Kania, J.@mdashThis is a reference, on a case stated by the Tribunal u/s. 256(1) of the IT Act, 1961 (''the Act''), at the instance of the applicant-assessee. The reference arises out of a consolidated order of the Tribunal dt. 1-5-1972 in three Income Tax applications. The assessment years in question are the asst. yrs. 1964-65, 1965-66 and 1966-67, respectively for which the respective previous years were those ending on 31-3-1964, 31-3-1965 and 31-3-1966. The assessee-company manufactures electrodes and welding equipment. The assessee had a manufacturing unit or a plant at Bhandup. It set up a plant at the industrial estate at Bilaspur in Raipur. The said Raipur plant went into production on 24-7-1962. This plant was for the manufacture of electrodes. At the time when the said plant went into manufacture, the total cost of building, plant and machinery comprised in that plant or industrial unit was Rs. 10,50,997. The admitted position was that out of the aforesaid plant and machinery, plant and machinery of the total written down value of Rs. 2,51,556 was transferred to the said Raipur plant from the Bhandup factory of the assessee and installed in the Raipur plant. During the previous year, relevant to the asst. yr. 1964-65, additional buildings at a cost of Rs. 1,62,287 were constructed at the said Raipur plant and machinery and plant worth Rs. 45,388 was installed. In this way, the total value of the buildings, plant and machinery in the Raipur plant came to Rs. 12,58,672 in the said previous year. No additions to the plant or machinery or buildings were made during the previous years relevant to the asst. yrs. 1965-66 and 1966-67. In the course of the assessment proceedings, for the asst. yr. 1964-65 the assessee claimed relief u/s. 84 of the Act (as it then stood) in respect of the said Raipur plant. The ITO omitted to consider the said claim of the assessee at the time of passing of the assessment order for that year. However, the said claim was considered by the ITO concerned u/s. 154 of the Act and was rejected by him by his order dt. 25-11-1967. The ITO pointed out in his order that the assessee had not claimed relief u/s. 84 in the course of the assessment proceedings for the asst. yr. 1963-64 but claimed such relief in respect of the asst. yr. 1964-65. It was further pointed out that the assessee was right in not claiming any relief in respect of the asst. yr. 1963-64, as in the relevant previous year, the value of old assets, which were transferred to the new unit, exceeded 20 per cent of the total value of the building, plant and machinery brought into nor in the new unit, viz., the said Raipur plant, in that year. The ITO rejected the claim of the assessee in respect of the asst. yr. 1964-65 holding that entitlement to relief u/s. 84 had to be decided in respect of the year in which the unit was formed. The said unit at Raipur was formed in the accounting year 1961-62 relevant to the asst. yr. 1962-63 and in that year the value of machinery and plant previously used, which was included in the said unit, was more that 20 per cent of the total investment. The ITO also rejected the claim of the assessee on the same ground in respect of the asst. yrs. 1965-66 and 1966-67 following his order in respect of the asst. yr. 1964-65. Appeals preferred by the assessee before the AAC were dismissed. The assessee then preferred appeals to the Tribunal. Before the Tribunal it was contended that although the plant went into production on 24-7-1962, the construction of the buildings and plant of the whole unit was complete in the subsequent year, that is, in the previous year relevant to the asst. yr. 1964-65 and, hence, the claim u/s. 84 could be considered in the asst. yrs. 1964-65. This argument, it may be pointed out, has not been dealt with by the Tribunal at all. As against this, it was contended on behalf of the revenue that the provisions of s. 84 has to be considered with reference to the assessment year in the relevant previous year of which the undertaking began to manufacture or produce articles and the same position would continue for the four assessments years immediately succeeding. The departmental representative referred to the provisions of s. 84(2)(ii) and to the word ''form'' used therein. It was urged by him that the said word was not defined in the Act and, hence, it must be given its ordinary meaning, viz., ''put in shape'' or ''assumed shape''. It was urged by the revenue that in the year of manufacture, the said Raipur plant must be regarded as having been formed by transfer of old plant and machinery as the value of such old plant and machinery utilised in the Raipur plant exceeded 20 per cent of the total value of the building, plant and machinery used in the said unit. After setting out the relevant provisions of s. 84, the Tribunal came to the conclusion that the relief u/s. 84 in relation to the said Raipur plant could not be available to the assessee for the assessment year relevant to the previous year in which the said undertaking began to manufacture or produce articles and for the four years immediately succeeding. In other words, it was held by the Tribunal that as the said unit began to produce or manufacture articles in the previous year relevant to the asst. yr. 1963-64, in view of the aforesaid facts the said unit was not entitled to the relief referred to in s. 84 in that year and it would not be entitled to such relief either in that year or in any of the four succeeding assessment years.
