Mettur Chemical and Industrial Corporation vs Commissioner of Income Tax

Sethuraman, J.—In this reference three questions have been referred u/s 256(1) of the Income Tax Act of 1961 by the Appellate Tribunal.

The first two questions have to be considered in the light of certain common facts and those two questions are first taken up for consideration.

They are as follows:

(1) Whether the first year in which the assessee was entitled to relief in respect of the new industrial undertaking was the assessment year 1957-

58 or 1958-59 and whether the assessee was entitled to relief in respect of the assessment for 1962-63 u/s 84?

(2) Even if the assessee is not entitled to the full relief in respect of 60 Hooker Cells claimed in respect of the assessment for 1962-63 whether it is

entitled to relief in respect of the 30 Hooker Cells completed during the previous year for 1958-59 ?

The assessee is a public company, carrying on business of manufacture and sale of caustic soda among other chemicals. Caustic soda was being

produced by a process using what is called ""Billiter Cells"". Since this was found to be uneconomical, the company decided to switch over to

Hooker Cells"". The production capacity was 13''5 tons per day up to the year 1956. It was decided by the company to step up the production to

20 tons per day. The company had the necessary licence for this purpose. The installation of ""Hooker Cells"" required a change-over in the power

system and the installation of the rectifier. However the ""Hooker Cells"" could be and were utilised for production as and when they were installed

by a suitable adjustment in the power system even before the rectifier was installed. The ""Hooker Cells"" came to be installed from the middle of

1956 and during the year ended on 31st March, 1957, 30 Hooker Cells started to work along with the 11 Billiter Cells, which were also

simultaneously working. From then on, till about February, 1958, there was a gradual reduction in the work of the old Billiter Cells, while the new

Hooker Cells increased in number to the unit capacity of 60. In February, 1958, all the 60 Hooker Cells were working and the Billiter Cells were

scrapped. The change-over in the power system was also completed. The company did not maintain separate accounts with reference to the

production in the Hooker Cells, though it is not disputed that the Hooker Cells formed a unit so as to be treated as an industrial undertaking for the

purpose of Section 15C of the Indian Income Tax Act, 1922, and also Section 84 of the Income Tax Act of 1961.

The company claimed the relief u/s 15C for the first time for the assessment year 1959-60. The Income Tax Officer found that the claim for

relief for the first time for the assessment year 1959-60 was not proper. The assessment for 1958-59 had been reopened and, in the course of that

reassessment, the claim for that year was allowed. The company had not claimed a relief for the assessment year 1957-58 and there were no

proceedings in which it could be allowed subsequently.

In the assessment for the wealth-tax for 1958-59 the assessee claimed exemption in respect of the assets consisting of the industrial unit

established with the 60 Hooker Cells in the light of Section 5(1)(xxi) of the Wealth-tax Act. That provision exempted from assessment of the

wealth-tax that portion of the wealth of the company established with the object of carrying on an industrial undertaking in India within the meaning

of the Explanation of Clause (d) of Section 45 of the said Act, as was employed by it in a new and separate unit set up after the commencement of

the Act by way of substantial expansion of its undertaking. The revenue authorities declined to grant exemption and the matter reached the

Appellate Tribunal for that year. The question before the Tribunal was whether the unit had been set up after the commencement of the Wealth-tax

Act. That Act came into force on the 1st of April, 1957. Thus, for the purposes of the Wealth-tax Act, the question that came to be considered by

the Tribunal was whether the unit was established after 1st of April, 1957. The Tribunal held that the unit came to be established after that date and

granted the relief to the assessee u/s 5(1)(xxi) of the Act as claimed by it. We do not have before us a full copy of the Tribunal''s order under the

Wealth-tax Act.

