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  • N.U. RavalR. P. Bhatt
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  • S.B. MajumdarB.j. Diwan
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  • N.U. RavalR. P. Bhatt
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Smart Summary

Structured Summary of the Opinion (Divan CJ)

Factual and Procedural Background

The assessee is a limited company engaged in manufacturing ball-bearings and other machinery used in textile spinning departments. The assessment year in question is 1962-63 (previous year ending 30 September 1961). The assessee filed a revised return on 15 January 1963 claiming relief under section 84 of the Income-tax Act, 1961. The Income-tax Officer (ITO) denied the claim, holding that the assessee was not a "new industrial undertaking" within the meaning of section 84, and relied on a prior decision of the Income Tax Appellate Tribunal (Tribunal) for the assessee's assessment year 1961-62.

The assessee appealed, and the Appellate Assistant Commissioner (AAC), following the Tribunal's decision for the earlier year, held that relief under section 84 was admissible and directed the ITO to allow the relief. The revenue appealed to the Tribunal. The Tribunal, after being shown the Tribunal's earlier decision for 1961-62 (Bombay Bench) and noting similar facts for subsequent assessment years (1963-64, 1964-65 and 1965-66), upheld the AAC's decision. At the instance of the revenue the following question was referred to this court for opinion:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to the relief under section 84 of the Income-tax Act, 1961, as claimed by it?"

The primary factual dispute relevant to section 84 concerned that the assessee had taken on hire/lease a portion of a Bank of Baroda building for office purposes and had rented a portion of Laxmi Woollen Mills' estate for its factory; both premises had been used by other persons prior to the assessee's occupation. It was common ground that the plant and machinery installed by the assessee were new.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to relief under section 84 of the Income-tax Act, 1961 for assessment year 1962-63.
  2. Whether the fact that premises (office and factory shed) occupied by the assessee had previously been used by other persons disqualifies the assessee under clause (ii) of sub-section (2) (as then framed) of section 84, which excludes undertakings "formed by the transfer to a new business of a building, machinery or plant previously used for any purpose".
  3. How the decisions of the Supreme Court (notably Textile Machinery Corporation Ltd. v. CIT) and subsequent legislative history should be applied in interpreting the negative conditions in section 84 (and corresponding provisions in earlier/later statutes) in this factual context.

Arguments of the Parties

Revenue's Arguments (as recorded)

  • The revenue (represented by Mr. Raval) contended that the assessee contravened condition No. (ii) of sub-section (4) of section 84 as it then stood because the assessee had taken on hire/lease premises (office and shed) which had been previously used by other persons. This, the revenue argued, disqualified the assessee from claiming relief under section 84.
  • Mr. Raval relied on a number of High Court decisions as supporting authorities for this contention, including the Bombay High Court decision in CIT v. Suessin Textiles Ball Bearing & Products (P.) Ltd. [1979] 118 ITR 45 (which related to the assessment year 1961-62 of the same assessee), and earlier Bombay High Court authority in Capsulation Services Pvt. Ltd. v. CIT [1973] 91 ITR 566.
  • He also cited decisions of several other High Courts (Punjab & Haryana, Punjab (Delhi Bench), Assam, Madras, Bombay) — including Phagoo Mal Sant Ram v. CIT [1969] 74 ITR 734; Webbing and Belting Factory P. Ltd. v. CIT [1961] 43 ITR 234; Commissioner Of Income-Tax, Patiala v. Hindustan Milk Food Manufacturers Ltd. [1974] 96 ITR 278; CIT v. Kopran Chemical Co. Ltd. [1978] 112 ITR 893; Steelsworth Ltd. v CIT [1968] 69 ITR 366; Commissioner Of Income-Tax, Madras v. Fenner Cockill Ltd. [1969] 74 ITR 394 — to support the narrower construction.
  • Mr. Raval also relied on two decisions of this High Court (Saurashtra Cement & Chemical Industries Ltd. v. CIT [1980] 123 ITR 669 and Commissioner Of Income-Tax, Gujarat-I v. Satellite Engineering Ltd. [1978] 113 ITR 208) as additional support for the revenue's position or procedural consequences arising from earlier years.

Assessee's Arguments (as recorded)

