1979 (3) TMI 21 - HC - Income Tax

Capital Employed, Capital Work In Progress, Income Tax Concession, Industrial Undertaking, Office Appliance

Summary

Issues Involved:
1. Inclusion of specific assets in the capital employed for computing tax exemption under sections 84 and 101 of the Income-tax Act, 1961.
2. Justification for allowing development rebate for a telephone exchange installed in the factory area under section 33 of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Inclusion of Specific Assets in Capital Employed
Relevant Assets:
- Capital works-in-progress valued at Rs. 13,77,704
- Land acquired during the years valued at Rs. 84,902
- Stores in transit valued at Rs. 1,03,045

Key Points:
- The respondent-assessee is a public limited company with a complex of seven distinct units and a central unit for common expenses and assets.
- The assessee claimed tax exemption under section 84 and rebate on super-tax under section 101 of the Income-tax Act, 1961.
- The ITO rejected the inclusion of the three disputed items in the capital employed, arguing they were not used in the business during the accounting period.
- The AAC upheld the ITO's view, emphasizing that these assets were not in use in any of the units during the year.
- The Tribunal accepted the assessee's contention, stating that investment in the central unit is essential for efficient industrial operations and should be included in the capital computation.

Court's Analysis:
- The court emphasized the purpose of section 84, which is to encourage new industrial enterprises by providing tax exemptions based on the capital employed.
- The court rejected the restrictive interpretation of "capital employed" as only those assets actually utilized in the manufacturing process.
- The court stated that "capital employed" should include all assets purchased for the business, as they are part of the capital employed in the undertaking.
- The court referred to similar decisions from other High Courts, supporting the inclusion of capital work-in-progress, land, and stores in transit in the capital employed for tax exemption purposes.
- The court concluded that the capital value of these disputed items should be proportionately attributed to the profit-making units (malt extract, malt house, and brewery) for computing relief under section 84.

Issue 2: Development Rebate for Telephone Exchange
Key Points:
- The assessee installed an internal telephone system in its factories and claimed a development rebate under section 33 of the Income-tax Act.
- The ITO and AAC denied the rebate, considering the telephone system as an office appliance.
- The Tribunal allowed the rebate, considering the telephone system as a plant used for business purposes.

Court's Analysis:
- The court defined "plant" under section 43 of the Income-tax Act, which includes scientific apparatus used for business purposes.
- The court determined that the internal telephone system is a plant and not an office appliance, as it is essential for the efficient organization of the manufacturing process.
- The court emphasized that the system's primary use in factories for coordinating production activities qualifies it for the development rebate under section 33.

Conclusion:
- Question 1: The court ruled that the capital value of capital work-in-progress, land acquired during the accounting year, and stores in transit should be included in the capital employed for computing tax exemption under section 84. The value should be proportionately attributed to the profit-making units.
- Question 2: The court affirmed that the Tribunal was justified in allowing the development rebate for the internal telephone system installed in the factory area, as it qualifies as a plant and not an office appliance.

The court ordered that its opinion be sent to the Tribunal for disposal of the appeal in accordance with this judgment, with no costs awarded in the reference.