1. This is a reference under section 66(1) of the Indian Income tax Act, 1922, and two questions are referred to us for our consideration, one at the instance of the Commissioner and the other at the instance of the assessee. These two questions are as follows :
'(1) Whether, on the facts and in the circumstances of the case, and on a proper construction of section 15C(2)(i), the assessee is entitled to the exemption in section 15C(1) for the assessment years 1958-59 to 1961-62 in respect of the textile department unit
(2) Whether wealth-tax payable by the assessee is an allowable expenditure in the computation of the business income under the Income Tax Act ?'
2. Now, as far as question No. 2 which is referred to us at the instance of the assessee is concerned, counsel have stated that the matter is concluded by the amendment made to the Indian Income-tax Act, 1922, by section 4 of the Income-tax (Amendment) Act of 1972 (No. 41 of 1972), and further that the point is also concluded by a decision of this court given on 19th July, 1974, in Income-tax Reference No. 34 of 1965 : Commissioner of Income-tax v. Elphinstone Spg. & Wvg. Mills Co. Ltd. : 100ITR139(Bom) . Accordingly, it is agreed that the said question may be answered in the negative and against the assessee. We are, therefore, now concerned with question No. 1 only.
3. A few facts may be stated : The assessee is a non-resident company, and we are concerned with the assessment years 1958-59 to 1961-62. In the previous year for the assessment year 1950-51, which was the first assessment in the assessee's case, it was doing the business of manufacturing asbestos textile products in a factory rented at Sewri. The trade name of the products in those days was 'Fysax'. This Sewri factory was closed in 1955 and thereafter the assessee-company ceased to manufacture Fysax asbestos textiles. In 1954, the assessee acquired certain land at Ghatkopar and erected new factories, one of which, called the textile department, was for the manufacture of asbestos yarn and other asbestos products with the trade name 'Firefly'. When the factory for the textile department at Ghatkopar was set up, the assessee-company transferred to it some items of machinery and equipment which were formerly used in the Sewri factory. The original cost of such transferred items was Rs. 73,778, but their written-down value on the date of the transfer was about Rs. 26,000. It appears that the Tribunal had gone through the list of machinery which was transferred and found that the included items like portable platform scale, electric blower, fire extinguisher, etc. The main item of machinery transferred consisted or braiding machines used for twisting of yarn.
4. In the assessment years with which we are concerned the assessee claimed exemption under section 15C for all the units set up at Ghatkopar. The Income-tax Officer and the Appellate Assistant Commissioner held that the textile department unit was not entitled to the benefit of exemption under section 15C in view of the fact that some items of machinery belonging to the old Sewri factory had been transferred to and used in the new factory. The relevant statutory provision which was considered by these two authorities and subsequently by the Tribunal was section 15C(2)(i); this reads as follows :
'15C. (2) This section applied to any industrial undertaking which -
(i) is not formed by the splitting up, or the reconstruction of, business already in existence of by the transfer to a new business of building, machinery or plant previously used in any other business.'
5. It was the admitted position that some items of machinery had been transferred to the new textile department at Ghatkopar. The Tribunal addressed itself to the question whether the new textile department could be said to be formed by the transfer to it of machinery or plant previously used, and it observed :
'Now, if we pose to ourselves the question how the textile department was formed, the obvious answer would be that the unit was formed by purchasing land at a cost of about Rs. 4 1/2 lakhs, erecting buildings costing Rs. 8.63 lakhs, importing and installing machinery and equipment worth about Rs. 13 to 14 lakhs, and also providing further floating capital of about Rs. 20 Lakhs. A person who is very meticulous about details might remember that some minor equipment of the old Sewri factory with written down value of Rs. 26,000 was reconditioned and utilised in the new unit, but it would never be suggested that the new factory was 'formed' with this old reconditioned machinery. The Bombay High Court has held that exemption should be granted if it could be done without doing violence to the language; in this case, to deny exemption we shall have to do some violence to the language and say that this new factory was formed by transferring old machinery to it. We, therefore, accept the contention of Shri Palkhivala and direct the Income-tax Officer to give benefit of section 15C to the textile department as in the case of other units erected at Ghatkopar.'
6. In the impugned order the Tribunal has referred to and relied on the approach commended by this court in Commissioner of Income-tax v. Gaekwar Foam and Rubber Co. Ltd. : 35ITR662(Bom) , where it was observed that the exemption provisions in section 15C of the Act must, as far as possible, be liberally construed and in favour of the assessee, provided that in doing so no violence was being done to the language used. The principal was subsequently reiterated by a later judgment of this High Court in Capsulation Service Pvt. Ltd. v. Commissioner of Income-tax : 91ITR566(Bom) , where it was observed :
'The scheme of the section is to encourage new industrial undertakings provided they fulfill the conditions mentioned in the various clauses of the sub-section. In order to be entitled to exemption an assessee must strictly come within the terms of the provisions under which such exemption is being claimed, but in construing the provisions of this section, one must construe the said section reasonably in the context of the purpose for which the section has been introduced. It is a well-settled canon of construction that the provision relating to exemption must as far as possible be liberally construed and in favour of the assessee, provided in doing so no violence was being done to the language used.'
