1973 (9) TMI 29 - HC - Income Tax

Summary

Issues Involved:
1. Scope and width of clause (5) of rule 19 of the Income-tax Rules, 1962.
2. Computation of capital employed in an industrial undertaking for purposes of section 84 of the Income-tax Act, 1961.
3. Whether the figure arrived at by computation under rule 19(5) should be added to the figure arrived at by computation under rule 19(1) for determining the average capital employed.

Issue-wise Detailed Analysis:

1. Scope and Width of Clause (5) of Rule 19 of the Income-tax Rules, 1962:
The judgment addresses the interpretation of clause (5) of rule 19, which involves a fiction for ascertaining the average amount of capital employed during any computation period. The court elaborates that sub-rule (5) deems profits or losses to have accrued evenly throughout the period, resulting in a corresponding increase or decrease in the capital employed. The court emphasizes that this fiction is essential to accurately determine the actual capital employed, as the assets may not always reflect fluctuations in profits or losses at different stages of the computation period.

2. Computation of Capital Employed in an Industrial Undertaking for Purposes of Section 84 of the Income-tax Act, 1961:
The court discusses the method of computing capital employed as prescribed in rule 19. The assets are classified into four categories: assets entitled to depreciation, assets not entitled to depreciation, assets in the nature of debts, and assets acquired otherwise than by purchase. The valuation of these assets is determined based on their acquisition date and type. Sub-rule (3) provides for the deduction of borrowed money and debts, while sub-rule (4) excludes investments not required for business purposes. The court highlights that the legislative intent is to extend the concession of tax holiday by considering the average capital employed throughout the year.

3. Whether the Figure Arrived at by Computation under Rule 19(5) Should Be Added to the Figure Arrived at by Computation under Rule 19(1) for Determining the Average Capital Employed:
The court examines the contention of the revenue that profits are already reflected in the average valuation of assets, thus negating the need for further addition under sub-rule (5). However, the court disagrees, stating that the fiction in sub-rule (5) is necessary to account for the actual capital employed. The court provides an illustration to clarify that adding half the profit to the average capital computed under sub-rule (1) accurately reflects the capital employed. Consequently, the court concludes that the figure arrived at by computation under rule 19(5) should indeed be added to the figure arrived at by computation under rule 19(1) to determine the average capital employed.

Conclusion:
The court answers the question in favor of the assessee, holding that the figure arrived at by computation under rule 19(5) should be added to the figure arrived at by computation under rule 19(1) for determining the average capital employed. The judgment underscores the importance of the fiction in sub-rule (5) for accurately ascertaining the capital employed in an industrial undertaking, thereby supporting the legislative intent of providing a tax holiday for new industrial undertakings. The court also notes that there should be no order as to costs given the interpretative nature of the issue.