Rc/13/1996 Of The Comm.of Income Tax.hyd v. I.d.l. Chemicals Ltd.hyd

THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE RAMESH RANGANATHAN REFERRED CASE Nos.11 and 13 of 1996 % Dated: 03.11.2010 Between: The Commissioner of Income Tax – II, Hyderabad. … Applicant And M/s.I.D.L.Chemicals Limited, Hyderabad ... Respondent !Counsel for the Petitioner: Sri S.R.Ashok ^Counsel for the Respondent: Sri Y.Ratnakar <Gist: >Head Note: ?Citations: 1. 107 ITR 195 2. 108 ITR 367 3. (1982) 137 ITR 851 4. (1996) 220 ITR 201 5. (1992) 3 SCC 78 : AIR 1992 SC 1622 : (1992) 196 ITR 188 6. (1991) 191 ITR 288 Bom THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE RAMESH RANGANATHAN REFERRED CASE Nos.11 and 13 of 1996 November 03, 2010 Between: The Commissioner of Income Tax – II, Hyderabad. … Applicant And M/s.I.D.L.Chemicals Limited, Hyderabad ... Respondent THE HON'BLE SRI JUSTICE V.V.S.RAOAND THE HON'BLE SRI JUSTICE RAMESH RANGANATHANREFERRED CASE Nos.11 and 13 of 1996 COMMON ORDER:(Per Hon’ble Sri Justice V.V.S. Rao) These two Income Tax references at the instance of theRevenue require the High Court’s consideration of the following twoquestions. 1.Whether, on the facts and in the circumstances ofthe case, the ITAT was correct in law in holdingthat the assessee was entitled for deductionu/s.80J of the Income Tax Act, 1961, on thePETN Plant?the case, the ITAT was correct in law in holdingthat the assessee was entitled for deductionu/s.80J of the Income Tax Act, 1961, on thePETN Plant?2.Whether, on the facts and in the circumstances ofthe case, the ITAT was correct in law in holdingthat a new industrial undertaking has come intoexistence and it was not formed by the splitting-up or reconstruction of a business already inexistence”the case, the ITAT was correct in law in holdingthat a new industrial undertaking has come intoexistence and it was not formed by the splitting-up or reconstruction of a business already inexistence” The undisputed background of the two references is as follows.The assessee; I.D.L. Chemicals Limited is in the business ofmanufacture and sale of detonators, explosives and pharmaceuticalshaving its registered office and factory at Chandanagar, Hyderabad.They have units at Bangalore, Bombay, Calcutta, Delhi and Rurkela.For the assessment year 1982-1983, the assessee filed return onincome tax on 28.06.1982 showing the net income of Rs.2,56,87,917/-.Within a month thereafter, they filed revised return showingRs.2,13,51,290/- as net income. Therein the assessee claimeddeduction under Section 80J of the Income Tax Act, 1961 (the Act) to atune of Rs.67,29,221/- being the cost of imported plant and machineryfor construction of PETN (Penta Erythitol Tetra Nitrate) to replace oldPETN plant installed in 1969. The Assistant Commissioner of IncomeTax finalized the assessment under Section 143(3) of the Act. Thededuction was disallowed on the ground that it was reconstruction of thebusiness already in existence falling under the provisions of Section80J (4)(i) of the Act. On appeal, Commissioner of Income Tax (Appeals)(CIT (A), for brevity) confirmed disallowance. The assessee was,however, successful before Income Tax Appellate Tribunal. Therevenue then sought a reference under Section 256(1) of the Act.Referred case No.11 of 1996 is in respect of assessment year 1982-1983 and No.13 of 1996 is in relation to assessment year 1983-1984.As both the questions are interconnected, it is necessary to considerboth of them together. The assessee claimed the benefit under Section 80J of the Act The assessee claimed the benefit under Section 80J of the Act on the modernization of a PETN plant on the ground that a newindustrial undertaking has come into existence. The assessing officerissued notice under Section 143(2) of the Act pursuant to which arevised return was filed showing reduced net income ofRs.2,13,51,290/-. In this return, an amount of Rs.67,29,221/- was shownas relief under Section 80J of the Act. By assessment order, dated15.05.1985, the original authority rejected the claim on the ground thatthe assessee merely modernized PETN plant by making additions tothe plant and machinery during accounting year relevant to assessmentyear 1982-1983. The assessee assailed the assessment order beforeCIT (A) contending that there has been substantial investment of freshcapital of Rs.67 lakhs in PETN unit (new distinct undertaking) engagingrequired amount of labour, which resulted in improving the performanceof the unit, that there has been increase of capacity of the plant, besidesfacilitating the manufacture of Iso-sorbide Nitrite at 40 kg., per hour, inaddition to PETN using new technology and new solvents and that theWritten Down Value (WDV) of old plant and machinery was negligible atRs.4.95 lakhs in comparison to the cost of the new PETN plant, whichstood at Rs.67 lakhs. The CIT (A) was not impressed with any of thesecontentions. He came to a conclusion that, “there has been import oftechnical know-how together with plant and machinery aimed atmodifying the production process so as to increase the safety standards,the capacity of the plant and also produced