T.U. Mehta, C.J.
1. At the instance of the Commissioner of Income-tax, New Delhi, the Income-tax Appellate Tribunal, Chandigarh Bench, has referred the following two questions for our opinion with regard to the assessment of the respondent-company's income for the assessment year 1963-64, These questions are as under :
'(1) Whether, on the facts and in the circumstances of the case, the following assets have been correctly included by the Tribunal in the assets of the Central Unit for the purposes of computing the average capital employed in the undertaking under Sections 84 and 101 of the Income-tax Act, 1961:
(a) Capital works-in-progress Rs. 13,77,704(b) Land acquired during the years Rs. 84,902(c) Stores in transit Rs. 1,03,045. (2) Whether, on the, facts and in the circumstances of the case, the Tribunal was justified in allowing deduction by way of development rebate to the extent of Rs. 7,731 in respect of a telephone exchange installed in the factory area, under the provisions of Section 33 of the Income-tax Act ?'
2. While referring these two questions to this court the Tribunal has unfortunately not given out the proper data relevant to these two questions in the statement of facts submitted by it. The facts and the reasoning on which the Tribunal has taken a particular view on these two questions are not clear even by reference to the Tribunal's judgment in the appeal before it, found at annex. C. We have, therefore, gathered the necessary data on admitted facts from the record before us. These facts can be stated as under.
3. The respondent-assessee is a public limited company and is one of the leading manufacturers of alcoholic products. It has branches at various places. One of such branches is known as Mohan Nagar Branch. This branch is a complex of seven distinct units as under :
(i) Cold storage.
(ii) Ice factory.
(iii) Food products.
(iv) Malt extract.
(v) Malt house.
4. Apart from these seven separate units of production, the assessee-company also maintains the 8th unit, which is called Central unit for MohanNagar, in which accounts relating to common expenses, common assets and purchases, etc., for all the above-referred seven units are being maintained. It appears from the record of the case that the function of this Central unit is to distribute goods, articles and raw materials to different units and to co-ordinate their activities.
5. It is found that during the course of assessment the respondent-assessee claimed benefit of tax exemption under Section 84 and rebate on super-tax under Section 101 of the I.T. Act, 1961, as those sections then existed in the scheme of the Act. It should be noted here that previous to the introduction of Section 84 the exemption contemplated by it was given by Section 15C of the earlier Act of 1922. It need not be emphasised that this exemption is intended to encourage the setting up of new industrial enterprises and, therefore, Section 84 contemplates that the profits of the new industrial undertakings which fulfil the conditions prescribed by this section would be entitled to exemption from income-tax to the extent of 6% per annum on the capital employed in the undertaking in question. Section 101 contemplates rebate on the super-tax which such a concern is liable to pay. This rebate is to be computed with reference to the income-tax which is not payable on profits or gains under Section 84.
6. Sub-section (1) of Section 84 provides as under :
'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) prescribes the conditions which an industrial undertaking should fulfil with a view to take advantage of the exemption provided by Sub-section (1). For the purpose of this reference, we are not concerned with Sub-section (2), nor are we concerned with Sub-sections (4), (5) and (6) of this section. Sub-section (7), however, provides as under :
'The provisions of this section shall, in relation to an industrial undertaking, apply to the assessment-
(i) for the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles, and
(ii) where the assessee is a co-operative society, for the six assessment years immediately succeeding, and where the assessee is any other person, for the four assessment years immediately succeeding.'
8. It is evident from the above provision of Section 84 that tax exemption which a new undertaking is entitled to is maximum to the extent of 6% of the capital employed in that undertaking. Therefore, for the purpose of computation of the tax exemption under this section, it is necessary to calculate the quantum of capital employed in the undertaking. The methodof this computation is provided by Rule 19 of the I.T. Rules, 1962. Sub-rule (1) of Rule 19 says that for the purposes of Section 84, the capital employed in an undertaking to which the section applies shall be computed in the manner which is provided therein. The relevant portion of Rule 19 is as under:
'19. (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 todepreciation-
(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.' Sub-rule (6) of Rule 19 explains certain expressions. One such expression explained therein is 'average cost '.
