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PETITIONER:

COMMISSIONER OF INCOME TAX,BOMBAY

Vs.

RESPONDENT:

M/S. FILTRONE INDIA LTD.M/S. ALCOCK ASHDOWN & CO. LTD.

DATE OF JUDGMENT: 05/02/1997

BENCH:

B.P. JEEVAN REDDY, K.S. PARIPOORNAN

ACT:

HEADNOTE:

JUDGMENT:

WITH

CIVIL APPEAL NO. 9796 OF 1995

J U D G M E N T

Paripoornan, J.

A common question of law arises for consideration in

both the appeals. the appeals are preferred against the

judgments of the Bombay High Court in I.T.R. No. 40 of 1969

dated 7.7.1978 and I.T.R. No. 453 of 1975 dated 27.3.1987.

Civil Appeal NO. 1274 of 1980 preferred against the judgment

of the Bombay High Court in I.T.R. No. 40 of 1969 is the

main appeal. The judgment rendered therein is reported in

(1979) 119 ITR 164. This judgment was followed in the latter

case, I.T.R. No. 453 of 1975.

2. In Civil Appeal No. 1274 of 1980, the question arose

with reference to the assessment year 1962-63, wherein the

interpretation of Section 84 of the Income-tax Act, 1961, as

it existed then, came up for consideration. Civil Appeal No.

9796 of 1995 is concerned with the assessment year 1969-70,

wherein Section 80-J of the Act came up for consideration.

It was agreed at the bar and it is also fairly clear that

the controversy in these cases, is regarding the

interpretation of the crucial words viz. `capital employed

in the undertaking' occurring both in Sections 84(1) and 80-

J of the Income-tax Act (hereinafter referred to as `the

Act').

3. We heard counsel.

4. It will be sufficient if we advert of the minimal facts

in the main appeal -- Civil Appeal No. 1274 of 1980. The

respondent-assessee is a public limited company. It has a

chain of machine workshops. In the previous year (calendar

year 1961), relevant for the assessment year 1962-63, the

assessee started a new industrial undertaking at Bhavnagar.

It was to consist of several workshops, including one for

the manufacture of small boats. The undertaking at Bhavnagar

started business operations in the year of account. The

profit for this year was Rs.5,39,791/-. A good portion of

the plant and machinery was installed for the new business

operation, but some of them remained to be installed, though

they were paid for. Some of the workshops were still under

construction. The value of the plant and machinery not

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installed came to Rs. 11,95,167/-, while the cost of the

workshop under construction came to Rs.9,22,011/-. The

aggregate for the above two items came to Rs.21,17,178/-.

The assessee claimed relief for this amount under Section 84

of the Act as "capital employed in the new industrial

undertaking" at Bhavnagar. The Income-tax Officer declined

to afford the relief claimed on the ground that the assets

had not been put to use during the accounting period. The

appeal filed before the Appellate Assistant Commissioner was

futile. In second appeal filed by the assessee, the

Appellate Tribunal held that the industrial undertaking at

Bhavnagar formed an integral whole and the new workshops

under construction remaining to be installed were part and

parcel of that undertaking. The Appellate Tribunal also held

that the business of the industrial undertaking at Bhavnagar

had already commenced and was being carried on during the

year of account. The Tribunal further held that it was not

in dispute that the assets in question could not be

segregated from the industrial undertaking at Bhavnagar.

These are the basic findings of the Appellate Tribunal. On

the basis of the above findings, the Tribunal concluded that

"the capital employed in the undertaking" has to be

distinguished from "assets used in the undertaking" and the

relief envisaged by Section 84 of the Act is with reference

to the capital utilised for the purpose of acquiring the

asset for the business and the question as to whether it

(the asset) was actually used in the business or not during

the relevant year is of no consequence. The Tribunal decided

the question in favour of the assessee and held that the

aggregate amount of Rs.21,17,178/- was includable in the

computation of capital for the purpose of granting relief

under Section 84 of the Act to the assessee. On motion by

the Revenue, the Appellate Tribunal referred the following

question of law under Section 256(1) of the Act of the High

Court of Bombay:

"Whether, on the facts and in the

circumstances of the case, the

amount of Rs. 21,17,178/-

representing the cost of workshop

under construction, could be taken

into account in determining the

capital employed in the undertaking

at Bhavnagar for the purpose of

granting relief to the company in

terms of Section 84 of the Income-

tax Act, 1961 for the assessment

year 1962-63?"

