Skip to content


Commissioner of Income-tax, Bombay City-i Vs. Alcock Ashdown and Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 40 of 1969
Judge
Reported in(1979)8CTR(Bom)223; [1979]119ITR164(Bom)
ActsIncome Tax Act, 1961 - Sections 80J and 84; Income Tax Act, 1922 - Sections 15
AppellantCommissioner of Income-tax, Bombay City-i
RespondentAlcock Ashdown and Co. Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateS.E. Dastur, Adv.
Excerpt:
.....on machinery not yet installed and on workshops under construction was clearly includible in the capital employed in the industrial undertaking at bhavnagar. the emphasis, according to the assessee, was clearly on the employment of capital in the undertaking. 19(6) and it was submitted that this rule would clearly indicate that the assessee was to have relief only in respect of the assets in actual use and not on assets which were not in use. 19(6), the word should be given a wider meaning and embrace passive as well as active user. irc [1951] 2 all er 296, where the house of lords had occasion to construe the expression 'capital employed' in relation to the excess profits tax imposed by the finance act, 1959. in the latter case, one of the law lords constitution the majority, lord..........the ito that it was entitled to relief under s. 84 of the i. t. act, 1961, by reference to the capital employed in the new industrial undertaking at bhavnagar. the assessee's claim was that it was entitled to have the relief computed even in respect of the machinery which has not been installed and the workshops still under construction. the ito took the view that the amounts in question which aggregated to rs. 21,17,178 could not be included in the capital employed because the assets had not been put to use during the accounting period. he came to this conclusion after analysing s. 84 read with r. 19 of the i. t. rules. accordingly, he held that this amount could not be taken into account for the purpose of capital computation. 3. the assessee thereafter appealed to the aac, but.....
Judgment:

Desai, J.

1. The assessee before us is a public limited company having a chain of machine shops, and we are concerned with the assessment year 1962-63, the corresponding previous year being the calendar year 1961. The assessee has 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 had started business operations in the year of account. Its profit in this year was Rs. 5,39,791 according to the company's statement of account. A considerable part of the plant and machinery was installed for the purpose, but some of the plant and machinery which has been paid for remained to be installed. Similarly, some of the workshops were still under construction in the year of account. The value of the plant and machinery not installed came to Rs. 11,95,167 whilst the cost of the workshops under construction came to Rs. 9,22,011. In this reference, we are concerned with the aggregate figure of Rs. 21,17,178 made up of these two items.

2. The assessee claimed before the ITO that it was entitled to relief under s. 84 of the I. T. Act, 1961, by reference to the capital employed in the new industrial undertaking at Bhavnagar. The assessee's claim was that it was entitled to have the relief computed even in respect of the machinery which has not been installed and the workshops still under construction. The ITO took the view that the amounts in question which aggregated to Rs. 21,17,178 could not be included in the capital employed because the assets had not been put to use during the accounting period. He came to this conclusion after analysing s. 84 read with r. 19 of the I. T. Rules. Accordingly, he held that this amount could not be taken into account for the purpose of capital computation.

3. The assessee thereafter appealed to the AAC, but without success. The AAC fully upheld the approach and the conclusion of the ITO. The assessee, thereafter, carried the matter in second appeal to the Tribunal. It was submitted before the Tribunal that the amount laid out on machinery not yet installed and on workshops under construction was clearly includible in the capital employed in the industrial undertaking at Bhavnagar. It was pointed out that the scheme of relief under s. 84 was to give relief in respect of profits of a new undertaking limited to the extent of 6% of the capital employed in the undertaking. The emphasis, according to the assessee, was clearly on the employment of capital in the undertaking. It was further urged that the assets which were sought to be excluded by the department from the computation of capital employed in the undertaking were acquired for the purposes of the business and they should, therefore, have been included in the capital employed in the undertaking. On behalf of the department emphasis was placed on the reason and the basis for the relief. Further, reference was made to r. 19(6) and it was submitted that this rule would clearly indicate that the assessee was to have relief only in respect of the assets in actual use and not on assets which were not in use. The Tribunal allowed the appeal and found in favour on the assessee. It based its decision on several aspects. In the first place, it observed that the industrial undertaking at Bhavnagar was one integral whole and the new machinery remaining to be installed and the new workshops under construction were part and parcel of that undertaking. Secondly, it placed emphasis on the fact that the business of this industrial undertaking at Bhavanar has already commenced and had been carried on during the year of account. It examined the statutory provisions against this background. It first analysed the provisions of s. 84 and came to the conclusion that the capital employed in the undertaking has to be distinguished from assets used in the undertaking. It was noted that the relief contemplated under s. 84 starts only from the day on which the undertaking starts manufacture. But, according to the Tribunal, the relief is to be calculated by reference to the capital employed in the undertaking without there being any limitation or qualification that the capital is to be put to actual use before relief can be granted thereon. It then examined r. 19 of the I. T. Rules and rejected the argument of the department based on r. 19(6). In its opinion, although the word 'use' was to be found in r. 19(6), the word should be given a wider meaning and embrace passive as well as active user. In its view in the relevant context the expression 'during which such asset is used in the business' in r. 19(6) could only mean 'during which it was a part of the business assets of the undertaking' and did not imply actual and direct user of the assets in the process of manufacture carried on by the undertaking. As stated earlier, the Tribunal decided in favour of the assessee and held that the aggregate amount of Rs. 21,17,178 was includible in the computation of capital for the purpose of granting relief under s. 84 to the assessee. Accordingly, the following question has been referred to us at the instance of the Commissioner under s. 256(1) of the I. T. Act, 1961 :

