1995 (7) TMI 22 - HC - Income Tax

Computation Of Capital, High Court, Industrial Undertaking, Question Of Law, Special Deduction

Summary

Issues:
1. Whether the credit balance on the liabilities side of the balance-sheet of a distillery unit should be deducted in computing capital for the purpose of allowing deduction under section 80J of the Income-tax Act.
2. Whether the capital employed in a distillery unit should be computed after deducting borrowed funds diverted by the head office to the unit for arriving at the capital employed.

Detailed Analysis:
Issue 1:
The case involved a company engaged in the business of manufacturing yarn and running a distillery, claiming a deduction under section 80J of the Income-tax Act for the distillery unit. The Income-tax Officer withheld the deduction, requesting the company to provide its balance-sheet to ascertain the nature of the credit balance. The Commissioner of Income-tax (Appeals) allowed the relief to be carried forward, and the Tribunal held that the amount shown on the liabilities side could not be treated as borrowed funds. The court referred to the Indian Oil Corporation Ltd. v. S. Rajagopalan case, emphasizing that each unit must be treated independently for calculating capital under section 80J. The Central Board of Direct Taxes issued Circular No. 380, aligning with this principle. The court ruled in favor of the Revenue, stating that the Tribunal should have verified if the money transferred was from borrowed funds before allowing the deduction.

Issue 2:
Regarding the second issue, the court deemed it a contention rather than a legal question. Given the discussion and ruling on the first issue, the court declined to answer the second question separately, as the resolution of the first question encompassed the aspect raised in the second question. The court concluded that there would be no order as to costs in the circumstances of the case.