Interpretation of the term "Capital employed" in Section 80J of Income Tax Act 1961. - Income Tax - 1238/CBDT

INSTRUCTION NO. 1238/CBDT Dated : February 21, 1979 Section(s) Referred: 80J Statute: Income - Tax Act, 1961 In recent past, the controversy regarding interpretation of the term "Capital employed" in Section 80J read with Rule 19A has arisen after the two decisions of the Calcutta High Court both in the case of Century Enka Ltd. Vs. ITO (107 ITR 123 and 107 ITR 909) which decisions have been followed by the Madras High Court in Madras Industrial Linings Ltd. Vs. ITO (110 ITR 256) and also by the Allahabad High Court in Kota Box Manufacturing Company Vs. ITO (1989 TLR 640). It has been held that the Rule 19A(3) is ultra vires the rule-making power of the Board in as much as it provides for exclusion of borrowed money employed as capital in a new industrial undertaking from the quantum of capital employed. A number of writs on the same issue have been filed by the assessee in the Supreme Court which are pending after admission [M/s.Bharat Steel Tubes Ltd., Gedore Tools India Ltd., M/s.Catalyst Chemicals India (West Asia) Ltd. and M/s.Western Enterprises and another (WP Nos. 501 and 502 of 1977, 1895 to 1897 and 2648 of 1978 and WP Nos. 3810 to 3813 of 1978)]. 2. The Department is contesting the adverse decisions of the aforesaid High Courts. Against the single judge's decision in the case of Century Enka Ltd. appeal has been filed before the Division Bench of the Calcutta High Court and the same is pending. Against the Madras decision, petition for special leave to appeal has been filed in the Supreme Court. Against the Allahabad decision, by certificate of the High Court, an appeal has been filed in the Supreme Court. As huge stakes of revenue are involved and the controversy is still unsettled, it is necessary to keep the matters alive in all cases of assessees even within the jurisdiction of the Calcutta, Madras and Allahabad High Courts. For that purpose , the Board consider that the ITOs may continue to follow the existing Departmental view, till such time as an authoritative pronouncement on the subject is available from the Supreme Court, subject, of course, to the recovery of tax raised in assessment orders not being enforced within Calcutta, Madras and UP Charges till the decision of the Supreme Court. The fact that recovery is not being enforced in view of the High Court decision may be specifically brought out in the relevant orders.