H. R. KHANNA, CJ.

( 1 ) THIS judgment would dispose of two Incometax References Nos. I and 17 of 1967 in each of which the following identical question has been referred to this Court by the Incometax Appellate Tribunal under section 66 (1) of the Indian Incometax Act, 1922, (hereinafter referred to as the Act) at the instance of the Revenue :"whether, on the facts and in the circumstances of the case, the assessee company is entitled to exemption from tax on the profits or gains derived from the plant and machinery installed by it at a cost of Rs. l,10,00,000. 00 under section 15c of the Incometax Act, 1922"

( 2 ) REFERENCE No. 1 relates to assessment year 195960 whereas Reference No. 17 pertains to assessment years 196061, 196162 and 195758 The assessee in these References is Ganga Sugar Corporation Ltd. and the learned counsel for the parties are agreed that the decision in Reference No. 1 of 1967 would also cover the question which is the subject matter of the other Reference. In the circumstances, we may deal with the facts as given in Reference No. 1.

( 3 ) THE assessee company carles on the business of manufacturing sugar. At the time of its incorporation in 1934 it installed a complete plant for manufacturing sugar, having a daily crushing capacity of 400 tons of sugarcane. The said plant was operated by steam engine. During the course of the years the assessee company made additions and alterations in the said plant, as a result of which the crushing capacity was increased to 1050 tons of sugarcane per day by 1955. In the assessment year 195758,, the assessee company installed a new plant for manufacturing sugar with a daily crushing capacity of 4000 tons of sugarcane. The new plant is operated by electricity. The total cost of the installation of this plant and machinery was of the order of Rs. l,10,00,000. 00. The old building was completely overhauled and new buildings were constructed for housing this plant. The land on which the new plant was set up had been acquired by the assessee company in 1934. According to the assessee company, scrap and old material worth Rs. 72,617. 00 out of the old factory were used in the construction of the new factory As against that, according to the Revenue articles worth Rs. l,56,352. 00 out of the old factory were used in the new factory. Both the old and the new factories were run simultaneously in the assessment year 195758. In the assessment year 195859, the old factory was completely scrapped off and only the new factory was run.

( 4 ) THE assessee company claimed the benefit of partial exemption of its income from tax under section 15c of the Act in the assessment year in question. The Incometax Officer disallowed the claim of the assessee in this respect on the ground that what the assessee had done was to expand its factory by installing new machinery, most of which. he held, was in replacement of the old machinery. It was observed that as the assessee company had not dismantled scrap of the old machinery and that as the business had continued without break since 1948, the assessee company was not entitled to the exemption from lax under section 15c of the Act. The order, of the Incometax Officer was affirmed on appeal by the Appellate Assistant Commissioner.

( 5 ) THE assessee company preferred further appeal before the Tribunal. The Tribunal held that in order to claim the benefit of section 15c of the Act, it was not essential to show that the industrial undertaking had been newly established.

( 6 ) THE Tribunal referred to the facts of the case and pointed out that the old unit had not been touched at all and entirely a new and self contained unit run by electricity had been set up. Reference was also made to the fact that both the units had run simultaneously for some time. where after, the old unit had been scrapped off.

( 7 ) ON consideration of the facts the Tribunal held that. it was a case of new and distinct industrial undertaking having been established by the assessee company in 195657. Reference was. thereafter. made by the Tribunal to the assets of the old units, such as machinery. railway siding, workshop tools and implements of the total value of Rs. 3. 62. 853. 00, which were stated to have been used for the benefit of the new unit also. The Tribunal held that the common use of certain articles by two distinct industrial undertakings did not deprive them of their distinct identity. As regards the contention of the Revenue that parts worth Rs. 1. 56,352. 00 of the old factory had been used in the construction of the new unit, the Tribunal held that the use of some parts of the old unit in the construction of the new unit would not bring the case within the ambit of clause (i) of subsection (2) of section 15c of the Act. The assessee company was held entitled by the Tribunal to the benefit of the exemption under section 15 C of the Act.

( 8 ) AT the instance of the Revenue, the question reproduced above was thereafter referred to this court.

( 9 ) BEFORE dealing with the contention advanced, in this case, it may he pertinent to reproduce subsections (1) and (2) of section 15 C of the Act :Subsection (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 (or hotel) to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking (or hotel ). computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue. Subsection (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 (previously used in any other business); (ii) has begun or begins to manufacture or produce articles in (any part of the taxable territories) at any time within a period of (eighteen) years from the 1st 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. Provided that the Central Government may. by notification in the Official Gazette, direct that the exemption conferred by this section shall not apply to any particular industrial undertaking. "