  • The assessee claimed relief under section 84 in its revised return and maintained that it had established a new industrial undertaking by installing new plant and machinery.
  • It was accepted (and not disputed) that the plant and machinery were new. The assessee's position, as reflected in the orders allowing relief, was that taking premises on lease or rented premises which had been previously used by other persons did not disqualify it from relief under section 84 in the circumstances of this case.
  • The AAC and the Tribunal (following prior favourable findings in related years) had held that relief under section 84 was admissible to the assessee and directed the ITO to allow the relief; the Tribunal confirmed that view for the year 1962-63.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195 (SC) Interpreting section 15C (1922 Act) / section 84 (1961 Act): negative and positive aspects; requirement that a new industrial undertaking not be formed by splitting up or reconstruction "of the assessee"; emphasis on substantial new capital and that the new undertaking must be a separate and distinct unit producing results attributable to new capital. The court treated this Supreme Court decision as determinative of the correct interpretative approach. It read into clauses (i) and (ii) the requirement that "splitting up" or "reconstruction" must relate to the assessee's own pre-existing business, and relied on the decision to reject the narrower views of some High Courts.
CIT v. Suessin Textiles Ball Bearing & Products (P.) Ltd. [1979] 118 ITR 45 (Bombay HC) Applied by the ITO in denying relief for assessment year 1961-62; represents a contrary High Court view relied upon by the revenue. The court reviewed this decision and concluded that it had overlooked the full impact of the Supreme Court's decision in Textile Machinery Corporation's case. The present court declined to follow the Bombay High Court's approach in this instance.
Nagardas Bechardas & Brothers P. Ltd. v. CIT [1976] 104 ITR 255 (Guj) Explained the object of section 15C/section 84: encouragement of new industrial undertakings; rejected narrow construction that would defeat legislative object; asked whether the new undertaking is separate and distinct in ordinary commercial meaning. The court cited and relied on the reasoning in this decision as consistent with the Supreme Court's approach and supportive of allowing relief where a genuinely new undertaking is established.
Commissioner Of Income-Tax v. M/s Ganga Sugar Corp. [1973] 92 ITR 173 (Delhi HC) Held that reconstruction concept would not be attracted where a company already running one industrial unit sets up another; the new unit retains separate identity. The court noted this decision as one of the authorities approved by the Supreme Court and used it to support the proposition that establishing a new unit by an existing industrial company does not itself defeat the relief.
In re South African Supply and Cold Storage Co. [1904] 2 Ch 268 (Ch D) Definition/illustration of "reconstruction" in a company context: substantially the same business and persons continue, albeit in altered form. The Supreme Court's approval of this passage was adopted to interpret "reconstruction" in the tax context as meaning reconstruction of the assessee's own existing business and personnel; the court relied on that interpretive guidance.
Monogram Mills Co. Ltd. v. Commissioner Of Income-Tax, Gujarat (Income-tax Reference No. 174 of 1975) [1982] 135 ITR 122 (Guj) Considered effect of subsequent legislative exposition (amendments and provisos) on interpretation of negative condition concerning rented premises. The court followed the reasoning in Monogram Mills to support the conclusion that clause (ii) had not been contravened in the present case and that relief was therefore available.
Capsulation Services Pvt. Ltd. v. CIT [1973] 91 ITR 566 (Bombay HC) Earlier Bombay High Court interpretation of section 15C(2)(i) relied on by the Bombay High Court in the Suessin Textiles case. The court observed that the Bombay High Court had followed Capsulation Services in Suessin, but concluded that Capsulation's approach had been overtaken/qualified by the Supreme Court decision in Textile Machinery Corporation's case.
Phagoo Mal Sant Ram v. CIT [1969] 74 ITR 734 (Punjab & Haryana HC) One of the High Court decisions cited by the revenue in support of a narrower construction. The court noted this authority among several others cited for a contrary view, but found the Supreme Court authority and subsequent legislative history to be controlling.
Webbing and Belting Factory P. Ltd. v. CIT [1961] 43 ITR 234 (Punjab HC, Delhi Bench) Another High Court decision cited by the revenue. Noted by the court as part of the contrary body of authority, but not followed because of authoritative guidance from the Supreme Court.
Commissioner Of Income-Tax, Patiala v. Hindustan Milk Food Manufacturers Ltd. [1974] 96 ITR 278 (Punjab & Haryana HC) Cited by the revenue among contrary High Court authorities. Not followed for reasons explained — Supreme Court precedent and legislative history were decisive.
CIT v. Kopran Chemical Co. Ltd. [1978] 112 ITR 893 (Bombay HC) Cited by the revenue. Not followed; the court relied on Textile Machinery decision instead.
Steelsworth Ltd. v. CIT [1968] 69 ITR 366 (Assam HC) Cited by the revenue. Not followed for the reasons given in the opinion (Supreme Court's decision and legislative history).
Commissioner Of Income-Tax, Madras v. Fenner Cockill Ltd. [1969] 74 ITR 394 (Madras HC) Regarded reconditioning of machinery; cited by the revenue to support its submissions. The court noted the citation but held that Textile Machinery Corporation's decision controls the proper principles of interpretation.
CIT v. T. Maneklal Mfg. Co. Ltd. [1978] 115 ITR 725 (Bombay HC) Emphasised desirability of uniform construction of an all-India statute and that other High Courts' views should be followed unless overriding reasons exist. The court agreed with the sentiment but held that the Supreme Court's Textile Machinery decision supplied the overriding reason to take a different view from the Bombay High Court in this instance.
CIT v. Sainthia Rice and Oil Mills [1971] 82 ITR 778 (Calcutta HC) Cited as taking the same view of section 15C as adopted in the present opinion. Noted as an authority which aligns with the approach adopted by this court in the present case.
Chandulal Harjiwandas v. CIT [1967] 63 ITR 627 (SC) Principle that a provision should be interpreted so as not to nullify the object behind the section. Relied upon to support the purposive approach to interpreting section 84/section 15C in order to preserve the legislative object of encouraging new industrial undertakings.
Saurashtra Cement & Chemical Industries Ltd. v. CIT [1980] 123 ITR 669 (Guj) Division Bench view on continuation of relief in subsequent years once granted with reference to year of installation. The court held that Saurashtra Cement's case did not apply on these facts because relief had not been granted in the year of installation (per Bombay High Court decision for 1961-62).
Commissioner Of Income-Tax, Gujarat-I v. Satellite Engineering Ltd. [1978] 113 ITR 208 (Guj) Holds that relief not granted in an earlier year may be claimed and, if justified, granted in a subsequent year; relief must be computed afresh each year. The court applied Satellite Engineering to conclude that relief could be claimed for assessment year 1962-63 and subsequent years even if not granted in the year of installation, and therefore the assessee could seek relief for 1962-63.

