The Judgment of the Court was delivered by

K.S Puttaswamy, J.:— In this reference made under section 256(1) of the Income-tax Act, 1961 (“the Act”), the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore (“Tribunal”), at the instance of the assessee has referred the following question of law for the opinion of this court:

“Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in denying the deduction under section 80J of the Income-tax Act, 1961, to the assessee-company?”

2. In order to appreciate the question referred to us, it is necessary to notice in the first instance the facts as found by the Tribunal. A partnership firm called M/s. Khoday Eswarsa and Sons, Bangalore, was carrying on business in the manufacture of Indian made foreign liquors, gem clips and pins, carbon papers, typewriter ribbons, stamp pads, inks, aniline printing conversion of flexible, packaging materials, an engineering workshop and silk and twisting of silk yarn under different trade names. Under an agreement dated November 21, 1969, between the firm and the assessee which is a private limited company incorporated under the Companies Act, 1956, the latter became entitled to carry on the business undertakings of the former on the terms and conditions set out in that agreement. In terms of that agreement, the assessee has been carrying on those business undertakings which were carried on by the “firm” except the business in silk and twisting of silk yarn.

3. For the assessment year 1973-74, relevant to the accounting year ending on June 30, 1972, the assessee filed its return before the Income-tax Officer, Central Circle-I, Bangalore, inter alia, claiming a sum of Rs. 2,32,118 as permissible deduction under section 80J of the Act, with which claim only we are concerned in this reference. On August 23, 1976, the Income-tax Officer completed the assessment rejecting the said claim of the assessee. Aggrieved by the said order of the Income-tax Officer, the assessee filed an appeal in ITA No. 32 of 1976-77 before the Appellate Assistant Commissioner of Income-tax, Central Range, Madras, who by his order dated March 8, 1977, dismissed the same. Aggrieved by the said orders of the Appellate Assistant Commissioner and the Income-tax Officer, the assessee filed a second appeal in ITA No. 200.Bang/1977-78 before the Tribunal which by its order dated September 4, 1978, dismissed the same. Hence this reference.

4. Sri S.P Bhat, learned counsel for the assessee, strenuously contends that on a true construction of section 80J of the Act, the benefit of deduction was available to the assessee in respect of the “industrial undertaking” acquired by it treating that very undertaking as “newly established industrial undertaking” for purposes of section 80J of the Act. In support of his contention, Sri Bhat strongly relies on the very ruling of the Supreme Court in Textile Machinery Corporation Limited v. CIT, [1977] 107 ITR 195 relied on by the Tribunal, the true ratio of which, according to him, had been misunderstood and misapplied by the Tribunal.

5. Sri K. Srinivasan, learned senior standing counsel for the Income-tax Department appearing for the Revenue, contends that the deduction allowable under section 80J of the Act was on a “newly established industrial undertaking” for a limited period and was not on all undertakings from the date of their acquisition by an assessee as held by the Supreme Court in the very case relied on by Sri Bhat.

6. On an examination of the terms of the agreement and all other materials, the Tribunal concurring with the Appellate Assistant Commissioner and the Income-tax Officer had found that the assessee had not established a new industrial undertaking. But, the assessee without disputing the same had contended and even now contends that that very undertaking was an undertaking entitled to claim the permissible deduction under section 80J from the date of its acquisition.

7. On the very finding recorded by the Tribunal, the controversy between the parties really turns on the true construction of section 80J(1) and (1A)(IV) of the Act which reads thus:

“80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.— (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains reduced by the deduction, if any, admissible to the assessee under section 80HH or section 80HHA of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent, per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the manner specified in sub-section (1A) in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year):

Provided that in relation to the profits and gains derived by an assessee, being a company, from an industrial undertaking which begins to manufacture or produce articles or to operate its cold storage plant or plants after the 31st day of March, 1976, or from a ship which is first brought into use after that date, or from the business of a hotel which starts functioning after that date, the provisions of this sub-section shall have effect as if for the words ‘six per cent.’ the words ‘seven and a half per cent.’ had been substituted

(IV) The resultant sum as determined under clause (III) shall be diminished by the value, as ascertained under clause (II), of any investments the income from which is not taken into account in computing the profits of the business and any moneys not required for the purpose of the business, in so far as the aggregate of such investments or moneys exceed the amount of the borrowed moneys which under clause (III) are required to be deducted in computing the capital.”

