Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs U. Foam Private Limited on 12 February, 1987
Equivalent citations: [1987]167ITR586(AP)
Author: K. Ramaswamy
Bench: K. Ramaswamy
JUDGMENT K. Ramaswamy, J.
1. Pursuant to the direction issued by this court under section 256(2) of the Income-tax Act 1961 (Act 43 of 1961), for short "the Act", the following question has been referred which reads thus :
"Whether on the facts and in the circumstances of the case, the assessee is entitled to relief under section 84/80J for the assessment years 1967-68 to 1969-70 ?"
2. The undisputed fats are that the assessee-company commenced its production in the year 1960 in the manufacture of foam using the prepolymer foam system. On June 1, 1963, a fire broke out in the assessee's business premises and the entire building, plant and machinery were reduced to ashes and the whole factory had been destroyed. The company thereafter obtained a fresh licence on December 21, 1963, and entered into a new agreement with the Andhra Pradesh State Electricity Board for the supply of power and obtained a fresh connection. The company approached the Controller of Imports and Exports and obtained a licence to import machinery. After the machinery was imported, new plant and machinery with a capital outlay of Rs. 3,50,000 was installed. Though, in the first instance, a different site was allotted, the original site was reallotted. The said plant and machinery was installed in the month of February, 1964. The assessee started production of polyurethane foam. Initially, the Income-tax officer granted rebate under section 80J of the Act, which was previously section 84, for the assessment years from 1967-68 to 1969-70. But in exercise of power conferred under section 147(b) of the Act, the Income-tax officer had withdrawn the benefit and reassessed. The ground on which the said finding was arrived at is that the industrial undertakings a reconstructed one falling within sub-section 4(i) of section 80J of the Act. As a result, the assessee is not entitled to the rebate under section 80J(1) of the Act. In support hereof he placed reliance on CIT v. Textile Machinery Corporation . On appeal, the Appellate Assistant Commissioner held that the industrial undertaking is a new one. The commodity production by the assessee is also a new one. Power was obtained after making a fresh agreement with the electricity department. Export and import licence were obtained afresh. Therefore, it is not a reconstruction. He placed reliance on CIT v. Gaekwar Foam and Rubber Co. Ltd. [1959] 35 ITR 662 (Bom). The Revenue went in appeal. The Income-tax Appellate Tribunal confirmed the view of the Appellate Assistant Commissioner. Thus this reference.
3. Sri M.S.N. Murthy, learned standing counsel for the Revenue, has contended that the view of the Income-tax officer is clearly supportable from the facts in this case. The plant was established on the old site and the nature of the product is the foam. Though new machinery was installed, since the production is the same, namely, manufacture of foam, it is only reconstruction after the fire in this case. Therefore, the Tribunal committed a grievous error of law in according rebate in the computation under section 80J(1) of the Act. We are unable to agree.
4. The fact as set out hereinbefore are not in dispute. As a matter of fact, the Appellate Assistant Commissioner and the Tribunal have concurrently found these facts. Form the above stated facts, the only question that arises for consideration is whether the industrial undertaking is, as a result of reconsideration, one falling within the meaning of sub-section (4)(i) of section 80J of the Act. What is the meaning of the word "reconstruction" is the question. The word "reconstruction" was considered in In re South African Supply and Cold Strong Co. [1904] 2 Ch 268 (Ch D), Buckley J., dealing with the meaning of the word "reconstruction" in a company matter, observed at page 286 thus :
"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 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. It does not involve that all the assets shall pass to the new company or resuscitated company, or that all the shareholder 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."
5. This concept was accepted by the Bombay High Court in CIT v. Gaekwar Foam and Rubber Co. Ltd. [1959] 35 ITR 662, wherein it was held thus (p. 671) :
"Now fully appreciating the distinction which counsel for the Revenue has sought to make between the case of a reconstruction of a company and the case of reconstruction of a business, these observations, as we read them, are equally illuminating in the context of reconstruction of a business already in existence in the case of a newly established industrial undertaking."
6. This view was approved by their Lordships of the Supreme Court in Textile Machinery Corporation Ltd. v. CIT [197] 107 ITR 195. Goswami J., speaking for the court, while considering section 15C of the Indian Income-tax Act, 1922, which is the same as sub-section (4)(i) of section 80J of the Act held thus (p. 204) :
"such a new industrially recognisable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer of any asset of the old business to the new undertaking which takes places when there is reconstruction of the old business. For the purpose of the section 15C, the industrial units set up must be new in the sense that new plant and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of the section 15C, the new undertaking must be formed by reconstruction of the old business."
7. It was further held as follows (p. 206) :
"If any undertaking is not formed by the reconstruction of the old business, that undertaking will not be denied the benefit of section 15c simply because it goes to expand the general business of the assessee in some direction."
8. The view, in fact, of the Calcutta High Court relied on by the Revenue is reversed. The above view is reiterated by the latest decision of the Bombay High Court in CIT v. Simmonds Marshall Ltd. (1986) 161 ITR 817 and by the Madras High Court in CIT v. Madras Rubber Factory Ltd [1984] 149 ITR 405. We respectfully agree with the ratio in all the cases. We, therefore, hold that to attract sub-section (4)(i) of section 80J, there must be transfer of any assets of the old business to the new industrial undertaking to resuscitate the undertaking. It must be a new one in the sense that new machinery and plants are erected to produce the same or distinct goods by preservation of the old one to continue the old undertaking in the altered form so that the person carrying on the business will substantially do the same or similar business. Then only it must be held that it is a reconstructed old business and be denied the deduction of 6% of the profits or gains as rebate from the gross total income of the previous year relevant to the assessment year on the capital employed in the industrial undertaking. Applying the above principles, the facts now found are that the assessee factory was gutted to ashes in a fire accident. Thereafter, there was a cessation of production of prepolymer foam. In the year 1963, the assessee obtained new export and import licence and purchased new machinery with a capital outlay of Rs. 3,50,000. Thereafter, the machinery was installed and new connection for the supply of electrical power from the A.P. State Electricity Board was obtained. The new product in the assessee's new unit is polyurethane foam which is distinct from the prepolymer foam which was being produced before the fire accident. These circumstances clearly established that the assessee company is anew industrial undertaking producing polyurethane foam which is distinct and different from the prepolymer foam which was being manufactured prior to the accident. Under those circumstances, by no stretch of imagination can it be constructed to be a reconstruction within the meaning of sub section (4)(i) of section 80J of the Act. As a result, the assessee is entitled to the rebate of 6% as engrafted in section 80J(1) of the Act for a period of five year from the date of the establishment of the new industrial undertaking. According, we find that the appellate Assistant Commissioner and the tribunal are justified in law in holding that the assessee-industrial undertaking are justified in law in holding that the assessee-industrial undertaking is not a reconstructed one but a new one, entitled to the benefit of section 80J(1) of the Act.
9. The references is accordingly answered in favour of the assessee and against the Revenue. NO costs.