a new by-product”, andthat,“mere incidental increase of capacity and utilization for manufacturingnew product do not by themselves amount to new industrialundertaking”. The learned Tribunal considered the question of allowanceunder Section 80J of the Act in the light of the decisions of the SupremeCourt in Textile Machinery Corporation Limited v CIT[[1]]and CIT v Indian Aluminium Company[[2]]as well as the decision of Delhi HighCourt in CIT v Hindustan General Industries Limited[[3]]. They came tothe conclusion that, “a new industrial undertaking has come intoexistence and that it was not formed by splitting up or re-construction ofa business already in existence” and that, “the value of the out-modedmachinery of the old business … … was less than 10% of the total valueof the plant and machinery”. The Tribunal also observed that there is nomaterial to show that without the old machinery, the new plant could nothave become functional, and that the assessee has satisfied therequirements of Section 80J(4)(iv) of the Act. The appeal wasaccordingly allowed directing the assessing officer to allow the reliefunder Section 80J of the Act. The Junior Standing Counsel for Revenue submits that theassessee has put up a new PETN plant utilizing the old machinery and made improvements to the existing plant. Therefore, it is an industrialundertaking formed by splitting-up and reconstruction of the existingbusiness, which disentitles the assessee to the relief. He strongly relieson the fact that the assessee utilized some of the old machinery whoseWDV was about Rs.4.95 lakhs in setting up a new PETN plant andcontends that no new unit was set up, and therefore, the assessee doesnot fall within the ambit of sub-section (4) of Section 80J of the Act. Herelies on an unreported Judgment of this Court in R.C.No.103 of 1995,dated 22.03.2006 in CIT, Visakhapatnam v M/s.Srinivasa Sea Foods Limited and Travancore Rayons Limited v CIT[[4]]. The Junior Standing Counsel for Revenue submits that theassessee has put up a new PETN plant utilizing the old machinery and made improvements to the existing plant. Therefore, it is an industrialundertaking formed by splitting-up and reconstruction of the existingbusiness, which disentitles the assessee to the relief. He strongly relieson the fact that the assessee utilized some of the old machinery whoseWDV was about Rs.4.95 lakhs in setting up a new PETN plant andcontends that no new unit was set up, and therefore, the assessee doesnot fall within the ambit of sub-section (4) of Section 80J of the Act. Herelies on an unreported Judgment of this Court in R.C.No.103 of 1995,dated 22.03.2006 in CIT, Visakhapatnam v M/s.Srinivasa Sea Foods Limited and Travancore Rayons Limited v CIT[[4]]. The counsel for assessee submits that WDV of the old machinerybeing less than 10% of the WDV plant, the plea of splitting-up orreconstruction of already existing business cannot be accepted.According to him, the new plant enables the manufacture of not onlyPETN but also another product by using new technical know-how andnew solvents and therefore, a new industrial undertaking has come intoexistence which enables assessee to claim relief under Section 80J(1)of the Act. He would urge that the provisions of Section 80J of the Actshould be interpreted liberally in favour of the assessee. He relies onBajaj Tempo Limited v CIT[[5]]and CIT v Metropolitan Springs (Private) Limited[[6]]. Section 80J(1) enables an assessee to claim reduction fromprofits and gains from industrial undertaking calculated @ 6% perannum on the capital employed in the industrial undertaking in respectof the previous year relevant to the assessment year. Section 80J(4)lays down conditionalities subject to which an industrial undertakingcan claim the relief. It is necessary to quote Section 80J(4) as it stoodprior to Finance (No.2) Act, 1996, which omitted it with effect from01.04.1989. 80J. Deduction in respect of profits and gains fromnewly established industrial undertakings or ships orhotel business in certain cases.(1) to (3) omitted(4) This section applies to any industrialundertaking which fulfils all the following conditions,namely:(i) it is not formed by splitting up, or thereconstruction, of a business already in existence;(ii) it is not formed by the transfer to a new businessof machinery or plant previously used for any purpose;(iii) it manufactures or produces articles, or operatesone or more cold storage plant or plants, in any part ofIndia, and has begum or begins to manufacture or producearticles or to operate such plant or plants, at any timewithin the period of thirty-three next following the 1[st] ofApril, 1948, or such further period as the CentralGovernment may, by notification in the Official Gazette,specify with reference to any particular industrialundertaking; (iv) in a case where the industrial undertaking manufactures or produces articles, the undertakingemploys ten or more workers in a manufacturing processcarried on with the aid of power, or employs twenty ormore workers in a manufacturing process carried onwithout the aid of power: Provided that the condition in