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TMI Blog1978 (7) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... s determined by the ITO. The assessee carried the matter to the AAC and in this appeal there were other points in dispute. Before the AAC an additional ground was raised and it was urged that the ITO had erred in computing the capital employed in the new industrial undertaking by not giving effect to increased capital in terms of the legal fiction or presumption contained in sub-r. (5) of r. 19 of the I.T. Rules. It was contended on behalf of the assessee that by reason of this rule the moiety of book profits were required to be added to the capital computed by the ITO for the purpose of ascertainment of profits qualified for relief under s. 84 of the I.T. Act, 1961. The AAC rejected the submission holding that there had been no mistake in the computation of capital employed by the ITO. He was of the opinion that the value of the assets and liabilities in question had been taken as available on the first day of the accounting year and additions to such assets or liabilities were also considered on the actual or average basis. In his view, therefore, the contention that under sub-r. (5) half the profits should be added for the purpose of the ascertainment of capital employed could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he prescribed manner. Thus, by the section relief at six per cent. was to be allowed on the capital of the new undertaking computed in the prescribed manner. For this we have to go to the I.T. Rules, 1962. Sub-rule (1) of r. 19 provides that for the purposes of s. 84 the capital employed in an undertaking or hotel to which the said section applies shall be taken to be items (a), (b), (c) and (d), and these have to be considered along with the Explanation provided in the sub-rule. These items provide for assets subject to depreciation, assets not entitled to depreciation, assets acquired before the computation period and assets acquired during the computation period. Sub-rule (5) of rule 19 reads as follows : " (5) For the purpose of ascertaining the average amount of capital employed in a business during any computation period, the profits or losses made in that period shall, except so far as the contrary is shown, be deemed-- (a) to have accrued, at an even rate throughout the said period and (b) to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business. " On behalf of the assessee, Mr. Dastur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intervention seems called for in this matter. " The Gujarat High Court, after quoting the above observations which were cited by counsel for the revenue appearing before it, went on to observe that the observation of the learned author was not correct and more so when he observes that sub-r. (5)(a) is otiose. From the decision of the Gujarat High Court it is found that the ITO had originally worked out the capital employed in the undertaking at a particular figure by applying all the relevant applicable provisions to be found in r. 19(1). To the figure thus arrived at he added half the profit for the year from the new industrial project. Six per cent. of this figure was exempted. Thereafter, reassessment proceedings under s. 147(b) were adopted and the addition of half the profits was excluded and the capital computation figure was reduced by the said amount. Being aggrieved by the order of reassessment the assessee went in appeal before the AAC, who confirmed the reassessment order. The assessee carried the matter to the Tribunal, where it was urged on behalf of the revenue that in working out the capital the average profit of the year had already beep taken into account inasmu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrued at a uniform rate throughout the computation period and correspondingly resulted in increase or decrease as and when the profits or losses accrued. The Tribunal was, therefore, right in holding that the figure arrived at by computation under rule 19(5) was to be added to the figure arrived at by computation under rule 19(1) for determining the average capital employed in the assessee's undertaking. " In Modella Woollens Ltd.'s case [1979] 120 ITR 726 (Bom), the Division Bench has also referred to Hind Lamps (P.) Ltd.'s case [1977] 106 ITR 360 (All). It is found, however, on going through the decision that the Allahabad High Court took the view that the entire profit earned by the assessee during the relevant previous year would have to be taken into account in the computation of capital employed. The judgment is somewhat sketchy and apart from setting out sub-r. (5) of r. 19, full discussion and detailed arguments are not to be found in the report of the decision. It would appear to us that bearing in mind the language of sub-r. (5), if the two fictions in cls. (a) and (b) of the said sub-rule were to be applied without there being any material on record to show to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and (2) that these profits or losses as they accrued have increased or decreased the capital employed in the business. Either of these two presumptions can be rebutted by the contrary being shown. It may be shown that in fact the profits or losses did not accrue at an even rate throughout the period, or it may be shown that although the profits or losses accrued evenly throughout the period, in fact they did not result in an increase or decrease in the capital employed in the business . " The court went on to observe further : " In this case it is not disputed that the profits have accrued at an even rate throughout the accounting period. The only question is whether, having so accrued, they have resulted in a corresponding increase in the capital employed in the business. Unless the contrary is shown, there is a presumption in favour of the assessee that the capital was increased by the accrual of profits, but it would be open to the department to rebut the presumption by showing that there have been actual disbursements by the assessee out of the profits which accrued to the assessee, and in fact although the profits accrued the capital has not been increased as a result of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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