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PETITIONER: TRAVANCORE-COCHIN CHEMICALS (P.) LTD.

       Vs.

RESPONDENT: COMMISSIONER OF WEALTH-TAX, KERALA

DATE OF JUDGMENT: 06/04/1967

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SHAH, J.C. RAMASWAMI, V.

CITATION:  1967 AIR 1534            1967 SCR  (3) 448

ACT: Wealth  Tax  Act  (27 of  1957)  s.  45(d),  proviso-Company incorporated on one date and commencing business an a  later date- When "established"-Meaning of "established".

HEADNOTE: The  appellant,  which was a private  limited  company,  was formed and registered under the Indian Companies Act,  1913, on 8th November, 1951.  The erection and construction of its factory  was  completed  in  December  1953  and  production commenced  from  1-1-1954.   On  the  question-whether   the company  was established on 8th November, 1951, the date  of its incorporation and was therefore liable to pay wealth tax for  the assessment years 1957-58, 1958-59 and  1959-60,  on the  basis  that the exemption from payment  of  wealth  tax under  the proviso to s. 45d) was only for  five  successive assessment  years commencing with the assessment  year  next following the date on which the company was established. HELD  : A comparison of clauses (d) and (f) of s.  45  shows that the word "established" in cl. (d) and its proviso, does not  mean  "incorporated".  The word "established"  has  the same  meaning  it has in s. 5(1) (xxi) of the  Act,  namely, that the Company has been put into such a shape that it  can start   functioning  as  a  business  or   a   manufacturing Organisation.   So construed, the appellant was  established within s. 45(d) only in December, 1953, or 1st January 1954, and the five assessment years next following would be  1954- 55,  1955-56, 1956-57, 1957-58 and 1958-59.  Therefore,  the appellant would be entitled to exemption for the  assessment years 1957-58 and 1958-59 but not for 1959-60. [451F;  452D- E; 453B-C] Commissioner  of  Wealth Tax, Madras v.  Ranzaraju  Surgical Cotton Mills Ltd. [1967] 1 S.C.R. 761, followed. Thomas  J.  Davidson  v. W. L. Lanier, 18  L.Ed.  377,  379, referred to.

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos. 405-  407 of 1966.

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Appeals  by special leave from the judgment and order  dated March 9,  1964  of  the  Kerala High  Court  in  Income  Tax Referred Case No.   4 of 1963. S. T.     Desai and G. L. Sanghi, for the appellant (in  all the appeals). T. V.     Vishwanatha Iyer, Gopal Singh, S. P. Nayyar and R. N. Sachthey,   for the respondent (in all the appeals). The Judgment of the Court was delivered by Sikri,  J.  These  appeals by  special  leave  are  directed against  the  judgment  of the High Court  of  Kerala  in  a reference  made to it by the Income-Tax Appellate  Tribunal, Madras  Bench, under S. 27(1) of the Wealth Tax  Act,  1957, hereinafter referred to as the Act.  The reference was  made at the instance of the 449 Commissioner  of  Wealth  Tax,  Kerala,  and  the   question referred was as follows :-               "Whether  the  exemption  from  tax  for   the               assessment years 1957-58, 1958-59 and  1939-60               was not rightly granted." The  High Court held that the exemption from tax granted  to the  assessee under s. 45(d) of the Act for  the  assessment years  1957-58, 1958-59 and 1959-60 was not rightly  granted and  answered  the  question  against  the  assessee.    The relevant  facts are as follows :-The  appellant,  Travancore Cochin Chemicals (P) Ltd., hereinafter called the  assessee, was formed and registered under the Indian Companies Act  on November 8, 1951.  The prior history of the Company is given in the statement of the case as follows :-               "On   22-7-1949,  a  partnership  was   formed               between  two public limited  companies,  viz.,               Fertilisers   &  Chemical   Travancore   Ltd.,               Always,  and the Mettur Chemical &  Industrial               Corporation  Ltd., Mettur, for establishing  a               Caustic Soda Factory with an estimated capital               of Rs. one crore.  The firm could not function               due  to  lack of finance.  The  Government  of               Travancore   was  approached   for   necessary               finance to complete the purchase of plants and               machinery  which  had been started  in  August               1949, and that Government entered the  Company               and subscribed a large share capital and a new               private   limited  company  was   formed   and               registered  under the Indian Companies Act  on               8-11-1951."               Further  facts given in the statement  of  the               case are as follows               buildings,  construction  stores,   materials,               etc., at different stages of erection and also                             all  book debts and liabilities.  The  erection               and construction of the factory was  completed               in  December, 1953, and  production  commenced               from  1-1-1954.   The  trading  accounts  were               closed for the first time on 31-3-1954.  There               was a loss of Rs. 16,04,212/- incurred." For the assessment year 1957-58 (the relevant date of valua- tion  being March 31, 1957) the assessee claimed before  the Wealth Tax Officer that it was not liable to pay wealth  tax during  the year of account as it was exempted  from  wealth tax  under  s. 45 (d) of the Act.  The  Wealth  Tax  Officer rejected  the  claim  on the ground that  the  assessee  was established  within the meaning of s. 45(d) and the  proviso thereto,  in November 1951, and consequently the  period  of five years exemption was over with the assessment year 1956-

