Balakrishna Ayyar, J.
1. The assessee is a limited liability company which commenced business on 29-4-1943 as a spinning mill. Some lime later the assessee decided to expand its activities and open a weaving department, and, for this purpose purchased in 1944 eighty-one looms and various items of machinery from the Coimbatore Spinning and Weaving Mills. On 28-7-1945 the assessee commenced the construction of buildings to house its weaving department, and, by June 1946, the work was completed and the machinery installed. But, the weaving section actually commenced to operate only in July 1947.
2. The assessee company was subject to excess profits tax. In computing the average capital of the assessee for the chargeable accounting period between 1-7-1945 and 31-3-1946, the Excess Profits Tax Officer excluded the value of the buildings, plant and machinery which related to the weaving department.
3. On an appeal by the assesee the Appellate Assistant Commissioner held that the amount expended on the buildings, plant and machinery connected with the weaving department was capita employed in the business of the assessee and should therefore be taken into account in computing the average capital.
4. The department appealed against this decision. The Appellate Tribunal held that since,
'the weaving department of the assessee did not go into production during the chargeable accounting period the assets of the aforesaid department did not yet become business assets and hence did not become capital employed for the purpose of earning profits during the chargeable accounting period and the value of such assets cannot therefore be taken in the computation of average capital.'
In other words, it reversed the decision of the Assistant Commissioner.
5. In pursuance of the orders made by this Court in C.M.P. No; 10254 of 1951, the Appellate Tribunal referred the following question for the decision of this Court:
'Whether on the facts and the circumstances of the case in computing the average amount of capital employed in the assessee's business in the chargeable accounting period ending 31-3-1946 the exclusion of the value of the building, plant, machinery and electric fittings of the weaving department was in accordance with Schedule II, Rule 1.'
On 20-8-1956 an order was made directing the Tribunal to
'submit a specific finding on the question, whether the spinning and weaving departments constituted one business of the assessee or whether they constituted two separate and distinct businesses of the assessee during the relevant period.'
That finding has now been received and it is to the effect that both the spinning and weaving sections of the assessee can only form part and parcel of a single manufacturing business carried on by the assessed during the chargeable accounting period in question.'
The question, therefore, is whether the capital laid out by the assessee on its weaving department can be taken into account for ascertaining the average amount of capital employed in the business of the assessee within the chargeable accenting period.
6. We shall first quote the relevant statutory provision. We begin with Section 6 of the Excess Profits Tax Act and the first proviso thereto, which run as follows :
'Section 6. Standard profits: (1) For the purpose of this Act, the standard profits of a btisiness in relation to any chargeable accounting period shall, subject to the provisions of Sub-sections (3) and (4), be an amount bearing to the profits of the business during the standard period, if in respect of the business a standard period is available, the same proportion as the chargeable accounting period bears to the standard period:
Provided that if the average amount of capital employed in the business during such chargeable accounting period is greater or less than the average amount of capital employed during the standard period, such amount shall be increased or decreased, as the case may be, by an amount calculated by applying the statutory percentage to the amount of such increase or decrease.'
7. Then we have Sub-rule (1) of Rule 1 of Sechedule II which is as under :
'1. (1) Subject to the provisions of this Schedule the average amount of the capital employed in a business (so far as it does not consist of money) shall be taken to be -
(a) so far as it consists of assets acquired by purchase on or after the commencement of the business, the price at which those assets were acquired, subject to the deductions hereafter specified;
(b) so far as it consists of assets being debts due to the person carrying on the business, the nominal amount of those debts, subject to the said deductions;
(c) so far as it consists of any other assets which, have been acquired otherwise than by purchase as aforesaid, the value of the assets when they become assets of the business, subject to the said deductions.'
It will ho noticed that the rule states that the average amount of capital employed in the business shall be the price paid for assets where such assets have been purchased, the nominal amount of debts where the assets consist of debts, and, the value of the assets where they have been acquired otherwise than by purchase. It will be also noticed that the word 'employer' used in the sub-rule relates to capital and not to assets. Purely ,is a matter of grammatical construction it is not necessary to satisfy the requirements of this sub-rule that the assets should be employed in the business.
