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Century Enka Ltd. Vs. Income-tax Officer and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberCivil Rule No. 2887(W) of 1972
Judge
Reported in[1977]107ITR123(Cal)
ActsIncome Tax Act, 1961 - Sections 80J, 84 and 143(3); ;Income Tax Rules, 1962 - Rule 19A; ;Constitution of India - Article 226; ;Income Tax Act, 1922; ;Companies (Profits) Surtax Act, 1964 - Section 2(8)
AppellantCentury Enka Ltd.
Respondentincome-tax Officer and ors.
Appellant AdvocateD. Pal, ;R.N. Bajoria, ;R.K. Murarka and ;P.L. Khaitan, Advs.
Respondent AdvocateB. Pal and ;R.N. Mitra, Advs.
Excerpt:
- .....thereof as does not exceed theamount calculated at the rate of six per cent. per annum on the capitalemployed in the industrial undertaking or ship or business of the hotel, asthe case may be, computed in the prescribed manner 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 ofcapital employed during the previous year):.....'11. rule 19a of the income-tax rules, 1962, was introduced in 1967 for the purpose of computation of the capital employed in an industrial undertaking or the business of a hotel or ship. the said rule provides as follows :'19a. computation of capital employed in an industrial undertaking or a ship or the business of a hotel for the purposes of.....
Judgment:

Sabyasachi Mukharji, J.

1. Whether Rule 19A of the Income-tax Rules, 1962, providing for the computation of capital employed in an industrial undertaking or a hotel business for the purpose of Section 80J of the Income-tax Act, 1961, restricts the scope of reliefs under Section 84 of the Income-tax Act, 1961, is the question that falls for consideration in this application under Article 226 of the Constitution.

2. The petitioner is Century Enka Ltd. The petitioner carries on business, inter alia, of manufacture, process and sale of polymide, polyester, rayons or any other type of man-made fibres of silk, wool, cotton or any other types of natural fibres. In the year 1969 the petitioner established an industrial undertaking at Ghosari Post, Poona, for the manufacture of and/or process of nylon yarn and other fibres. It is the case of the petitioner that the said undertaking satisfies the conditions laid down by Sub-section (4) of Section 80J of the Income-tax Act, 1961. For the assessment year 1971-72, the relevant previous year for which is the year ending on September 30, 1970, the petitioner submitted its return for assessment to income-tax and the petitioner stated that the petitioner was entitled to deduction in the computation of its total income for the said assessment year 1971-72, under the provisions of Section 80J of the Act of 1961, out of the profits and gains derived by it from the said undertaking, of so much of the amount thereof as did not exceed the amount calculated at the rate of 6 per cent. per annum on the capital employed in the said industrial undertaking in the said previous year relevant to the said assessment year. On that basis, according to the petitioner, the petitioner was entitled to a deduction of Rs. 40,57,324. The capital employed during the previous year, according to the petitioner's calculation, was Rs. 6,76,22,072. Six per cent. of the said amount of capital would amount to Rs. 40,57,324. The petitioner made a claim accordingly before the Income-tax Officer.

3. The computation made by the petitioner was based not only on the value of assets and liabilities as on the first day of the previous year but also on the average amounts of increases and/or decreases in the assets and liabilities during the previous year.

4. The respondent No. 1, the Income-tax Officer, made the assessment under Section 143(3) of the Act of 1961, for the assessment year 1971-72 and in so assessing rejected the contention of the petitioner and applied Rule 19A of the Income-tax Rules, 1962, for computation of the capital employed. The Income-tax Officer computed the capital employed as on the first day of October, 1969, and determined the same at Rs. 5,26,59,600. The amount of admissible deduction under Section 80J of the Income-tax Act, 1961, was determined at Rs. 31,60,555 being the amount of 6 per cent. of the said Rs. 5,26,59,600.

5. The petitioner has made this application under Article 226 of the Constitution of India on the 24th day of May, 1972, against the said assessment order dated the 18th February, 1972. The subject-matter of challenge in this application is the applicability of Rule 19A of the rules, 1962, in determining the capital employed in the petitioner's undertaking for computation of deduction under Section 80J of the Act of 1961. In order to determine this question, in this case, it would be relevant to refer to the legislative history of Section 80J of the Act of 1961. For the purpose of giving relief to the new industrial undertakings of the capital employed in such undertaking the Indian Parliament seems to have been motivated in introducing Section 15C to the Indian Income-tax Act, 1922, The same was inserted by Section 13 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949. The said Section as introduced in 1949 provided as follows :

'15C. Exemption from tax of newly established industrial undertakings. --(1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this Section applies as do not exceed six per cent. per annum on the capital employed in the undertaking, computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue.....'

