Commissioner Of Income-Tax v. Travancore Rayons Ltd. And Another

K.P Radhakrishna Menon, J.:— The questions arise out of the same order of the Income-tax Appellate Tribunal, Cochin Bench, for short, the Appellate Tribunal (annexure C). The facts are: Disposing of O.P No. 4733 of 1977-L filed by the Commissioner of Income-tax, Kerala-I, Ernakulam, this court directed the Income-tax Appellate Tribunal, Cochin Bench, to refer the following question for our opinion:

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the provision for gratuity made by the assessee is an allowable deduction while computing the total income for the assessment year 1971-72?”

2. The question thus is at the instance of the Revenue. After considering an identical question, a Division Bench of this court has held that the Tribunal was right in law in allowing the claim of an assessee for deduction of the amounts provided towards liability for gratuity, subject to verification of the exact quantum of liability. (Vide CIT v. High Land Produce Co. Ltd., [1976] 102 ITR 803 (Ker) and Commissioner Of Income-Tax, Kerala v. Kerala Nut Food Co., [1978] 111 ITR 252 (Ker)). In the light of the above decisions, the question is answered in the affirmative and in favour of the assessee.

3. By judgment in O.P No. 3512 of 1977-B dated September 26, 1979, filed by the assessee, this court directed the Appellate Tribunal to refer the following questions for our opinion:

“1. Whether, on the facts and in the circumstances of the case, the appellant is entitled to relief under section 80J in respect of the new cellulose film unit established by it in the previous year relevant to the same assessment year 1971-72?

2. If the answer to the first question is in the affirmative, whether the Tribunal was right in law in accepting the contention of the Department and holding that in computing the capital, other liabilities besides the bank liabilities should also be taken into account and the closing stock should also be considered in computing the profit?”

4. The Tribunal accordingly has referred the above questions to this court.

5. Briefly stated, the facts are: The above questions are at the instance of the assessee. The year of assessment is 1971-72, corresponding to the accounting period ending on December 31, 1970. During the year in question, the assessee employed capital for the establishment of a cellulose film plant. This plant, according to the assessee, is a new industrial undertaking. This undertaking is called C.F Plant No. IV. Since this is a new undertaking established by the assessee in the accounting year, the assessee company claimed relief under section 80J of the Income-tax Act, for short, the Act, calculated at 6% of Rs. 1,12,50,113, the capital employed by the company to establish this undertaking.

6. The assessing authority, however, rejected the above claim. This is what the assessing authority has stated in the assessment order (annexure A):

“This is given the nomenclature as C.F Plant No. IV. Obviously, this is not the first plant erected by the company for the manufacture of cellulose film. There were three such plants already in operation when the fourth plant was commissioned. The assessee company had started manufacture of cellulose film in 1950 when the first plant was erected. From that year onwards, production of cellulose film was going on of course from time to time when the business expanded and new plants were added. The third plant was commissioned in 1962. It is interesting to note that at no time earlier did the assessee claim that the plant for manufacturing cellulose film formed a new industrial undertaking. Even as late as in 1962, when the third plant was commissioned, the assessee did not claim this as a new industrial undertaking eligible for the relief available to such undertakings. Only now, when the fourth plant started operation, this claim is raised for the first time. It is clear that the 4th C.F Plant installed in the accounting year cannot be considered as a new industrial undertaking eligible for relief under section 80J of the Income-tax Act.”

7. The assessment order was under challenge before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner found that inasmuch as the “C.F Plant No. IV” is capable of being operated independently of the other 3 units, the same is a new undertaking eligible for the relief provided for under section 80J of the Act. Accordingly, the Appellate Assistant Commissioner allowed the above claim, as is seen from the order marked annexure B.

8. The Revenue appealed. The Appellate Tribunal held that C.F Plant No. IV, being one installed for the manufacture of viscose from wood pulp, cannot exist independently. The Tribunal further held that the manufacture of rayon cellophane from viscose is merely the seventh stage in the process of manufacturing of rayon and cellophane. In fact, the Appellate Tribunal conducted a local investigation and came to the conclusion that “C.F Plant No. IV” is integrally connected with the three other plants already in existence. According to the Tribunal, all the four units including “C.F Plant No. IV” are part and parcel of the same undertaking. The Appellate Tribunal accordingly accepted the case of the Revenue and as a consequence thereof rejected the claim of the assessee for relief under section 80J of the Act.

