The Judgment of the Court was delivered by

Sabyasachi Mukharji, J.:— In this reference under section 66(2) of the Indian Income-tax Act, 1922, the following question has been referred to this court:

“Whether, on the facts and in the circumstances of the case, the electrolysis plant set up by the assessee-company was a new industrial undertaking within the meaning of section 15C of the Indian Income-tax Act, 1922, and as such the necessary relief under that section was admissible to the assessee?”

2. The reference arises in respect of the assessment year 1959–60. The assessee-company owns a paper mill and manufactures paper and sells it in the market. In the previous year relevant to the present assessment year it had set up an electrolysis plant for the purpose of manufacturing caustic soda which is an essential chemical for use in the process of manufacture of paper. The assessee-company obtained a separate licence for the manufacture of caustic soda and the plant was housed in a separate building. In assessing the company for the relevant year the Income-tax Officer held that the plant was ancillary to the main manufacturing unit and was not, therefore, a new industrial undertaking as contemplated under section 15C of the Indian Income-tax Act, 1922. The Income-tax Officer also held that as no part of the caustic soda manufactured was sold to any outsider no profit had been derived from the said plant and, therefore, no relief under section 15C was allowable to the assessee. There was an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner observed that the business of manufacture of caustic soda was merely a process of reconstruction of the existing business of manufacture of paper. The Appellate Assistant Commissioner observed that no sale had taken place of the caustic soda to the outside market. The Appellate Assistant Commissioner observed further that the business of the appellant was manufacture of paper. Caustic soda being an essential chemical for manufacture of paper, the assessee-company had set up plant for manufacture of caustic soda so as to avoid purchasing the same from outside. Therefore, the Appellate Assistant Commissioner came to the conclusion that the plant was set up for manufacturing caustic soda for being used in the manufacture of paper which was the existing business of the appellant. According to the Appellate Assistant Commissioner the business, therefore, remained the same and all that happened was that some reconstruction of the business, reconstruction in the sense that in respect of purchasing the chemical from outside the assessee-company had started producing it itself. The Appellate Assistant Commissioner was of the opinion that as long as the caustic soda was not manufactured for the purpose of selling it in the market and introducing a separate business thereby, the mere fact that the plant was housed in a separate building and that an industrial licence had to be obtained for the manufacture of this chemical were not sufficient considerations for holding that caustic soda plant was a new industrial undertaking as contemplated under section 15C of the Act. According to the Appellate Assistant Commissioner the industrial undertaking for exemption under section 15C must be a new industrial undertaking and must be a separate business. He, therefore, affirmed the order of the Income-tax Officer.

3. There was a further appeal to the Tribunal. Before the Tribunal the departmental representative supported the order of the Appellate Assistant Commissioner and submitted that the language used in section 15C was “profits or gains derived from any industrial undertaking”. Stress was laid before the Tribunal on the word “derived” and it was urged that unless the profits arose directly by the sale of the product of the new plant no profits could be said to have been derived. The argument was that the profit should be directly derived and not indirectly or deemed to be derived. The Tribunal was unable to accept this proposition advanced on behalf of the revenue relying on the decision in the case of Tata Iron & Steel Co. Ltd. v. State of Bihar [1963] 48 I.T.R S.C 123. The Tribunal noted that the assessee had produced before the Tribunal the computation showing the profit of the plant at Rs. 8,24,224 out of which exemption was being claimed on Rs. 2,37,711 being 6 per cent. of the capital employed. The Tribunal was of the opinion that, prima facie, the computation appeared to be in order and, therefore, directed the Income-tax Officer to grant requisite relief to the assessee after verifying the figures and allowed the appeal of the assessee. Upon this an application having been made, the aforesaid question has been referred to this court under section 66(2) of the Indian Income-tax Act, 1922. The facts found in this case lie in a very short compass. These are as follows:

(1) Caustic soda is a chemical;

(2) Such caustic soda is essential in the process of manufacturing paper; it is a raw material needed for the manufacture of paper;

(3) The assessee has obtained a separate licence for the manufacture of caustic soda;

(4) The plant for manufacture of caustic soda had been housed in a separate building;

(5) Previously the assessee used to purchase caustic soda from the market for use in the process of manufacture;

(6) Caustic soda manufactured by the assessee from the plant was used in the manufacture of the paper which is the ultimate product produced by the assessee, and

(7) From the computation placed before the Tribunal, it appears that it was possible to indicate how much capital was employed in the setting up of this plant and what would be the amount of 6 per cent. of the capital for the setting up of the plant though we are, in this reference, not concerned with the correctness or otherwise of the said computation.