What the rule says is that the capital employed in the business shall he taken to be the price or value of the assets or the amount of the debts. It does not say that the assets should be employed in the business. Apart from authority, therefore, on the mere language of the rule, one would be justified in saying that if the funds of the assessee have been used to acquire assets for being used in the business of the assessee, that would be capital employed in the business within the meaning of the rule. Actual employment of the assets acquired is not necessary, The assessee may lay by a large stock of spare parts. It may happen that no occasion arises to utilise such spare parts. Still the money spent in acquiring the spare parts would be capital employed in the business of the assessee.
Similarly the assessee may acquire an engine to replace another which it is feared may break down. The new engine may not be used at all. Nevertheless it would be an asset of the assesses and the money used to purchase that piece of machinery would he capital of the assessee employed in its business. The circumstance, therefore, that in the present case the weaving department did not go into actual production will not disentitle the assessee from claiming that the money spent on it should be considered to be capital employed in its business.
8. Learned counsel for the assessee referred to Inland Revenue Commissioners v. Byron Ltd., 1946) 14 ITR (Sup) 1. The relevant facts and the contentions of the Crown are correctly summarised in the first part of the headnote ;
'The respondent company carried on business as theatre proprietors, and in April 1937, bought the A. Theatre at Hull for 12,280. On 7-5-1941, the theatre was destroyed by enemy action. The freehold' site continued to belong to the company. The Crown contended that there had been a decrease in the average amount of the capital employed in the respondents' business in the accounting period ending 28-5-1941, and that the standard profits should therefore be decreased in relation to that accounting period by the statutory percentage of 6 per cent on the decrease of capital, and that the company was left with a new and different asset from the asset it acquired for & 12,280 in April 1937.'
The Court held that,
'So long as the asset remains part of the capital' employed in the trade or business, it would appear, therefore, that the value to be put upon it for the purposes of calculating excess profits fax is not to be increased with the increase of its real value, and, equally, that changes of circumstances which in fact render the asset no longer worth its original value do not affect the value to he put on the asset for excess profits tax purposes. In these respects, as well as in others, the valuation of capital under the Schedule for the purpose of calculating the tax is manifestly different from the valuation which would be proper in a balance-sheet or in the application o company law.'
'All that has happened is that, while the original asset continues to be owned by the company, its value has been greatly reduced by the damage which 'has occurred. On this view of the facts the value that must be attributed to the asset for the purposes of the tax is the price originally paid for it, and there is no decrease in the capital when the capital is computed in accordance with the Seventh Schedule. The Crown put forward, as' an alternative contention, the view that the damage which has occurred produced the result that whatever capital the company previously had at Hull was no longer 'employed in its trade or business.' In my opinion, this contention is not sound. The fact that the Hull building has been so much damaged that it cannot at present be used as a threatre does not mean to me in itself to establish that the freehold site and what is upon it is not still 'employed in the trade or business.'
If the company decided to abandon the use of 'the site for the purpose of its business, different considerations might arise. If, however the theatre was for other reasons, temporarily closed, or if it was in course of reconstruction and improvement, this would not justify the contention that it formed no part of the capital referred to in Part II of the Seventh Schedule. Even if it be the case that, for the purposes of excess profits tax, the capital employed in a trade or business of a company does not necessarily include all the capital of the company and it certainly expressly excludes investments held by a company, the income from which is not to be taken into account in computing the profits of the trade or business (Seventh Schedule, Part II. para 3), the asset at Hull must be regarded as still employed in the trade or business, even though it is not actively or productively employed in the accounting period.'
9. This decision is certainly authority for the view that the contention that the assets must have been actually employed or put in use before the value of such assets can be said to be capital employed in the business of the assesses, is not sound.
