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Canara Wire and Wire Products Ltd. Vs. First Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Bangalore
Decided On
Judge
Reported in(1984)9ITD807(Bang.)
AppellantCanara Wire and Wire Products Ltd.
RespondentFirst Income-tax Officer
Excerpt:
.....a new undertaking must be a new and identifiable undertaking separate and distinct from the existing business and this test has not been satisfied in the assessee's case. all that has been done is that only a new transformer and furnace have been put to use and in this process production capacity has increased. it is the same old steel wire and rods which is continued to be manufactured and nothing new or distinct which the existing business has been manufacturing. there is no new and identifiable undertaking, separate and distinct from the existing business. there was just an addition of new machinery and buildings to the existing unit and nothing more. thus, it is only an expansion of already existing business or reconstruction of the unit already in existence as distinct from.....
Judgment:
1. The first common point in all these years is with regard to relief under Section 80J of the Income-tax Act, 1961 ('the Act'). The assessee claimed that a new industrial undertaking has come into existence on account of the major expansion undertaken during the previous year relevant to the assessment year 1976-77. According to the assessee, the licensed capacity increased from 5,000 tons to 6,250 tons per annum.

The assessee has installed new furnace, new transformer and some new motors. On these facts, it was urged that new industrial undertaking has come into existence and the assessee is entitled for Section 80J relief. The ITO disallowed the claim. He held that no new industrial undertaking at all has come into existence to enable the assessee to claim Section 80J relief. It is only old assets which are employed as capital. A new undertaking must be a new and identifiable undertaking separate and distinct from the existing business and this test has not been satisfied in the assessee's case. All that has been done is that only a new transformer and furnace have been put to use and in this process production capacity has increased. It is the same old steel wire and rods which is continued to be manufactured and nothing new or distinct which the existing business has been manufacturing. There is no new and identifiable undertaking, separate and distinct from the existing business. There was just an addition of new machinery and buildings to the existing unit and nothing more. Thus, it is only an expansion of already existing business or reconstruction of the unit already in existence as distinct from an independent new business or new line of manufacture with new buildings, machinery or plant, etc.

Simply because there are additions to the existing machinery, i.e., installing a transformer and furnace, at a higher cost, the assessee will not be entitled to claim relief under Section 80J. Thus, he disallowed the claim of the assessee. On appeal, the Commissioner (Appeals) upheld the disallowance.

2. The learned Counsel for the assessee strongly urged that the lower authorities were wrong in holding that it is mere, reconstruction of the existing business. The licensed capacity has increased and the production has doubled. Thus, there was major expansion. Thus, a new industrial undertaking has come into existence. The assessee is entitled for the relief under Section 80J. The learned departmental representative submitted that no new industrial undertaking has come into existence and it is only reconstruction of the existing business.

Thus, the assessee is not entitled for the relief under Section 80J.3. We have considered the rival submissions. In our view, no new industrial undertaking has come into existence. All that the assessee has done is that a new transformer, furnace and motor were installed on account of which the production capacity has increased. It is in the same old building they have been installed. It is the same old steel wire and rods which has been manufactured. No separate and distinct identifiable industrial undertaking has come into existence. It is only reconstruction of the existing business. Thus, no new industrial undertaking has come into existence.

In Textile Machinery Corpn. Ltd. v. CIT [1911] 107 ITR 195 the Supreme Court held that the test should be whether it is all the same new and identifiable undertaking separate and distinct from the existing business. It was observed as under : Again, the new undertaking must not be substantially the same old existing business. The third excluded category mentioned above is significant. Even if a new business is carried on but by piercing the veil of the new business it is found that there is employment of the assets of the old business, the benefit will not be available.

From this it clearly follows that substantial investment of new capital is imperative. The words 'the capital employed' in the principal clause of Section 15C are significant, for fresh capital must be employed in the new undertaking claiming exemption. There must be a new undertaking where substantial investment of fresh capital must be made in order to enable earning of profits attributable to that new capital.

The assessee continues to be the same for the purpose of assessment.

It has its existing business already liable to tax. It produced in the two concerned undertakings commodities different from those which it has been manufacturing or producing in its existing business. Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter, to earn benefit from the exemption of tax liability under Section 15C. Sub-section (6) of the section also points to the same effect, namely, production of articles. The answer, in every particular case, depends upon the peculiar facts and conditions of the new industrial undertaking on account of which the assessee claims exemption under Section 15C. No hard and fast rule can be laid down. Trade and industry do not run in earmarked channels and particularly so in view of manifold scientific and technological developments. There is great scope for expansion of trade and industry. The fact that an assessee by establishment of a new industrial undertaking expands his existing business, which he certainly does, would not, on that score, deprive him of the benefit under Section 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under Section 15C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved. This has not happened here in the case of the two undertakings which are separate and distinct.

... One thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced and at least a minimum of ten persons with the aid of power and a minimum of twenty persons without the aid of power have been employed. 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 assets of the old business to the new undertaking which takes place when there is reconstruction of the old business. For the purpose of Section 15C the industrial units set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of Section 15C the new undertaking must be formed by reconstruction of the old business. Now, in the instant case, there is no formation of any industrial undertaking out of the existing business since that can take place only when the assets of the old business are transferred substantially to the new undertaking. There is no such transfer of assets in the two cases with which we are concerned.

It is clear from the above decision that the test to be applied is whether it is a new and identifiable undertaking separate and distinct from the existing business. Applying the above test to the facts of the instant case, we hold that a new and identifiable undertaking separate and distinct from the existing business has not come into existence.

