1984 (8) TMI 17 - HC - Income Tax

Summary

Issues Involved:

1. Depreciation on the cost of digging and construction of a well.
2. Interpretation of "borrowed monies and debts due" in Rule 19A(3).
3. Inclusion of capital expenditure on scientific research in assets.
4. Relief u/s 80J for the entire year despite partial year operation.
5. Treatment of pre-paid expenses as assets.
6. Classification of technical fees as revenue expenditure.
7. Taxability of excess perquisites u/s 40(a)(v).
8. Computation of capital employed without deductions under Rule 19A(3).
9. Deduction of liabilities in the computation of capital employed.
10. Tribunal's jurisdiction to raise new points.
11. Inclusion of full value of debts owed to the assessee.
12. Treatment of tax recoverable as an asset.
13. Inclusion of excess advance tax as an asset.
14. Classification of unclaimed dividends and refundable equity issue application moneys.
15. Inclusion of unclaimed dividends and refundable equity issue application moneys as capital.
16. Deduction u/s 80J despite prior year's loss.
17. Entitlement to deduction u/s 80J for the Chemical Unit.
18. Validity of the decision in Rajapalayam Mills Ltd. v. CIT.
19. Relevance of previous year's loss in determining deduction u/s 80J.

Summary:

Issue 1: Depreciation on Well Construction
The Tribunal allowed depreciation on the cost of digging and construction of a well within the factory premises, following earlier decisions in favor of the assessee. This was affirmed by the High Court, referencing CIT v. Warner Hindustan Ltd. [1979] 117 ITR 15.

Issue 2: Interpretation of "Borrowed Monies and Debts Due"
The High Court held that Rule 19A(3) is ultra vires section 80J, making the distinction between "debt due and payable" and "debt owed" irrelevant. This question was deemed academic and not answered.

Issue 3: Capital Expenditure on Scientific Research
The Tribunal included capital expenditure on scientific research as an asset for calculating capital employed under section 80J. The High Court affirmed this, stating the expenditure remains an asset despite deductions under section 35.

Issue 4: Relief u/s 80J for the Entire Year
The Tribunal granted relief for the entire accounting year, not just the period after production commenced. The High Court supported this, noting the rate of 6% per annum does not imply a pro-rata restriction.

Issue 5: Pre-paid Expenses as Assets
The Tribunal included pre-paid expenses as assets for calculating capital employed under section 80J. The High Court agreed, finding these expenses fall under assets acquired by purchase and not entitled to depreciation.

Issue 6: Technical Fees as Revenue Expenditure
The Tribunal classified technical fees paid to Warner Lambert Pharmaceutical Company as revenue expenditure. The High Court disagreed, finding the expenditure to be capital in nature due to the enduring benefits and association with the initial setup of the company.

Issue 7: Taxability of Excess Perquisites
The Tribunal held that excess perquisites taxed by the Income-tax Officer were cash payments and not taxable. The High Court affirmed this, referencing CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24.

Issue 8: Computation of Capital Employed
The Tribunal's decision to deduct liabilities under Rule 19A(3) was overturned by the High Court, which held the rule ultra vires section 80J. Thus, the computation should be based on gross assets without such deductions.

Issue 9: Deduction of Liabilities
The High Court confirmed that liabilities should not be deducted from gross assets under Rule 19A(3), aligning with its decision in Warner Hindustan Ltd. v. ITO [1982] 134 ITR 158.

Issue 10: Tribunal's Jurisdiction
The High Court found the Tribunal had overstepped by allowing new points not raised before the first appellate authority. This question was deemed academic and not answered.

Issue 11: Inclusion of Full Value of Debts Owed
The High Court ruled that both debts due and debts owed to the assessee should be included as assets under Rule 19A(2), rejecting the Tribunal's narrower interpretation.

Issue 12: Tax Recoverable as an Asset
The High Court upheld the Tribunal's view that tax recoverable could not be treated as an asset until assessment completion.

Issue 13: Excess Advance Tax as an Asset
The High Court agreed with the Tribunal that excess advance tax paid could not be treated as an asset until assessment completion.

Issue 14: Unclaimed Dividends and Refundable Equity Issue Application Moneys
The High Court held these amounts could not be deducted as liabilities due to Rule 19A(3) being ultra vires, but also could not be considered assets or capital employed.

Issue 15: Inclusion of Unclaimed Dividends and Refundable Equity Issue Application Moneys as Capital
The High Court found these amounts could not be included as capital employed or assets of the assessee.

Issue 16: Deduction u/s 80J Despite Prior Year's Loss
The High Court ruled the assessee was entitled to deduction under section 80J despite the Chemical Unit's prior year's loss, as the loss was absorbed by other profits.

Issue 17: Entitlement to Deduction u/s 80J for the Chemical Unit
The High Court affirmed the assessee's entitlement to deduction under section 80J for the Chemical Unit for the assessment year 1971-72.

Issue 18: Validity of the Decision in Rajapalayam Mills Ltd. v. CIT
The High Court noted the Supreme Court had reversed the Madras High Court's decision in Rajapalayam Mills Ltd. v. CIT, supporting the assessee's position.

Issue 19: Relevance of Previous Year's Loss
The High Court held the previous year's loss, absorbed by other profits, was not relevant in determining the deduction under section 80J for the subsequent year.

Conclusion:
The High Court's answers favored the assessee on most issues, particularly those related to section 80J and Rule 19A, while ruling against the assessee on the classification of technical fees as revenue expenditure.