'Whether, on the facts and in the circumstances of the case, the amount of Rs. 21,17,178 representing the cost of plant and machinery not installed and 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 1962-6 ?'

4. Sub-section (1) of s. 84, 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.'

5. Sub-rule (1) of r. 19 provides for computation of capital employed in an industrial undertaking or a hotel and reads as under :

'19. (1) 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 -

(i) 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 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......'

6. Sub-rule (6)(i) of r. 19 indicates how average cost in relation to any asset is required to be calculated.

7. Mr. Joshi on behalf of the revenue reiterated the argument which the department had urged before the Tribunal and submitted that the relief under s. 84 was meant only for assets actually used and that this view was completely borne out by the method provided in r. 19(6) for calculation of average cost. However, he very fairly drew our attention to a decision of the Calcutta High Court in which arguments similar to those advanced by the revenue before us were decisively rejected and the expression 'capital employed' in s. 84 construed as meaning and including all assets acquired and not necessarily assets in actual use; this decision is CIT v. Indian Oxygen Ltd. : [1978]113ITR109(Cal) . The Division Bench of the Calcutta High Court, after referring to the statutory provisions, viz., s. 84 and r. 19 under consideration, referred to two decisions of the House of Lords in IRC v. Terence Byron Ltd. [1945] 1 All ER 636 and Birmingham Small Arms Co. Ltd. v. IRC [1951] 2 All ER 296, where the House of Lords had occasion to construe the expression 'capital employed' in relation to the excess profits tax imposed by the Finance Act, 1959. In the latter case, one of the Law Lords constitution the majority, Lord Radcliffe, has at page 303 observed that the words 'capital employed in a trade or business' did not bear any significant difference of meaning from the words 'capital of a trade or business'. Another Law Lord, Lord Tucker, had observed that the authority as well as the legislative history of the words 'capital employed' pointed to the conclusion that in their present context they did not refer to the actual use made of a particular asset in the relevant accounting period once it is shown to have been a form of capital put into the business and still there (at page 306). The Calcutta High Court also referred to a decision of the Madras High Court in Jayaram Mills Ltd. v. CEPT : [1959]35ITR651(Mad) , where the Madras High Court had followed the two decision of the House of Lords. It is true that both the House of Lords and the Madras High Court concerned with E. P. T. Acts, but has occasion whilst so doing to distinguish between the expressions 'capital employed' and 'assets use in the undertaking'. After citing these decisions the Calcutta High Court in Indian Oxygen Ltd.'s case : [1978]113ITR109(Cal) observed as follows :

'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.'

8. Reliance was placed on behalf of the revenue on r. 19(6) before the Calcutta High Court and in its opinion it has no bearing on the computation of the value of assets acquired before the commencing date of the computation period although it may have some bearing on the computation of the value of the assets acquired after that date. Obviously, the view of the Calcutta High Court was that such rule could not govern the computation of assets under r. 19(1) and restrict or qualify the relief to be given to the assessee under s. 84.

9. It may be stated that in the case before us we are not concerned with any application of r. 19(6). It is unnecessary, therefore, to consider whether the view taken by the Tribunal in its order or the view expressed by the Calcutta High Court (which High Court also was not directly concerned with the computation of average cost of an asset under r. 19(1) is correct. We are, however, concerned with the application of the provisions contained in s. 84 and r. 19(1). These provisions came up for consideration directly before the Calcutta High Court in Indian Oxygen Ltd.'s case : [1978]113ITR109(Cal) and have been considered and applied by the court in the same manner which commended itself to the Tribunal from whose decision the reference has been preferred at the instance of the Commissioner. All the relevant statutory provisions and rules have been brought to the attention of the Calcutta High Court. It passed its decision on a consideration of the two decisions of the House of Lords and the Madras High Court. As far as this court is concerned, we have taken the view that since the I. T. Act is a piece of all-India legislation, as far as possible if any High Court has construed any section or rule and come to a particular interpretation thereof, that interpretation should be followed by this court unless there are compelling reasons brought to our notice for departing from the view taken by another High Court. No such compelling reason has been brought to our notice by learned counsel for the revenue. In this case also, therefore, we propose to follow the principle of uniformity which even earlier we have followed in a number of matters.

10. In this view of the matter, the question referred to us in answered in the affirmative and in favour of the assessee.

11. The Commissioner will pay to the assessee the costs of the reference.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //