1. This is a reference application arising under Section 27 of the Wealth Tax Act (Act 27 of 1957) and the question raised is "whether the asset of Rs. 1,43,727 is exempt under Section 5(1)(xxi) read with the second proviso thereunder of the Wealth Tax Act?"
2. The assessee is a public limited company incorporated under the Indian Companies Act in the year 1939. It is carrying on business in the manufacture and sale of absorbent cotton wool. The Board of Directors of the company resolved, on 3-3-1955, at a duly constituted meeting, to establish a new spinning unit with 6,000 spindles under the name of "Sundarsanam Spinning Mills". On 25-4-1955, the company applied to the Government of India for licence to establish the spinning unit under the Industries (Development and Regulation) Act, 1951. The license was granted by the Government on 17-8-1955. In the months of January and February 1956, the Company placed orders with Machinery Manufacturers' Corporation Ltd., Bombay, and with Voltas Ltd., Madras, for the purchase of certain items of plants and machinery.
Orders were placed, in February 1956, with P. S. G. and Sons, Charity Industrial Institute, Coimbatore, and with Textool Co., Ltd., Coimbatore, for other items of machineries. The company then began constructing the necessary buildings and the construction was completed sometime in December 1957. The erection of the machinery and plant of this spinning Unit was, of course, done In several stages, commencing from June 1967. The Government of India extended the time for completion of the project till 17-3-1959. The machinery was installed and the factory was fully equipped to go into operation only in the accounting year 1957-58. Permission to work the spinning mill was obtained in June 1958. The company had laid out a total sum of Rs. 1, 43, 727 till 30-9-195S in the construction of the new spinning unit, as per details set out below :
Spinning buildings. Rs. 11,129-14-0
Textool Co. Ltd. 21,009-0-0
Parrys Engineering Department 4,186-0-0
Spinning initial expenses 4,401,2-0
P. S. G. and Sons Charitable Industrial Institute 6,560,0-0 Voltas Ltd. Madras 75,000-0-0
Machinery Manufacturers Corporation 75,000-0-0
Total Rs. 1,43,727-0-0
3. The Wealth Tax Act came into force on 1-4-1957. The first assessment year was 1st April 1957 to 31st March 1958. In response to a notice issued by the Wealth Tax Officer, Virudhunagar, the company submitted a return admitting a net wealth of Rs. 6,07,001. The company claimed exemption for the outlay of Rs. 1,43,727 the details of which we have set out above, under Section 5(1)(xxi) of the Act. The officer disallowed the claim holding as follows :
"This exemption applies only for the new unit set up after commencement of this Act, i. e., after 1-4-1957. As the unit in question was set up prior to the above date, the assessee is not entitled to the exemption".
The assessed preferred an appeal to the Appellate Assistant Commissioner of Wealth tax, Madurai. The appellate authority held that though the grammatical meaning of the expression "set up" in Section 5(1)(xxi) would warrant the contention of the assessee, the proviso of that section would cut down its real meaning, and that as the operation of the establishment of the factory had commenced prior to 1-4-1957, the exemption cannot be invoked.
4. The assessee went up on further appeal to the Income-tax Appellate Tribunal, the proper appellate authority under the Wealth Tax Act also. The Tribunal was also of the opinion that the proviso to Section 5(1)(xxi) should govern the interpretation of the main provision itself, and negatived the assessee's claim. The Tribunal observes :
"We have no doubt that the clear intention of Parliament is to grant exemptions to new units, in regard to the establishment of which a company commences operations after the date of commencement of the Act, namely, 1st April 1957".
5. We shall first refer to the relevant provisions of the Act. Section 2(d) defines "assessment year":
"'Assessment year' means the year for which tax is chargeable under Section 3".
Section 2(q) :
"'Valuation date' in relation to any year for which an assessment is to be made under this Act, means the last day of the previous year as defined in Clause (II) of Section 2 of the Income tax Act if an assessment were to be made under that Act for that year:. ....."
Section 3 is the charging section :
"Subject to the other provisions contained in this Act, there shall be charged for every financial year commencing on and from the first day of April 1957 a tax (hereinafter referred to as wealth tax) in respect of net wealth on the correspondending valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule".
Section 5 (is the provision for exemption). Section 5(1) :
"Wealth tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee-
(xxi) that portion of the net wealth of a company established with the object of carrying on an industrial undertaking in India within the meaning of the Explanation to Clause (d) of Section 45, as is employed by it in a new and separate unit set up after the commencement of this Act by way of substantial expansion of its undertaking;
(a) separate accounts are maintained in respect of such unit; and (b) the conditions specified in Clause (d) of Section 45 are complied with in relation to the establishment of such unit;
Provided further that this exemption shall apply to any such company only for a period of five successive assessment years commencing with the assessment year next following the date on which the company commences operations for the establishment of such unit".