Court's Reasoning and Analysis

The court's analysis proceeded in a sequence that reflects statutory construction, purposive interpretation and attention to legislative history:

  1. Purpose and Context: The court began by noting the object behind section 15C (1922 Act), section 84 (1961 Act) and section 80J (successor) — namely, a scheme of tax holiday to encourage the setting up of new industrial undertakings. The statutory provisions should be interpreted in light of that objective so as not to nullify it (citing Chandulal Harjiwandas v. CIT).
  2. Reading Negative Conditions: The court examined the negative conditions in subsection (2) (and corresponding sub-section (4) language) which exclude undertakings formed by (i) splitting up of a business already in existence, (ii) reconstruction of a business already in existence, and (iii) by transfer to a new business of building, machinery or plant used in a business carried on before a specified date. Relying on Textile Machinery Corporation Ltd. v. CIT (SC), the court read into clauses (i) and (ii) the words "of the assessee", i.e., those clauses apply to splitting up or reconstruction of the assessee's own pre-existing business.
  3. Meaning of "Reconstruction": The court adopted the exposition approved in Textile Machinery (which in turn quoted Buckley J. in In re South African Supply and Cold Storage Co.) — "reconstruction" connotes substantially the same business and substantially the same persons continuing the business in altered form. Consequently, reconstruction refers to the assessee's own business being reconstructed rather than the more general notion of any prior business in the premises.
  4. Application of Noscitur a Sociis to Clause (iii): The court reasoned that clause (iii) (transfer to a new business of building, machinery or plant previously used) must be read in the same contextual sense — that "transfer to a new business" and "the business which was being carried on before April 1, 1948" refer to the assessee's own business. The context and surrounding negative conditions (all directed at preventing claims where the new undertaking is in substance merely the old business of the assessee) support this reading.
  5. Practical and Commercial Considerations: The court observed the practical difficulty in metropolitan areas of finding premises that were never previously used for office or industrial purposes. It concluded that, as a matter of commonsense and commercial expediency, a new undertaking established by an assessee in rented premises previously used by others should not be automatically disqualified under clause (ii)/(iii).
  6. Legislative History: The court reviewed legislative amendments and provisos (including the second proviso added with effect from 1 April 1967 deeming the condition in clause (ii) not to be contravened if the undertaking is set up in rented premises, and later changes in section 80J omitting references to building). The subsequent legislative changes were taken as reinforcing the interpretive conclusion the court reached.
  7. Precedent and Weight of Authorities: The court emphasized that the Supreme Court's decision in Textile Machinery Corporation's case supplies the correct principles governing interpretation. While several High Court decisions supported a contrary, narrower view, the court held that those decisions had overlooked the controlling Supreme Court authority and the later legislative developments. The court followed authorities (including Nagardas Bechardas and Monogram Mills) that aligned with the purposive approach.
  8. Application to Facts: Applying these interpretive conclusions to the facts found by the Tribunal — that plant and machinery installed by the assessee were new and that the assessee had invested capital in a new undertaking — the court concluded that prior use of the rented premises by other persons did not disqualify the assessee from relief under section 84. The Tribunal's decision (confirming the AAC) that the assessee was entitled to relief under section 84 was correct.

Holding and Implications

Holding: The court answered the referred question in the affirmative — in favour of the assessee and against the revenue. It held that, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to the relief under section 84 of the Income-tax Act, 1961, as claimed. The Commissioner was ordered to pay the costs of the reference to the assessee.

Implications:

  • Direct effect: The Tribunal's and AAC's decisions in favour of the assessee for assessment year 1962-63 are upheld; the assessee is entitled to the relief claimed under section 84 for the year in question, despite having taken premises on lease/rent that were previously used by other persons.
  • Interpretive guidance: The opinion applies and emphasizes the Supreme Court's interpretive approach in Textile Machinery Corporation's case — reading the negative conditions in the relevant provision as directed at the assessee's own pre-existing business and adopting a purposive construction oriented to encouraging new industrial undertakings. The court also relied on subsequent legislative changes as reinforcing that approach.
  • Precedential status: The court declined to follow contrary High Court authorities (notably the Bombay High Court decision in Suessin Textiles for 1961-62) to the extent they conflict with the Supreme Court's approach; however, the decision is presented as an application and reinforcement of existing Supreme Court authority and legislative history rather than as a pronouncement creating an unrelated new legal principle.
Show full summary ...

