Kerala State Cashew Development Corporation v. Commissioner Of Income-Tax.

The Judgment of the Court was delivered by

T.L Viswanatha Iyer, J.:— The Income-tax Appellate Tribunal, Cochin Bench, has referred the following question of law for the opinion of this court under section 256(2) of the Income-tax Act, 1961 (“the Act”):

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the assessee is not entitled to get the benefit under section 80J(4) of the Income-tax Act, 1961?”

2. The assessment years concerned are 1972–73, 1973–74, 1974–75 and 1975–76. The assessee is the Kerala State Cashew Development Corporation Limited, which is a wholly owned undertaking of the Government of Kerala, formed in the year 1970 for the purpose of taking over and running sick cashew factories. The assessee took over five factories in the year 1970–71, and 22 factories in the year 1971–72, of which two were purchased outright and the rest taken on lease from the owners for periods ranging from two to five years. The balance-sheet of the assessee showed as its assets only the buildings, sheds and machinery in the two concerns purchased, besides additions made by way of new machinery. The substantial part of the assets by way of buildings and machinery taken on lease was hot reflected in the balance-sheet.

3. In the assessment for the year 1972–73, the assessee claimed deduction under section 80J as if it were a newly established industrial undertaking. The Income-tax Officer declined the deduction on two grounds: firstly, on the ground that it was not an industrial undertaking manufacturing or producing articles, but one merely processing cashew nuts by roasting, shelling and peeling; secondly, on the ground that the assessee was using only buildings, machinery and plant which had previously been used by others. No new machinery or plant had been set up, nor were any new buildings put up, attracting the application of section 80J.

4. For the year 1973–74, the claim was negatived stating that the assessee had not earned any positive income during the period and, therefore, no deduction could be allowed. In the subsequent years, it was held that the assessee had only reconstructed a business already in existence by transfer of building and machinery previously used and was, therefore, not entitled to any relief under section 80J.

5. On appeal, the Appellate Assistant Commissioner who dealt with the appeal for 1972–73 noted that the assessee had installed only some balancing equipment in the twenty factories taken on lease. They were only using the machinery previously used by the lessors in these factories. The assessee had some machinery of its own only in the two factories purchased by them. Even the staff was the same. The business was, therefore, one which had been formed by reconstruction of a business already in existence. The Appellate Assistant Commissioner further held on the facts that the business of the assessee was one formed by the transfer of buildings, machinery and plant previously used for any purpose. This decision was followed in the subsequent years 1973–74 and 1975–76. In 1974–75, the Commissioner of Income-tax (Appeals) who dealt with the appeal did not specifically deal with the point.

6. The Tribunal dealt with the appeal for 1972–73 in the first instance. It held that only an insignificant part of the machinery had been newly purchased. The Tribunal also recorded the assessee's acceptance of the position that the Explanation to section 80J was not applicable. The Tribunal found it impossible on the facts to hold that the undertaking was not formed by the transfer of building, machinery or plant, previously used for any purpose. The Tribunal did not accept the assessee's contention that “transfer” for purposes of section 80J meant only an outright sale and not a lease; nor the further consequential submission that buildings included the machinery as well and, therefore, lease of machinery was also out of the pale of the section. The Tribunal then went on to hold that the undertaking was not a new one, but one which had been in existence for decades. Sub-section (2) of section 80J allowed deduction in the year in which the undertaking began the manufacture and for four succeeding assessment years. Since the undertakings were old ones, which began manufacture decades back, there was no scope for any exemption this year. The assessee's appeal was accordingly dismissed and this decision was followed and applied in the years 1973–74 and 1974–75.

7. When the appeal for 1975–76 came up before the Tribunal, the assessee placed considerable, reliance on the Explanation to section 80J (the non-applicability of which had been conceded in 1972–73 (as recorded by the Tribunal) and followed in the next two years), contending that the total value of the building, machinery and plant had to be computed ignoring the value of the buildings taken on lease, and if so computed, the value of the machinery and plant transferred to the new business will not exceed 20 per cent of the value of the building, machinery and plant used for the business of the industrial undertaking. The Tribunal did not find its way to accept this new contention raised by the assessee in the view that they took that the value, of the buildings taken on lease also came into the reckoning for purposes of the Explanation. In all other respects, the Tribunal followed its decision for the year 1972–73.

