1986 (11) TMI 88 - AT - Income Tax

Business Expenditure, Capital Employed, Expenditure Incurred, Industrial Undertaking, Profits And Gains

Summary

Issues Involved:
1. Computation of capital employed for Section 80J(1) deduction.
2. Deduction of liabilities from the aggregate value of assets.
3. Treatment of borrowed funds and debts owed by the head office.
4. Disallowance of capital expenditure.

Issue-wise Detailed Analysis:

1. Computation of Capital Employed for Section 80J(1) Deduction:
The primary issue was whether, in computing the capital employed in the assessee's newly established undertakings, the amount due to the head office, representing borrowed monies and debts owed by the head office to third parties, should be deducted from the aggregate amounts representing the values of the assets of the respective undertakings for the purpose of determining the qualifying amount deductible under Section 80J(1) of the Income-tax Act, 1961.

2. Deduction of Liabilities from the Aggregate Value of Assets:
The ITO held that the liabilities shown in the balance sheet, including current liabilities and head office/division current account, needed to be deducted from the aggregate value of the assets for computing the relief under Section 80J(1A)(III). This was because the investment in the plant was made out of borrowed funds, not from the company's capital and accumulated reserves.

3. Treatment of Borrowed Funds and Debts Owed by the Head Office:
The Commissioner (Appeals) allowed the assessee's claim under Section 80J, stating that the borrowings were peculiar to the appellant due to the nature of its business transactions with Indian Oil Corporation. The Commissioner (Appeals) cited the case of Indian Oil Corpn. Ltd. v. S. Rajagopalan, ITO [1973] 92 ITR 241 (Bom.), where it was held that current liabilities incidental to business do not fall under the mischief of rule 19A or amended Section 80J(1A).

The departmental representative argued that the Supreme Court's decision in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308 should apply, which held that only the owner's capital should be considered for Section 80J(1) and borrowed monies should be excluded.

The assessee's counsel contended that the debts owed by the head office should not be deducted from the aggregate value of the assets of the undertakings, as these were not the undertakings' liabilities but those of the head office. The Tribunal, however, found that the amount shown as a liability in the branch balance sheet representing money owed to the head office was, in substance, borrowed money by the assessee for the industrial undertakings and thus needed to be considered under Section 80J(1A)(III).

4. Disallowance of Capital Expenditure:
For the assessment year 1979-80, the ITO disallowed Rs. 1,29,471 as capital expenditure incurred for office renovation, considering it as an expenditure that provided an enduring benefit. The Commissioner (Appeals) deleted this addition, relying on the Delhi High Court decision in Instalment Supply (P.) Ltd. v. CIT [1984] 149 ITR 52, which held that the expenditure incurred for redesigning a tenanted premise for better efficiency was not a capital expenditure.

The Tribunal upheld the Commissioner (Appeals)'s decision, agreeing that the expenditure was for achieving better efficiency and did not provide an enduring benefit, thus not warranting capital expenditure treatment.

Conclusion:
The appeals for the assessment years 1978-79, 1980-81, and 1981-82 were allowed, reversing the Commissioner (Appeals)'s order and restoring the ITO's order rejecting the assessee's claim under Section 80J. The appeal for the assessment year 1979-80 was allowed in part, upholding the deletion of the capital expenditure disallowance.