S. 80HH and S. 80-I — New industrial undertaking vis-à-vis expansion of production capacity of existing unit.

The assessee is engaged in the business of manufacturing
calcium carbonate since 1978 with a starting production capacity of 5,000 MT
annually, which was enhanced in various stages — to 7,500 MT in 1986-97 — to
9,600 MT in the year 1988-89 — to 11,000 MT in 1990-91 and 70,000 MT in 1991-92,
which resulted in corresponding increase in the production. The assessee claimed
deductions u/s.80HH and u/s.80-I in these years on the basis that with each
expansion a new industrial undertaking came into existence in the year in which
the production capacity was increased and the period of allowability of
deductions will increase accordingly.

For A.Y. 1991-92 and 1992-93, the AO rejected such claims of
the assessee holding that it was a case of gradual expansion and reconstruction
of existing unit and the increase in the production capacity cannot be held as
establishment of new industrial undertaking. The CIT(A) confirmed the view of
the AO in A.Y. 1991-92. However for A.Y. 1992-93, the CIT(A) took a different
view than his predecessor and allowed the claim of the assessee.

The Tribunal decided the appeal for A.Y. 1991-92 in favour of
the assessee relying on the observations of the CIT(A) for A.Y. 1992-93. Whereas
for A.Y. 1992-93 the Tribunal considered the matter afresh without being
influenced by the earlier order on the ground that the fact that the appeal
against the order of the CIT(A) for A.Y. 1992-93 was pending before the Tribunal
was not brought to the notice of the Tribunal at the time when the appeal for
A.Y. 1991-92 was heard. Upon considering the matter afresh, the Tribunal decided
against the assessee.

Upon further appeal to the High Court, it was directed to
form a Special Bench to resolve the controversy.

The true test is, there must emerge a new and identifiable
undertaking, separate and distinct from the existing unit. In the present case,
there is no dispute that so-called expanded new plant and machinery were
installed in the existing building, on same process line-up and infrastructure
and new equipments were connected to the old machinery set-up. The rotary gas
producer was common for the old and the new plant. Similarly, all the raw
material processed passed through a common lime holding tank. The old and the
new plant were integrated in such a manner that it was difficult to identify the
input of raw material and final product whether it was produced through the
so-called expanded plant and machinery or through the old plant and machinery.
Raw material, finished products, employees, electric connection, maintenance of
books of accounts, etc. were all common and could not be identified as coming
from new or old plant. Further, the assessee was not able to ascertain the exact
profits independently from old and expanded plant, that is why the assessee
computed its profits on proportionate basis. Therefore no independent and
distinct unit came into existence for the purpose of claiming deduction either
u/s.80HH or u/s.80-I.