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57. 450 The relevant portion of S. 45 of the Act reads as follows               "45.   The  provisions of this Act  shall  not               apply to               (a)               (b)               (c)   any company established with the  object               of  financing, whether by way of making  loans               or advances to, or subscribing to the  capital               of’, private industrial enterprises in  India,               in  any case where the Central Government  has               made  or  agreed  to make  to  the  company  a               special   advance  for  the  purpose  or   has               guaranteed or agreed to guarantee the  payment               of  moneys  borrowed by the company  from  any               institution outside India;               (d)   any company established with the  object               of  carrying on an industrial under-taking  in               India  in  any case where the company  is  not               formed   by   the   splitting   up,   or   the               reconstruction   of  a  business  already   in               existence or by the transfer to a new business               of any building, machinery or plant used in  a               business which was being previously carried on               :               Provided that the exemption granted by  clause               (d)  shall  apply to any such  company  as  is               referred to therein only for a period of  five               successive  assessment years  commencing  with               the assessment year next following the date on               which the company is established, which period               shall,  in the case of a  company  established               before  the  commencement  of  this  Act,   be               computed in accordance with this Act from  the               date  of its establishment as if this Act  had               been  in  force on and from the  date  of  its               establishment;               Explanation.-               (e)               (f)   any company registered under section  25               of the Companies Act, 1956." The  Wealth Tax Officer followed the same reasoning for  the -assessment  years  1958-59  and  1959-60.   The   Appellate Assistant  Commissioner of Wealth Tax upheld the  orders  of the Wealth Tax Officer.  The Income Tax Appellate  Tribunal, however, allowed the appeals of the assessee.  It held  that the   word   "established"   in  S.  45(d)   was   used   in contradistinction to the word "incorporated". It observed :               "It  seems to us that this  ’establish’  (sic)               can  be  inferred only when  the  object  with               which  the company was formed or  incorporated               is begun to be achieved."                 451               It further held :               "To attract tax under sec. 3 there must be  an               assessment year as defined in sec. 2 (d).   In               this  case, the assesssment has commenced  for               the first time in 1954-55 and having regard to               Part 11 of the Schedule to the Wealth Tax Act,               the first year 1954-55 having ended in a loss,               the  assessment year can be said  to  commence               only from 1955-56.  For five years from  then,               the   assessee  would  be  entitled   to   the               exemption."

