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PETITIONER: METTUR CHEMICAL AND INDUSTRIAL CORPORATION LIMITED

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TEX, MADRAS-1

DATE OF JUDGMENT16/11/1995

BENCH: KIRPAL B.N. (J) BENCH: KIRPAL B.N. (J) JEEVAN REDDY, B.P. (J)

CITATION:  1995 SCC  Supl.  (4) 732 1995 SCALE  (6)468

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T KIRPAL. J.      This is  an appeal  by way of special leave having been granted against  the judgment of the Madras High Court which had answered  the three  questions of  law referred to it by Income Tax  Tribunal under  Section 256(1) of the Income Tax Act, 1961  (hereinafter referred  to as ‘the Act’) in favour of the respondent.      The facts  as  found  by  the  Tribunal  are  that  the appellant was  manufacturing coustic soda utilising billiter cells and  up to  the year 1956, its production capacity was 13.5 tons per day. The appellant felt the need to expand its capacity and  obtained  a  licence  which  permitted  it  to manufacture 20 tons of caustic soda per day.      In  order  to  increase  the  capacity,  the  appellant gradually replaced  billiter cells with hooker cells. Thirty hooker cells  were installed  by 31.3.1957  and thirty  more were installed  in February,  1958. The  installation of the hooker cells  required a change over in the power system and the installation  of a  rectifier was  completed only in the year  ended   31.3.1959.  However,  the  hooker  cells  were utilised for  the production as and when they were installed by a suitable adjustment in the power system even before the rectifier was  installed. The  position, thus,  was that the production  for   the  year   31.3.1957   included   certain production attributable  to the  use of thirty hooker cells. All the  sixty hookers  cells were  installed by  the end of 1958 and  the installation  of the  unit together  with  the rectifier was also completed in the year ended 31.3.1959. It was clear  that the capacity of the unit gradually increased from the  stage of  the installation  of the  hooker  cells, though full  capacity was reached only with the installation of all the hooker cells.      Claim was  made by  the  appellant  before  Income  Tax Officer to  the effect  that it  was entitled  to the relief under Section  84 of  the Act  in respect of assessment year

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1962-63 on  the ground  that such  relief is  admissible for five assessment  years starting  from the  year in which the industrial undertaking  begins  to  manufacture  or  produce articles. The  contention of  the appellant  was that it had not claimed  any relief  in respect of assessment year 1957- 58, when thirty of the sixty hooker cells had been installed and, therefore,  the period  of five  years should  commence only with  effect from  the year  1958-59 by  which time the installation of  the sixty  hooker cells,  as  well  as  the rectifier, had  been completed.  In the  alternative, it was also contended  that the  appellant was  entitled to  relief atleast in relation to production of the thirty hooker cells which were  installed for  the first  time in the assessment year 1958-59,  as the fifth year for these hooker cells from the commencement  of the  production is  the assessment year 1962-63.      The claim had been disallowed by the Income Tax Officer and in  appeal by  the Appellate Assistant Commissioner. The Income Tax  Tribunal, on  the further  appeal, rejected  the claim of the appellant by holding that though the industrial unit ultimately  consisted of  sixty hooker  cells  and  the rectifier but  it had commenced commercial production in the year ended  31.3.1957 and,  therefore, the five years had to be reckoned from the year 1957-58 and not 1953-59.      Another contention  which was raised before the Revenue Authorities  and   the  Tribunal  was  with  regard  to  the deduction of  development rebate,  which  was  allowable  in respect of  a new  industrial undertaking  in computing  the profits and gains for the purpose of relief under Section 84 of the  Act. In  respect of  assessment  year  1962-63,  the profits and  gains from  the new  industrial unit  had  been computed at  Rs. 1,08,282  before adjustment for development rebate. The  total amount  of development  rebate  had  been determined  at  Rs.13,69,487/-.  Adjusting  the  development rebate towards this profit of Rs. 1,08,282/-, the Income Tax Officer and  the Appellate  Assistant Commissioner held that there was  no income  from the new industrial undertaking on which relief  was admissible under Section 84(1) of the said Act. The contention of appellant was that in arriving at the business income  of  industrial  undertaking  on  which  the relief under  Section 84(1)  of the  Act was admissible, the development rebate  was not  to be  deducted. This claim was not accepted  by the  Appellate Tribunal.  It  came  to  the conclusion that  on the correct interpretation of Section 84 of  the  Act,  the  relief  under  the  said  provision  was allowable only  in case where there was a positive income of the  industrial   undertaking   after   the   allowance   of development rebate.      On an  application being  filed by  the appellant,  the Tribunal referred  the following  three questions  of law to the High Court:      "(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 and  whether  the  assessee  was      entitled to  relief in  respect  of  the      assessment for  1962-63 under Section 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      thirty hooker cells completed during the