clause (i) shall not applyin respect of any industrial undertaking which is formed asa result of the re-establishment, reconstruction or revivalby the assessee of the business of any such industrialundertaking as is referred to in Section 33B, in thecircumstances and within the period specified in thatsection: Provided further that, where any building or any partthereof previously used for any purpose is transferred tothe business of the industrial undertaking, the value of thebuilding or part so transferred shall not be taken intoaccount in computing the capital employed in theindustrial undertaking. Provided that the condition in clause (i) shall not applyin respect of any industrial undertaking which is formed asa result of the re-establishment, reconstruction or revivalby the assessee of the business of any such industrialundertaking as is referred to in Section 33B, in thecircumstances and within the period specified in thatsection: Provided further that, where any building or any partthereof previously used for any purpose is transferred tothe business of the industrial undertaking, the value of thebuilding or part so transferred shall not be taken intoaccount in computing the capital employed in theindustrial undertaking. Provided also that in the case of an industrialundertaking which manufactures or produces any articlespecified in the list in the Eleventh Schedule, theprovisions of clause (iii) shall have effect as if for thewords, “thirty-three years”, the words “thirty-one years” hadbeen substituted. Explanation 1:For the purposes of clause (ii) of thissub-section, any machinery or plant which was usedoutside India by any person other than the assessee shallnot be regarded as machinery or plant previously used forany purpose, if the following conditions are fulfilled,namely: (a) such machinery or plant was not, at any timeprevious to the date of the installation by the assessee,used in India; (b) such machinery or plant is imported into India fromany country outside India; and (c) no deduction on account of depreciation in respectof such machinery or plant has been allowed or isallowable under the provisions of the Indian Income TaxAct, 1922 (11 of 1922), or this Act in computing the totalincome of any person for any period prior to the date of theinstallation of the machinery or plant by the assessee.Explanation 2: Where in the case of an industrialundertaking, any machinery or plant or any part thereofpreviously used for any purpose is transferred to a newbusiness and the total value of the machinery or plant orpart so transferred does not exceed twenty per cent of thetotal value of the machinery or plant used in the business,then, for the purposes of clause (ii) of this sub-section, thecondition specified therein shall be deemed to have beencomplied with and the value of the machinery or plant orpart so transferred shall not be taken into account incomputing the capital employed in the industrialundertaking. Section 80J gives the relief of deduction of specified profits andgains to an industrial undertaking subject to certain disqualifications. Beit also noted that the Section is couched in language as that of Section15C of the Income Tax Act, 1922, which provided for exemption from taxto newly established industrial undertakings. When an industrialundertaking incurs disqualification to claim the relief under Section 80J(1) of the Act? First, when an industrial undertaking is formed by thesplitting-up or reconstruction of a business already in existence. As perthe proviso to sub-section (4), this shall not, however, apply in respect ofany industrial undertaking which is formed as a result of re- establishment, reconstruction or revival by the assessee of the businessof any industrial undertaking, which is victim of extensive damage ordestruction due to floods, riots, civil disobedience, enemy action etc.Secondly, an industrial undertaking, which is formed by transfer to anew business of machinery or plant previously used for any purpose.This is again subject to the condition as stipulated in the secondproviso. Thirdly, if an industrial undertaking manufactures or producesarticles with ten or more workers with the aid of power, or employstwenty or more workers without the aid of power. Explanation II to sub-section (4) is to the effect that if the value of the machinery or plant orpart transferred to new undertaking does not exceed twenty per cent ofthe total value of the new machinery or plant, the same is not barredfrom claiming the relief. In Bajaj Tempo, the Supreme Court was dealing with a case ofpartial exemption from payment of tax under Section 15C of the IncomeTax Act, 1922. Therein, the appellant secured manufacturing rights fromM/s.Bachhraj Trading Corporation (which had a know-how agreementwith a foreign collaborator for manufacturing tempo vehicles in India).Under relevant clause, the appellant got possession of Bachhrajpremises of the factory as a lessee and also licencee to use tools andimplements valued at Rs.3,500/-. For the assessment year 1960-1961,they claimed the benefit of partial exemption from tax under Section 15Cof