Patna High Court
Commissioner Of Income-Tax vs Ridhkeran Someni on 4 September, 1978
Equivalent citations: [1980]121ITR668(PATNA)
JUDGMENT
1. The Income-tax Appellate Tribunal, Patna Bench, has referred the following question of law under Section 256(1) of the I.T. Act, 1961 :
" Whether, on the facts and in the circumstances of the case, the assessee was entitled to claim exemption under the repealed Section 84 (now replaced by Section 80J) of the Income-tax Act, 1961 ? "
2. The relevant facts leading to this reference may be briefly stated. The assessee was a partner of Messrs. Bihar Trading Company, Bettiah. The business, it appears, was carried on in the name of North Bihar Saw Mill. Certain machineries were purchased for their installation at Ghorasahan in February, 1961. On April 15, 1961, the firm was dissolved. On the dissolution of the firm, the saw mill, which was under installation at Ghorasahan, came to the share of the assessee. During the assessment year 1962-63, the assessee claimed exemption in respect of the saw mill, whose installation was completed at Ghorasahan after dissolution of the partnership under Section 84 (now replaced by Section 80J) of the I.T. Act, 1961. The claim was on the ground that it was a new industrial undertaking.
3. The assessing officer held that the new industrial undertaking came into existence on the splitting up of the business of the said Bihar Trading Company. In this view of the matter, it was held that the assessee was not entitled to exemption as claimed by him. The AAC held that, on the facts and in the circumstances of the case, the assessee was entitled to exemption in respect of the new industrial undertaking. The Appellate Tribunal has confirmed the decision of the AAC. There has thereafter been reference to this court at the instance of the CIT.
4. Before the Tribunal, two alternative contentions were raised. It was contended that since the machineries of the saw mill came to the share of the assessee on dissolution of the Bihar Trading Company of which the assessee was a partner, it amounted to splitting up of the business already in existence which was being carried on by the Bihar Trading Company. Alternatively, it was contended that the industrial undertaking in question came into existence on the reconstruction of an existing business.
5. Section 84 of the Act, which is the same as Section 80J, grants exemption to newly established undertakings as mentioned in Sub-clause (1). Sub-clause (4), so far as it is relevant, states that the section applies to any industrial undertaking which is not formed by the splitting up, or the reconstruction, of a business already in existence. It is thus clear that if the new industrial undertaking could be said to have been formed either by the splitting up or reconstruction of business which was already in existence, the exemption could not be claimed.
6. The meaning of the expression " reconstruction " has now been finally settled by the decision of the Supreme Court in Texile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195, wherein the observation of Buckley J. in In re South African Supply and Cold Storage Co. [1904] 2 Ch 268 (Ch D), dealing with the meaning of the word " reconstruction " in a company matter, has been approved. The Supreme Court has also approved the decision of the Bombay High Court in CIT v. Gaekwar Foam and Rubber Co. Ltd. [1959] 35 ITR 662 as also the decision of the Delhi High Court in CIT v. Ganga Sugar Corporation Ltd. [1973] 92 ITR 173, 179, where the following observations were made :
" We have given the matter our earnest consideration and are of the view that in the reconstruction of a business, as in the reconstruction of a company, there is an element of transfer of assets and of some change, however partial or restricted it may be, of ownership of the assets."
7. After endorsing the above view, the Supreme Court observed (p. 206) :
" Reconstruction of business involves the idea of substantially the same persons carrying on substantially the same business."
8. It is thus clear that, in view of the facts stated, it cannot be said that the same persons were carrying on substantially the same business in this case. It is also clear that the business of the assessee could not be said to be reconstruction of a business already in existence.
9. In view of these decisions, learned standing counsel for the department did not seriously press the alternative argument which was canvassed before the Tribunal.
10. What was, however, pressed more seriously was the argument that the business of the assessee was formed on the splitting up of a business already in existence. Learned counsel referred to the decision of the Kerala High Court in Chembra Peak Estates Ltd. v. CIT [1972) 85 ITR 401 but it must be stated at once that this decision is of not much assistance as, in this case, on the facts, the Tribunal found that a new factory was formed by the splitting up of a business already in existence. Thus, the factual finding being as noticed above, the Kerala High Court held that the assessee was not entitled to exemption under Section 84(1) read with Section 84(2) of the Act.
11. In our view, it is not necessary to define as to what the expression " splitting up of a business " means. It will be sufficient to indicate that, in the facts and circumstances of the case, it cannot be said that the new industrial undertaking of the assessee was formed by the splitting up of any existing business. The view of the AAC and the Tribunal is also to the same effect. It has to be observed that the partnership business carried on in the name of Bihar Trading Company was dissolved on April 15, 1961. On the date of dissolution, the saw mill had not been completely installed or was so working at Ghorasahan. The assessee, on dissolution of the partnership, had no interest in the business which migh have been carried on by the other partners, either individually or collectively. Thus, it was a new business unconnected with the earlier business which was being carried on by the assessee in the accounting year in question. Had the saw mill at Ghorasahan been installed and working, perhaps, the matter would have required further consideration, but, in the circumstances, it is not possible to hold that the business of the assessee amounted to the splitting up of a business already in existence. In fact, the question whether the business was established on the splitting up of a business already in existence is primarily a question of fact. We do not find any error of law in the approach of the Tribunal. In the circumstences, we would answer the reference in favour of the assessee and in the affirmative. The reference is answered accordingly. The assessee will be entitled to costs. Hearing fee, Rs. 200.