My industrial land was compulsorily acquired and I put up a new factory on land I took on lease rather than buying. The Assessing Officer says s.54D needs a purchase. Does the lease sink the claim?
Not on this Andhra Pradesh decision. Section 54D(1) offers three alternatives — purchase of land or a building, purchase of a right in land or a building, or CONSTRUCTION of another building — and where the assessee constructed a new factory on leased land within three years and installed new machinery there, the Court held the department's reason for refusal, that the land had not been purchased, untenable. It also adopted the wide, popular meaning of 'industrial undertaking' and held it need not be engaged in manufacture or production.
Decided by the High Court (S.R. Nayak J (the retrieved report names one judge; the judgment is in the first person plural)) on 2001-07-27, reported as [2001] 251 ITR 693 (AP), as printed in the report retrieved; reference under s.256 at the instance of the Commissioner of Income-tax, Andhra Pradesh-II, Hyderabad. It bears on section 54D, section 80HH, section 256 of the Income Tax Act 1961, in Capital Gains, Capital Gains Exemptions and Deductions & Disallowances matters.
This is the practical half of s.54D. Two objections account for most refusals: that the undertaking does not manufacture anything, and that the replacement asset was not bought. Both are answered here in one judgment, and the second answer is the more valuable because it is invisible from the section's marginal note — the construction limb is easy to overlook when the officer's letter uses the word 'purchased'. The judgment also shows the Tribunal's finding that the new unit was an independent factory and not a reconstruction of the old one doing real work, so the s.80HH/s.80J splitting-and-reconstruction learning gets imported into the s.54D fight over whether the assessee has genuinely shifted or re-established.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee bought and sold groundnuts, decorticated them into kernel and sold the kernel. At the relevant time it had a factory on lease at Anantapur and its own factory at Kadiri. For assessment year 1984-85 it returned income of Rs 2,15,886; the Income-tax Officer assessed Rs 4,72,760. Land was compulsorily acquired on 10 September 1983 and the assessee claimed s.54D on Rs 6,24,817 of compensation and solatium, on the footing that the money was used to set up a new factory. The Income-tax Officer disallowed the claim on two grounds — that the assessee had not purchased the new land but taken it on lease, and that it was not an industrial undertaking engaged in manufacturing — and also refused s.80HH. The CIT(A) confirmed. The Tribunal found that the assessee had taken a site on lease, constructed a new building and installed machinery worth about Rs 2 lakhs, that no machinery had been transferred from the Anantapur factory, and that the new factory was an independent entity and not a reconstruction, applying Textile Machinery Corporation Ltd. v CIT; it also held decortication of groundnut to be a manufacturing activity and allowed the appeal. Four questions were referred at the Commissioner's instance, two of them (questions 3 and 4) on s.54D.
All four questions were answered against the Revenue and in favour of the assessee. On s.54D the Court held that the section granting an exemption must be construed liberally, that 'industrial undertaking' bears its popular meaning and need not manufacture or produce anything, and that the department's reason for refusing relief — that the assessee had not purchased the land on which the new factory was established, having taken it on lease — was untenable, the assessee having in fact set up the new industrial undertaking within the statutory window (paras 18 to 20). The Tribunal's finding that the new factory was a new and independent factory rested on acceptable evidence and could not lightly be disturbed.
The Court set out s.54D(1) in full (para 17) and then its scheme (para 18): relief is available where the land or building compulsorily acquired was used for the business of the industrial undertaking during the two years immediately preceding the acquisition and the taxpayer, within three years of the acquisition, purchases any other land or building or CONSTRUCTS any other building for the purpose of shifting or re-establishing the undertaking or setting up another industrial undertaking. Reading the section as an exemption to be construed liberally, it adopted the reasoning of the Kerala High Court in P. Alikunju: an undertaking under s.54D is one maintained by a person for carrying on his business, the adjective 'industrial' shows only that it must partake of the character of a business, and 'business' being of wide import the phrase takes in any project or business a person may undertake (para 18). Turning to the facts (para 19), the assessee had set up an industrial undertaking on land secured on lease and had invested in it; the departmental objection that the land was not purchased therefore failed. On the independence of the new unit the Court declined to disturb the Tribunal's finding of fact, it being the final fact-finding authority and its findings not being perverse or based on no evidence.
Section 54D, granting an exemption, must be construed liberally and the expression "industrial undertaking" occurring therein must be given its popular meaning. An undertaking mentioned in Section 54D must be one maintained by a person for the purpose of carrying on his business.