    Commissioner of Income-tax v. Suessin Textile Bearing Ltd.

    Divan CJ.—In this case, at the instance of the revenue, the following question has been referred to us for our opinion :

    "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to the relief under section 84 of the Income-tax Act, 1961, as claimed by it?"

    The facts leading to this reference are that the assessee is a limited company and is carrying on the business of manufacturing ball-bearings and other machineries used in textile spinning deparments. The assessment year under consideration is 1962-63, the previous year being the year ending September 30, 1961. The assessee claimed relief under section 84 of the Income-tax Act, 1961, in the revised return which it filed on January 15, 1963. The ITO negatived the claim by holding that the assessee could not be termed as a new industrial undertaking within the meaning of section 84 of the Income-tax Act, 1961. In coming to this decision, he also relied on the decision of the Tribunal for the assessment year 1961-62 in the case of this very assessee.

    The assessee took the matter in appeal and the AAC following the decision of the Tribunal for the earlier year held that relief under section 84 was admissible to the assessee. He, accordingly, directed the ITO to allow the necessary relief as claimed by the assessee under section 84. Thereafter, the matter was taken in appeal before the Tribunal by the revenue and at that stage, the attention of the Tribunal was drawn to the decision of the Bombay Bench of the Tribunal in the case of this very assessee for the assessment year 1961-62. This decision was also followed by the Tribunal in respect of this very assessee for the assessment years 1963-64, 1964-65 and 1965-66. It was pointed out to the Tribunal that the facts stated in the order of the Tribunal relating to the assessment year 1961-62 would govern the facts of the case in the instant case also and, following that decision, the Tribunal upheld the decision of the AAC. Thereafter, at the instance of the revenue, the question hereinabove set out has been referred to us.

    It may be pointed out that the reference against the decision of the Bombay Bench of the Tribunal for the assessment year 1961-62 was made to the Bombay High Court and the decision of the Bombay High Court is to be found in CIT v. Suessin Textiles Ball Bearing & Products (P.) Ltd. [1979] 118. ITR 45. We are informed that the references against the decision of the Tribunal for the assessment years 1963-64, 1964-65 and 1965-66 are pending. The main ground why the ITO declined to grant relief under section 84 to the assessee was that the assessee had taken on hire a building for office purposes and it had also taken on rent a shed for installing machinery and that both the office space and the shed where the machinery was installed had been used by other persons for their own purposes prior to the renting of these spaces—office space and the shed—by the assessee.

    The Tribunal has pointed out in its order that the fact that the plant and machinery were new has not been disputed. It is also common ground that the assessee-company took on lease for its office purposes a portion of the Bank of Baroda building which was earlier thereto used by someone else for the purposes of office. Similarly, it was also common ground that the assessee took a portion of Laxmi Woollen Mills Estate where it has set up the factory. The said portion was earlier used by someone else for the purpose of his business and it is on these facts that the question arises whether the assessee is disqualified for claiming relief under section 84 of the Income-tax Act, 1961.

    Section 84, as it stood at the relevant time, read as follows:

    "Save as otherwise hereinafter provided, income-tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking or business of a hotel or from any ship, to which this section applies, as does not exceed six per cent, per annum on the capital employed in such undertaking or business or ship, computed in the prescribed manner :

    Sub-section (2) of this section provided :

    "This section applies to any industrial undertaking which fulfils all the following conditions, namely :

    (i)it is not formed by the splitting up, or the reconstruction of, a business already in existence ;

    (ii)it is not formed by the transfer to a new business of a building, machinery or plant previously used for any purpose... "

    Clauses (iii) and (iv) of sub-section (2) of section 84, as it stood then, are not material for our purposes. It may be pointed out that with effect from April 1, 1967, that is, for the assessment year 1967-68 onwards, the second proviso to sub-section (2) of section 84 was in these terms :

    "Provided further that the condition in clause (ii ) shall be deemed not to have been contravened if the industrial undertaking is set up in rented premises."

    It may further be pointed out that sections 81 to 85C were deleted by the Finance (No. 2) Act of 1967, with effect from April 1, 1966, and in place of section 84, section 80J was enacted providing for the same type of relief but instead of the word " relief " the word " deduction " was used in section 80J and the second proviso to sub-section (4) of section 80J provided :

    "…………where any building or any part thereof previously used for any purpose is transferred to the business of the industrial undertaking, the value of the building or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking."

    Thereafter, section 80J was further amended with effect from 1st April, 1976, and after that amendment, condition No. (ii) read :

    " It is not formed by the transfer to a new business of machinery or plant previously used for any purpose."

    and reference to " building " was omitted altogether. Formerly, the words were " a building taken on rent or lease " which were deleted by the amendment which came into effect from April 1, 1976.

