Full Judgment Text
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PETITIONER:
C.I.T. GUJARAT
Vs.
RESPONDENT:
ELECON ENGINEERING CO. LTD.
DATE OF JUDGMENT21/07/1987
BENCH:
MISRA RANGNATH
BENCH:
MISRA RANGNATH
PATHAK, R.S. (CJ)
CITATION:
1987 AIR 2014 1987 SCR (3) 588
1987 SCC (4) 530 JT 1987 (3) 117
1987 SCALE (2)89
ACT:
Income Tax Act, 1961/Income Tax Rules, 1962--Section 84
(Section 80J)/Rule 19--New Industrial Undertaking--Admissi-
bility of exemption--Manner of computation.
HEADNOTE:
The assessee, a public limited company, in the assess-
ment year 1964-65 was in the second year of its new project
going into production. The Income-tax Officer computed the
assessment under s. 143(3) of the Income-tax Act, 1961 after
determining the rebate admissible under ss. 84 and 101 at
Rs.2,72,372. He re-opened the assessment under s. 147(b) and
re-computed the rebate at Rs.2,51,222. The appeal by the
assessee to the Appellate Assistant Commissioner was dis-
missed. The Appellate Tribunal accepted the plea of the
assessee that to the figure of capital as worked out under
Rule 19(1) is to be added the average profit as worked out
under sub-rule (5) of Rule 19 and held that the average
capital has to be taken at Rs.45,39,557 and not at
Rs.41,87,034. In the Reference, the High Court agreed with
the conclusion reached by the Appellate Tribunal.
Dismissing the Appeal of the Revenue,
HELD: 1. Admissibility of exemption under s. 84 of the
Incometax Act, 1961 which has been repealed with effect from
1.4.1968 has never been in dispute. What has been deputed is
the manner of its computation. Rule 19 of the Income-tax
Rules, 1962 prescribes the method of computation and on a
proper interpretation of sub-rule (1), (3) and (5) of this
Rule would depend the ultimate conclusion to be reached.
[590F-G]
2. The High Court is right in saying that the dispute
has to be resolved by referring to sub-rules (1), (3), (5)
and (6) of Rule 19. The High Court found that the value of
assets entitled to depreciation under Rule 19(1)(a) worked
out to Rs.40,10,947. To this figure was added a sum of
Rs.1,39,764 on account of depreciation as on 1.1.63 as also
on account of the average value of additions. The other
assets were valued under Rule 19(1)(b) at Rs.44,38,126 as on
1.1.63. All put together the
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aggregate valuation came to Rs.85,38,837. From this aggre-
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gate, deduction of sum of Rs.44,01,803 representing loans,
other liabilities including provision for tax as authorised
by Rule 19 was made leaving the valuation of the capital at
Rs.41,87,034. To this figure the sum of Rs.3,52,503 being
half of the profit from the New Project was added to compute
the value at Rs.45,39,537. Following the provision of s. 84,
entitlement to exemption was determined at Rs.2,72,372
representing 6% of the capital employed in the new industri-
al undertaking. [592C-E]
3. Re-assessment was made by deleting the addition of
Rs.3,52,503’ which represented half the profit of the year.
According to the Revenue, profits earned during the year had
already been taken into account in the process of computa-
tion and there was no warrent for its addition over again to
the extent of a moiety. In fact, that is the only dispute
that fell to be resolved. The High Court took note of the
fact that profits had necessarily been reflected in the
average valuation of the assets but in its view the deeming
provision of Rule 19(5) was the special procedure laid down
for computation for the purpose of calculation and could not
be over-looked for the reasons advanced by the Revenue.
There is sufficient force in the reasoning of the High Court
and the conclusion reached by it is accepted. [592E-G]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1 of
1975.
From the Judgment and Order dated 11/12.9.1973 of the
Gujarat High Court in I.T. Reference No. 19 of 1971.
K.P. Bhatnagar and Ms. A. Subhashini for the Appellant.
The Judgment of the Court was delivered by
RANGANATH MISRA, J. This appeal by certificate has been
carried by the Revenue challenging the decision rendered by
the Gujarat High Court reported in 104 ITR 5 10 on a refer-
ence under the Income Tax Act, 1961.
Assessee is a Public Limited Company and the relevant
assessment year is 1964-65. This was the second year of the
assessee’s new project at Vidyanagar going into production.
