PETITIONER:
COMMISSIONER OF INCOME TAX,BOMBAY
Vs.
RESPONDENT:
M/S. FILTRONE INDIA LTD.M/S. ALCOCK ASHDOWN & CO. LTD.
DATE OF JUDGMENT: 05/02/1997
BENCH:
B.P. JEEVAN REDDY, K.S. PARIPOORNAN
ACT
HEADNOTE
JUDGMENT
WITH
CIVIL APPEAL NO. 9796 OF 1995
JUDGMENT
Paripoornan, J.
A common question of law arises for consideration in both the appeals. the appeals are preferred against the judgments of the Bombay High Court in I.T.R. No. 40 of 1969 dated 7.7.1978 and I.T.R. No. 453 of 1975 dated 27.3.1987. Civil Appeal NO. 1274 of 1980 preferred against the judgment of the Bombay High Court in I.T.R. No. 40 of 1969 is the main appeal. The judgment rendered therein is reported in (1979) 119 ITR 164. This judgment was followed in the latter case, I.T.R. No. 453 of 1975. 2. In Civil Appeal No. 1274 of 1980, the question arose with reference to the assessment year 1962-63, wherein the interpretation of Section 84 of the Income-tax Act, 1961, as it existed then, came up for consideration. Civil Appeal No. 9796 of 1995 is concerned with the assessment year 1969-70, wherein Section 80-J of the Act came up for consideration. It was agreed at the bar and it is also fairly clear that the controversy in these cases, is regarding the interpretation of the crucial words viz. ‘capital employed in the undertaking’ occurring both in Sections 84(1) and 80- J of the Income-tax Act (hereinafter referred to as ‘the Act’). 3. We heard counsel. 4. It will be sufficient if we advert of the minimal facts in the main appeal -- Civil Appeal No. 1274 of 1980. The respondent-assessee is a public limited company. It has a chain of machine workshops. In the previous year (calendar year 1961), relevant for the assessment year 1962-63, the assessee started a new industrial undertaking at Bhavnagar. It was to consist of several workshops, including one for the manufacture of small boats. The undertaking at Bhavnagar started business operations in the year of account. The profit for this year was Rs.5,39,791/-. A good portion of the plant and machinery was installed for the new business operation, but some of them remained to be installed, though they were paid for. Some of the workshops were still under construction. The value of the plant and machinery not installed came to Rs. 11,95,167/-, while the cost of the workshop under construction came to Rs.9,22,011/-. The aggregate for the above two items came to Rs.21,17,178/-. The assessee claimed relief for this amount under Section 84 of the Act as "capital employed in the new industrial undertaking" at Bhavnagar. The Income-tax Officer declined to afford the relief claimed on the ground that the assets had not been put to use during the accounting period. The appeal filed before the Appellate Assistant Commissioner was futile. In second appeal filed by the assessee, the Appellate Tribunal held that the industrial undertaking at Bhavnagar formed an integral whole and the new workshops under construction remaining to be installed were part and parcel of that undertaking. The Appellate Tribunal also held that the business of the industrial undertaking at Bhavnagar had already commenced and was being carried on during the year of account. The Tribunal further held that it was not in dispute that the assets in question could not be segregated from the industrial undertaking at Bhavnagar. These are the basic findings of the Appellate Tribunal. On the basis of the above findings, the Tribunal concluded that "the capital employed in the undertaking" has to be distinguished from "assets used in the undertaking" and the relief envisaged by Section 84 of the Act is with reference to the capital utilised for the purpose of acquiring the asset for the business and the question as to whether it (the asset) was actually used in the business or not during the relevant year is of no consequence. The Tribunal decided the question in favour of the assessee and held that the aggregate amount of Rs.21,17,178/- was includable in the computation of capital for the purpose of granting relief under Section 84 of the Act to the assessee. On motion by the Revenue, the Appellate Tribunal referred the following question of law under Section 256(1) of the Act of the High Court of Bombay:
"Whether, on the facts and in the
circumstances of the case, the
amount of Rs. 21,17,178/-
representing the cost of workshop
under construction, could be taken
into account in determining the
capital employed in the undertaking
at Bhavnagar for the purpose of
granting relief to the company in
terms of Section 84 of the Income-
tax Act, 1961 for the assessment
year 1962-63?" 5. The High Court of Bombay, by its judgment dated 7.7.1978, considered the rival pleas of the Revenue and the assessee in detail and concurred with the reasoning and conclusions of the Appellate Tribunal and answered the question in the affirmative and in favour of the assessee. Thereafter, this Court granted special leave to the Revenue to appeal to this Court against the aforesaid judgment of the Bombay High Court and that is how the appeal is before us. 6. Section 84(1) of the Income-tax, Act, 1961 at the relevant period read as follows:
"84(1) Save as otherwise
hereinafter provided, income-tax
shall not be payable by an assessee
on so much of the profits or gains
derived from any industrial
undertaking or hotel to which this
section applies as do not exceed
six per cent per annum on the
capital employed in the undertaking
or hotel, computed in the
prescribed manner."