In the assessment for 1962-63 the assessee claimed that it was eligible for the relief u/s 84 of the Income Tax Act, 1961. Under that provision,

Income Tax is not payable by the assessee on so much of the profits or gains derived from any industrial undertaking to which the section applied

as did not exceed six per cent. per annum on the capital employed in the undertaking, computed in the prescribed manner. u/s 84(5) 1977]

METTUR CHEMICAL & INDUSTRIAL CORPN. V. C. 1. T. (Mad.) 355 of the Act the profits or gains of the industrial undertaking had to be

computed in accordance with the provisions contained in Chapter IV-D. u/s 84(7) of the Act the provisions of that section applied to the

assessment for the assessment year relevant to the previous year in which the undertaking began to manufacture or produce articles and for the

four assessment years immediately succeeding. If the claim of the assessee for the relief under this provision or its earlier counterpart was available

for the first time only in the assessment year 1958-59, then the fifth assessment year for which the relief would enure would be the assessment year

1962-63. If the relief for the first time could be had only in the assessment year 1957-58, then the assessee would have exhausted the relief by the

assessment year 1961-62, so that for this year the relief could not be had. Thus, the point for consideration by the Income Tax Officer was

whether the relief u/s 15C which was in force in the earlier years and which was substantially identical in terms u/s 84 could be had for the first time

in the assessment year 1957-58 or 1958-59. He took the view that the assessment year 1957-58 was the first year in which the assessee should

have claimed the relief u/s 15C. He, therefore, did not entertain the claim for the relief in this year. Before him it was sought to be argued that by

31st March, 1957, commercial production with the use of Hooker Cells had not commenced and that the use of the Hooker Cells during the year

ended on 3Ist March, 1957, was only an experimental measure. He rejected this contention also.

The assessee appealed to the Appellate Assistant Commissioner and repeated the claim for relief u/s 84 of the Act. He also took the view that

the undertaking began to manufacture articles before 31st March, 1957, relevant for the assessment year 1957-58 and that consequently the relief

was not admissible for the assessment year 1962-63. There was an alternative contention that in any event with reference to 30 Hooker Cells

established after 1st of April, 1957, the assessee would be eligible for the relief. In his view, the Act did not provide for the relief by dividing the

industrial undertaking into parts simply because the entire unit did not produce articles in the first year of account. On further appeal before the

Appellate Tribunal the proceedings under the Wealth-tax Act mentioned earlier were relied on, saying that the relief u/s 15C could also start only

from the assessment year 1958-59. The Tribunal rejected the submission on the ground that the language relevant to the provision under the

Wealth-tax Act was different from that in the Income Tax Act so that the said decision had no application. Before the Tribunal it was admitted that

production in relation to the industrial unit consisting of 30 Hooker Cells installed prior to 31st March, 1957, did commence in that year. The

Tribunal, therefore, negatived the relief for the assessment year 1962-63, which would be the sixth year from the assessment year 1958-59. The

Tribunal rejected the alternative plea for the relief at least in relation to 30 Hooker Cells installed for the first time in the relevant previous year for

the assessment year 1958-59, as it was of the view that there was no separate industrial undertaking consisting only of 30 Hooker Cells installed

after 1st of April, 1957. Thus, the Tribunal also confirmed the conclusion of the Income Tax authorities.

On the above facts, the two questions extracted already have been referred for the opinion of this court. On behalf of the assessee the learned

counsel submitted that the industrial undertaking consisted of 60 Hooker Cells and that the said undertaking began to manufacture or produce

articles only from the relevant previous year for the assessment year 1958-59. He relied in this connection on the finding of the Tribunal under the

Wealth-tax Act for the assessment year 1958-59, in which it had been held that the industrial undertaking had been set up after 1st of April, 1957.