Section 45(d) : ... . . . . .Explanation:
For the purpose of Clause (d), 'industrial undertaking' means an undertaking engaged in the manufacture, production or processing of goods or articles or in the mining or in the generation or distribution of electricity or any other form of power;
6. There is no dispute that the "valuation date" in the present case is 30th September 1956. As stated already, the Act came into force on 1st April 1957. It is clear that the exemption under Section 5(1)(xxi) can be claimed only in respect of a new and separate unit set no after the commencement of the Act by way of substantial expansion of the undertaking. That the assessee erected 6000 spindles as a new and separate unit by way of substantial expansion of its original undertaking has not been denied by the department. The only point of controversy is whether the new and separate unit has been "set up" after the commencement of the Act. The expression "set up" is assigned the following meaning in the Oxford Concise Dictionary: start (institution, business); establish oneself in some capacity. The Chambers Dictionary gives the following meaning : to erect, to put up and set him up to begin, to begin a career. The words "set up" are quite familiar and common place. But in the special context of the exempting provision of Section 5(1)(xxi) of this Act, they present some complexity, creating a stubborn indefiniteness. When can a business, undertaking or factory, be said to be "set up"? Is it the date of the very commencement when the preliminaries are put through or is it one or other of the several intermediate stages that have to be passed through before a factory can become a fait accompli or is it the final act which puts it in. gear?
One thing however seems to be fairly clear and it is this: Unless a factory is erected and the plants and machinery installed therein, it cannot be said to have been set up. The resolutions of the Board of Directors, the orders placed for purchasing the machinery, the licence obtained from the Government for constructing the factory, are merely initial stages towards setting up, however necessary, and essential they may be to further the achievement of the end. It is not, however, the actual functioning of the factory or its going into production that can alone be called setting up of the factory. The setting up is perhaps a stage anterior to the commencement of the factory.
7. We may, at this stage, refer to the decision of the Bombay High Court in Western India Vegetable Products Ltd. v. Commr. of Income-tax, Bombay City, , which dealt with a case arising under the Indian Income-Tax Act. The following observation of Chagla C. J. at page 158 though in a different context, seems to be quite apposite:
"It is important to consider whether the expression used in the Indian statute for setting up a business is different from the expression Mr. Justice Rowlatt was considering, viz., 'commencing of the business'. It seems to us, that the expression 'setting up' means, as is defined in the Oxford English Dictionary "to place on foot' or 'to establish', and in contradistinction to "commence". The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up." In our opinion, the proper meaning to be assigned to the expression 'set up' in Section 5(1)(xxi) would be "ready to commence business."
8. We shall now examine the language of the second proviso to Section 5(1)(xxi), as the department and the Tribunal have laid great emphasis on the wording of the proviso and used it as a key to the interpretation of the main provisions. The proviso states that the exemption shall apply to any company only for a period of five successive assessment years commencing with the assessment year next following the date on which the company commences operations for the establishment of such unit. It is pointed out by the Tribunal that if the-exemption were to last and subsist only for a period of five assessment years from the date on which the Company commences operations for establishment, "setting up" must mean only the commencement of the operation. This reasoning of the Tribunal is based upon the gross misconstruction of the proviso. Assessment year, as defined under the Act, is the financial year commencing from 1st April 1957. The definition of "assessment year" is' that it means the year for which tax is chargeable.
The first assessment year under the Act is 1st April 1957 to 31st March 1958. The next assessment year would be 1st April 1958 to 31st March 1959. This must go on in succession from year to year. It is only the financial year that is the assessment year under the Act. In cases- where the company had commenced operations for the establishment of the unit prior to the advent of the Act, the assessment year next following that date would be the first assessment year under the Act, namely, 1st April 1957 to 31st March 1958. This means that the exemption will be available to the assessee only for a period of first five assessment years under the Act, where, though the unit is set up after the Act, the operations for the establishment commenced earlier than the Act. It seems to us that the scope of the second proviso is quite clear and that there is no need to strain the expression "set up" occurring in Section 5(1)(xxi) because of the language of the proviso.
9. In this case, the new and separate unit was put in a ready stage to go into production only after the commencement of the Act, and that, therefore, it was set up after the Act within the meaning of the said expression in Section 5(1)(xxi). In view of the language of the second proviso, the benefit of exemption will be available to the assessee only for the first five successive assessment years commencing from 1st April 1957. The assessee's claim for exemption should, therefore, have been allowed. The question is answered in favour of the assessee. The department will pay the costs to the assessee. Counsel's fee Rs. 250.