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Handle my notice → Ask a CA on WhatsAppNot on this Andhra Pradesh decision. Section 54D(1) offers three alternatives — purchase of land or a building, purchase of a right in land or a building, or CONSTRUCTION of another building — and where the assessee constructed a new factory on leased land within three years and installed new machinery there, the Court held the department's reason for refusal, that the land had not been purchased, untenable. It also adopted the wide, popular meaning of 'industrial undertaking' and held it need not be engaged in manufacture or production. This was decided by the High Court (S.R. Nayak J (the retrieved report names one judge; the judgment is in the first person plural)) and bears on section 54D, section 80HH, section 256 of the Income Tax Act 1961. It is reported as [2001] 251 ITR 693 (AP), as printed in the report retrieved; reference under s.256 at the instance of the Commissioner of Income-tax, Andhra Pradesh-II, Hyderabad. This is the practical half of s.54D. Two objections account for most refusals: that the undertaking does not manufacture anything, and that the replacement asset was not bought. Both are answered here in one judgment, and the second answer is the more valuable because it is invisible from the section's marginal note — the construction limb is easy to overlook when the officer's letter uses the word 'purchased'. The judgment also shows the Tribunal's finding that the new unit was an independent factory and not a reconstruction of the old one doing real work, so the s.80HH/s.80J splitting-and-reconstruction learning gets imported into the s.54D fight over whether the assessee has genuinely shifted or re-established. If it applies to you, the first step is this: Identify which of the three limbs of s.54D(1) the claim rests on and say so expressly in the reply — 'constructed any other building' is a limb in its own right and does not require ownership of the land under it.
The assessee bought and sold groundnuts, decorticated them into kernel and sold the kernel. At the relevant time it had a factory on lease at Anantapur and its own factory at Kadiri. For assessment year 1984-85 it returned income of Rs 2,15,886; the Income-tax Officer assessed Rs 4,72,760. Land was compulsorily acquired on 10 September 1983 and the assessee claimed s.54D on Rs 6,24,817 of compensation and solatium, on the footing that the money was used to set up a new factory. The Income-tax Officer disallowed the claim on two grounds — that the assessee had not purchased the new land but taken it on lease, and that it was not an industrial undertaking engaged in manufacturing — and also refused s.80HH. The CIT(A) confirmed. The Tribunal found that the assessee had taken a site on lease, constructed a new building and installed machinery worth about Rs 2 lakhs, that no machinery had been transferred from the Anantapur factory, and that the new factory was an independent entity and not a reconstruction, applying Textile Machinery Corporation Ltd. v CIT; it also held decortication of groundnut to be a manufacturing activity and allowed the appeal. Four questions were referred at the Commissioner's instance, two of them (questions 3 and 4) on s.54D. The matter was decided on 2001-07-27 by the High Court (S.R. Nayak J (the retrieved report names one judge; the judgment is in the first person plural)). On those facts the High Court held as follows. All four questions were answered against the Revenue and in favour of the assessee. On s.54D the Court held that the section granting an exemption must be construed liberally, that 'industrial undertaking' bears its popular meaning and need not manufacture or produce anything, and that the department's reason for refusing relief — that the assessee had not purchased the land on which the new factory was established, having taken it on lease — was untenable, the assessee having in fact set up the new industrial undertaking within the statutory window (paras 18 to 20). The Tribunal's finding that the new factory was a new and independent factory rested on acceptable evidence and could not lightly be disturbed.
The Court set out s.54D(1) in full (para 17) and then its scheme (para 18): relief is available where the land or building compulsorily acquired was used for the business of the industrial undertaking during the two years immediately preceding the acquisition and the taxpayer, within three years of the acquisition, purchases any other land or building or CONSTRUCTS any other building for the purpose of shifting or re-establishing the undertaking or setting up another industrial undertaking. Reading the section as an exemption to be construed liberally, it adopted the reasoning of the Kerala High Court in P. Alikunju: an undertaking under s.54D is one maintained by a person for carrying on his business, the adjective 'industrial' shows only that it must partake of the character of a business, and 'business' being of wide import the phrase takes in any project or business a person may undertake (para 18). Turning to the facts (para 19), the assessee had set up an industrial undertaking on land secured on lease and had invested in it; the departmental objection that the land was not purchased therefore failed. On the independence of the new unit the Court declined to disturb the Tribunal's finding of fact, it being the final fact-finding authority and its findings not being perverse or based on no evidence. In the words reproduced by the source cited on this page: "Section 54D, granting an exemption, must be construed liberally and the expression "industrial undertaking" occurring therein must be given its popular meaning. An undertaking mentioned in Section 54D must be one maintained by a person for the purpose of carrying on his business." The decision followed or applied P. Alikunju, M.A. Nazeer Cashew Industries v. CIT [1987] 166 ITR 804 (Ker) — followed on the meaning of 'industrial undertaking' in s.54D; Textile Machinery Corporation Ltd. v. CIT — applied by the Tribunal on whether the new unit was a reconstruction; Ganesh Trading Co. v. State of Haryana (SC) — applied on manufacture; Omkarmal Agarwal v. CIT [1968] 67 ITR 329 (AP) — applied on manufacture; CIT v. M.R. Gopal [1965] 58 ITR 598 (Mad) — applied on 'industrial undertaking'.