(Emphasis supplied)
Rules 19(1) and (6) of the Income-tax Rules, 1962 insofar as they are relevant, provide as follows:
"19. Computation of capital
employed in an industrial
undertaking or a hotel -- (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 --
(1) if they have been acquired
before the computation period,
their written down value on the
commencing date of 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 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. ... ....
....
.... ... .... ....
(6) In this rule, --
(i) ‘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 the days comprised
in the said period;
(ii) ‘computation period’ means the
period for which the profits and
gains of the undertaking or hotel
are computed under sections 28 to
43A. ......................." 7. Counsel for the appellant (Revenue), Dr. R.R. Misra, contended that the High Court should have read section 84(1) along with Rules 19(1) to (6) of the Income-tax Rules and held that the relief under Section 84 was meant only for assets actually used and if the assets are not actually and directly used in the business, the amount representing the cost thereof should not be taken into account in determining the capital employed in the undertaking. On the other hand, counsel for the assessee, Mr. S. Ganesh, submitted that the proper interpretation of Section 84 read with Rule 19(1) of the Rules only envisages that the particular asset should have been a form of capital put into the business during the relevant accounting period and does not refer to the actual use made of any particular asset during that period. The emphasis placed by counsel for the Revenue on Rule 19(6) of the Rules has no relevance since reference to Rule 19(6) is called for only in cases where the average cost in relation to an asset arises for consideration. 8. On examining the rival pleas, we are of the view that the reasoning and conclusion of the High Court does not call for any interference. Section 84(1) of the Income-tax Act is very clear. It affords relief to an assessee as provided therein the moment ‘the capital is employed in the undertaking’. The Section does not state or specify that the asset should be actually used or utilised. After adverting to the interpretation placed by the House of Lords on similar or kindred words that occurred in the Finance Act (England) and also the decision of the Madras High Court in Jayaram Mills Ltd. v. CEPT (35 ITR 651), wherein similar words were construed with reference to Excess Profits Tax Act, a Division Bench of the Calcutta High Court, in CIT v. Indian Oxygen Ltd. (113 ITR 109) at pages 119 and 120, laid down the law, with reference to Section 84 and Rule 19 of the Income-tax Rules, thus:-
"Only in the computation of the
value of the assets, acquired at or
after the commencing date of the
computation period, it is necessary
to determine their average cost
during the entire accounting period
and for that purpose only the
actual user of the assets in the
business becomes relevant. It is
quite clear from the rule that if
an asset is acquired prior to the
commencement of the accounting
period the question of its user or
non-user is entirely immaterial.
Whether such an asset is used or
not, it will still be included i
the capital employed in the
business.
Looking at the position from
another point of view it appears to
us that the moment capital is
utilised for the purposes of
acquiring any asset for a business
such capital becomes employed in
the business. Whether the asset
itself is actually used in the
business or not, so far as the
capital is concerned, it continues
to be employed in the business.
Our view as aforesaid finds support
from the observations of the
majority of the Law Lords in the
case of Birmingham Small Arms Co.
Ltd. (1951) 2 All ER 296 (HL). The
Madras High Court has taken the
same view in the case of Jayaram
Mills Ltd. (1959) 35 ITR 651."
