1987 (5) TMI 99 - AT - Income Tax

Summary

Issues:
Claim for benefit under s. 80J of the IT Act based on the capital employed by the assessee on a specific date.

Analysis:
The appeal before the Appellate Tribunal ITAT Pune revolved around the sole issue of the assessee's claim for benefit under section 80J of the Income Tax Act. The relevant accounting period for the assessee was from 1st October 1976 to 30th November 1977. The Income Tax Officer (ITO) had initially denied the benefit under section 80J, citing that the capital employed by the assessee resulted in a negative figure. The ITO based this decision on the capital employed as of 1st October 1976. However, the assessee contended that the business was set up on 1st May 1977, and thus, the capital employed on that specific date should be considered. The Appellate Assistant Commissioner (AAC) ruled in favor of the assessee, directing the ITO to consider the capital employed as on 30th April 1977.

During the proceedings, the departmental representative highlighted Explanation 2 to section 80J(1), which defines the computation period as the duration for which profits and gains of the industrial undertaking are computed. The representative argued that since the assessee calculated profits for the period from 1st October 1976 to 30th November 1977, the capital employed as of 1st October 1976 should be taken into account. Conversely, the assessee's counsel contended that the computation period referred to the previous year as defined in section 3. The counsel pointed out specific clauses supporting the argument that the capital employed at the time of setting up the business should be considered.

The Tribunal held that the date of setting up the business is crucial for determining eligibility for benefits under section 80J, regardless of the income calculation period chosen by the assessee. It emphasized that an industrial undertaking cannot generate profits until its machinery is operational. Therefore, the capital employed in the machinery should only be considered when the machinery starts operations. In this case, the machinery commenced operations on 1st May 1977, making that the relevant date for determining the capital employed. The Tribunal rejected the departmental representative's argument based on the definition of the previous year in section 3, as it aligned with the assessee's position. Consequently, the Tribunal upheld the AAC's decision and dismissed the appeal, affirming the assessee's entitlement to benefit under section 80J.