Madras High Court
Commissioner Of Income-Tax vs India Radiators Ltd. on 22 August, 1994
Equivalent citations: [1995]213ITR835(MAD)
JUDGMENT Thanikkachalam, J.
1. In pursuance of the direction given by this court in Tax Cases Nos. 94 and 95 of 1980 (Deputy Commr., Sales Tax, Appellate (Addl.) Bench, Coimbatore v.Tvl. India Roller Flour Mills) (sic) under section 256(2) of the Income-tax Act, 1961, the Tribunal has referred the following questions for our opinion :
"(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the capital computed by the assessee for the purpose of allowing relief under section 80J in respect of heavy duty radiator division has to be accepted ?
(ii) Whether, on the facts and in the circumstances of the case and having regard to the provisions of rule 19A(3) of the Income-tax Rules, 1962, the Appellate Tribunal was right in holding that borrowed capital should also be taken as capital for the purpose of allowing relief under section 80J for the assessment years 1972-73 and 1973-74 ?
(iii) Whether, on the facts the Appellate Tribunal's view that since the new unit came into existence after the old unit and only the main division was borrowing amounts, it cannot be said that borrowed money has been diverted to the new undertakings if there are no fresh borrowings, is maintainable in law ?"
2. The assessment years involved in these references are 1972-73 and 1973-74. The assessee is a company engaged in the manufacture and sale of radiators. Apart from the main business of the company, there was a heavy duty radiator division. Separate balance-sheets for the said division were maintained. In the returns relating to the assessment years 1972-73 and 1973-74, the assessee claimed relief under section 80J in respect of its new unit. In doing so, it has computed the capital at Rs. 7,42,752 and Rs. 7,46,245, respectively, for the assessment years 1972-73 and 1973-74, by taking the cost of the fixed assets and deducting therefrom the current liabilities.
3. In the course of the assessment proceedings, the Income-tax Officer found that the capital computed by the assessee included not only the assessee's own funds but also the amounts borrowed. According to the Income-tax Officer, since the relief claimed under section 80J cannot be granted on borrowed capital as per rule 19A(3) of the Income-tax Rules, 1962, the Income-tax officer worked out on a proportionate basis the assessee's own capital in the new industrial undertaking and computed the relief under section 80J at Rs. 15,102 and Rs. 17,896 against Rs. 44,565 and Rs. 44,774 claimed by the assessee in these two assessment years under consideration and allowed the same.
4. On appeal, the Appellate Assistant Commissioner confirmed the order passed by the Income-tax Officer in these two assessment years under consideration. Aggrieved the Department went on appeal before the Tribunal. The Tribunal relying upon a decision of the Calcutta High Court in the case of Century Enka Ltd. v. ITO [1977] 107 ITR 909 and a decision of the Madras High Court in Madras Industrial Linings Ltd. v. ITO [1977] 110 ITR 256, held that the Income-tax Officer cannot, for grant of relief, compute the capital utilised in the business on the basis of the proportion between the borrowed capital and the assessee's own capital, and that the assessee is entitled to the relief under section 80J as claimed by it. According to the Tribunal, since the new unit came into existence after the old unit, and only the main division was borrowing amounts, it cannot be said that the borrowed money had been diverted to the new industrial undertaking especially when there are no fresh borrowings at the time of starting the new industrial unit. Accordingly, the appeals were allowed on the legal question.
5. Learned standing counsel appearing for the Department submitted that in view of the later decision of the Supreme Court in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308, the order passed by the Tribunal in holding that borrowed capital should also be included for the purpose of granting relief under section 80J of the Act is not correct. It was further pointed out that in view of the abovesaid decision of the Supreme Court and also in view of the amendment brought about by the Finance (No. 2) Act of 1980 with effect from April 1, 1972, the Tribunal was not correct in holding that borrowed capital should also be taken as capital for the purpose of granting relief under section 80J for the assessment years under consideration.