As we have already observed, the order of the Tribunal for the assessment year 1958-59 is not before us. No doubt some passages therefrom

have been extracted in the Tribunal''s order for the year under consideration. However, the question as to whether the assessee was properly

granted the relief u/s 5(1)(xxi) of the Wealth-tax Act is not before us. The language of Section 5(1)(xxi) of the Wealth-tax Act is different. The test

for grant of exemption under that Act is different. Under the Income Tax Act now under scrutiny the question to be decided is as to when the

undertaking began to manufacture or produce articles. Counsel for the assessee had conceded before the Tribunal that with 30 Hooker Cells

installed in the accounting year ended on 31st March, 1957, commercial production had commenced. It follows, therefore, that the industrial

undertaking had begun to manufacture or produce articles even in the previous year ended on 31st March, 1957. As indicated earlier, the

contention of the learned counsel for the assessee is that the unit of 60 Hooker Cells must be taken as a whole for the purpose of applying Section

84(7) of the Act. We are unable to agree with the submission. The industrial undertaking relevant for our purpose is the one which used the

Hooker Cells for production of caustic soda. Whether it had 30 cells in one year or more in another year is not relevant. What we have to see is

whether with whatever number of Hooker Cells at any particular point of time the assessee had begun to manufacture or produce articles in the

relevant unit. There can be no dispute that the assessee had begun to manufacture or produce articles in the previous year ended on 31st March,

1957, with the help of 30 Hooker Cells. The addition to the Hooker Cells does not in any manner affect the point of time when the undertaking

began to manufacture or produce the articles. If the unit had started to manufacture or produce articles, then any subsequent addition to the unit so

as to expand it would not in any manner postpone the date of the beginning of manufacture or production of articles. When once production on

commercial scale had commenced, that would start the operation of Section 84(7) of the Act. In the light of the above test, the undertaking had

begun to manufacture or produce articles by 31st March, 1957, so that the first assessment year in which the relief u/s 15C corresponding to

Section 84 of the present Act could be claimed was 1957-58. The four succeeding years would end by 1961-62 so that the assessee would not

be eligible for the relief in the sixth assessment year 1962-63 now under consideration. The first question has, therefore, to be answered

accordingly. This answer does not preclude the assessee from working out its relief for any other assessment year.

We now take up the second question. The point to be considered is whether the assessee is entitled to the relief u/s 84 in respect of 30 Hooker

Cells installed during the previous year ended on 31st March, 1958. For this purpose we have to determine what is the industrial undertaking as

such. Whether the said undertaking had 30 Hooker Cells or 60 Hooker Cells is not really the criterion. The industrial undertaking relevant for the

purpose of Section 84 is the unit as such. This unit functioned with 30 Hooker Cells in the relevant assessment year 1957-58. There were

additions to this unit in the previous year for the assessment year 1958-59. There is nothing in Section 84 which provides for relief with reference

to the additions made in the previous year ended on 31st March, 1958. As rightly pointed out by the Tribunal, the relief is available to the industrial

undertaking as such. The undertaking as such could function with a number of Hooker Cells in one year and with further number in another year.

But when once it had started functioning with some particular number in one year, then notwithstanding the additions later, the unit as such is

eligible for the relief in the year in which it began to manufacture or produce articles. There is nothing in Section 84 to split up the relief based on

the additions made in one or more succeeding years to the particular unit which had already begun to manufacture or produce articles. The

assessee cannot be said to be entitled to the relief only when it completed the 60 Hooker Cells, as the unit had started with 30 Hooker Cells even

in the earlier year, viz., the previous year ended on 31st March, 1957. There is no scope for allowing a partial relief or splitting up of the relief as

and when fresh cells came to be added. The second question is, therefore, answered in favour of the revenue.

We now turn to the third question which runs as follows :

Whether development rebate in respect of the new industrial undertaking established during the previous year for 1962-63 should be deducted in

computing the profits and gains for the purpose of Section 84 and whether the assessee is entitled to any relief under that section in respect of this

undertaking ?

Apart from the 60 Hooker Cells discussed earlier, the assessee-company installed 60 more cells progressively and produced caustic soda

therefrom during the previous year ended on 31st March, 1962. The profit with reference to this additional unit of 60 more cells, which is called

caustic soda plant No. 2, was worked out by the assessee at Rs. 1,08,282 before allowance of development rebate. The development rebate

pertaining to this second plant came to Rs. 12,15,055. If development rebate was adjusted against the sum of Rs. 1,08,282 mentioned above, then

the net result would be loss of Rs. 11,06,773. There would be no profit, which would be eligible for the relief u/s 84 of the Act. The assessee

would be eligible for the maximum relief of Rs. 1,95,239 which is the equivalent to 6% on the capital employed in the second caustic soda plant.

