1994 (10) TMI 12 - HC - Income Tax

Actual Cost Initial Depreciation New Industrial Undertaking Plant And Machinery Plant Or Machinery Special Deduction

Summary

Issues Involved:
1. Entitlement to initial depreciation under section 32(1)(vi) of the Income-tax Act, 1961, for the assessment year 1976-77.
2. Disentitlement to relief under section 80J due to old machinery exceeding 20% in an earlier year.
3. Inclusion of borrowed capital as part of the capital base for the purpose of refund under section 80J.

Issue-wise Detailed Analysis:

1. Entitlement to Initial Depreciation under Section 32(1)(vi):
The primary issue was whether the assessee qualified as a small-scale industrial undertaking under section 32(1)(vi) of the Income-tax Act, 1961, for the assessment year 1976-77. The assessee claimed that the aggregate value of its machinery and plant did not exceed Rs. 7,50,000. However, the Income-tax Officer included additional costs such as service and installation charges, which pushed the aggregate value beyond the limit.

The court examined Explanation 3 to section 32(1)(vi), which defines a small-scale industrial undertaking as one where the aggregate value of machinery and plant does not exceed Rs. 7,50,000. The Appellate Assistant Commissioner and the Tribunal both agreed that the cost should be calculated based on the actual cost to the owner, excluding service and installation charges. The Tribunal upheld that the interpretation placed by the Appellate Assistant Commissioner was correct, emphasizing that the deeming provision in Explanation 3(b) should be applied.

2. Disentitlement to Relief under Section 80J:
The second issue was whether the assessee was disentitled to relief under section 80J because the old machinery exceeded 20% in an earlier year, even though it was less than 20% during the relevant year. Section 80J provides deductions for profits and gains from newly established industrial undertakings, with specific conditions outlined in section 80J(4).

The court referred to the Gujarat High Court's judgment in CIT v. Satellite Engineering Ltd. [1978] 113 ITR 208, which allowed benefits under section 80J if the conditions were met during any of the subsequent years within the tax holiday period. The court emphasized that the legislative intent was to promote new industrial undertakings by providing tax holidays, and this benefit should not be denied if the conditions were met in subsequent years.

3. Inclusion of Borrowed Capital as Part of the Capital Base:
The third issue was whether borrowed capital could be included as part of the capital base for the purpose of relief under section 80J. The court noted that this issue had already been settled by the Supreme Court in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308, which held that borrowed capital should not be included in the capital base for the purpose of section 80J relief.

Conclusion:
The court concluded that the assessee was entitled to initial depreciation under section 32(1)(vi) as a small-scale industrial undertaking, as the value of the machinery and plant did not exceed Rs. 7,50,000 when excluding service and installation charges. The assessee was also entitled to relief under section 80J, as the old machinery did not exceed 20% of the total value during the relevant year, aligning with the legislative intent to promote new industrial undertakings. The issue of borrowed capital inclusion was not required to be addressed, as it was already settled by the Supreme Court. The reference was answered accordingly, with no order as to costs.