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As  mentioned  above, the Appellate  Tribunal  referred  the question  at the instance of the Commissioner, and the  High Court  answered  the  question against  the  assessee.   The assessee  having  obtained leave from the  High  Court,  the appeal is now before us- The learned counsel for the assessee contends that the  word "established" in s. 45(d) has the same meaning as it has  in s. 5(1)(xxi) of the Act, which was interpreted by this Court in  Commissioner of Wealth Tax, Madras v. Ramaraju  Surgical Cotton  Mills  Ltd.(1) He says that the  word  "established" cannot be equated with the word "incorporated".  The learned counsel for the respondent, on the other hand, contends that the  word "established" in s. 45(d) has a different  meaning to that in s. 5 (1) (xxi), as s. 45 (d) deals with a company being established while s. 5(1)(xxi) deals with a unit being established.   Bhargava,  J.,  speaking for  the  Court,  in Commissioner  of  Wealth Tax, Madras  v.  Ramaraju  Surgical Cotton Mills Ltd.,(1) observed:               "A  unit  cannot be said to have been  set  up               unless  it is ready to discharge the  function               for which it-is being set up.  It is only when               the  unit has been put into such a shape  that               it  can start functioning as a business  or  a                             manufacturing Organisation that it can  be  said               that the unit has been set up.  The expression               used  in the proviso, under which  the  period               for which the exemption is available is to  be               determined,  is not the same as that  used  in               the  principal  clause.  In the  proviso,  the               period  of five successive years of  exemption               has to commence with the assessment year  next               following  the  date  on  which  the   company               commences operations for the establishment  of               the unit.  Operations for the establishment of               a   unit,  from  the  very  nature   of   that               expression,  can only signify steps that  have               to  be taken to establish the unit.  The  word               ’set  up’  in  the principal  clause,  in  our               opinion,    is   equivalent   to   the    word               ’established’,     but     operations      for               establishment  cannot  be  equated  with   the               establishment  of  the  unit  itself  or   its               setting up.  The applicability of the  proviso               has, therefore, to be decided               (1) [1967] I.S.C.R. 761, 764 : 63 I.T.R.  478,               481-482.               L5Sup CI/67--16               452               by  finding  out when  the  company  commenced               operations  for  establishment  of  the  unit,               which  operation  must be  antecedent  to  the               actual  date on Which the company is  held  to               have been set up for purposes of the principal               clause.   This  is also the meaning  that  the               Bombay  High  Court  derived in  the  case  in               Western  India  Vegetable  Products   Ltd.,(1)               where  that  Court  was  concerned  with   the               interpretation of the expression set up’ as in               section  2 (II) of the Income-tax  Act.   That               court  held-  :  ’it  seems  to  us  that  the               expression setting up means, as is defined  in               the  Oxford  English Dictionary,-to  place  on               foot or to establish, and in contradistinction               to  commence.   The distinction is  this  that

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             when a business is established and is ready to               commence business, then it can be said of that               business  that it is set up. But before it  is               ready  to commence business it is not set  up.               This  view was expressed when that  Court  was               considering the difference between the meaning               of  the expression setting up a  business  and               commencing of a business." It  seems to us that the same meaning must be given  to  the word "established" in s. 45 (d) as in s. 5 ( 1 ) (xxi).   It would  be noticed that s. 45 uses the word "established"  in cl.  (c)  and  in the proviso to cl.  (d),  while  the  word "formed" is also used, apart from the word "established"  in cl.  (d);  and  in cl. (f) the word  "registered"  is  used. There  is a clear distinction between the word  "registered" or  "incorporated"  and  the  word  "established".   If  the Legislature was thinking of incorporation of a company, then we fail to understand why this word was not used instead  of the word "established".  Further, if we look at cl. (d),  it excludes certain industrial undertakings from the benefit of s.  45;  what  are -excluded are companies  "formed  by  the splitting up, or the reconstruction of a business already in existence  or  by  the transfer to a  new  business  of  any building,  machinery or plant used in a business  which  was being  previously  carried  on."  Ordinarily  the  date   of incorporation  of  a  company has nothing  to  do  with  the transfer of a machinery or plant to it. The  case  of Thomas J. Davidson v. W. L. Lanier  2  )  also lends support to the interpretation which we have placed  on the word "established".  Chase, C.J., observed :               "What  is  meant by putting  in  operation  or               establishing a Banking Company ? We think that               this  language  has a much wider  import  than               mere commencement of business.  To establish a               company  for any business means  complete  and               permanent provision for               (1) 26 I.T.R. IS 1.               (2) 18 L. Ed. 377, 379.               453               carrying  on  that  business,  and  putting  a               company  in  operation may  well  include  its               continued  as  well as its first  or  original               operation." We may mention that no other point was debated before us. In  the  result we hold that the  assessee  was  established within s. 45(d)  of the Act in December 1953, or January  1, 1954.  The first year following the date of establishment of the Company was 1954-55, and the next four assessment  years would  be 1955-56, 1956-57, 1957-58 and 1958-59.   The  only assessment  year in dispute that is not covered is  1959-60. Consequently  the  answer to question referred is  that  the exemption  for the assessment years 1957-58 and 1958-59  was wrongly  withheld while the exemption for the  year  1959-60 was rightly not granted.  We accordingly accept the  appeals and  answer the question as indicated above.  There will  be no order to costs. V.P.S.                             Appeal allowed in part.