As the profit computed even by the assessee fell within the figure, the assessee would be eligible for that relief, if at all, to the extent of Rs.

1,08,282 if development rebate relating to this plant is not to be adjusted. The contention of the assessee before the Income Tax Officer was that

the development, rebate should not be deducted in arriving at the business income, because it had no bearing on the business profit of the industrial

undertaking. According to the assessee the development rebate could only reduce the profit to a nil figure and would not, therefore, be a deduction

from the profits in the real sense. The Income Tax Officer was, however, of the view that the development rebate had to be adjusted against this

profit and that as there was no profit after adjusting the development rebate, the relief u/s 84 was not allowable to the assessee for this year. The

Appellate Assistant Commissioner and the Tribunal confirmed this conclusion.

The learned counsel for the assessee submitted that Section 33 of the Act allowing development rebate came in for application only after the

total income was arrived at, so that it could reduce the taxable profit to nil. In his submission we are concerned with a stage anterior to the

computation of the total income so that the deduction contemplated by Section 33 had no scope for application at that stage. For the revenue the

submission was that Section 84(5) contemplated computation of the profits and gains derived from an industrial undertaking in accordance with the

provisions of Chapter IV-D and that Section 33 was one of the provisions falling under Chapter IV-D. On the language of Section 84(5), in the

submission of the counsel for the revenue, there was no scope for excluding the allowance of development rebate.

We agree with the submission urged on behalf of the revenue. Chapter IV-D commences with Section 28 and ends with Section 44 of the Act

as it was in 1962. Section 84 appears in Chapter VII, the provisions of which deal with ""Income forming part of total income on which no Income

Tax is payable"". Therefore, there has to be first a computation of the total income. Total income is defined in Section 2(45) as meaning the total

amount of income referred to in Section 5, computed in the manner laid down in the Act. Section 5 deals with what forms part of the total income

in the case of a resident and a non-resident. This is a resident company, which would have to be assessed with reference to the total income which

includes all income from whatever source derived whether in India or outside India. The manner of computation laid down in the Act is provided

for in Section 14. The manner of computation varies with reference to the several heads of income. We are concerned here with the profits and

gains of business or profession. This is classified as head ""D"" and the provisions relevant for this purpose are Sections 28 to 44. Section 33 is

included in those provisions and cannot be ruled out of consideration for the purpose on hand. If Section 84 had provided for the exclusion of the

relief u/s 33 for the present purpose, then the position would have been different. But the language of Section 84(5), as we have already seen,

enjoins the computation in accordance with the provisions contained in Chapter IV-D. Therefore, the development rebate allowable u/s 33 has to

be taken as a deduction for this purpose. Learned counsel for the assessee pointed out that Section 33(2) itself contemplated the computation of

total income without the allowance of deduction u/s 33 and also provided for the reduction of the total income only to nil. The need for the

computation of the total income for the purpose of Section 33(2) before allowance of development rebate arose because of the special manner in

which the development rebate is proposed to be allowed under the Act. Ordinarily, any deduction provided under the Act would, if it exceeded

the gross total income, reduce the profit to a minus figure. The minus figure would then be treated as a loss eligible for adjustment in the relevant

assessment in accordance with the provisions contained in Chapter VI. Section 33(2) provided for the adjustment of the development rebate so as

to reduce the total income to nil. The unabsorbed development rebate would be eligible for adjustment in the subsequent year. This is only a

method or manner of allowing the deduction. The deduction would in the present case reduce the total income to nil. In the present case even after

allowance of the development rebate the total income of the company as such was Rs. 9,61,509 as computed by the Income Tax Officer. The

business income itself was computed at Rs. 8,56,326 after allowing the development rebate. In effect what the assessee wants is the allowance of

both the deduction u/s 33 as well as the relief u/s 84. If Section 84 had not referred to the computation of the income in the manner done under

Chapter IV- D then the position would have been different. The effect of Section 84(5) is to allow the relief under that provision only in a case

where there was a positive income of the industrial undertaking after the allowance of the development rebate. It is not disputed that in the present

case the development rebate referable to the assets in the second caustic soda plant came to Rs. 12,15,055 and that it has been allowed as a

deduction in the assessment. In computing the profit eligible for the relief u/s 84, the development rebate could not be ignored and we are satisfied

that the conclusion of the Tribunal on this point is correct.