8. The heading of this section provides for deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases. But, in the body of the section, the term “newly established” before the term “industrial undertakings” had not been employed. While Sri Srinivasan relying on the rulings of the Supreme Court in K.P Varghese v. ITO, [1981] 131 ITR 597, Me Dowell and Company Limited v. CTO, [1985] 59 STC 1277; [1985] 154 ITR 148 (SC) and the Full Bench ruling of this court in C. Arunachalam…* v. Commissioner Of Income Tax…., [1985] 151 ITR 172 urged for reading the terms “newly established” before the term “industrial undertakings” occurring in the body of the section, Sri Bhat relying on the ruling of the Supreme Court in Chandroji Rao v. CIT, [1970] 77 ITR 743 strongly opposes the same on the grounds (i) that will amount to legislation in the thin guise of interpretation which is impermissible, and (ii) that a taxing provision in case of ambiguity must be construed in favour of the taxpayer and not in favour of the Revenue.

9. That the heading of a section generally gives a clue in understanding a section, though it cannot control the plain language of the section is well-settled and does not require reference to decided cases. But, that is not the precise question that arises in the construction of section 80J of the Act. What is the effect of the omission of a term deliberately and very conscientiously employed by the Legislature in the heading of the section but not found in the body of that very section is the precise question here. In such a situation, the rule laid down by Collins M.R in Bushell v. Hammord, [1904] 2 KB 563 is more apposite. Therein, the learned Master of the Rolls observed thus (at p. 567):

“In order to understand sub-section 4, we must look at the whole of the section of which it forms a part, and some help will be derived from the side-note (though, of course, it is not part of the statute), which shews that the section is dealing with the control of justices over the structure of licensed premises”

10. Applying this rule and the progressive rule of construction of statutes explained in the rulings relied on by Sri Srinivasan, we must ascertain the true scope and ambit of section 80J of the Act.

11. The heading expressly, very deliberately and conscientiously employs the term “newly established” before the term “industrial undertakings” in respect of which detailed provisions are made for special deduction for a specified period. The object and intendment of allowing a special deduction for a specified term is to encourage the establishment of new industries in the country. A new industrial undertaking unlike an established industrial undertaking has its own “teething troubles” or “special problems”. The anxiety and solicitousness of the Legislature is to new industrial undertakings and not to old and established undertakings that have passed what is figuratively described as the “take off” stage. We are, therefore, of the view that the term “newly established” though not occurring in the body of section 80J of the Act, or notwithstanding their omission, must be read in wherever the term “industrial undertakings” occur in that section. If that construction is not placed and the construction suggested by Sri Bhat is accepted, then an undertaking having enjoyed the special deduction by mere change of hands, by very artificial contrivances, that too just on the eve of expiry of the period stipulated in that section, can continue to claim the special deduction virtually for all times to come or almost permanently, which is not the object and purpose of section 80J of the Act. We need hardly say that such a construction which will not achieve the purpose and object of the provision and positively results in defeating the same, has to be avoided by us. We have, therefore, no hesitation in holding that notwithstanding its omission, the term “newly established” must be read in wherever the term “industrial undertakings” occurs in that section.

12. Section 80J(4) of the Act, when closely analysed only supports the construction placed by us and not the strained construction suggested by Sri Bhat.

13. In Textile Machinery Corporation Limited's case, [1977] 107 ITR 195, the Supreme Court was considering the exemption from payment of tax claimed by that company on the two industrial undertakings established by it under section 15C of the Indian Income-tax Act, 1922 (“old Act”), which had been negatived by the High Court of Calcutta though the same had been accepted by the concerned Income-tax Appellate Tribunal. Section 15C of the old Act introduced by the Taxation Laws (Extension to Merged States and Amendment) Act, 1949 (Act 67 of 1949). read thus:

“15C. Exemption from tax of newly established industrial undertakings.— (1) Save as otherwise hereinafter provided, 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, computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue.

