Subramonian Poti, C.J.
1. The question referred to this court by the Income-tax Appellate Tribunal, Cochin Bench, reads :
' Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that on a correct interpretation of Section 80J of the Income-tax Act, 1961, read with Rule 19A of the Income-tax Rules, 1962, the assessee-company is entitled to a deduction of the entire amount of Rs. 1,47,495 as claimed by it under that section and not to 1/6th alone of the amount, as determined by the Income-tax Officer '
2. The assesses is a public limited company. For the assessment year 1971-72, for which the relevant previous year is that ending on March 31, 1971, the assessee filed the return claiming loss of Rs. 10,57,776. The assessee claimed deduction of Rs. 1,47,495 under Section 80J of the I.T. Act, 1961, that being 6% on the amount of adjusted capital as on the opening day. On account of labour trouble, the company had worked during the previous year only for two months. The ITO took the view that in view of this fact deduction under Section 80J should be limited to 1/6th of the claim, that being the proportionate part of the year during which the company worked. He allowed only Rs. 24,982 as deduction under Section 80J of the I.T. Act, 1961.
3. The assessee then filed an appeal to the AAC claiming that the capital employed, being capital as computed under the rule at the beginning of the year, interest should be allowed on the whole amount of the capitalso employed and not for only a part of the year. The AAC accepted this contention and allowed the deduction claimed by the assessee.
4. An appeal was filed thereupon to the Income-tax Appellate Tribunal by the Department contending that only 1/6th should have been allowed as deduction. The Tribunal found that the expression '6% per annum' occurring in Section 80J and Sub-rules (2) to (4) of Rule 19A of the I.T. Rules does not warrant the view that the amount may be reduced or restricted in proportion to the period in which the assessee's industrial undertaking had worked. The appeal was dismissed. The reference arises under the above circumstances.
5. Section 80J(1) of the Income-tax Act, 1961 reads :
' 80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.--(I) 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 asses-see, a deduction from such profits and gains reduced by the deduction, if any, admissible to the assessee under Section 80HH or Section 80HHA 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 specified in Sub-section (1A) 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) : Provided that in relation to the profits and gains derived by an assessee, being a company, from an industrial undertaking which begins to manufacture or produce articles or to operate its cold storage plant or plants after March 31, 1976, or from a ship which is first brought into use after that date, or from the business of a hotel which starts functioning, after that date, the provisions of this sub-section shall have effect as if for the words 'six per cent. ', the words 'seven and a half per cent. ' had been substituted.'
6. Sub-section (2) of Section 80J provides that deduction specified under Sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles and each of the four assessment years immediately succeeding the initial assessment year. There is a proviso which applies to a co-operative society. The period is enlarged in the case of a co-operative society. The purport of the sectionis evidently to grant tax relief to an assessee who begins manufacture or production of articles in the industrial undertaking. He obtains the benefit of tax relief for five assessment years commencing from the year in which the manufacture or production begins. This tax relief is limited to 6% per annum on the capital employed. This is deducted from profits and gains derived from the industrial undertaking included in the gross total income of the assessee. According to us, Section 80J gives no room for doubt that the deduction is six per cent. per annum on the capital employed and not a portion of the capital employed, that portion being determined by reference to that part of the year in which the manufacture or production was carried on. On the plain language of the section, we see no reason for a different view. We see no justification in the scheme of things to so limit the deduction, for, evidently, what is intended is that an assessee who commences a new undertaking must get tax relief for a period of 5 years and that tax relief during the five years is six per cent. per annum of the capital employed. Naturally the term 'capital employed ' will have to be explained with reference to the date on which such capital is taken into account. That is provided for in Rule 19A of the I.T. Rules which reads:
' 19A. Computation of capital employed in 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 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;
Explanation 7.---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 owed by the assessee (including amounts due towards any liability in respect of tax). Explanation.--For the purpose of this sub-rule,--(i) ' tax ,' means-
(a) income-tax or super-tax (including advance tax) due under any provision of the Act;
(b) wealth-tax due under any provision of the Wealth-tax Act, 1957 (27 of 1957);
(c) gift-tax due under any provision of the Gift-tax Act, 1958 (18 of 1958) ;
(d) super profits tax due under any provision of the Super Profits Tax Act, 1963 (14 of 1963) ;
(e) surtax due under any provision of the Companies (Profits) Surtax Act, 1964 (7 of 1964);
(ii) any liability in respect of tax shall be deemed to have become due-
(a) in the case of advance tax due under any provision of the Act, on the date on which such advance tax is payable ; and
(b) in the case of any other tax, on the first day of the period within which it is required to be paid.
(4) The resultant sum as determined under Sub-rule (3) shall be diminished by the value, as ascertained under Sub-rule (2), of any investments the income from which is not taken into account in computing the profits of the business and any moneys not required for the purpose of the business, in so far as the aggregate of such investments or moneys exceed the amount of the borrowed moneys which under Sub-rule (3) are required to be deducted in computing the capital.
(5) The capital employed in a ship shall be taken to be the written down value of the ship as reduced by the aggregate of the amounts owed by the assessee as on the computation date on account of moneys borrow-ed or debts incurred in acquiring that ship.