All that the assessee has done is to install a new transformer, furnace and motor in the same old existing business and, thus, no new identifiable undertaking distinct from the existing business has come into existence. Thus, the assessee is not entitled for the relief under Section 80J. Thus, we uphold the orders of the lower authorities in disallowing the claim of the assessee made under Section 80J.4. The next ground that arises in the appeal for the assessment year 1976-77 is against the disallowance of initial depreciation on electrical fittings and water tank. The assessee claimed that the electrical fittings and water tank should be-considered as machinery and initial depreciation should be allowed. The lower authorities have disallowed the claim.

We have heard the parties. In our view, the assessee is entitled for initial depreciation on electrical fittings and water tank. The electrical fittings and water tank fall within the definition of 'plant'. Hence, the assessee is entitled for initial depreciation.

5. In CIT v. Taj Mahal Hotel [1971] 82 ITR 44 the Supreme Court held that sanitary and pipeline fittings fell within the definition of 'plant' in Section 10(5) of the Indian Income-tax Act, 1922 ('the 1922 Act') and the assessee was entitled to development rebate. In CIT v.Warner Hindustan Ltd. [1979] 117 ITR 15 the Andhra Pradesh High Court held that the definition of 'plant' in Section 43(3) of the Act is an inclusive definition and is of wide amplitude so as to take in even a well dug for the purpose of carrying on the business of the assessee and, hence, the assessee is entitled to depreciation and development rebate on the cost of digging well. This decision was again followed by the same Court in CIT v. Warner Hindustan Ltd. [1979] 117 ITR 68 (AP).

In CIT v. Caltex Oil Refining (India) Ltd. [1979] 116 ITR 404 the Bombay High Court held that the fencing round the refinery processing units constituted 'plant' so as to be entitled to depreciation and development rebate.

In Indian Aluminium Co. Ltd. v. CIT [1983] 140 ITR 114 the Calcutta High Court held that the water storage tank would be entitled for depreciation as plant and machinery.

In the above decisions it is held that the sanitary and pipeline fittings, wire fencing, water storage tank and well are to be treated as plant. The above ratio squarely applies to the instant case. We hold that the electrical fittings and water tank have to be treated as plant and the assessee is entitled for initial depreciation with respect to them. We direct the ITO to allow the same.

6. The next ground that arises for consideration in the appeal for the assessment year 1976-77 is with regard to development rebate claimed at 25 per cent of the value of the machinery installed during this year but allowed at 15 per cent by the lower authorities. The assessee produces wire rods. The assessee's case is that it falls within the ambit of item 1 of the Fifth Schedule of the Act, which reads as under : The ITO disallowed the claim on the ground that the assessee produces only iron rods and not iron and steel as such. On appeal, the Commissioner (Appeals) upheld the same.

7. The learned Counsel for the assessee submitted that even wire rods produced by the assessee come within the ambit of item 1 of the Fifth Schedule and so, the assessee is entitled for development rebate on the value of the machinery installed during this year. He placed reliance on an order of this Bench of the Tribunal in IT Appeal No. 574 (Bang.) of 980, dated 6-2-1982. The learned departmental representative submitted that the assessee only produces iron rods but not iron and steel as such. Hence, the assessee is not entitled for development rebate.

8. We have considered the rival submissions. In CIT v. West India Steel Co. Ltd. [1977] 108 ITR 601 (Ker.) (FB) item 1 of the Fifth Schedule came up for consideration. It was held therein that M.S. rods and steel sections are basically 'iron and steel (metal)' within the meaning of item 1 of the Fifth Schedule and the assessee was entitled to the higher rate of development rebate. This decision was followed by the Madras High Court in Addl. CIT v. Trichy Steel Rolling Mills Ltd. [1979] 118 ITR 39. Similar view was taken by the Allahabad High Court in Singh Engg. Works (P.) Ltd. v. CIT [1979] 119 ITR 891 and also by the Punjab High Court in CIT v. Krishna Copper & Steel Rolling Mills [1979] 119 ITR 256. A contrary view has been taken by the Calcutta High Court in Indian Steel & Wire Products Ltd. v. CIT [1977] 108 ITR 802.

We prefer to follow with respect the decisions of the Kerala, Allahabad and Punjab High Courts in preference to the decision of the Calcutta High Court. This Bench of the Tribunal in its order in the case of ITO v. Jindal Aluminium Ltd. [IT Appeal No. 574 (Bang.) of 1980, dated 6-2-1982] has taken a similar view following the above majority decisions of the High Courts. In view of the above decisions, we hold that wire rods manufactured by the assessee come within item 1 of the Fifth Schedule and the assessee is entitled for the development rebate at 25 per cent. Accordingly, we direct the ITO to allow.

9. Ground No. 2 raised in the appeal for the year 1976-77 is not pressed and is, accordingly, rejected. In the appeal for the year 1977-78, another ground is against the disallowance of weighted deduction under Section 35B of the Act. The weighted deduction on expenditure relating to freight and forwarding charges, packing and loading has been rightly disallowed in view of the decision of the Karnataka High Court in Ullal Narayan Mallya & Sons [1975] 1 KLJ 487 and the decision of the Special Bench of the Tribunal in J.H. & Co. v.Second ITO [1982] 1 SOT 150 (Bom.). Thus, we uphold the disallowance on these items. The weighted deduction in respect of bank charges has also been rightly disallowed. The assessee claimed weighted deduction in respect of commission paid for procuring sales. This was disallowed on the ground that it is not a commission paid to any foreign agent with reference to export sales made but to Indian parties. In our view, the claim has been rightly disallowed. The assessee has not placed any evidence to prove that the commission has been paid to Indian parties who furnished information about the foreign buyers and it is they who brought them together for concluding the sales. Thus, the claim has been rightly disallowed.

10. In the result, the appeal for the year 1976-77 is partly allowed and the appeals for the years 1977-78 and 1978-79 are dismissed.


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