1. In this reference two question stand referred to us by the Income-tax Appellate Tribunal, Bombay Bench 'C'. The reference is under s. 66(1) of the Indian I.T. Act, 1922 :
'(1) Whether, on the facts an in the circumstance of the case, the Tribunal was justified in holding that the sum of Rs. 7,21,772 being the initial depreciation was not to be deducted in determining the written down value of the assets of the company (building and compound wall) for the purposes of rule 3(1)(a)(i) of the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949 ?
(2) Whether, on the facts and in the circumstances o the case, the Tribunal was justified in including the amount of Rs. 1,59,50,000 for the purposes of computation of the capital employed by the assessee for giving relief under section 15C of the Indians Income-tax Act, 1922 ?'
2. It would appears to us that the answer to be given to question No. 1 is now concluded by our decision given this morning in Income-tax Reference No. 181 of 1971 CIT v. Zenith Steel Pipes Ltd. : 137ITR34(Bom) , and in accordance with the observation made therein, the question will have to be answered in the negative and in favour of the revenue. The view we have taken in the said decision, which will have to be followed, is that the initial depreciation is required to be deducted in determining the written down value of the assets of the company for the purposes of r. 3(1)(a)(i) of the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949.
3. The assessee is Hindustan Antibiotics Ltd., a public sector company. It manufactures penciling and other medicines. It is registered under the Indian Companies Act, 1913. It has an authorised capital of Rs. 4 cores and subscribed capital of Rs. 2,47,26,000. We are concerned with the assessment year 1960-61 corresponding to the previous year ended on 31st March, 1960.
4. The assessment was originally made by the ITO on a total income of Rs. 1,42,16,871. Thereafter certain appeals took place but ultimately the ITO issued a notice under s. 148 of the I.T. Act. In pursuance of that of notice, the assessee filed a return on 18th May, 1965, declaring an income of Rs. 1,39,41,098. On 15th November, 1965, a revised return was filed by the assessee showing an income of Rs. 1,42,13,438. At the time of passing the reassessment order the ITO deducted a sum of Rs. 1,59,50,000 from the computation of the capital employed by it in accordance with the Indian Income-tax) Computation of Capital of Industrial Undertakings) Rules, 1949, in respect of relief under s. 15C of the Indian I.T. Act, 1922. The ITO gave the following reason for so doing. According to the ITO, the company had a sum of Rs. 1,60,00,000 in fixed deposits as on 31st March, 1959, and a sum of Rs. 1,89,00,000 represented the fixed deposits as on 31st March, 1960. The amount of fixed deposits had gone as high as Rs. 2,51,50,000 during the financial year 1959-60 and the total of fixed deposits was never less then Rs. 1,76,00,000 at any time in the year. According to the ITO, it was thus clear that a considerable amount was not required by the company for the purposes of the business. This amount was thus required to be excluded on a proper application of r. 3(5). According to the company, the keeping of theses large amounts became necessary as it was accumulating funds to finance the entire cost of the streptomycin and Tetracycline plants which were in fact commissioned in the subsequent years. According to the company, this keeping of money in fixed deposits was a peculiar but normal feature of the business of the company. According to the company, the amounts accumulated were kept in fixed deposits in order to earn interest to raise the profit of the company until the funds accumulated could be used for the company's business as contemplated. This contention was rejected by the ITO.
5. The ITO also deducted a sum of Rs. 7,21,772, being the initial depreciation on buildings and compound walls under s. 10(2)(vi) of the Indian I.T. Act, 1922. This was while arriving at the written down value of the assets of the assessee for the purposes of r. 3(1)(a)(i) of the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949.