Explanation. -- In this sub-rule, 'computation date ', in relation to a ship, means,--
(a) in respect of the previous year in which the ship is first brought into use, the date on which it is so brought into use;
(b) in respect of any subsequent previous year, the first day of such previous year. '
7. As per Sub-rule (2) in which reference to the aggregate of certain amounts representing the value of the assets is made, such value must be with reference to the first day of the computation period. There could be no doubt as to the scope of the term ' capital employed ' in the light of Rule 19A and if that term could be well understood, 6% per annum of the amount also could be easily determined. We find no warrant in any of the provisions adverted to by us to limit the deduction to any portion of the capital employed as determined with reference to Sub-rule (2) of Rule 19A of the I.T. Rules. Evidently, some emphasis was placed on the term ' per annum ' following ' six per cent. ' to indicate that where capital employed is not for the whole year, the deduction should be proportionate. Apart from the fact that we cannot say capital is not employed for the period during which manufacture or production is stopped, we see no reason to read the words 'six per cent. per annum ' as indicating that for broken periods proportionate amounts should be deducted. Deduction is contemplated in the section for five successive years. It is not as if six per cent. of the capital is the permissible deduction for all the years together. It is so deductible for each one of the five years. It is evidently that idea that is sought to be conveyed by the expression ' six per cent. per annum '.
8. The view that we expressed here is in consonance with the view expressed by the Madhya Pradesh High Court in a case where a similar contention is seen to have been raised at the instance of the Revenue. We are referring to CIT v. Sanghi Beverages (Pvt.) Ltd. : 134ITR623(MP) . After referring to the relevant provision, the court held in the case (p. 624) :
' Section 80J of the Act, nowhere further provides for reduction of the amount of deduction on time basis, with reference to the working of the industrial undertaking. The provisions of Section 80J of the Act which are intended to encourage the setting up of a new industrial enterprise have to be construed liberally. Even if a new undertaking has functioned foronly a part of an accounting year, the deduction has to be allowed to the full extent and the percentage cannot be reduced in proportion to the part of the year during which the undertaking was in productive operation. '
9. We may also advert to a decision of the Madras High Court in CIT v. Simpson and Co, : 122ITR283(Mad) . The court was not concerned with Section 80J in that case, but Section 84 of the I.T. Act, 1961, which was repealed by Finance (No. 2) Act, 1967. With effect from April 1, 1968, by the same Finance Act, the provision found a place as Section 80J in the Act. Rule 19 in the LT. Rules dealt with computation of capital employed in an industrial undertaking or a hotel and the rule is for the purpose of Section 84. Rule 19A is a similar provision for the purpose of computation of capital employed for the purpose of Section 80J. But there is an essential difference between these two rules. While Sub-rule (2) of Rule 19A, as we have already pointed out, deals with determination of the capital employed by aggregating the value of assets as on the first day of the computation period and provides for such determination to be the basis for the deduction under Section 80J, Rule 19, refers to the capital employed being determined with reference to ' average cost '. Average cost is defined in Sub-rule (6) of Rule 19 as such proportion of the actual cost thereof as the number of days of the computation period during which such asset is used in the business bears to the total number of days comprised in the said period. We are only pointing out that as Rule 19 stood, the question of average cost was relevant and in turn it related to the period during which the asset was used in the business. That concept is absent in Rule 19A. Even so, the Madras High Court held construing Section 84 that the deduction under that section was not to be limited for the period during which alone the assets were used. An argument advanced before the court that the word ' per annum ' would imply a proportionate deduction for the period during which the assets remained unemployed did not appeal to the court.
10. Though we do not normally make reference to the views expressed by commentators on the I.T. Act, in view of the conflicting views expressed by two of the prominent among them, we may notice them here. Commenting on Section 80J at p. 676 of the 7th Edn. of Kanga and Palkhivala's Law and Practice of Income Tax, the commentators observe:
' Even if a new undertaking has functioned for only a part of an accounting year, the deduction should be allowed to the full extent of six per cent. or seven and a half per cent. as the case may be, and the percentage is not to be reduced in proportion to the part of the year during which the undertaking, ship or hotel was in productive operation. '
11. In the Supplement to the 7th edn., at p, 1-136, there is a note ;
'At the end of last para. add. (CIT v. Simpson : 122ITR283(Mad) ; CIT v. United Carbon (India) Ltd. decided by Bom HC on 18-6-1974) '.
12. We may notice that a contrary view has been expressed on the scope of this section in Sampath Iyengar's Commentary on the Income Tax Act, 6th Edn., at p. 1307. The commentator observes :
' Statutory exemption limit.--Where the above conditions are fulfilled, relief is to be granted as discussed infra (see under heading ' Nature of Relief' post) in respect of six per cent. of the capital employed in the undertaking (referred to in the statute as the relevant amount of capital employed). There are two points to be noticed in this connection. The first is that the percentage is to be worked out on a time basis, depending upon the whole or part of the previous year for which any item of capital is employed in the undertaking, at the rate of six per cent. per annum. The second is that the capital employed in the undertaking, ship or hotel during the previous year relevant to the assessment year has to be computed in the manner prescribed. Rules 19 and 19A of the Income-tax Rules set forth the rules governing such computation.
In computing the capital employed in an undertaking for the purpose of granting relief to the assessee under this section on the basis of the written down value of the assets, initial depreciation should not be deducted. This was held to be a prima facie view. '
13. In the light of our discussion, we hold that deduction under Section 80J is permissible on the capital employed at six per cent. per annum for the whole year and not for any part of the year as contended by the Revenue. Therefore, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue.
14. A copy of this judgment under the signature of the Registrar and the seal of this court shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.