In a way, a similar question came up for consideration before this court in Ashok Motors Ltd. Vs. Commissioner of Income Tax, Madras, .

The assessee in that case was an industrial undertaking which had profits both from its car manufacturing as well as its trading activities. The trading

activity consisted in purchase and sale of certain motor car components. For the assessment year 1951-52, the total profit of the composite

business came to Rs. 4,44,462. A sum of Rs. 2,48,483 was left over as unabsorbed depreciation to be carried forward. The Income Tax Officer

computed the assessee''s profits from the industrial undertaking at Rs. 2,53,198. After adjusting the unabsorbed depreciation relating entirely to the

industrial undertaking there was a balance of only Rs. 4,715 out of the aforesaid sum of Rs. 2,53,198. The Income Tax Officer gave exemption u/s

15C of the 1922 Act with reference to that figure. The assessee claimed that the unabsorbed depreciation should not be adjusted against the

industrial undertaking''s profits of the relevant year. In dealing with this claim this court observed at page 405 as follows:

Now, it is seen from Section 15C itself, Sub-section (3) thereof, that the profits or gains of an industrial undertaking to which this section applies

shall be computed in accordance with the provisions of Section 10. This provision accordingly contemplates the determination of the profits or

gains of the industrial undertaking as a separate part of the business and the computation of such profits and gains by the application of Section 10.

If we take the total profits of the composite business, the unabsorbed depreciation allowance has to be deducted therefrom in order to arrive at the

taxable profits. Once again, in computing the profits or gains of the industrial undertaking, Section 10 has to be applied and the taxable profits and

gains have to be computed by deducting the unabsorbed depreciation referable to the industrial undertaking from the total profits and gains of the

undertaking. After arriving at this figure, that portion of it which does not exceed six per cent. of the capital employed will have to be exempted

from tax.

The above passage would wholly apply to the decision of the point under consideration. The only difference is that in that case the deduction

related to the unabsorbed depreciation and in the present case the development rebate. In principle both stand on the same footing.

In the Commissioner of Income Tax, Madras Vs. S.S. Sivan Pillai and Others, , the Supreme Court had an occasion to consider the

adjustment of unabsorbed depreciation in working out the relief available in the computation u/s 15C of the Act. That case related to the claim of

the assessee, who was a shareholder in the company, which according to him had profits eligible for the relief u/s 15C. If the company had profits

eligible for the relief u/s 15C, then to that extent, the shareholder could also claim that the proportionate part of the dividend was not taxable in his

hands. In that case also the point to be considered was whether, an computing the profits of an industrial undertaking u/s 10 of the Act of 1922,

the unabsorbed depreciation could be ignored. The Supreme Court held that, in computing profits of an industrial undertaking, the unabsorbed

depreciation could not be ignored and that the contrary view would be inconsistent with the plain terms of Section 10. The conclusion of the

Supreme Court is the same as that arrived at in the case of Ashok Motors Ltd. Vs. Commissioner of Income Tax, Madras, cited already. Thus,

neither authority nor the statute supports the stand taken by the assessee in the present case.

In the result, we hold that the development rebate in respect of the new. industrial undertaking should be deducted in computing the profits,

and gains for the purpose of Section 84 and that the assessee is not entitled to any relief under that section in respect of this- undertaking for the

relevant year. This question is also answered in favour of the revenue.

All the three questions are answered as indicated earlier. The department will be entitled to its costs. Counsel''s fee Rs. 250.