9. It is explained as under :
'(i) 'average cost', in relation to any asset, means 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 the days comprised in the said period.'
10. It appears to be an unchallengeable and admitted position that all the seven units of Mohan Nagar Branch complex of the assessee had conducted its manufacturing work during the accounting period, and, therefore, the application of Section 84 was attracted with regard to all these units. However, out of the seven units mentioned above, unit No. (i) cold storage, No. (ii) ice factory, No. (iii) food products, No. (v) malt house, and No. (vii) distillery, did not earn any profits, but rather made losses. The accounts of all these seven units had admittedly been maintained separately by the assessee and, therefore, all these seven units have been given separate treatment for thepurpose of assessment of income by the concerned authorities. So far as the ITO and the AAC are concerned, they considered the application of Section 84 only with regard to unit No. (iv) matt extract, and unit No. (vi) brewery, which had admittedly made profits, The contention of the assessee was that the unit known as malt house should also fee taken into consideration for the purpose of computing exemption under Section 84 because the products manufactured in malt house unit were sold to malt extract unit at a lower rate and not at the commercial rate, and therefore, if this sale is computed at commercial rate pursuant to the decision given by the Gujarat High Court in Anil Search Products Ltd. v. CIT : 59ITR514(Guj) , even malt house unit can be treated as having made profits, and therefore, the capital employed for the purpose of malt house should also be taken into consideration in computing tax exemption under Section 84. This contention was rejected by the ITO and the AAC, but was eventually accepted by the Tribunal.
11. So far as this reference is concerned, the dispute relates to the following three items, namely :
(1) Capital work-in-progress, valued at Rs. 13,77,704;
(2) Land acquired by the assessee during the accounting period, valued at Rs. 84,902 ; and
(3) Stores in transit, valued at Rs. 1,03,045.
12. So far as these three items are concerned, the case of the assessee is that their capital valuation shown above should be added to the 'capital employed' for the purpose of computing tax exemption under Section 84 and rebate under Section 101. The ITO rejected this contention of the assessee by making the following observations :
'It is observed that Mohan Nagar is an industrial complex consisting of several units. Besides specific assets pertaining to each unit and as shown in the balance-sheet of the respective units, there are assets which are common to all, like administrative block, power house, staff quarters, canteen, etc. Their common assets and liabilities are incorporated in the balance-sheet of the central unit. Apart from these common assets there are assets like capital work-in-progress, newly purchased land, which cannot be related to any of the existing units. They are programmes for future expansion and the assessee's contention that they should be included in working out the average capital in the central unit is without any basis. Computation of average capital as envisaged in rule 19 is on the basis of assets used in the business. Work-in-progress and land purchased for future expansion cannot be called assets in use for any of the units, and, therefore, these have to be excluded.'
13. From the observations of the ITO, it appears that he has rejected the above-referred claim of the assessee on two grounds, namely, that these three items cannot be related to any existing unit or units and that computationof average capital as envisaged by Rule 19 referred to above is 'on the basis of assets used in the business. The ITO seems to have construed the word 'business' as meaning manufacture and sale. In other words, according to the ITO, unless it is shown that a particular asset is actually utilized in the manufacturing process and sold subsequently to make profit, its capital valuation cannot be added for the purpose of computing tax exemption under Section 84.
14. The AAC, while dealing with this contention of the assesses, had confirmed the view taken by the ITO by making the following observations :
'As regards items (d) and (e) the ITO has excluded them from the capital on the ground that the assets were not in use in any of the units during the year. This view of the ITO is correct and the exclusion on this ground is upheld. As regards item (f) (stores in transit) there is no mention in the assessment order or in the capital computation in this connection but it is seen from the balance-sheet details furnished by the company that the amount has been excluded. This exclusion is justified for the same reasons as for items (d) and (e) (capital work-in-progress, and land acquired) as the stores were not held by any particular units.'
