1985 (1) TMI 1 - SC - Income Tax

Interpretation of s. 80J - validity of rule 19A - constitutionality of the retrospective amendment made in s. 80J, by the Finance (No. 2) Act, 1980 - held that Rule 19A(3) of IT Rules 1962 which excludes borrowed monies and debts and long term borrowings in the computation of capital employment by a new industrial undertaking for purposes of s. 80J is valid and within the authority conferred on CBDT under s. 80J

Summary

Issues Involved:
1. Validity of Rule 19A of the Income Tax Rules, 1962.
2. Constitutionality of the retrospective amendment made in Section 80J by the Finance (No. 2) Act, 1980.

Issue-Wise Detailed Analysis:

1. Validity of Rule 19A of the Income Tax Rules, 1962

Background and Legislative History:
- Section 80J of the Income Tax Act, 1961, provides for a deduction from profits and gains derived from an industrial undertaking, ship, or hotel business.
- Rule 19A of the Income Tax Rules, 1962, prescribes the manner of computing the capital employed in such undertakings, explicitly excluding borrowed monies and debts.
- Historical context reveals that similar exclusions were present in the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949, and rule 19 under the Indian Income Tax Act, 1922, and the Income Tax Act, 1961.

Arguments by Petitioners:
- Petitioners argued that the exclusion of borrowed capital under Rule 19A is contrary to the plain language of Section 80J, which does not differentiate between owned and borrowed capital.
- They contended that the rule-making authority exceeded its jurisdiction by excluding borrowed capital, as it alters the substance of the statutory provision.

Arguments by Respondents:
- The respondents, represented by the learned Attorney-General, argued that the term "capital employed" does not have a fixed meaning and can be interpreted to exclude borrowed monies.
- They further contended that the rule-making authority is within its rights to prescribe the manner of computation, which includes the exclusion of certain items.

Judgment:
- The majority held that Rule 19A is valid. It was reasoned that the term "capital employed" is flexible and can be interpreted to exclude borrowed monies.
- The legislative history and consistent legislative practice supported the view that the exclusion of borrowed monies was within the mandate of Section 80J.
- The rule-making authority's power to prescribe the manner of computation includes the ability to exclude borrowed monies, thus Rule 19A does not derogate from the provisions of Section 80J.

Dissenting Opinion:
- The dissenting judge argued that Rule 19A is invalid as it contradicts the clear language of Section 80J, which does not distinguish between owned and borrowed capital.
- The judge emphasized that the rule-making authority cannot encroach upon the substantive provisions of the statute.

2. Constitutionality of the Retrospective Amendment in Section 80J by the Finance (No. 2) Act, 1980

Background:
- The Finance (No. 2) Act, 1980, amended Section 80J to incorporate the provisions of Rule 19A, thereby excluding borrowed capital and fixing the first day of the year for computing the capital employed, with retrospective effect from April 1, 1972.

Arguments by Petitioners:
- Petitioners argued that the retrospective amendment is arbitrary, unreasonable, and violative of Articles 14 and 19 of the Constitution.
- They contended that the retrospective withdrawal of relief granted under Section 80J imposes an undue financial burden on assessees and disrupts their settled financial affairs.

Arguments by Respondents:
- The respondents argued that the retrospective amendment was necessary to clarify the legislative intent and to ensure uniform application of the law.
- They asserted that the retrospective amendment is in the public interest and does not violate constitutional provisions.

Judgment:
- The majority upheld the retrospective amendment, reasoning that it was clarificatory in nature and aimed at resolving the controversy regarding the computation of capital employed.
- The amendment was deemed necessary to maintain consistency in the application of tax laws and to prevent undue advantage to certain assessees.

Dissenting Opinion:
- The dissenting judge held that the retrospective amendment is unconstitutional as it imposes an unreasonable burden on assessees and disrupts their settled financial affairs.
- The judge emphasized that the withdrawal of relief granted by a valid statutory provision with retrospective effect is arbitrary and violative of Articles 14 and 19 of the Constitution.

Conclusion:
The majority judgment upheld the validity of Rule 19A and the retrospective amendment to Section 80J, while the dissenting opinion found both to be unconstitutional. The writ petitions challenging the validity of Rule 19A and the retrospective amendment were dismissed, with each party bearing its own costs.