the Income Tax Act, 1922. The Tribunal ultimately held that as thebusiness of the new industrial undertaking did not exist prior to itsincorporation, it cannot be said to have been formed by reconstruction ofBachhraj. The High Court, however, took a view favouring revenueholding that Bajaj Tempo was not a new industrial undertaking. TheSupreme Court reversed the High Court and held that when once theeligibility clause under Section 15C(1) is satisfied, the provisions shouldbe interpreted liberally, keeping in view the spirit of the provisions ofSection 15C(2A)[[7]]. While referring to Section 80J(4) of the Act andTextile Machinery Corporation, the Supreme Court observed (paras 8and 9 of SCC): For instance an undertaking otherwise entitled tobenefit would fall within mischief of the clause if it wasestablished in a building which was used for businesspurposes at any time in the remote past. Or it mighthave been established in part of building, earlier usedfor business purposes due to paucity ofaccommodation. Denying benefit to such undertakingcould not have been intended when the very purposeof Section 15-C was to encourage industrialisation. Itwas for this reason that various High Courts evolvedthe test of commercial expediency or substantialinvolvement valued in terms of money etc. to interpretthis clause. Adopting literal construction in such caseswould have resulted in defeating the very purpose of Section 15-C. Therefore it becomes necessary to resort toa construction which is reasonable and purposive to makethe provision meaningful. (emphasis supplied) The approach of the Court in a case of doubt regardingapplication of Section 80J of the Act, was indicated as below (Para 9 ofSCC). Section 15-C. Therefore it becomes necessary to resort toa construction which is reasonable and purposive to makethe provision meaningful. (emphasis supplied) The approach of the Court in a case of doubt regardingapplication of Section 80J of the Act, was indicated as below (Para 9 ofSCC). Initial exercise, therefore, should be to find out if theundertaking was new. Once this test is satisfied thenclause (i) should be applied reasonably and liberally inkeeping with spirit of Section 15-C(1) of the Act. Whiledoing so various situations may arise for instance theformation may be without anything to do with any earlierbusiness. That is the undertaking may be formed withoutsplitting up or reconstructing any existing business orwithout transfer of any building material or plant of anyprevious business. Such an undertaking undoubtedlywould be eligible to benefit without any difficulty. On theother extreme may be an undertaking new in its form butnot in substance. It may be new in name only. Such anundertaking would obviously not be entitled to the benefit.In between the two there may be various other situations.The difficulty arises in such cases. For instance a newcompany may be formed, as was in this case a fact whichcould not be disputed, even by the Income Tax Officer. Buttools and implements worth Rs.3,500 were transferred to itof previous firm. Technically speaking it was transfer ofmaterial used in previous business. One could say as wasvehemently urged by the learned counsel for thedepartment that where the language of statute was clearthere was no scope for interpretation. If the submission ofthe learned counsel is accepted then once it is found thatthe material used in the undertaking was of a previousbusiness there was an end of inquiry and the assesseewas precluded from claiming any benefit. Words of astatute are undoubtedly the best guide. But if theirmeaning gets clouded then courts are required to clear thehaze. Sub-section (2) advances the objective of sub-section (1) by including in it every undertaking except if itis covered by clause (i) for which it is necessary that itshould not be formed by transfer of building or machinery.The restriction or denial of benefit arises not bytransfer of building or material to the new companybut that it should not be formed by such transfer. Thisis the key to the interpretation. The formation should notbe by such transfer. The emphasis is on formation not onuse. (emphasis supplied) I n Metropolitan Springs, the assessee engaged in themanufacture of springs used in automobile industry, set up project forproduction of axle shafts and torsion bars by importing machinery worthabout Rs.10 lakhs. As they had no spine-milling and hobbing machines,assessee was doing forging and getting the forges drilled, splined and cut elsewhere on job work. Subsequently, it installed magnetic crackdetector and other machines for manufacturing axle shafts at one place.They claimed deduction under Section 84 and 80J for assessment year1967–1968. The appellate Assistant Commissioner as well as IncomeTax Appellate Tribunal agreed with assessee’s contention. In thereference at the instance of revenue, the Division Bench of BombayHigh Court answered the question in favour of the assessee holdingthus: I n Metropolitan Springs, the assessee engaged in themanufacture of springs used in automobile industry, set up project forproduction of axle shafts and