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Industrial Gases Limited v. Commissioner Of Income-Tax, Calcutta.
Summary of Opinion: Sankar Prasad Mitra, J. (Reference under section 66(2) of the Indian Income-tax Act, 1922)
Factual and Procedural Background
The opinion concerns a reference under section 66(2) of the Indian Income-tax Act, 1922, for assessment year 1951-52 (accounting period: calendar year 1950). The assessee is a private limited company incorporated on 25 July 1947 with, among other objects, the manufacture of industrial gases.
Prior to installation of its factory, the assessee engaged in dealings in carbide, machinery parts and other industrial gases. During the accounting period the factory installation was completed and the company commenced manufacturing industrial gases.
The assessee maintained separate sets of accounts for its manufacturing unit and for its commercial dealings; the manufacturing unit showed a loss while the commercial dealings produced substantial profit. Because the manufacturing unit incurred a loss, the Income-tax Officer did not examine whether the assessee's claim to exemption under section 15C should be allowed.
The assessee contended (before the Appellate Assistant Commissioner and later the Tribunal) that because it undertook some manufacturing in the accounting year, the whole of its income from all business activities should be treated as arising from a single industrial undertaking and thus be eligible for exemption under section 15C. The Appellate Assistant Commissioner rejected that contention. The Appellate Tribunal also rejected the claim and held that the profits from the commercial activities were not profits "derived from any industrial undertaking" within section 15C(1) and did not fall within sub-clause (ii) of section 15C(2). This court framed two questions for decision (set out below) and referred the matter accordingly.
Legal Issues Presented
- On the facts found and/or admitted, did the manufacture and sale of industrial gases and the sale of equipment for use of such gases constitute two separate undertakings?
- Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the profits made by the assessee-company from sale of gases and equipment were not exempted under section 15C of the Indian Income-tax Act as it stood at the time of the assessment year?
Arguments of the Parties
Assessee / Appellant (as advanced by Mr. Sukumar Mitra)
- The determinative question whether a business is single or consists of separate businesses depends on how the activities are carried on; the correct test is whether there is interlacing, interlocking and dovetailing of the activities.
- Counsel relied on authorities (Spiers & Son Ltd. v. Ogden and Setabganj Sugar Mills Ltd. v. Commissioner of Income-tax) to support that test.
- The burden of proving that different activities constitute separate businesses rests on the person asserting that separation.
- The assessee's core object was to produce and sell gas; creating a market for gas was an essential part of the undertaking and merchanting of other people's and the assessee's products should, on the facts, be treated as the same business.
Revenue / Tribunal (as represented in material before this Court)
- The Appellate Tribunal held that the income from the assessee's commercial activities could not be deemed to be "profits or gains" derived from any "industrial undertaking" within the meaning of section 15C(1).
- The Tribunal found the commercial activities were entirely separate from the manufacturing business and did not fall within the categories in sub-clause (ii) of section 15C(2).
- Accordingly, the Tribunal disallowed the assessee's claim for exemption under section 15C for profits arising from its commercial dealings.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Spiers & Son Ltd. v. Ogden (1932 17 Tax Cas. 117) | Cited by assessee's counsel to support the proposition that the test for whether activities form a single business or separate businesses is whether there is interlacing, interlocking and dovetailing. | Noted as cited by the assessee's counsel; the opinion records the citation but does not state reliance on this case as the primary source of rules applied in the court's analysis. |
| Setabganj Sugar Mills Ltd. v. Commissioner of Income-tax ([1961] 41 I.T.R. 272) | Cited by assessee's counsel in support of the foregoing proposition regarding the test for single vs. separate businesses. | Recorded as a citation relied upon by the assessee's counsel; the court summarizes other authorities and principles it applies, rather than expressly basing its decision on this citation alone. |
| Ashok Motors Ltd. v. Commissioner of Income-tax, Madras | Established that the unit of assessment is the assessee (not the industrial undertaking) and that exemption under section 15C is confined to profits derived from the industrial undertaking; illustrated that exemption can be allowed only in respect of profits properly attributable to the industrial undertaking. | The court extracted and relied on this decision as establishing that section 15C benefits apply only to profits of the industrial undertaking and that profits from other business activities are taxable separately. These principles were incorporated into the court's analysis. |
| Commissioner of Income-tax v. Standard Motor Products of India Ltd. (Madras High Court) | Held that section 15C must be strictly construed; profits from non-industrial activities (e.g., sale of spare parts) are not exempt even if allied to industrial undertaking. It established the real test: whether the non-industrial business is essential to the subsistence of the industrial undertaking; forbids merger of separate activities into the industrial undertaking simply because they are allied. | The court set out the principles from this decision (strict construction of section 15C; confinement of exemption to industrial undertaking profits; test of essentiality) and applied them to the facts, concluding that the assessee's non-industrial commercial activities could be carried on independently and thus were not part of the industrial undertaking for section 15C relief. |
Court's Reasoning and Analysis
The court proceeded by first recording the factual picture: two physically and accountingly separate units (manufacturing unit and commercial unit) with separate books; manufacturing made a loss while commercial dealings made substantial profit. The Income-tax Officer had not examined the section 15C claim because of the loss in manufacture.
