FLASHAW J. - This is a reference under section 66(I) of the Income-tax Act in which the following question has been referred by the Appellant Tribunal to this court :
'Whether on the facts and in the circumstances of this case the concession contained in section 15C of the Indian Income-tax Act in respect of the industrial undertaking for the manufacturer of handloom fabrics at Ghaziabad is available to the assessee ?'
The question arises out of the assessment of 1952-53 covering the financial year 1951-52. The assessee is a company, Webbing & Belting Factory Private Ltd., which had started as a partnership business run by two partners. They were running two factories at Delhi, one situated at Nicholson Road and the other at Bela Road, the business being the manufacture of tapes, works, webbing etc. for supply to the Government Departments during the war. After the war was over, in 1946 one of the partners conceived the idea of manufacturing handloom furnishing fabrics on the lines of manufacturers carried on in South India by a company called the Commonwealth Trust Ltd. He accordingly entered into negotiations with this company which agreed to supply technicians and technical advice and organise sales for the assessee under the label of Commonwealth Trust Ltd. Accordingly in February, 1947, the partnership concern was sold to the assessee limited company which was formed for the purpose of acquiring the partnership business and also for the purpose of establishing a factory at Ghaziabad for manufacturing handloom furnishing fabrics. The company was formed on January 22, 1947.
For experimental and training purposes a number of handlooms were set up in the factory at Bela Road and workmen were then trained by employees of the Commonwealth Trust Ltd. It is admitted that between February and December, 1947, the total sales of grey (or unbleached) cloth so manufactured amounted to Rs. 67,085. This cloth was sold through the selling organization of the Commonwealth Trust Ltd. But without the latters label since the goods were not considered to be of the requisite quality.
Thereafter the factory at Bela Road was dismantled and sold and the looms were transferred to factory premises at Ghaziabad where the manufacture of furnishing fabrics began after the end of March, 1948. In these circumstances the assessee claimed the concession contained in section 15C of the Act so far as the factory at Ghaziabad is concerned. The Income-tax Officer was of the opinion that the handloom manufacture had started before March 31, 1948, at the Bela Road Factory, and that since the looms used at the factory were transferred to the factory at Ghaziabad the assessee was not entitled to claim the said concession.
On appeal by the assessee the case was remanded to the Income-tax Officer by the Appellate Assistant Commissioner. The Appellate Assistant Commissioner directed the Income-tax Officer to consider all the points raised on behalf of the assessee and to visit the factory at Ghaziabad in order to appreciate the situation properly. The relevant portion of the report of the Income-tax Officer after the remand reads :
'As far as power-looms are concerned enough evidence has been produced before me to show that these have never worked at Ghaziabad.... As far as cloth handlooms are concerned it has been contended that these were being used before March 31, 1948, on experimental basis to see whether the scheme conceived by Mr. Kaul could be successfully executed in this part of the country. Huge correspondence which Mr. Kaul had been carrying on with the Commonwealth Trust Ltd., Calicut, shows that the entire work was done under instructions from that Trust including the construction of looms. On visit I noticed that the size of these looms was much smaller than the size of looms now being worked at Ghaziabad factory. I am told that the looms used on experimental measure were 36' only whereas the looms presently installed vary from 48 'to 90'. I also found that the looms now being worked are of Jacquard type.'
However, the Income-tax Officer was still of the same opinion, namely, that since the manufacture of handloom fabrics had been started at the Bela Road factory the assessee was not entitled to claim concession under section 15C and this was upheld by the Appellate Assistant Commissioner and in turn by the Appellate Tribunal which dismissed the assessees appeal in a very brief order observing that the undertaking was partly formed by transfer to it of machinery and plant that had been used in a business carried on before April 1, 2948, and had begun to manufacture or produce articles before the date.
The relevant provisions of section 15C of the Act read :
'(1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking, computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue.
