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Issues:
Whether relief under section 80J of the Income-tax Act, 1961, is allowable to the assessee on borrowed capital. Analysis: The judgment delivered by the High Court of Rajasthan pertains to a reference made by the Income-tax Appellate Tribunal regarding the eligibility of the assessee, a partnership firm, to claim a deduction under section 80J of the Income-tax Act, 1961, on borrowed capital. The firm, engaged in the manufacture and sale of iron bars, claimed a deduction in its return for the assessment year 1977-78, which was disallowed by the Income-tax Officer. The Commissioner (Appeals) directed the deduction to be allowed, relying on decisions from the Calcutta and Madras High Courts. However, the Revenue appealed to the Tribunal, which upheld the Commissioner's decision. Subsequently, the Commissioner of Income-tax requested the Tribunal to refer the question to the High Court for adjudication. During the hearing, the Revenue argued that the decisions of the Calcutta and Madras High Courts had been overruled by the Supreme Court in a specific case, rendering the previous decisions invalid. The counsel for the assessee conceded that the law laid down by the Supreme Court was applicable in this case. The High Court noted that the Supreme Court had indeed overruled the decisions of various High Courts and approved the view expressed by the Madhya Pradesh High Court in certain cases. The High Court emphasized a specific passage from the Supreme Court judgment, highlighting the validity of the rule excluding borrowed capital from the computation of 'capital employed' for tax exemption purposes. Ultimately, the High Court held that the Tribunal was incorrect in allowing the deduction under section 80J on the entire amount claimed by the assessee, including borrowed capital, without considering the provisions of rule 19A of the Income-tax Rules, 1962. The reference was answered in the negative, favoring the Revenue. Each party was directed to bear their own costs of the court.
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