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TMI Blog1973 (9) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent-assessee was entitled to exemption in respect of its newly established industrial undertaking. In the course of the original assessment the Income-tax Officer had worked out the capital employed in the undertaking at Rs. 45,39,537. For working out this figure, the Income-tax Officer has, as per rule 19(1)(a), valued the assets entitled to depreciation including the additions made during the year at Rs. 40,10,947. He has added a sum of Rs. 1,39,764 to the said amount on account of the net depreciable assets as on January 1, 1963, and also on account of the average value of the additions. The Income-tax Officer, thereafter, valued other assets as on January 1, 1963, at Rs. 44,38,126 as per rule 19(1)(b). The aggregate valuation so placed by the Income-tax Officer was Rs. 85,88,837. Out of this aggregate valuation, the Income-tax Officer has deducted an amount of Rs. 44,01,803 on account of loans, other liabilities and tax provisions, etc. The Income-tax Officer after deducting the aforesaid amount of Rs. 44,01,803 found the valuation of capital according to rule 19(1) at Rs. 41,87,034 to which he added Rs. 3,52,503 being half of the profit for the year from its new industrial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets of that year. However, the Tribunal was of the opinion that the respondent-assessee was entitled under clause (5) of the aforesaid rule 19 to have benefit of further addition of half the amount of the profit in view of the fiction incorporated in the said clause (5). The Tribunal, therefore, held that the assessee was entitled to claim a further addition of Rs. 3,52,503 being half the amount of the profit to the valuation of the capital at Rs. 41,87,034 and, therefore, the net valuation should be Rs. 45,39,537. On that basis the assessee was entitled to claim exemption on the amount of Rs. 2,72,372 being 6 per cent. of the value of the capital employed in the industrial undertaking. At the instance of the Commissioner, therefore, the question set out hereinabove has been referred to us for our opinion. Before we deal with the contentions raised on behalf of the revenue, at the time of hearing of this reference, we would like to reproduce the relevant provisions of the Income-tax Act, 1961, and the Rules which have a bearing on the point involved in this reference. Chapter VII of the Income-tax Act, 1961, which included to 85C (which are now omitted by section 33 of and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said period ; (ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period ; (b) in the case of assets acquired by purchase and not entitled to depreciation-- (i) if they have, been acquired before the computation period, their actual cost to the assessee ; (ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period ; (c) in the case of assets being debts due to the person carrying on the business, the nominal amounts of those debts ; (d) in the case of any other assets, the value of the assets when they became assets of the business: Provided that if any such asset has been acquired within the computation period, only the average of such value shall be taken in the same manner as average cost is to be computed. Explanation.--For the purposes of clauses (a) and (b) of this sub-rule, the value of any building, machinery or plant or any part thereof which having been previously used for any purpose is transferred to the undertaking or hotel it the time of its formation shall not be taken into account for computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he computation period, the average cost is to be taken into consideration. As regards the assets in the nature of debt, it is not clear as to which cost is to be taken into consideration, but the nominal amount of the debt is considered as the valuation of that type of assets. This is provided in rule 19(1)(c). As regards the other assets not acquired by purchase, rule 19(1)(d) provides the method of computation as actual value if acquired before the computation period and average value if acquired in the course of the computation period. After making sum total of such cost of the valuations as prescribed in sub-rule (1) of rule 19, such debts or moneys borrowed by the assessee as well as the income of the investments of idle moneys not required for the business are to be deducted. This is provided in sub-rules (3) and (4) of rule 19. It is thereafter that in rule 19(5) which has been set out above that the fiction is provided for purposes of ascertaining the average amount of capital employed ina the course of any computation period. The wording of sub-rule (5) of rule 19 causes some anxiety about its width and ambit. Does it envisage, in view of the fiction incorporated therein, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islative intent as expressed in sale 19 seems to us, having regard to the entire scheme of the said rule, that to effectively extend the concession of the tax holiday, the average capital employed throughout the year in an industrial undertaking or a hotel should form the basis for such concession. This basis appears to emerge from a comparison of the phraseology employed in sub-rules (1) and (5) of rule 19. The opening part of sub-rule (1) provides as under: "(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--.... " while in sub-rule (5) the opening wordings are as under : " (5) For the purpose of ascertaining the average amount of capital employed in a business during any computation period ......" " It seems clear to us that the legislature has adopted two different concepts in sub-rules (1) and (5), namely, the valuation or the cost of the assets and the average amount of capital employed. It appears that the Income-tax Officer as well as the Appellate Assistant Commissioner were of the opinion that the average cost or valuation of the total assets has been computed and the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot always and necessarily account for fluctuations in the profit and the different rates of profit at which it accrued at the different stages of the computation period. The legislature has, therefore, provided that for ascertaining the average amount of capital employed in a business during any computation period, the profit or loss made in that period shall, except so far as the contrary is shown, be deemed to have accrued at an even rate and to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business. It may be that in ascertaining the average amount of capital, as provided in the fiction, numerous factors may have to be considered. But it appears that the income-tax authorities have, by way of rough and ready method, adopted the addition of half the amount of the profit on the basis of this fiction that the profits have accrued at a uniform rate throughout the computation period and correspondingly resulted in increase or decrease as and when the profits or losses accrued. Mr. Kaji, therefore, pointed out, in order to persuade us to accept his contention and to read in the manner in which he wanted to r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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