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Commissioner of Income-tax, Gujarat Ii Vs. Elecon Engineering Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 19 of 1971
Judge
Reported in[1976]104ITR510(Guj)
ActsIncome Tax Act, 1922 - Sections 15C; Income Tax Act, 1961 - Sections 80J, 81, 82, 83, 84, 84(1), 84(2), 84(7), 84(8), 84(9), 85C, 101 and 147; Income-tax Rules, 1962 - Rule 19, 19(1) and 19(5)
AppellantCommissioner of Income-tax, Gujarat Ii
RespondentElecon Engineering Co. Ltd.
Appellant Advocate K.H. Kaji, Adv.
Respondent Advocate I.M. Nanavati, Adv.
Excerpt:
.....sections 80j, 81, 82, 83, 84, 85c, 101 and 147 of income tax act, 1961 - whether for determining average capital employed in industrial undertaking or hotel for purpose of section 84 amount computed under rule 19 (5) to be added to amount computed under rule 19 (1) - rule 19 (5) is not otiose - rules formulated with view to effectively extend concession of tax holiday - as per provisions amount computed under rule 19 (5) must be included in amount calculated under rule 19 (1) for purpose of determining average capital employed in industrial undertaking or hotel. - - 1. this reference raise a short but an interesting question as to the scope and width of clause (5) of rule 19 of the income-tax rules, 1962, regarding computation of capital employed in an industrial undertaking or a..........scope and width of clause (5) of rule 19 of the income-tax rules, 1962, regarding computation of capital employed in an industrial undertaking or a hotel for purposes of section 84 of the income-tax act, 1961. the question posed by the tribunal for our opinion in as under : 'whether, on the facts and the circumstances of the case, the figure arrived at by computation under rule 19(5) was to be added to the figure arrived at by computation under rule 19(1) for determining the average capital employed in the assessee's undertaking ?' 2. in order to appreciate the rival contentions for and against the point involved in this question, a few facts which have led to this reference need be stated. 3. the relevant assessment year is 1964-65. under section 84 of the income-tax act, 1961, the.....
Judgment:

B.K. Mehta, J.

1. This reference raise a short but an interesting question as to the scope and width of clause (5) of rule 19 of the Income-tax Rules, 1962, regarding computation of capital employed in an industrial undertaking or a hotel for purposes of section 84 of the Income-tax Act, 1961. The question posed by the Tribunal for our opinion in as under :

'Whether, on the facts and the circumstances of the case, the figure arrived at by computation under rule 19(5) was to be added to the figure arrived at by computation under rule 19(1) for determining the average capital employed in the assessee's undertaking ?'

2. In order to appreciate the rival contentions for and against the point involved in this question, a few facts which have led to this reference need be stated.

3. The relevant assessment year is 1964-65. Under section 84 of the Income-tax Act, 1961, the respondent-assessee was entiled to exemption in respect of its newly established industrial undertaking. In the course of the original assessment the Income-tax Officer had worked out the capital employed in the undertaking at Rs. 45,39,537. For working out this figure, the Income-tax Officer has, as per rule 19(1)(a), valued the assets entitled to depreciation including the additions made during the year at Rs. 40,10,947. He has a added a sum of Rs. 1,39,764 to the said amount on account of the net depreciable assets as on January 1, 1963, and also on account of the average value of the additions. The Income-tax Officer, thereafter, valued other assets as on January 1, 1963, at Rs. 44,38,126 as per rule 19(1)(b). The aggregate valuation so placed by the Income-tax Officer was Rs. 85,88,837. Out of this aggregate valuation, the Income-tax Officer has deducted an amount of Rs. 44,01,803 on account of loans, other liabilities and tax provisions, etc. The Income-tax Officer after deducting the aforesaid amount of Rs. 44,01,803 found the valuation of capital according to rule 19(1) at Rs 41,87,034 to which he added Rs. 3,52,503 being half of the profit for the year from its new industrial project at Vidyanagar. He thus computed the value of the capital employed at Rs. 45,39,537. Accordingly, under section 84 read with section 101 of the Income-tax Act, 1961, the Income-tax Officer exempted an amount of Rs. 2,72,372 being 6 per cent. of the capital employed in the new industrial undertaking. It appears that the Income-tax Officer thereafter held reassessment proceedings under section 147(b) and computed the capital employed at Rs. 41,87,034 as stated above. However, he refused to add the amount of Rs. 3,53,503 being half of the profit for the year from the new industrial undertaking at Vidyanagar as he was of the opinion that the average profit of the year had already been taken into account, inasmuch as in arrive at the above figure, the assets were taken as at the beginning of the year to which added the average value of additions made in respected of the assets during the previous year and the liabilities were also computed accordingly and, therefore, the profits were already reflected in the assets and it was, therefore, not necessary to give benefit again to the assessee by adding the amount the Vidyanagar project. Accordingly, the Income-tax Officer respondent-assessee was entitled to claim exemption only for the amount of Rs. 2,51,222 being six per cent of Rs. 41,87,034 being the amount of capital employed in the industrial undertaking.

