Bombay H.C : Whether the applicant’s powder manufacturing unit was an industrial undertaking ‘formed by . . . the reconstruction of a business already in existence’ within the meaning of s. 80J(4) and, therefore, not entitled to deduction under s. 80J(1) ?

Counsel Appeared

Dalvi, i/b M/s Rustamji & Ginwala, for the Assessee : G.S. Jetly, Mrs. Manjula Singh & K.C. Sidhwa, for the Revenue

D. SUGLA, J. :

The following three questions of law have been raised in this reference at the instance of the assessee : “

(1) Whether the applicant’s powder manufacturing unit was an industrial undertaking ‘formed by . . . the reconstruction of a business already in existence’ within the meaning of s. 80J(4) and, therefore, not entitled to deduction under s. 80J(1) ?

(2) Whether the Addl. CIT was competent to revise the assessment order for the asst. yr. 1970-71 in view of the fact that the question regarding the applicability of s. 80J was determined in the assessment for the asst. yr. 1969-70 ?

(3) If the answer to the above question is in the affirmative, in any event, whether the Addl. CIT, while revising the assessment for the asst. yr. 1970-71 was competent to enhance that assessment by the amount of Rs. 45,442 which was the deduction granted in the assessment order for the asst. yr. 1969-70, the revisional proceedings against which had become time-barred ?”

2. The assessee-company carries on a business of manufacture of sintered bearings out of copper and iron powder. Up to the asst.yr. 1969-70, it was importing copper powder. During the previous year for the asst. yr. 1969-70, it started a new unit for the manufacture of copper powder. The assessee claimed that the new unit was entitled to relief under s. 80J of the IT Act and computed the relief at Rs. 45,442. For paucity of profits, this relief remained unabsorbed. For the asst. yr. 1970-71, the relief was computed at Rs. 54,506. Total of two years relief thus worked out to Rs. 99,948 which was claimed against income for the asst. yr. 1970-71. The ITO accepted the returns under s. 143(1) of the IT Act, 1961.

3. On perusal of the records, the Addl. CIT felt that the assessee-company did not fulfil the conditions laid down in s. 80J of the IT Act. Accordingly, after giving the assessee an opportunity of being heard, he passed an order under s. 263 of the Act enhancing the total income for the asst. yr. 1970-71 by the said sum of Rs. 99,948. Following the Calcutta High Court decision in CIT vs. Textile Machinery Corporation (1971) 80 ITR 428 (Cal), he held that the new unit set up by the assessee was not an industrial undertaking within the meaning of s. 80J and that the assessee had not maintained separate accounts for the new unit. He rejected the assessee’s contention that this question could not be considered in the proceedings for the asst. yr. 1970-71 as the new unit was set up and the relief was claimed and allowed for the first time in the asst. yr. 1969-70.

4. The assessee carried the matter in appeal to the Tribunal. The Tribunal confirmed the order of the Addl. CIT. According to the Tribunal also, the new unit started for manufacture of copper powder amounted to reconstruction of business and was hit by the provisions of s. 80J(4)(i) of the Act in view of the Calcutta High Court decision in (1971) 80 ITR 428. Distinguishing the case of CIT vs. Indian Aluminium Co. Ltd. (1973) 88 ITR 257 (Cal), the Tribunal agreed with the Addl.CIT that the assessee had not maintained separate accounts for its new unit and that in view of the Supreme Court decision in the case of CIT vs. Manmohan Das (1966) 59 ITR 699 (SC), the Addl. CIT was justified in considering the question of deduction under s. 80J of the Act in the proceedings for the asst. yr. 1970-71 as the claim under s. 80J was given set off for the first time in that year.

5. The judgment of the Calcutta High Court in (1971) 80 ITR 428 has been reversed by the Supreme Court in Textile Machinery Corporation Ltd. vs. CIT 1977 CTR (SC) 151:(1977) 107 ITR 195 (SC). The judgment in the case of CIT vs. Indian Aluminium Co. Ltd. (1973) 88 ITR 257 (Cal) has been confirmed in (1977) 108 ITR 367 (SC). It has been held that a new activity launched by an assessee by establishing a new plant and machinery by investing substantial funds may produce some commodities of the old business or it may produce some other distinct marketable products or even commodities which may feed the old business. These products may be reconsumed by the assessee in his old business or may be sold in the open market. Such an undertaking cannot be said to have been formed by the reconstruction of the old business and denied the benefit of s. 15C which corresponds to s. 80J of the new Act merely because it goes to expand the existing business of the assessee in some directions. Two reasons given by the Addl. CIT and upheld by the Tribunal in this case for holding that the new unit started by the assessee is not an industrial unit within the meaning of s. 80J are (1) that the new unit was manufacturing copper powder which it was earlier importing from abroad and which powder it was using in its own factory for manufacture of its old products, and (2) no separate accounts were maintained in respect of this activity. As regards the first objection, we have already stated that the Supreme Court had reversed the Calcutta High Court’s decision on the basis of which the new unit was not considered to be a new industrial undertaking within the meaning of s. 80J(4) by the Addl. CIT as well as the Tribunal. As regards the second objection that no separate accounts were maintained in respect of this activity, s. 80J does not envisage any such requirement. Moreover, separate accounts in the ledger have been kept by the assessee in respect of the new unit upon the basis of which the profits have been determined.

6. Accordingly, the first question of law referred to us is answered in the negative and in favour of the assessee. Having regard to that answer, questions Nos. 2 and 3 need not be considered.

No order as to costs.

[Citation : 177 ITR 111]