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Issues: Interpretation of Section 80J of the Income Tax Act and eligibility for relief under the section.
The judgment delivered by the High Court of Karnataka involved a reference under section 256(1) of the Income Tax Act, 1961, at the instance of the Revenue. The central question was whether the assessee, a registered firm, was entitled to relief under section 80J of the Act for establishing a new industrial undertaking unit in Goa. The Income Tax Officer initially disallowed the claim, citing that borrowed moneys and debts exceeded the value of the assets of the industrial undertaking. However, the Commissioner (Appeals) ruled in favor of the assessee, stating that the investment by the head office should not be considered borrowed capital and directed the ITO to verify the amount and allow relief under section 80J. Upon appeal by the Revenue to the Tribunal, it was contended that borrowed capital was utilized in the new unit. Nevertheless, the Tribunal found that the firm had sufficient capital of its own, which was transferred to the branch unit without a direct link to borrowed money. The Tribunal concurred with the Commissioner (Appeals) and dismissed the appeal, emphasizing the absence of a nexus between the borrowed funds and the investment in the branch unit. The judgment highlighted an amendment to section 80J by the Finance (No. 2) Act, 1980, which incorporated provisions from Rule 19A of the Income Tax Rules, 1962, retrospectively from April 1, 1972. Despite this amendment, the Tribunal's finding of no direct connection between borrowed funds and the branch unit investment remained crucial. Citing the Bombay High Court's decision in Indian Oil Corporation Ltd. v. Rajagopalan ITO, the judgment emphasized that liabilities and assets of the industrial undertaking should be considered separately, aligning with Circular No. 380 issued by the Board of Direct Taxes. Considering the Tribunal's finding and the Board's circular, the High Court ruled in favor of the assessee, affirming their entitlement to relief under section 80J. Consequently, the question was answered in the affirmative against the Revenue, and no costs were awarded in the circumstances.
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