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TMI Blog1979 (3) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and in the circumstances of the case, the Tribunal was justified in allowing deduction by way of development rebate to the extent of Rs. 7,731 in respect of a telephone exchange installed in the factory area, under the provisions of section 33 of the Income-tax Act ? " While referring these two questions to this court the Tribunal has unfortunately not given out the proper data relevant to these two questions in the statement of facts submitted by it. The facts and the reasoning on which the Tribunal has taken a particular view on these two questions are not clear even by reference to the Tribunal's judgment in the appeal before it, found at annex. C. We have, therefore, gathered the necessary data on admitted facts from the record before us. These facts can be stated as under. The respondent-assessee is a public limited company and is one of the leading manufacturers of alcoholic products. It has branches at various places. One of such branches is known as Mohan Nagar Branch. This branch is a complex of seven distinct units as under : (i) Cold storage. (ii) Ice factory. (iii) Food products. (iv) Malt extract. (v) Malt house. (vi) Brewery. (vii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking begins to manufacture or produce articles, 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." It is evident from the above provision of s. 84 that tax exemption which a new undertaking is entitled to is maximum to the extent of 6% of the capital employed in that undertaking. Therefore, for the purpose of computation of the tax exemption under this section, it is necessary to calculate the quantum of capital employed in the undertaking. The method of this computation is provided by r. 19 of the I.T. Rules, 1962. Sub-rule (1) of r. 19 says that for the purposes of s. 84, the capital employed in an undertaking to which the section applies shall be computed in the manner which is provided therein. The relevant portion of r. 19 is as under : " 19. (1) For the purposes of section 84, the capital employed in an undertaking or a hotel to which the said section applies shall be taken to be-- (a) in the case of assets acquired by purchase and entitled to depreciation-- (i) if they have been acquired before the computa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration for the purpose of computing exemption under s. 84 because the products manufactured in malt house unit were sold to malt extract unit at a lower rate and not at the commercial rate, and therefore, if this sale is computed at commercial rate pursuant to the decision given by the Gujarat High ,Court in Anil Starch Products Ltd. v. CIT [1966] 59 ITR 514, even malt house unit can be treated as haying made profits, and therefore, the capital employed for the purpose of malt house should also be taken into consideration in computing tax exemption under s. 84. This contention was rejected by the ITO and the AAC, but was eventually accepted by the Tribunal. So far as this reference is concerned, the dispute relates to the following three items, namely : (1) Capital work-in-progress, valued at Rs. 13,77,704 ; (2) Land acquired by the assessee during the accounting period, valued at Rs. 84,902 ; and (3) Stores in transit, valued at Rs. 1,03,045. So far as these three items are concerned, the case of the assessee is that their capital valuation shown above should be added to the " capital employed " for the purpose of computing tax exemption under s. 84 and rebate un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s exclusion is justified for the same reasons as for items (d) and (e) (capital work-in-progress, and land acquired) as the stores were not held by any particular units." Being dissatisfied with the view taken by the ITO and the AAC, the assessee approached the Tribunal. The Tribunal's order found at annex. C does not disclose reasons why it has taken a particular view in the matter. But para. 24 of the Tribunal's judgment states as under : " The central unit or the type now before us, is a prominent feature of all modern industrial complexes. It is not only a well known feature but an essential requirement for efficient industrial operations. We believe that it would not be incorrect to say that this is true of every large public sector undertaking also. We, therefore, see no reason to hold that investment to be non-industrial. They are, in our opinion, entitled to the benefit under sections 84 and 101. They should be included in the capital computation. " We do not find here any observation of the Tribunal with regard to the department's contention that the capital value of these three disputed items can be included for the purpose of tax exemption under s. 84 only if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der s. 84. It does not, in any manner, restrict the implications of the expression " capital employed " used in sub-s. (1) of s. 84. Our attention was also drawn to the above-quoted meaning of the expression " average cost " found in r. 19(6)(i) of the I.T. Rules, 1962. It is no doubt true that the meaning of the expression " average cost " which is given therein makes reference to the use of the asset in business, but even that does not restrict the implication of the expression " capital employed " found in s. 84(1). The definition of the expression " average cost " given in r. 19(6)(i) is for the limited purpose of calculating the average cost of a particular asset which is not used for the whole time of the account period. Expression " average cost " appears in cls. (a)(ii), (b)(ii) and (d) of sub-r. (1) of this rule, for the purpose of calculating the value of assets employed in the undertaking, but acquired at different periods. Clause (a) is about the assets entitled to depreciation and provides for different standards of computation depending upon the question whether they are purchased before or after the commencement of the computation period. Clause (b) makes similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d so as to render it contrary to s. 84(1). Under these circumstances we find that neither sub-s. (7) of s. 84, nor the definition of the expression " average cost " given in r. 19, is helpful in deciding the meaning of the expression " capital employed " found in s. 84(1). The meaning of this expression is to be sought on the interpretation which can be given to it by the plain meaning of the language employed by the legislature in sub-s. (1) of s. 84. If again a reference is made to this language, it becomes evident that exemption contemplated by s. 84(1) is to be given to the extent of 6% of the capital " employed " in the undertaking in question. The capital which is " employed " in a particular undertaking should not be confused with the capital which is " used " in that undertaking. It is obvious that the whole capital which is employed by an entrepreneur in establishing a particular industry cannot and would not necessarily be utilized or used in manufacturing process. Therefore, if the word " employed " is construed as carrying the same connotation as the word " used ", the whole object with which s. 84 has been enacted by the legislature would be destroyed because it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the amount representing the value of the capital shown under the head " work-in-progress " at the beginning of the accounting year should be included in the computation of the expression " capital employed " for the purpose of working out the relief under s. 84(1). This view has been shared even by the High Court of Karnataka in Ravi Machine Tools (P.) Ltd. v. CIT [1978] 114 ITR 459 and the High Court of Gujarat in CIT v. Cibatul Ltd. [1978] 115 ITR 879, wherein the capital value of the machinery which was not yet installed was taken into account for the purpose of working out the benefit contemplated by s. 80J of the Act which is equivalent to s. 84 with which we are concerned in this reference. In view of what is stated above, we are of the opinion that the capital value of the capital work-in-progress, land acquired during the accounting year and stores in transit, should be taken into account as assets of the central unit. It is found that the central unit does not keep its separate profit and loss account, but distributes the common assets held by it to the different seven units. We, therefore, opine that out of the total value of these three disputed items, that prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of technical and managerial executives, or even at their residences, that would not make any difference because these technical executives and managers are expected to see that the machines installed in the factories are efficiently working and giving proper production. Therefore, if it is found that a particular plant or machinery is substantially and essentially for the purpose of production, such plant and machinery cannot be taken as covered by the expression " office appliances ". The AAC has taken a view that this internal telephone system cannot earn development rebate because by itself it produces nothing. This concept is totally outdated if it is found that the plant or machinery in question is helpful in making the other machines run properly and efficiently. It cannot be doubted that the internal telephone system installed in the different factories of the complex would be quite essential in harmonising and co-ordinating the manufacturing process undertaken by the assessee. We are, therefore, of the opinion that the installation of the internal telephone system cannot be construed as " office appliances ". It can, therefore, earn development rebate under s. 33, and, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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