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TMI Blog1980 (4) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... -(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the aggregate of the deductions, if any, admissible to the assessee under section 80H and section 80HH) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year):...... (2) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggregate of the amounts, as on the first day of the computation period, of borrowed moneys, and the debts owed by the assessee (including amounts due towards any liability in respect of tax) not being, (a) in the case of an assessee being a company, the amount of its debentures, if any, and (b) in the case of any assessee (including a company), any moneys borrowed from an approved source for the creation of a capital asset in India, if the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years. Explanation.-For the purpose of this sub-rule, (i) 'approved source' means the Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India Ltd. or any banking institution or any person in country outside India or any of the following financial institutions, namely: (a) a State Financial Corporation established under the State Financial Corporations Act, 1951 (63 of 1951); (b) the Industrial Development Bank of India, established under the Industrial Development Bank of India Act, 1964 (19 of 1964); (c) the Madras Industrial and Investment Corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d " in respect of the previous year " should be calculated, and (iii) r. 19A(3) directs the value of the asset as per the written down value after allowing for depreciation should be taken as the capital employed in the industrial undertaking in that previous year, is ultra vires s. 80J of the Act. W. P. Nos. 6001, 6002 and 6003\78: These three writ petitions are by the India Fruits (Private) Ltd., Kadiyam, represented by its managing director. The petitioner is a private limited company. In these three writ petitions, the reassessment order for the income-tax assessment year 1970-71, assessment order for the income-tax assessment year 1976-77 and reassessment order for the income-tax assessment year 1969-70, respectively, are challenged and writ of certiorari to quash each of the said orders is prayed for. Suffice, for the appreciation of the contentions in these writ petitions and the disposal of the same, to refer to the facts in Writ Petition No. 6001/1978. The petitioner-company was initially assessed by order dated 26th February, 1971, for the assessment year 1970-71 on an income of Rs. 24,89,970 allowing relief at 6% under s. 80J of the I.T. Act, 1961, to the extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyed in its new industrial undertaking for the assessment years 1974-75 and 1975-76, respectively, by taking into account not only the assets on the first day of the computation period but also assets acquired up to the end of the computation period and further to compute the moneys borrowed and debts owed by the petitioner-company in the capital employed by it in the industrial undertaking in the relevant assessment years. It would be sufficient to mention the facts in W. P. No. 6005/1978, so far as these two writ petitions are concerned. The petitioner-company filed a return for the income-tax assessment year 1974-75 on June 22, 1974. It filed a revised return on December 18, 1976. In both these returns, it claimed relief under s. 80J of the I.T. Act, 1961, at 6% on a total capital of Rs. 1,81,19,282 employed in the new industrial undertakings comprising of Delay Detonators Unit, Boosters Unit, High Explosives Unit and PETN Unit. The relief claimed amounted to Rs. 10,87,156. The ITO by his order dated September 29, 1977, allowed relief of Rs. 1,60,614 on Delay Detonators Unit and Boosters plant but not on High Explosives Unit and PETN Unit. The petitioner-company filed an appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down by r. 19A(3), the moneys borrowed and debts owed by the petitioner-assessee for granting relief under s. 80J. It is the petitioner-assessee's contention that rr. 19A(2) and 19A(3) in so far as they direct as above, are ultra vires of s. 80J. The petitioner is a public limited company to which s. 80J of the Act applies and is assessed as such under the I.T. Act, 1961. It started a pharmaceutical unit in August, 1968. It is assessed to income-tax and its assessment year is the calendar year. For the purpose of application of s. 80J for the assessment year 1969-70, the previous year was 1968-69. During the calendar year 1969-70, which was the second year of the pharmaceutical unit, the ITO, by his order dated August 6, 1970, following r. 19A of the I.T. Rules, 1962, granted certain reliefs, but not to the extent claimed by the assessee in respect of the said industrial undertaking. Aggrieved by that order, the assessee preferred an appeal to the AAC. Before the AAC, the assessee contended that the liabilities of the assessee should not be deducted in computing the capital employed in the industrial undertaking for the purpose of granting relief under s. 80J of the Act. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quiring the asset and not at the written down value after allowing for depreciation, was not raised. Rule 19A was slightly amended and, as it stood applicable to the assessment year 1974-75, read as follows: 19A. (1) For the purposes of section 80J, the capital employed in an industrial undertaking or the business of a hotel shall be computed in accordance with sub-rules (2) to (4), and the capital employed in a ship shall be computed in accordance with sub-rule (5). (2) The aggregate of the amounts representing the values of the assets as on the first day of the computation period, of the undertaking or of the business of the hotel to which the said section 80J applies, shall first be ascertained in the following manner: (i) in the case of assets entitled to depreciation, their written down value ; (ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee; (iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business; (iv) in the case of assets being debts due to the person carrying on the business, the nominal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he capital. (5) The capital employed in a ship shall be taken to be the written down value of the ship as reduced by the aggregate of the amounts owed by the assessee as on the computation date on account of moneys borrowed or debts incurred in acquiring that ship. Explanation.-In this sub-rule 'computation date', in relation to ship, means, (a) in respect of the previous year in which the ship is first brought into use, the date on which it is so brought into use; (b) in respect of any subsequent previous year, the first day of such previous year." The ITO, the AAC as well as the Appellate Tribunal rejected the assessee's contention on all the points raised by it. It is unnecessary to mention the several averments made in the counters filed in these several writ petitions, for, ultimately if the principal contention raised by the petitioners viz., that rr. 19A(2), 19A(3) and 19A(2)(i) are ultra vires, is accepted, the assessment orders have to be quashed and the matter remitted to the appropriate ITOs for fresh assessment and if the contention is rejected it would not be open to this court to go into the correctness of the assessments on facts of each case. We, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same in the new industrial undertaking should be deducted. In so directing, r. 19A(3) runs contrary to the express provision of s. 80J and also the intendment of the said provision.. It is, therefore, necessary to ascertain what the terms " capital employed " and " industrial undertaking " mean. " Capital " has not been defined under the Act. In Black's Dictionary, at p. 262, " capital " is stated to mean " aggregation of all capital ". In American Jurisprudence, Vol. 13, item 172, it is stated that whatever is invested in an undertaking is capital. The term " employed " means, as stated in Webster's Dictionary, p. 476, " to make use of or use ". Thus, capital from whatever source it may have been raised, whether it belongs to the assessee himself or it is raised by the assessee from other individuals or institutions by way of borrowing or hand-loans, if used in the industrial undertaking, would be it capital employed ". Merely because the funds have been raised by way of borrowings, they do not cease to be capital employed in the undertaking. So far as the undertaking is concerned, the capital, whether raised from out of the assessee's own funds or out of his borrowings, yield ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany registered in the taxable territories with a paid-up capital of not less than five hundred thousand rupees ; (c) is run in premises which are owned by the company; (d) has such number and types of guest rooms and provides such amenities as may be prescribed, having regard to the population and the tourist importance of the place in which the hotel is located; and (e) is for the time being approved for the purposes of this sub-section by the Central Government. (3) The profits or gains of an industrial undertaking or a hotel to which this section applies shall be computed in accordance with the provisions of section 10. (4) The tax shall not be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him by an industrial undertaking or a hotel as is attributable to that part of the profits or gains on which the tax is not payable under this section. Explanation.-The amount of dividend in respect of which the tax is not payable under this sub-section shall be computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue. (5) Nothing in this section shall affect this application of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e workers in a manufacturing process carried on without the aid of power: Provided that the condition in clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section: Provided further that the condition in clause (ii) shall be deemed not to have been contravened if the industrial undertaking is set up in rented premises. (3) This section applies to the business of any hotel where all the following conditions are fulfilled, namely: (a) the business of the hotel starts functioning on or after the 1st day of April, 1961, and is not formed by the splitting up, or