Kerala High Court
Periyar Chemicals Ltd. vs Commissioner Of Income-Tax on 8 October, 1996
Equivalent citations: [1997]226ITR467(KER)
JUDGMENT V.V. Kamat, J.
1. A claim regarding deduction under Section 80J of the Income-tax Act, 1961, for the concerned assessment years comes before us expecting an answer to the following question:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in rejecting the claim of your applicant that it was not entitled to deduction under Section 80J of the Income-tax Act, in respect of the new unit set up by it during the year ended June 30, 1976 ?"
2. Undoubtedly, even on an impulsive blush, the question is purely relating to the factual matrix. The statutory provision of Section 80J speaks of deduction in respect of profits and gains from newly established industrial undertakings, in the context of the factual matrix. Profits and gains derived from an industrial undertaking are conditioned by the statutory provisions of the proviso thereto. It requires the said profits and gains in the context of an industrial undertaking, beginning to manufacture or produce articles or to operate its cold storage plant or plants after March 31, 1976. The deductions specified in sub-section (1) thereof, in accordance with the provisions of sub-section (2) thereof take us to the previous year with reference to which the industrial undertaking began to manufacture or produce articles. It would be seen from the statutory provision that there should be material on record with reference to the concerned industrial undertaking relating to the beginning of the manufacture or production of the article as specified in the said statutory provision and the relevant date is March 31, 1976. In other words, the statutory provision requires a new industrial undertaking with reference to the time specified in the said provision and it is only after satisfaction of the statutory provisions that deduction can be considered in accordance therewith.
3. The assessee is a public limited company carrying on the business of manufacture of formic acid and sodium sulphate. For the purpose of consideration of the statutory provision of Section 80J, the previous year of the assessee ends on 30th June of each year. The assessee had an installed capacity of 990 metric tons formic acid and 1,518 metric tons sodium sulphate.
4. For the year ending on June 30, 1976, the assessee had invested Rs. 38,73,183 as regards the new plant and machinery, Rs. 6,95,459 as regards the necessary building for the same, Rs. 61,141 relating to investment in furniture and fittings, in all a total investment of Rs. 46,29,783. The assessee claimed the benefit of deduction according to the provisions of Section 80J of the Act.
5. In support of the said contention, the assessee claimed that this was a new unit housed in a building adjoining the old plant and thus was a severable separate unit having separate autoclaves, converters, distillers, etc. It is contended that all these resulted in a substantial increase in the production capacity.
6. In the proceedings before the Income-tax Officer these contentions were rejected in paragraph 4.1 of his order dated October 28, 1981, the factual position is summarised in the following manner :
"As I have already mentioned the assessee is engaged in the manufacture chiefly of formic acid. The new unit is also for manufacture of the same product. The process employed for the manufacture in the new unit is the same as in the old one. The new unit is housed in a building adjoining the old plant. The assessee would contend that the new unit is separately identifiable with separate formate and acid sections, having autoclaves, converters, distillers, etc. It adds that there is a substantial increase in the production capacity ; the raw materials consumed and formic acid and sodium sulphate produced by the new plant are separately ascertainable and daily records are maintained ; the new unit is housed in a separate building. The company has furnished a statement giving the working receipts of the new units for the year 1976-77. Now, whether these are sufficient to hold that the new unit is, in fact, a new undertaking. The Supreme Court has observed in the aforesaid case that expansion, howsoever extensive of an existing industrial undertaking, could not be considered as bringing into existence a new undertaking. The materials furnished by the assessee are not sufficient to dispel the impression that what had been under way was not the setting up of a new unit but only a substantial expansion. I would, therefore, hold that the assessee is not entitled to Section 80J deduction in regard to the new unit."
7. Although unnecessary for the purpose of answering the question, the Income-tax Officer on a consideration of the factual position has held that the concerned unit did not satisfy the statutory conditions regarding commencement of production in the context of the date--March 31, 1976. In this connection, the conclusion is to the following effect :
"In the instant case, it is not the assessee's case that the company went into production to manufacture an intermediate product which is a marketable commodity. Thus the first year for Section 80J deduction is the assessment year 1977-78 in whose relevant previous year the unit began manufacturing formic acid. The relief, if the bigger issue of admis-sibility of Section 80J relief is decided in the assessee's favour, will be admissible for this year also but as the second year and not as the first year."
8. Since separate orders were passed by the Income-tax Officer with regard to the assessment years in question, four separate appeals were taken before the first appellate authority--Commissioner of Income-tax (Appeals), Ernakulam, which came to be decided by the common order dated February 16, 1985. The question under consideration is considered by the first appellate authority in paragraph 5 of its order (at page 26 of the paper book). On going through the reasoning which is confined only to paragraph 5 of the order we are compelled to observe that the discussion fails to draw any required strength much less to justify interference with the order of the Income-tax Officer. The first appellate authority appears to have been unnecessarily influenced by the figure of Rs. 46 lakhs appearing to him as a massive investment. It is observed that the new unit can substantially operate and exist independently and separately of the old unit and the marginal dependence of some of the facilities of the old unit by the new unit cannot be a disqualification in granting deduction under Section 80J of the Act. Thereafter we get the following observations :
"In fact, the law itself provides for such a dependence by ignoring the utilisation of old plant and machinery to the extent of 20 per cent. of the total plant and machinery employed in the new unit. Having a common inlet for carbon monoxide or a common outlet in the matter of marketing and sales are only tests of prudent business management in these days. Those factors cannot be treated as destructive of the independent nature of the new unit. After all the business is one and the various units cannot function as strangers or enemies in the overall conduct of the business. Thus having regard to the facts and circumstances of the claim, I would hold that the appellant should get the benefit of deduction under Section 80J in respect of capital employed in the new unit. The capital, no doubt, is to be computed as laid down in Section 80J."
