Karnataka High Court
Canara Wire And Wire Products Ltd. vs Commissioner Of Income-Tax on 25 March, 1991
Equivalent citations: [1992]196ITR426(KAR), [1992]196ITR426(KARN)
JUDGMENT K. Shivshankar Bhat, J.
1. Two questions have been referred to us under the provisions of the Income-tax Act, 1961 ("the Act" for short), which read thus :
"1. Whether, on the facts and in the circumstances or the case, the Tribunal was right in disallowing the claim of the applicant under section 80J of the Income-tax Act, 1961 ? and
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the claim of the applicant under section 35B of the Act ?"
2. The second question need not detain us for long since, in several references, we have already held that weighted deduction claimed by the assessee under section 35B of the Income-tax Act, 1961, is not deductible, - these are freight and forwarding charges, packing and loading charges, bank charges and commission paid for procuring sales to Indian agents. These items would not fall within sub-clause (iii) of section 35B(1)(b); no other sub-clause of the said section is attracted. Hence, the said question is answered in the affirmative and against the assessee.
3. The first question arises by virtue of the claim made by the assessee on the ground that the assessee has installed a new transformer, a new furnace and new motors in the existing factory premises. This involved heavy investment; the licensed capacity of the assessee increased from 5,000 tonnes to 6,250 tonnes per annum. The nature of the goods produced continued to be the same. The assessee contended that these new installations resulted in a new undertaking and, therefore, under section 80J, the assessee is entitled to the allowance. The Income-tax Officer rejected the claim on the ground that the assessee had only extended its existing undertaking but no new undertaking was installed. This was affirmed by the Commissioner of Income-tax (Appeals) and was further affirmed by the Commissioner of Income-tax Appellate Tribunal. Hence, these references.
4. A perusal of the civil petition field by the assessee seeking these references itself shows that the assessee contended that there was a "major expansion" and that this sort of major expansion resulted in the setting up of a new industrial undertaking. Similar was the contention raised before the Income-tax Officer as could be seen from the summary of the arguments referred to in the assessment order. The phraseology used before the Income-tax Officer was that the existing assets stood as the new enlarged unit. (Vide paragraph (f) of the order). No doubt the Income-tax Officer committed an error when he said that the benefit of section 80J cannot be granted because the assessee continued to produce the same product as earlier, i.e., steel wire and rods. We find that the Income-tax Officer posed a correct question at the outset when he said that a new undertaking must be a new and identifiable undertaking, separate and distinct from the existing business and it must also be an undertaking which could be carried on independently of the old unit (Textile Machinery Corporation Ltd. v. CIT and CIT v. Indian Aluminium Co. LTD. ). Thereafter, he found that there was no new and identifiable undertaking separate and distinct from the existing business. In other words, there was no emergence of a new physically separate industrial unit which came into existence as a viable unit manufacturing a new article. The assessing authority further found that the same old machinery was used in addition to the new ones brought in and, without the existing old machinery, building, etc., the assessee cannot manufacture the same old steel wire and rods. Therefore, the finding was that there was not new integrated unit by itself.
5. The Appellate Tribunal has affirmed this finding and found that all that the assessee has done is that a new transformer and furnace and motors were installed, on account of which the production capacity increased. It is in the same old building these have been installed. It is the same old steel wire and rods which are being manufactured. No separate and distinct identifiable industrial undertaking has come into existence. It is only reconstruction of the existing business. Thus, no new industrial undertaking has come into existence. The Tribunal has referred to the decision of the Supreme Court in Textile Machinery Corporation Ltd. v. CIT .
6. Sri G. Sarangan, learned counsel for the assessee, referred to several decisions starting with a Bench decision of this court in International Instruments P. Ltd. v. CIT [1980] 123 ITR 11. Justice E. S. Venkataramaiah, as he then was, speaking for the Bench, observed, after referring to the decision of the Supreme Court in Textile Machinery Corporation's case , thus (at page 20) :
"It is seen from the decision of the Supreme Court that the grounds on which the Tribunal denied relief to the assessee are irrelevant. Merely because pursuant to a single collaboration agreement the units in question came into existence it cannot be said that they are not new industrial undertakings or separate units. The fact that getting articles produced from the new undertakings from abroad for manufacturing dashboard instruments earlier, shows that they were marketable commodities and they answered one of the tests adopted by the Supreme Court in determining whether an undertaking is a new industrial undertaking or not. The fact that there was common management or the fact that separate accounts had not been maintained, would not also lead to the conclusion that they were not separate undertakings. Even if separate accounts are not maintained, the investment on each of the units can be reasonably determined with the material which the assessee may make available to the Department."
7. The decision of the Supreme Court shows that the assessee may continue to produce the same kind of article as hitherto but that is not a relevant factor at all to consider whether section 80J is attracted (old section 15C). What is relevant is that the industrial unit set up must be new. In that sense, though new plant and machinery are erected for producing either the same commodities or some distinct commodities, it should not be a case of reconstruction of the old business.
8. The primary purpose of section 80J is to grant relief to a new industrial undertaking. Therefore, whenever an assessee claims relief under section 80J, the assessee will have to plead and establish that a new unit has come into existence which independently produces article of whatsoever nature and that this new unit is new unit is not dependent upon the old existing unit, in the sense that the new unit cannot be equated as an expansion of the old unit. This principle has been repeated in several decisions and it is unnecessary to cite them extensively. Some of the decisions are CIT v. Associated Cement Companies Ltd. [1979] 118 ITR 406 (Bom), CIT v. Shri Digvijay Cement Co. Ltd. , Mahindra Sintered Products Ltd. v. CIT [1989] 177 ITR 111 (Bom), CIT v. A. K. Silk and Woollen Mills Pvt. Ltd. , Khoday Industries Pvt. Ltd. v. CIT and Bangalore Soft Drinks Pvt. Ltd. v. CIT .
9. Whatever may the features of the facts involved in those decisions, all of them ultimately lead to the decision of the Supreme Court in Textile Machinery Corporation Ltd.'s case . The decision of the Calcutta High Court in CIT v. Indian Aluminium Co. Ltd. , was affirmed by the Supreme Court in CIT v. Indian Aluminium Co. Ltd. by following again Textile Machinery Corporation's case .
10. The basic question is whether the assessee has established a new unit of manufacture and whether it is an integrated unit. Unfortunately for the assessee, there is no such plea in the instant case. The assessee relied upon the fact that it has invested large amounts when compared to the initial investment on the manufacturing unit and these new installations have contributed to the production capacity of the assessee. But that is not sufficient. If the assessee had shown that the newly installed machinery produces articles independently of the existing unit, section 80J could have been applied to grant the necessary relief to the assessee.
11. In view of the above, we are constrained to answer the question against the assessee.
12. Question No. 1 is, accordingly, answered in the affirmative and against the assessee. References are answered accordingly.