(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 or by the transfer to a new business of building, machinery or plant used in a business which was being carried on behalf the April 1, 1948;
(ii) has begun or begins to manufacture or produce articles in any part of the taxable territories at any time within a period of thirteen years from the April 1, 1948, or such further period as the Central Government may, by notification in the official Gazette, specify with reference to any particular industrial undertaking;
(iii) employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.'
The undisputed facts, some of which are taken from the copies of the orders of the Income-tax Officer and the Appellate Assistant Commissioner which have been made annexures to the statement of the case and so form part of it, are as follows. The manufacture of handloom fabrics was started at the Bela Road factory in 1946-47 on a restricted scale the cloth so manufactured being simply unbleached cloth of 36 'width, and after the Bela Road factory had been closed down and dismantled the looms lying there were transferred to the new factory erected by the company at Ghaziabad where the manufacture was started after March 31, 1948, of a wider range of fabrics on a much larger scale. Although it appears that power-looms worth about Rs. 20,000 were transferred from Bela Road to the factory at Ghaziabad it is agreed that these had never yet been used up to the time when the Income-tax Officer made his remand report in 1955. The handlooms worth about Rs. 12,000 for manufacturing cloth of 36' width were transferred and apparently used, though this is not quite clear, but in any case additional handlooms of the type called Jacquard for manufacturing cloth of widths from 48 'to 90' costing about Rs. 22,000 were also installed. Cloth valued at Rs. 67,000 manufactured at the Bela Road factory was sold in 1947 but by the account year 1951-52 sales of cloth had risen to over Rs. 15,00,000.
The ground on which the concession under section 15C, which was evidently introduced to encourage the starting of new industrial enterprises, has been refused to the assessee is that machinery or plant used in a business which was carried on before April 1, 1948, had been transferred to a new business. In deciding whether the decision is correct it is obvious that the transfer of power-looms which had not been brought into use and had merely been stored must be ignored.
The question in issue thus becomes whether the transfer of any machinery or plant to a new business, however small a portion the plant or machinery so transferred forms of the plant or machinery of the new business, automatically has the effect of denying the new business the concession under section 15C. With this is involved the question whether the manufacture of cloth at the Bela Road factory was undertaken merely by way of an experiment and as training for the start of what might be called the new business of the manufacture of handloom furnishing fabrics.
On this point the learned counsel for the Commissioner has argued that we cannot question the finding of fact of the Appellate Assistant Commissioner that the sale of cloth worth Rs. 67,000 in 1947 could not be described as purely experimental production. I find, however, that the Income-tax Officer accepted the fact that the production before April 1, 1948, was experimental, and that the pilot plant consisting of the handlooms became the starting point of the enterprise. Moreover, what we are to consider is a question of law arising out of the final order of the Appellate Tribunal which has not expressed any opinion either as to whether the manufacture in 1947 was by way of experiment and training, but has based its decision entirely on the fact that some looms were transferred to the new factory. I therefore do not consider that I am precluded from expressing the opinion that the fact that the sales amounted to Rs. 67,000 in 1947 in no way rebutted the contention of the assessee that the production at the Bela Road factory of one simple kind of cloth was by way of experiment and training, and this opinion is supported by the fact that in the fourth year of production of the new factory sales had risen to Rs. 15,00,000.
In my opinion a provision of this kind which is intended to encourage the setting up of new industrial enterprises must be construed liberally and on this view of the matter I consider that the opening of factory at Ghaziabad was a new enterprise encouraged by the successful experiment, and that the fact that what apparently amounts to about 35% of the machinery or plant used in the factory had been used before April 1, 1948, does not preclude the factory at Ghaziabad from enjoying the concession granted under section 15C. I would accordingly answer the question propounded by the Appellate Tribunal in the affirmative and allow the assessee company its costs from the Commissioner of Income-tax. Counsels fee Rs. 250.
KHOSLA C.J. - I agree.
Question answered in the affirmative.