Under section 80-IA of the Income-tax Act, 1961, certain industrial undertakings are eligible for exemption to the extent of 30 per cent of their taxable profits.

At present, only small scale undertakings and those which are set up in the industrially backward areas are eligible for this benefit.

In order to avail this benefit, one of the important conditions is that the undertaking should not be formed by the reconstruction of an existing one.The Supreme Court has held in the case of Textile Machinery Corporation Limited vs CIT(107 ITR 195) that the following facts have to be established by the assessee in order to be entitled to the relief under this section:-

(1) Investment of fresh capital in the new undertaking;

(2) Employment of requisite labour therein;

(3) Manufacture or production of articles in the new undertaking;

(4) Earning of profits clearly attributable to the new undertaking; and

(5) A separate and distinct identity of the industrial unit.

The court further emphasised that relief would not be denied merely because the new undertaking went to expand the general business of the assessee in certain directions. Once the new undertakings were separate and independent production units in the sense that the commodities produced were commercially tangible products and the undertakings could be set up separately without complete absorption and loss of identity with the old business, they were not to be treated as being formed by reconstruction of the existing business.

Applying this principle to the facts of the instant case, the Supreme Court held that the steel foundry division and the jute mill division were independently producing articles which were of aid to the principal business and, hence, it could not be said that they constituted reconstruction of the existing business of the assesee. The fact that the articles produced in the new undertakings were used in the existing business was an immaterial test in construing the benefit.

In CIT vs Indian Aluminiuma Company Ltd (108 ITR 367), which came up directly in appeal before the Supreme Court, the company was a manufacturer of aluminium ingots from ore. In the years prior to the assessment year 1960-61 in question, the assessee had four manufacturing centres at Belur, Kalwa, Alupuram and Hirakud.

In the accounting year relevant to the assessment year in question, one more centre was established at Muri and there were also extensions to the existing factories at Belur and Alupuram. In the assessment year 1960-61, the assessee claimed relief under section 15-C of the Income-Tax Act, 1922, in respect of the fresh capital outlay at Muri as well as in respect of the additional investments in the form of extensions to the existing factory premises, installation of new plant and machinery at Belur and Alupuram.

The income-tax officer refused to allow the relief and the Appellate Assistant Commissioner dismissed the assessee's appeal. On appeal to the Appellate Tribunal, it held that during the previous year, the production of aluminum ingots went up by double, that the additional units set up by the asessee cost over Rs 50 lakh at Belur and about the same figure or a little more at Alupuram, and that in view of the nature of the substantial investments, it could not be said that the units were not new industrial units by themselves.

It further held that these units had been set up side by side with the old ones and had added to the assessee's total output of aluminium ingots. The tribunal, therefore, held that the assessee was entitled to the relief under section 15-C.

On appeal to the high court, it was held that the assessee was entitled to relief under section 15-C since the assessee had invested large sums of money and established new production units. The high court further held that the new undertakings need not be in respect of a different business and that so long as the existing business remained intact and retained its original character, the subsequent undertakings could not be called reconstruction of the existing business, even though they could manufacture exactly the same product.This view of the high court found support with the Supreme Court which held that the assessee was entitled to relief both in respect of the new undertaking as well as in respect of expansion of the existing undertaking.

The decision of the Supreme Court would apply in all cases of expansion or setting up of new units even though it may be for manufacturing the same product. However, section 80-1A may not apply where a new unit is not independent or viable as a separate undertaking. This point was considered by the Kerala high court in Perivar Chemicals Ltd vs CIT (226 ITR 467).The facts in this case were that the assessee company carried on business of manufacture of formic acid and sodium sulphate. The assessee claimed deduction under section 80-J of the Income-Tax Act, 1961, as regards investment in new plant and machinery worth Rs 38,73,183 investment in building worth Rs 6,95,459 and investment in furniture and fittings worth Rs 61,141.

The assessee claimed before the income-tax officer that this was a new unit housed in a new building adjoining the old plant and, thus, was a severable separate unit having separate autoclaves, convertors, distillers, etc. The assessee also claimed that these resulted in substantial increase in the production capacity.

The income-tax officer rejected the claim for deduction on the ground that what took place was not the setting up of a new plant but only a substantial expansion. The commissioner (appeals) held that there was a massive investment of Rs 46 lakh in the new unit, that the new unit could substantially operate and exist independently and separately from the old unit and the marginal dependence on some of the facilities of the old unit by the new unit could not be disqualification for granting deduction under section l80-J.

The tribunal remanded the matter to the commissioner (appeals) and the remand report stated that the old and new units were housed in the same building that there was a common pipeline, a common boiler house, common purchase of raw materials and sale of finished products by both the old and new units, that though there were two supervisors for the old and the new units, nobody was assigned specific duty to any particular plant, that deployment of workers was common for both the old land new units, that there was common catering facility and common workshop for both the old and new units, that there was only one licence and one electricity bill for both the units and that if one unit were to close down the other unit would have to follow suit.

The tribunal, on the basis of the remand report, held that no new unit was set up but what resulted was only substantial expansion of the old unit, that both the old and the new units was a single industrial undertaking functioning under a common roof and, therefore, it reversed the order of the commissioner (appeals) and restored the order of the Income-tax Officer.

On a reference, the Kerala high court noted the following facts:-

(i) there was a common pipeline to bring carbon monoxide gas necessary for the manufacture of formic acid from Fact up to the compression section, though thereafter the independent pipelines took carbon monoxide to individual autoclaves of the old and new units.'

(ii) the boiler house was one and the same for both the units and the pipelines in regard thereto were also the same.

(iii) the purchases of raw materials were also commonly made; (iv) sales of finished products were also effected as the common process;

(v) there was one licence for both the units as one factory and the licence fee was paid in pursuance of a single demand notice.

(vi) the situation did not necessitate taking a separate licence from the factories department;

(vii)there was one electricity bill from the KSEB not showing electricity charges payable by the old and new unit separately;

(viii) although there were two plant supervisors, nobody was assigned specific duty to any particular plant and this was also the situation in regard to the deployment of workers.'

(ix) workers were shifted from one plant to another levery three months and there was a common catering facility and only one workshop catering to the needs of both the plants.

Based on these facts, the high court held that there were common facilities linking the existing unit with the new one. If one of the units were to close down, the other would also have to follow suit. Both the old and the new units were functioning under a common roof.

Hence, the high court concluded that the new unit could not stand alone, financially or otherwise. This made it impossible for it to be treated as a separate industrial undertaking.

Needless to add, every case stands on its own facts, but the principle which needs to be emphasised is that a new unit should be a separate and viable undertaking. So long as it fulfills this test, it would be eligible for the benefit under section 80-iA even if it manufacturers the same product as the existing unit.

In other words, enhancement of the existing production capacity would make a separate unit eligible for the tax holiday benefit under the aforesaid provision of law which exempts 30 per cent of the profits for 10 years.

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