4. The relevant portion of section 15C of the Indian Income-tax Act, 1922, provides as follows:

“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 or hotel to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking or hotel, 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 eighteen 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 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:

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.”

5. It is, therefore, essential to answer this question to find out whether any profit or gain is derived from an industrial undertaking which is not formed by splitting up or reconstruction of a business already in existence or by transfer to a new business, of building, machinery or plant. We are not concerned with the other parts of the section. No controversy as to the applicability or non-applicability has been urged in this reference on any other ground. The other conditions stipulated in clauses (ii) and (iii) of sub-section (2) of section 15C must obviously have been fulfilled. The only argument that was urged in this reference was that this undertaking, viz., the undertaking or the plant set up for production of caustic soda, was formed by reconstruction of the business already in existence. It was urged that the assessee's business was production of paper. In doing that business the assessee in the past was buying caustic soda from the market and instead of doing that it is now produced by the assessee in the plant or factory set up for that purpose. It was, therefore, urged that the business had remained the same and as such the only thing that had happened was that there was reconstruction of the business or different method of carrying on the same business. In support of this reliance was placed on a Division Bench decision of this court in the case of Commissioner of Income-tax v. Textile Machinery Corporation. There, it was held that the words “industrial undertaking” in the Indian Income-tax Act, 1922, should be interpreted to mean any venture or enterprise which a person undertook to do and it had relation to some industry or had some industrial consequences. The notion of an undertaking basically meant that it had got to be a concrete and tangible venture in the path of industry to make it an industrial undertaking. In that case the assessee, Textile Machinery Corporation Ltd., was a heavy engineering concern manufacturing boilers, machinery parts, wagons, etc. For the assessment years 1958–59 and 1959–60, the assessee claimed an exemption from tax under section 15C in respect of the profits and gains derived from its steel foundry division and for the year 1959–60 from its jute mill division also. The Income-tax Officer found that the steel foundry division began manufacturing the same castings which it was previously buying from the market, but the castings were merely used by the other existing divisions of the assessee itself, that no profit could be made on such departmental transfers and the assessee being itself a big engineering concern, such expansion of activities was in the normal process of the business which did not constitute a new industrial undertaking within the meaning of section 15C, that raw materials were supplied to the jute mill division by the boiler division and after machining and forging parts were given to the boiler division and that this kind of activity was in the nature of job work, that the sales to outside were only a small proportion, that the jute mill division was merely an expansion of the existing activities in the heavy engineering concern of the assessee and that the assessee was not entitled to relief under section 15C. The appeal to the Appellate Assistant Commissioner was dismissed and he had held that there had only been some reconstruction of the business and that there was no industrial undertaking which was a separate business. The Appellate Tribunal allowed the appeal holding that both the steel foundry division and jute mill division of the assessee were new industrial undertakings because the machinery was new and housed in a separate building and that an industrial licence had to be obtained for manufacturing parts in question and that the existing business of the assessee consisted of manufacturing boilers, wagons, etc., and for that purpose the assessee was purchasing the spare parts, forgings and castings from outside, that the business of the new industrial undertaking was to manufacture spare parts and this could not be said to be formed out of the existing business, and that even though the manufactured products of the new industrial undertaking were mostly used in the assessee's other business of manufacturing wagons, etc., the element of profit was there and the extent of the same could be ascertained as the assessee was maintaining separate books of account. It was held by the High Court on a reference that on an interpretation of section 15C of the Act, the industrial undertaking must be such where some capital was employed and which was separate to the extent as to show how much a six per cent. return on it would be in order to merit or qualify for the exemption from tax under section 15C. In other words, this industrial undertaking should not be such where it would be difficult to find the capital employed or where it was part and parcel of the general capital employed otherwise by the assessee. This employment of the capital need not be formal in the sense of actually raising the capital and putting it into the new industrial undertaking, but, nevertheless, there should be a definite employment of capital in that undertaking and that is one of the requirements of the section. The idea of this factor of capital being employed in that undertaking to qualify for exemption under section 15C was to introduce a kind of separateness to that undertaking which could be taken by itself apart from the general context of the business or industry of the assessee. An industrial undertaking which was formed by splitting up or reconstruction of the business already in existence was not within the exemption. The exemption granted was also intended to be given to an existing assessee who had established a new undertaking. The Division Bench further held that the Tribunal was not right in holding that the steel foundry division and the jute mill division set up by the assessee-company were industrial undertakings to which section 15C of the Act applied. The goods which the steel foundry division and jute mill division began producing for the assessee were also previously used by the assessee in its business but these were purchased from outside and this purchase from outside was replaced by production or manufacture from within the assessee's own business. This change of purchasing one's own goods systematically used in the existing business instead of buying these from ouside would only be a reconstruction of business already in existence. The expression business “already in existence”, in the context, necessarily meant and included the purchase of goods in the outside market for the simple reason that these were used for the business of the assessee. It was a part of the business of the assessee to run its business and for that purpose, if necessary, to get its goods even from outside. The business, therefore, remained the same. The method of procurement of the goods had changed. Instead of procuring from outside, these were being manufactured from within by the assessee itself under those two divisions. The business did not only mean actual production of the goods in question, but also included the business of getting the goods even from outside so long as those goods had all along been employed in the existing business of the assessee. The expression “already in existence” must be given its ordinary meaning commercially. The business already in existence in this case was the business of heavy engineering and in particular the business of manufacturing wagons and boilers. In doing that business, castings and forgings were necessary ingredients. The assessee had to have those castings and forgings but it bought them from outside. In so far as it started producing and manufacturing these, the assessee was doing the same thing which was only a reconstruction of the business already in existence. The assessee had not shown that the number of persons employed in the business or the percentage of profits fell within the limits specified in section 15C. The newness of the machinery in the steel division and the jute mill division could not by itself make them new industrial undertakings. Separate housing of, and separate accounts for, the steel foundry division and jute mill division might be parts of reconstruction of the same business and did not necessarily indicate a new industrial undertaking. The grant of a special licence for the steel foundry division did not make it an industrial undertaking to qualify for exemption from the tax under section 15C, because the licence was for expansion of the existing industrial undertaking and the licence did not cover the jute mill division.