( 10 ) MR. Sharma. on behalf of the Revenue, concedes that the case of the assessee company is covered by the above provision of law except in one particular, to which reference would be made hereafter. It is urged that the assessee company does not answer to the description given in clause (i) of subsection (2) reproduced above. Even so far as the above clause is concerned, Mr. Sharma does not dispute that the assessee companys new unit was not formed by the splitting up of

business already in existence. But he contends that the new unit was an industrial undertaking which was formed by "the reconstruction of business already in existence". In the alternative it is argued that the new unit was an industrial undertaking which was formed "by the transfer to a new business of building, machinery or plant previously used in any other business". The above contentions have been controverted by Mr. Chagla on behalf of the assessee company and we are of the opinion that they are not well founded. It cannot be disputed that all the conditions and requirements of clause (i) of subsection (2) must be satisfied before the benefit of the exemption can be claimed by an industrial undertaking. The subsection would not apply and the exemption cannot be claimed by an assessee if the industrial undertaking is formed (a) by the splitting up of its business already in existence or (b) by reconstruction of business already in existence or (c) by the transfer to a new business of building, machinery or plant previously used in any other business. As stated above, it is nobodys case that there has been any splitting up of the business already in existence so as to attract clause (a ). The important question which arises for determination is whether the industrial undertaking in question was formed by the reconstruction of business already in existence, as contended by the Revenue. The word reconstruction is a commercial term used in Company law and has been distinguished from amalgamation. By a reconstruction a company transfers its assets to a new company in consideration of the issue of the new companys shares to the first companys members, and if the first companys debentures are not paid off. in further consideration of the new company issuing debentures to the first companys debenture holders. The result of the transaction is that the nandw company has the same assets, members and debenture holders as the old one, and the old company has no undertaking to manage and is therefore wound up. Reconstructions were far commoner at the end of the last century and the beginning of this than they are today. (See Company Law by Pennington, 1967 Edition, page 727 ). it has been further observed on that page :"in form, an malgamation is merely the reconstruction of several companies by which all of them transfer their respective assets to one of their number or to a new company formed for the purpose, in consideration of the allotment of the transferee companys share or debentures to their members and debenture holders in agreed propositions. The economic result of an amalgamation and a reconstruction differs vastly, however. "

( 11 ) IN re South African Supply and Cold Storage Co. , (1904) 2 Ch. D. 268,. Buckley. , while dealing with the word reconstruction observed: what does reconstruction mean To my mind it means this. An undertaking of some definite kind is being carried on, and the conclusion is arrived at that it is not desirable to kill that undertaking, but that it is desirable to preserve it in some form, and to do so, not by selling it to an outsider who shall carry it on that would be a mere sale but in some altered form to continue the undertaking in such a manner as that the persons now carrying it on will substantially continue to carry it on. It involves, think, that substantially the same business shall be carried on and substantially the same person shall carry it on. But it does not involve that all the assets shall pass to the new company or resuscitated company, or that all the shareholders of the old company shall be shareholders in the new company or resuscitated company. Substantially the business and the persons interested must be the same. Does it make any difference that the new company or resuscitated company does or does not take over the liabilities I think not. I think it is none the less a reconstruction because from the assets taken over some part is excepted provided that substantially the business is taken, and it is immaterial whether the liabilities are taken over by the new or resuscitated company or are provided for by excepting from the scheme of reconstruction a sufficient amount to answer them. it is not, therefore, vital that either the whole assets should be taken over or that the liabilities should be taken over. You have to see whether substantially the same persons carry on the same business; and if they do, that. T conceive, is a reconstruction. "

( 12 ) THE above observations, as already pointed out, were in the context of a

reconstruction of a company while the words used in clause (i) of subsection (2) of section 15c of the Act relate to reconstruction of business. A Division Bench (S. T. Desai and K. T. Desa.) of the Bombay High Court held in the case of Commissioner of Incometax, Bombay City I v. Gaekwar Foam and Rubber Co. Ltd. , 35. T. R. 662,

(1) that though the above observations of Buckley. were in the context of reconstruction of a company, they were equally illuminating for determining the scope of reconstruction of a business already in existence. The learned Judges further observed :"the reconstruction of a business or an industrial undertaking must necessarily involve the concept that the original business or undertaking is not to cease functioning, and its identity is not to be lost or abandoned. The concept essentially rests on changes but the changes must be constructive and not destructive. There must be something positive about the whole matter as opposed to negative. The underlying idea of a reconstruction evidently must beand this is brought out by the section itself of a business already in existence. There must be a continuation of the activities and business of the same industrial undertaking. The undertaking must continue to carry on the same business though in some altered or varied form. If the alterations and changes are substantial, there would be little scope for describing what emerges as a reconstruction of the business. Thus for instance if the ownership of a business or an undertaking changes hands not ostensibly but in reality and effectively, that would not be reconstruction or if the very nature of the business is changed, that again would not be reconstruction. On the other hand, reorganization of the business on sounder lines or alterations in the mode or method or scope of the activities of the business or in its personnel or infusion of new blood in the management or control of the business which may even be by some changes in the constitution of persons interested in the underaking would certainly be no more than reconstruction of the business if it is substantially the same business carried on by substantially the same persons. "