7. It may be mentioned that the facts in the two matters considered by our High Court, whose judgment are referred to above, were different from the facts before us. On the facts as found by the Tribunal, the position is that the new textile department at Ghatkopar was formed by the purchasing certain land at a cost of about Rs. 4 1/2 lakhs, erecting building costing over Rs. 8 1/2 lakhs, importing and installing machinery and equipment worth about Rs. 13 to 14 lakhs. Without considering the floating and the working capital required to operate this department, the fixed capital would aggregate to about Rs. 26 lakhs. Whether the entire fixed capital or only the machinery and equipment installed (the latter costing about Rs. 13 to 14 lakhs as found by the Tribunal) is taken into consideration, it is clear that the old machinery of the Sewri factory transferred to the new undertaking, whether the original cost or the written down value be regarded as reflecting its seal value, formed but a small and insignificant part of the new department. Can the new textile department at Ghatkopar be then said to be formed by transferring to it the old Sewri machinery A very similar question came to be considered by the Delhi High Court in Commissioner of Income-tax v. Ganga Sugar Corporation Ltd. : 92ITR173(Delhi) . In the case before the Delhi High Court the assessee, which carried on the business of manufacturing sugar, had a plant operated by steam for manufacturing sugar, which in 1955 had a crushing capacity of 1,050 tons sugarcane per day. In the accounting period relevant to the assessment year 1957-58, the company installed at a cost of Rs. 1 crore 10 lakhs a new plant operated by electricity for manufacturing sugar with a daily crushing capacity of 4,000 tons. The old building was completely overhauled and new buildings were constructed for housing this plant on land which was acquired in 1934. The value of scrap and material of the old unit used in the erection of the new plant was a small fraction, i.e., about 1% of the expenditure involved in the setting up of the new plant. Both the old and the new factories were run simultaneously in the assessment year 1957-58, but in the assessment year 1958-59 the old factory was completely scrapped and only the new factory was run. The question considered by the Delhi High Court was whether the assessee-company was entitled to the benefit of partial exemption from tax under section 15C of the Indian Income-tax Act, 1922, in respect of the profits and gains derived from the new plant and machinery installed, which question was answered in favour of the assessee. The Delhi High Court observed that the use of scrap and material of the old unit of the value of a small fraction of the expenditure involved in the setting up of the new unit would not attract the concluding words of clause (1) of section 15C(2). The relevant passage is to be found at pages 180-181 of the report.
8. Whether we consider the value of the Sewri machinery transferred to the textile department at Ghatkopar in conjunction with the entire cost in the setting up of the Ghatkopar unit (textile department) or only the machinery imported and installed therein, the value of the transferred machinery forms but a small fraction of the assets employed in the textile department at Ghatkopar. In my view, the word 'formed' to be found in the clause which is under consideration must be given its due significance. The relief under section 15C cannot be denied to an assessee merely because some existing building, plant or machinery is transferred to and utilised in the formation of the new undertaking irrespective to the importance and essentiality of the old building, machinery or plant to the new undertaking. One of the very important aspect to be considered must be the monetary value of the old assets transferred to and utilised in the new undertaking. Where the old machinery utilised cannot be regarded as important or essential to the new undertaking and where its value is comparatively very small (and in the actual case before us it only comes to hardly one or two per cent. of the capital assets employed in the new undertaking), the assessee on the ground of such utilisation should not be denied relief under section 15C if it is otherwise entitled to the same.
9. Applying the approach commended by this court in Commissioner of Income-tax v. Gaekwar Foam and Rubber Co. Ltd. : 35ITR662(Bom) and reiterated in Capsulation Service Pvt. Ltd. v. Commissioner of Income-tax : 91ITR566(Bom) and respectfully agreeing with the approach of the Delhi High Court in Commissioner of Income-tax v. Ganga Sugar Corporation Ltd. : 92ITR173(Delhi) , I am of opinion that the question posed for our decision at the insurance of the Commissioner, to be found in para. 6 of the statement of the case, must be answered in the affirmative and in favour of the assessee.
10. I agree and have nothing to add.
BY THE COURT : The question in para. 6 of the statement of case is answered in the affirmative and in favour of the assessee; the question in para. 7 is answered in the negative and against the assessee.
11. Parties will bear their own costs of this reference.