2. 2. In respect of the relevant previous year relevant to the asst. yr. 1966-67, the assessee claimed deduction as revenue expenditure in respect of an amount of Rs. 6,000 paid by it to the Central Electronic Research Institute for the purpose of acquiring the technical process of flash gun developed by the institute. This claim was negatived by all the IT Authorities and also by the Tribunal on the ground that the said payment was in the nature of capital expenditure.
3. Arising from the said order of the Tribunal, the following two questions have been referred to us for determination :
"Asst. Yrs. 1964-65, 1965-66 and 1966-67 :
1. Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief u/s. 84 of the IT Act, 1961, in the asst. yrs. 1964-65, 1965-66 and 1966-67 in respect of Raipur plant ?
Asst. Yr. 1966-67 :
2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction as revenue expenditure of the payment of Rs. 6,000 made by it to the Central Electronic Research Institute ?"
4. Before setting out the contentions of the parties, we may note that it was not the case of either party at any earlier stage or before us that the year of formation as contemplated in s. 84 could be prior to the year in which the unit in question started manufacturing or producing articles. It was also not the contention of either of the parties that an industrial unit would be entitled to the relief u/s. 84, even if the total value of the building, machinery or plant transferred to such unit, which building, machinery or plant had been previously used, exceeded 20 per cent of the total value of the building, machinery and plant used in the said unit on the ground that it could still be regarded as a new industrial unit to which the provisions of cl. (ii) of sub-s. (2) of s. 84 were applicable. In view of this, we may make it clear that we are not called upon to decide these two questions.
5. The submission of Mrs. Visanji, the ld. counsel for the assessee was that as the said Raipur plant, being the unit in question, was a new unit and the value of the building, machinery and plant which was previously used and included in the said unit, did not exceed 20% of the total value of the building, machinery and plant comprised in the said unit in the previous year relevant to the asst. yr. 1964-65 and the two succeeding assessment years, the said unit was entitled to the benefit of the partial tax-holiday afforded by s. 84 to the extent set out therein. It was submitted by her that the expression ''formed'' used in cl. (ii) of sub-s. (2) of s. 84 could only mean ''composed of'' or ''made up of'' or ''constituted by'' and that the question whether the unit had complied with the conditions prescribed for the grant of relief u/s. 84 had to be considered separately in the year in which the unit in question commenced the manufacture or production of articles as well as in the four succeeding years.
6. The submission of Mr. Joshi, the ld. counsel for the department, on the other hand, was that in view of the expression ''formed by'' used in cl. (ii) of sub-s. (2) of s. 84, the question as to whether the unit in question could be regarded as new unit or whether it was to be regarded as a unit formed by the transfer of previously used building, machinery or plant in excess of 20 per cent had to be considered only in that year in which the unit started manufacture or production. It was in the year of manufacture that the question had to be determined whether the unit was entitled to the relief conferred by s. 84 and subsequent changes in that connection in the next four years would not make any difference to the situation.
7. Before considering the submissions of the respective ld. counsel, it would be useful to set out the relevant provisions of law. The relevant provisions of s. 84 as it stood at the relevant time, are as follows :
"84. Income of newly established industrial undertakings or hotels. - (1) Save as otherwise hereinafter provided, Income Tax shall not be payable by an assessee on so much of the profits and gains derived from any industrial undertaking or business of a hotel or from any ship, to which this section applies, as does not exceed six per cent per annum on the capital employed in such undertaking or business or ship, computed in the prescribed manner.
(2) This section applies to any industrial undertaking which fulfills all the following conditions, namely :
(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence;
(ii) it is not formed by the transfer to a new business of a building, machinery or plant previously used for any purpose;
(iii) it manufactures or produces articles or operates one or more cold storage plants in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of twenty-three years next following the 1st day of April, 1948, ....
(iv) in a case where the industrial undertaking manufactures or produces articles, it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on with the aid of power.
(3) xx xx xx
Explanation. - Where any building, machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the building, machinery or plant or part so transferred does not exceed twenty per cent of the total value of the building, machinery or plant used in the business then, for the purposes of clause (ii) of sub-section (2) and clause (a) of sub-section (3), the industrial undertaking or hotel to which the transfer has been made shall be deemed to have complied with the condition specified therein and the total value of the building, machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking or hotel.