4. Being aggrieved by this order of reassessment, the respondent-assessee went in appeal before the Appellate Assistant Commissioner; he, however, confirmed the reassessment order of the Income-tax Officer. In further appeal to the Appellate Tribunal, it was contended that full effect was not given to clause (5) of the aforesaid rule 19, inasmuch as the Income-tax Officer failed to add the profit which accrued and which also resulted in corresponding increase in the capital. The contention of the revenue was that in working out the capital at Rs. 41,87,034, the average profit of the year had already been taken into account, inasmuch as in working out the said figure the assets were taken as at the beginning of the year to which was added the average value of addition made in respect of the assets during the previous year. It appears that the Tribunal did accept this contention of the revenue that the average profit of the year was reflected in the assets of that year. However, the Tribunal was of the opinion that the respondent-assessee was entitled under clause (5) of the aforesaid rule 19 to have benefit of further addition of half the amount of the profit in view of the fiction incorporated in the said clause (5). The Tribunal, therefore, held that the assessee was entitled to claim a further addition of Rs. 3,52,503 being half the amount of the profit to the valuation of the capital at Rs. 41,87,034 and, therefore, the net valuation should be Rs. 45,39,537. On that basis the assessee was entitled to claim exemption on the amount of Rs. 2,72,372 being 6 per cent. of the value of the capital employed in the industrial undertaking. At the instance of the Commissioner, therefore, the question set out hereinabove has been referred to us for our opinion.

5. Before we deal with the contentions raised on behalf of the revenue, at the time of hearing of this reference, we would like to reproduce the relevant provisions of the Income-tax Act, 1961, and the Rules which have a bearing on the point involved in this reference.

6. Chapter VII of the Income-tax Act, 1961, which included sections 81 to 85C (which are now omitted by section 33 of and the Third Schedule to the Finance (No. 2) Act, 1967, with effects from the April 1, 1968), provided for incomes forming part of total income on which no income-tax is payable. Section 84(1) which deals with income of newly established industrial undertakings or hotels provides as under :

'84. Income of newly established industrial undertakings or hotels. (1) Save as otherwise hereinafter provided, income-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 the prescribed manner.'

7. Sub-section (2) of section 84 thereafter prescribes the conditions which would enable an industrial undertaking to claim exemption under the aforesaid sub-section (1). Sub-section (3) provides for the conditions which are required to be fulfilled by a hotel before it is entitled to claim exemption under sub-section (1). Sub-section (3A) provides for the conditions which would entitle a ship to claim exemption under sub-section (1). Sub-section (4) empowers the Central Government to withdraw exemption conferred by sub-section (1) by a notification in respect of any class of industrial undertakings from a date to be specified. Sub-section (5) provides for the method of calculating profits or gains of industrial undertaking, hotel or ship. Sub-section (6) saves the provision contained in Chapter XI in relation to the profits or gains derived from an industrial undertaking or hotel to which section 84 applies. Sub-sections (7), (8) and (9) provide for incidental matters as to the respective years for which the assessment could be made of the industrial undertakings, hotels, etc. The manner of computing capital employed in an undertaking, business or ship for purposes of sub-section (1) of section 84 is prescribed in rule 19. Sub-rule (1) of rule 19 provides as under :

