Case Note & Summary
The Supreme Court dismissed an appeal by special leave filed by Mettur Chemical and Industrial Corporation Limited against the judgment of the Madras High Court which had answered three questions of law referred by the Income Tax Tribunal in favour of the Revenue. The dispute arose under Section 84 of the Income Tax Act, 1961, which granted tax relief to new industrial undertakings. The assessee manufactured caustic soda and sought to expand its capacity from 13.5 tons to 20 tons per day by replacing billiter cells with hooker cells. Thirty hooker cells were installed by 31.3.1957 and another thirty by February 1958, with a rectifier completed only by 31.3.1959. The assessee claimed relief under Section 84 for assessment year 1962-63, contending that the new undertaking consisting of sixty hooker cells and rectifier was completed only in 1958-59 and therefore the five-year relief period should start from 1958-59. Alternatively, it claimed partial relief for the thirty hooker cells installed in 1958-59. The Revenue authorities and Tribunal disallowed the claim, holding that commercial production began in the year ended 31.3.1957 when the first thirty hooker cells were put to use, and thus the relief period ended by 1961-62. The Tribunal also held that development rebate must be deducted in computing profits for Section 84 relief, and since the profit of Rs.1,08,282 was less than the development rebate of Rs.12,15,055, there was no positive income eligible for relief. On reference, the High Court agreed with the Tribunal on all three questions. The Supreme Court upheld the High Court. On the first two questions, it held that under Section 84(7)(i), the relief period begins from the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles. The finding that production with thirty hooker cells in 1957-58 was commercial, not experimental, was crucial. Therefore, the first assessment year for relief was 1957-58, and the four succeeding years ended by 1961-62, making the claim for 1962-63 invalid. The Court rejected the argument for partial relief, stating that expansion of an existing undertaking does not create a new undertaking or restart the relief period; there is no scope for splitting relief. On the third question, the Court followed its earlier decision in Cambay Electric Supply Industrial Co. Ltd. v. Commissioner of Income-tax, Gujarat-II, holding that development rebate must be deducted before arriving at profits eligible for Section 84 relief. It overruled the contrary view of the Punjab and Haryana High Court in Patiala Flour Mills. Consequently, since the development rebate exceeded the profit, no relief was admissible. The appeal was dismissed.
Headnote
A) Income Tax - New Industrial Undertaking - Relief under Section 84 - Income Tax Act, 1961, Section 84(7) - The first assessment year for relief is the year in which the undertaking begins to manufacture or produce articles; commercial production with part of the plant triggers the benefit period - The assessee installed 30 hooker cells by 31.3.1957 and used them for commercial production, even without rectifier, so the undertaking began manufacture in the previous year ended 31.3.1957; relief period started from assessment year 1957-58 and ended by 1961-62, making claim for 1962-63 invalid - Held that the High Court rightly held first relief year was 1957-58. (Paras 1-5) B) Income Tax - New Industrial Undertaking - Partial Relief for Subsequent Expansion - Income Tax Act, 1961, Section 84 - No splitting of relief for later additions to an existing undertaking; expansion does not restart the five-year period - The assessee installed another 30 hooker cells and rectifier in 1958-59, but since the undertaking had already commenced commercial production in 1957-58, the subsequent expansion did not create a new undertaking or extend relief; partial relief was not permissible - Held that question No.2 was rightly answered in the negative. (Paras 1-5) C) Income Tax - Deductions and Exemptions - Computation of Profits for Section 84 Relief - Income Tax Act, 1961, Sections 84(1), 84(5), 33(2), 80E - Development rebate must be deducted before computing profits eligible for Section 84 relief; if after set-off there is no positive income, no relief - The assessee's profit from the new unit was Rs.1,08,282 before development rebate of Rs.12,15,055, resulting in a loss; following Cambay Electric Supply, development rebate had to be deducted first, so no profits remained for exemption; Patiala Flour Mills was overruled - Held that the third question was rightly answered in favor of the revenue. (Paras 1-5)
Issue of Consideration
Whether the first year for relief under Section 84 of Income Tax Act, 1961 was assessment year 1957-58; whether the assessee was entitled to relief for assessment year 1962-63; whether the assessee was entitled to relief in respect of thirty hooker cells installed in 1958-59; whether development rebate should be deducted in computing profits and gains for Section 84 relief.
Final Decision
Appeal dismissed; Supreme Court upheld High Court's answers: (1) first year for relief under Section 84 was assessment year 1957-58, so no relief for 1962-63; (2) no partial relief for thirty hooker cells installed later; (3) development rebate must be deducted in computing profits, leaving no positive income for relief. Patiala Flour Mills held to be no longer good law.
Law Points
- Relief under Section 84 of Income Tax Act
- 1961 starts from the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles
- commercial production with part of the plant triggers the benefit period
- expansion of an existing undertaking does not create a new undertaking eligible for separate relief
- development rebate must be deducted in computing profits and gains for Section 84 relief
- if after deduction of development rebate there is no positive income
- no relief is admissible.
