INDUSTRIAL GASES LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under s. 66(2) of the Indian IT Act, 1922. The assessment year is 1951-52. The accounting period is the calendar year 1950. From the statement of the case it appears that the assessee is a private limited company incorporated on 25th July, 1947, with the object, inter alia, of carrying on the business of manufacturing industrial gases. Pending the installation of the factory the assessee up to the preceding assessment year was having dealings only in carbide, machinery parts and other industrial gases. During the accounting period the installation of the factory had been completed, and the assessee started the manufacture of industrial gases. The activities of the assessee with regard to the manufacturing business and commercial dealings were found to be carried on as two completely separate units for which separate sets of account books were also maintained. The result of the manufacturing unit was a loss and there was substantial profit in its commercial dealings. In view of the loss in the manufacturing unit the ITO did not consider it necessary to go into the question as to whether the exemption under s. 15C as claimed by the assessee was attracted.

(2.) THE contention of the assessee before the AAC was that, since the assessee-company did some manufacturing during the accounting year, its entire income arising from the business as a whole including the commercial activities in dealings in gases etc., should be treated as income of one industrial undertaking and the resultant profit should be exempted under the provision of s. 15C. THE AAC did not uphold this contention. Before the Tribunal it was urged that, since some manufacturing was done during the accounting year, it became a new industrial undertaking as contemplated under s. 15C and was, therefore, entitled to the exemption. It was urged further that it was not necessary in an industrial undertaking to manufacture or produce anything through the help of machinery inasmuch as there being no definition of "industrial undertaking" in the IT Act, the ordinary meaning of "industry" as given in the English dictionary should be adopted. "Industry" it was submitted, according to its dictionary meaning, included such other activities as agricultural operations where the help of machinery was not incumbent in the process of production. THE Tribunal rejected this contention on the ground that the income derived by the assessee from its commercial activities could not be deemed to be "profits or gains" derived from any "industrial undertaking" within the meaning of s. 15C(1). THE Tribunal was of the view that the commercial activities of the assessee were entirely separate from its business of manufacturing industrial gases and did not fall in any of the categories mentioned in sub-cl. (ii) of sub-s. (2) of s. 15C. THE Tribunal held that the benefits of s. 15C were allowable to a new industrial undertaking which satisfied the conditions laid down in sub-cl. (ii) of sub-s. (2) of that section. THE assessee's claim for exemption was, therefore, disallowed. THE following questions of law have been framed by this Court : "(1) On the facts found and/or admitted, did the manufacture and sale of industrial gases and equipment for use of such gases constitute two separate undertakings ? (2) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the profits made by the assessee-company from sale of gases and equipment were not exempted under s. 15C of the Indian IT Act as it stood at the time of the assessment year ?"

(3.) OUR attention has been invited to two decisions of the Madras High Court on s. 15C of the Act. I shall first briefly refer to the facts in these two cases and the decisions given therein. In Ashok Motors Ltd. vs. CIT (1961) 41 ITR 397 (Mad) : TC25R.656, the assessee was a public limited company, which commenced business in February, 1948, as a dealer in Austin cars and trucks and spares. Early in 1949, it began to import parts from abroad and assemble cars at its factory. The assessee derived profits from its industrial undertaking as well as other trade activities. The total profits of the composite business came to Rs. 4,44,462 (rupees four lakhs and forty-four thousand and four hundred and sixty two). A sum of Rs. 2,48,483 (rupees two lakhs and forty-eight thousand and four hundred and eighty three) left over as unabsorbed depreciation relating entirely to the industrial undertaking had to be carried forward. The ITO computed the assessee's profits from the industrial undertaking at Rs. 2,53,198 (rupees two lakhs and fifty-three thousand and one hundred and ninety-eight) which after adjusting the unabsorbed depreciation left a balance of Rs. 4,715 (rupees four thousand seven hundred and fifteen). The officer gave exemption under s. 15C of the IT Act in respect of the sum of Rs. 4,715 (rupees four thousand seven hundred and fifteen) alone and brought to tax the sum of Rs. 1,91,264 (rupees one lakh ninety- one thousand two hundred and sixty four) pertaining to its other business activities. The Madras High Court held that the procedure adopted by the ITO was in conformity with the provisions of s. 15C and the assessee was entitled to exemption under s. 15C only in respect of the sum of Rs. 4,715 (rupees four thousand seven hundred and fifteen). In CIT vs. Standard Motor Products of India Ltd. (962) 46 ITR 814 (Mad) : TC25R.661, the assessee-company was engaged in the manufacture of motor-cars and tractors. It entered into an agreement with an English company under the terms of which it became entitled to import parts and components for assembling cars and tractors. The assessee imported spare parts, used some of them for assembling cars and sold some as spare parts. In computing the relief to which the assessee was entitled under s. 15C, the ITO excluded the profit derived by the company from the sale of spare parts. The assessee contended that the business of importing and selling spare parts was part of the industrial undertaking of the company, that the purchase of spare parts was obligatory under the terms of the agreement and, as such, the profit derived from the sale of spare parts were entitled to exemption under s. 15C. The Madras High Court held that the business in spare parts was not essential to the subsistence of the industrial undertaking of the assessee and the failure or cessation to carry on such business would not put an end to the undertaking itself. The profits from the sale of spare parts did not form part and parcel of its income from an industrial undertaking and was not entitled to the exemption under s. 15C.