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Judgment
R. Jayasimha Babu, J.—Two questions have been referred to us at the instance of the Revenue. The first relates to the assessment year
1979-80 while the second question relates to the assessment years 1980-81 and 1981-82. The two questions are :
(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the provisions of Section 40(c)(ii) and not
Section 40A(5) should be applied in allowing the deduction in respect of salary, perquisites, etc., made to the managing director ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in confirming the orders of the
Commissioner of Income Tax (Appeals) by holding that the assessee would be entitled to a deduction u/s 80J for the assessment years 1981-82
and 1980-81 ?
So far as the first question is concerned we may straightaway refer to the decision of the Supreme Court in the case of Commissioner of Income
Tax, Bombay Vs. M/s. Indian Engineering and Commercial Corporation Pvt. Ltd., . It was held by the Supreme Court in that case that both
Sections 40(c) and 40A(5) of the Income Tax Act apply to employees who also happen to be directors and that ""in the case of directors who are
also employees, both the provisions will be attracted--the higher of the two ceilings has to be applied.
The first question refers to the salary, perquisites paid to the managing director. It is not in dispute that the managing director is also an employee
as, though he is a director of the company, he receives salary from the company and also enjoys the perquisites given to him by the company after
the company had secured the approval required under the Companies Act for paying the salaries and perquisites for the managing director.
The Tribunal was not right in holding that Section 40A(5) of the Act is not applicable to the managing director. As observed by the Supreme
Court both Sections 40(c) and 40A(5) of the Act apply to the employees, directors, the higher of the two ceilings mentioned in those provisions
being applicable to such employee-directors. We, therefore, while answering the first question in the negative, direct the Assessing Officer to re-
compute the extent of deduction to be made after applying the ratio of the decision of the Supreme Court rendered in the case of CIT v. Indian
Engineering and Commercial Corporation Pvt. Ltd. [19931 201 ITR 723.
The second question concerned the extent of the assessee''s entitlement to claim deduction u/s 80J of the Act for the two assessment years
1980-81 and 1981-82. The assessee made the claim for such deduction on the ground that the assessee had completed substantial expansion of
spindles by the assessment years 1980-81 and 1981-82 and that the assessee was entitled to the benefit of the deduction u/s 80J of the Act for a
period of five years commencing from 1980-81. The assessee''s claim was that it had by July, 1981, increased its capacity from 32,400 to 50,200
spindles and that increase in capacity was by way of substantial expansion of its production facilities, that it had erected separate sheds, had
installed carding room, had constructed godowns ; and all those facilities taken together would show that a new production unit has been brought
into existence though that was done by way of substantial expansion.
The assessee had relied on the fact that it had obtained an industrial licence in the year 1975 for such substantial expansion and it had completed
that programme of substantial expansion by July, 1981. The asses-see-company was established in the year 1960. It had an installed capacity of
29,892 spindles by March 51, 1977, which went up to 50,000 spindles by July 1981.
The Income Tax Officer rejected the assessee''s claim only on the ground that substantial expansion did not amount to the establishment of a
new industrial undertaking and that unless a new industrial undertaking was established, the deduction u/s 80J of the Act could not be granted. The
assessee''s appeal against the orders of the Income Tax Officer having been allowed by the appellate authority, the Revenue took up the matter in
further appeal to the Tribunal. The Tribunal in the course of its order passed on those appeals has recorded its finding with regard to the expansion
so effected by the assessee :
In this case there is no dispute that the assessee had substantially increased the capacity, separate factory buildings have been erected, new plant
and machinery had been purchased and installed and new facility like godown, etc., including a carding room have been found installed and the
entire expansion is an independent unit and capable of functioning as such.
There is no dispute regarding the correctness of the finding of the Tribunal.
We have to consider the arguments advanced by learned counsel for the Revenue in the background of that finding of the Tribunal. It was
contended by learned senior counsel for the Revenue, Mr. S. V. Subrarnaniam, that Section 80J of the Act cannot at all be invoked by the
assessee which had not established a new industrial undertaking and that the scope of Section 80J of the Act is limited to new industrial
undertakings and does not extend to expansion of existing undertakings. The further submission was that as the expansion was not accomplished
within a single year, but was spread over a longer period of time, additional spindlage having been added over a period of five years the benefit if
any, found to be permissible u/s 80J of the Act could only be confined to the spindlage added in the previous year relevant to the assessment year.