8. It is on these findings that the question mentioned earlier has been referred to this court under section 256(2).

9. Section 80J, which had a predecessor in section 84 of the Act, provides for a deduction of six per cent, per annum of the capital employed, from the profits and gains of a newly established industrial undertaking, for a period of five years from the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles. Sub-section (4) lays down four conditions all of which have to be fulfilled by the industrial undertaking to become eligible for this deduction. As the sub-section stood in the years in question, it stated that the section applied to any industrial undertaking which fulfilled all the following conditions, namely: (i) it was not formed by the splitting up, or the reconstruction, of a business already in existence; (ii) it was not formed by the transfer to a new business of a building (not being a building taken on rent or lease), machinery or plant previously used for any purpose. There are two more conditions which are not relevant for the purposes of this case. The Explanation to the section (as it stood during the relevant years) provided that, where, in the case of an industrial undertaking, any building, machinery or plant or any part thereof previously used for any purpose was transferred to a new business, and the total value of the building, machinery or plant or part so transferred did not exceed twenty per cent, of the total value of the building, machinery or plant used in the business, then, for the purpose of clause (ii) of sub-section (4), the condition specified therein shall be deemed to have been complied with and the total value of the building, machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking.. The finding of the Tribunal is that the assessee does not fulfil conditions (i) and (ii) in section 80J(4) and, therefore, is not eligible for the deduction. The assessee had also conceded before the Tribunal in the appeal relating to 1972–73 that it was not entitled to the benefit of the Explanation and this was followed in the subsequent two years 1973–74 and 1974–75, where the assessee did not place any reliance on the Explanation at all. But the assessee claimed benefit under the Explanation in the year 1975–76 and, therefore, that further question was also considered in the year 1975–76 and negatived.

10. We may mention at the outset that the object with which section 80J has been enacted is to encourage the establishment of new industries in the country. The heading of the section refers to “newly established industrial undertakings”, and the conditions laid down by sub-section (4) for the applicability of the section emphasise the newly established nature of the undertaking. It is true that the term “newly established” does not occur in the body of the section, but it is implicit in its very object and purpose. A necessary corollary of this is that the undertaking itself must be a newly established one, and not that it is a new undertaking to the person acquiring the same from another. The emphasis is on the establishment of the undertaking and not on the person who acquires it afterwards. Otherwise, an undertaking having enjoyed the special deduction can continue to claim the deduction virtually for all time to come by mere change of hands, which is not the object or purpose of the provision. (See in this connection Khoday Industries P. Ltd. v. CIT, [1987] 163 ITR 646 (Kar)). We have referred to this aspect even at the threshold because of the assessee's contention that what is contemplated by the section is only a venture employing fresh capital by new entrepreneurs which, according to the assessee, ought to be encouraged with tax concessions like this. But this plea overlooks the distinction maintained in the section between the assessee and the industrial undertaking.

11. The assessee is a company. But its industrial undertakings are the cashew factories which it has either purchased or taken on lease. What sub-section (4) makes relevant is the industrial undertaking and not the assessee. The industrial undertaking must fulfil the conditions prescribed in that sub-section. The fact that the assessee is a new company incorporated for taking over existing industrial undertakings (which belonged to businesses which previously existed) is, therefore, irrelevant. The cashew factories which were taken over by the assessee existed as undertakings of businesses already in existence. The change of hands of the industrial undertaking does not make it a newly established one for purposes of section 80J, though it is a new venture for the transferee.

12. This also answers the further submission of the assessee that the assessee is not one formed by the transfer to a new business of building, machinery or plant previously used for any purpose and, therefore, the section is not rendered inoperative. The contention is that the assessee-company itself was incorporated in 1971 and that formation was not by transfer of any building, machinery or plant of an existing business which were taken over only in 1971, and, therefore, section 80J(4)(ii) does not stand in the way of the assessee. This argument is fallacious for the reason mentioned earlier that it fails to keep in mind the distinction maintained in the section between the assessee and the industrial undertaking, what is made relevant being the newness of the industrial undertaking, and not of the assessee.

