Madras Machine Tools Manufacturers Ltd. vs Commissioner of Income Tax

Ramanujam, J.—The assessee in this case was incorporated on the 15th of March, 1957, as a private limited company, under the name of

Abboi Machine Tools (P.) Ltd. Subsequently, it was converted into a public limited company and its name was also changed to Madras Machine

Tools Manufacturers Ltd. The objects of the company, inter alia, are :

(1) To manufacture, produce, buy, sell, import, export, stock and deal in grinding machines, automatic lathes, drilling machines, planning machines,

planogr Plano grinders ,inders, machine tools and machinery of every description, electric motors, electrical equipment, cables, wires, transformers,

switches, switchgears and generally to manufacture and deal in all kinds of electrical goods, whether as principals or agents ;

(2) to manufacture modern trucks with rubber tyres, agricultural implements, machinery for oil mills, machinery for silk and wool industry, textile

machinery, printing machinery, litho-printing machines, etc. ;

(3) to manufacture, assemble, convert, repair, renew motor cars, motor vans, motor trucks, etc.;

(4) to manufacture railway rolling stocks, railway engines, etc.;

(5) to manufacture small tools, cutting tools, drills, taps from steel, mild steel or other ferrous or non-ferrous metals or valuable stores and to sell,

buy, import, export and deal in the same, whether as principals or agents.

An application was made on 21st December, 1956, by one D. Doraiswamy, craftsman, Machine Tools Private Ltd., to the Government of

India, under the Industrial Undertakings Rules, 1932, for a licence to establish a new industrial undertaking for manufacture of centre lathes and

bench grinders. The necessary licence was granted on 28th June, 1957. One of the conditions of the said licence was that the new industrial

undertaking should have an installed capacity for the manufacture of, (1) Centre lathes (Cone pully type), 100 numbers per annum, and (2) Bench

grinders, 50 numbers per annum. Thereafter, the work of installation of the necessary machinery commenced. Two machines were installed in.

August, 1957, One Air Universal Grinding machine was installed on October 15, 1957, and one V8 Universal Gear Mobbing Machine was

installed on November 9, 1957, but power supply was actually sanctioned on 9th August, 1958. for a connected load of 10 h.p. Two drilling

machines, and two lathes, etc., were installed in October and November, 1958.

The accounts of the company started on 11th April, 1957, and were closed for the first time on 31st May, 1958. The cost of the machinery

installed as in May 31, 1958, amounted to Rs. 1,02,667. During this period the assessee showed in. its profit and loss account Rs. 3,397 by sales

and repair charges of which Rs, 1,800 and odd represented the sales of bamboos. The expenditure under electricity charges during the said period

came to Rs. 254''56. The purchase of stores and the payment of wages during the period amounted to Rs. 1,137.29 and Rs. 1,054.09,

respectively. The net profit during the year came to Rs. 906.12. During this period no depreciation had been provided on the assets for the reason

that practically very little work was done.

On 14th August, 1958, the directors in their report to the shareholders in respect of the accounts for the period from 11th April, 1957, to 3Ist

May, 1958, had stated that they hoped to bring out the first machine very shortly.

The assessee closed its accounts subsequently on March 31, 1959, and the accounts were made up for the period June 1, 1958, to March 31,

1959. During this period the additions to the machinery amounted to Rs. 52,799.92 and the depreciation provided for the machinery came to Rs.

5,985. The receipts during the period were mainly from the sales of lathes (Rs. 21,17,), sales of chucks (Rs. 399) and repair charges (Rs. 345).

The net profit for this period was Rs. 7,292.54. The assessee filed its first return under the Income Tax Act for the entire period from April 11,

1957, to March 31, 1959, showing a loss of Rs. 32,409 as under:

Rs. Rs.

Profit lor for the period 11-4-1957 to 31-5-1958 906

Profit for the period 1-6-1958 to 31-3-1959 7,292

8,198

Less : development rebate 40,607

Loss 32,409

This return was accepted by the Income Tax Officer and the assessee was declared not assessable for 1959-60, and the loss of Rs. 32,409

was carried forward. Tne Income Tax Officer had given the following reason for making a single assessment in respect of the above two

accounting periods :

As the machinery has started functioning early and the assessee claimed development rebate in respect of the machinery previously installed even

for the first period there will only be a loss and in the second period also, there is a loss in view of the development rebate claimed. In view of

these circumstances, and in view of the fact that the assessee is agreeable to have the entire income from the date of commencement of the

business up to March 31, 1959, assessed in 1959-60, I am not making two separate assessments for the proportionate periods as it results in loss

for both the periods.