Mr. Sarangan, learned senior counsel for the assessee, on the other hand, submitted that if such a restrictive view was taken of Section 80J of
the Act, it would defeat the purpose of the statutory provision which was placed on the statute book, with the avowed object of encouraging
economic growth by offering incentives by way of deductions under that provision for installing new production facilities for the manufacture of
goods and articles. The purpose of the Section is to help bring into existence additional production capacity by the installation of new production
facilities. The test to be applied is not as to whether the production facility is an independent undertaking or an addition to an existing undertaking.
If the production facility is newly installed whether independently or as addition or by way of expansion of existing facility, to the extent such
addition or expansion is capable of being regarded as industrial undertaking and goods and articles are manufactured with the aid of the newly
installed machinery such expansion would qualify for the benefits u/s 80J of the Act.
Having considered the matter in the light of the provisions of the statute, the purpose for which the provision was enacted and the decisions of
the Supreme Court to which our attention was invited, we are of the view that the submissions made for the assessee merit acceptance. In Section
80J of the Act, before it was omitted by the Finance (No. 2) Act, 1996, with effect from April 1, 1989, provided for deduction in respect of
profits and gains from newly established industrial undertakings or ships or hotel business in certain cases. Though the heading of the Section refers
to newly established industrial undertakings, in the body of the Section, there is no requirement that the undertaking should be new. Sub-section (4)
of Section 80J provides ;
(4) This Section applies to any industrial undertaking which fulfils all the following conditions, namely :
(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence ;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose ;
(iii) it manufactures or produces articles, or operates one or more cold storage plant or plants, in any part of India, and has begun or begins to
manufacture or produce articles on to operate such plant or plants, at any time within the period of thirty three years next following the 1st clay of
April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular
industrial undertaking ;
(iv) in a case where the industrial undertaking manufactures or produces articles, the undertaking 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 first two conditions are in negative terms. They require that the industrial undertaking in respect of which the deduction is claimed u/s 80J
of the Act is not one which is formed by the splitting up, or the reconstruction, of a business already in existence and is also not formed by the
transfer to a new business of machinery or plant previously used for any purpose. These two provisions indicate that it was not the bringing into
existence of a separate legal entity or the commencement of a business as a new business that render the undertaking eligible for the benefits u/s
80J of the Act. The second condition u/s 80J(4) of the Act clearly indicates that the use of plant and machinery which was already in use, but in a
different unit will not be sufficient. What is more important is that the plant and machinery which forms part of the industrial undertaking is installed
for the first time in that undertaking. The third condition laid down in Section 80J(4) is that the industrial undertaking manufactures or produces
articles. It is not necessary to note the other parts of Sub-clause (iii) of Section 80J(4). The fourth condition is that workmen employed there is not
less than the number specified.
There is, thus, no requirement in Section 80J of the Act that the undertaking in respect of which the deduction can be claimed must have been
set up as an independent unit. As noticed earlier, the unit being independent by itself will not entitle such an unit to claim the benefit. The essential
requirement for claiming the benefits under the provision is the installation of plant and machinery and the manufacture or production of articles with
the aid of such plant and machinery. The plant and machinery so installed is not to be the plant and machinery transferred from an existing business.
The requirements of the Section are met if the assessee is able to demonstrate that the assessee has established an industrial undertaking which
manufactures or produces article with the aid of plant and machinery newly, installe''d in that undertaking. The term industrial undertaking is not
defined in Section 80J of the Act. The word ""undertaking"" is not to be equated with the legal entity which may own undertaking. A single legal
entity may own and operate more than one industrial undertaking and the fact of common ownership does not render undertakings which are
otherwise capable of being separate into a common undertaking. What is of relevance is the existence of all the facilities including factory buildings,
plant, machinery godowns and things which are incidental to the carrying on of manufacture or production, all of which where taken together are
capable of being regarded as an industrial undertaking.
When an existing industrial undertaking is substantially expanded and the manner of such expansion is such that the newly installed plant,
machinery and other facilities such as factory buildings, godowns, etc., when taken together are capable of being regarded as an industrial
undertaking, the requirements of the Section are met. The fact that the industrial undertaking so established by way of substantial expansion is at a
location which is adjacent to the existing undertaking would not in any way render such an undertaking any the less a new undertaking for the
purpose of determining its eligibility u/s 80J of the Act.