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    previous year for 1958-59 ?      (3)  "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 the assessee is entitled to      any relief under that section in respect      of this undertaking ?"      The High Court agreeing with the Tribunal, answered the aforesaid questions  of law  in favour of the respondent. On leave to  appeal being  refused, this  Court granted special leave to appeal. Hence, this appeal.      Taking  the   first  two  questions  together,  it  was contended by  Shri Ramachandran,  learned  counsel  for  the appellant, that  the new industrial undertaking was entitled to the  benefit of  the provisions  of Section 84 of the Act corresponding to  Section 15(c)  of the Income Tax Act, 1922 in the  year 1962-63  because the new industrial undertaking consisted of  sixty hooker  cells and rectifier and the same were installed  only  in  the  year  1958-59.  It  was  also contended that  in respect of the year 1957-58, no claim was made under  the said  provision because  the assessee had by then not completed the installation.      According to  Section 84  of the Act, income tax is not payable by  an assessee on so much of the profits and gains, inter alia, derived from any industrial undertaking to which the Section  applies, as does not exceed 6% per annum on the capital employed  in such  undertaking. Sub-section  (2)  of Section 84 provides the conditions which should be specified so as  to enable  the assessee  to enjoy  the benefit of the said provision.  It is  not in dispute that these conditions are satisfied but what we are concerned in this case is with regard to the applicability of sub-section (7) of Section 84 of the Act which reads as follows:      "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 or, as the case may be,      operate  the   cold  storage   plant  or      plants, and      (ii) where the assesee 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."      It is  found as  a fact that the appellant had begun to manufacture or  produce articles  in the previous year ended on 31.3.1957  with the  help of  thirty hooker  cells. It is true that rectifier had not been installed in the year 1957- 58 but it not in dispute that with suitable adjustment being made to  the power system, the thirty hooker cells which had been installed  were utilised.  The use  of these new hooker cells had  resulted in  the capacity  of the  unit gradually increasing and  the production  so made was not experimental but  was   commercial.  This   being  so,   the  appellant’s undertaking  must   be  regarded   as  having   been   newly established when  it had  begun to  manufacture  or  produce articles by  31.3.1957. As  1957-58 was the first assessment