In the previous year ending March 31, 1963, the assessee made a profit of Rs. 1,18,854 including interest receipts of Rs. 27,695 from call

deposits. It claimed a sum of Rs. 75,649 as a deduction u/s 84 of the Income Tax Act from the book profits. The Income Tax Officer rejected the

assessee''s claim for deduction u/s 84, as, according to him, the benefit of Section 84 was available only up to the assessment year 1962-63. He

held that the assessee began to manufacture and produce articles as early as 1957, that the assessee had in fact sold 58 numbers of North Light

Covers and 35 numbers of T. Pinion Wheels on February 14, 1958, and that, therefore, the benefit of Section 84 could be availed of only for the

assessment years 1958-59 to 1962-63, and not for the assessment year 1963-64. He, therefore, determined the income to be assessed for the

year 1963-64 at Rs. 94,334 which included the interest receipts of Rs. 27,695.

The assessee appealed to the Appellate Assistant Commissioner contending that it commenced production of lathes and bench grinders only

after May 31, 1958, that in 1957 only sundry repair work was done during the time of trial run of the machinery and that, therefore, the rejection

of its claim for deduction u/s 84 was erroneous. The Appellate Assistant Commissioner took the view that the primary business of the company

was manufacture of lathes, grinders and other heavy machinery, that there was no manufacture or production of those articles before May 31,

1958, and that, therefore, the benefit of Section 84 can be claimed by the assessee only for the years 1959-60 to 1963-64. He also held that the

first assessment having been made for the year 1959-60, the assessment year 1963-64 will be the fifth assessment year and as such the assessee

will be entitled to the relief u/s 84.

The revenue appealed to the Appellate Tribunal contending that the assessee had begun the manufacture and production of the articles even in

the assessment year 1953-59, that, therefore, the benefit of Section 84 will not be available to the assessee for the assessment year 1963-64, that

the first accounts of the assessee having been made up for the period from April 11, 1957 to May 31, 1958, which exceeded 12 months, the

assessee could not exercise any option as contemplated in Section 2(11)(i)(c) and, therefore, the said period would clearly fall within the

assessment year 1958-59 and, therefore, the benefit u/s 84 can be claimed only for four years thereafter, and that, in any event, the interest income

of Rs. 27,965 did not represent the profits of the undertaking entitled to relief u/s 84.

The Tribunal held that the interest income was the profits of the assessee''s undertaking. But it, however, held that the assessee had started

manufacture and production of articles prior to first of April, 1958, and, therefore, the benefit u/s 84 would enure to it only for a period of four

years from the assessment year 1958-59, and as such it would not be available for the assessment year 1963-64. At the instance of the assessee

the following questions have been referred to this court:

(1) Whether, on the facts and in the circumstances of the case, the first assessment having been made on the assessee for 1959-60, is not the

assessee entitled to the relief u/s 84 of the Income Tax Act in the assessment year 1963-64?

(2) Whether, on the facts and in the circumstances of the case, the assessee was not entitled to the relief u/s 84 of the Income Tax Act for the

assessment year 1963-64 ?

(3) Whether, on the facts and in the circumstances of the case, the interest income of Rs. 27,695 was profit of the undertaking entitled to relief u/s

84 of the Income Tax Act ?

So far as the third question is concerned, it is now contended by the learned counsel for the assessee that reference on that question has been

sought on a mistaken impression that the assessee has failed to get relief in relation to the interest income, that it is a case of indiscretion on the part

of the assessee to have raised that question and that, if at all, it is the revenue which could have agitated the matter. The learned counsel, therefore,

does not seek to press that question before us. The learned counsel for the revenue, however, points out that even if the assessee had succeeded in

getting the relief in respect of the interest income it can nonetheless seek a reference in relation thereto u/s 256 and it is not necessary that the

assessee should be aggrieved against the decision of the Tribunal before, seeking a reference. It is true, as contended by the revenue, that the

reference by the Tribunal on the third question is competent and quite legal even though the decision of the Tribunal on that question was in favour

of the assessee. But having regard to the fact that the assessee at whose instance the reference on that question has been made does not want to

prosecute the same, we think it unnecessary to consider that question and express our opinion thereon. It is purely a matter of discretion to answer

or not to answer the question in the circumstances when a party who has caused a reference does not want to press the same. We, therefore,

refrain from answering the said question.

Both the first and the second questions relate to the scope of Section 84 of the Act. The predecessor of Section 84 under the old Act was

section J5C and its successor is Section 80J which is in force now. Section 84, so far as it is relevant for the purpose of this case, is set out below :

Income of newly established industrial undertakings or hotels.--(1) Save as otherwise hereinafter provided, Income Tax shall not be payable

by an assessee on so much of the profits and gains derived from any industrial undertaking or business of a hotel or from any ship, to which this

section applies, as does not exceed six per cent, per annum on the capital employed in such undertaking or business or ship, computed in the

prescribed manner .....