When substantial expansion of industrial undertaking is embarked upon such expansion cannot be expected to be completed overnight or
within the same assessment year. The size of the expansion, the amount of investment required, the extent of the construction that may be involved,
the lead time required for securing the new machinery, the source of the supply, the extent of finance available and the speed with which such
finance can be obtained are all factors which along with other relevant factors cumulatively determine the extent of time within which the expansion
can be completed. All these factors are no doubt relevant even when a new undertaking is established for the first time by the newly constituted
legal entity or by an individual who proceeds to set up a new industrial undertaking. The fact that the expansion is completed in stages by adding
spindles to existing spinning mills does not on that score alone render such addition incapable of being regarded as part of the establishment of an
industrial undertaking for the purpose of Section 80J of the Act, The addition though made in stages is part of a larger plan of substantial expansion
which plan is implemented in stages over a period of time having regard to the various factors which affect the installation of new machinery and the
addition of the facilities required such as factory buildings, godowns, etc. In this case, the Industrial licence was obtained by the assessee for a
substantial expansion on August 20, 1975. The licence enabled the assessee to increase the number of spindles which was apparently less than
20,000 as on the date of that licence, to 50,000. The assessee had added the additional spindlage after securing that licence and had completed
the programme of expansion by July, 1981.
The claim for deduction u/s 80J was made thereafter and the claim so made cannot be regarded as one which is impermissible under the
provisions of Section 80J of the Act. The stipulation in Section 80J(4)(iii) to the beginning of manufacture or production of articles or the operation
of the plant must in cases of substantial expansion be regarded as the time at which the substantial expansion was completed in such a way as to
render the expanded production facility capable of being regarded as an industrial undertaking.
The Supreme Court in the case of Textile Machinery Corporation Limited, Calcutta Vs. The Commissioner of Income Tax, West Bengal,
construed Section 15C of the Indian Income Tax Act, 1922, which provision is similar to Section 80J of the Act of 1961. The Supreme Court,
inter alia, held that ""Section 15C is an exemption Section, The words ""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 court also observed that ""the principal of object of
Section 15C is to encourage setting up of new industrial undertakings by obtaining tax incentives . . . ."". ""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 exemption of tax
liability u/s 15C"". Regarding the effect of substantial expansion, the court observed, ""the true test is not whether the new industrial undertaking
connotes expansion of an 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 u/s 15C or
not"".
In the case of Commissioner of Income Tax, West Bengal-I Vs. Indian Aluminium Co. Ltd., . The Supreme Court upheld the claim of the
assessee for benefits u/s 15C of the Indian Income Tax Act, 1922, inter alia, in respect of expansion of its existing factories by setting up units side
by side with the old units and adding to the respondent''s total output.
In the case of Commissioner of Income Tax, West Bengal Vs. Orient Paper Mills Ltd., , the apex court upheld the decision of the Calcutta
High Court which had held that the assessee which had set up a plant for the manufacture of caustic soda housed in a separate building after
obtaining a separate industrial licence was entitled to relief u/s 15C of the Indian Income Tax Act, 1922.
In the case of Municipal Commissioner, Chinchwad New Township Municipal Council Vs. M/s. Century Enka Ltd., , the court reiterated the
law laid down in the cases of Commissioner of Income Tax, West Bengal Vs. Orient Paper Mills Ltd., and Commissioner of Income Tax, West
Bengal-I Vs. Indian Aluminium Co. Ltd., .
In this case, the Tribunal has recorded a specific finding that the entire expansion undertaken by the assessee "". . . is an independent unit and
capable of functioning as such. . ."" It is no doubt true that what is manufactured with the aid of newly installed machinery is the same article as the
one that was being manufactured by the assessee in its existing unit. There is no requirement in Section 80J of the Act that the article produced in
the newly established industrial undertaking should be different from the one produced by the assessee in its existing undertaking. What is material
is the bringing into existence by investing fresh capital, a unit which is capable of functioning as an independent unit and is capable of being
regarded as an industrial undertaking engaged in the production of articles. That test having been satisfied in this case, the assessee is entitled to the
benefit of Section 80J of the Act.
We therefore answer the second question referred to us in favour of the assessee and against the Revenue.
The assessee shall be entitled to costs in the sum of Rs. 2,000 (rupees two thousand only).