9. The above findings of fact have not been challenged by the assessee. The said findings have become final. This court cannot disturb or go behind the abovementioned findings of fact given by the final fact-finding body, the Tribunal.

10. Learned counsel for the assessee, however, submitted that the assessee, notwithstanding the above findings, is eligible for the relief under section 80J because “C.F Plant No. IV” cannot be said to be an Industrial undertaking formed either by splitting up or by the reconstruction of a business already in existence. According to him, “C.F Plant No. IV” is an “industrial undertaking newly established” within the meaning of section 80J of the Act. He submits that this plant cannot be said to be a unit integrated with the other three plants already in operation.

11. This argument, though attractive at the first blush, cannot be countenanced because the same runs counter to the facts found by the fact-finding authority under the Act. Here, it is worth recalling the fact that the assessee has not chosen to challenge the findings of fact. Regarding these aspects, this is what the Tribunal has stated:

“That being the position, one cannot accept that the rayon/cellophane units which convert viscose into finished products have to be considered as separate units, having an independent existence apart from the viscose production. The number of units making the final product would be dictated by the needs of the undertaking considered as a whole. If the viscose producing plants can produce enough viscose to feed four units, it would be economical to have four units. If production is enough for three units, a fourth unit cannot be economically feasible. The number of units being dependent upon the production of viscose, establishment of a new unit is more like adding to or replacing existing machineries like Xanthators or caustic soda solution vats. It is no more or no less.

Thus, in the rayon business, the continuous process shows that it has to be considered as one industrial undertaking. Even if it is possible to convert the processes into separate undertakings, the way the assessee company has conducted the business shows that they have treated it as one undertaking.”

12. Under section 80J, an industrial undertaking can be declared eligible for the reliefs provided for thereunder only if the same is not formed by the splitting up, or the reconstruction, of a business already in existence. The other provisions of sub-section (4) of section 80J are not dealt with here because they are not relevant. The enquiry in this regard centres round the question whether the industrial undertaking in respect of which the assessee has claimed the relief is a new undertaking within the meaning of section 80J. In other words, it should be established that the industrial undertaking is not formed by the splitting up, or the reconstruction, of a business already in existence. It is not the case either of the assessee or of the Revenue that the industrial undertaking in question is one formed by the splitting up of a business carried on by the assessee. But it is the case of the Revenue that “C.F Plant No. IV” is one formed by the reconstruction of a business already in existence.

13. To settle the dispute, it is necessary to understand the meaning of the expression “reconstruction” The expression “reconstruction”, in the context in which it is used, denotes that the original business or undertaking continues to exist without its identity being lost or abandoned. The concept, no doubt, visualises changes, but the changes must be constructive. They shall not result in the extinction of the existing business. In short, even after the reconstruction, the undertaking must continue to carry on the same business. On the other hand, the undertaking, in order to qualify for the benefit, must be new and identifiable, distinct and different from the existing business. We are fortified in this view, by the decision of the Bombay High Court in CIT v. Gaekwar Foam and Rubber Co. Ltd., [1959] 35 ITR 662, approved by the Supreme Court in Textile Machinery Corporation Ltd. v. CIT, [1977] 107 ITR 195. It is also relevant to note in this connection that the deductions contemplated under section 80J can be claimed only from the profits and gains derived from the new industrial undertaking. In short, the assessee should show that he had claimed the deduction from out of the profits and gains derived from the newly established undertaking. The findings of the Tribunal in this regard, however, disentitle the assessee to get the benefit. The findings are:

“No separate accounts are maintained and it becomes necessary to make an allocation of all the liabilities, apart from the liability directly related to the new unit.”

14. It can thus be seen that it is not possible to find out from the accounts, the profits the assessee has derived from the new establishment C.F Plant No. IV. In other words, the assessee itself has treated the hew plant as forming part of the existing business.

15. From the facts found by the Tribunal, the only inference possible is that “C.F Plant No. IV” was formed by the reconstruction of an existing business and that it is not possible to work out the profit and gains derived from the above undertaking, as the assessee has not maintained separate accounts relating to this undertaking.

16. If that be so, the relief claimed under section 80J, according to us, has rightly been rejected by the Department. For the reasons stated above, question No. 1 is answered in the negative and against the assessee. In the light of the above answer, the second question does not arise for consideration. We, therefore, decline to answer the same. No order as to costs.

17. A copy of, 1; his judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.