6. The assessee preferred an appeal, which came up before the AAC, Pune Range II, Pune. The AAC upheld the order of the ITO on both points. On behalf of the assessee, it was submitted before the AAC that the requirement of computation set down cumulative conditions and only on satisfaction of both the conditions can an abatement be justified. Against, the need to accumulate monies for further expansion was emphasised, and it was submitted that merely because such expansion took place after two years it cannot be said that the amounts were not required for the purposes of the business of the company. On this latter point the order passed reveals agreement with the stand of the assessee, but deposits such agreement, the AAC ultimately upheld the deduction made by the ITO. The assessee thereafter carried the matter to the Income-tax Appellate Tribunal. Before the Tribunal, the assessee succeeded on both aspects of the matter. As far as the deduction of the initial depreciation for the purpose of the written down value of the assets was concerned, the Tribunal referred to a decision of this court in Burmah-Shell Refineries Ltd. v. G. B. Chand, ITO : 67ITR653(Bom) , where a prima facie view was expressed that this was not to be deducted in determining the written down value of the assets for the purposes of computation of the capital employed. As stated earlier, we have taken a contrary view in our judgment given this morning in CIT v. Zenith Steel Pipes Ltd. (Income-tax Reference No. 181 of 1971) (see p. 34 supra). We shall not advert further to this point inasmuch as we are inclined to answer question No. 1 in accordance with our decision in Zenith Steel Pipes' case. On the amounts kept accumulated, the Tribunal extracted r. 3(5) of the Rules and considered the balance sheet and directors' report for the relevant years. It observed that it was prudent that a company like the assessee should set aside a large fund out of its profits for financing such expansions. In the view of the Tribunal, accumulations of profits for such purposes have to be regarded as amounts required for the purposes of business of the company like the assessee. It could not be said, according to the Tribunal, that theses were monies not required for the purposes of the business of the assessee. Accordingly, the assessee's appeal was allowed on both points.
7. Section 15C(1) of the Indian I.T. Act, 1922, provides as follows :
'15C. Exemption from tax of newly established industrial undertakings. - (1) Save as otherwise hereinafter provided, the 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 accordance with such rules as may be made in this behalf by the Central Board of Revenue.'
8. The rules made by the C.B.D.T, which prescribe the method of computation of the capital as provided by s. 15C, are the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949, and we are concerned with sub-r. (5) of r. 3. Rule 3(5) reads as under :
'Any investment the income from which is not to be taken into account in computing the profits of the business and any moneys not requited for the purposes of the business, shall be left out of account, but where any investments in the beneficial ownership of the person carrying on the business are so left out of account, the sum (if any) to be deducted under sub-rule (3) in respect of borrowed money shall be computed as if the principal of the borrowed money were reduced by the value of those investments.'
9. The short question to be considered is whether the monies kept by the assessee-company on fixed deposit can be regarded as monies required or not required for the purpose of the business.
10. In order to answers the question, we have to bear in mind the various statements made in the directors' report for the year 1959-60 which have been extracted by the Tribunal in its order dated 18th September, 1970, (Annex. 'C' to the statement of case). According to the directors of the assessee-company :
'It would be relevant here to recall that your company had an excess of Rs. 33.43 lakhs over expenditure at the end of the financial year 1957-58, and a net amount of Rs. 22 lakhs was carried forward to the general reserve. At the end of 1958-59, the company had a surplus of Rs. 81.10 lakhs after providing Rs. 57 lakhs for payment of the income-tax and Rs. 6 lakhs for deferred revenue expenditure carried forward from the previous year. During the year 1959-60, the working of the company has resulted in a net surplus of Rs. 76.85 lakhs after providing for Rs. 63 lakhs for income-tax. It is proposed to transfer Rs. 76.75 lakhs to the general reserve in order to meet the cost of future expansion and development and to carry forward the balance of Rs. 20,625.31 to the next year's account. As it is proposed to finance the entire cost of the Streptomycin project and Tetracyline plant (estimated at Rs. 2 crores) out of your company's resources, your directors do not recommend any declaration of dividend for this year also.'
11. It would appear that the streptomycin plant was indeed commissioned in March, 1962, and we are informed at the Bar that its cost came to over Rs. 4 cores.
12. Can a company like the assessee-company, which accumulates and retains for the purposes of its future expansion large amounts out of the profits earned during the year, be said to have accumulated theses amounts for purposes other then its business Indeed, any such contention would appear ridiculous when so put. These are what are known in business parlance as 'retained profits'. Retained profits may be retained for the purposes either of meeting and reducing the present liabilities or for meeting the working capital required in praesenti or for the reduction of loans and borrowings or for a future expansion of the company. Regarded in any of theses ways, such retained amounts must be regarded as moneys required for the purposes of the business of the company like the assessee-company. It is clear to us that the view taken by the Tribunal was entirely correct, and if that be so, question No. 2 will be required to be answered in favour of the assessee. In the result, the question referred to us are answered as follows :
Question No. 1 : In view of the decision given by us earlier in Income-tax Reference No. 181 of 1971 decided on 4th September, 1981 CIT v. Zenith Steel Pipes Ltd. : 137ITR34(Bom) , in the negative and in favour of the revenue.
Question No. 2 : In the affirmative and in favour of the assessee.
13. Parties to bear their own costs.