(2) This section applies to any industrial undertaking which—

(i) is not formed by the splitting up, or the reconstruction of, business already in existence or by the transfer to a new business of building, machinery or plant previously used in any other business;

(ii) has begun or begins to manufacture or produce articles in any part of the taxable territories at any time within a period of thirteen years from the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking;

(iii) employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process qarried on without the aid of power:

Provided that the Central Government may, by notification in the Official Gazette, direct that the exemption conferred by this section shall not apply to any particular industrial undertaking.

(3) The profits or gains of an industrial undertaking to which this section applies shall be computed in accordance with the provisions of section 10.

(4) The tax shall not be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him by an industrial undertaking as is attributable to that part of the profits or gains on which the tax is not payable under this section.

(5) Nothing in this section shall affect the application of section 23A in relation to the profits or gains of an industrial undertaking to which this section applies.

(6) 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.”

14. In reversing the decision of the High Court of Calcutta and upholding the claim of that assessee in that case, on the scheme and object of section 15C of the old Act, the court expressed thus (at p. 202 of 107 ITR):

“The principal object of section 15C is to encourage setting up of new industrial undertakings by offering tax incentives within a period 13 years from April 1, 1948. Section 15C provides for a fractional exemption from tax of profits of a newly established undertaking for five assessment years as specified therein. This section was inserted in the Act in 1949 by section 13 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949 (Act 67 of 1949), extending the benefit to the actual manufacture or production of articles commencing from a prior date, namely, April 1, 1948. After the country had gained independence in 1947, it was most essential to give a fillip to trade and industry from all quarters. That seems to be the background for the insertion of section 15C.

It is also significant that the limit of the number of years for the purpose of claiming exemption has been progressively raised from the initial 3 years in 1949 to 6 years in 1953, 7 years in 1954, 13 years in 1956 and 18 years in 1960. The incentive introduced in 1949, has been thus stepped up ever since and the only object is that which we have already mentioned.

Under sub-section (1) of section 15C, the tax shall not be payable by an assessee on profits not exceeding six per cent, per annum on the capital employed in the new industrial undertaking from the profits of which alone exemption is claimed. Sub-section (2) of section 15C has a negative as well as a positive aspect. Negatively, the new industrial undertaking of the assessee should not be formed—

(1) by the splitting up of the business already in existence,

(2) by the reconstruction of business already in existence, or

(3) by the transfer to a new business of building, machinery or plant used in a business which was being carried on before April 1, 1948.

We agree that it is not possible to exclude any new industrial undertaking other than the three categories mentioned above.”

15. Section 80J is almost a reproduction of section 15C of the old Act and, therefore, the construction placed on the latter equally governs the former also. We are of the view that these observations also support our above conclusion only and not the construction suggested by Sri Bhat.

16. We are of view that the ratio in Chandroji Rao's case, [1970] 77 ITR 743 (SC) relied on by Sri Bhat does not really bear on the point.

17. What is important is that the undertaking established must be a newly established undertaking and not that the undertaking is a new undertaking to the person acquiring the same from another. The real test and emphasis is on the establishment of the undertaking for the first time and not on the person that establishes or acquires the same afterwards. On the foregoing discussion, we hold that the benefit of section 80J is allowable only to a newly established industrial undertaking for the periods specified therein and an existing undertaking on acquisition by another does not become a newly established undertaking to claim the benefit allowable under section 80J of the Act, which means that our answer to the question referred must be in the affirmative. In this view, it is unnecessary to examine the correctness of the other views expressed by the Tribunal or the contentions urged by the assessee against them. We, therefore, decline to notice and examine them as unnecessary.

18. In the light of our above discussion, we answer the question referred to us in the affirmative, against the assessee and in favour of the Revenue. But, in the circumstances of the case, we direct the parties to bear their own costs.