'19. Computation of capital employed in an industrial undertaking or a hotel. - (1) For the purposes of section 84, the capital employed in an undertaking or a hotel to which the said section applies shall 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;

(b) in the case of assets acquired by purchase and not entitled to depreciation -

(i) if they have been acquired before the computation period, their actual cost to the assessee;

(ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period;

(c) in the case of assets being debts due to the person carrying on the business, the nominal amounts of those debts;

(d) in the case of any other assets, the value of the assets when they became assets of the business :

Provided that if any such asset has been acquired within the computation period, only the average of such value shall be taken in the same manner as average cost is to be computed. Explanation. - For the purposes of clauses (a) and (b) of this sub-rule, the value of any building, machinery or plant or any part thereof which having been previously used for any purpose is transferred to the undertaking or hotel at the time of its formation shall not be taken into account for computing the capital employed in cases to which the Explanation to section 84 applies.'

8. Sub-rule (2) is not relevant for the purposes of this reference. Sub-rule (3) provides for deduction of any borrowed money and debt by the person carrying on the business, including the debt incurred for taxation and the advance tax to be paid under the provisions of the Income-tax Act. Sub-rule (4) provides that in the course of any investments of such industry business or ship, which is not required for the purposes of business, shall be left out of account for purposes of computation of the income. Sub-rule (5), the interpretation of which has given rise to this reference, reads as under :

'(5) For the purpose of ascertaining the average amount of capital employed in a business during any computation period, the profits or losses made in that period shall, except so far as the contrary is shown, be deemed -

(a) to have accrued at an even rate throughout the said period; and

(b) to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business.'

Broadly the scheme of rule 19 of the Income-tax Rules, 1962, appears to be as under :

For purposes of the computation of the capital employed in the new industrial undertakings or hotels, the assets are classified into four categories, namely, (i) assets to depreciation, such as building, machinery etc; (ii) assets not entitled to depreciation, such as raw materials, consumable stock-in-trade, etc.,; (iii) assets in the nature of debts; and (iv) assets acquired otherwise than by purchase. Rule 19(1)(a)(i) and (ii) prescribes the method of valuing assets entitled to depreciation. In respect of the assets entitled to depreciation, acquired before the computation period, the written down value as at the time of commencement of the computation period, is to be taken into consideration, while in respect of the additions made in the course of the computation period, the average cost of such additions is to be taken into consideration. Rule 19(1)(b) provides for the method of valuing the assets not entitled to depreciation with reference to the date of acquisition of such assets. As regards the assets acquired before the computation period, the actual cost is to be taken into consideration, while as regards the additions made in the course of the computation period, the average cost is to be taken into consideration. As regards the assets in the nature of debt, it is not clear as to which cost is to be taken into consideration, but the nominal amount of the debt is considered as the valuation of that type of assets. This is provided in rule 19(1)(c). As regards the other assets not acquired by purchase, rule 19(1)(d) provides the method of computation as actual value if acquired before the computation period and average value if acquired in the course of the computation period. After making sum total of such cost of the valuations as prescribed in sub-rule (1) of rule 19, such debts or moneys borrowed by the assessee as well as the income of the investments of idle moneys not required for the business are to be deducted. This is provided in sub-rule s (3) and (4) of rule 19. It is thereafter that in rule 19(5) which has been set out above that the fiction is provided for purposes of ascertaining the average amount of capital employed in a business in the course of any computation period. The wording of sub-rule (5) of rule 19 causes some anxiety about its width and ambit. Does it envisage, in view of the fiction incorporated therein, that the legislature intended to add to or subtract from the total the total of value and cost of the assets as computed according to sub-rue (1), the average profit or loss as the case may be It is contended on behalf of the revenue that the fiction has been incorporated in sub-rule (5) only to allay the misapprehension or to repel the plausible contention on behalf of the assessee that their profits are not necessarily reflected in the assets. According to the revenue, the scope of sub-rule (5) should be limited to those cases only where the capital employed is worked out with reference to the value of assets at the date of the commencement of the computation period and the value of additions made in the course of the said period. On the other hand, on behalf of the assessee, it is contended that the legislative intent underlying section 84 of the Income-tax Act, 1961, is to provide tax holiday to new industrial undertakings or hotels and for this purpose not merely the cost or value of capital is to be worked out, but the average capital employed throughout the year in the business of industrial undertakings or hotels should in fact be ascertained, and with that end in view, the fiction is incorporated in sub-rule (5)(a).

