are relevant; mere expansion of the existing business is not decisive to deny relief unless the purported new unit is formed by reconstruction transferring assets of the old business to the new undertaking.
Applying those tests, the Court concluded that the Tribunal's reliance on the single collaboration agreement, common management, and absence of separate accounts was insufficient to deny relief. The Court noted that even if separate accounts were not maintained, the investments in each unit could be reasonably ascertained from materials the assessee could provide.
On the development rebate question, the Court analysed the statutory requirements (noting Section 34 requires at least 75% of the allowance be debited to profit and loss and credited to a development rebate reserve to be utilised over eight years). The assessee had not created a new reserve in the particular assessment years, but had an earlier excess reserve created in 1965-1966 which, the assessee argued, could cover the later claims.
The assessee had made a representation to the Central Board requesting that existing reserve be treated as covering the later claims; the Board had issued instructions favourable to the assessee which led the Appellate Assistant Commissioner to direct allowance of the rebate. The Tribunal thought those instructions were withdrawn in light of the Supreme Court decision in Indian Overseas Bank Ltd. v. C.I.T. and the Gujarat High Court decision in Surat Textile Mills Ltd., and therefore declined to follow the Board's earlier instruction.
The Court examined the Board's circular dated 14 October 1965 and subsequent clarifications (including Circular No. 189 dated 30 January 1976). It concluded that only part (a) of the 1965 circular (which suggested reserves under other statutes could be treated as the development rebate reserve) had been rendered inoperative by Indian Overseas Bank; parts (b) and (c) (which provided that where total income before rebate is a loss no statutory reserve need be created, and that genuine deficiencies may be condoned subject to making up the reserve in the current year's books) were not invalidated by that decision. The Board re-examined and confirmed that, except for the clarification in part (a), the other clarifications remained valid.
The Court concluded that the assessee's case fell within para 1(c) of the Board's clarified position — i.e., where there was no deliberate contravention, the Income-tax Officer may condone genuine deficiencies subject to the assessee making up the reserve in the current year's books. The Tribunal erred in treating the Board's specific instruction in favour of the assessee as withdrawn and in setting aside the Appellate Assistant Commissioner's direction to the Income-tax Officer.
Holding and Implications
Holding: The Court answered the referred questions as follows: Question No. 1 (entitlement to deduction under Section 84 / Section 80J) is answered in the affirmative, and Question No. 2 (whether the Tribunal was right to deny development rebate) is answered in the negative. Both questions were answered in favour of the assessee.
Implications / Consequences:
- Direct effect on the parties: The Tribunal's denial of relief under Sections 84 and 80J was held to be erroneous; the assessee was entitled to the deductions under those provisions for the assessment years in question (as per the Court's answers to the referred questions).
- On development rebate, the Court held that the Tribunal should not have disallowed the Appellate Assistant Commissioner's direction based on a mistaken view that Board instructions had been wholly withdrawn; accordingly the assessee's claim for development rebate was to be treated favourably in line with the Board's instructions and the Appellate Assistant Commissioner's direction (subject to making good any deficiency as per the Board's para 1(c) guidance).
- The opinion rests on and applies the Supreme Court's tests in Textile Machinery Corporation v. C.I.T. and the clarified Board circular position post-Indian Overseas Bank; the Court treats the Tribunal's reliance on earlier Calcutta High Court reasoning as undermined by subsequent higher authority and by the Board's clarified instructions.
- No wider novel legal doctrine beyond applying settled Supreme Court tests and Board clarifications is proclaimed by this opinion; the practical effect is to reverse the Tribunal's findings and to decide the referred questions in favour of the assessee on the facts before the Court.
This summary is based exclusively on the contents of the provided opinion and does not add or infer facts beyond those stated in the opinion.
