1988 (4) TMI 113 - AT - Income Tax

Issues Involved:
1. Entitlement to relief under Section 80J of the Income-tax Act for Unit No. 2.
2. Calculation and consideration of capital employed in Unit No. 2.
3. Determination of whether the funds used in Unit No. 2 were borrowed or from surplus capital.

Issue-wise Detailed Analysis:

1. Entitlement to Relief under Section 80J for Unit No. 2:
The primary issue in this appeal is whether the second unit started by the assessee, referred to as Unit No. 2, qualifies for the relief provided under Section 80J of the Income-tax Act for the assessment year 1977-78. The Income-tax Officer (ITO) denied the relief on the grounds that Unit No. 2 was carved out of Unit No. 1, and the financial accounts were mixed, showing liabilities in Unit No. 2 exceeding investments, resulting in a deficiency in capital. Consequently, the borrowings made for Unit No. 2 did not qualify for relief under Section 80J.

2. Calculation and Consideration of Capital Employed in Unit No. 2:
The assessee, a limited company, filed a return declaring a net loss, later revised to claim more relief under Section 80J. The ITO allowed partial relief but disallowed the claim for Unit No. 2, arguing that liabilities exceeded the value of fixed assets on the opening day, resulting in no capital employed to be computed under Section 80J. The ITO's calculation showed gross fixed assets of Rs. 36,10,701 and current assets as nil, with secured loans and dues from Plant 1 exceeding these assets, leading to the conclusion that no capital was employed in Unit No. 2.

3. Determination of Whether Funds Used in Unit No. 2 Were Borrowed or from Surplus Capital:
The Commissioner (A) analyzed the balance sheet and observed that the total amount invested in Unit No. 1 exceeded the aggregate share capital and reserves, indicating that borrowed funds were required even for Unit No. 1. Thus, the claim that Rs. 36,11,901 was invested in Unit No. 2 out of reserves and share capital was deemed incorrect. The Commissioner (A) agreed with the ITO that there was no positive figure of capital employed in Unit No. 2 for Section 80J relief.

Appellant's Arguments and Tribunal's Analysis:
The assessee argued that there was enough surplus capital in Unit No. 1 to advance money to Unit No. 2, and Unit No. 2 was not financed by borrowed funds. The Tribunal analyzed the figures of both the head office (Plant No. 1) and Unit No. 2, noting that Plant No. 1 had current assets exceeding current liabilities by Rs. 61.66 lacs, representing available working capital. The Tribunal considered whether this surplus was utilized for investment in Unit No. 2 and concluded that since the borrowals and own capital were mixed, a presumption could be made that working capital was out of share capital reserves.

Conclusion:
For the purposes of Section 80J, Unit No. 2 must be regarded as an independent new industrial undertaking. The Tribunal referred to the Delhi High Court decision in Gedore Tools India (P.) Ltd., which stated that surplus/reserve capital utilized for acquiring assets for a new undertaking qualifies as employment of capital for Section 80J relief. The Tribunal concluded that the sum of Rs. 36 lacs received from the head office could be regarded as capital for Unit No. 2, entitling the assessee to the relief claimed. The authorities were directed to compute the capital properly and allow the relief.

Judgment:
The appeal was allowed, and the assessee was granted the relief under Section 80J for Unit No. 2.

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