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year in  which the  relief under Section 15(C) of the Income Tax Act,  1922 corresponding  to Section 84 of the Act could have been  claimed, the  four succeeding  years would end by 1961-62 with  the result  that the  appellant would  not  be entitled to any relief in the year 1962-63 which was rightly regarded as the sixth assessment year. In answer to question No. 1,  the High  Court,  therefore,  rightly  come  to  the conclusion that  the first year in which the relief could be claimed was the assessment year 1957-58.      As  regards   question  No.  2  is  concerned,  it  was alternatively submitted  that thirty  hooker cells  and  the rectifier were installed in the year 1958-59 and, therefore, benefit under  Section 84  of the  Act with  regard to these thirty hooker cells should be available in the year 1962-63.      This is  a case where the manufacturing capacity of the appellant was increased on a licence being granted from 13.5 tons per  day to  20 tons  per day.  In other  words,  these hooker cells  were installed  and the  billiter  cells  were gradually replaced. The new industrial undertaking came into existence when  the initial  lot of thirty hooker cells were installed in the year 1957-58 which had resulted in enhanced commercial production.  The Tribunal  and the High Court, in our  opinion,  rightly  came  to  the  conclusion  that  the undertaking could  function with  thirty hooker cells in the year  1957-58   and  further   numbers  were  added  in  the subsequent year.  The undertaking  having, thus, started the commercial manufacture  in the  year 1957-58 could not claim the benefit  of provisions  of Section 84 of the Act because the  unit   as  such  had  commenced  in  the  year  1957-58 notwithstanding the  fact that  there had  been an expansion thereto in  the subsequent  year. There  was  no  scope  for allowing a  partial relief  or splitting up of the relief as and when  fresh cells came to the added. The question No. 2, therefore, was  thus rightly answered in the negative and in favour of the revenue.      Coming to  the third  question, the  relevant  fact  as already stated  is that  the profit  with reference  to  the additional unit  of sixty  hooker  cells  which  was  called caustic soda  plant No. 2 was worked out by the appellant at Rs. 1,08,282/-  before allowing the allowing the development rebate. The  development rebate  pertaining to  this  second plant came to Rs. 12,15,055/-. If the development rebate was adjusted against  the sum  of Rs.  1,08,282/- then  the  net result would be a loss of Rs. 11,06,773/-. There would, thus be no  profit which  would be  eligible for the relief under Section 84  of Act.  In order  to avail  of this relief, the submission of  the appellant  is that the development rebate should not  be deducted  in arriving  at the business income because it  had no  bearing on  the business  profits of the industrial undertaking.      In view  of the  decision of  this Court in the case of Cambay Electric  Supply Industrial Co. Ltd. Vs. Commissioner of Income-tax,  Gujarat-II, 113  ITR 84, this question is no longer res  integra. Dealing with a similar provision i.e.80 E of  the Act  prior to its amendment by the Finance (No. 2) Act, 1967,  this  Court  came  to  the  conclusion  that  in computing the profits of the assessee for the purpose of the special deduction  provided under  Section 80  E,  items  of unabsorbed depreciation  and unabsorbed  development rebate, carried forward from earlier years, will have to be deducted before arriving at the figure from which the 8% contemplated by Section 80E is to be deducted.      In an  effort to distinguish the aforesaid decision, it was submitted  by Mr.  Ramachandran that under Section 33(2) of the  Act, development  rebate is  deducted from the total

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income of  an assessee  and it  is  not  a  component  or  a ingredient for  determining  profits  and  gains.  In  other words, in  Computing the  profits and  gains  under  Section 84(5) of  the Act,  there must  first be  a deduction  under Section 84(1)  of the  Act of  6% per  annum an  the capital employed on  the caustic  soda plant  No. 2  and it  is only thereafter the  development rebate  should be  deducted from the total income. In support thereof, reliance was placed on the  judgment   of  the  Punjab  &  Haryana  High  Court  in Commissioner of  Income-tax,  Patiala-I  Vs.  Patiala  Flour Mills Co.  P. Ltd.,  127 ITR  301. As  already  observed  in Cambay Electric  Supply Industrial  Company"s  case  (supra) while interpreting  a provision  similar to Section 84(5) of the Act, this Court has held that the profits and gains from an industrial  undertaking to which Section applies, have to be computed  in accordance  with the provisions contained in Chapter IV(d) of the Act and development rebate has first to be deducted from the total income and it is only thereafter, if any profits and gains remain from this business, that the benefit under  Section 84(1) of the Act would be applicable. It appears  that the  aforesaid decision  of this  Court  in Cambay Electric Supply Industrial Company’s case (supra) was not brought  to the notice of Punjab & Haryana High Court in the aforesaid  case of  Patiala Flour Mills case (supra). It is clear  that the  decision of  Patiala  Flour  Mills  case (supra) is  no longer a good law. We, accordingly, hold that the third  question of  law was  also  rightly  answered  in favour of the Revenue.      For the  aforesaid reasons,  this appeal  is dismissed, but in the circumstances, parties are left to bear their won costs.