Venkataramiah, J.:— The assesessee in these two cases is International Instruments Private Limited, Bangalore, and the assessment years are 1967-1968 and 1968-1969. The assessee owned a factory in Bangalore where it was manufacturing dash-board instruments used in automobile industry under a licence which it had obtained under an agreement dated September 30th 1959, with a German Company known as VDO TACHOMETER WERKE Adolf Schind ling GmbH. Till the assessment year 1966-1967 the assessee had been claiming relief under Section 84 of the Income-Tax, Act, 1961 (here in after referred to as the Act) as it stood then on the basis that the entire unit was one new industrial undertaking. In the course of the assessment year 1967-1968 the assessee was advised that having regard to the provisions of Section 84 of the Act and the development of the industry of the assessee over several years, that it should claim relief that it was entitled to in law by putting forward before the income-tax authorities the real state of affairs. Accordingly, in the assessment year 1967-1968 the assessee claimed relief under Section 84 of the Act in respect of the following seven units which commenced operation subsequent to the year 1961:
Name of the Unit Year of Commencement Nature of work 1 2 3 1. Press Shop 1962 Manufactures metal cases to mount the instrument technically known as ‘Pressed Components’.
2. Machine Shop 1963 In this section, iron brass and aluminium rods are fed into machine to make gears, axles, special type bolts, screws and other tiny articles technically called ‘turned components’. 3. Dial Printing Shop 1964 Prints dials on metal sheets to be used in the instruments. 4. Plastic Moulding Shop 1965 Manufactures plastic components like figure wheel, digit wheel, traffic wheels, etc. 5. Cable Shop 1962 Manufactures steel wires used as cables for speedmeters. 6. Others (assembling, plating, and all other remaining odd works 1961 All the remaining items of assembling plating etc. under taken in this section. 7. Dye-casting Shop 1966 Manufactures of dyes used in other sections.
The assessee stated that at the commencement it used import all the components of the dash-board instruments from abroad and was merely assembling them. Gradually it commenced to manufacture the components required for the manufacture of dash-board instruments one after another in the manner indicated above. In order to establish each one of the unit referred to-above, it had to invest fresh capital, instal fresh machinery and engage fresh labour. The products that were being manufactured in each one of the above units were marketable commodities which the assessee had either to import or buy earlier for the purpose of manufacturing finished dash-board instruments. On the setting up of each of the units, the assessee manufactured or produced the relative articles in each of them and used them in the manufacture of dashboard instruments. It contended that each one of them should therefore be treated as a new industrial undertaking established in the year mentioned against it and relief granted in respect of it under Section 84 of the Act. In the following, assessment year 1968-1969, a deduction was claimed by the assessee under Section 80J of the Act which was introduced in the place of Section 84 of the Act in respect of the said units. The assessee also claimed in the assessment year 1967-1968 development rebate under Section 33 of the Act on assets of the value of Rs. 68,393 in addition to other assets. In the assessment year 1968-1969 the assessee claimed development rebate in respect of the assets of the value of Rs. 1,60,066 in addition to the value of other assets. The Income-tax Officer rejected the claim of relief under Section 84 of the Act in the assessment year 1967-1968 and deduction under Section 80J of the Act in the assessment year 1968-1969 on the ground that the units in question were not new industrial undertaking eligible to any relief thereunder. In respect of the development rebate, he held that the assets of the value of Rs. 1,658 were not eligible for development rebate in the year 1967-1968 and assets of the value of Rs. 4,720 were not eligible for development rebate in the year 1968-1969. He, however, denied development rebate even in regard to the rest of the items on the ground that the required reserve had not been created by the assessee. On the basis of the above findings he concluded the assessments.
Aggrieved by the orders of assessment, the assessee filed appeals before the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner upheld the decision of the Income-tax Officer in so far as the claim of the assessee for relief under Section 84 and deduction under Section 80J were concerned. But in view of the submission made on behalf of the assessee before him that the Central Board of Direct Taxes had issued instructions in regard to the assessee to grant development rebate under Section 33 of the Act in respect of the assets in question during the assessment years 1967-1968, and 1968-1969, he directed the Income-tax Officer to consider the said question afresh and grant the permissible relief. Against the orders of the Appellate Assistant Commissioner, the assessee as well as the department, filed appeals before the Income-tax Appellate Tribunal. The Tribunal allowed the appeal of the department and set aside the direction of the Appellate Assistant Commissioner in regard to development rebate. It dismissed the appeal of the assessee and confirmed the order in so far as the relief claimed under Section 84 and deduction under Section 80J were concerned. Thereupon, at the instance of the assessee the Tribunal has referred to this Court under Section 256(1) of the Act, the following questions.—
Re: 1967-1968
“(i) Whether, on the facts and in the circumstances of the case, the assessee was entitled to any deduction under Section 84 in the assessment for 1967-1968?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the allowance of development rebate on the assets of the value of Rs. 66,735?