6. Counsel for the revenue contended that this was an authority for the proposition that, where there was a replacement of purchase by setting up of a unit or factory, such a process of replacement would come within the meaning of reconstruction as contemplated in clause (i) of sub-section (2) of section 15C of Indian Income-tax Act, 1922. It was urged, therefore, in the facts of the instant case that it was covered by the decision in the case of Commissioner of Income-tax v. Textile Machinery Corporation. It is, however, necessary to remember that the case was not dealing with the question of raw material. The Division Bench observed at page 443 of the report that the theory of raw material being processed into a finished product taking analogous theory of primary product, intermediary product and end product was in the view of the Division Bench not relevant and appropriate in the facts of the case before the Division Bench. In this connection, the Division Bench referred to the decision in the case of Anil Starch Products Ltd. v. Commissioner of Income-tax [1966] 59 I.T.R 514 Guj.., and observed that the starch was a raw material for producing dextrose and the court further observed that casting and forging would not be described as raw materials for boilers and wagons. The Division Bench also noted the decision of the Supreme Court in the case of Tata Iron & Steel Co. Ltd. v. State of Bihar [1963] 48 I.T.R S.C 123, and observed that one could understand Tata's case as raw material for the finished product but that analogy did not apply to the case before the Division Bench. The Division Bench observed the limits of the application of the decision at pages 439-40 as follows:

