Commissioner of Income Tax, Bombay City-I vs Industrial Perfumes Ltd.

Kania, J.—This is a reference under s. 256(1) of the I.T. Act, 1961. The question referred to us for our determination is as follows :

"Whether, on the facts and in the circumstances of the case, it can be said that the industrial undertaking of the assessee was one which was formed by the transfer to a new business of machinery or plant previously used in any other business within the meaning of section 15C(2)(i) of the Indian I.T. Act, 1922 ?"

The facts giving rise to this reference are as follows :

The assessee, a company, was incorporated on 3rd May, 1957, and is engaged in the manufacture of aromatic chemicals, perfumery compounds and so on. It started its manufacturing activities in 1959. For this purpose it had to install machinery worth Rs. 7,28,000. Machinery worth Rs. 75,000 was transferred by Tata Oil Mills Co. Ltd. to the assessee and the rest of the machinery was newly purchased by the assessee. Ultimately out of the machinery of Rs. 75,000 transferred by Tata Oil Mills Company Limited, machinery worth Rs. 36,000 was returned to Tata Oil Mills Co. Ltd. Tata Oil Mills Co. Ltd. was carrying on business in the manufacture of perfumery, cosmetics, etc., and had entered into an agreement with a French company on 18th December, 1950, for promoting the assessee-company to manufacture and sell in India essential oils, aromatic chemicals, perfumery compounds, and so on. It may be mentioned that in clause 22 of the tripartite agreement between the assessee-company, Tata Oil Mills Co. Ltd. and the said French company, it was provided that some equipment would be transferred by the said Tata Oil Mills Company to the assessee. Relief was claimed by the assessee under s. 15C of the Indian. I.T. Act, 1922 (referred to hereinafter as ''the said Act''), for the assessment year 1961-62, being the assessment year with which we are concerned and which related to the accounting period ending on 31st March, 1960. The ITO allowed such relief by his assessment order dated 30th March, 1960. The ITO allowed such relief by his assessment order dated 30th November, 1961. On 9th March, 1966, the ITO reopened the assessment under s. 148 of the I.T. Act, 1961, on the ground that income chargeable to tax had escaped assessment because the relief had been wrongly granted under s. 15C of the said Act. The ITO held that the requirement of s. 15C(2)(i) of the said Act had not been satisfied as the assessee-company had used second hand machinery of the value of Rs. 75,000 at the time of formation of its undertaking, and that, in view of that, s. 15C did not apply to the undertaking of the assessee. On appeal, the AAC agreed with the view taken by the ITO and confirmed his decision. In appeal before the Income Tax Tribunal, it was contended by the assessee that the assessee-company had not been formed by the use of the second hand machinery worth Rs. 75,000 and that a considerable part of it, in fact, had been returned without affecting the manufacturing activity of the assessee. It was urged that the assessee-company had been formed really be purchasing a large block of new machinery worth Rs. 7 lakhs and odd. It was urged by the department that in view of the purchase and use of the said second had machinery worth Rs. 75,000 by the assessee at the time of the formation of its undertaking, it must be held that the undertaking of the assessee was formed by the transfer to it of machinery previously used in another business. The Tribunal accepted said contention urged by the assessee, holding that it was not possible to accept the view that a new undertaking is formed by transferring the machinery previously used for the purpose of business, unless the machinery so transferred is of considerable importance and magnitude. The Tribunal found that the machinery transferred by the said Tata Oil Mills to the assessee was not of substantial importance and that this was shown by the fact that a part of the same had been returned to the said Tata Oil Mills without affecting the manufacturing activity of the assessee-company. It is this decision of the Tribunal which has given rise to this reference.

Before considering the controversy raised before us, we may refer to the relevant statutory provisions. Section 15C of the said Act deals with exemption from tax of newly established industrial undertakings. Sub-section (1) of the said section grants the exemption. The portion of sub-s. (2) which is relevant for the purposes of this reference is cl. (i) thereof. The said relevant portion reads thus :

"(2) This section applies 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 previously used in any other business."

Now, as the facts recited above would show, the industrial undertaking in question was formed by purchase of new machinery worth Rs. 7 lakhs odd and old transferred machinery worth Rs. 75,000 was utilised therein. In fact, a substantial part of the said old machinery, which was transferred, has been returned by the assessee to Tata Oil Mills Ltd., from whom it had been transferred without affecting the manufacturing activity of the assessee. From these facts, the Tribunal has drawn the conclusion that the old machinery transferred, which was used in the formation of the said industrial undertaking was not of such importance that it could be said that the said industrial undertaking had been formed by the transfer of the said used machinery. We fail to see how the Tribunal can be said to have gone wrong in that conclusion and, in any event, the said conclusion is a conclusion of fact, there being no question before us as to whether there was any evidence to justify that conclusion. It was urged by Mr. Butani that the fact that the agreement between the assessee-company, Tata Oil Mills Company Ltd., and the aforesaid French company provided for the transfer of the said used machinery, showed that it was of vital importance in the formation of the industrial undertaking. We totally fail to see how such a conclusion can ever be drawn. In view of the fact that the old machinery transferred was a value constituting a mere fraction of the total worth of the machinery utilised for the formation of the said undertaking, if at all, it was for the department to show that the old machinery transferred was of such vital importance that the said industrial undertaking could be said to have been formed only by the use of the said machinery. Merely because the agreement provides for the transfer of such old machinery, it cannot be said that the old machinery transferred was of vital importance to the formation of the new undertaking.

We may refer to the decision of a Division Bench of this court in Commissioner of Income Tax, Bombay City-I, Bombay Vs. Kopran Chemical Co. Ltd., where, in the accounting year ended 31st March, 1959, the assessee-company purchased machinery of the value of Rs. 58,003, out of which the value of the new machinery was Rs. 28,455 and of the old machinery was Rs. 29,588. The old machinery purchased by the assessee consisted of three portions : (1) Machinery of the value of Rs. 7,000 part of which was resold by the assessee and the other portion was not used in the business but kept idle. (2) A rotary tablet-making machine was purchased by the assessee for Rs, 19,601 on 18th November, 1958, three months after the production of goods by the assessee was commenced. The industrial undertaking could not be regarded as having been formed by the use of that machine. (3) A reconditioned tablet-making machine of the value of Rs. 2,987 was purchased from Kilburn & Co. Pvt. Ltd. It was held that out of the machinery of the value of Rs.58,003, the said tablet-making machine was of insignificant value and even if its user is assumed, it will not affect the claim for exemption and the contention of the Revenue that the benefit of s. 15C(2) was not available to the assessee could not be accepted. This decision completely support the view, which we have take, as stated earlier.

In view of he aforesaid, the question referred to us must be answered in the negative and in favour of the assessee.

The Commissioner to pay to the assessee the costs of this reference.