Re: 1968-1969.—
“(i) Whether, on the facts and in the circumstances of the case, the assessee was entitled to any deduction under section 80J in the assessment for 1968-1969?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the allowance of development rebate on the assets of the value of Rs. 1,55,346?”
3. The Tribunal refused to grant the relief under Section 84 and deduction under Section 80J of the Act for the following: reasons:
“6. The only other contention in this appeal is that the lower authorities erred in not allowing the relief under section 80J of the Income-tax Act. In dist following the assessee's claim in this regard the Appellate Assistant Commissioner has referred to his order for earlier years. The facts are set out in the Appellate Assistant Commissioner's order for the assessment year 1967-1968. Briefly the facts are, according to the assessee, its undertaking consists of different shops or units which operate at different stages of production and each such unit should be taken as a separate and independent industrial undertaking within the meaning of Section 80J of the Act. These units are as follows:
Name of the Unit Year of Commencement 1 2 3 1. Press Shop … 1962 2. Machine Shop … 1963 3. Dial Printing Shop … 1965 4. Plastic Moulding Shop … 1965 5. Cables Shop … 1962 6. Others … 1961 7. Die Casting Shop … 1966
The Income-tax Officer held that the entire plant and machinery constituted a single industrial undertaking which commenced operation even as early as assessment year 1962-1963 when they started production of dash board instruments by mainly assembling imported parts. For this purpose he relied on a finding in the assessment order for 1962-1963. According to the assessee however each of the above so called shops should be taken as separate end independent industrial undertaking and the profits of the same should be given the relief under Section 80J upto the limits prescribed in sub-section (2) of that section.
7. It was a result of a collaboration agreement entered by the assessee on 30-9-1959 with a German concern, viz. VDO Tachometer Worke that the asseessee undertook the manufacture of dash board instruments under licence from the German Company. The agreement shows that it is a composite and indivisible agreement and it does not make any distinction between the so called units which are now claimed to be distinct and separate from each other. The manner of functioning by the assessee and its method of accounting also show that there are no separate independent units at all. No separate account is kept for each unit. There are no inter-departmental sales noted and the cost of production in each stages is not separately ascertained. Even with regard to the capital equipment lite plant and machinery, the balance sheets from the beginning do not make any distinction between plants and machinery of the various units which are said to be distinct and separate. The assessee itself has not ascertained the profit of each unit and, on the facts and in the circumstances of the case, in our opinion, it would be practically impossible to do so. The facts of the case are, therefore, very similar to the facts in the case of Commissioner of Income Tax v. Textile Machinery Corporation (80 ITR 428) decided by the Calcutta High Court. In the case of Commissioner of Income Tax v. India Aluminium Co. Ltd., (86 ITR 257), which is a later judgment of the Calcutta High Court, it was held that substantial expansion bringing to existence a new industrial undertaking. In that case there were factories at different places and it was found, as a fact, that there was substantial expansion which could be taken as bringing into existence a new industrial undertaking, There is no such thing in the present case. The decisions in the case of Rajeswari Mills Ltd. v. Commissioner Of Income-Tax, Madras. (50 ITR 29) and in the case of Anil Starch Products Ltd. v. Commissioner of Income tax (59 ITR 514) are clearly distinguishable and have been rightly distinguished by the Appellate Assistant Commissioner in his order for the Assessment year 1967-1968.
8. In the above circumstances, we are unable to accept the claim of the assessee that the various units aforementioned constitute different industrial undertakings. The contention is accordingly rejected.
(vide. Orders of the Tribunal in I.T.A 818.Bang/1972-1973 dated 8-2-1974 in respect of assessment year 1969-1970).