5. The High Court of Bombay, by its judgment dated

7.7.1978, considered the rival pleas of the Revenue and the

assessee in detail and concurred with the reasoning and

conclusions of the Appellate Tribunal and answered the

question in the affirmative and in favour of the assessee.

Thereafter, this Court granted special leave to the Revenue

to appeal to this Court against the aforesaid judgment of

the Bombay High Court and that is how the appeal is before

us.

6. Section 84(1) of the Income-tax, Act, 1961 at the

relevant period read 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

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six per cent per annum on the

capital employed in the undertaking

or hotel, computed in the

prescribed manner."

(Emphasis supplied)

Rules 19(1) and (6) of the Income-tax Rules, 1962

insofar as they are relevant, provide 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 --

(1) 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 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. ... ....

....

.... ... .... ....

(6) In this rule, --

(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;

(ii) `computation period' means the

period for which the profits and

gains of the undertaking or hotel

are computed under sections 28 to

43A. ......................."

7. Counsel for the appellant (Revenue), Dr. R.R. Misra,

contended that the High Court should have read section 84(1)

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along with Rules 19(1) to (6) of the Income-tax Rules and

held that the relief under Section 84 was meant only for

assets actually used and if the assets are not actually and

directly used in the business, the amount representing the

cost thereof should not be taken into account in determining

the capital employed in the undertaking. On the other hand,

counsel for the assessee, Mr. S. Ganesh, submitted that the

proper interpretation of Section 84 read with Rule 19(1) of

the Rules only envisages that the particular asset should

have been a form of capital put into the business during the

relevant accounting period and does not refer to the actual

use made of any particular asset during that period. The

emphasis placed by counsel for the Revenue on Rule 19(6) of

the Rules has no relevance since reference to Rule 19(6) is

called for only in cases where the average cost in relation

to an asset arises for consideration.

8. On examining the rival pleas, we are of the view that

the reasoning and conclusion of the High Court does not call

for any interference. Section 84(1) of the Income-tax Act is

very clear. It affords relief to an assessee as provided

therein the moment `the capital is employed in the

undertaking'. The Section does not state or specify that the

asset should be actually used or utilised. After adverting

to the interpretation placed by the House of Lords on

similar or kindred words that occurred in the Finance Act

(England) and also the decision of the Madras High Court in

Jayaram Mills Ltd. v. CEPT (35 ITR 651), wherein similar

words were construed with reference to Excess Profits Tax

Act, a Division Bench of the Calcutta High Court, in CIT v.

Indian Oxygen Ltd. (113 ITR 109) at pages 119 and 120, laid

down the law, with reference to Section 84 and Rule 19 of

the Income-tax Rules, thus:-

"Only in the computation of the

value of the assets, acquired at or

after the commencing date of the

computation period, it is necessary

to determine their average cost

during the entire accounting period

and for that purpose only the

actual user of the assets in the

business becomes relevant. It is

quite clear from the rule that if

an asset is acquired prior to the

commencement of the accounting

period the question of its user or

non-user is entirely immaterial.

Whether such an asset is used or

not, it will still be included i

the capital employed in the

business.

Looking at the position from

another point of view it appears to

us that the moment capital is

utilised for the purposes of

acquiring any asset for a business

such capital becomes employed in

the business. Whether the asset

itself is actually used in the

business or not, so far as the

capital is concerned, it continues

to be employed in the business.

Our view as aforesaid finds support

from the observations of the

majority of the Law Lords in the

case of Birmingham Small Arms Co.

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Ltd. (1951) 2 All ER 296 (HL). The

Madras High Court has taken the

same view in the case of Jayaram

Mills Ltd. (1959) 35 ITR 651."

(Emphasis supplied)

In the decision under appeal, (Alcock case - 119 ITR

164) the Bombay High Court has followed the above Calcutta

decision.