“At the same time it would be necessary to indicate certain other aspects of the interpretation of the expression ‘business already in existence’ in section 15C(2)(i) of the Income-tax Act, 1922. We shall call this aspect as the feeder principle or the canopy principle. In the course of argument it was suggested by the learned counsel for the revenue that any industrial undertaking which really was intended to feed the main stream of business of the assessee would be within the expression ‘business already in existence’. It was also argued by the learned counsel for the revenue on the same strain that when the assessee is a company carrying on business, it must carry on business within its charter of memorandum and articles of association. The far-reaching implication of this argument is that the canopy of charter spreads so that no industrial undertaking started by such a company can at all claim exemption because it is only carrying on business within its charter of incorporation and, therefore, is a ‘business already in existence’ within the meaning of section 15C. We have no hesitation in rejecting these two arguments advanced on behalf of the revenue in their extreme form. No doubt, an assessee which is a company doing its business under its memorandum of objects and articles of association has to do its business within its charter but then the charter contains usually numerous objects in the memorandum and the articles and it is common knowledge that such a company often carries on business only in one or two or even more objects of the company and not in other objects stated in the memorandum of articles. Therefore, if it starts an industrial undertaking, no doubt within its objects and charter, then it can, in an appropriate case, claim exemption under section 15C of the Indian Income-tax Act, 1922, and say that it is not business already in existence but it is permitted by the charter but which had not been undertaken so far but is now being undertaken. For instance, in this very case in the memorandum of objects and articles of association clause (3)(i) describes a number of objects by which a company is authorised to carry on business, namely, ‘to carry on the business of manufacturing machinery, engines, turbines, tanks, ships, bodies, tools, implements, accessories, equipments and other materials and products in India and elsewhere’. Now, this assessee, the Textile Machinery Corporation, is not manufacturing ships at the moment. Suppose it does, it will be within its objects and in that event if it otherwise satisfies the requirements of the statute then such a new industrial undertaking of ship-building, within the charter of objects, will be entitled to claim exemption under section 15C of the Indian Income-tax Act, 1922. No doubt an assessee, which is a company doing business under its charter of incorporation, when it wants to establish a new industrial undertaking, it must be well within its objects, otherwise such an industrial undertaking will be ultra vires the company.

While, therefore, these extreme propositions advanced by the learned counsel for the revenue cannot be accepted, yet there is a residue of consideration which may be effective in appropriate cases and the present case is one such appropriate case. The expression ‘business already in existence’ must be given its ordinary commercial meaning. The business already in existence in this case is the business of heavy engineering and in particular the business of manufacturing wagons and boilers. In doing that business castings and forgings are necessary ingredients. In fact, the assessee had to have these castings and forgings but they bought them from outside. In so far as they started producing and manufacturing themselves, the assessee, in this case, therefore, was doing something which was reconstruction of the business already in existence and to that extent the feeding principle may be invoked but no more, and to that extent the canopy principle may be invoked and no more and, subject to the limitation of these principles of feeder or canopy as we have indicated, each case has to be judged on its own facts whether the business was already in existence or not.”

7. Therefore, it appears to us that it would not be correct to say that the Division Bench was laying down a proposition that in case of raw material which is used for finished products if an assessee sets up an independent plant or machinery for the production of that raw material that by itself would not merit exemption under section 15C of the Indian Income-tax Act, 1922. This question was also considered by another decision of this court in the case of Commissioner of Income-tax v. Indian Aluminium Co. Ltd. There it was held that for the purpose of getting advantage of section 15C, the sine qua non was that the assessee had established or commenced a new undertaking, which might either take the shape of reconstitution, reformation, reincorporation, on the one hand, or a new production unit or separate business, on the other. It was observed that the separate business need not be a different kind of business. The commodity which the original produced, manufactured or sold might be a relevant factor in finding out whether the subsequent business was an extended business or an independent business. The court referred to the legal meaning of the term “reconstruction” and observed that it was a mixed question of law and fact and it would be incorrect to say that reconstruction must include or exclude all kinds of expansion irrespective of the nature, constitution or character of subsequent undertaking. The Madras High Court in the case of Rajeswari Mills Ltd. v. Commissioner Of Income-Tax, Madras. had also considered this question. There the assessee-company was incorporated in 1946 to carry on business in cotton, jute, yarn, silk, cloth, etc. Machinery for the weaving of silk cloth was purchased and silk weaving was commenced on January 12, 1949. This business was stopped in December, 1949. The assessee had put up a separate building in March, 1950, and installed machinery for the manufacture of cotton yarn and the production was commenced on March 24, 1951. There were losses in subsequent years and such losses carried forward to assessment year 1956–57, the year of account being the year ending December 31, 1955, amounted to Rs. 2,89,197. In this accounting year the company earned an income of Rs. 3,84,684 from cotton spinning and the difference of Rs. 95,487 was taken as the assessable profits. The assessee claimed that the cotton spinning industry which was commenced only in 1952–53, was a distinct undertaking and under section 15C of the Income-tax Act, the income of Rs. 95,487 was exempt from tax, but the claim was disallowed on the ground that spinning was not a distinct industrial undertaking but only a section of the textile industry and the five years of exemption under section 15C had to be calculated from 1949. It was held that the spinning operations which were commenced in the assessment year 1951–52 were an industrial undertaking different from the weaving operations which were commenced in January, 1949, and discontinued in December, 1949, and as the spinning operations were commenced only in 1951–52, and five years had not expired therefrom, the assessee was entitled to exemption under section 15C. Solely for the reason that a spinning mill and weaving mill related to the same part of what might be called the textile industry, it did not follow that the spinning mill would not be a separate industrial unit. It was also held that the company was formed with the object of setting up both lines of business did not necessarily lead to the conclusion that the subsequent setting up of the spinning mill was the same undertaking as that which was started in 1949.