9. It should be noted that section 84 of the 1961 Act (which is now deleted) corresponds to section 15C of the 1922 Act, except sub-section (4). While considering the question under section 15C of the 1922 Act, the Bombay High Court in Commissioner of Income-tax v. National Electrical Industries Ltd., observed as under :

'It is true that in order to give a fillip to new industrial undertakings and to secure speedy industrialisation the legislature has provided for exemption from payment of tax on a percentage of the capital employed in the undertaking, but thereby the true nature of the exemption is not attained. The exemption is in terms of payment of tax and it is not an exclusion of income in the computation of total income.'

10. Section 84, therefore, provides for tax holiday for new industrial undertakings or hotels and exempts the income thereof to the extent of six per cent. of the capital employed in the business of the new industrial undertakings or hotels, computed in the manner prescribed by rule 19 of the aforesaid rules. Though the arrangement of the permissible additions and subtractions is not rationally and chronologically made, the legislative intent as expressed in rule 19 seems to us, having regard to the entire scheme of the said rule, that to effectively extend the concession of the tax holiday, the average capital employed throughout the year in an industrial undertaking or a hotel should form the basis for such concession. This basis appears to emerge from a comparison of the phraseology employed in sub-rule (1) and (5) of rule 19. The opening part of sub-rule (1) provides as under :

'(1) For the purposes of section 84, the capital employed in an undertaking or a hotel to which the said section applies shall be taken to be -.....' while in sub-rule (5) the opening wordings are as under : '(5) For the purpose of ascertaining the average amount of capital employed in a business during any computation period...'

11. It seems clear to us that legislature has adopted two different concepts in sub-rules (1) and (5), namely, the valuation or the cost of the assets and the average amount of capital employed. It appears that the Income-tax Officer as well as the Appellate Assistant Commissioner were of the opinion that the average cost or valuation of the total assets has been computed and the profits would necessarily be reflected therein and, therefore, it was not necessary for them under sub-rule (5) to ascertain the average amount of the capital by adding half the amount of the profits in order to carry out the fiction incorporated in the said sub-rule.