( 13 ) WE have given the matter our earnest consideration and are of the view that in the reconstruction of a business, as in the reconstruction of a company, there is an element of transfer of assets and of some change, however partial or restricted it may be, of ownership of the assets. The transfer however need not be of all the assets. It is nontheless imperative that there should be continuity and preservation of the old undertaking though in an altered form. The concept of reconstruction of business would not be attracted when a company which is already running one industrial unit sets up another industrial unit. The new industrial unit would not lose its separate and independent identity even though it has been set up by a company which is already running an industrial unit before the setting up of the new unit. The object of section 15c of the Act is to provide an incentive for setting up of new industries so as to accelerate the process of industrialisation. It does not appear to have been the intention of the Legislature, as envisaged by section 15c of the Act. that the benefit of the said section would be confined to the industrial undertaking of those parties who had not already set up such undertakings in the past but would not be extended to parties who have past experience of running similar undertaking.

( 14 ) COMING to the facts of the present case. we find that the total cost of the installation of the new unit by the assessee company was of the order of Rs. l,10,00,000. 00. The old unit of the assessee company had a crushing capacity of 1050 tons of sugarcane per day and it was operated by a steam engine. The new unit had a daily crushing capacity of 4000 tons of sugarcane and it was operated by electricity. In the assessment year 195758 both the old as well as the new unit were running simultaneously. In the circumstances, the new unit should, in our opinion, be held to be distinct and separate from the old unit and not a continuation of the old unit. The fact that scrap and material out of the old unit was used in the construction of the new factory, in our opinion, would not make any material difference because the value of such scrap and material was only about 1% of the cost of the new unit. It cannot, on the facts of the present case. be said that the industrial undertaking represented by the new unit of the assessee company was formed by the reconstruction of the business already in existence.

( 15 ) SO far as the second contention of the Revenue is concerned that the new unit was an industrial undertaking which was formed by the transfer to the new business of building, machinery of plant previously used in another business, we have already pointed out above that the value of such material was about 1% of the expenditure involved in the setting up of the new plant. The use of the aforesaid scrap and material of the old unit would not, in our opinion, attract the concluding words of clause (i) of subsection (2) of section 15c of the Act to the present case. In order to hold that an industrial undertaking has been formed by the transfer to a new business of building, machinery or plant previously used in any other business, the Court should take into account the value of the transferred building, machinery or plant visavis the total cost involved in the setting up of the new industrial undertaking. If in the context of the total cost involved in the setting up of the new industrial undertaking the value of transferred building, machinery or plant constitutes only a small fraction, the new industrial undertaking would not be held to have been formed by the transfer to new business of building, machinery or plant previously used in another business. As against that, if, however, the value of the transferred building, machinery or plant is substantial when compared to the total cost involved in the setting up of the new industrial undertaking, the said undertaking would be hit by the concluding words of clause (i) of subsection (2) of section 15c. It may be stated that in subsection (6) of section 80j of the Income Tax Act of 1961, the Legislature has specified that the total value of the building. machinery or plant so transferred should not exceed 20% of the total value of building, machinery plant used in the business of a new industrial undertaking. Although no such percentage was fixed in section 15c (2) (1) of the Act of 1922, the extent and quantum of the value of the transferred building, machinery or plant visavis the total cost involved in the setting up of the new industrial undertaking was, in our view, a relevant and material factor the importance of which cannot be lost sight of. In the light of all the facts of the case, we are of the opinion that the new industrial undertaking in the present case cannot be said to have been former, by the transfer to a newbusiness of building, machinery or plant previously used in another business, Reference has been made on behalf of the Revenue to a decision of this Court in The Commissioner of Incometax, Delhi v. Naya Sahitya, Delhi,. T. R. No. 5 (2) of 1967, decided on March 15, 1971. The assessee in that case was carrying on business of publishing books. Prior to 196162 the assessee got its books printed in some other printing press. During the assessment year 196162 the assessee started printing books in its own printing press. The question referred to the Court was whether on the facts and in the circumstances of the case the assessees business of printing and publishing books was a newly established industrial undertaking entitled to exemption under section 15c of the Act. A Division Bench of this Court (Hardy and Ansar.) took note of the fact that the only change that took place in the assessment year in question was that instead of getting its books printed in some other printing press the assessee got the books printed in its own printing press. The Court held it was not altogether a new business and the assessee was not entitled to the benefit of section 15c of the Act. In our opinion, the facts of that case are clearly distinguishable and as such the Revenue cannot derive much assistance from it.

( 16 ) WE, therefore, are of the opinion that the assessee company was entitled to exemption from tax on the profits or gain derived from the new industrial undertaking under section 15c of the Act. The question referred to this Court is consequently decided in the affirmative and in favour of the assessee. In the circumstances of the case we leave the parties to bear their own costs.