1. At the instance of the assessee, the Income-tax Appellate Tribunal, Bangalore Bench (hereinafter referred to as 'the Tribunal'), has referred to this court under s. 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), the following two questions of law :
'(1) Whether, on the facts and in the circumstances of the case, the difference in the rupee value of the machinery calculated with reference to the devaluation of the rupee was part of the actual cost of the plant and machinery for purposes of allowance of depreciation and development rebate
(2) Whether the Tribunal was right in holding that for the purpose of computing the quantum of deficiency for assessment year 1967-68 liable to be carried forward and set off in assessment year 1968-69 under section 80J, the computation of capital has to be made under rule 19A and not under rule 19 of the Income-tax Rules, 1962 ?'
2. The first of the aforesaid questions had also been referred to this court in I. T. R. Cs. Nos. 106 and 107 of 1975 (Kirloskar Asea Ltd. v. CIT - since reported in : 117ITR717(KAR) ) in which that question has been answered in favour of the assessee by another Division Bench of this court (of which one of us was a member). For the reasons stated in those two cases, we answer the first question in the present reference also in favour of the assessee.
3. The second question referred in this case relates to the quantum of tax concession which the Act gives to newly established industrial undertakings. In order to appreciate the rival contentions of Sri G. Sarangan, learned counsel for the assessee, and the learned standing counsel for the revenue, it is necessary to set out briefly the history of the statutory provisions relating to such concession.
4. Section 84 which has since been repealed by Finance (No. 2) Act, 1967, with effect from April 1, 1968, provided inter alia, that income-tax shall not be payable by an assessee on so much of his profits and gains derived from his industrial undertaking to which that section applied, as did not exceed six per cent. per annum on the capital employed therein computed in the prescribed manner. The manner of such computation had been provided by r. 19 of the Income-tax rules, 1962 (hereinafter referred to as 'the Rules'). That rule provided, inter alia, that for the purpose of s. 84, the capital employed in such undertaking should 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.....'
5. Sub-rule (5) of that rule provided, inter alia, that for the purpose of ascertaining the average amount of capital employed in an industrial undertaking during any computation period, the profits or losses made in the period shall, except so far as the contrary is shown, be deemed to have accrued at an even rate throughout the said period and to have resulted, as they accrued, in corresponding increase or decrease, as the case may be, in the capital employed in the undertaking.
6. In effect, what r. 19 provided was that if there was an addition to the capital of the undertaking subsequent to the first day of the accounting period, such addition should be deemed to have been made at an even rate throughout the accounting year and the average amount of capital during that entire year should be the basis for computing profits or gains at six per cent. per annum for the purpose of giving the tax concession under s. 84.
7. Section 80J was inserted in the Act and s. 84 was repealed by the Finance (No. 2) Act, 1967, with effect from April 1, 1968. Section 80J provides, inter alia, that where the gross total income of an assessee includes any profits and gains derived from a newly established industrial undertaking, in computing the total income of the assessee, a deduction from such profits and gains shall be allowed of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent, per annum on the capital employed in the relevant accounting year in the industrial undertaking computed in the prescribed manner. The manner of such computation for the purpose of that section has been prescribed by r. 19A which was brought into force with effect from April 1, 1968. That rule provides, inter alia, that for the purpose of s. 80J, the capital employed in an industrial undertaking shall be the value of the assets as on the first day of the relevant accounting year.
8. Sub-section (3) of s. 80J provides that where profits and gains of an industrial undertaking have not been sufficient in any year in absorb such deduction, such unabsorbed tax concession (which is called the deficiency) shall be carried forward to the following years subject to a limit of seven years. The earliest year from which such deficiency can be carried forward is the previous year relevant to the assessment year commencing from April 1, 1967.
9. The main difference between r. 19 and r. 19A, for the purpose of computation of the capital, is that the average capital during the accounting year is taken under the former rule, while the capital as on the first day of the relevant accounting year is taken under the latter rule. In other words, additions to the capital of the undertaking after the first day of the relevant accounting year are ignored under r. 19A, while such additions were taken into account under r. 19 for computing the average capital during that year.
10. The assessee had been assessed to income-tax for the year 1967-68 and the tax concession admissible to it under s. 84 for that year had been determined after computing the capital of its new industrial undertaking during the accounting year October 1, 1965, to September 30, 1966, in accordance with r. 19. The income of the assessee for that year was not sufficient to absorb the entire tax concession admissible for that year and there was a deficiency. Under the scheme of s. 84, there was no provision for carrying forward such deficiency to succeeding years for being set off against the profits and gains for those succeeding years.
11. In the assessment for the year 1968-69, the assessee claimed that such deficiency should be set off against the profits and gains for that year and that any deficiency still remaining should be carried forward to succeeding years. For determining such deficiency, the ITO recomputed the tax concession admissible for the assessment year 1967-68, on the basis of the amount of capital in the accounting year October 1, 1965, to September 30, 1966, computed in accordance with r. 19A. The amount of capital of the assessee's industrial undertaking was taken as it stood on October 1, 1965, and additions to the capital between October 1, 1965, and September 30, 1966 were ignored as r. 19A does not provide for taking into account such additions. The assessee's contention that the tax concession determined for the assessment year 1967-68 under s. 84 should not be reopened and should be carried forward without modification for the assessment year 1968-69 was accepted by the AAC who reversed this part of the order of the ITO and computed the deficiency as claimed by the assessee. But the Tribunal reversed the decision of the AAC and restored the decision of the ITO on this point.
12. Sri Sarangan contended that, as the tax concession for the assessment year 1967-68 had already been determined by the ITO in accordance with the law that was applicable for that assessment year, it was not open to the ITO to reopen and to redetermine such tax concession for computing the deficiency that could be set off against profits and gains while making the assessment for the assessment year 1968-69.
13. We are unable to accept the above contention of Sri Sarangan. For the assessment year 1968-69, the provision relating to tax concession for the newly established industrial undertakings was governed by s. 80J and not s. 84. Whatever tax concession was provided by s. 80J had to be computed in accordance with the rules prescribed for the purpose of that section. As stated earlier, the relevant rule for such computation for the purpose of s. 80J was r. 19A and not r. 19. Though the tax concession for the purpose of assessment for the assessment year 1967-68 had already been computed under s. 84 read with r. 19, for the purpose determining the deficiency (unabsorbed tax concession) in the assessment year 1967-68, which should be set off against profits and gains in the assessment for the assessment year 1968-69, such tax concession had to be determined in accordance with s. 80J as expressly provided therein. As seen earlier, s. 84 did not provide for carrying forward unabsorbed tax concession and such carrying forward was provided for the first time by s. 80J. It follows that for recomputing the tax concession for the assessment year 1967-68, for the purpose of determining the deficiency to be set off under s. 80J in the assessment for the assessment year 1968-69, it was r. 19A and nor r. 19 that could be applied. This is what the ITO had done and rightly in our opinion.
14. As a result of the foregoing discussion, our answer to the second question referred to us should be in favour of the revenue and against the assessee.
15. To sum up, the first question referred in this case is answered in the affirmative and in favour of the assessee and against the revenue and the second question is answered in the affirmative and in favour of the revenue and against the assessee.
16. As one of the questions referred to us is in favour of the assessee and another against it, we direct the parties to bear their own costs in this case.