    As has been pointed out by the Supreme Court in Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195, the provisions of section 15C were enacted after the Second World War in order to encourage setting up of new industrial undertakings. Section 15C was enacted and inserted in the Indian Income-tax Act, 1922, to encourage setting up of new industrial undertakings by offering tax incentives and the period of tax incentives was increased from time to time and the period to be counted was from April 1, 1948. Section 15C provided for a fractional exemption from tax of profits of a newly established undertaking for five assessment years as specified therein and this provision extended the benefits to the actual manufacture or production of articles commencing from April 1, 1948. After the country had gained independence in 1947, it was most essential to give fillip to trade and industry from all quarters. That seems to be the background for the insertion of section 15C.

    It has also been stated that section 15C of the Act of 1922, section 84 of the Act of 1961 and section 80J, which has now replaced section 84, were all parts of the scheme of tax holiday to new industrial undertakings, and, in our opinion, unless this object of encouraging the setting up of new industrial undertakings by giving tax relief with reference to the investment of capital in the new business is borne in mind, it is not possible to interpret the conditions which have been laid down in section 15C and which were subsequently laid down by section 84, sub-section (4). Section 84(4) is equivalent to section 15C(2) of the Act of 1922. At p. 202 of the report in Textile Machinery Corporation's case [1977] 107 ITR 195 , the Supreme Court pointed out :

    "Sub-section (2) of section 15C has a negative as well as a positive aspect. Negatively, the new industrial undertaking of the assessee should not be formed—

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

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

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

    The Supreme Court agreed that it was not possible to exclude any new industrial undertaking other than the three categories mentioned above. The case before the Supreme Court in Textile Machinery Corporation's case [1977] 107 ITR 195 was of type No. (2) mentioned above, namely, that the new industrial undertaking of the assessee should not be formed by the reconstruction of a business already in existence and in that context it mentioned positively that the new industrial undertaking must produce result, that is to say, it has to manufacture or produce articles at any time within a period of 13 years from April 1, 1948. The further requirement under sub-section (2) is with regard to the personnel in the undertaking, namely, that ten or more workers have to work in the manufacturing process carried on with the aid of power or twenty or more workers have to carry on work without the aid of power. The above element with regard to the number of workers engaged in the undertaking would go to show that even small industrial undertakings, newly started, are within the exemption clause, where, for example, twenty workers may complete the industrial process without the aid of power. There is no controversy about the positive aspect. At p. 203, Goswami J., speaking for the Supreme Court, observed :

    "Again the new undertaking must not be substantially the same old existing business. The third excluded category mentioned above is significant. Even if a new business is carried on but by piercing the veil of the new business it is found that there is employment of the assets of the old business, the benefit will not be available. From this it clearly follows that substantial investment of new capital is imperative. The words ' the capital employed ' in the principal clause of section 15C are significant, for, fresh capital must be employed in the new undertaking claiming exemption. There must be a new undertaking where substantial investment of fresh capital must be made in order to enable earning of profits attributable to that new capital... Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter, to earn benefit from the exemption of tax liability under section 15C. Sub-section (6) of the section also points to the same effect, namely, production of articles. The answer, in every particular case, depends upon the peculiar facts and conditions of the new industrial undertaking on account of which the assessee claims exemption under section 15C. No hard and fast rule can be laid down. Trade and industry do not run in earmarked channels and particularly so in view of manifold scientific and technological developments. There is great scope for expansion of trade and industry. The fact that an assessee by establishment of a new industrial undertaking expands his existing business, which he certainly does, would not, on that score, deprive him of the benefit under section 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business."

    Thus, when it came to construe conditions (i) and (ii) out of the three conditions, the Supreme Court read into those conditions that the new industrial undertaking must not be formed by the splitting up of the business of the assessee already in existence nor must it be formed by reconstruction of the business of the assessee already in existence. The words "of the assessee" have been read into this section by the Supreme Court in order to give effect and substance to the provisions of the section and to interpret the section in the light of the object with which the section was enacted. So far as the word " reconstruction " was concerned, the Supreme Court approved of the following passage from the decision of Buckley J., in In re South African Supply and Cold Storage Co. [1904] 2 Ch 268 (Ch D) in a company matter (p. 205 of 107 ITR):

    " 'What does "reconstruction" mean ? To my mind it means this. An undertaking of some definite kind is being carried on, and the conclusion is arrived at that it is not desirable to kill that undertaking, but that it is desirable to preserve it in some form, and to do so, not by selling it to an outsider who shall carry it on—that would be a mere sale—but in some altered form to continue the undertaking in such a manner as that the persons now carrying it on will substantially continue to carry it on. It involves

    I think, that substantially the same business shall be carried on and substantially the same persons shall carry it on. But it does not involve that all the assets shall pass to the new company or resuscitated company, or that all the shareholders of the old company shall be shareholders in the new company or resuscitated company. Substantially the business and the persons interested must be the same .' "