(7) The provisions of this section shall, in relation to an industrial undertaking, apply to the assessment-

(i) for the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles, and

(ii) where the assessee is a co-operative society, for the six assessment years immediately succeeding and where the assessee is any other person,

for the four assessment years immediately succeeding.

While Sub-section (1) gives the benefit of deduction up to 6 per cent, per annum on the capital employed by an industrial undertaking newly

established, Sub-section (7) provides a limitation for the grant of that benefit. Sub-section (7) limits the benefit available under Sub-section (1) to

four assessment years beginning from the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce

articles. The issue in this case is as to which is the previous year in which the assessee''s undertaking began to manufacture or produce articles.

According to the assessee, it is only in the assessment year 1959-60 production and manufacture of articles commenced. It is also the

contention of the assessee that the first assessment having been made by the Income Tax Officer for the assessment year 1959-60, covering a

period from April 11, 1957, to March 31, 1959; the fourth assessment will be the assessment for the year 1963-64, and hence the benefit of

Section 84 cannot be denied for that year. But, according to the revenue, such manufacture and production have actually commenced even in the

assessment year 1958-59, and though the first assessment was made by the Income Tax Officer in 1959-60, covering a period of more than 23

months, that will not be material or relevant for the purpose of determining the assessment year relevant to the previous year in which the

undertaking began to manufacture and produce articles and having regard to the provision in Section 2(11)(i)(c) the assessment year relevant to the

previous year in which the articles were manufactured and produced can only be 1958-59. In this case the Tribunal has found that the facts of the

case establish that the undertaking began the manufacture and production of the articles even before May 31, 1958. The facts relied on in support

of that finding are, (1) the assessee had produced pinion wheels and spindle wheels, (2) the managing director himself his given a certificate that the

grinding and bobbing machines began working from 25th October, 1957, and 24th November, 1957, respectively, and, (3) the objects of the

company will also take in manufacture and sale of sundry items like the pinion wheels and spindle wheels. From this it is clear that the Tribunal took

the view that if the company has manufactured or produced any article in the assessment year 1958-59, that will be the first assessment year in

which the benefit u/s 84 could be claimed and it will not be postponed to the assessment year in which the lathes and bench grinders which it has

been licensed to manufacture are produced. We are inclined to agree with the contention of the learned counsel for the assessee that the

manufacture and production of lathes and bench grinders can alone be taken into account for the purpose of applying Section 84(7).

Though Section 84(7) uses the word ""articles"" it cannot be understood in isolation; it has to be understood in the context and setting in which it

has been used. Sub-section (7)(i) refers to the previous year in which the undertaking began to manufacture or produce articles. It is not the

manufacture or production of articles by the company but the manufacture or production by the undertaking, which is different from the company,

that is contemplated under the sub-section, A company may own or run many undertakings some of which may be entitled to the benefit of Section

84 and others may not be so entitled. It is not, therefore, possible to equate the undertaking with the company. When a company owns more than

one undertaking the application, of Section 84 has to be with respect to the particular undertaking and not to the company in general. When we

apply Section 84 to a particular undertaking it has to be seen when, that undertaking commenced the manufacture or production of articles, It is

true that the word ""undertaking"" has not been defined under the Income Tax Act. But in common parlance it is taken as a concern started or

formed for a specific purpose or a project engaged in. In this case though the objects of the company as set out in its articles of association cover a

variety of objects, the object of the undertaking is only to manufacture lathes and bench grinders as- is clear from the licence issued to the

company under the Industries Development and Regulation Act, 1951. It is not in dispute in this case that the lathes and bench grinders were

produced only subsequent to May 31, 1958, and not earlier. On the facts proved, we are ''not in a position to agree with the Tribunal that the

articles produced by the assessee were such as to attract the provision of Section 84(7). As already stated, power supply was sanctioned only on

August 9, 1958, and the various machineries were installed at various stages beginning from August, 1957, up to end of November, 1957. Though

the accounts up to May 31, 1958, show the total receipts of Rs. 3,397, a bulk of it (Rs. 1,800 and odd) represented the sale of bamboos, leaving

a balance of Rs. 1,597 which again represented substantially repair charges and the actual sales of 5 8 numbers North Light Covers, 35 numbers

of pinion wheels and three numbers back roller pinion wheel amounted to Rs. 397''05. Thus the sale value of the articles manufactured and

produced by the assessee-company was only Rs. 397''05 before May 31, 1958. The electricity charges paid for the period April 11, 1957, up to

May 31, 1958, came to only Rs. 254 56 and the wages paid to the workers for the entire period of over 13 months was only Rs. 1,054. The

purchase of stores during the period was only for Rs. 1,137. In our view these figures speak for themselves. There could not have been any

substantial employment of labour as the wages paid for the entire period was only Rs. 1,054 and the articles sold were also for a considerably low

sum of Rs. 397. Under these circumstances we are not inclined to agree with the Tribunal that the undertaking began manufacture and production

of articles on any commercial scale before May 31, 1958.