the reconstruction, of a business, already in existence or by the transfer, to a new business, of a building previously used as a hotel, or of any machinery or plant previously used for any purpose; (b) the business of the hotel is owned and carried on by a company registered in India with a paid-up capital of not less than five hundred thousand rupees; (c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Chapter XI in relation to the profits and gains derived from an industrial undertaking or business of a hotel or from a ship to which this section applies. (7) The provisions of this section shall, in relation to an industrial undertaking, apply to the assessment (i) for the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles, or, as the case may be, operate the cold storage plant or plants, and (ii) where the assessee is a co-operative society, for the six assessment years immediately succeeding, and where the assessee is any other person for the four assessment years immediately succeeding. (8) The provisions of this section shall, in relation to the business of hotel, apply to the assessment for the financial year next following the previous year in which the business of the hotel starts functioning and for the four assessments immediately succeeding. (9) The provisions of this section shall, in relation to a ship, apply to the assessment for the assessment year relevant to the previous year in which the ship is brought into use by the Indian company and for the four assessment years immediately succe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in an industrial undertaking may be a certain sum if that sum comprises of assessee's own funds and also funds raised by way of borrowings and debts, that which is raised by the assessee by way of borrowings or debts should be deducted. But for r. 19A, the capital employed in the industrial undertaking would have been the aggregate of all sums from whatever source they may have been raised. But as a result of the direction contained in r. 19A(3) the capital employed would be the aggregate of all such sums less the borrowed monies and debts due by the assessee. The amount of capital employed calculated in accordance with r. 19A(3) would be different from and less than the amount of capital employed as envisaged by s. 80J. It is well settled that when a rule framed in exercise of the rule making authority conferred by the Act travels beyond the scope of the section or takes away the benefit conferred by the Act, that rule cannot be sustained. The Supreme Court in Director of Inspection of Income-tax (Investigation) v. Pooran Mall Sons [1974] 96 ITR 390, dealing with the question whether r. 112A of the I.T. Rules, 1962, could whittle down the power of the ITO under s. 132 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the fact that r. 19A was placed before the Houses of Parliament and was not amended, modified or annulled by Parliament would not render it immune from attack if it takes away the benefit conferred by the Act. In construing a taxing provision especially where such provision grants exemption from liability to tax or grants some allowance in the matter of assessing the income to tax with a view to give an impetus to industrial development, the provision must be construed liberally. Section 80J being one such provision, the interpretation of that provision should not be such as to deprive its benefit to the assessee (owner) of new industrial undertaking. Merely because power is conferred on the Board to frame rules for the purpose of computing the capital employed, a rule cannot be so framed as to take away this benefit. In CIT v. Gaekwar Foam and Rubber Co. Ltd. [1959] 35 ITR 662, a Bench of the Bombay High Court, dealing with s. 15C of the Indian I.T. Act, 1922, at p. 672 observed: " The object (of section 15C) is to benefit newly established industrial undertakings .... that a provision relating to exemption must as far as possible be liberally construed and in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of the deductions in respect of profits and gains from newly established undertakings, the capital employed, even according to s. 80J would be only such capital as is computed in the manner prescribed in respect of the previous year relevant to the assessment year. According to him, it is not " capital employed " as understood in the ordinary sense or common parlance nor according to the dictionary meaning of these terms, but as prescribed by the rules framed in exercise of the rule-making authority conferred on the Government/Board. In other words, according to him, the Legislature, while declaring that the deductions from profits and gains at a rate not exceeding 6% should be allowed on the capital employed in the new industrial undertaking, at the same time, intended that the power to frame rules to compute the capital employed should be conferred on the Central Govt./Board having regard to the conditions and circumstances existing from time to time. The Legislature in its wisdom thought it expedient to confer this wide power on the rule-making authority and if the rule-making authority in exercising that power has, in its discretion, framed a rule directing the computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessarily be understood as any person engaged in an industrial undertaking understands it or as that expression is understood in business or mercantile use. Mr. Rama Rao, learned counsel for the revenue, also pointed out that r. 19(3) in so far as it directs the deduction of borrowings and debts due by the assessee does not lay down anything unusual. In several taxation statutes in computing the capital, current liabilities and borrowings are excluded. He referred in this behalf to s. 2(3) of the E.P.T. Act, 1940, which defines the " average amount of capital " as follows: " ' Average amount of capital' means the average amount of capital employed in any business as computed in accordance with the Second Schedule. " In the Second Schedule of the said Act are the rules for computing the " average amount of capital ". Rule 2(1) of the Second Schedule of the said Act directs that any borrowed money and debts shall be deducted and in particular there shall be a deduction of debts incurred in respect of the business for income-tax or super-tax or excess profits tax or for advance payments due under any provisions of the Indian I.T. Act, 1922 (XI of 1922), or for any further s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits, exceeds the aggregate of (i) any money borrowed by it which remains outstanding; and (ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under this rule. Explanation 1.-A paid up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act. Explanation 2.-Any premium received in cash by the company on the issue of its shares standing to the credit of the share premium account shall be regarded as forming part of its paid up share capital. Explanation 3.-Where a company has different previous years in respect of its income, profits and gains, the computation of capital under rule I and rule 2 of this Schedule shall be made with reference to the previous year which commenced first. " It also lays down that the money borrowed which remains outstanding shall not be includible under the C. (P.)S.T. Act, 1964 (VII of 1964). Rules for computing the capital of a company for the purpose of surtax are contained in the said Schedule to that Act. Those rules also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of s. 80J nor is it contended that the Legislature cannot limit the scope of the expression " capital employed " by way of definition or by framing rules incorporated in the Schedule to the Act itself. The power of the Legislature to delegate the authority to frame rules by way of subordinate legislation is also not questioned. We, therefore, deem it unnecessary to refer in detail to the several decisions relied upon by Mr. Rama Rao, learned counsel for the revenue, in support of his contention that the Legislature has authority to delegate the power to select persons which was upheld in Bangalore Woollen, Cotton and Silk Mills Co. Ltd. v. Bangalore Corporation, AIR 1962 SC 1263, or the power given to the Municipal Corporation to tax by framing rules which came up for consideration in Corporation of Calcutta v. Liberty Cinema, AIR 1965 SC 1107, or the decision in Babu Ram Jagdish Kumar and Co. v. State of Punjab, AIR 1979 SC 1475, where the power to impose tax on certain items by amending the Schedule was held to be valid. Reliance was also placed on the decision in Cobb Co. Ltd. v. Kropp [1967] AC 141, at p. 154, wherein it was held as follows: "' The Indian legislatur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny general intent of the Legislature that in computing the capital employed the borrowings or debts due by the assessee should be excluded. This factual assumption by itself is not correct. It would be seen that under the E.P.T. Act, 1940, while under r. 2 borrowed money was to be deducted for computing the average amount of capital, after r. 2(a) was inserted by s. 9 of the E.P.T. (Second Amendment) Act, 1941 (XXIV of 1941), with effect from April 1, 1941, for the purpose of computing the average capital, no deduction was to be made in respect of borrowed money. The Business Profits Tax Act, 1947, does not indicate any particular pattern. The S. P. T. Act (XIV of 1963), among others, provides for computing the capital of a company by diminishing it by the amount by which the cost to it of the assets exceeds the aggregate of any money borrowed by it which remains outstanding. The C. (P.) S. T. Act, 1964, takes long term borrowings into account till 1972, in computing the capital of a company for the purpose of surtax. But, with effect from April 1, 1972, they are not taken into account. Thus, no particular pattern is disclosed by these enactments so as to conclude that s. 80J also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at under s. 35D of the I.T. Act, 1961, itself, which allows amortisation of certain preliminary expenses, the capital employed in the business of a company includes long-term borrowings. If this be any indication, there is no reason why under r. 19A borrowings should be excluded. What can, therefore, be deduced is that no particular pattern is disclosed in the matter of computing the capital employed for various purposes either under the I.T. Act, 