12. At the time of hearing of this reference, on behalf of the revenue it was again pointed out to us that though the Tribunal agreed with this plea of the revenue that profits were necessarily reflected in the average valuation of the assets it held that in view of the fiction incorporated in sub-rule (5) the assessee was entitled to the addition of half the amount of the profit to the total value and cost of the assets as computed under sub-rule (1) and that this may be additional benefit, was so intended to be conferred by the legislature, having regard to the fiction incorporated in sub-rule (5). It may be true, in a given case, that profit or loss might be invested in or debited to the financial statement of the assessee from time to time, but it cannot be always so, as the assets of the assessee may not at all times reflect the fluctuations of the profits at different rates as and when they accrue at the different stages of the computation period. This view of ours would be clarified by a simple illustration. Before the computation period in case of an assessee there are assets worth Rs. 100 and on the first day of the computation period, the assessee makes profit of Rs. 100 which he ploughs back in the business and employs it as a capital for the whole year. In fact, therefore, be employees the capital of Rs. 200 for the whole of the computation period. If we compute this capital, as has been done by the Income-tax Officer and the Appellate Assistant Commissioner in the reassessment proceedings, the capital employed would be Rs. 100 + Rs. 200=Rs. 300 divided by 2, which will give Rs. 150 as the average capital employed. Now, as a matter of fact, the assessee has employed Rs. 200 as the working capital for the whole of the computation period. If we add half of the profit, that is, Rs. 50, in the average capital so valued by the Income-tax Officer, then only we will get the capital actually and in fact employed by the assessee during the computation period. This is what the legislature has tried to achieve by incorporating the fiction in sub-rule (5). As stated by us earlier, the assets will not always and necessarily account for fluctuations in the profit and the different rates of profit at which it accrued at the different stages of the computation period. The legislature has, therefore, provided that for ascertaining the average amount of capital employed in a business during any computation period, the profit or loss made in that period shall, except so far as the country is shown, be deemed to have accrued at an even rate and to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business. It may be that in ascertaining the average amount of capital, as provided in the fiction, numerous factors may have to be considered. But it appears that the income-tax authorities have, by way of rough and ready method, adopted the addition of half the amount of the profit on the basis of this fiction that the profits have accrued at a uniform rate throughout the computation period and correspondingly resulted in increase or decrease as and when the profits or losses accrued. Mr.Kaji, therefore, pointed out, in order to persuade us to accept his contention and to read in the manner in which he wanted to restrict the scope of sub-rule (5) some observations in the commentary on sub-rule (5) from the look of Income-tax Law and Practice by Chopra, which reads as under :

'Sub-rule (5) of rule 19 lays down the principles on which the average amount of profit or loss should be computed. According to this rule the profit or loss shall be taken to have accrued at an even rate throughout the C.P. and to have resulted, as it accrued, in a corresponding increase or decrease, as the case amy be, in the capital employed in the business. The rule does not contemplate a separate addition or deduction, and where the capital employed is computed as above with reference to all the assets and liabilities of the business and the profit or loss remain invested or debited in the business, they would be automatically reflected in the assets of the business. The sub-rule seems to have scope only in cases where the capital employed is worked out by first ascertaining the amount of capital employed at the commencement of C.P. and adding thereto or subtracting therefrom the capital introduced or moneys taken out of the business including profit or loss of the C.P. Since the latter method has not the sanction of law the rule seems otiose and its existence, without expressly authorising the adoption of the latter method, is only confounding. Legislative intention seems called for in this matter.'

13. We do not think that this observation of the learned author is correct, and more so when he has observed that sub-rule (5)(a) is otiose. As stated above, the two concepts adopted in sub-rule (1)(a),(b),(c) and (d) and sub-rule (5) are valuation of cost or capital and the amount of average capital employed. It is a well-known principle of the interpretation of statues that there would be nothing which is superfluous or redundant in an Act or a provision of an Act placed on the statute book by the legislature. Considering the entire scheme embodied under rule 19, we do not agree with the observation of the learned author that sub-rule (5) is otiose. The reason for his observation appears to be that as the valuation or cost of the assets is made on the average basis, there is no scope for the application of the fiction incorporated in sub-rule (5). But as pointed out by us in the illustration given above unless the fiction is applied and taken to its logical conclusion, one would not be in a position to ascertain the real and actual capital employed in the business of an industrial undertaking. In that view of the matter, therefore, we are of the opinion that the Tribunal was justified in accepting the appeal of the assessee and rejecting the contention of the revenue. We, therefore, answer the question referred to us as under :

14. On the facts and in the circumstances of the case, the figure arrived at by computation under rule 19(5) was to be added to the figure arrived at by computation under rule 19(1) for determining the average capital employed in the assessee's undertaking.

15. Having regard to the fact this reference involves a question of interpretation on which there are no rulings, we think that there should be no order as to costs.


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