1. At the instance of the assessee the following three questions have been referred to us for our determination :
'1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 6,29,663 shown as a provision for payment of gratuity on the balance-sheet as at December 31, 1956, the valuation date, was a debt owed liable to be deducted in computing the net wealth of the assessee as on the said valuation date under section 2(m) of the Wealth-tax Act, 1957
2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 32,22,886 was similarly liable to be allowed as a deduction as a debt owed in computing the net wealth of the assessee as on the said valuation date under section 2(m) of the Wealth-tax Act, 1957
3. Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,88,18,634 or any part thereof was eligible for exemption from wealth-tax under section 5(1)(xxi) of the Wealth-tax Act ?'
2. The amounts claimed as deduction in the first two questions relate to provisions for payment of gratuity and Mr. Mehta has fairly drawn our attention to the two decision of the Supreme Court in the case of Standard Mills Co. Ltd. v. Commissioner of Wealth-tax : 63ITR470(SC) and in the case of Bombay Dyeing and . v. Commissioner of Wealth-tax : 93ITR603(SC) , wherein the Supreme Court has taken the view that in computing the net wealth of the assessee-company as defined in section 2(m) of the Wealth-tax Act, 1957, or in assessing the net value of the assets under section 7(2), the estimated liability of the company in respect of gratuity in terms of industrial court awards fort the benefit of its employees in respect of their periods of service up to the valuation date was not deductible. In view of this decision, after reserving his right to argue before the Supreme Court to persuade them to take a contrary view, he stated that the first two questions shall have to be answered against the assessee in the negative. Accordingly, the facts necessary for the first two questions need not be stated.
3. So far as the third question is concerned, the assessee claimed exemption from tax for a sum of Rs. 1,88,18,634 being the investment made in a new unit, a rayon plant, under section 5(1)(xxi) of the Act. The assessee is engaged in the manufacture of textile fabrics and it is the case of the assessee that the above rayon plant was a new and separate unit set up by way of substantial expansion of its undertaking. The claim for exemption was rejected by the Wealth-tax Officer by reason of the following facts and materials :
1. The decision to put up a rayon plant for the production of viscose filament rayon yarn was taken at the meeting of the board of directors on May 17, 1954.
2. The scheme was approved at the general meeting of the shareholders held on June 7, 1954.
3. An agreement for the supply of he main plant and the erection of plant and machinery was entered into with V. K. International Corporation of U.S.A. on July 31, 1954.
4. A licence for the new industrial undertaking was obtained from the Government on August 18, 1954, and lands were procured from the Government of Bombay immediately thereafter.
5. The building operations commenced on November 1, 1954.
6. The first consignment of machinery and plant was received on February 8,1955.
7. Some of the building for housing the ancillary plants were complete early in 1956. The building and the main factory was almost complete by September, 1956.
8. Four out of eighteen spinning machines of the new plant with a production capacity of 5 1/2 tons per day started working immediately.
9. Another nine spinning machines with similar production capacity started working by December, 1956.
10. The plant reached full production capacity in June, 1957.
The contention of the assessee before the Wealth-tax Officer was that though the plant had started production in September, 1956, the setting up of the new unit was till in progress before the commencement of the Act and reached full production subsequent to the commencement of the Act when only it was complete. That contention was rejected by the Wealth-tax Officer. He took the view that 'the meaning of the phrase 'set up' is quite clear from the context of the clause itself. It simply connotes the erection or establishment o a new plant. No other meaning can be given to this phrase. A new unit in the case of the assessee was established long before and was duly set up before the commencement of the Act and almost reached full production prior to the commencement of the Act.'
4. In an appeal by the assessee the Appellate Assistant Commissioner confirmed the order of the Wealth-tax Officer; it was also confirmed by the Tribunal in a second appeal preferred by the assessee. The Tribunal found that the rayon factory having been ready to commence production, though it was in stages that the production was started according to the spinning machines that were erected, before the coming into operation of the Wealth-tax Act, the assessee was not entitled to claim exemption under section 5(1)(xxi) of the Act. An alternative plea was advanced on behalf of the assessee before the Tribunal that at least proportionate exemption should be given in respect of that part of the unit which went into production after April 1, 1957, as having been set up after the coming into force of the Act, but the said contention was also rejected. According to the Tribunal, the unit is spoken of as a whole and no expansion of such new an separate unit, once the unit has already been set up, is shown as eligible for proportionate exemption. Initially, the unit was expected to produce 5 1/2 tons per day. There was a programme of expansion of he plant to increase the capacity to 12 tons per day. This was not a case of the earlier unit being one unit and the increased capacity was sought to be achieved by establishing a different unit. It was the same unit that had already been set up of which a future expansion was contemplated. Accordingly, the claim for proportionate exemption was also rejected.
5. Mr. Mehta, on behalf of the assessee, submitted that right form the inception it was the intention of the assessee-company to set up a new rayon plant consisting of 18 spinning machines. His submission was that until the entire plant consisting of 18 separate spinning machines is set up the unit cannot be said to have been set up. According to him, both the taxing authorities and the Tribunal were in error in taking the view that simply because in respect of some of the machines production had started prior to the commencement of the Act the unit could not be regarded as having been set up after the commencement of the Act. In short, his submission was that until the full production as contemplated by the assessee was achieved the unit was not set up and as such production capacity was achieved after the commencement of the Act, the claimant is entitled to the benefit of exemption under section 5(1)(xxi) of the Act.