The court set out the two legal questions to be answered and then summarized the assessee's legal approach (interlacing/interlocking test, burden of proof) as pressed by counsel. The court reproduced section 15C in full as it stood at the material time and highlighted relevant sub-sections, particularly sub-section (2) which specifies conditions for an undertaking to qualify.
The court then considered two Madras High Court decisions (Ashok Motors and Standard Motor Products) and extracted from them a set of principles which it regarded as applicable. Those principles (enumerated in the opinion) include:
- Section 15C must be strictly construed; benefits do not extend to income merely incidental or ancillary to the industrial undertaking where such income does not arise directly from the undertaking.
- Section 15C distinguishes between the assessee and the industrial undertaking; the unit of assessment is the assessee, and exemption is confined to profits derived from the industrial undertaking, not other trade or business of the assessee.
- Even in a composite business, exemption is confined to profits of the industrial undertaking; non-industrial activities allied to or associated with the industrial undertaking cannot be merged into it for the purposes of section 15C.
- The key test is whether the non-industrial unit's business is essential to the subsistence of the industrial undertaking; if not, the profits of that non-industrial unit are not exempt.
Applying these principles to the facts, the court observed that the assessee's commercial activities (buying and selling machinery parts and industrial gases) were not carried on through the industrial undertaking (the factory) and could be carried on independently of the factory. Likewise, the factory could operate even if the non-industrial business ceased. On that factual foundation, the non-industrial business was not essential to the subsistence of the industrial undertaking.
On this basis the court concluded that the Tribunal's conclusion — that the profits from the commercial activities were not profits "derived from any industrial undertaking" within section 15C(1) and thus not exempt — was correct and should be sustained.
Holding and Implications
The Tribunal's order is sustained; both questions referred to this Court are answered in the affirmative.
Direct, stated consequences for the parties:
- The assessee's claim for exemption under section 15C in respect of profits from its commercial dealings (sale of gases and equipment) is disallowed; those profits are not treated as profits or gains "derived from any industrial undertaking" for the purposes of section 15C.
- The applicant (assessee) is ordered to pay the respondent's costs of the reference.
The opinion does not set out any broader novel rule of law beyond applying existing authorities and principles; it applies the established Madras High Court principles to the facts and affirms the Tribunal's determination.
The Judgment of the Court was delivered by
Sankar Prasad Mitra, J.:— This is a reference under section 66(2) of the Indian Income-tax Act, 1922. The assessment year is 1951-52. The accounting period is the calendar year 1950. From the statement of the case it appears that the assessee is a private limited company incorporated on the 25th July, 1947, with the object, inter alia, of carrying on the business of manufacturing industrial gases. Pending the installation of the factory the assessee up to the preceding assessment year was having dealings only in carbide, machinery parts and other industrial gases.
2. During the accounting period the installation of the factory had been completed, and the assessee started the manufacture of industrial gases. The activities of the assessee with regard to the manufacturing business and commercial dealings were found to be carried on as two completely separate units for which separate sets of account books were also maintained. The result of the manufacturing unit was a loss and there was substantial profit in its commercial dealings. In view of the loss in the manufacturing unit the Income-tax Officer did not consider it necessary to go into the question as to whether the exemption under section 15C as claimed by the assessee was attracted.
3. The contention of the assessee before the Appellate Assistant Commissioner was that since the assessee-company did some manufacturing during the accounting year its entire income arising from the business as a whole including the commercial activities in dealings in gases etc., should be treated as income of one industrial undertaking and the resultant profit should be exempted under the provision of section 15C. The Appellate Assistant Commissioner did not uphold this contention.
