SANKAR PRASAD MITRA, J. - (1.) THIS is a reference under s. 66(2) of the Indian IT Act, 1922. The assessment year is 1951-52. The accounting period is the calendar year 1950. From the statement of the case it appears that the assessee is a private limited company incorporated on 25th July, 1947, with the object, inter alia, of carrying on the business of manufacturing industrial gases. Pending the installation of the factory the assessee up to the preceding assessment year was having dealings only in carbide, machinery parts and other industrial gases. During the accounting period the installation of the factory had been completed, and the assessee started the manufacture of industrial gases. The activities of the assessee with regard to the manufacturing business and commercial dealings were found to be carried on as two completely separate units for which separate sets of account books were also maintained. The result of the manufacturing unit was a loss and there was substantial profit in its commercial dealings. In view of the loss in the manufacturing unit the ITO did not consider it necessary to go into the question as to whether the exemption under s. 15C as claimed by the assessee was attracted.
(2.) THE contention of the assessee before the AAC was that, since the assessee-company did some manufacturing during the accounting year, its entire income arising from the business as a whole including the commercial activities in dealings in gases etc., should be treated as income of one industrial undertaking and the resultant profit should be exempted under the provision of s. 15C. THE AAC did not uphold this contention. Before the Tribunal it was urged that, since some manufacturing was done during the accounting year, it became a new industrial undertaking as contemplated under s. 15C and was, therefore, entitled to the exemption. It was urged further that it was not necessary in an industrial undertaking to manufacture or produce anything through the help of machinery inasmuch as there being no definition of "industrial undertaking" in the IT Act, the ordinary meaning of "industry" as given in the English dictionary should be adopted. "Industry" it was submitted, according to its dictionary meaning, included such other activities as agricultural operations where the help of machinery was not incumbent in the process of production. THE Tribunal rejected this contention on the ground that the income derived by the assessee from its commercial activities could not be deemed to be "profits or gains" derived from any "industrial undertaking" within the meaning of s. 15C(1). THE Tribunal was of the view that the commercial activities of the assessee were entirely separate from its business of manufacturing industrial gases and did not fall in any of the categories mentioned in sub-cl. (ii) of sub-s. (2) of s. 15C. THE Tribunal held that the benefits of s. 15C were allowable to a new industrial undertaking which satisfied the conditions laid down in sub-cl. (ii) of sub-s. (2) of that section. THE assessee's claim for exemption was, therefore, disallowed. THE following questions of law have been framed by this Court : "(1) On the facts found and/or admitted, did the manufacture and sale of industrial gases and equipment for use of such gases constitute two separate undertakings ? (2) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the profits made by the assessee-company from sale of gases and equipment were not exempted under s. 15C of the Indian IT Act as it stood at the time of the assessment year ?" Mr. Sukumar Mitra, learned counsel for the assessee, did not urge before us any of the points which the Tribunal was invited to consider. Mr. Mitra's legal approach is that whether a business is single with different activities or two or more separate businesses constituted by each activity depends on the evidence as to how the activities are carried on. The test, according to the learned counsel, is whether there is interlacing, interlocking and dovetailing of the various activities. Learned counsel cited in support of this proposition, Spiers and Son Ltd. vs. Ogden (1932) 17 Tax Cases 117 and the judgment of the Supreme Court in Setabganj Sugar Mills Ltd. vs. CIT (1961) 41 ITR 272 (SC). Secondly, Mr. Mitra says that the burden of proving that the different activities of an assessee constituted separate businesses is on the person who asserts the same. Learned counsel strongly urged that the Tribunal in the instant reference has arrived at its conclusions without any evidence that establishes separate businesses. The main object, Mr. Mitra states, of the assessee-company is to produce and sell gas and an essential part of its undertaking is to create a market for gas manufactured by it. In creating such market until its factory was set up the assessee-company sold some of the contemplated products in the year of account before its production began. In other words, merchanting of other people's products and of its own products on the facts of the present case should be treated as one and the same business. Before we proceed any further it would be convenient to set out in full s. 15C of the Indian IT Act as it stood at the material time and underline the portions thereof more relevant for our purposes : "15C. (1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent per annum on the capital employed in the undertaking, computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue. (2) This section applies to any industrial undertaking which-- (i) is not formed by the splitting up, or the reconstruction of, business already in existence or by the transfer to a new business of building, machinery or plant used in a business which was being carried on before the first day of April, 1948; (ii) has begun or begins to manufacture or produce articles in any part of the taxable territories at any time within a period of three years from the first day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking; (iii) 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 without the aid of power .... (3) The profits or gains of an industrial undertaking to which this section applies shall be computed in accordance with the provisions of s. 10... (6) The provisions of this section shall apply to the assessment for the financial year next following the previous year in which the assessee begins to manufacture or produce articles and for the four assessments immediately succeeding."