15. Being dissatisfied with the view taken by the ITO and the AAC, the assessee approached the Tribunal. The Tribunal's order found at annex. C does not disclose reasons why it has taken a particular view in the matter. But para. 24 of the Tribunal's judgment states as under :
'The central unit or the type now before us, is a prominent feature of all modern industrial complexes. It is not only a well known feature but an essential requirement for efficient industrial operations. We believe that it would not be incorrect to say that this is true of every large public sector undertaking also.
We, therefore, see no reason, to hold that investment to be non-industrial. They are, in our opinion, entitled to the benefit under Sections 84 and 101. They should be included in the capital computation.'
16. We do not find here any observation of the Tribunal with regard to the department's contention that the capital value of these three disputed items can be included for the purpose of tax exemption under Section 84 only if these items have been actually utilized in the manufacturing process and then sold. It is further evident from the Tribunal's order that though the Tribunal has found that all the three disputed items stated above are belonging to the central unit, the Tribunal has not specifically said anything on the question whether the capital value of these items should be counted in proportion to the three units which are found to have made profits, namely, malt extract, malt house and brewery.
17. It is in this background that we now proceed to decide the first question which is referred to us by the Tribunal. The first question specifically refers to the three disputed items, namely, (1) capital work-in-progress, (2) land acquired during the accounting year, and (3) stores in transit. It was contended on behalf of the petitioner by its learned advocate, Shri Inder Singh, that since it is an admitted position that none of these three disputed items is actually utilized either in manufacturing process or in the conduct of the sale business of the assessee, their valuation should not be taken into account for the purpose of computing tax exemption under Section 84. It was pointed out that when the capital work is in progress it is obvious that such type of work would not have been used or utilized in manufacturing any article. The same is the contention with regard to the second item of land which is acquired during the accounting year, and the stores which were in transit. In substance, the argument was that unless and until a particular capital asset is found to have been used in the business, i.e., in the manufacture and sale of the products by the assessee, its valuation should be excluded at the time of calculating or computing the value of the capital employed for the purpose of Section 84. In support of this contention, our attention was drawn to Sub-section (7) of Section 84 which is quoted above, and which says that the provision for tax exemption contemplated by Section 84 shall apply to the assessment for the assessment year relevant to the previous year in which an undertaking begins to 'manufacture or produce' articles. In our opinion, Sub-section (7) of Section 84 is wholly irrelevant because it merely points out the assessment year for which the provisions of Section 84 are to be worked out. In other words, it points out the period for which the tax exemption could be claimed by an assessee under Section 84. It does not, in any manner, restrict the implications of the expression 'capital employed' used in Sub-section (1) of Section 84. Our attention was also drawn to the above-quoted meaning of the expression 'average cost' found in Rule 19(6)(i) of the I.T. Rules, 1962. It is no doubt true that the meaning of the expression 'average cost' which is given therein makes reference to the use of the asset in business, but even that does not restrict the implication of the expression 'capital employed' found in Section 84(1). The definition of the expression 'average cost' given in Rule 19(6)(i) is for the limited purpose of calculating the average cost of a particular asset which is not used for the whole time of the account period.
18. Expression 'average cost' appears in Clauses (a)(ii), (b)(ii) and (d) of Sub-rule (1) of this rule, for the purpose of calculating the value of assets employed in the undertaking, but acquired at different periods. Clause (a) is about the assets entitled to depreciation and provides for different standards of computation depending upon the question whether they are purchased before or after the commencement of the computation period. Clause (b) makes similar provisions for the assets which are not entitled todepreciation. Clause (c) prescribes the measure of computation for assets which are debts, and Clause (d) provides for all other types of assets, and the proviso attached to it says that if such assets are acquired within the computation period, its average value shall, be computed in the same manner in which 'average cost' is computed.