4. Before the Appellate Tribunal it was urged that since some manufacturing was done during the accounting year it became a new industrial undertaking as contemplated under section 15C and was, therefore, entitled to the exemption. It was urged further that it was not necessary in an industrial undertaking to manufacture or produce anything through the help of machinery inasmuch as there being no definition of “industrial undertaking” in the Income-tax Act, the ordinary meaning of “industry” as given in the English dictionary should be adopted. “Industry” it was submitted, according to its dictionary meaning, included such other activities as agricultural operations where the help of machinery was not incumbent in the process of production.
5. The Appellate Tribunal rejected this contention on the ground that the income derived by the assessee from its commercial activities could not be deemed to be “profits or gains” derived from any “industrial undertaking” within the meaning of section 15C(1). The Tribunal was of the view that the commercial activities of the assessee were entirely separate from its business of manufacturing industrial gases and did not fall in any of the categories mentioned in sub-clause (ii) of sub-section (2) of section 15C. The Tribunal held that the benefits of section 15C were allowable to a new industrial undertaking which satisfied the conditions laid down in sub-clause (ii) of sub-section (2) of that section. The assessee's claim for exemption was, therefore, disallowed.
6. The following questions of law have been framed by this court:
“(1) On the facts found and/or admitted, did the manufacture and sale of industrial gases and equipment for use of such gases constitute two separate undertakings?
(2) Whether on the facts and circumstances of the case the Tribunal was right in holding that the profits made by the assessee-company from sale of gases and equipment were not exempted under section 15C of the Indian Income-tax Act as it stood at the time of the assessment year?”
7. Mr. Sukumar Mitra, learned counsel for the assessee, did not urge before us any of the points which the Tribunal was invited to consider. Mr. Mitra's legal approach is that whether a business is single with different activities or two or more separate businesses constituted by each activity depends on the evidence as to how the activities are carried on. The test, according to the learned counsel, is whether there is interlacing, interlocking and dovetailing of the various activities. Learned counsel cited in support of this proposition, Spiers & Son Ltd. v. Ogden 1932 17 Tax Cas. 117. and the judgment of the Supreme Court in Setabganj Sugar Mills Ltd. v. Commissioner of Income-tax [1961] 41 I.T.R 272, 274.
8. Secondly, Mr. Mitra says that the burden of proving that the different activities of an assessee constituted separate businesses is on the person who asserts the same.
9. Learned counsel strongly urged that the Tribunal in the instant reference has arrived at its conclusions without any evidence that establishes separate businesses. The main object, Mr. Mitra states, of the assessee company is to produce and sell gas and an essential part of its undertaking is to create a market for gas manufactured by it. In creating such market until its factory was set up the assessee-company sold some of the contemplated products in the year of account before its production began. In other words, merchanting of other people's products and of its own products on the facts of the present case should be treated as one and the same business.
10. Before we proceed any further it would be convenient to set out in full section 15C of the Indian Income-tax Act as it stood at the material time and underline the portions thereof more relevant for our purposes:
“15C. (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 used in a business which was being carried on before the first day of April, 1948;
(ii) has begun or begins to manufacture or produce articles in any part of the taxable territories at any time within a period of three years from the first 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 carried on without the aid of power….
(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…
(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.”
11. Our attention has been invited to two decisions of the Madras High Court on section 15C of the Act. I shall first briefly refer to the facts in these two cases and the decisions given therein.
12. In Ashok Motors Ltd. v. Commissioner Of Income-Tax, Madras., the assessee was a public limited company, which commenced business in February, 1948, as a dealer in Austin cars and trucks and spares. Early in 1949, it began to import parts from abroad and assemble cars at its factory. The assessee derived profits from its industrial undertaking as well as other trade activities. The total profits of the composite business came to Rs. 4,44,462 (rupees four lakhs and forty-four thousand and four hundred and sixty-two). A sum of Rs. 2,48,483 (rupees two lakhs and forty-eight thousand and four hundred and eighty three) left over as unabsorbed depreciation relating entirely to the industrial undertaking had to be carried forward. The Income-tax Officer computed the assessee's profits from the industrial undertaking at Rs. 2,53,198 (rupees two lakhs and fifty-three thousand and one hundred and ninety-eight) which after adjusting the unabsorbed depreciation left a balance of Rs. 4,715 (rupees four thousand seven hundred and fifteen). The officer gave exemption under section 15C of the Income-tax Act in respect of the sum of Rs. 4,715 (rupees four thousand seven hundred and fifteen) alone and brought to tax the sum of Rs. 1,91,264 (rupees one lakh ninety-one thousand two hundred and sixty four) pertaining to its other business activities. The Madras High Court held that the procedure adopted by the Income-tax Officer was in conformity with the provisions of section 15C and the assessee was entitled to exemption under section 15C only in respect of the sum of Rs. 4,715 (rupees four thousand seven hundred and fifteen).
13. In Commissioner of Income-tax v. Standard Motor Products of India Ltd., the assessee-company was engaged in the manufacture of motor-cars and tractors. It entered into an agreement with an English company under the terms of which it became entitled to import parts and components for assembling cars and tractors. The assessee imported spare parts, used some of them for assembling cars and sold some as spare parts. In computing the relief to which the assessee was entitled under section 15C, the Income-tax Officer excluded the profit derived by the company from the sale of spare parts. The assessee contended that the business of importing and selling spare parts was part of the industrial undertaking of the company, that the purchase of spare parts was obligatory under the terms of the agreement and, as such, the profit derived from the sale of spare parts were entitled to exemption under section 15C. The Madras High Court holds that the business in spare parts was not essential to the subsistence of the industrial undertaking of the assessee and the failure or cessation to carry on such business would not put an end to the undertaking itself. The profits from the sale of spare parts did not form part and parcel of its income from an industrial undertaking and was not entitled to the exemption under section 15C.
14. The principles that emerge out of these decisions and fall for our consideration in the present reference are as follows:
(1) The exemption under section 15C has to be strictly construed and the language of the enactment prevents the extension of the benefits to income which is merely incidental or ancillary to the industrial undertaking but which does not arise directly from and out of it: Commissioner of Income-tax v. Standard Motor Products of India Ltd. Section 15C makes a distinction between the assessee and the industrial undertaking owned by him. The unit of assessment is the assessee and not the industrial undertaking: Ashok Motors Ltd. v. Commissioner Of Income-Tax, Madras..
(2) The exemption conferred by section 15C is confined only to the profits derived from the industrial undertaking and not to the profits derived from any trade or business carried on by the assessee other than the industrial undertaking: Ashok Motors Ltd. v. Commissioner Of Income-Tax, Madras..
(3) Even if an assessee carries on a composite business, part of which is done through the industrial undertaking and the rest is non-industrial in character, the exemption under section 15C is confined only to the profits derived from the industrial undertaking: Commissioner of Income-tax v. Standard Motor Products of India Ltd.; Ashok Motors Ltd. v. Commissioner Of Income-Tax, Madras..
(4) There is no difference in this legal position even if the non-industrial portion of the business activities of the assessee is allied to or intimately associated with the business carried on through the industrial undertaking: Commissioner of Income-tax v. Standard Motor Products of India Ltd.
(5) For purposes of section 15C, there can be no merger of several business activities into the industrial undertaking, however much they may be closely allied to or intimately associated with the latter: Commissoner of Income-tax v. Standard Motor Products of India Ltd.
(6) The real test is whether the business carried on by the assessee through the non-industrial unit is essential to the subsistence of the industrial undertaking of the assessee: Commissioner of Income-tax v. Standard Motor Products of India Ltd.
15. Applying the above principles to the facts of the instant case, it seems to us that, though the assessee-company carried on its commercial activities of buying and selling machinery parts allied to those required for its own manufacturing business as also industrial gases, this part of the activity of the assessee was not carried on through the industrial undertaking which was subsequently set up. It is clear that the non-industrial business activities of the assessee could be carried on independently of the industrial undertaking, that is the factory, and it could be carried on even though the factory was not subsequently installed at all. Looking at it from another point of view, the factory itself, when set up, could be run even if the assessee ceased to carry on the non-industrial business activities which it had already been carrying on before the factory was set up.
16. We are, therefore, of the opinion that the Tribunal's order in the instant reference must be sustained and the answers to both the questions which arise for our consideration are in the affirmative. The applicant will pay to the respondent the costs of this reference.
Sen, J.:— I agree.
17. Questions answered in the affirmative.
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