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Commissioner of Income-tax Vs. Anand Bahri Steel and Wire Products - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Civil Case No. 602 of 1976
Judge
Reported in(1981)21CTR(MP)166; [1982]133ITR365(MP)
ActsIncome Tax Act, 1922 - Sections 15C; Indian Income Tax (Computation of Capital of Industrial Undertakings) Rules, 1949 - Rule 3(3); Income Tax Act, 1961 - Sections 80J; Income Tax Rules, 1962 - Rule 19A(3)
AppellantCommissioner of Income-tax
RespondentAnand Bahri Steel and Wire Products
Appellant AdvocateP.S. Khirwadkar, Adv.
Respondent AdvocateK.M. Agrawal, Adv.
Cases ReferredC) and Dhulabhai v. State of M.P.
Excerpt:
.....then value of the consideration actually given for the asset shall be treated as the actual cost of the asset. but we are clearly of opinion that in the content of section 80j the expression does not include borrowed moneys, and debts, as it is in this sense that this expression has been understood right from 1949. it also cannot be lost sight of that the computation of capital employed has to be 'in the prescribed manner 'as is expressly provided in section 80j and, therefore, the rules can prescribe as. the provision for deduction of borrowed moneys and debts in rule 19a(3) is not such which changes the character of that which has to be computed under section 80j and is, in our opinion, perfectly valid. it is well settled that parliament has a very wide discretion of making..........of capital of industrial undertakings) rules, 1949, which correspond to rule 19a of the 1962 rules. rule 3(3) of the 1949 rules provided for deduction of any borrowed money and debt due by the person carrying on the business in the computation of capital for purposes of section 15c. rule 3(3) of the 1949 rules was not challenged and was in operation till the coming into force of the 1961 act and the making of the 1962 rules. rule 19a(3) follows the same pattern as rule 3(3) of the 1949 rules, except that the amount of debentures and the amount of long-term loans, i.e., loans providing for repayment during a period of not less than seven years when taken from an approved source, are not deducted in the computation of capital for purposes of section 80j. rule 19a was later on amended.....
Judgment:

G.P. Singh, C.J.

1. The questions of law referred in this reference made by the Income-tax Appellate Tribunal under Section 256(1) of the I.T. Act, 1961, are as follows;

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in ignoring the provisions of Rule 19A of the I.T. Rules, 1962, and thereby holding that borrowed capital is to be treated at par with own capital of the assessee for working out the capital employed for the purpose of Section 80J ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is entitled to a deduction under Section 80J of the entire capital without differentiating between the own capital and borrowed capital ?

3. Whether the Tribunal was justified in allowing deduction under Section 80J at Rs. 67,548 in place of Rs. 13,975 allowed '

2. The facts stated are that the assessee is a registered firm deriving income from manufacture and sale of barbed wire and G.I. wire, etc. The relevant assessment year is 1971-72, for which the accounting year ended on 31st March, 1971. The assessee claimed a deduction under Section 80J of the Act. The ITO was of the view that the assessee could be given relief under Section 80J of the Act at 6 per cent. on the net capital employed. In other words, the ITO was of the opinion that the amount borrowed and invested in the industrial undertaking by the assessee could not be taken into consideration for computing capital under Section 80J of the Act. On this basis, the ITO rejected the claim for deduction amounting to Rs. 67,548 and allowed deduction only of Rs. 39,975. The order of the ITO was upheld by the AAC. The Tribunal, however, took a different view. The Tribunal followed a decision of its Bombay Bench and held that the capital employed in an industrial undertaking is the entire investment of the assessee in the undertaking and that no distinction can be made between the assessee's own capital and borrowed capital. The Tribunal ignored Rule 19A on the ground that a clear direction to the contrary was available from the decision of the Supreme Court in Indore Malwa United Mills Ltd. v. State of M.P. : [1965]55ITR736(SC) , which held that after borrowing the money borrowed became the borrower's money. Section 80J, in so far as relevant, reads as follows :

' 80J. Deduction in respect of profits and gams from newly established industrial undertakings or ships or hotel business in certain cases.--(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the aggregate of the deductions, if any, admissible to the assessee under Section 80H and Section 80I) 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 industrial undertaking or ship or business of the hotel, as the case -may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year). '

3. The manner of computation of capital employed is given in Rule 19A of the I.T. Rules, 1962, which, in so far as relevant, reads as follows :

' 19A. Computation of capital employedin an industrial undertaking or a ship or the business of a hotel for the purposes of Section 80J.--(1) For the purposes of Section 80J, the capital employed in an industrial undertaking or the business of a hotel shall be computed in accordance with Sub-rules (2) to (4), and the capital employed in a ship shall be computed in accordance with Sub-rule (5).

(2) The aggregate of the amounts representing the values of the assets, as on the first day of the computation period, of the undertaking or of the business of the hotel to which the said Section 80J applies, shall first be ascertained in the following manner ;--

(i) in the case of assets entitled to depreciation, their written downvalue;

(ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee ;

(iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business ;

(iv) in the case of assets being debts due to the persons carrying on the business, the nominal amount of those debts;

(v) in the case of assets being cash in hand or bank, the amount thereof.

