1979 (12) TMI 97 - AT - Income Tax

Summary

Issues Involved:

1. Conflict between Section 80J of the IT Act, 1961, and Rule 19A of the IT Rules, 1962.
2. Inclusion of borrowed capital in the computation of capital employed.
3. Determination of the date for computing capital employed.

Issue-wise Detailed Analysis:

1. Conflict between Section 80J of the IT Act, 1961, and Rule 19A of the IT Rules, 1962:

The primary issue is whether there is a conflict between Section 80J of the IT Act, 1961, and Rule 19A of the IT Rules, 1962. The contention on behalf of the assessees is that this point was directly in issue before the Special Bench of the ITAT Bombay Bench 'B' in the case of M/S Amar Dye-Chem Limited, Bombay. The Special Bench found that there is a conflict between the Section and the Rule, specifically that Rule 19A(3) of the IT Rules, 1962 is repugnant to Section 80J of the Act. The Tribunal also found that the total value of the assessee's assets of the new industrial undertaking should be taken as capital employed for the purpose of computing the relief under Section 80J of the Act, without deducting any sum by way of liabilities.

The Revenue argued that there is no conflict between Section 80J and Rule 19A(3), and that the Tribunal does not have the power to declare the Rule as repugnant to the Section. The Revenue also contended that the capital employed should only include funds belonging to the assessee, and not borrowed capital.

The Tribunal, after considering the evidence and the decisions of various High Courts, concluded that there is indeed a conflict between Section 80J and Rule 19A(3). The Tribunal adopted the reasoning of the Special Bench and agreed with the findings that Rule 19A(3) is repugnant to Section 80J of the Act.

2. Inclusion of Borrowed Capital in the Computation of Capital Employed:

The second issue is whether borrowed capital should be included in the computation of capital employed for the purpose of Section 80J. The Special Bench of the Tribunal had previously held that the total value of the assessee's assets of the new industrial undertaking should be taken as capital employed for the purpose of computing relief under Section 80J, without deducting any sum by way of liabilities.

The Tribunal noted that the decisions in the cases of Century Enka Limited, Madras Industrial Linings Limited, and Kota Box Manufacturing Company support the inclusion of borrowed capital in the computation of capital employed. These decisions held that Section 80J does not provide that the capital employed must be out of the money belonging to the assessees and that borrowed capital, if employed as capital in the new industrial undertaking, should be taken into account for the purpose of determining rebate under Section 80J.

The Tribunal agreed with the assessees' contention that the total value of the assets of the new industrial undertaking should be taken as the capital employed for the purpose of computing relief under Section 80J, without deducting any sum by way of liabilities.

3. Determination of the Date for Computing Capital Employed:

The third issue is regarding the date for computing capital employed in the industrial undertaking for the purpose of granting relief under Section 80J. The Tribunal noted that Rule 19A(2) of the IT Rules, 1962, is inconsistent with Section 80J in so far as it provides for the computation of the capital employed on the first day of the accounting year. The Tribunal observed that Section 80J does not specify that the relief should be given on the capital employed as on the first day of the previous year.

The Tribunal concluded that the relief under Section 80J should be computed based on the capital employed during the entirety of the previous year. The Tribunal referred to the decision in the case of Century Enka Limited, which held that relief under Section 80J should be given at 6% per annum on the capital employed during the previous year.

The Tribunal further held that Rule 19A(3), in so far as it directs the exclusion of borrowed capital from the assets, is repugnant to Section 80J and should be ignored. Similarly, Rule 19A(2), in so far as it directs that the capital employed on the first day of the computation period should be taken as the basis, is against the provisions of Section 80J and should also be ignored. The other parts of Rule 19A, however, remain valid and should be taken into account while computing the relief under Section 80J.

Conclusion:

The Tribunal allowed the appeals of the assessees regarding relief under Section 80J of the IT Act and dismissed the appeals by the Department. The Tribunal held that there is a conflict between Section 80J and Rule 19A(3) of the IT Rules, 1962, and that borrowed capital should be included in the computation of capital employed. The Tribunal also concluded that the relief under Section 80J should be computed based on the capital employed during the entirety of the previous year.