19. The pertinent question, however, is as to how an 'average cost' is to be calculated. We have already quoted the definition of this expression. This definition does provide that an 'average cost' depends upon the 'period during which such asset is used in business'. Therefore, user of the asset in business is undoubtedly an important factor to be taken into account. But what is the user of an asset in 'business' Can the meaning of the word 'business' be confined merely to the actual utilisation in manufacture and sale In our opinion, to confine the meaning of the word 'business' in this manner would amount to putting an unwarranted restriction to the same. The word 'business' has a wider connotation which comprehends within itself three important stages of the business of every industrial undertaking, viz., purchase, manufacture and sale. Therefore, it must follow that when a particular asset is used in the 'capital work-in-progress' that asset must be treated as an asset 'used in business'. Similarly, if a piece of land is acquired and stores are put in transit, they must be treated as having been 'used in business' because user in business starts the moment the land or the store is purchased for the business of the undertaking concerned. In our opinion, any attempt to limit the user in business to manufacture and subsequent sale would offend the clear and simple meaning of the word 'business' which has obviously a wider significance.
20. Moreover, as will be presently seen, we are of the opinion that the expression 'capital employed' found in the section itself cannot be construed as carrying the meaning 'capital used or utilised'. We are of the clear opinion that any asset purchased for the undertaking is 'capital employed' in that undertaking. If this is the interpretation of the statutory provision, the rule framed under the statute cannot restrict the wider meaning contemplated by the statute itself. Rule 19, therefore, cannot be construed so as to render it contrary to Section 84(1).
21. Under these circumstances we find that neither Sub-section (7) of Section 84, nor the definition of the expression 'average cost' given in Rule 19, is helpful in deciding the meaning of the expression 'capital employed' found in Section 84(1). The meaning of this expression is to be sought on the interpretation which can be given to it by the plain meaning of the language employed by the legislature in Sub-section (1) of Section 84.
22. If again a reference is made to this language, it becomes evident that exemption contemplated by Section 84(1) is to be given to the extent of 6% ofthe capital 'employed' in the undertaking in question. The capital which is 'employed' in a particular undertaking should not be confused with the capital which is 'used' in that undertaking. It is obvious that the whole capital which is employed by an entrepreneur in establishing a particular industry cannot and would not necessarily be utilized or used in manufacturing process. Therefore, if the word 'employed' is construed as carrying the same connotation as the word 'used', the whole object with which Section 84 has been enacted by the legislature would be destroyed because it is almost impossible to utilize the whole capital which is employed in the industry for the purpose of manufacturing. The employment of a capital for the establishment of an industry has obviously a very wide connotation. When an entrepreneur starts a new industry it is obvious that for various commercial exigencies he cannot utilise all the assets which are employed by him for starting that industry. Therefore, the value of the assets employed by that entrepreneur would always be more than the value of the assets which are actually utilised for bringing out production. The purpose of Section 84 is to give incentive, to new industries. The modern concept of taxation is not merely to collect revenue, because by its tax-policy, the Government can shape the fiscal aspects of the economic activities of the nation suitable to its own policies. If, therefore, the legislature wants to give incentive to new industries in order to further the industrial progress of the nation then the enactment made by the legislature for that purpose cannot be construed in a manner which would thwart the very purpose for which the statute was enacted. Therefore, if the expression 'capital employed' is construed as meaning the capital utilized in the manufacturing process, the whole purpose for which Section 84 was enacted would be destroyed. We, therefore, find ourselves unable to agree with the department's contention that the value of only those assets which have been, actually utilized in the manufacturing process should be included for the purpose of assessing the value of the capital employed under Section 84 of the Act.
23. We find support for this view from the various decisions of other High Courts to which we shall shortly refer at this stage.
