Supreme Court Dismisses Revenue Appeal in Wealth Tax Exemption for New Industrial Unit Under Section 5(1)(xxi) of Wealth Tax Act, 1957. Unit Held to Be Set Up After 1 April 1957 as It Became Ready to Commence Business; Exemption of Rs.1,43,727 Upheld and New Question on Commencement of Operations Not Entertained.

Case Note & Summary

In this civil appeal before the Supreme Court of India, the Commissioner of Wealth Tax, Madras challenged the judgment of the Madras High Court which had allowed the respondent assessee, Ramaraju Surgical Cotton Mills Ltd., an exemption under Section 5(1)(xxi) of the Wealth Tax Act, 1957. The dispute arose for the assessment year 1957-58, with the relevant valuation date 30 September 1956. The respondent, a public limited company incorporated in 1939 under the Indian Companies Act, 1913, carried on the business of manufacturing absorbent cotton wool. In March 1955, its Board of Directors resolved to establish a new spinning unit named Sudarsanan Spinning Mills. A licence under the Industries (Development and Regulation) Act, 1951 was obtained in August 1955. Orders for spinning machinery and plant were placed in January and February 1956; factory construction began in March 1956 and was completed by December 1957; erection of machinery and plant was completed in stages from June 1957; and a factory working licence was obtained in June 1958. The Government extended the time to complete the project up to 17 March 1959. The respondent claimed a deduction of Rs.1,43,727 from net wealth for the assessment year 1957-58 as an amount laid out in setting up the new unit. The Wealth Tax Officer disallowed the claim on the ground that the unit was set up before the Wealth Tax Act came into force on 1 April 1957. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the disallowance. The High Court answered the referred question in favour of the assessee, holding that the unit became ready to commence business after the Act came into force. The Revenue appealed by special leave. The legal issue before the Supreme Court was the interpretation of Section 5(1)(xxi) read with the second proviso. The principal clause exempts net wealth employed in a new and separate unit set up after commencement of the Act, while the second proviso limits the exemption to five successive assessment years commencing with the assessment year next following the date on which the company commences operations for establishment of such unit. The Revenue contended that the clause and proviso should be read harmoniously and that a unit is set up only when operations for establishment commence. The assessee argued that 'set up' means ready to commence business and that the unit was not ready until after 1 April 1957. The Supreme Court rejected the Revenue's contention. It held that 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. The word 'set up' is equivalent to 'established', but operations for establishment cannot be equated with the establishment itself; operations must precede the setting up. The Court relied on Western India Vegetable Products Ltd. v. Commissioner of Income-tax, Bombay City, 26 ITR 151, which defined 'set up' as 'ready to commence business'. On the facts, the construction was completed only in December 1957 and the machinery erection continued from June 1957, so the unit became ready after 1 April 1957. Thus the condition of the principal clause was satisfied. The Revenue also sought to raise a new question that operations for establishment commenced simultaneously with setting up and thus the exemption period for 1957-58 was not covered. The Court refused to entertain this new question as it was not raised before the Tribunal, relying on Commissioner of Income-tax, Bombay v. Scindia Steam Navigation Co. Ltd., 42 ITR 589. The Supreme Court dismissed the appeal and upheld the High Court's decision allowing the exemption.

Headnote

Issue of Consideration

Final Decision

The Supreme Court dismissed the appeal, upheld the High Court, and held that the respondent was entitled to the exemption under Section 5(1)(xxi) of the Wealth Tax Act, 1957 for the assessment year 1957-58. The unit was completed and became ready to go into business after 1 April 1957. The new question regarding commencement of operations was not entertained.

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