1997 (2) TMI 5 - SC - Income Tax

Held that the moment an asset is acquired or purchased for the purpose of the business, it is capital employed, though the asset as such is not actually utilised or used during the accounting year. In the chain of events, the earliest event is the purchase or acquisition of the asset. That by itself entitles the assessee to get the relief. The employment of the capital is done or over. The subsequent or later events, including the actual user of the asset, have nothing to do in the matter

Issues Involved:
1. Interpretation of "capital employed in the undertaking" under sections 84(1) and 80J of the Income-tax Act, 1961.
2. Whether the cost of plant and machinery not installed and workshops under construction can be included in the capital employed for tax relief purposes.

Detailed Analysis:

1. Interpretation of "capital employed in the undertaking" under sections 84(1) and 80J of the Income-tax Act, 1961:

The primary issue in both appeals revolves around the interpretation of the phrase "capital employed in the undertaking" as mentioned in sections 84(1) and 80J of the Income-tax Act, 1961. The court examined whether this phrase necessitates the actual use of the assets during the accounting period or if it merely requires that the capital has been invested in acquiring the assets.

In Civil Appeal No. 1274 of 1980, the respondent-assessee, a public limited company, started a new industrial undertaking at Bhavnagar in the assessment year 1962-63. The assessee claimed relief under section 84 of the Act for the cost of plant and machinery not installed and workshops under construction, totaling Rs. 21,17,178. The Income-tax Officer denied the relief, arguing that the assets were not put to use during the accounting period.

The Appellate Tribunal, however, held that the industrial undertaking at Bhavnagar formed an integral whole, and the new workshops under construction were part and parcel of that undertaking. The Tribunal concluded that "the capital employed in the undertaking" should be distinguished from "assets used in the undertaking," and relief under section 84 is based on capital utilized for acquiring the asset, irrespective of its actual use during the relevant year.

The High Court of Bombay concurred with the Tribunal and answered the referred question in the affirmative, favoring the assessee. The Supreme Court upheld this interpretation, stating that section 84(1) affords relief the moment "the capital is employed in the undertaking." The section does not specify that the asset should be actually used or utilized.

2. Whether the cost of plant and machinery not installed and workshops under construction can be included in the capital employed for tax relief purposes:

The court examined the relevant provisions of the Income-tax Rules, 1962, particularly rules 19(1) and (6), which outline the computation of capital employed in an industrial undertaking. The Revenue argued that relief under section 84 was meant only for assets actually used in the business, while the assessee contended that the capital employed includes assets acquired for the business, regardless of their actual use.

The court referred to the interpretation placed by the House of Lords in similar contexts and decisions of various High Courts, including the Calcutta High Court in CIT v. Indian Oxygen Ltd. [1978] 113 ITR 109 and the Karnataka High Court in Ravi Machine Tools (P.) Ltd. v. CIT [1978] 114 ITR 459. These decisions emphasized that the moment capital is utilized for acquiring any asset for a business, it becomes employed in the business, irrespective of the asset's actual use.

The Supreme Court agreed with this interpretation, stating that once an asset is acquired or purchased for business purposes, it constitutes capital employed. The actual use of the asset during the accounting year is immaterial. The court concluded that the law laid down in Indian Oxygen Ltd.'s case and followed in Alcock Ashdown and Co.'s case represents the correct legal position.

Conclusion:

The Supreme Court dismissed the appeals, affirming that the cost of plant and machinery not installed and workshops under construction can be included in the capital employed for tax relief purposes under sections 84(1) and 80J of the Income-tax Act, 1961. The court emphasized that the capital is considered employed the moment it is utilized for acquiring assets for the business, irrespective of their actual use during the relevant year.

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