24. In CIT v. Indian Oxygen Ltd. : 113ITR109(Cal) the question was whether capital shown under the item 'work-in-progress' should be included for the purpose of calculating tax exemption under Section 84 of the Act. In that decision the High Court of Calcutta considered the meaning of the expression 'capital employed' and came to the conclusion that the moment capital is utilized for the purpose of acquiring any asset for a business, such capital becomes employed in the business. Therefore, whether the asset is used in the business or not, so far as the capital is concerned, it continued to be employed in the business. The High Courtfurther held that the amount representing the value of the capital shown under the, head 'work-in-progress' at the beginning of the accounting year should be included in the computation of the expression 'capital employed' for the purpose of working out the relief under Section 84(1). This view has been shared even by the High Court of Karnataka in Ram Machine Tools (P.) Ltd. v. CIT : 114ITR459(KAR) and the High Court of Gujarat in CIT v. Cibatul Ltd. : 115ITR879(Guj) , wherein the capital value of the machinery which was riot yet installed was taken into account for the purpose of working out the benefit contemplated by Section 80J of the Act which is equivalent to Section 84 with which we are concerned in this reference.
25. In view of what is stated above, we are of the opinion that the capital, value of the capital work-in-progress, land acquired during the accounting year and stores in transit, should be taken into account as assets of the central unit. It is found that the central unit does not keep its separate profit and loss account, but distributes the common assets held by it to the different seven units. We, therefore, opine that out of the total value of these three disputed items, that proportion of the capital value of the items which can be attributed to the three profit-making units, namely, malt extract unit, malt house unit, and brewery unit, should be added to the capital value of these three units for the purpose of computing relief under Section 84 of the Act. This disposes of question No. 1.
26. So far as question No. 2 is concerned, the facts are that the assessee has constructed a network of telephones in its factories in Mohan Nagar complex. This phone system is admittedly an internal phone system which has installed a total number of 50 telephones during the accounting period. The assessee-company claimed the development rebate to the extent of Rs. 7,731 in respect of this installation under Section 33 of the I.T. Act. Under this section, development rebate can be claimed in respect of new machinery or plant (other than office appliances) which is owned by the assessee and is wholly used for 'the purpose of business carried on by it. Installation of internal telephone system must be construed as a plant in view of the definition of the word 'plant' given in Section 43 of the Act. This definition is inclusive in its character and says that the word 'plant' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession. Internal telephone system is undoubtedly a scientific apparatus used for the purpose of the business of the assessee. There is, therefore, no difficulty in concluding that it is a plant. That, however, would not conclude the matter because even 'if a particular item is a plant it would not earn development rebate if it is found to be an office appliance. Therefore, the real question to be considered is whether the internal telephone system is an office appliance. There is 'no statutory definition of the expression 'office appliance'. However, the plain meaning of this expression suggests that an 'office appliance' is an appliance which is primarily used for the office purposes. The question, therefore, is whether the internal telephone system which is installed by the assessee in its factories in the complex is for the purpose of office. It is evident that this internal telephone system installed in the factories is for the purpose of efficient organisation of the manufacturing process carried on by these factories. If some of these appliances are put in the offices of technical and managerial executives, or even at their residences, that would not make any difference because these technical executives and managers are expected to see that the machines installed in the factories are efficiently working and giving proper production. Therefore, if it is found that a particular plant or machinery is substantially and essentially for the purpose of production, such plant and machinery cannot be taken as covered by the expression 'office appliances'. The AAC has taken a view that this internal telephone system cannot earn development rebate because by itself it produces nothing. This concept is totally outdated if it is found that the plant or machinery in question is helpful in making the other machines run properly and efficiently. It cannot be doubted that the internal telephone system installed in the different factories of the complex would be quite essential in harmonising and co-ordinating the manufacturing process undertaken by the assessee. We are, therefore, of the opinion that the installation of the internal telephone system cannot be construed as 'office appliances'. It can therefore, earn development rebate under Section 33, and, therefore, we answer question No. 2 by saying that the Tribunal was justified in allowing the deduction by way of development rebate to the extent of Rs. 7,731 in respect of the telephone exchange installed in the factory area.
27. This disposes of both the questions referred to us by the Tribunal.
28. It is, therefore, ordered that our opinion be sent to the Tribunal which shall dispose of the appeal before it in accordance with this opinion.
29. There shall be no costs in this reference.