4. From the portion of the order of the Tribunal extracted above, it is clear that the principal grounds on which the relief was denied were:—
(i) that all the new undertakings in respect of which relief was claimed, had come into existence as a result of a single collaboration agreement;
(ii) that the manner of functioning by the assessee and its method of a accounting showed that there were no independent units at all because no separate accounts had been kept for each unit;
(iii) that there were no inter-departmental sales noted and the cost of production in each stage had not been separately ascertained; and five that in similar circumstances, the High Court of Calcutta had denied relief in C.I.T v. Textile Machinery Corporation(1)
The Tribunal, however, did not hold that each of the seven units referred to above bad not been established in the respective years as claimed by the assessee and that some articles were being manufactured there. It also did not disbelieve the case of the assessee that formerly it was securing from abroad the articles, which were later on manufactured in the several units, for the purpose of using them in the manufacture of dash-board instruments. In the circumstances it is reasonable to hold that it was possible for the assessee to manufacture dash-board instruments even without the several units which came into existence subsequently. It follows that each one of the units has to be treated as a new industrial undertaking in which new articles came to be manufactured as and when it was established. It is no doubt true that in similar circumstances the Calcutta High Court had denied relief to the assessee in the case of C.I.T v. TEXTILE MACHINERY CORPORATION That decision has subsequently been reversed by the Supreme Court in Textile Machinery Corporation v. C.I.T, West Bengal(2). In that case Section 15C of the Indian Income-tax Act, 1922, corresponding to Sections 84 and 80J of the Act came up for consideration. The Supreme Court held that the assessee was entitled to relief under Section 15C of the 1922 Act in respect of two new units, namely, a steel foundry division, and a jute mill division which were established as adjuncts to its existing factory. In doing so, the Supreme Court observed as follows:—
“The assessee continues to be the same for the purpose of assessment. It has its existing business already liable to tax. It produces in the two concerned undertakings commodities different from those which it has been manufacturing or producing in its existing business. Manufacture or production of articles yielding additional profit attributable to the new out lay of capital in a separate and distinct unit is the heard of the matter, to earn benefit from the exemption of tax liability under Section 15C Sub-section (6) of the section also points to the same effect, namely, production of articles. The answer in every particular case, depends upon the peculiar facts and conditions of the new industrial undertaking on account of which the assessee claims exemption under Section 15C. No hard and fast rule can be, laid down. Trade and industry do not run in earmarked channels and particularly so in view of manifold scientific and technological developments. There is great scope for expansion of trade end industry. 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 16C. 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 all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can lay down in inexorable test to determine whether a given case comes under Section 15C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved. This has not happended here in the case of the two undertakings which are separate and distinct.
It is clear that the principal business of the assessee is heavy engineering in the coarse of which it manufacturers boilers, wagons, etc. If an industrial undertaking produces certain machines or parts which are, by themselves, identifiable units being marketable commodities and the undertaking can exist even after the cessation of the principal business of the assessee, it cannot be anything but a new and separate industrial undertaking to qualify for appropriate exemption under Section 15C. The principal business of the assessee can be carried on even if the said two additional undertakings cease to function. Again, the converse is also true. The fact that the articles produced by the two undertakings are used by the boiler division of the assessee will not weigh against holding that these art new and separate undertakings. On the other hand, the fact that a portion of the articles produced in these two new industrial undertakings has been sold in the open market to other is a circumstance in favour of the assessee that the new industrial units can function on their own. Use of the articles by the assessee is not decisive to deny the benefit of Section 15C.
Section 15C partially exempts from tax a new industrial unit which is separate physically from the old one, the capital of which and the profits thereon are ascertainable. There is no difficulty to hold the Section 150 is applicable to an absolutely new undertaking for the first time started by an assessee. The cases which give rise to controversy are those where the old business is being carried on by the assessee and a new activity is launched by him by establishing new plants and machinery by investing substantial funds. The new activity may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. These products may be consumed by the assessee in his old business or may be sold in the open market. One thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced and at least of minimum of ten persons within the aid of power and a minimum of twenty persons without the aid of power have been employed. Such a new industrially recognisable unit of the assessee cannot be said to be reconstruction of his old business since there is no transfer of any assets of the old business to the new undertaking which takes place when there is reconstruction of the old business. For the purpose of Section 15C the industrial units set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of Section 15C the new undertaking must be formed by reconstruction of the old business. Now, in the instant case, there is no formation of any industrial undertaking out of the existing business since that can take place only when the assets of the old business are transferred substantially to the new undertaking. There is no such transfer of assets in the two cases with which we are concerned.”
