1. The question referred to us is:
Whether the sum of Rs. 44,617 out of the profit derived by the company from out of its spinning operations which commenced on March 24, 1951, is exempt from payment of tax for the assessment year 1956-57, under Section 15C of the Income-tax Act
2. The assessee is a public limited company. It was incorporated in 1946, one of the objects of the company being to carry on business in 'fibrous articles, viz., cotton, jute, etc., purchase, sale or production of fibrous articles such as yarn, cloth, silk, wool, etc., the purchase of the machinery required for the same....' Buildings were constructed and necessary machinery installed for weaving silk cloth and the manufacture was commenced on January 12, 1949. As a result of losses, the company stopped the silk weaving business on December 31, 1949.
3. Thereafter, the company put up separate buildings and installed machinery for the manufacture of cotton yarn. The buildings were completed in March, 1950, and the production commenced from the 24th of March, 1951. During the years following, there appear to have been losses and such losses carried forward from the preceding year relevant to the assessment year 1956-57 came to Rs. 2,89,197. The account year relevant to the assessment year 1956-57 was the calendar year ending December 31, 1955, and during that year of account the company derived an income of Rs. 3,84,684 from its cotton spinning undertaking. These figures are not in dispute and the assessable income of the asssessee was taken as the difference of Rs. 95,487. Before the Income-tax Officer, the assessee claimed that this spinning undertaking was established by the company in the assessment year 1952-53, and that, therefore, it was entitled to the benefit of Section 15C of the Act. The Income-tax Officer, however, chose to take the view that the spinning business, though it came into existence only in the assessment year 1952-53, was nevertheless part of the textile mill which had been started by the company in 1949 itself. In his view, therefore, the exemption contemplated by Section 15C of the Act would be available only from the assessment year immediately following the production of silk cloth, and since the exemption was limited to a period of five years, it was not available in respect of the assessment year 1956-57. On appeal, the Appellate Assistant Commissioner agreed with the Income-tax Officer. He too observed that the two businesses are connected with the same branch of trade or manufacture, that one business is ancillary to the other, that the two businesses are controlled on one account and that financial arrangements and banking accounts are also common. He therefore, held that the weaving business that was started in 1948, and the spinning business which was started in 1951, were parts of the same business and that the date of commencement must be taken to be the date on which any part of this single joint venture was started, that is, 1948. He also thought that the expression 'any industrial undertaking' in Section 15C must refer to the unit as a whole and not to parts of a single unit.
4. On a further appeal to the Tribunal, the Tribunal rejected the contention of the assessee that the spinning mill was a distinct industrial under-taking. It observed:
The assessee company was engaged in textile industry. Cotton yarn is a textile fibre and cloth is a textile fibre. Due to non-receipt of the spinning mill, the spinning of cotton yarn had to be postponed; but the company in the meanwhile carried on, so to say, another part of the same business, i.e., weaving. It may be silk or cotton, it does not make any difference. It was stated by the assessee's representative that the machinery used for silk weaving could not be used for weaving cotton cloth and, in fact, according to the report of the directors, the company sought permission of the Government to use cotton yarn on the looms.
5. The Tribunal further thought that the starting of the spinning industry was only a reconstruction of the existing business. It also relied upon the features mentioned by the Appellate Assistant Commissioner in denying the exemption sought.
6. The question before us, to put it in terms of Section 15C of the Act, is whether the spinning section of the business which was started in the assessment year 1951-52, is an industrial undertaking to which this section applies. What is contended by the assessee is that a textile industry is not a single and indivisible unit and that the various parts of such an industry such as spinning mill or weaving mill are distinct and separate parts of the industry, any one of which may be started and carried on without the necessity of bringing into existence other aspects of that industry. As a matter of fact, in this case, the weaving section was started in 1948 with 12 looms. It worked for about a year and thereafter ceased business. It was only subsequently that the spinning mill was brought into existence by putting up separate buildings therefor and installing the necessary machinery. It is, therefore, claimed that a spinning mill being a distinct industrial undertaking, not having necessarily any connection with the weaving mill, in the sense that it can be operated independently of the other, the exemption contemplated by Section 15C must apply to each of the two industrial undertakings irrespective of the other.
7. It seems to us that this contention is sound and has to be accepted. The reasons that have been advanced by the departmental officers and the Tribunal appear to us to be some what superficial. Solely for the reason that the spinning mill and the weaving mill relate to the same part of what may be called the textile industry, it does not follow that the spinning mill cannot be a separate industrial undertaking distinct from the weaving mill. It is common knowledge that mills confine themselves only to spinning yarn and several others to weaving only, while there are other composite mills engaging themselves in both kinds of activity. It is not, therefore, proper to say that once a weaving mill started and worked for some time, whether or not that weaving mill obtained any exemption under Section 15C of the Act, the subsequent installation of a spinning mill as a distinct entity, with separate buildings and separate machinery must be regarded as having come into existence even on the date on which the weaving mill itself came into existence. One of the features relied upon by the Tribunal that the textile industry takes in both parts of activity, i.e., weaving and spinning, cannot, to our minds, make the two parts of the same undertaking in all cases. The other grounds, that as the company was formed with the object of setting up both lines of business, it must be taken to mean that the company intended to put up both a spinning mill and a weaving mill, and that this should lead to the conclusion that the subsequent setting up of the spinning mill is not a distinct industrial undertaking is wholly unconvincing. The Tribunal seems to have been obsessed by the fact that it is a textile industry and that any part of a textile industry, though it might be a distinct part, must nevertheless be treated as a whole for the purpose of Section 15C. It is not the case of the department that the spinning mill, which is undoubtedly a distinct undertaking, was set up even in 1948. What is stated is that the company placed orders for the machinery for both the weaving and the spinning mills, but set up only the weaving mill. Mr. Ranganathan purports to contend that the fact that the company 'intended' to set up both these units must be taken to mean that at the time the weaving section alone was put up, it marked the commencement of an industrial undertaking comprised of, both weaving and spinning mills. But the factual position is wholly different. There is no doubt that the weaving section was started as an independent industrial undertaking. Whether or not it continued to be in operation is wholly immaterial for considering when the industrial undertaking represented by the spinning mill came into existence. The mere fact that the same company set up both, can have no bearing, for the same assessee may embark on several industrial undertakings and the section applies to each industrial undertaking independently of each other.
8. We are satisfied that there is no warrant for holding that the spinning mill must be deemed to have come into existence in 1948 itself. Factually it was not so brought into existence. Even on principle, the two were distinct from each other and merely because they are parts of the textile industry, the commencement of one cannot also be deemed to mark the commencement of the other.
9. Nor is there any warrant for holding that the industrial undertaking represented by the spinning mill constituted a reconstruction of the existing business. Section 15C(2) denies exemption only when there is such a reconstruction of a business already in existence. It is not the case of the department that the business that was already in existence, viz., that represented by the weaving mill, was so reconstituted. On the other hand, the weaving mill continues to exist, though in a moribund condition. Nor it is a case where the building, machinery or plant used in business which was already in existence were transferred to this new business.
10. If the spinning mill is in itself an industrial undertaking, it is not denied by Mr. Ranganathan, learned Counsel for the department, that this assessment year falls within the period during which the benefit of Section 15C is available to the assessee.
11. The question is accordingly answered in favour of the assessee, which will get its costs. Counsel's fee Rs. 250.