(3A) to (6) xx xx xx
(7) 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 assessee 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"
We may point out that there have been minor differences in these provisions as they stood for the asst. yrs. 1962-63 to 1964-65, and as they stood for the asst. yrs. 1965-66 and 1966-67. However, these are not material for our purposes. We shall have to consider the legal effect of these provisions. Before doing so, it would not be out of place to advert very briefly to the legislative history of these provisions. The object of this section clearly was to offer a tax incentive in the shape of a fractional exemption or partial exemption from tax on profits of newly established industrial undertakings for the five assessment years. A provision for this purpose was first introduced in 1949 in the Indian It Act, 1922, by Taxation Laws (Extension to Merged States and Amendment) Act, 1949. That was by way of s. 15C. The benefit was extended to the actual manufacture or production of articles commencing from a prior date, namely, 1-4-1948, and initially the relief could only be claimed by a new industrial undertaking which had begun or begins to manufacture or produce articles at any time within a period of three years from the said date. That time limit has been progressively enlarged and under the Finance Act, 1975, the said limit was raised to 33 years. As pointed out by the Supreme Court in
"The scheme of the section is to encourage new industrial undertakings provided they fulfil the conditions mentioned in the various clauses of the sub-section. In order to be entitled to exemption an assessee must strictly come within the terms of the provisions under which such exemption is being claimed, but in construing the provisions of this section, one must construe the said section reasonably in the context of the purpose for which the section reasonably in the context of the purpose for which the section has been introduced. It is a well settled canon of construction that the provision relating to exemption must as far as possible be liberally construed and in favour of the assessee provided in doing so no violence was being done to the language used ...."
8. Coming now to the case before us, what we have to see is whether the said Raipur unit or plant of the assessee could be said to be a plant, which was not formed by the transfer to a new business of a building, machinery or plant previously used for any purpose i.e., whether the assessee complied with or fulfilled the condition laid down in cl. (ii) of sub-s. (2) of s. 84. For that purpose the Explanation, set out earlier and the provisions of sub-s. (7) have to be kept in mind. The facts show that in the year in which the manufacture began, which we propose to refer to as the year of manufacture, the previously used plant and machinery included in the said Raipur plant exceeded the limit of 20 per cent prescribed under the Explanation and, hence, no contention was raised on behalf of the assessee that even in that year the said unit was entitled to the relief conferred by s. 84. It is also the accepted position that in the previous years relevant to the asst. yrs. 1964-65, 1965-66 and 1966-67, the value of the previously used plant and machinery included in the said Raipur plant was less than 20 per cent of the total value of the land, plant and machinery employed in the said unit and, hence, the conditions prescribed by the Explanation were complied with. The question is whether, in these circumstances, it could be said that the condition prescribed by cl. (ii) of sub-s. (2) of s. 84 was complied with in the previous years relevant to the assessment years, we are concerned with Provisions of sub-s. (7) show that under this sub-section it has been provided that the provisions of s. 84 have, in relation to the industrial under taking, to be applied to the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles and to the four succeeding assessment years. A plain reading of this provision leads to the conclusion that in respect of each of the assessment years in question, viz. the asst. yr. 1964-65 and the three succeeding assessment years, it has to be examined whether the provisions of s. 84, including the provisions of sub-s. (2) thereof, are complied with. According to Mr. Joshi, even on this basis it could not be said that the conditions prescribed by cl. (ii) in sub-s. (2) of s. 84 were complied with ''as the year of formation being only one, namely, the year in which the unit begins to manufacture or produce articles, the unit must be regarded as formed in the year and whether it was a new industrial unit would have to be considered at that stage and any sub-sequent change would not make any difference; whereas, according to Mrs. Visanji, in each of the said assessment years, the position has to be considered afresh as to whether the previously used plant, machinery or building, included in the industrial unit in question exceeds 20 per cent of the total value of the plant, machinery and building comprised in the industrial unit. The main argument of Mr. Joshi is based on the expression ''formed by'' used in cl. (ii) of sub-s. (2) of s. 84. In this regard, the provisions of the Explanation assume great importance, because the Explanation contains a deeming provision and, inter alia, provides that where the, building, machinery or plant or any part thereof, which has been previously used and transferred to the new business, did not exceed 20 per cent of the total value of the building machinery or plant used in that business, the condition prescribed in cl. (ii) of sub-s. (2) is deemed to be complied with. In view of the plain language of sub-s. (7), the applicability of the Explanation will have to be considered in the assessment year relevant to the previous year in which the manufacture or production has commenced and the four succeeding assessment years. If this is done in respect of the asst. yrs. 1964-65 to 1966-67, it would be found that the value of the previously used machinery and plant transferred to the Raipur plant, being the new building, did not exceed 20 per cent to the total value of the building, machinery or plant used in that business and, hence, it must be held that the requirements of the Explanation were complied with. The result of this would be that the condition prescribed in s. 84(2)(ii) would be deemed to be complied with irrespective of whether it was, in fact, complied with or not and the expression ''formed by'', whatever be the meaning given to it, looses much of its significance. Thus, whatever, might have been the situation if the provisions of cl. (ii) of sub-s. (2) of s. 84, had stood by themselves, in view of the conditions prescribed by the Explanation or the requirements of the Explanation having been complied with, the condition in cl. (ii) would be deemed to be complied with.