Explanation 1.--In this rule, 'computation period' means the period for which profits and gains of the industrial undertaking or business of the hotel are computed under sections 28 to 43A.

Explanation 2.--The value of any building, machinery or plant or any part thereof as is referred to in Clause (a) or Clause (b) of the Explanation at the end of Sub-section (6) of Section 80J shall not be taken into account in computing the capital employed in the industrial undertaking or, as the case may be, the business of the hotel.

Explanation 3.--Where the cost of any asset has been satisfied otherwise than in cash, the then value of the consideration actually given for the asset shall be treated as the actual cost of the asset.

(3) From the aggregate of the amounts as ascertained under sub-rule (2) shall be deducted the aggregate of the amounts, as on the first day of the computation period, of borrowed moneys and debts due by the assessee (including amounts due towards any liability in respect of tax), not being,--

(a) in the case of an assessee being a company, the amount of its debentures, if any, and

(b) in the case of any assessee (including a company), any moneys borrowed from an approved source for the creation of a capital asset in India, if the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years...... '

4. A perusal of Sub-rule (3) of Rule 19A will go to show that after aggregating the amounts representing the values of the assets as given in Sub-rule (2), the aggregate of the amounts of borrowed moneys and debts due by the assessee have to be deducted, except as provided in Clause (a) and (b) of Sub-rule (3). Sub-rule (3) of Rule 19A thus specifically requires deduction of borrowed moneys in determining the capital employed by the assessee for the purpose of calculating the tax relief under Section 80J. As earlier stated by us, the Tribunal's opinion is that there can be no distinction between the assessee's own capital and borrowed capital and that the tax levied under Section 80J cannot be limited to 6 per cent. of the assessee's own capital employed in the industrial undertaking. In so holding the Tribunal impliedly held sub- Rule (3) of Rule 19A to be invalid, although it did not expressly say so. Now, the Tribunal had no such power to ignore the Rules made under the Act in deciding the appeal before it. The Tribunal's observation that it could do so because of the decision of the Supreme Court in Indore Malwa United Mills Ltd. v. State of M.P. : [1965]55ITR736(SC) , is also not correct. The Supreme Court in that case was not at all concerned with Section 80J or Rule 19A. The case related to the imposition of industrial tax under the Indore Industrial Tax Rules, 1927, and the question was whether the company could claim deduction of the money borrowed by the managing agents which had become irrecoverable as a trading loss in computing its profits. The observation made by the Supreme Court at p. 740 of the report that, after the borrowing, the money became the company's money, does not assist us in the interpretation of s, 80J or in determining the validity of Rule 19A(3). It is now settled law that the assessing authorities functioning under a taxing Act have no jurisdiction to decide the validity of any of its provisions or rules or notifications made thereunder: [See K. S. Venkataraman and Co. (P.) Ltd. v. State of Madras : [1966]60ITR112(SC) and Dhulabhai v. State of M.P. [1968] 22 STC 416]. Indeed, even the High Courts and the Supreme Court in a reference have normally no jurisdiction to entertain the validity of the taxing Act or a statutory rule or order made under it : [See CIT v. Straw Products : [1966]60ITR156(SC) ].

5. Learned counsel for the assessee, however, has relied upon the decisions of the Calcutta, Madras and Allahabad High Courts in support of his submission that the expression ' capital employed ' as used in Section 80J is not restricted to the assessee's own capital and that Rule 19A(3) is invalid in so far as it provides for the deduction of borrowed moneys in computing the capital employed. These decisions are : Century Enka Ltd. v. ITO : [1977]107ITR909(Cal) , Madras Industrial Linings Ltd. v. ITO : [1977]110ITR256(Mad) and Kota Box Mfg. Co. v. ITO : [1980]123ITR638(All) . These cases do support the contention of the learned counsel for the assessee, but as they are not binding on us, we have to examine ourselves the correctness of the view taken in them : [See CIT v. Vrajlal Manilal & Co. : [1981]127ITR512(MP) ].