1961, itself or under the aforesaid four enactments, the objects of which are different from the object of s. 80J. That cannot, therefore, form the basis for holding that the Legislature in enacting s. 80J itself envisaged that the borrowings and debts due by the assessee should be excluded and, therefore, a provision to that effect made by way of subordinate legislation under r. 19A(3) is valid. To contend that since s. 80J lays down that capital employed in an industrial undertaking shall be computed in the manner prescribed, the rule-making authority could make any rule as it deemed fit, would be to allow the object of the Legislature to be defeated, which intended that the deduction should be allowed on the entire capital employed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, one must construe the said section reasonably in the context of the purpose for which the section has been introduced. It is a well-settled canon of construction that the provision relating to exemption must as far as possible be liberally construed and in favour of the assessee provided in doing so no violence was being done to the language used ". If the rule is interpreted as contended for the revenue, it would defeat the very purpose of the enactment especially in these days when the " capital employed " in the industrial undertaking is largely raised by way of borrowings and debts by the assessee from various financial institutions. It would also work out very inequitably on different types of entrepreneurs. It is common knowledge that with a view to encourage entrepreneurs and aid rapid industrial growth, the welfare State is coming forward in a big way to advance moneys through banks and other financial institutions for setting up new industrial undertakings. In the case of technically qualified but unemployed persons huge amounts are advanced from financial institutions sometimes even up to 90 per cent. for the purpose of raising capital to be employed for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule-making authority cannot restrict the scope of this expression by framing a rule that the money borrowed and the debts due by the assessee shall not be included in Computing the capital employed. That is to say, if capital employed in the industrial undertaking, but for the rules, means a certain quantum by any mode of computation prescribed by the rules, this quantum cannot be reduced. An artificial definition of an expression may be given by the Legislature but where the Legislature has omitted to give any artificial definition for the purpose of the Act, that expression must be understood in the context in which it is used by the persons engaged in such business or undertaking ; in other words, it should be understood in the ordinary commercial or mercantile usage. A subordinate legislative authority as the rule-making authority cannot give an artificial meaning to the expression which the Legislature did not itself do or intend to do. That would be exceeding the power vested in the rule-making authority. It only authorises the rules to be framed for the method of computation and not for altering the scope and ambit of what is meant by capital employed in the industrial un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary but under that garb it cannot extend the definition of the term 'industrial disputes' nor is this extended meaning necessary to subserve the objects of the Act. " But when the Legislature in enacting s. 80J has not restricted its meaning and has envisaged the rules to be framed for merely computing the capital employed and such rules cannot whittle down what is meant by capital employed in the ordinary commercial parlance, it is, therefore, necessary to gather what" capital employed" means in the ordinary mercantile usage. In Black's Law Dictionary, 4th Edn., at p. 263, it is stated in regard to " capital " that " the word may have different meanings when used in different connections .... It may mean actual property or estate; aggregate of property; all capital invested plus surplus or undivided profits; money required of partners by agreement; money which one adventures in an undertaking ; the income is the fruit of capital ; capital is the source of income ". In American Jurisprudence, vol. 13, item 172, at p. 297, it is stated that "the term 'capital' generally distinguished from the capital stock of corporation, is sometimes used broadly to indicate the entire as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rant any attempt to exclude any amounts invested in an undertaking merely on the ground that such moneys are raised not from out of the enterpreneurs' or the assessees' own funds but are raised by way of borrowings or advances. Any such interpretation would debar the large number of undertakings of technically educated unemployed and others starved of their own funds who are eager to start industries and need the protection of s. 80J more than those entrepreneurs who have large funds of their own to set up new industrial undertakings. That could never be the intention of the Legislature in enacting s. 80J in a welfare State which has an objective of rapid industrialisation by attracting otherwise qualified enterpreneurs but (who are) only starved of finances. There is no warrant for limiting the scope of the expression "capital employed " by excluding therefrom borrowings by or advances made to the assessees, in the application of s. 80J. In so far as r. 19A(3) directs that borrowings of and debts due by the assessee should be excluded from the capital employed is contrary to the intendment of s. 80J. In so providing it does not seek to lay down the method of computation but seeks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f it is employed as capital in a new industrial undertaking, in my opinion, is entitled to computation... There is, in my opinion no warrant for restricting the computation of the capital in the manner done and in so far as rule 19A(3) does so, in my opinion, it is violative of the authority given under section 80J and is not carrying out the purpose of the Act'. " In coming to that conclusion the court earlier observed (p. 914): " That in s. 80J the relief is granted on the basis of 'capital employed n the industrial undertaking'. Therefore, the relief is on the capital employed in the industrial undertaking. The authority of the rule-making body is to prescribe the rules for computation of that capital. But the relief is not restricted to capital employed in the shape of the assessee's own money. What is necessary for the grant of the relief is employment in the new industrial undertaking and employment in the shape of capital. " These two ingredients of s. 80J have to be satisfied in order to be entitled to this benefit. In Indore Malwa United Mills Ltd. v. State of M. P. [1965] 55 ITR 736 (SC), dealing with the question of trading loss with reference to the amount borro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch would amount to excessive delegation. Naturally we have to give a meaning, to the section which will not make the section otiose. " It accordingly struck down the rule as violative of s. 80J. In Kola Box Manufacturing Co. v. ITO [1980] 123 ITR 638 a Bench of the Allahabad High Court in declaring r. 19A(3) ultra vires of s. 80J followed the earlier decisions of the Calcutta High Court in Century Enka Ltd. v. ITO [1977] 107 ITR 909 and Madras Industrial Linings Ltd. v. ITO [1977] 110 ITR 256 and referred to what was stated by the Madras High Court with respect to the words " capital employed used in s. 80J mean (pp. 639, 640): " The amounts that have been employed as capital in the business. There is no indication that the capital employed must have come from any particular source or sources. There is no reference at all to the nature of the capital that is employed. The capital can be that which a company possessed, namely, share capital or other moneys belonging to the company. It may also be moneys that have become moneys of the company because the company had borrowed, and if that money had been employed as capital by the company, that amount will be capital employed for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns from a newly established industrial undertaking in certain cases, the capital employed in the industrial undertaking should be computed as on the first day of the computation period of the undertaking. It directs the computation of the capital employed in the industrial undertaking " in respect of the previous year ". The previous year relevant for the assessment year for an industrial undertaking may be the financial year or the calendar year or from deepavali to deepavali. Capital is employed in an industrial undertaking, be it new or old, not on any particular day nor only on the first day of any year. It will be employed from time to time as the exigencies of the industrial undertaking require. In particular undertaking on the first day of the previous year relevant to the assessment, year of that industrial undertaking, no capital may have been employed but on and from the very next day large amounts of capital may have been employed or the new industrial undertaking may itself be started after the first day of that year. When s. 80J directs that the capital employed in that industrial undertaking should be computed in the prescribed manner " in respect of the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into account. As observed by learned single judge of the Calcutta High Court in Century Enka Ltd. v. ITO [1977] 107 ITR 123, the main consideration upon which this question has to be resolved is (p. 132), " whether having regard to the purpose for which provision of s. 80J of the Act was introduced, it was the legislative intent to restrict the capital employed in any manner so as to limit it to the first day of the computation period ". So far as s. 80J is concerned, it does not give any such indication. That apart, such computation of capital employed in an industrial undertaking would defeat the very purpose of the undertaking and would lead to incongruous and anomalous results While an assessee who has employed the capital in an industrial undertaking on the very first day but has withdrawn it for the major part of the year would be entitled to the full benefit, an assessee who has not employed the capital on the first day but has employed it during the major part of the previous year would