9. Even apart from what we have observed above, we may point out that construction of the expression ''formed by'' urged before us by Mrs. Visanji is supported by the meaning given to the word ''form'' in Murray''s English Dictionary, Vol. IV, p. 450, at para 6, where it is stated that the noun ''form'' means ''to be the components or material of; to go to make up, to compose''. It is also supported by the meaning given to the said word at p. 738 of the Shorter Oxford English Dictionary and the meaning given to the verb ''form'' at p. 383 of New Webster''s Dictionary of the English Language, 1981 edition. In the Law Lexicon compiled and edited by Aiyer (1940 edition) we find that the verb ''to form'' is, inter alia, defined at p. 459 as meaning ''compose or constitute''. If this meaning is to be given to the word ''formed'' as used in s. 84(2)(ii), it is clear that the applicability of the said condition has to be considered, not merely in the year in which the manufacture commences but even in the immediately succeeding four years.
10. There are also certain other indications which support the conclusion that the applicability of the condition prescribed in sub-s. (2) of s. 84 has to be considered in respect of the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles and also the four immediately succeeding assessment years. For example, if in the year in which the manufacturing commences an industrial undertaking employs 10 or more workers in manufacturing process carried on with the aid of power and the other prescribed conditions are satisfied, it would be entitled to the relief given u/s. 84 in the relevant assessment year. If in the next year it employs less than 10 workers in such manufacturing process, it is nobody''s contention that in the next assessment year also it would still be entitled to get that benefit. This would show that, for example, the applicability of or the compliance, with the condition prescribed in cl. (iv) of sub-s. (2) of s. 84 has to be considered in respect of each of the relevant assessment years. Similarly the computation of the benefit which is limited to 6 per cent of the capital employed would have to be done separately in the relevant assessment year being the assessment year in whose relevant previous year the manufacturing commences and in each of the four immediately succeeding years. The exclusion of the value of previously used building, machinery or plant in the computation of such capital would have to be done in respect of each of the said five assessment years. If the applicability of these conditions is to be considered separately for each of the five relevant assessment years, there is no reason why the applicability of the other conditions prescribed in sub-s. (2) of s. 84 should also not be similarly considered. Even as far as cl. (ii) of sub-s. (2) is concerned, let us assume that an assessee in the year in which the manufacturing commences, has utilised in the new unit less than 20 per cent of used machinery, plant or building, but in the next year he brings in a lot of used or second hand machinery with the result that the proportion of the value of used machinery, land and building goes to well over 20 per cent of total value of the land, machinery, and building employed. It would be inequitable in such a case to hold that he would still be entitled to the benefit in the four succeeding years automatically. Similarly, it would be inequitable to deny the benefit to an assessee like the one we have before us where it is in the next year, that is the year succeeding the year in which the manufacturing commences, that the proportion of used machinery, land and plant employed goes below 20 per cent of the total value. We are making it clear that it is not as if we are construing the section merely on general notions of equity but what we have set out above is merely to point out that the constructions which we are giving to the section is the more equitable constructions as well as the more plausible of the two possible constructions.
11. Even as far as the expression ''formed by'' on which so much reliance has been placed by Mr. Joshi, is concerned, we find that in
12. In view of what we have held above; we are of the view that on the facts and in the circumstances of this case, the assessee is entitled to the relief u/s. 84, in the asst. yrs. 1964-65, 1965-66 and 1966-67 in respect of the aforesaid Raipur plant. Question No. 1 is, therefore, answered in the affirmative and in favour of the assessee.
13. As far as question No. 2 is concerned, Mrs. Visanji frankly stated that the assessee does not desire that the same should be answered. In view of this, we decline to answered. In view of this, we decline to answer the said question.
14. As far as the costs of the reference are concerned, looking to all the facts and circumstances of the case, there will be no order as to costs.