torsion bars by importing machinery worthabout Rs.10 lakhs. As they had no spine-milling and hobbing machines,assessee was doing forging and getting the forges drilled, splined and cut elsewhere on job work. Subsequently, it installed magnetic crackdetector and other machines for manufacturing axle shafts at one place.They claimed deduction under Section 84 and 80J for assessment year1967–1968. The appellate Assistant Commissioner as well as IncomeTax Appellate Tribunal agreed with assessee’s contention. In thereference at the instance of revenue, the Division Bench of BombayHigh Court answered the question in favour of the assessee holdingthus: We have been taken through the statement of case,paragraph 10 of the appellate Assistant Commissioner forthe assessment year 1967-68, which is the basis of theAppellate Assistant Commissioner’s order for the year andthe Tribunal’s order for the year under reference. From thefacts stated in the order of the Appellate AssistantCommissioner and found by the Tribunal, we are satisfiedthat the assessee had set up a new industrial undertakingwhich is a finding of fact. Once, we agree with theTribunal that the particular unit constitutes anindustrial undertaking within the meaning of Section80J of the Income Tax Act, the result must follow thatthe assessee is entitled to deduction under Section80J. The mere fact that a part of the premises used bythe old undertaking was used for the new industrialundertaking or that some members of the staff werecommon does not, in our opinion, make any materialdifference in the situation. (emphasis supplied) We have perused the two authorities relied on by the juniorstanding counsel. Those are the decisions which have no bearing onthe factual background of this case nor they differ from above referredview of the Supreme Court. In this case, the admitted facts are as follows. The assesseeengaged in manufacturing and marketing of detonators and explosivesand has factories at six places in India including Hyderabad. The basicmaterial for making detonators and detonating fuses is PETN. Formanufacturing the same, the assessee installed unit in 1969 with thethen available technology. The unit became outmoded and sufferedcorrosion. During assessment year 1982-1983, assessee investedRs.67.29 lakhs for importing brand new machiney and plant and alsolatest technical know-how for production of PETN and Iso-sorbide Nitriteas well. In addition, the PETN production capacity of 100 Kg per hourincreased to 180 Kg per hour. A few pieces of plant and machinery ofold PETN plant whose WDV was about Rs.4.95 lakhs were also used inthe new plant. It is also admitted that the old plant was used onlyAcetone as solvent whereas the new plant can use Acetone as well as Methyl Ethyl Ketone. It was also found as a matter of fact by the Tribunalthat there was nothing on record to show that assessee could not haveput the new plant to use but without use of few pieces of plant andmachinery of old plant. Methyl Ethyl Ketone. It was also found as a matter of fact by the Tribunalthat there was nothing on record to show that assessee could not haveput the new plant to use but without use of few pieces of plant andmachinery of old plant. Applying the tests laid down by Supreme Court in Bajaj Tempoand adopting the reasoning of Bombay High Court in MetropolitanSprings, it cannot be said that the assessee incurs any ineligibility toclaim benefit under Section 80J of the Act. The mere use of oldmachinery whose WDV is less than 10% of the investments made in thenew plant cannot amount to reconstruction. This is made clear byexplanation II to Section 80J(4) of the Act. If the total value of machineryor plant or part so transferred to new industrial undertaking does notexceed 20%, the same does not amount to splitting-up or reconstructionof the business already in existence. ‘Reconstruction’ denotes “thetransfer of the undertaking or part of the undertaking of an existingcompany to a new company with substantially the same persons asmembers of the new company as were members of the old company”(see Advanced Law Lexicon by Ramanath Iyer, Book 4, p.3993). It isnobody’s case that the assessee company is disentitled under any ofthe other clauses of sub-section (4) of Section 80J of the Act, andtherefore, we need not deal with other aspects. In the result, for the above reasons, we answer the reference inthe affirmative in favour of the assessee and against the revenue. Thetwo referred cases shall stand disposed of accordingly. No costs. _______________ (V.V.S.RAO, J) 03.11.2010 ______________________________(RAMESH RANGANATHAN, J) Note: LR copy be marked. (By order) pln [1]107 ITR 195[2]108 ITR 367[3](1982) 137 ITR 851[4](1996) 220 ITR 201[5](1992) 3 SCC 78 : AIR 1992 SC 1622 : (1992) 196 ITR 188[6](1991) 191 ITR 288 Bom [7]15C(2A): This section applied to any hotel which- (a) starts functioning on or after the 1[st] day of April, 1961, and is not formed by the splitting up, or the reconstruction, ofbusiness already in existence or by the transfer to a new business of building,machinery or plant previously used in any other business;