(3.) OUR attention has been invited to two decisions of the Madras High Court on s. 15C of the Act. I shall first briefly refer to the facts in these two cases and the decisions given therein. In Ashok Motors Ltd. vs. CIT (1961) 41 ITR 397 (Mad) : TC25R.656, the assessee was a public limited company, which commenced business in February, 1948, as a dealer in Austin cars and trucks and spares. Early in 1949, it began to import parts from abroad and assemble cars at its factory. The assessee derived profits from its industrial undertaking as well as other trade activities. The total profits of the composite business came to Rs. 4,44,462 (rupees four lakhs and forty-four thousand and four hundred and sixty two). A sum of Rs. 2,48,483 (rupees two lakhs and forty-eight thousand and four hundred and eighty three) left over as unabsorbed depreciation relating entirely to the industrial undertaking had to be carried forward. The ITO computed the assessee's profits from the industrial undertaking at Rs. 2,53,198 (rupees two lakhs and fifty-three thousand and one hundred and ninety-eight) which after adjusting the unabsorbed depreciation left a balance of Rs. 4,715 (rupees four thousand seven hundred and fifteen). The officer gave exemption under s. 15C of the IT Act in respect of the sum of Rs. 4,715 (rupees four thousand seven hundred and fifteen) alone and brought to tax the sum of Rs. 1,91,264 (rupees one lakh ninety- one thousand two hundred and sixty four) pertaining to its other business activities. The Madras High Court held that the procedure adopted by the ITO was in conformity with the provisions of s. 15C and the assessee was entitled to exemption under s. 15C only in respect of the sum of Rs. 4,715 (rupees four thousand seven hundred and fifteen). In CIT vs. Standard Motor Products of India Ltd. (962) 46 ITR 814 (Mad) : TC25R.661, the assessee-company was engaged in the manufacture of motor-cars and tractors. It entered into an agreement with an English company under the terms of which it became entitled to import parts and components for assembling cars and tractors. The assessee imported spare parts, used some of them for assembling cars and sold some as spare parts. In computing the relief to which the assessee was entitled under s. 15C, the ITO excluded the profit derived by the company from the sale of spare parts. The assessee contended that the business of importing and selling spare parts was part of the industrial undertaking of the company, that the purchase of spare parts was obligatory under the terms of the agreement and, as such, the profit derived from the sale of spare parts were entitled to exemption under s. 15C. The Madras High Court held that the business in spare parts was not essential to the subsistence of the industrial undertaking of the assessee and the failure or cessation to carry on such business would not put an end to the undertaking itself. The profits from the sale of spare parts did not form part and parcel of its income from an industrial undertaking and was not entitled to the exemption under s. 15C. The principles that emerge out of these decisions and fall for our consideration in the present reference are as follows : (1) The exemption under s. 15C has to be strictly construed and the language of the enactment prevents the extension of the benefits to income which is merely incidental or ancillary to the industrial undertaking but which does not arise directly from and out of it : CIT vs. Standard Motor Products of India Ltd. (supra). Sec. 15C makes a distinction between the assessee and the industrial undertaking owned by him. The unit of assessment is the assessee and not the industrial undertaking : Ashok Motors Ltd. vs. CIT (supra). (2) The exemption conferred by s. 15C is confined only to the profits derived from the industrial undertaking and not to the profits derived from any trade or business carried on by the assessee other than the industrial undertaking : Ashok Motors Ltd. vs. CIT (supra). (3) Even if an assessee carries on a composite business, part of which is done through the industrial undertaking and the rest is non-industrial in character, the exemption under s. 15C is confined only to the profits derived from the industrial undertaking : CIT vs. Standard Motor Products of India Ltd. (supra) and Ashok Motors Ltd. vs. CIT (supra). (4) There is no difference in this legal position even if the non-industrial portion of the business activities of the assessee is allied to or intimately associated with the business carried on through the industrial undertaking : CIT vs. Standard Motor Products of India Ltd. (supra). (5) For purposes of s. 15C, there can be no merger of several business activities into the industrial undertaking, however much they may be closely allied to or intimately associated with the latter : CIT vs. Standard Motor Products of India Ltd. (supra). (6) The real test is whether the business carried on by the assessee through the non-industrial unit is essential to the subsistence of the industrial undertaking of the assessee : CIT vs. Standard Motor Products of India Ltd. (supra). Applying the above principles to the facts of the instant case, it seems to us that, though the assessee-company carried on its commercial activities of buying and selling machinery parts allied to those required for its own manufacturing business as also industrial gases, this part of the activity of the assessee was not carried on through the industrial undertaking which was subsequently set up. It is clear that the non-industrial business activities of the assessee could be carried on independently of the industrial undertaking, that is the factory, and it could be carried on even though the factory was not subsequently installed at all. Looking at it from another point of view, the factory itself, when set up, could be run even if the assessee ceased to carry on the non-industrial business activities which it had already been carrying on before the factory was set up. ;