6. As would be evident from the Section the purpose was to give tax holiday in respect of capital employed in a new industrial undertaking of certain specified types mentioned in the Section. In order to implement the working out of the scheme of the Section, rules were framed (see Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949) and rule 3 on the computation of capital employed in an undertaking for the purpose of Section 15C of the Indian Income-tax Act, 1922, provided as follows:

'3. (1) For the purpose of scction 15C of the Act, the capital employed in an undertaking 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.

(2) Where the price 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 price at which the asset was acquired.

(3) Any borrowed money and debt due by the person carrying on the business shall be deducted and in particular there shall be deducted any debts incurred in respect of the business for income-tax and super-tax or business profits tax or for advance payments due under any provision of the Indian Income-tax Act, 1922, or for any sum payable in relation to business profits tax under Section 13 of the Business Profits Tax Act, 1947 (XXI of 1947):

Provided that any such debt for income-tax or super-tax or business profits tax shall, for the purpose of this sub-rule, be deemed to have become due-

(a) in the case of income-tax and super-tax on the last day of the period of time within which the tax is payable under Section 45 of the Act;

(b) in the case of business profits tax on the first day after the end of the chargeable accounting period in respect of which the tax is assessable notwithstanding that the business profits tax may not have been assessed until after that date ;

(c) in the case of any advance payment due under any provision of the Act or of any provisional tax paid under Section 23B of the Act, on the date on which, under the provision of Section 45 of the Act, the payment first became due.

(4) Where any debt for business profits tax assessable in respect of any period is to be deducted under this rule, the amount thereof shall not be reduced as a result of any relief to be given in respect of a deficiency of profits accruing in any subsequent period, and the amount of such relief shall be treated as having become an asset of the business on the first day after the end of the chargeable accounting period in which the deficiency occurred.

(5) Any investments the income from which is not to be taken intoaccount in computing the profits of the business and any moneys not required for the purpose of the business, shall be left out of account, but where any investments in the beneficial ownership of the person carrying on thebusiness are so left out of account, the sum (if any) to be deducted underSub-rule (3) in respect of borrowed money shall be computed as if theprincipal of the borrowed money were reduced by the value of thoseinvestments.

(6) 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.'

7. When the Income-tax Act, 1961, repealed the Indian Income-tax Act, 1922, Section 84 was introduced to further the same purpose as Section 15C of the Indian Income-tax Act, 1922. The relevant sub-section provided as follows :

'84. (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.'

8. By the Finance (No. 2) Act, 1967, Sub-section (1) was substituted by the following :

'(1) Save as otherwise hereinafter provided, income-tax shall not be payable by an assessee on so much of the profits and gains derived from any industrial undertaking or business of a hotel or from any ship, to which this Section applies, as does not exceed six per cent. per annum on the capital employed in such undertaking, or business or ship, computed in the prescribed manner.'

9. The said provision came into effect from 1st April, 1967, and was effective upto 1st April, 1968. Rule 19 of the Income-tax Rules, 1962, was introduced for the purpose of working out the computation of capital in such industrial undertakings. The said Rule 19 provided as follows :

'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.'

10. As a result of the amendment effected by the Finance (No. 2) Act, 1967, these amendments in Section 84 were effective for the prescribed period and from 1st April, 1968, Section 84 stood repealed and Section 80J was introduced. Section 80J provides as follows : .

'80J. Deduction in respect of profits and gains from newly establishedindustrial undertakings or ships or hotel business in certain cases.--(1) Where the gross total income of an assessee includes any profits and gains derivedfrom an industrial undertaking or a ship or the business of a hotel, towhich this Section applies, there shall, in accordance with and subject to theprovisions of 'this Section, be allowed, in computing the total income of theassessee, a deduction from such profits and gains (reduced by the aggregateof the deductions, if any, admissible to the assessee under Section 80H and Section 80HH) of so much of the amount thereof as does not exceed theamount calculated at the rate of six per cent. per annum on the capitalemployed in the industrial undertaking or ship or business of the hotel, asthe case may be, computed in the prescribed manner 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 ofcapital employed during the previous year):.....'

11. Rule 19A of the Income-tax Rules, 1962, was introduced in 1967 for the purpose of computation of the capital employed in an industrial undertaking or the business of a hotel or ship. The said rule provides as follows :

'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 value 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 1.--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.'