It was decided by the High Court on 2001-07-27 and is reported as [2001] 251 ITR 693 (AP), as printed in the report retrieved; reference under s.256 at the instance of the Commissioner of Income-tax, Andhra Pradesh-II, Hyderabad. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 54D, section 80HH, section 256, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. All four questions were answered against the Revenue and in favour of the assessee. On s.54D the Court held that the section granting an exemption must be construed liberally, that 'industrial undertaking' bears its popular meaning and need not manufacture or produce anything, and that the department's reason for refusing relief — that the assessee had not purchased the land on which the new factory was established, having taken it on lease — was untenable, the assessee having in fact set up the new industrial undertaking within the statutory window (paras 18 to 20). The Tribunal's finding that the new factory was a new and independent factory rested on acceptable evidence and could not lightly be disturbed. It arises in Capital Gains, Capital Gains Exemptions and Deductions & Disallowances matters, on section 54D, section 80HH, section 256 of the Income Tax Act 1961, and was decided by S.R. Nayak J (the retrieved report names one judge; the judgment is in the first person plural). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Prove the new unit is independent: no machinery transferred from the old site, new plant erected, separate premises. That is what carried the Tribunal's finding here, applying Textile Machinery Corporation Ltd. v CIT. Keep the three-year clock from the date of compulsory acquisition and document the date the acquisition took place; here it was 10 September 1983 and the department did not dispute that the new undertaking came up within three years. If the officer says the undertaking is not 'industrial' because it does not manufacture, rely on paras 18 and 19 and on P. Alikunju (Ker, 1987), which this Court cites by name. Do not rely on this decision for the two-year prior-use condition — it was not in issue and was not tested.
Validity check could not be completed. Validity check could not be completed. I did not search for later treatment of this decision. The construction of 'industrial undertaking' it adopts is the same as the Kerala High Court's in P. Alikunju, which I also read, so the two are mutually corroborative on that limb. The leased-land limb rests on paras 18 and 19 and, given the Kadiri/Gooty confusion recorded in the editor note, a practitioner relying on it should obtain the original report before citing it as the sole authority. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The report is confused about the location of the new factory and the reader should be warned. Para 2 says the assessee took a site on lease AT KADIRI and constructed a new building there, and in the same paragraph says that within three years of the 10 September 1983 acquisition it established an industrial undertaking AT GOOTY. Para 16 refers to the factory at Kadiri; para 19 refers to the assessee having set up an industrial undertaking at Gooty on land secured on lease. The Assessing Officer's stated reason for refusal, recorded in para 2, was that 'the assessee did not acquire the land at Gooty, but the land was taken only on tease [lease]'. Para 19 also refers to investment 'during the assessment years 1985-86 and 1986-87' although the assessment year in issue is 1984-85, and to an investment figure of Rs 1,88,530 while para 2 records machinery worth Rs 2 lakhs. Para 2 records the assessment as 'completed on August 18, 1996' for assessment year 1984-85, which is not reconcilable with the rest of the chronology. The transcription also shows scanning artefacts ('tease' for lease, 'Atikunju' for Alikunju, 'denned' for defined, 'deco-rtication'). The s.54D holding stands on paras 17 to 19 and is not affected by these slips, but do not cite the place names or the figures from this report without checking the original. The document was fetched once. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
All four questions were answered against the Revenue and in favour of the assessee. On s.54D the Court held that the section granting an exemption must be construed liberally, that 'industrial undertaking' bears its popular meaning and need not manufacture or produce anything, and that the department's reason for refusing relief — that the assessee had not purchased the land on which the new factory was established, having taken it on lease — was untenable, the assessee having in fact set up the new industrial undertaking within the statutory window (paras 18 to 20). The Tribunal's finding that the new factory was a new and independent factory rested on acceptable evidence and could not lightly be disturbed.
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