1986 (11) TMI 89 - AT - Income Tax

Summary

Issues Involved:
1. Computation of capital employed under Section 80J(1) for the assessee's newly established undertakings.
2. Deduction of liabilities from the aggregate value of assets for the purpose of Section 80J(1).
3. Carry-forward of deficiency under Section 80J(3).
4. Classification of office renovation expenses as capital or revenue expenditure.

Issue-wise Detailed Analysis:

1. Computation of Capital Employed under Section 80J(1):
The primary issue was whether the amounts due to the Head Office, representing borrowed monies and debts owed by the Head Office to third parties, should be deducted from the aggregate value of the assets of the newly established undertakings to determine the qualifying amount deductible under Section 80J(1). The assessee set up multiple industrial units and claimed deductions under Section 80J based on the capital employed in these units. The Income Tax Officer (ITO) rejected these claims, asserting that the investments were made out of borrowed funds and not from the assessee's capital and reserves.

2. Deduction of Liabilities from Aggregate Value of Assets:
The ITO held that the liabilities shown in the balance sheet, including current liabilities and amounts due to the Head Office, should be deducted from the aggregate value of the assets of the undertakings. The ITO's position was supported by the provision in Section 80J(1A)(III) introduced by the Finance (No. 2) Act, 1980, with retrospective effect from 1st April 1972. The assessee argued that the debts and borrowings were of the Head Office and not of the undertakings, and hence should not be deducted. The Tribunal, however, concluded that the amount shown as monies owed to the Head Office would, in substance, be the amount borrowed by the Head Office, and thus needed to be taken into account for computing the capital employed in the undertakings.

3. Carry-forward of Deficiency under Section 80J(3):
For the assessment years 1979-80 and 1980-81, the assessee claimed the carry-forward of deficiency under Section 80J(3) due to losses suffered in the industrial undertakings. The ITO rejected these claims on the grounds that the investments were made out of borrowed funds. The Tribunal upheld the ITO's decision, reiterating that the capital employed should be computed after deducting borrowed funds.

4. Classification of Office Renovation Expenses:
For the assessment year 1979-80, the ITO classified the expenditure on office renovation, including false ceilings and partitioning, as capital expenditure, arguing that it provided an enduring benefit. The CIT(A) reversed this decision, relying on the Delhi High Court decision in Instalment Supply P. Ltd. vs. CIT. The Tribunal agreed with the CIT(A), concluding that the expenditure was incurred for better efficiency and did not result in an enduring benefit, thus classifying it as revenue expenditure.

Conclusion:
The Tribunal reversed the CIT(A)'s order for the assessment years 1978-79, 1980-81, and 1981-82, restoring the ITO's order rejecting the assessee's claim under Section 80J. For the assessment year 1979-80, the Tribunal allowed the appeal in part, upholding the CIT(A)'s decision on the classification of office renovation expenses as revenue expenditure.