13. We shall now come to the main points arising in the case. The three authorities have held that the industrial undertaking of the assessee does not fulfil the conditions laid down in sub-clauses (i) and (ii) of sub-section (4) of the section. A perusal of sub-section (4) shows that the conditions prescribed therein are cumulative so that unless all of them are satisfied, the industrial undertaking does not qualify for the deduction. It follows therefore, that, if an industrial undertaking is one formed by the splitting up or the reconstruction of a business already in existence, or by the transfer to a new business of building (not being a building taken on rent or lease) machinery or plant previously used for any purpose, it will not be eligible for the deduction. The non-fulfilment of either of these two conditions (among others) is sufficient to deprive the assessee of the benefit of the section.

14. There is no dispute in this case that existing cashew factories were taken over by the assessee with all their staff, building, machinery and plant.

15. One of the conditions to be fulfilled for purposes of section 80J is that prescribed in clause (ii) of sub-section (4), namely, that the industrial undertaking is not one formed by the transfer to a new business of a building, machinery or plant previously used for any purpose. Counsel for the petitioner urges that the taking over of a unit on lease is not hit by this condition as, according to him, a lease is not “transfer” for purposes of the section. He relies on the decision of the Andhra Pradesh High Court in Ghanshyamdas Kishan Chander v. CIT, [1980] 121 ITR 121, where, in relation to an assessment to capital gains, the Bench held that, unless the entire interest in the property was transferred or assigned, there is no “transfer” within the meaning of that expression in section 2(47) of the Act. Accordingly, it was held that, where the assessee mortgaged his property in the first instance, and subsequently sold it, the transfer took place only when the sale was effected, and not when the property was mortgaged and the mortgagee was put in possession. Section 2(47) states that, in relation to a capital asset, “transfer” includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. This is an inclusive definition which should not ordinarily bear a restrictive or limited construction (State of Bombay v. Hospital Mazdoor Sabha, [1959-60] 17 FJR 423 : AIR 1960 SC 610). The scope of this definition in section 2(47) was explained by a Division Bench of this court in Blue Bay Fisheries (P.) Ltd. v. Commissioner Of Income-Tax, [1987] 166 ITR 1. Kochu Thommen J., speaking for the court, observed that the five categories of transfer mentioned therein are by way of illustration or for abundant caution, and were not intended to exclude other categories which naturally come within the expression “transfer”. The expression had to be read broadly and not narrowly. The decision of the Andhra Pradesh High Court was referred to and its scope was held limited to cases of capital gains where only an outright transfer of the property could attract the levy. This court observed that it was perhaps, overlooked by the Andhra Pradesh High Court that section 2(47) embodied an inclusive definition.

16. In L.G Balahrishnan and Bros. Ltd. v. CIT, [1985] 151 ITR 270, the Madras High Court was dealing with a case arising under the predecessor section 84(2)(ii), when it was held that the expression “transfer” could not be given a restricted meaning and that it was comprehensive enough to include a lease as well. The assessee having acquired its machinery on lease while forming the undertaking could not claim the benefit of section 84. The court did not accept the restricted meaning given to the word “transfer” by the Andhra Pradesh High Court in Ghanshyamdas Kishan Chander's case, [1980] 121 ITR 121.

17. A Bench of the High Court of Bombay consisting of Madon and Kania JJ., as they then were, also took the same view in CIT v. Indian Expanded Metals P. Ltd., [1982] 134 ITR 483, in relation to section 84(2)(ii) of the Act. After a discussion of the cases on the point, the learned judges held that “transfer” in the section cannot be restricted to cases where the full rights of ownership were transferred and that it will include transfer of limited rights or interests as well. Thus a transfer effected by creation of lease of a building in favour of a new business or the person carrying on a new business was one within the purview of section 84(2)(ii). It was further held that it was not necessary that the building transferred must have been used previously by the assessee himself in any other business of his; a building earlier used for business by a stranger would also come within the ambit of the section. Thus where the assessee set up a new industrial undertaking in a building taken on lease from another company which had been using it for its business, the transfer fell within the purview of section 84(2)(ii).