It is seen from the decision of the Supreme Court that the grounds on which the Tribunal denied relief to the assessee are irrelevant. Merely because pursuant to a single collaboration agreement the units in question came into existence it cannot be said that they are not new industrial undertakings or separate units. The fact that the assessee was getting articles produced from the new undertakings from abroad for manufacturing dash-board instruments earlier, shows that they were marketable commodities and they answered one of the tests adopted by the Supreme Court in determining whether an undertaking is a new industrial undertaking or not. The fact that there was common management or the fact that separate accounts had not been maintained, would not also lead to the conclusion that they were not separate undertakings. Even if separate account is not maintained, the investment on each of the units can be reasonably determined with the material which the assessee may make available to the department. We are, therefore, of the view that the finding of the Tribunal that the assessee was not entitled to relief under Section 84 and deduction under Section 80J of the Act during the assessment years in question, is erroneous.
5. The next question relates to the claim of development rebate made by the assessee under Section 33 of the Act. It is well known that development rebate is granted by way of an incentive to encourage enterpreneurs to modernise the plant and machinery of their industrial undertakings. In order to see that the rebate so granted is used in business and is not otherwise frittered away, Section 34 provides that at least 75 per cent of such allowance should be debited to the profit and loss account of the assessee of the relevant previous year and credited to a reserve account as development rebate reserve to be utilised over a period of eight years next following for the business and not distributed either by way of dividends or profits or remitted outside India as profits or for the creation of any asset outside India. In the instant cases, it is no doubt true that the assessee had not created a fresh development rebate reserve during the assessment years in relation to the assets in respect of which the development rebate was claimed. But its case was that in the year 1965-1966 a development rebate reserve to the extent of Rs. 6,35,505 had been created though in law, having regard to the value of the assets in respect of which development rebate had been claimed during that assessment year it had to create development rebate reserve only in a sum of Rs. 4,63,971 and as there was an excess of Rs. 1,71,534 by way of reserve was available, which would cover the claim made in these two assessment years 1967-1968 and 1968-1969, it was not necessary for the assessee to create a separate reserve. In fact, it could have before preparing the profit and loss account and the balance sheet withdrawn the excess reserve referred to above and treated it as fresh reserve created during the relevant assessment years. But as the balance sheet and the profit and loss account had been sent to the Registrar of Companies the assessee thought it would not to proper to reconstruct the balance-sheet and the profit and loss account treating the said excess amount as fresh reserve. It however made a representation to the Central Board of Direct Taxes explaining the circumstances of the case and requesting it to issue necessary instructions to the assessing authorities to allow development rebate on the basis of the reserve already available. It is seen from the order of the Tribunal that the Central Board of Direct Taxes had issued instructions to the department in favour of the assessee. It is on the basis of such instructions the Appellate Assistant Commissioner issued directions to the Income-tax Officer to grant the allowance prayed for under Section 33 of the Act. The Tribunal did not act upon the instructions of the Board thinking that the said instructions had been withdrawn, as could be seen from the relevant portion of it order:
“In so far as the Board's instructions are concerned it appears from the, paper book furnished by the counsel that although previously the Board had given instructions for allowance of the assessee's claim, these instructions were subsequently withdrawn by the Board's circular letter dated 27th October 1972 based on the judgment of the Supreme Court in the Indian Overseas Bank Ltd.'s case (77 ITR 512) and of the Gujarat High Court in the case of Surat Textile Mills Ltd. (80 ITR 1). Therefore, the assessee's claim that the development rebate should be allowed on the additional items on the basis of Board's instructions untenable as the Board's earlier instructions were later withdrawn.” (vide, para 11 of the order of the Tribunal in I.T.A Nos. 816, 817, 841 and 842.Bang/72-73 dated 9-5-1974)
The conclusion of the Tribunal is the result of a misconception What had been actually withdrawn by the Board was a part of a Circular No. F10/49/55-ITA 1 dated 14th October 1965 which contained certain general instructions. The remaining parts of that circular which did not conflict with decision of the Supreme Court in The Indian Overseas Bank Ltd. v. C.I.T(3) remained intact. That it was so is clear from Circular No. 189 dated. 30th January 1976 which is found in 102 I.T.R (Statutes) 9, the relevant part of which reads as follows:—
“Reference is invited to Board's Ciretilar F. No. 10/49/65-ITA, I dated 14th October, 1965, which, inter-alia, explained the position regarding the creation of statutory reserve for allowance of development rebate as follows:—
(a) In the case of certain industrial undertakings, particularly those in which there is Government participation either by way of capital, loan; or guarantee, and where there are certain obligations by law or agreement about the maintenance of reserve for development purposes, the development rebate reserve may be treated as included in the Said reserve though not specifically created as a development rebate reserve.