6. Section 5(1)(xxi) of the Act is as under :
'5(1). Subject to the provision of sub-section 1(A), wealth-tax shall not be payable by an assessee in respect of the following assets and such assets shall not be included in the net wealth of the assessee - ........
(xxi) that portion of the net-wealth of a company established with the object of carrying on an industrial undertaking in India within the meaning of the Explanation to clause (d) of section 45, as is employed by it in a new and separate unit set up after the commencement of this Act by way substantial expansion of its undertaking.'
7. The assessee-company decided to put up a rayon plant for starting production of viscose filament rayon yarn. The short question to be considered is whether this new and separate unit was set up prior to the commencement of the Act. If it was set up prior to the commencement of the Act, then the benefit of the exemption under clause (xxi) will not be available to the assessee but if it was set up after the commencement of the Act, then the assessee will be entitled to the exemption.
8. The question that has to be considered in this case is, when a new and separate unit can be regards s set up by the assessee-company. It is not controverted before us, nor was it controverted before the taxing authorities or the Tribunal that the intention of the assessee was to have production of 12 tons per day by installing 18 spinning machines. It appears from the findings of the Wealth-tax Officer that not only the work of construction of the building was commenced and the plant and machinery was set up, but even the entire building and the main factory was almost complete by September, 1956. As a matter of fact four out of the eighteen spinning machines of the new plant with a production capacity of 5 1/2 tons per day started working immediately, i.e., from September, 1956. Further, other nine spinning machines with similar production capacity started working by December, 1956. The Act came into operation on April 1, 1957. Thus, the production was started some months prior to the date of commencement of the Act. It is not correct to say that the new unit was not set up until the entire installation of 18 spinning machines was completed in June, 1957. The expression 'set up' has been used both in the Income-tax Act as well as in the Wealth-tax Act. The meaning of that expression came up for consideration under the Income-tax Act before this High Court in the case of Western India Vegetable Products Ltd. v. Commissioner of Income-tax : 26ITR151(Bom) . Chief Justice Chagla points out :
'It seems to us, that the expression 'setting up' means, as is defined in the Oxford English Dictionary, 'to place on foot' or 'to establish' and in contradistinction to 'commence'. The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But there may be an interregnum, that may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deduction under section 10(2).'
9. This interpretation put by this court upon the expression 'set up' has been followed by the Madras High Court in the case of Ramaraju Surgical Cotton Mills Ltd. v. Commissioner of Wealth-tax : 46ITR820(Mad) . This is a case under the Wealth-tax Act and the expression 'set up' came to be interpreted in the context of section 5(1)(xxi) as exemption was claimed as a new an separate unit set up after the commencement of the Act. The Madras High Court at page 824 observes :
'Unless a factory is erected and the plant and machinery installed therein, it cannot be said to have been set up. The resolutions of the board of directors, the orders placed for purchasing the machinery, the licence obtained from the Government for constructing the factory, are merely initial stages towards setting up, however necessary and essential they may be to further the achievement of the end. It is not, however, the actual functioning of the factory or its going into production that can alone be called setting up of the factory. The setting up is perhaps a stage anterior to the commencement of the factory.'
10. After referring to the decision of the Bombay High Court in the case of Western India Vegetable Products Ltd. : 26ITR151(Bom) , the Madras High Court went on to observe-See : 46ITR820(Mad) ;
'In our opinion, the proper meaning to be assigned to the expression 'set up' in section 5(1)(xxi) would be 'ready to commence business'.'
11. Thus' what the expression 'set up' means in law both under the Income-tax Act as well as under the Wealth-tax Act is well settled in view of these decisions. The stage of setting up a unit is anterior to the stage of commencement of business. In the present case' the finding of the Wealth-tax Officer that production had started in September, 1956' has not been challenged before us. The entire factory was complete by September' 1956' and even in that month production capacity of 5 1/2 tons per day was achieved with the help of 4 out of 18 spinning machines of the new plant. Even within a few months thereafter another nine spinning machines with similar production capacity started working by December, 1956. It is true that as intended by the assessee-company all the 18 spinning machines were not installed prior to April 1, 1957, but simply because of that factor it is not possible for us to take the view that even when the initial production had started the new and separate unit of rayon factory could not be regarded as having been set up. Having regard to the facts of the present case as found by the Wealth-tax Officer the new and separate unit of rayon factory was not only set up in September, 1956, itself but it had commenced production and business from and after that date. It is not possible for us to take the view that under section 5(1)(xxi) of the Act until all the 18 spinning machines are installed and start production the new and separate unit cannot be regarded as set up.
12. Before us no contention is urged by mr. Mehta claiming proportionate exemption in respect of machines which were set up from and after April 1, 1957, in view of the fact that on the fact that on the principal question we have not accepted his contention.
13. In the result, our answer to question No. 3 is in the negative an in favour of the revenue. The assessee shall pay the costs of the revenue.