1980 (4) TMI 20 - HC - Income Tax

Summary

Issues Involved:
1. Validity of Rule 19A(3) of the Income Tax Rules, 1962.
2. Validity of Rule 19A(2) of the Income Tax Rules, 1962.
3. Validity of Rule 19A(2)(i) of the Income Tax Rules, 1962.

Detailed Analysis:

1. Validity of Rule 19A(3):
The primary contention was that Rule 19A(3) of the Income Tax Rules, 1962, which directs the exclusion of borrowed monies and debts owed by the assessee in computing the capital employed in an industrial undertaking, is ultra vires of Section 80J of the Income Tax Act, 1961. The court observed that "capital employed" should include all funds invested in the business, regardless of whether they are the assessee's own funds or borrowed. The court emphasized that the term "capital employed" in Section 80J must be understood in its ordinary sense, which includes borrowed funds used in the industrial undertaking. The court held that Rule 19A(3) travels beyond the scope of Section 80J and takes away the benefit conferred by the Act, thus declaring it ultra vires.

2. Validity of Rule 19A(2):
The court examined Rule 19A(2), which directs the computation of the aggregate value of assets as on the first day of the computation period. Section 80J requires the computation of capital employed "in respect of the previous year," which implies considering the entire previous year and not just a single day. The court noted that capital is employed throughout the year and not just on the first day. By limiting the computation to the first day of the previous year, Rule 19A(2) contradicts the provisions of Section 80J, leading to incongruous and anomalous results. Therefore, the court declared Rule 19A(2) ultra vires of Section 80J.

3. Validity of Rule 19A(2)(i):
Rule 19A(2)(i) prescribes that the written down value of assets entitled to depreciation should be considered for computing the capital employed. The court held that this rule does not contravene Section 80J. The rationale is that depreciation is a notional expenditure, and the value of the asset after allowing for depreciation reflects the actual capital employed. The court reasoned that allowing the original cost of the asset would result in double computation of the same capital, which is not the intendment of Section 80J. Therefore, Rule 19A(2)(i) was upheld as valid.

Conclusion:
The court declared Rule 19A(3) and Rule 19A(2) of the Income Tax Rules, 1962, as ultra vires of Section 80J of the Income Tax Act, 1961, and quashed the assessments made under these rules. However, Rule 19A(2)(i) was upheld as valid. The authorities were directed to make fresh assessments by ignoring the invalidated rules and computing the capital employed during the entire previous year, including borrowed monies and debts due from the assessee, and allowing a rebate of six percent on the entire capital employed during the previous year.