Skip to content


Skol Breweries Ltd. Vs. Third Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)14ITD298(Mum.)
AppellantSkol Breweries Ltd.
RespondentThird Income-tax Officer
Excerpt:
.....in the balance sheet shall not be taken into account for the purpose of determining the net value of assets of the business as a whole. shri lalkaka submitted that in the absence of any such exclusion provided in the case of section 80j, we must presume that all the amounts shown on the assets side of the balance sheet should be taken into account in the computation of capital employed for the purpose of relief under section 80j. reference in this connection was made by him to the observations of the hon'ble supreme court in the case of india cements ltd. v. cit [1966] 60 itr 52 at p. 60 that as long as the law allows preliminary expenses and goodwill to be treated as assets, although of an intangible nature, the money so spent is in the nature of capital expenditure just as much.....
Judgment:
1. This is an appeal filed by the assessee-company against the order of the Commissioner (Appeals) Bombay.

2. The assessee is a limited company and the appeal relates to the assessment year 1979-80. Among the claims before the ITO in the course of the assessment proceedings, one was that the preliminary expenses of Rs. 4,95,435 shown on the assets side of the balance sheet should be taken into account in working out the capital employed for the purpose of relief under Section 80J of the Income-tax Act, 1961 ('the Act').

This claim was not accepted by the ITO. It was brought to our notice at the time of the hearing of the appeal that this claim was also made by grounds of appeal before the Commissioner (Appeals) but was, not considered by him. The assessee-company has, therefore, come up in the present appeal before us.

3. The assessee's learned counsel, Shri Lalkaka, pointed out that the preliminary expenses of Rs. 4,95,435 appearing on the assets side of the balance sheet were for public issue of share capital. Our attention was invited to rule ID of the Wealth-tax Rules, 1957 ('the 1957 Rules'), where Explanation II provided for amounts shown as assets in the balance sheet not being treated as assets and Rule 2D again under the 1957 Rules, where it was provided that the value of some assets, which were disclosed in the balance sheet shall not be taken into account for the purpose of determining the net value of assets of the business as a whole. Shri Lalkaka submitted that in the absence of any such exclusion provided in the case of Section 80J, we must presume that all the amounts shown on the assets side of the balance sheet should be taken into account in the computation of capital employed for the purpose of relief under Section 80J. Reference in this connection was made by him to the observations of the Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 at p. 60 that as long as the law allows preliminary expenses and goodwill to be treated as assets, although of an intangible nature, the money so spent is in the nature of capital expenditure just as much as money spent in the purchase of land and machinery. He, therefore, submitted that the preliminary expenses was an asset, though of an intangible nature and, therefore, there was no reason why the preliminary expenses of Rs. 4,95,435 should not be taken into account in the computation of capital employed under Section 80J. The alternative argument of Shri Lalkaka was that if the preliminary expenses were not treated as an asset, the corresponding liability for incurring these expenses should also not be considered as a liability. Summing up, Shri Lalkaka vehemently argued before us that on this issue, the orders of the revenue authorities were not correct.

4. On the other hand, the learned departmental representative, Shri Mahadeshwar, pointed out that the preliminary expenses did not represent an asset intangible or otherwise, they were fictitious assets, which had no value whatsoever and they were shown on the assets side of the balance sheet only because they being expenses of a capital nature, could not be debited to the profit and loss account and had, therefore, to be shown on the assets side of the balance sheet to comply with the requirements of Schedule VI of Part I of the Companies Act, 1956. Reference was then made by him to Section 80J, as retrospectively amended by the Finance (No. 2) Act, 1980, with effect from 1-4-1972, and Rule 19A of the Income-tax Rules, 1962 ('the 1962 Rules'), both of which provided that in the computation of capital employed in an industrial undertaking, the assets have to be taken if entitled to depreciation at their written down value, if acquired by purchase and not entitled to depreciation, their actual cost to the assessee, and if acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business and this clearly showed that unless the assets can come under one of these classifications, they cannot be taken into account in the computation of capital employed. Coming to the alternative argument of Shri Lalkaka, Shri Mahadeshwar again referred to both Rule 19A of the 1962 Rules and the retrospectively amended Section 80J both of which laid down that what is to be deducted from the aggregate of the amounts representing the values of the assets as on the first day of the computation period will be borrowed moneys and debts owed by the assessee. He, therefore, vehemently argued before us that there is no merit in the alternative argument of Shri Lalkaka.

5. We have carefully considered the rival submissions. At the outset, it will be necessary to point out that the Hon'ble Supreme Court in the case of India Cements Ltd. (supra) simply referred to the observations of Macleod, CJ., in the context of whether the money spent on preliminary expenses was in the nature of capital expenditure or revenue expenditure and it was in this context that the observation was made that preliminary expenses were in the nature of capital expenditure just as much as expenses in the purchase of land and machinery. This is not, therefore, any authority for the proposition that preliminary expenses represent an asset. On the other hand, even according to the principles of accountancy, as explained in Spicer and Pegler's Book Keeping and Accounts, Seventeenth edn., at p. 4, preliminary expenses, in the case of a limited company, are fictitious assets of no value, which have to be written off as soon as possible.

Section 35D of the Act also provides for expenses in connection with the issue for public subscription of shares, which is the case under consideration here, being allowed as a deduction in working out the business income in ten years commencing from the year of the commencement of the business. This clearly shows that the preliminary expenses can under no circumstance constitute a capital asset. Even otherwise, the provisions of both Rule 19A and Section 80J(1A) to the extent to which they are relevant for our purpose, are as follows : 19A. (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 down value; (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 person 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.

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 owed by the assessee (including amounts due towards any liability in respect of tax).

80J (IA) (I) For the purposes of this section, the capital employed in an industrial undertaking or the business of a hotel shall except as otherwise expressly provided in this section be computed in accordance with Clauses (ii) to (iv) and the capital employed in a ship shall be computed in accordance with Clause (v).

(II)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 this section applies shall first be ascertained in the following manner :- (i) in the case of assets entitled to depreciation, their written down value ; (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 person 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.

(III) From the aggregate of the amounts as ascertained under Clause (II) shall be deducted the aggregate of the amounts, as on the first day of the computation period, of borrowed moneys and debts owed by the assessee (including amounts due towards any liability in respect of tax).

Here, it will be necessary to point out that the validity of both Rule 19A and the retrospective amendment of Section 80J brought about by the Finance (No. 2) Act, 1980, have been upheld by the Hon'ble Supreme Court in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308. The preliminary expenses do not come under any of the above items and, hence, cannot be taken into account for the purpose of determining the aggregate of the amounts representing the values of the assets as on the first day of the computation period of the undertaking. We also agree with the learned departmental representative, Shri Mahadeshwar, that all the borrowed moneys and debts owed by the assessee, including amounts due towards any liability in respect of tax have to be deducted, from the aggregate of the amounts as ascertained representing the value of the assets and there is, therefore, no justification for excluding any borrowed moneys or debts while making the deduction. We, therefore, see no merit in the assessee's alternative argument and have no hesitation in coming to the conclusion that the preliminary expenses were rightly not taken into account in the computation of capital employed for the purpose of relief under Section 80J. We also see no merit in the alternative argument of the assessee's learned counsel, Shri Lalkaka, that the corresponding liabilities shown in the balance sheet for incurring the expenses on preliminary expenses should not be considered as a liability and, therefore, should not be deducted from the aggregate of the amounts representing the value of the assets as on the first day of the computation period.

6. The appeal filed by the assessee-company, therefore, fails and is hereby dismissed.


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