On 19.3.1965, the Income Tax Officer computed the assessment
under section 143(3) of the Act after determining the rebate
admissible under sections 84 and
590
101 of the Act at Rs.2,72.372. He reopened the assessment
under section 147(b) of the Act and by his reassessment
order dated 29.11.1966 recomputed the rebate at Rs.2,51,222.
The appeal by the assessee to the Appellate Assistant Com-
missioner was dismissed. The Appellate Tribunal on further
appeal by the assessee came to hold:-
"There is considerable force in the arguments
urged by Sri Talati. In view of the
phraseology used in the rules we are inclined
to accept Sri Talati’s plea that to the figure
of capital as worked out under Rule 19(1) is
to be added the average profit as worked out
under sub-rule (5) of Rule 19. Accordingly,
the average capital has to be taken at
Rs.45,39,537 and not at Rs.41.87.034. The
assessee’s contention must, therefore, be
upheld."
At the instance of the Revenue, the Tribunal
referred the following question for the
opinion of the High Court:-
"Whether on the facts and in the circumstances
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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?"
The High Court noticed the feature that there was dearth
of judicial decisions on the point at issue, dealt with the
relevant provisions at length and came to agree with the
conclusion reached by the Appellate Tribunal.
Admissibility of exemption under section 84 of the Act
which has been repealed with effect from 1.4.1968, has never
been in dispute. What has been debated is the manner of its
computation. Rule 19 of the Income Tax Rules, 1962 pre-
scribes the method of computation and on a proper interpre-
tation of the relevant provisions of this Rule would depend
the ultimate conclusion to be reached. Sub-rule (1), (3) and
(5) are relevant. They provide:
"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 to depreciation--
591
(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;
...........................................................
(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 tax (including advance tax) due
under any provision of the Act:
Provided that any such debt for tax
(including advance tax) shall, for the purpose
of this sub-rule, be deemed to have become
due--
(a) in the case of any advance tax due under
any provision of the Act or of any tax payable
under section 140-A or under section 141, on
the date on which, under the provisions of
section 211 or section 2 12 or section 2 13 or
section 140-A or section 220, as the case may
be, the payment first became due;
(b) in any other case, on the last day of the
period of time within which the tax is payable
under section 220.
(5) For the purpose of ascertaining the
average amount of capital employed in a
business during any computation
592
period, the profits or losses made in that
period shall, except so far as the contrary is
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shown, be deemed--
(a) to have accrued at an even rates
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."
’Average Cost’, ’Computation Period’, ’depreciation’ and
’Written Down Value’ have been defined in sub-rule (6). The
High Court is right in saying that the dispute has to be
resolved by referring to sub-rules (1), (3), (5) and (6) of
Rule 19. The High Court found that the value of assets
entitled to depreciation under Rule 19(1)(a) worked out to
Rs.40, 10,947. To this figure was added a sum of Rs.
1,39,764 on account of depreciation as on 1.1. 1963 as also
on account of the average value of additions. The other
assets were valued under Rule 19(1)(b) at Rs.44,38,126 as on
1.1.1963. All put together, the aggregate valuation came to
Rs.85.88,837. From this aggregate, deduction of a sum of
Rs.44,01,803 representing loans, other liabilities including
provision for tax as authorised by Rule 19 was made leaving
the valuation of the capital at Rs.41,67,034. To this fig-
ure, the sum of Rs.3,52,503 being half of the profit from
the New Project was added to compute the value at
Rs.45,39,537. Following the provision of Section 84 of the
Act, entitlement to exemption was determined at Rs.2,72,372
representing 6% of the capital employed in the new industri-
al undertaking.
The assessment was made by deleting the addition of
Rs.3,52,503 which represented half the profit of the year.
According to the Revenue, profits earned during the year had
already been taken into account in the process of computa-
tion and there was no warrant for its addition over again to
the extent of a moiety. In fact, that is the only dispute
that fell to be resolved. The High Court took note of the
fact that profits had necessarily been reflected in the
average valuation of the assets but in its view the deeming
provision in Rule 19(5) was the special procedure laid down
for computation for the purpose of calculation and could not
be overlooked for the reasons advanced by the Revenue. We
find sufficient force in the reasoning of the High Court and
accept the conclusion reached by it.
The appeal is devoid of merit and is dismissed. Parties
shall bear their own costs throughout.
A.P.J. Appeal
dismissed.
593