9. This is the discussion by the first appellate authority.
10. What we find from the further travel of the proceedings of the Income-tax Appellate Tribunal, Cochin Bench, at the instance of the Revenue is no wonder that the Tribunal felt the need for fresh investigation on the facts of this case compelling it to call for a remand report. In paragraph 5 (at page 35 of the paper book annexure "C") the Tribunal has reproduced the contents of the said remand report dated November 6, 1984. The factual peculiarities of the location are available in the following manner :
"It is not correct to say that the new unit is housed in a different building. On the contrary the correct factual position is that the so called new unit is also housed in the same building where the old plant is also erected. It is seen that the additional space necessary for installing the machinery of the new unit was made available by removing one longitudinal wall of the old building and enlarging the old building by extending the cross walls and constructing a new wall lengthwise. Of course fresh roofing had to be given to the enlarged area, but the roofing is contiguous with the roofing of the building of the old unit. There are four rows of autoclaves and formate acid Sections erected in the common hall. Of these, two rows are stated to belong to the existing unit and the other two to the new unit. There is no partition whatsoever between the rows of the machinery of the two units. Unless somebody specifically points out that there are two units inside the hall, it is improbable that anybody will be struck by such an idea. As a result the overall impression which any viewer is likely to form is that of a single industrial undertaking functioning under a common roof."
11. In addition thereto, the remand report also places on record certain factual peculiarities to show the commonness as far as the existing unit and the so called new unit. In the same paragraph, the following features are specified ;
(i) common pipeline to bring carbon monoxide gas necessary for the manufacture of formic acid from FACT up to the compression section, though thereafter the independent pipelines take carbon monoxide to individual autoclaves of the old and new units.
(ii) the boiler house is one and the same for both the units and the pipelines in regard thereto are also the same.
(iii) the purchases of raw materials are also commonly made.
(iv) sales of finished products are also effected as the common process.
(v) there is one licence for both the units as one factory and the licence fee is paid in pursuance of a single demand notice.
(vi) the situation did not necessitate taking a separate licence from the factories department.
(vii) there is one electricity bill from the K.S.E.B. not showing electricity charges payable by the old and new unit separately.
(viii) Although there are two plant supervisors, nobody is assigned specific duty to any particular plant and this is also the situation in regard to the deployment of workers.
(ix) workers are shifted from one plant to another every three months and there is only a common catering facility, only one workshop catering to the needs of both the plants.
12. It is on the basis of these factual peculiarities, the Appellate Tribunal, on the facts, reached the conclusion that the first appellate authority was in error in allowing the deduction under Section 80J and restored the orders of the Income-tax Officer as a consequence.
13. Shri Ramachandran Nair appearing for the assessee in all these references strenuously contended that every new creation in business is some kind of expansion and advancement and that by itself should not be a factor in the rejection of the statutory benefit of Section 80J of the Act. Learned counsel submitted that the true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but it is necessary to find out as to whether it is new and identifiable, as separate and distinct, from the existing business. Learned counsel in this context submitted that one of the surest tests would be to find out as to whether in the event of the existing undertaking coming down to a closed undertaking, whether the industry in regard to which a claim for deduction under Section 80J is sought to be made, could continue to function independently by itself with no effect of closure of the existing establishment in any way whatsoever. Learned counsel submitted that if this is the position on the basis of which it can be ascertained that the industry in regard to which a claim under Section 80J of the Act is sought to be made out, it would have to be understood as one being entitled to be considered for the purpose of deduction under Section 80J of the Act. In other words, learned counsel submitted that as to whether the installation is an extension of the old building, as to whether the extension appears to be a new building by itself would not be one of the determinative factors going to the rejection of the claim. Undisputedly, learned counsel placed strong reliance on the decision of the apex court in Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195. Taking us through the said decision, learned counsel also invited our attention to its reference in paragraph 12 of the judgment of the Appellate Tribunal. There can hardly be any dispute and quarrel with regard to the proposition. The Tribunal has also, after considering the said declaration of law, allowed the appeal and restored the order of the Income-tax Officer with regard to the rejection of the claim for deduction. The Tribunal has proceeded to apply the test laid down by the apex court to the peculiar factual matrix available through the remand report dated November 6, 1984, of the Income-tax Officer. We have quoted the text of the said remand report as available in paragraph 5 (at page 35 of the paper book) of the judgment of the Tribunal. In addition thereto, we have also specified various aspects and if these aspects are taken into consideration, even the test as suggested by learned counsel would not be of any help to the assessee. There are several factors that are revealed from the inspection report which would show not only the common functioning but also the inseparable (character leading to the inescapable situation that if one unit is closed the other unit will have to follow suit. There is a common pipeline, there is a common boiler house and there is common purchase of raw materials. Therefore, if all the features that are available through the remand report dated November 6, 1984, are taken into consideration, left to ourselves we also would not be able to reach any other conclusion than the one reached by the Tribunal. In fact, the Tribunal is more than justified having been placed in a situation of the generality of the observations in paragraph 5 of the order of the first appellate authority to call for the remand report and it is also necessary for us to record that the remand report gives minute details not only with reference to the location but also with reference to the management on the basis of which the factual position could get determined rightly by the Tribunal. The apex court itself has observed that no particular decision in one case can lay down an inexorable test to determine whether a given case comes for a claim after deduction or not, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. In our judgment, it is not possible, although relating to factual basis, to interfere with the careful and cautious order of the Income-tax Appellate Tribunal (annexure "C").
14. For all the above reasons, the question is answered in the affirmative, in favour of the Revenue and against the assessee.
15. A copy of the judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.