6. Learned standing counsel also submitted that in view of the alter developments of law on its aspect, it is for the Department to find out what would be the borrowed capital that was utilised in the new industrial undertaking. In order to find out this aspect, it was submitted that the matter should go back to the assessing authority.
7. We have also heard learned counsel appearing for the assessee who supported the contention put forward by learned standing counsel for the Department. However, learned counsel submitted that for the purpose of finding out the amount utilised by way of borrowed capital the matter should go back to the assessing authority.
8. It remains to be seen that relief under section 80J was claimed for the assessment years 1972-73 and 1973-74. The department held that the assessee is not entitled to claim relief under section 80J on the borrowed capital. On the other hand, the Tribunal held that the assessee is entitled to claim relief under section 80J even on the borrowed capital. In order to come to this conclusion, the Tribunal relied upon the earlier decision of the Calcutta High Court in the case of Century Enka Ltd. [1977] 107 ITR 909 and also the decision of the madras High Court in Madras Industrial Linings Ltd.'s case [1977] 110 ITR 256. It remains to be seen that these decisions were overruled by the later Supreme Court decision in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308.
9. In the abovesaid later decision, the Supreme Court held that the expression "capital employed" is not a terms of art nor is it an expression having a fixed connotation or meaning but it is susceptible of varied meanings, including or excluding short-term borrowings or long-term borrowings, whether of all categories or of any particular category or categories, depending on its environmental context. Since the expression "capital employed" has a variable meaning, which in a given case may or may not include borrowed monies, the Board could, in exercise of its rule-making power, exclude borrowed monies in the computation of the "capital employed" and in doing so, it would not in any way be acting contrary to the mandate of the statute.
10. Therefore, according to the abovesaid decision of the Supreme Court, borrowed capital should be excluded for the purpose granting relief under section 80J of the Act. While considering rule 19A, the Supreme Court held that rule 19A in so for as it provided for computation of the "capital employed" as on the first day of the computation period, was within the rule-making authority of the Central Board under section 80J(1), and that since rule 19A did not suffer from any infirmity and was valid in its entirety, the Finance (No. 2) Act, 1980, in so far as it amended section 80J by incorporating the provisions of rule 19A, as sub-section (1A) in section 80J with retrospective effect from April 1, 1972, was merely clarificatory in nature and was accordingly valid.
11. In view of the abovesaid decision of the Supreme Court, the Tribunal was not correct in holding that the relief under section 80J should also be granted on borrowed capital. Accordingly, following the abovesaid decision of the Supreme Court, we are of the opinion that the order passed by the Tribunal in granting relief under section 80J of the Act for the assessment years under consideration is not in accordance with the provision of section 80J and rules 19A(1) of the Rules. In that view of the matter, we answer question Nos. 1 and 2 referred to us in the negative and in favour of the Department.
12. In so far as question No. 3 is concerned, the Tribunal held that since the new unit came into existence after the old unit, and as only the main division was borrowing amounts, it cannot be said that the borrowed money has been diverted to the new undertakings unless there are any other fresh borrowings. But in view of the fact that narrowed capital should be excluded while granting relief under section 80J, it is necessary to find out whether any borrowed capital was applied by the assessee in the new industrial undertaking. For this purpose, be remit this issue to the Tribunal to find out this aspect and grant relief in accordance with section 80J of the Act. In such circumstances, we reframe the question suggest as question No. 3 in the following manner :
"Whether the Tribunal was correct in not remitting this issue to the authorities below for the purpose of finding out what is the borrowed capital that was utilised for the new industrial undertaking in the assessment years under consideration in order to give relief under section 80J ?"
13. In view of the foregoing reasons, we answer this question also in the negative and in favour of the Department.
14. Accordingly, questions Nos. 1 and 2 answered in the negative and in favour of the Department, and question No. 3 is also answered in the negative and in favour of the Department. Counsel's fee Rs. 1,000 one set.