1. At the instance of the assessee, the following questions have been referred to this court as arising out of the order of the Tribunal in R. A. No. 279 of 1976-77 :
'1. Whether, on the facts and circumstances of the case, the relief under section 80J of the Income-tax Act, 1961, has to be computed for the assessment years 1968-69 and 1969-70 after deducting the liabilities
2. Whether, on the facts and circumstances of this case, the assessee is entitled to a deduction of Rs. 20,313 under section 35A of the Income-tax Act, 1961, for the assessment year 1969-70 ?'
2. The Revenue also has sought and obtained a reference on the following question as arising out of the same order of the Tribunal :
'Whether, on the facts and circumstances of this case, the assessee is entitled to a deduction under section 80J at six per cent. of the capital employed without it being limited on a proportionate time basis for the assessment year 1968-69
3. So far as the question referred at the instance of the Revenue in T. C. No. 862 of 1977 is concerned. we find that the question is covered by the decision of this court in CIT v. Simpson Company : 122ITR283(Mad) . Following the said decision, we answer that question in he affirmative and in favour of the assessee.
4. Coming to the second question referred at the instance of the assessee, we find that the assessee has claimed deduction under section 35A of the Income-tax Act on the sum of Rs. 20,313 which is part of a sum of Rs. 1,50,000 paid as fees to a foreign company for obtaining what is called technical know-how. The Income-tax Officer allowed the assessee's claim for deduction under section 35A to the extent of Rs. 10,714, being one-fourth of the total value under section 35A but refused deduction as regards the excess amount of Rs. 9,599. When the matter was taken to the Appellate Assistant Commissioner, he held that the purchase of know-how by the assessee from the foreign company cannot be taken to be an acquisition of patent rights or copyrights as contemplated by section 35A of the Act and, therefore, the assessee will not be entitled to deduction to any extent under section 35A of the Act. The said view of the Appellate Assistant Commissioner has been upheld by the Tribunal. The question is whether the Tribunal has come to the right conclusion on this aspect of the case. It is no doubt true, the assessee has acquired, by payment of Rs. 1,50,000, the know-how, secret formula and other designs and specifications from the foreign company. For claiming the benefit under section 35A, the assessee has to show that the know-how, secret formula, designs and specifications are either patent rights or copyrights, for, the deduction under section 35A of the Income-tax Act is only applicable in respect of an acquisition of patent rights and copyrights. The agreement between the assessee and Rockweld Limited, England, does not indicate that the material which is the subject-matter of a bargain is either patent rights or copyrights. Nor has any material been placed before the authorities below by the assessee to show that what he has bargained for with the foreign company is for the acquisition of either copyrights or patent rights. On the material on record, we, therefore, find that both the Appellate Assistant Commissioner as well as the Tribunal are right in their conclusion that the assessee is not entitled to the relief under section 35A of the Income-tax Act as he is not shown to have acquired any patent rights or copyrights under the agreement entered into between the assessee and the foreign company for the supply of knowhow. In this view of the matter, we have to answer the said question in the negative and against the assessee.
5. Coming to question No.1, referred at the instance of the assessee, we find that the same relates to the mode of computation of the capital for the purpose of section 80J of the Income-tax Act. According to the assessee, though section 80J does not contemplate the exclusion of money borrowed or the debt due by the assessee in the computation of the capital, rule 19A of the Income-tax Rules provides for the exclusion of borrowed moneys and the debts owed by the assessee from the aggregate amount representing the value of the assets. When the rule provides for such exclusion and the section does not enable such deduction, the rule should be taken to go beyond the section and, therefore, it should be taken to be invalid. But, the learned counsel relies on the decision in Madras Industrial Linings Ltd. v. ITO : 110ITR256(Mad) , In that case, while construing the provisions of rule 19A(3), this court has expressed the view that the capital employed may be one's own capital or it may represent the capital borrowed by the assessee from others. Therefore, in so far as the rule excluded the moneys borrowed in the computation of capital, it cannot be given effect to. In that case, the moneys borrowed by the assessee for the purpose of the business was directed to be taken as part of the capital employed. According to the learned counsel for the assessee, the principle of the said decision will apply to this case as well and that the expression 'borrowed moneys' and 'debts owed by the assessee' occurring in sub-rule (3) of rule 19A are synonymous. We are of the view that both sides have put forward contentions. The Revenue contends that the debts owed by the assessee have to be excluded from the aggregate of the amounts ascertained under sub-rule (2) of rule 19A as the debts owed cannot in any sense be construed as capital employed as contemplated under section 80J of the Act. On the other hand, the contention of the assessee is that every debt owed by the assessee should be taken to be part of the capital employed, for, the amount which have to go to the discharge of the debts owed by the assessee will normally be treated as capital employed. We are not in a position to accept the extreme contention put forward by the parties. We are of the view that it is not possible to say that all the liabilities or debts owed by the assessee can be automatically treated as not capital employed as contended by the Revenue or all the debts owed or incurred by the assessee should be taken to be automatically as capital employed as contended by the assessee. The nature of the debt or the liability will have to be ascertained and if the debt or liability has arisen out of the borrowing for the purpose of business, then those debts or liabilities can be treated as part of the capital employed. On the other hand, if the debts or the liabilities incurred has not resulted in the augmentation of the capital employed, then those debts or liabilities have naturally to be excluded from the computation of the capital employed. In this case, though the Income- tax Officer refers to the-liability of Rs. 80,514 for the assessment year 1968-69 and Rs. 45,198 for the assessment year 1969-70 and has deducted the same from the aggregate amount of the value of the assets as per sub rule (3) of rule 19A, he has not gone into the question as to how the liability was incurred. The appellate authorities also have not gone into the nature of the said liability, since on the facts available, unless the assessee shows that this liability has been incurred for augmenting the capital of the company, he cannot treat the liability as part of the capital employed. Thus, the matter requires further investigation. The Tribunal has, therefore, necessarily to go into the question as to the nature of the liability and whether the incurring of that liability has resulted in the augmentation of the capital. The result is, on the materials on record, it is not possible to answer the said question unless there is a further investigation into the nature of the liabilities in respect of which the assessee claims relief in the computation of the capital employed. The result is, the Tribunal will have to rehear the appeal on this aspect of the cage and after determining the factual position pass final orders. The question is returned unanswered. No costs.