    Therefore, so far as the second condition mentioned at page 202 of the report in Textile Machinery Corporation's case [1977] 107 ITR 195 (SC) is concerned, by the process of interpretation of the phrase "reconstruction of business" it means reconstruction of the existing business of the assessee because "reconstruction" connotes that substantially the same business and the same persons interested are continuing the business though in a different form. In the same manner, when the existing business of an assessee is split up, then only it can be said that a new industrial undertaking has been formed by the splitting up of the business of the assessee which is already in existence. It is only in cases where the business has been formed by the splitting up of the business of the assessee which is already in existence or by reconstruction of the same business as before and by the same personnel but in a different form that it can be said that a new industrial undertaking was formed by the splitting up or reconstruction of the business already in existence. It is in this sense that the two negative conditions mentioned by the Supreme Court operate. The question then arises whether, in the third negative condition, the words, "by the assessee or of the assessee" should or should not be read while interpreting the third condition, the third condition being that the industrial undertaking should not be formed by transfer to a new business of building, machinery or plant used in a business which was being carried on before April 1, 1948. Now, it is obvious that "transfer to a new business" in this context must be transferred to the new business of the assessee and "the business which was being carried on before April 1, 1948" must mean the business of the assessee. The principle of noscitur a sociis would apply so far as the interpretation of negative condition No. 3 mentioned by the Supreme Court at p. 202 of the report in Textile Machinery Corporation's case [1977] 107 ITR 195 (SC) is concerned.

    We may point out that at p. 207 of the report in Textile Machinery Corporation's case [1977] 107 ITR 195 (SC), Goswami J., speaking for the Supreme Court, has approved, inter alia, the decision of this High Court in Nagardas Bechardas & Brothers P. Ltd. v. CIT [1976] 104 ITR 255 .

    In Nagardas Bechardas & Brothers P. Ltd. v. CIT, a Division Bench of this High Court has considered the principle and object underlying the provisions of section 15C of the 1922 Act and section 84 of the 1961 Act which was replaced by section 80J of the same Act. At p. 260 of the report it has been pointed out :

    "The object of the legislature in providing for the concession contemplated by section 84 is obviously to encourage new industrial undertakings so that production of a particular type would increase. This object is achieved even if a new undertaking is established by a person who is already in the line. Therefore, to reject the claim to such concessions of the persons who are already in the line on the narrow ground that the establishment of the new unit is a mere ' reconstruction ' of their existing business, without taking into consideration the nature of the existing business and the new one, would result in defeating the very object with which the section was framed."

    It has also been pointed out that one of the decisions approved of by the Supreme Court was also the decision of the Delhi High Court in Commissioner Of Income-Tax… v. M/S Ganga Sugar Corp.… [1973] 92 ITR 173 . In that case, Khannn CJ. of the Delhi High Court, as he then was, observed at pp. 179 and 180 of the report :

    "The concept of reconstruction of business would not be attracted when a company which is already running one industrial unit sets up another industrial unit. The new industrial unit would not lose its separate and independent identity even though it has been set up by a company which is already running an industrial unit before the setting up of the new unit. The object of section 15C of the Act is to provide an incentive for the setting up of new industries so as to accelerate the process of industrialisation. It does not appear to have been the intention of the legislature, as envisaged by section 15C of the Act, that the benefit of the said section would be confined to the industrial undertakings of those parties who had not already set up such undertakings in the past but would not be extended to parties who have past experience of running similar undertakings."

    At p. 260 of the report in Nagardas Bechardas & Brothers' case [1976] 104 ITR 255 , the Division Bench of this High Court further observed :

    "We find that the expression 'business already in existence' must be given its ordinary commercial meaning. In its ordinary commercial meaning, is it possible to say that manufacturing of moulding was the assessee's business ' already in existence' before it established the new factory for the same ?"

    Thus, in the decisions which have been approved by the Supreme Court in Textile Machinery Corporation's case [1977] 107. ITR 195 and in the decision of the Supreme Court itself, sufficient indications have been given that so far as " reconstruction of the business" is concerned or " splitting of business " is concerned, it must be splitting up of the business which was already being carried on by the assessee or the reconstruction of the business which was already being carried on by the assessee and the new industrial undertaking must have been formed as a result of the splitting up of the previously existing business of the assessee or the reconstruction of the previously existing business of the assessee. Thus, so far as the first two clauses are concerned, the only conclusions possible looking to the object of the Legislature and the words used by the Legislature in the relevant provisions laying down the conditions then obtaining regarding section 84, are that in the first two conditions the previously existing business must be of the assessee himself. Similarly, the previously existing business which is resuscitated or reconstructed or which is being split up must be of the assessee himself. If that is so, the position is very clear, namely, that so far as the third condition mentioned at p. 202 is concerned, namely, that the new industrial undertaking of the assessee should not be formed by the transfer to the new business of building, machinery or plant used by another prior to April 1, 1948, must apply in the context of the previous business being carried on by the Assessee himself. These words must be held to take colour from the context in which they are appearing.