(b) In a case where the total income computed before allowing the development rebate is a loss, there was no legal obligation to create any statutory reserve in that year, as no development rebate would actually be allowed in that year.
(c) Where there was no deliberate contravention of the previsions, the Income-tax Officer may condone genuine deficiencies subject to the same being made good by the assessee through creation of adequate additional reserve in the current year's books in which the assessment is framed.
2. The Supreme Court, in the case of Indian Overseas Bank Ltd., C.I.T (77 ITR 512) had occasion to consider the validity of the position as explained at (a) above. In that case, the Bank had not created any development rebate ps such, although the books of accounts disclosed a substantial reserve under Section 17 of the Banking Companies Act of 1949. On the claim of the bank that reserve had been created for purposes of claiming development rebate, the Supreme Court held that the reserve contemplated under the Income-tax Act was altogether an independent reserve and since the taxpayer had not complied with the requirements for the creation of special developments rebate reserve, it was not entitled to claim the allowance in question. The Supreme Court also observed that the entries in the account book Were not idle formalities. Thus, the instructions of the Board set out above in so far as part (a) is concerned became inoperable. However, the position explained in parts (b) and (c) above were not specifically considered by the Supreme Court in that decision. Taking note of the decision of the Supreme Court in Indian Over seas Bank (77 ITR 512) as well as a subsequent pronouncement of the Gujarat High Court in the case of Surat Textile Mill Ltd. (80 ITR 1) the Board had withdrawn in 1972 the aforesaid circular dated 14th October, 1965 to the extent it was superseded by the aforesaid Supreme Court decision and the judgment of the Gujarat High Court in Surat Textile Mills Ltd.
3. It was also directed that past assessments be reviewed and suitable action taken to retrieve loss of revenue including securing of necessary disallowances by way of enhancement, etc., in appeals relying on the aforesaid judicial pronouncements. It would appear that this has been interpreted by the field officers as having, withdrawn not only part (a), but parts (b) and (c) of para, 1 above also, and rectificatory/revisionary action has been initiated in a number of cases.
4. It has been represented to the dated that their earlier instruction dated 14th October, 1965, represented the correct position in law and that its withdrawal to the extent it was presumed to be over-ruled by the Supreme Court in the Indian Overseas Bank's case (77 ITR 512) created unnecessary hardship to assessees. Some of the rectificatory action taken had also reached High Court for decision and in two separate decisions the Bombay High Court struck down the “rectificatory order under Section 154 in the case of Tata Iron and Steel Co. Ltd. v. N.C Upadhyaya (96 ITR 1) ‘and in a more detailed discussion on merits in the writ petition of the Indian Oil Corporation Ltd. v. Rajagopalan (92 ITR 241).
5. The Board have re-examined the issues involved and are of the view that except the clarification given in para (a) of para 1 above, which stands superseded lay the aforesaid decision of the Supreme Court, the clarifications given in paras (b) and (c) of para 1 above hold good.”
The case of the assessee came under para 1(c) of the above circular which provided that where there was no deliberate contravention of the provisions, the income-tear. Officer by condone geauine deficiencies subject to the same being made good by the assessee through creation of adequate additional reserve in the current years's books in which the assessment is framed. In addition to the foregoing general instructions, the Board issued specific instructions in exercise of its power under Section 119 of the Act which empowered it to issue instructions wherever it considered it desirable or expedient so to do. Unfortunately the Tribunal committed an error in thinking that the specific instruction issued in the case of the assessee in the year 1069 had been withdrawn. The Tribunal should not have, therefore, interfered with the order of the Appellate Assistant Commissioner in this behalf.
6. In the result, in each of the cases question ‘No. 1 is answered in the affirmative and question No. 2 in the negative. Both the questions are answered in favour of the assessee.
Alert