9. Construing the words `capital employed in the

undertaking', a Bench of the Karnataka High Court in Ravi

Machine Tools (P) Ltd. v. CIT (114 ITR 459) at page 462,

stated the law thus:

"Section 80J refers to capital

employed in an industrial

undertaking and not the user of any

asset as such. The company acquires

an asset for its undertaking and

the capital employed in the

undertaking is the amount paid to

acquire that asset. The user or

non-user of the assets so acquired

is immaterial for the computation

of the benefit under Sec.80J. This

is the view that was taken by the

High Court of Calcutta in CIT v.

Indian Oxygen ltd. (1978) 113 ITR

109 and also (1959) 35 ITR 651 of

the High Court of Madras (Jayaram

mills Ltd. v. Commissioner of

Excess Profits Tax). in Indian

Oxygen's case (1978) 113 ITR 109,

after referring to the observations

of the House of Lords in the case

of Birmingham Small Arms Co. Ltd.

(1951) 2 All ER 296, it was held --

See (1978) 113 ITR 109, 120 (Cal).

"......it appears to us that the

moment capital is utilised for the

purposes of acquiring any asset for

a business, such capital becomes

employed in the business. Whether

the asset itself is actually used

in the business or not, so far as

the capital is concerned, it

continues to be employed in the

business."

We entirely agree with this

enunciation.......".

(Emphasis supplied)

We find that the Bombay High Court has consistently

followed the decision in CIT v. Alcock Ashdown & Co. Ltd.

(119 ITR 164), the decision under appeal in the subsequent

cases. See - CIT v. Boehringer Knoll (148 ITR 70), CIT v.

Hindustan Polymers Ltd. (156 ITR 860), CIT v. Advani

Oerlikon Pvt. ltd. (161 ITR 449), CIT v. Indian Smelting &

Refining Co. Ltd. (169 ITR 562), CIT v. Elpro International

Ltd. (177 ITR 20) and CIT v. Century Spinning &

Manufacturing Co. Ltd. (181 ITR 214). The other High Courts

have also followed, either the one or more or all, the

decisions reported in CIT v. Indian Oxygen Ltd. (113 ITR

109-Calcutta), Ravi Machine Tools Pvt. Ltd. v. CIT (114 ITR

459-Karnataka) and the decision under appeal CIT v. Alcock

Ashdown & Co. Ltd. (119 ITR 164). See -- CIT v. Cibatul Ltd.

(115 ITR 879-Gujarat), CIT v. Mohan Meakin Breweries Ltd.

(122 ITR 203 - Himachal Pradesh), Periyar Chemical Ltd. v.

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CIT (162 ITR 163-Kerala), CIT v. Sundaram Industries Ltd.

(166 ITR 35 - Madras), CIT v. Southern Agrifurane Industries

Ltd. (174 ITR 697-Madras) and CIT v. Gopi Chand Textile

Mills ltd. (179 ITR 371 - Punjab & Haryana). Our attention

was not invited to any decision taking a contrary view.

10. In our opinion, the law laid down in Indian Oxygen

Ltd.'s case (113 ITR 109) and followed in the decisions

under appeal, Alcock Ashdown & Co.'s case (119 ITR 164) and

other cases referred to above represents the correct law on

the subject. We are of opinion, that the moment an asset is

acquired or purchased for the purpose of the business, it is

capital employed, though the asset as such is not actually

utilised or used during the accounting year. In the chain of

events, the earliest act or event, is the purchase or

acquisition of the asset. That by itself entitles the

assessee to get the relief. The "employment" of the capital

is done or over. The subsequent or later events - including

the actual user of the asset has nothing to do in the

matter. In this view, the judgment under appeal merits no

interference. The appeal is accordingly dismissed with

costs.

11. In Civil Appeal No.9796 of 1995, the judgment under

appeal has only followed the earlier decision in Alcock

Ashdown & Co's case (119 ITR 164). Since we have already

dismissed the appeal preferred by the Revenue against the

decision reported in 119 ITR 164 (Civil Appeal No. 1274 of

1980), Civil Appeal no. 9796 of 1995 is also dismissed.

There shall be no order as to costs.

The appeals are disposed of as above.