Commissioner of Income-tax, Patiala v. Metalways (P) Ltd.

1. FACTS OF THE CASE

The hand-knitting-machine business of sole proprietor R.K. Mahajan was transferred as a running concern to a company incorporated on 29 June 1977. For 1979-80 and 1980-81 it sought section 80J relief. The Assessing Officer treated the original 1973 manufacturing activity as starting the five-year period in 1974-75 and rejected relief beyond 1978-79. CIT(A) and the Tribunal accepted eligibility under Explanation 2 governing limited transferred machinery.

Source: PDF pp.1–3

2. DISCUSSION BY THE COURT

The Court distinguished eligibility from computation: section 80J relief related to capital employed in the undertaking, not a five-year benefit attached to each machine’s first purchase. Explanation 2 deemed the transferred-machinery condition met within its 20% threshold but excluded that machinery’s value from qualifying capital. On the undisputed threshold finding, the new entity was eligible from 1978-79, placing both disputed years within five years.

Source: PDF pp.6–7

3. JUDICIAL DECISION

The reference question was answered against Revenue and for the assessee, sustaining section 80J eligibility for assessment years 1979-80 and 1980-81.

Source: PDF p.7

4. OUTCOME

The company retained the deduction entitlement for both years, subject to the statutory computation excluding transferred old machinery. No fresh allowance on the old machinery’s value or independently quantified deduction was ordered.

Source: PDF pp.6–7

5. Expert Comments

AKHB editorial analysis, distinct from the Court’s findings.

Eligibility and qualifying capital are separate steps

The deeming provision could satisfy the formation condition even though transferred machinery was present, but its value still had to be left out of capital employed for relief. Reading eligibility as permission to include that value would reproduce the misunderstanding the Court rejected. A historical computation must therefore document both the threshold test and the separate capital exclusion.

Source: PDF p.6 · PDF p.7

The five-year result followed the accepted new-undertaking finding

The Court treated the eligible new entity as arising in 1978-79 and thus included 1979-80 and 1980-81. It did not hold that every conversion or transfer restarts a deduction period regardless of section 80J(4). The accepted eligibility conditions are essential before applying the timing conclusion to another restructuring.

Source: PDF p.2 · PDF p.3 · PDF p.7

Preserve the statutory denominator and source identity limits

Explanation 2 as reproduced uses the total value of machinery or plant; the factual conclusion later says capital employed. That wording should not be used to substitute a new denominator. The source also alternates docket years 1995 and 1996. These ambiguities are disclosed while both numbered references and the clear decision date are retained.

Source: PDF p.1 · PDF p.6 · PDF p.7 · PDF p.8