We are also not inclined to accept the contention of the revenue that the articles produced or manufactured need not be the articles licensed

under the Industries Development and Regulation Act, 1951, and that any article produced by the undertaking will entitle the company to claim the

benefit of Section 84 in the year of such production. Section 84(7) contemplates all articles by the undertaking and the word "" undertaking "" in the

context can only mean a licensed undertaking. In the context the articles of the undertaking can only be those for which licence has been obtained

by the undertaking under the said Act. In any event, we are of the view that there has not been any regular and substantial production or

manufacture of articles by the company and that the few articles produced are quite insignificant in value and quantity. Hence it could not be said

that the company has started production and manufacture of the articles before May 31, 1958.

The learned counsel for the revenue draws our attention to the decision in Commissioner of Income Tax v. Webbing and Belting Factory Ltd.

In that case the assessee claimed tax concession u/s 15C of the Indian Income Tax Act, 1922, in relation to machinery for the manufacture of

handloom fabrics which had been functioning during February to December, 1947. The Income Tax Officer proceeded on the basis that machinery

was worked as an experimental measure and, therefore, the assessee is not entitled to the benefit. The Appellate Assistant Commissioner, on

appeal, held that the production of articles worth about Rs. 67,085 during the period could not be described as "" pure experimental production

and that, therefore, the assessee was not entitled to the relief. The Tribunal also agreed. On a reference to the High Court, it held that the fact that

the sales amounted to Rs. 67,085 in no way rebutted the contention of the assessee that the same was by way of experiment and training, and that,

therefore, the assessee was not precluded from enjoying the concession. The Supreme Court, however, thought that, though the experimental

production cannot be taken into account for the purpose of Section 84, there was no clear finding by either the Tribunal or the Appellate Assistant

Commissioner as to whether the production was experimental or not and that both of them have proceeded on the basis that the production was

not experimental. It, therefore, remitted the matter to the High Court for calling for a supplementary statement of the case and for disposal in

accordance with law. This remand order was on the basis that if the production is only experimental then that cannot be taken into account for

application of Section 84(7), This decision clearly supports our view that the manufacture of a few sundry articles at a cost of Rs. 307.05 by the

assessee before May 31, 1958, cannot be taken to be the manufacture of articles by the undertaking. Hence, the assessee is justified in taking the

year of production as 1959-60 so that he could claim the benefit of Section 84 for the year 1963-64. The second question is, therefore, answered

in favour of the assessee.

The first question raises the point as to which is the assessee''s first assessment year for the application of Section 84(7). According to the

learned counsel for the assessee, the first assessment having been made on the assessee for 1959-60, the assessment year 1963-64 will fall within

the four year limit prescribed in Section 84(7). But, according to the revenue, though the assessment came to be made for the assessment year

1959-60 for a consolidated period of 23 months and odd, the first assessment year can only be the financial year 1958-59 corresponding to the

accounting year ended 31st March, 1958, and that, irrespective of the factual assessment made by the Income Tax Officer for a period of 23

months and odd, the fixation of the first assessment year and the computation of the benefit have to be done afresh and independently of the actual

assessment for the purpose of application of Section 84(7). The learned counsel for the assessee points out that the first assessment was for 1959-

60 and that it is open to the Income Tax Officer to make an assessment for a period beyond 12 months. He refers to the decision in Esthuri

Aswathaiah v. Commissioner of Income Tax, where the Supreme Court has expressed:

A combined reading of the several clauses of Section 2(11) shows that the length of a previous year need not necessarily be 12 calendar months

u/s 2(11)(i)(b), the previous year is such period as may be deter mined by the Central Board of Revenue or such authority as the Board may

authorise in this behalf, and the period so determined may be more or less than 12 months.

But that was not a case of first assessment and in the case of first assessment in respect of a newly set up business the provisions of Section

2(11)(i)(b) have to apply and the previous year in respect of such a business can only be 12 months or less. The first accounts of the assessee

which started on April 11, 1957 to March 31, 1958, should be taken to be the first year and there is no question of the first year of business being

more than 12 months either by operation of law or by option of the assessee. Therefore, the first previous year can be taken to be from April 11,

1957, to March 31, 1958. If the manufacture and production of articles have started during this period, then it may not be possible to uphold the

assessee''s claim for the benefit of Section 84 for the assessment year 1963-64. We have, to answer the first question in favour of the revenue. But

as we have held that the manufacture and production of articles by the undertaking had commenced only after April 1, 1958, the benefit of Section

84 will be available to the assessee for the assessment year 1963-64. The assessee will be entitled to his costs. Counsel''s fee Rs. 250.