TEXTILE MACHINERY CORPORATION LIMITED, CALCUTTA vs. THE COMMISSIONER OF INCOME-TAX, WEST BENGAL, CALCUTTA

CIVIL APPEAL No. 772/1972Supreme Court[1977] 2 S.C.R. 76225 January 1977Bench: 3 JudgesAuthor: HANS RAJ KHANNA, P.K. GOSWAMI, P.S. KAILASAM B12 pages
AI SummaryAllowed

What were the facts?

Textile Machinery Corporation Limited (the assessee) is a heavy engineering concern. For assessment years 1958-59 and 1959-60, it claimed exemption under Section 15C of the Indian Income-tax Act, 1922, for its newly established Steel Foundry Division and Jute Mill Division. The Income-tax Officer and Appellate Assistant Commissioner rejected the claim, viewing these divisions as an expansion and reconstruction of existing business. The Appellate Tribunal, however, found them to be new industrial undertakings, citing new machinery, separate buildings, separate licenses, and separate accounts. The High Court, on reference, disagreed, holding it was a reconstruction because the divisions' products were primarily used in the assessee's engineering concern. The dispute concerns the applicability of Section 15C to these new divisions.

What did the Supreme Court hold?

The Supreme Court held that the Tribunal was right in favour of the assessee, reversing the High Court's decision. Section 15C is applicable to absolutely new undertakings. To deny the benefit, a new undertaking must be formed by the reconstruction of an existing business. The Court outlined five tests for entitlement to Section 15C: (1) investment of substantial fresh capital, (2) employment of requisite labour, (3) manufacture or production of articles, (4) earning of profits attributable to the new undertaking, and (5) a separate and distinct identity. The Court clarified that an undertaking is not formed by reconstruction if it is a separate and independent production unit, producing commercially tangible products, and can operate independently without losing its identity in the old business. The fact that the assessee expanded its existing business or that the new undertaking's products were used by the assessee was not decisive. The Court found that the principal business could continue even if the new undertakings ceased, and the sale of some products in the open market supported their independent functioning. The High Court erred in holding the undertakings as formed by reconstruction. The Court approved decisions in Commissioner of Income-tax v. Ganga Sugar Corporation Ltd., Rajeswari Mills Ltd. v. Commissioner of Income-tax, Madras, Nagardas Bechardas & Brothers P. Ltd. v. Commissioner of Income-tax Gujarat, Commissioner of Income-tax, West Bengal-I v. Electric Construction and Equipment Company Ltd., and Commissioner of Income-tax v. Hindusthan Motors Limited. The decision in Commissioner of Income-tax v. Naya Sahitya was not approved. The Court noted that the ascertainment of profit was not an issue in this case as separate accounts were maintained. The two questions referred were answered in the affirmative.

What were the issues?

1. Whether, on the facts and in the circumstances, the Tribunal was right in holding that the Steel Foundry Division was an industrial undertaking to which Section 15C of the Indian Income-tax Act, 1922, applied? 2. Whether, on the facts and in the circumstances, the Tribunal was right in holding that the Jute Mill Division set up by the assessee-company was an industrial undertaking to which Section 15C of the Indian Income-tax Act, 1922, applied? Assessee's Contentions: The assessee argued that the Steel Foundry and Jute Mill Divisions were new industrial undertakings, meeting the criteria for exemption under Section 15C. They contended that the use of their products within the assessee's existing business or the expansion of the overall business did not disqualify them, as they maintained separate identities, used new machinery, and operated from separate premises. Revenue's Contentions: The revenue contended that the new divisions constituted a reconstruction of the existing business, thereby disentitling the assessee from the benefit of Section 15C. They argued that the primary use of the manufactured goods in the assessee's engineering concern indicated a lack of separate identity and a continuation of the old business in a new form.

Which sections of the Income-tax Act were involved?

Section 15C,Section 66(1)

AI-generated summary — verify with the full judgment below

A B .c D E F 0 H :::TILE MA~llNERY CORPORATION UMITED, CALCUTTA\ "II v. THE COMJ.\USSIONER OF INCOME-TAX, WEST BENGAL, CALCUTTA January 25, 1977 (H. R. KHANNA, P. K. GOSWAMI AND P. S. KAILASAM, JJ.] , Indian Income-tax Act, 1922-S. 15C(2) (i)-Scope of Tests for determining when benefit of the section available-Reconstruction-Tests for determination.

Section I 5C of the Indian Income-tax Act 1922, which deals with exemption from tax of newly established industrial undertakings, provides in sub-s. 2(i) that tl)e sect10n apphes, among others, to any industrial undertaking which is not formed by the splitting up, or the reconstruction of business already in existence. ·The assessee (appellant) was a heavy engineering concern manufacturing boilers, machinery parts and wagons. In addition, it had started a Steel Foundry Division and a Jute Mill Division. The bulk of the goods produced in both the divisions was used in the varic;ms divisions of the assessee company. The assessee's claim for exemption from tax under s. 15C in respect of profits derived from both the companies was rejected by the Income-tax Officer and its appeal was rejected by the App_ellate As

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 66(1)

All 184 judgments and leading authorities on Section 66(1) →

Recent GST High Court judgments

Search GST case law →