    As regards the question of the building where a new business or any existing business is being carried on, it must be pointed out that because of extreme shortage of space—for office space or space where industrial activity could be carried on—it is practically impossible in our metropolitan cities to find a space or place where, previous to the new business being started, another business was not being carried on or another business by somebody else other than the assessee was not being carried on. If that is so, practical commonsense and commercial expediency would necessitate the conclusion that in so far as a new undertaking is being carried on in a building which was previously being used by someone else or which was rented by someone else other than the assessee and the new undertaking being started for the first time by the assessee in the newly rented premises, then, the third negative condition cannot be said to be violated. Both as a matter of commonsense as well as from the point of view of commercial expediency and from what is happening in our metropolitan cities today and in major centres of industries today, it would be impossible to expect that a building should be a space which was not used at all at any previous time by someone else.

    The conclusion that we have arrived at on a pure question of construction is reinforced by the subsequent legislative history regarding this aspect of the negative condition in section 84. With effect from April 1, 1967, the Legislature amended section 84 of the Act and provided in the shape of the second proviso to sub-section (2) of section 84 as follows:

    "Provided further that the condition in clause (ii ) shall be deemed not to have been contravened if the industrial undertaking is set up in rented premises."

    And the second clause was:

    "It is not formed by the transfer to a new business of a building, machinery or plant previously used for any purpose."

    When the Legislature repealed sections. 81 to 85C with effect from 1st April, 1968, and enacted Chap. VI-A which contained sections. 80A to 80VV, in section 80J, which corresponded to section 84, in sub-section (4), the original words were so far as condition (ii) was concerned " it is not formed by a 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" and with effect from 1st April, 1976, even the words " a building not being a building taken on rent or lease " have been omitted altogether by the Legislature. Thus, the subsequent legislative history of this provision reinforces the conclusion that we are arriving at and that which was required to be reached as a result of interpretative provision has now been made specifically clear by the Legislature by making a suitable provision in that behalf.

    In Income-tax Reference No. 174 of 1975, decided on August 12, 1980 [Monogram Mills Co. Ltd. v. Commissioner Of Income-Tax, Gujarat, (since reported in [1982] 135 ITR 122 (Guj)], the relevant decisions regarding the effect of the subsequent legislative exposition have been considered by this court. Following the decision in that case and for the reasons recorded in that decision it is clear that the Tribunal was right when it came to the conclusion that the assessee had not contravened clause (ii) of sub-section (4) of section 84 and that he was entitled to obtain relief it was seeking for.

    It may be pointed out that Mr. Raval for the revenue has drawn our attention to a number of decisions of other High Courts and he has contended that in view of those decisions we should hold that in the instant case the assessee had contravened condition No. (ii) set out in section 84, sub-section (4), as it stood at the relevant time. He has especially relied upon the decision of the Bombay High Court in the case of this very assessee (CIT v. Suessin Textile, Ball Bearing & Products (P. ) Ltd. [1979] 118 ITR 45) as that was in respect of assessment year 1961-62. We have gone through the judgment of the Bombay High Court in [1979] 118 ITR 45 and we find that in that case the Bombay High Court followed its own earlier decision in Capsulation Services Pvt. Ltd. v. CIT [1973] 91 ITR 566 . Now, after the decision of the Bombay High Court in [1973] 91 ITR 566 regarding the interpretation of section 15C (2)(i), there has been the decision of the Supreme Court in Textile Machinery Corporation's case [1977] 107 ITR 195. With great respect to the learned judges of the Bombay High Court who decided the case reported in [1979] 118 ITR 45 , the full impact of the decision of the Supreme Court in Textile Machinery Corporation's case [1977] 107 ITR 195 (SC) on the interpretation of section 15C and the approach to the interpretation of section 15C had been overlooked and it is because that impact had been overlooked that the Bombay High Court apparently followed its own earlier decision in the case of Capsulation Services Pvt. Ltd. [1973] 91 ITR 566 . Mr. Raval drew our attention to the decision of the Punjab & Haryana High Court in Phagoo Mal Sant Ram v. CIT [1969] 74 ITR 734 , the decision of the Punjab High Court (Delhi Bench) in Webbing and Belting Factory P. Ltd. v. CIT [1961] 43 ITR 234 and of the Punjab and Haryana High Court in Commissioner Of Income-Tax, Patiala v. Hindustan Milk Food Manufacturers Ltd. [1974] 96 ITR 278 . He also drew our attention to the decision of the Bombay High Court in CIT v. Kopran Chemical Co. Ltd. [1978] 112 ITR 893 and the decision of the Assam High Court in Steelsworth Ltd. v CIT [1968] 69 ITR 366 . There is also the decision of the Madras High Court in Commissioner Of Income-Tax, Madras v. Fenner Cockill Ltd.* [1969] 74 ITR 394 regarding reconditioning the machinery from which Mr. Raval sought to gain support for his submissions but, in our view, in view of the decision of the Supreme Court in Textile Machinery Corporation's case [1977] 107 ITR 195, the correct, principles which are required to be followed while interpreting section 15C of the 1922 Act and section 84 (now section 80J) of the Act of 1961, have been indicated and it is only in the light of this decision that the problem has to be approached.

