1978 (1) TMI 24 - HC - Income Tax

Capital Employed, Carrying On Business, Computation Of Capital, Income Tax Act, New Industrial Undertaking Relief

Summary

Issues Involved:
1. Entitlement to depreciation on the cost of digging a well.
2. Correctness of the method of computing capital for relief under section 80J.
3. Allowability of deduction under section 80J on the entire capital employed without reduction by borrowed monies and debts.

Issue-wise Detailed Analysis:

1. Entitlement to Depreciation on the Cost of Digging a Well:
The primary issue was whether the assessee was entitled to depreciation on the cost incurred for digging a well in its factory premises. The Income Tax Officer (ITO) disallowed the claim, relying on the Bombay High Court's decision in Jayasingrao Piraji Rao Ghatge v. CIT, which held that a well does not come within the definition of "plant." However, the Appellate Assistant Commissioner (AAC) allowed the claim and directed that depreciation should be allowed at 10%. The Tribunal upheld the AAC's decision, applying the Supreme Court's ruling in CIT v. Taj Mahal Hotel, which included a well within the expression "plant." The High Court affirmed this view, stating that the well, being essential for the factory's operations, formed part and parcel of the "plant."

2. Correctness of the Method of Computing Capital for Relief under Section 80J:
The second issue concerned the method of computing capital for relief under section 80J of the Income Tax Act. The assessee argued that certain liabilities, which were due but not payable, should not be deducted for arriving at the capital employed figure. The ITO disagreed, considering the total figure as liability. The AAC, however, upheld the assessee's contention, stating that only moneys and debts due and payable should be deducted. The Tribunal affirmed the AAC's view, relying on a Bombay Tribunal decision. The High Court, however, held that the Tribunal erred in law by not following the Supreme Court's decisions regarding the jurisdiction of the Tribunal to determine the vires of the rule.

3. Allowability of Deduction under Section 80J on the Entire Capital Employed:
The third issue was whether the deduction under section 80J was allowable on the entire capital employed by the assessee without reducing it by borrowed monies and debts. The Tribunal had concluded that the borrowed capital should not be excluded from the computation, based on the language difference between rule 19(3) before and after April 1, 1972. The High Court disagreed, stating that the Tribunal was in error in interpreting "debts owed" or "debts due" to mean only those debts that are due and payable. The Court clarified that "debts owed" includes all debts, whether payable now or in the future, and ruled that the computation of capital employed must deduct borrowed monies and debts owed as per rule 19A(3).

Conclusion:
The High Court answered the first question in the affirmative, affirming the assessee's entitlement to depreciation on the cost of digging a well. However, it answered the second and third questions in the negative, against the assessee, holding that the borrowed monies and debts owed must be deducted in computing the capital employed for relief under section 80J. The Court also rejected the assessee's challenge to the vires of rule 19A(3), stating that such a question could not be entertained in a reference under section 256 of the Act.