18. We need not multiply authorities except to refer to the recent decision of the Supreme Court in Bajaj Tempo Ltd. v. CIT, [1992] 196 ITR 188, where the court proceeded on the premise that an assessee taking lease of a building in which the promoter had carried on business was not covered, by section 15C of the Indian Income-tax Act, 1922 (akin to section 80J). The court nevertheless held that the assessee in that case was entitled to the special deduction as the part played by the lease was not dominant to the formation of the new undertaking. The court also held that to disentitle the assessee to the benefit of the section, the building need not have been used by the assessee itself previously.

19. The definition of “transfer” in section 2(47) is an inclusive one and it has therefore to be given its broad ordinary meaning. The transfer contemplated by section 80J(4)(ii) comprehends leases as well (except to the extent excluded by the parenthesis therein) consistent with the object sought to be achieved by section 80J, of conferring a benefit on new industrial undertakings. The conditions stipulated for fulfilment are aimed at controlling the abuse that may otherwise result by successive transferees claiming the benefit by mere transfers—whatever form they take. Successive assessees taking the business on lease or other form of transfer of limited interest may otherwise be allowed to avail of the exemption for all time to come, defeating the very conditions for the applicability of the section. We are in agreement with the view expressed by this court earlier and by the Madras and Bombay High Courts, particularly in the light of the decision of the Supreme Court in Bajaj Tempo Ltd.'s case, [1992] 196 ITR 188. It is, therefore, unnecessary to deal with the decision of the Gujarat High Court in CIT v. Suessin Textile Bearing Ltd., [1982] 135 ITR 443, where the court held that the benefit of tax holiday cannot be denied merely because the premises taken on rent or lease for purposes of the new undertaking were previously used for business.

20. It is also unnecessary for us to deal with the scope of the inclusion of building taken on rent or lease appearing in section 80J(4)(ii) as, admittedly, the machinery or plant have also been taken on lease and that is sufficient to bring the case within the ambit of the said sub-section.

21. Rule 19A of the Income-tax Rules, 1962, on which considerable reliance was placed by counsel for the assessee in no way militates against the view we have taken.

22. But counsel for the assessee maintains that the assessee is entitled to the benefit of the Explanation to the section in that the value of the building, machinery and plant taken over on transfer will be less than 20 per cent, of the building, machinery and plant used in the business. This point had not been urged for the years 1972–73, 1973–74 and 1974–75 and, therefore, does not arise for consideration for those years. In fact, it was conceded before the Tribunal when the appeal for 1972–73 was heard that the Explanation was not applicable. It was so recorded by the Tribunal. This decision was followed without any further claim for the years 1973–74 and 1974–75. Though counsel for the assessee attempts to argue that the record made by the Tribunal as to what happened before it is not correct, he cannot be allowed to do so in the light of the decisions of the Supreme Court in State of Maharashtra v. Ramdas Shrinivas Nayak, (1982) 2 SCC 463 : AIR 1982 SC 1249 and of this court in R. Nagarajan & Co. v. State Of Kerala, [1986] KLT 1231. The only contention urged during these years related to the main part of the section as to whether the industrial undertaking was one formed by transfer or not, and whether it was one formed by the reconstruction of an existing business or otherwise. The factual foundation for invoking the Explanation has not been laid by the assessee during these years and, therefore, this question does not really arise for consideration for these three years, even apart from the concession made before the Tribunal.

23. But the point was argued in the appeal for 1975–76, and the Tribunal held against the assessee on the point. According to the assessee, they are entitled to have the benefit of the section, even if they are not entitled to its benefit for the first three years if the requisite conditions are satisfied. We agree. Even if the assessee had been denied the benefit under section 80J for any year, the relief could be claimed and granted in a subsequent year, if the requisite conditions are fulfilled for that year. We are in agreement with the view taken on this point in CIT v. Satellite Engineering Ltd., [1978] 113 ITR 208 (Guj) and CIT v. Suessin Textile Bearing Ltd., [1982] 135 ITR 443 (Guj).