be deprived of the benefit. If the intendment of the Act is to give tax holiday for the new industrial undertaking with a view to help them find their roots and encourage enterpreneurs to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s year. Rule 3 of the Indian Income-tax (Computation of Capital of Industrial, Undertakings) Rules, 1949, framed in this behalf directs the computation of the average cost which has been defined in r. 2(ii) as follows I " 2. (ii) 'Average cost' in relation to any asset means such proportion of the actual cost thereof as the number of days of the computation period during which such asset is used in the business bears to the total number of days comprised in the said period." Section 84 of the I.T. Act, 1961, which is the provision equivalent to s. 15C of the Indian I.T. Act, 1922, which also directs the computation of the capital employed in the industrial undertaking in the manner prescribed does not lay down that the capital employed should be computed as on the first day of the previous year. Rule 19 of the I.T. Rules, 1962, which is the relevant rule in this behalf just as r. 3 of the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949, directs the computation of the average cost of the asset for the relevant computation period. Section 80J which also directs the computation of the capital employed in the industrial undertaking in respect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployed, the actual cost to the assessee is computed as the capital employed, there is no reason why the written down value of an asset which is entitled to depreciation should be computed as the capital employed in the undertaking. So far as the asset acquired and employed in the undertaking is concerned, whether it is entitled to depreciation allowance or not, the amount expended to acquire that asset would be the capital employed by the assessee. In fact, it is also urged that according to s. 80J, the actual cost to the assessee for acquiring the capital employed in the industrial undertaking must be computed and not the aggregate amount representing the value of the asset. There is no direct decision on this point and the question is not free from difficulty. It is true that money expended for acquiring an asset irrespective of whether depreciation allowance is deductible or not on that asset for the purpose of assessing the tax liability would be the capital employed in the undertaking. That does not vary having regard to the depreciation allowable on the particular asset. It is argued by Mr. Dastoor, learned counsel for the petitioners, that s. 80J requires capital employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guntas of land on the outskirts of Bangalore City for industrial undertaking was claimed as the capital in the undertaking. The income-tax authorities came to the conclusion that the fair market value of the property as on the date of the purchase was only Rs. 64,000 and disallowed the relief under s. 80J in respect of the difference of the amount, viz., Rs. 10,000 although the assessee did in fact part with Rs. 1,65,000. The court held that " the capital employed in the undertaking is the amount paid to acquire that asset " (at p. 462). Again in the context of whether the user must be established to claim the benefit of s. 80J, in CIT v. Indian Oxygen Ltd. [1978] 113 ITR 109, the Calcutta High Court held (at p. 120): "...... the moment capital is utilised for the purposes of acquiring any asset for a business, such capital becomes employed in the business." In CIT v. Cibatul Ltd. [1978] 115 ITR 879, the Gujarat High Court held that in assessing the value of the asset under s. 80J read with r. 19A(2) the cost of the uninstalled machinery should also be taken into consideration for the purpose of granting relief under s. 80J, for, under that clause, cash in hand or at bank was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Such depreciation is not distributed and cannot be distributed as profits. It remains very much with the assessee. In allowing the depreciation the profits and gains are already reduced. The amounts so retained or invested is not fresh capital invested. If such depreciation deducted which is reinvested is computed as capital employed then there would be double computation of the same amount of capital employed. In Advanced Accounts by Mr. M. C. Shukla and Grewal, 9th Edn., p. 852, it is stated that capital employed is now recognised to mean " fixed assets less depreciation written off plus net working capital, i. e., current assets, current liabilities. This may also be expressed as aggregate of share capital reserves and long-term loans ". The amount retained with the assessee as a consequence of depreciation allowance being deducted is not fresh capital employed. As such in respect of an asset which is acquired when initially the cost of an asset is taken as the " capital employed " in the subsequent years for which the benefit under s. 80J is available allowing depreciation and also computing the value of that asset as its original cost price, as the capital employed would amo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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