    Mr. Raval also drew our attention to the decision of the Bombay High Court CIT v. T. Maneklal Mfg. Co. Ltd. [1978] 115 ITR 725 , where the Bombay High Court has pointed out that the Income-tax Act being an all India statute, uniformity in the construction of its statutory provisions is eminently desirable and the considered opinion of any other High Court should be followed unless there are overriding reasons for taking a divergent view. With utmost respect we are in full agreement with the sentiments expressed in this decision but we find that there are overriding reasons, namely, the decision of the Supreme Court in Textile Machinery Corporation's case [1977] 107 ITR 195 , which compel us to take a view different from the view taken by the Bombay High Court in the case of the assessee in CIT v. T. Maneklal Mfg. Co. Ltd. [1978] 115 ITR 725 (Bom). We may also point out that amongst the decisions of other High Courts, there is the decision of the Calcutta High Court in CIT v. Sainthia Rice and Oil Mills [1971] 82 ITR 778 , which has taken the same view of the provisions of the conditions laid down in section 15C of the Act of 1922 as we are taking in the instant case.

    It is true that in Chaturvedi's Book, Vol. II, at p. 1228, and in Palkhivala & Kanga's Volume, 7th Edn., at p. 679, of the first volume, the decisions of different High Courts have been summarised but neither of these learned commentators has expressed his positive view as to which out of the several views is the correct view and the reasons for that view. It has been pointed out by the Supreme Court in Chandulal Harjiwandas v. CIT [1967] 63 ITR 627 that when there is a particular object behind a particular section enacted in the Income-tax Act, the section should be so interpreted as not to nullify that object. It is in the light of the object behind the provisions of section 84 and section 80J of the 1961 Act and section 15C of the Act of 1922 that we have to approach this problem of interpretation of the section.

    The last submission of Mr. Raval was that there are two decisions of this High Court, one in Saurashtra Cement & Chemical Industries Ltd. v. CIT [1980] 123 ITR 669 and the other in Commissioner Of Income-Tax, Gujarat-I v. Satellite Engineering Ltd. [1978] 113 ITR 208 (Guj) and in the light of these two decisions the point should be decided in favour of the revenue. In Satellite Engineering Ltd. case [1978] 113 ITR 208 (Guj) it was pointed out by a Division Bench of this High Court that even if in an earlier year the ITO has not granted relief under section 84 or section 15C of the Act of 1922, in the subsequent years that relief can be granted and can be claimed and in each year it has to be computed once again. In Saurashtra Cement's case [1980] 123 ITR 669 another Division Bench of this High Court has taken the view that once the granting of relief under section 84 has been started with reference to the year of installation, in subsequent years that relief cannot be denied unless the original finding and original conclusion as regards the year of installation is disturbed. We find no difficulty in the instant case because of either of these two decision. The Saurashtra Cement & Chemical Industries Ltd.'s case [1980] 123 ITR 669 (Guj) does not apply to the facts of this case because in the year of installation relief under section 84 was not granted because that is the effect of the decision of the Bombay High Court in the case of this very assessee in CIT v. Suessin Textiles Ball Bearing & Products Ltd. [1979] 118 ITR 45 . However, in view of what has been stated in Satellite Engineering's case [1978] 113 ITR 208 at p. 221, it must be held that in the subsequent years, that is in assessment year 1962-63 and in subsequent assessment years, relief under section 84 can be claimed and should be granted if the claim of the assessee to that relief is found to be justified.

    Under these circumstances, in view of the decision regarding the correct legal approach and correct principles which flow from the decision of the Supreme Court in Textile Machinery Corporation's case [1977] 107 ITR 195, it must be held in the instant case that on the facts as found in this case, namely, that plant and machinery were new and that only the company had taken the premises on lease for office purposes from a portion of the Bank of Baroda building which had been previously used by someone else and similarly it had taken a portion of Laxmi Woollen Mills' estate where it set up its factory and in the earlier years someone else had used that portion of Laxmi Woollen Mills' estate for his own purposes, cannot stand in the way of the assessee in the instant case once it is found that what it had set up was a new industrial undertaking of its own by installing new plant and machinery. It was entirely a new business of its own and it had invested capital for the purposes of that new business or new undertaking. Under these circumstances, the requirements of section 84 and the object of granting relief under section 84 which we have indicated above are fully satisfied in the instant case and hence the Tribunal was right in the instant case in confirming the view of the AAC and in deciding in favour of the assessee.

    We, therefore, answer, the question referred to us in the affirmative, that is, in favour of the assessee and against the revenue. The Commissioner will pay the costs of this reference to the assessee.

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    Commissioner of Income-tax v. Suessin Textile Bearing Ltd.
    (Sep 23, 1980)