24. The petitioner's contention is that the buildings which form part of the lease, inclusive of the machinery therein, should be excluded from the value of the unit leased. We find it difficult to accept this contention. What we are concerned with on this aspect is the interpretation of the Explanation. There is nothing in it for excluding the value of the building or machinery forming part of the lease in computing the value of the building, machinery or plant previously used for any purpose. Even the parenthesis which appears in clause (ii) of sub-section (4) of section 80J—“not being a building taken on rent or lease”—does not find a place in the Explanation. Therefore, the value of the building, machinery and plant leased out has to be taken into consideration for the purposes of the Explanation. The further argument that machinery situated in the building leased out should also be excluded along with the buildings, as forming part of the buildings is also fallacious, when the section itself treats the building, machinery and plant as separate items—apart from our conclusion reached above that the value of the building is not outside the purview of the Explanation. We are, therefore, in agreement with the Tribunal on this point. There is no case for the assessee that, if the vaue of the buildings and the machinery are also taken into account, the value of the transferred assets will be less than 20 per cent, of the total value of the building, machinery and plant used in the business, to attract the applicability of the Explanation.

25. The aforesaid findings of ours are sufficient to negative the assessee's claims for deduction under section 80J, as the four conditions specified in sub-section (4) are cumulative and each one of them has to be fulfilled for the assessee to get the benefit of the section. However, we shall briefly advert to the question of reconstruction arising under sub-clause (i) of subsection (4) though it is really unnecessary to render a decision on the point in view of our finding that the industrial undertaking does not satisfy clause (ii) of sub-section (4).

26. Reconstruction is the rejuvenation or rehabilitaton of an existing undertaking. The original business or undertaking continues to exist without its identity being lost. The existing business does not become extinct. On the other hand, if the new business has a new identity or independent existence, distinct and different from the existing business, it qualifies for the relief under the section without being hit by clause (i) of sub-section (4). (See CIT v. Travancore Rayons Ltd., [1987] 164 ITR 134 (Ker) and Textile Machinery Corporation Ltd. v. CIT, [1977] 107 ITR 195 (SC). In the latter case, the Supreme Court stated that a new activity launched by the assessee by establishing hew plant and machinery by investing substantial funds may produce the same commodities of the old business or it may produce some other distinct marketable products. Such a new industrially recognised unit of an assessee will not be the reconstruction of the old business, since there is no transfer of the assets of the old business to the new undertaking, which takes place when there is a reconstruction of the old business. Thus, the transfer of the existing assets of an old business and the undertaking being rehabilitated by fresh investments and improvements, or modernisation, will be a reconstruction, but a new activity with a fresh distinct identity may not be a reconstruction even if it only adds to the existing business. What the assessee in these cases has done is only to take over the existing units of sick cashew factories, which they allege to have improved and strengthened by pumping in additional funds and some new machinery, and nothing more. Even the staff continues to be the same. The old units continue to exist. The undertakings of the assessee do not have any distinct identity, apart from the old units and, therefore, there is only a reconstruction of an existing business and not the starting of a new industrial undertaking entitling the assessee to the benefit of section 80J.

27. These findings are sufficient to reject the claim of the assessee under section 80J. But there is a more valid reason why the assessee is not entitled to the benefit of section 80J. It will be seen from sub-section (2.) that the deduction under the section is allowed only for the first five years after the industrial undertaking begins to manufacture or produce articles. What is important is the beginning of manufacture or production of articles in the industrial undertaking and not by a particular assessee. In the case of old units taken over by an assessee, as in this case, where the cashew factories in question have been in existence for decades (as noted by the Tribunal), the manufacture or production of articles in the industrial undertaking has begun long back and, therefore, the five-year period mentioned in sub-section (2) has also expired long ago. Such an undertaking cannot avail of the deduction under section 80J, as the period of five years has to be reckoned from the date of commencement of manufacture or production and not from the date on which the undertaking came into the hands of the new management. For this reason as well, the assessee is disentitled to any benefit under section 80J. We are, therefore, in agreement with the Tribunal that the assessee is not entitled to the deduction under section 80J. The question referred to us is, therefore, answered in the affirmative, that is, against the assessee and in favour of the Revenue.

28. There will be no order as to costs.