(Emphasis supplied)
In the decision under appeal, (Alcock case - 119 ITR 164) the Bombay High Court has followed the above Calcutta decision. 9. Construing the words ‘capital employed in the undertaking’, a Bench of the Karnataka High Court in Ravi Machine Tools (P) Ltd. v. CIT (114 ITR 459) at page 462, stated the law thus:
"Section 80J refers to capital
employed in an industrial
undertaking and not the user of any
asset as such. The company acquires
an asset for its undertaking and
the capital employed in the
undertaking is the amount paid to
acquire that asset. The user or
non-user of the assets so acquired
is immaterial for the computation
of the benefit under Sec.80J. This
is the view that was taken by the
High Court of Calcutta in CIT v.
Indian Oxygen ltd. (1978) 113 ITR
109 and also (1959) 35 ITR 651 of
the High Court of Madras (Jayaram
mills Ltd. v. Commissioner of
Excess Profits Tax). in Indian
Oxygen’s case (1978) 113 ITR 109,
after referring to the observations
of the House of Lords in the case
of Birmingham Small Arms Co. Ltd.
(1951) 2 All ER 296, it was held --
See (1978) 113 ITR 109, 120 (Cal).
"......it appears to us that the
moment capital is utilised for the
purposes of acquiring any asset for
a business, such capital becomes
employed in the business. Whether
the asset itself is actually used
in the business or not, so far as
the capital is concerned, it
continues to be employed in the
business."
We entirely agree with this
enunciation.......".
(Emphasis supplied)
We find that the Bombay High Court has consistently followed the decision in CIT v. Alcock Ashdown & Co. Ltd. (119 ITR 164), the decision under appeal in the subsequent cases. See - CIT v. Boehringer Knoll (148 ITR 70), CIT v. Hindustan Polymers Ltd. (156 ITR 860), CIT v. Advani Oerlikon Pvt. ltd. (161 ITR 449), CIT v. Indian Smelting & Refining Co. Ltd. (169 ITR 562), CIT v. Elpro International Ltd. (177 ITR 20) and CIT v. Century Spinning & Manufacturing Co. Ltd. (181 ITR 214). The other High Courts have also followed, either the one or more or all, the decisions reported in CIT v. Indian Oxygen Ltd. (113 ITR 109-Calcutta), Ravi Machine Tools Pvt. Ltd. v. CIT (114 ITR 459-Karnataka) and the decision under appeal CIT v. Alcock Ashdown & Co. Ltd. (119 ITR 164). See -- CIT v. Cibatul Ltd. (115 ITR 879-Gujarat), CIT v. Mohan Meakin Breweries Ltd. (122 ITR 203 - Himachal Pradesh), Periyar Chemical Ltd. v. CIT (162 ITR 163-Kerala), CIT v. Sundaram Industries Ltd. (166 ITR 35 - Madras), CIT v. Southern Agrifurane Industries Ltd. (174 ITR 697-Madras) and CIT v. Gopi Chand Textile Mills ltd. (179 ITR 371 - Punjab & Haryana). Our attention was not invited to any decision taking a contrary view. 10. In our opinion, the law laid down in Indian Oxygen Ltd.’s case (113 ITR 109) and followed in the decisions under appeal, Alcock Ashdown & Co.’s case (119 ITR 164) and other cases referred to above represents the correct law on the subject. We are of opinion, that the moment an asset is acquired or purchased for the purpose of the business, it is capital employed, though the asset as such is not actually utilised or used during the accounting year. In the chain of events, the earliest act or event, is the purchase or acquisition of the asset. That by itself entitles the assessee to get the relief. The "employment" of the capital is done or over. The subsequent or later events - including the actual user of the asset has nothing to do in the matter. In this view, the judgment under appeal merits no interference. The appeal is accordingly dismissed with costs. 11. In Civil Appeal No.9796 of 1995, the judgment under appeal has only followed the earlier decision in Alcock Ashdown & Co’s case (119 ITR 164). Since we have already dismissed the appeal preferred by the Revenue against the decision reported in 119 ITR 164 (Civil Appeal No. 1274 of 1980), Civil Appeal no. 9796 of 1995 is also dismissed. There shall be no order as to costs.
The appeals are disposed of as above.