12. The question is whether Rule 19A, in so far as by Sub-rule (2) it stipulates that the aggregate amount representing the value as on the first day of the computation period should be the basis for the determination of capital employed in an industrial undertaking for the purpose of relief to be granted under Section 80J of the Act of 1961, is valid. It was submitted that the purpose of Section 80J was to grant tax holiday or relief in respect of the capital employed in the new industrial undertaking of specified types,in respect of capital employed therein up to a certain percentage, namely, 6 per cent. The purpose of the Section is to encourage deployment of capital in those industries. The deduction is given in respect of the previous year in respect of the capital employed. This Section does not provide as such as to whether the capital had to be employed during a part or the whole of the previous year. In the parenthesis portion of the Section, however, it is provided that the capital calculated in the manner prescribed would be referred to as relevant amount of capital employed during the previous year. There is no dispute in principle that if the Section was intended or meant to grant relief for the capital employed during the entirety of the period, that is to say, entirety of the previous year, then by the exercise of the rule-making power the meaning of that expression Could not be curtailed. The question is, whether the legislature in Section 80J, when it intended to grant relief on 6 per cent. of the capital employed in an industrial undertaking was contemplating capital employed either on a particular period of the previous year or capital employed during the average of the previous year or capital employed during the entirety of the previous year. As mentioned hereinbefore, this Section which had its background in Section 15C of the Indian Income-tax Act, 1922, Section 84 of the Act of 1961, prior to its amendment in 1967, and the rules framed thereunder, which I have set out hereinbefore, indicated that it was understood by the rule-making authority that capital employed in the undertaking covered the capital employed either since before the computation period or after the commencement of the computation period as such and was not restricted only to the value of the aggregate amounts at the commencement of the computation period. There is, of course, no indication as to how this expression was judicially understood when in the new Act Section 80J was introduced in 1967, but there is the indication as mentioned hereinbefore as to how the same was understood by the rule-making authority. It is well settled that if two statutes are in pari materia any judicial decision as to the construction of one was a sound rule of construction for the other. Similarly, when a particular legislative enactment which has received authoritative interpretation, whether by judicial decision or by long course of practice, is adopted in the framing of a later statute, it is a sound rule of construction to hold that the words so adopted were intended by the legislature to bear the meaning which had been so put upon them. For the aforesaid proposition reliance may be placed on the Construction of Deeds and Statutes (4th edition) by C. E. Odgers, at page 241. It is true that, in this case, as mentioned hereinbefore, there is no indication of any judicial interpretation. There is only the indication how the rule-making authority understood the expression 'capital employed.' in Section 15C of the Indian Income-tax Act, 1922, and Section 84 of the Act of 1961, before its amendment in 1967.

13. The main consideration upon which, in my opinion, this question has to be resolved is, whether having regard to the purpose for which provision of Section 80J of the Act was introduced, it was the legislative intent to restrict the capital employed in any manner so as to limit it to the first day of the computation period. It was suggested that such a basis might lead to incongruous results; for instance, if an assessee deploys a large amount of capital on the first day of the previous year then he would be entitled to deduction under Section 80J even though on the next day or some time thereafter he withdraws capital ; on the other hand, an assessee who introduces or brings in capital not on the first day but some time thereafter and keeps the capital employed for a good part of the previous year would not be entitled to the benefits of Section 80J as the capital was not employed on the first day of the previous year. This is an anomaly which will result if such a construction is put as to mean that the capital employed must be restricted as on the first day of the previous year. It, however, is well-settled that in a fiscal provision if the Section is clear, then, whether it would lead to incongruity or not is a matter, with which judicial review is not at all concerned. But, if the Section is not clear, then the court should lean against an interpretation which will lead to absurd or incongruous result.

14. There is another aspect of the matter, namely, that where the legisla-ture wanted certain computation to be made on the basis existing on a particular date, the legislature has provided for it itself. Reference in this connection may be made to the provisions of the Companies (Profits) Surtax Act, 1964. Section 2(8) of the Act provides that statutory deduction means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of two hundred thousand rupees, whichever is greater, subject to certain provisions. The Second Schedule of the Act, which is a part of the Act itself, provides that, subject to other provisions contained in that Schedule, the capital of the company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year. Therefore, in cases where the legislature wanted to say that the state of affairs as on the first day of a previous year should be the basis of either relief or for computation of capital, the legislature has indicated so in the Act. In cases where there is no indication, as in the instant case before me, it would be wrong to consider that the authority was given to the rule-making power to curtail the relief in a manner which has been done under Rule 19Aof the Rules. In that view of the matter I must hold that Rule 19A of the Rules, in so far as it directs that, for the purpose of computation of capital employed, the aggregate amount representing the value of the assets on the first day of the computation period should be taken as the basis, the same is beyond the scope of Section 80J of the Income-tax Act, 1961. Therefore, it is ultra vires to that extent. The Income-tax Officer in this case was, therefore, in error in refusing to grant the relief to the assessee.

15. The assessment order, which is annexure 'B' to the petition, in so far as it refuses deduction or relief to the assessee on the basis of the capital employed during the period of the previous year on the basis of the average, the same, in my opinion, is erroneous for the reasons mentioned hereinbefore and the same is hereby set aside. Th'e Income-tax Officer will now proceed to make the assessment in the light of the aforesaid observations.

16. The rule is made absolute to the extent indicated above.

17. There will be no order for costs.

18. Interim orders are vacated.

19. Let there be stay of operation of this order till two weeks after thelong vacation.


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