8. The expressions “new industrial undertaking” and “splitting up or reconstruction of business already in existence” must be understood in broad commercial sense from a commonsense point of view. In order to appreciate the meaning of these expressions one should bear in mind the purpose of section 15C of the Act—to encourage setting up of new industries. The other conditions in clause (iv) of sub-section (2) of section 15C are also significant. Reconstruction of the business or splitting up of the business already in existence must be in relation to the new industrial undertaking. Further, the new industrial undertaking must not be by transferring building, plant or machinery of the existing business. Sub-section (1) requires separate capital but not new or different capital. But whether a new industrial undertaking is entitled to exemption under section 15C of the Act must depend upon the facts and circumstances of each case. We have set out the essential facts of this case. It was the case of an assessee beginning to produce raw materials of a type which was capable of being available in the market independently and which was also capable of being sold in the market and the assessee has set up a new and separate unit for the same in a separate building and has obtained a separate licence for it. It must be noted that setting up of a factory or a plant for the manufacture of caustic soda was not an essential or ingredient part for the setting up of the plant and machinery for paper manufacture. It is true that caustic soda is essential for the manufacture of paper but setting up of a plant for the manufacture of caustic soda is not an essential ingredient for paper manufacture. Furthermore, it is to be noted that this plant has been set up for production of raw material. Thirdly, it has to be noted that this raw material has an independent market both to be purchased and to be sold apart from the production of paper. It was pointed out that if it was not held as a new industrial undertaking simply because the assessee was using this in the manufacturing process then it would lead to a strange result. If the assessee had set up this under taking for production of caustic soda and had sold its produce in the market and had purchased this caustic soda from the market then this new venture of selling caustic soda would be entitled to exemption under section 15C but would lose such exemption simply because the assessee was using the same for its own products. Such an anomalous result, if possible, should be avoided. Furthermore, it appears to us that the expressions “splitting up or reconstruction of business already in existence” should be given their ordinary commercial meaning. Judged from that point of view it appears to us that, as a new plant was set up in a new building not by re-fitting any existing plant or machinery for production of a raw material which can be continued irrespective of paper manufacturing business, the assessee in this case was entitled to the benefit of section 15C of the Act.

9. There is, however, another decision of the Delhi High Court to which our attention was drawn in the case of The Commissioner Of Income-Tax, Delhi… v. Naya Sahitya, Delhi…. There, prior to the assessment year 1961–62, the assessee was getting its books printed in some other printing press. The assessee installed a new printing press for the first time in the accounting period relevant to the assessment year 1961–62, and printed its books in the new press. The assessee satisfied clause (iii) of section 15C(2) of the Indian Income-tax Act, 1922, and the question was whether the assessee's business of printing and publishing books was a newly established industrial undertaking and entitled to exemption from tax under section 15C(2). It was held that since the assessee was already carrying on business of publishing books in the earlier years and the only change that took place in the relevant year was that, instead of getting its books printed in some other press, the assessee printed them in its own press, that was a case of an industrial undertaking formed by the reconstruction of a business already in existence and the exemption under section 15C(2) was not available to the assessee. It seems that the Division Bench of the Delhi High Court had proceeded on the basis that the business of printing and publishing was an integral part of the business. If that be the principle upon which the Delhi High Court had proceeded then of course the facts of that case will be entirely different from the facts of the instant case. But, if the principle be that production of something which was necessary for the production of the ultimate goods and the production is taken up by a separate and independent plant and unit, even then it would be reconstruction, with great respect, we are unable to agree.

10. For the reasons mentioned hereinbefore, the question referred to this court must, therefore, be answered in the affirmative and in favour of the assessee. In the facts and circumstances of the case, there will be no order as to costs.

Hazra, J.:— I agree.

11. Question answered in the affirmative.