6. The precursor of Section 80J of the present Act was Section 15C of the 1922 Act. Section 15C also provided for exemption from tax of newly established industrial undertakings on so much of the profits or gains as did not exceed six per cent. per annum 'on the capital employed in the undertaking, computed in accordance with such rules as may be made in this behalf by the CBR'. In pursuance of this rule-making power, the CBR made the Indiaa I.T. (Computation of Capital of Industrial Undertakings) Rules, 1949, which correspond to Rule 19A of the 1962 Rules. Rule 3(3) of the 1949 Rules provided for deduction of any borrowed money and debt due by the person carrying on the business in the computation of capital for purposes of Section 15C. Rule 3(3) of the 1949 Rules was not challenged and was in operation till the coming into force of the 1961 Act and the making of the 1962 Rules. Rule 19A(3) follows the same pattern as Rule 3(3) of the 1949 Rules, except that the amount of debentures and the amount of long-term loans, i.e., loans providing for repayment during a period of not less than seven years when taken from an approved source, are not deducted in the computation of capital for purposes of Section 80J. Rule 19A was later on amended and the exception made in respect of debentures and long-term loans was withdrawn. The validity of Rule 19A(3) in so far as it requires deduction of borrowed moneys and debts due by the assessee in the computation of capital for purposes of Section 80J was for the first time challenged in 1977 in the Calcutta High Court in Century Enka Ltd.'s case : [1977]107ITR909(Cal) . The fact that such a rule existed right from 1949 when Section 15C was introduced and was followed by all concerned till 1977, itself shows that the rule was in accordance with the intention expressed by the Legislature. When Parliament enacted Section 80J, it must have known as to how Section 15C of the 1922 Act was interpreted by the CBR and applied by the income-tax authorities. The fact that Section 80J was enacted in similar terms without showing any disapproval of the interpretation put by the CBR that the amount of borrowings and debts is to be deducted in computing the capital employed, goes to show that Parliament approved of that interpretation. This, in our opinion, is a very important factor to hold that Rule 19A(3) which follows the same pattern as Rule 3(3) of the 1949 Rules, is valid and is in line with the intention of Parliament in enacting Section 80J. Where contemporaneous and practical interpretation has stood unchallenged for a considerable length of time, it is regarded as of great importance in arriving at the proper construction of a statute. Further, such an interpretation gains greater weight when the statute as interpreted is re-enacted and is regarded presumptively the correct interpretation of the law. This rule is based upon the theory that the Legislature is acquainted with the contemporaneous interpretation of a statute, especially when made by an administrative body or executive officers charged with the duty of administering or enforcing the law, and, therefore, impliedly adopts the interpretation upon re-enactment: (See Sutherland's Statutory Construction, 3rd Edn., pp. 520, 521, 523, 524). This important principle was not considered by the Calcutta, Madras and Allahabad High Courts in holding that Rule 19A(3) in so far as it provides for the deduction of borrowings and debts in the computation of the capital employed, goes beyond the rule-making power conferred by Section 80J. Another equally important matter which has not been noticed by these High Courts is that the word ' capital ' in the business world means the net worth of an enterprise and thus necessarily excludes the borrowings. In Batliboi's Advanced Accounting, 19th Edn., p. 78, it is stated that ' capital is the excess of a trader's assets over his liabilities '. Similarly, in Encyclopaedia Britannica (Macropaedia), Vol. 3, p. 799, it is observed that ' in the business world the word capital usually refers to an item in the balance-sheet representing that part of the net worth of an enterprise that has not been produced through the operation of the enterprise '. It is, therefore, wrong to assume that the expression ' capital employed ' is not open to construction that it does not embrace moneys borrowed by the assessee and invested in the industrial undertaking. It may be that in some contexts the expression 'capital employed' may include the borrowed moneys or borrowed capital; but we are clearly of opinion that in the content of Section 80J the expression does not include borrowed moneys, and debts, as it is in this sense that this expression has been understood right from 1949. It also cannot be lost sight of that the computation of capital employed has to be ' in the prescribed manner ' as is expressly provided in Section 80J and, therefore, the rules can prescribe as. to what should or should not be included in the computation. The provision for deduction of borrowed moneys and debts in Rule 19A(3) is not such which changes the character of that which has to be computed under Section 80J and is, in our opinion, perfectly valid.

7. Learned counsel for the assessee also relied upon [Birmingham Small Arms Co. Ltd. v. IRC [1951] 2 All ER 296]. In this case, it was held by the House of Lords that the claim of compensation made by the assessee-company for war damage did not constitute capital employed in the trade or business of the assessee. This case has no bearing on the question with which we are concerned in the instant case. It was also submitted by the learned counsel that the construction adopted by us would be discriminating the indigent assessees who have to borrow funds for their undertakings and that Parliament could not have possibly intended to create this discrimination. We are unable to accept this submission. The indigent assessees who have to borrow capital are given relief by Section 36(1)(iii) of the Act which permits deduction of interest on borrowed capital in the computation of income. The benefit of Section 36(1)(iii) is obviously not available to those who do not borrow capital to finance their undertakings. This may be the reason for not including borrowed moneys in computing the relief under Section 80J. It is well settled that Parliament has a Very wide discretion of making classifications in matters of taxation. It is not possible to argue, nor it is argued, that the construction adopted by us will make Section 80J invalid being violative of Article 14. As explained by us, there are weighty reasons to hold that Rule 19A(3) is consistent with the intention of Parliament and does not go beyond the rule-making power conferred by Section 80J.

8. For the reasons given above, we answer the questions as follows :

(1) The Tribunal was not justified in ignoring Rule 19A(3).

(2) The Tribunal was not justified in holding that borrowed capital has not (sic) to be included in the computation of capital employed.

(3) The Tribunal was not justified in enhancing the deduction under Section 80J from Rs. 13,975 to Rs. 67,548.

9. There will be no order as to costs of this reference.


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