10. Mr. Rama Rao Sahib, the learned advocate for the department, however, referred to Birmingham Small Arms Co. v. I.R.C.. [1951-2 All ER 299. The material facts are summarised in the first paragraph of the head note :
'On several occasions the factory of a company was severely damaged by enemy action, and it was agreed with the Board of Trade for the purpose of the War Damages Act. 1941, Section 62(1), that 22-11-1940 should be taken as the date from which interest should accrue in respect of any claim under the Act for compensation for the destruction of machine tools and plant. On 12-11-1945, the amount of the claim was finally agreed by the Board of Trade at 6,47,012. Payment was made in one sum in March 1947, In the assessment of the company to excess profits tax for the chargeable accounting period beginning 1-8-1940, and ending 31-7-1941, in computing the amount of capital employed in their trade or business, no account was taken of the right of claim to compensation.'
11. The Court ruled that the claim to compensation was not an asset, the value of which, during the chargeable accounting period in question, formed part of the capital employed in the business of the assessee.
12. It will be at once perceived that there is one important difference between that case and the instant case. In the English case all that the company had was a claim to compensation which might or might not materialise. In the case before us that is not so. The capital of the company had actually been expended in the acquisition or an asset in order that it might be put in use. All that happened is that the assesses was not actually able to do so.
13. Mr. Rama Rao Sahib referred to certain passages from the speech of Lord Simonds at page 299:
'My Lords, it is plain on the face of this sub-para (1) that 'capital employed' means assets employed. For die capital is something which 'consists' of money or 'consists' of assets of various kinds. Then by a slight twist the 'value' of the assess becomes the 'amount' of the capital.'
'My Lords, I see no valid reason for disregarding and giving no meaning to the word 'employed'.'
When, however, we read the speeches of the other learned Lords we find that this view that the assets should have been employed expressed by Lord Simonds was not accepted by them. Lord Radcliffe said :
'The test in computing capital is not whether an asset belonging to the proprietor of a business is employed in his business or not, but whether there is capital employed in his business consisting of this or that asset. In many cases, there is no difference it all between the two questions : in a few cases the difference may be important. But to treat them as the same question does tend to lead to a confusion that has not been absent from the arguments in this case, for, whereas once capital has been introduced into a business it may naturally be regarded as still employed in it until such capital is lost or withdrawn. I have not been able to bring to my mind any clear conception of what is meant by an asset being employed in a business if it means something different from merely belonging to it. Your Lordships have been, in effect, invited to say that there is some pregnant meaning that should be attached to the word 'employed' in this connection.
I do not think that I am being unfair to the argument of the respondents if I say that we were not presented with any set of words which were can-able of defining what that pregnant meaning might be, apart from the suggested interpretation of the word 'employed' as meaning 'actively or productively employed during the accounting period' which has already been rejected by this House in the Terence Byron case, 1945 1 All ER 636 .......... My Lords, I do not think, that the words 'capital employed in a trade or business' bear any significant difference of meaning from the words 'capital of a trade or business.'
Throughout this section the word 'employed' is used in reference to capital, but I take it to be clear that it is not introduced with the purpose of drawing any distinction between the various kinds or measures of use to which assets may be put once capital of the business has come to consist of them.
They themselves may no money, or debts, or real or personal property, but if they represent a form in which capital of the business has clothed itself for the time being, no further question needs to be asked as to the nature of their contribution at any particular period to the conduct of the business .... .... ..... But I think that it would take a good deal of argument to demonstrate that capital employed in a trade or business' in Schedule VII to this Act has some meaning aseertainably distinct from 'capital of a trade or business', if the two phrases were, as I think, interchargeable under the former Act. ....... Secondly, capital employed may consist of assets that are inherently unproductive' ............... I should have concluded from these indications and the legislative history of the words' capital employed' that they were used in the present Act without any reference to the actual use made of particular assets during a particular period, once it could be said of them that they were a form of capital which had been put into the business.'
Lord Tucker was of the same view :
'My Lords, I agree with those of your Lordships who consider that authority, as well as the legislative history of the words 'capital employed', point to the conclusion that in their present context they do not refer to the actual use made of a particular asset in the relevant accounting period once it is shown to have been a form of capital put into the business and still there.'
To us it does not appear that the decision relied on by Mr. Rama Rao Sahib is authority for the position that the assets must have been put into use. It seem? to us to be sufficient if the assets have been acquired for the purpose of the business and, whether used or not, are still there and available for the use of the business.
14. In the result, we answer the question referred to us in the negative and in favour of the assessee. The assesses will get its costs.