Case Note & Summary
The dispute concerned the interpretation of the phrase 'capital employed in the undertaking' appearing in Sections 84(1) and 80J of the Income-tax Act, 1961. The Revenue, as appellant before the Supreme Court, challenged two judgments of the Bombay High Court which had answered in favour of the assessee the question whether the cost of assets acquired for a new industrial undertaking but not actually used during the relevant accounting year could be included in capital employed for computing tax relief. The main appeal arose from I.T.R. No. 40 of 1969 for assessment year 1962-63 under Section 84, while the connected appeal pertained to assessment year 1969-70 under Section 80J. The respondent assessee in the main appeal was a public limited company with a chain of machine workshops. During the calendar year 1961, relevant to assessment year 1962-63, it started a new industrial undertaking at Bhavnagar consisting of several workshops including one for manufacturing small boats. The undertaking commenced business operations, earning a profit of Rs.5,39,791. A portion of plant and machinery was installed, but some remained to be installed though paid for, and some workshops were still under construction. The value of uninstalled plant and machinery was Rs.11,95,167 and the cost of workshops under construction was Rs.9,22,011, aggregating Rs.21,17,178. The assessee claimed relief under Section 84 on this aggregate as capital employed. The Income-tax Officer disallowed the claim on the ground that the assets had not been put to use during the accounting period. The Appellate Assistant Commissioner affirmed the disallowance. On further appeal, the Income-tax Appellate Tribunal held that the Bhavnagar industrial undertaking was an integral whole, that business had commenced, and that the assets in question could not be segregated from the undertaking. The Tribunal concluded that 'capital employed in the undertaking' must be distinguished from 'assets used in the undertaking,' and that relief was with reference to capital utilised for acquiring assets regardless of actual use. The Tribunal allowed the assessee's claim for the full aggregate amount. On reference under Section 256(1) of the Act, the Bombay High Court agreed with the Tribunal and answered the question in the affirmative in favour of the assessee. The Supreme Court heard the Revenue's appeal. The Revenue argued that Section 84 should be read with Rule 19, particularly Rule 19(6), to require actual user of assets. The assessee contended that Section 84 and Rule 19(1) only required that capital be put into the business during the accounting period, and that Rule 19(6) was relevant only for computing average cost of assets acquired during the computation period. The Supreme Court examined Section 84(1), Rule 19(1) and Rule 19(6), and held that the section did not require actual user. The Court approved the reasoning of the Calcutta High Court in CIT v. Indian Oxygen Ltd. that the moment capital is utilised to acquire an asset for a business, such capital becomes employed in the business, and the question of actual user is immaterial. The Court also noted that the Karnataka High Court in Ravi Machine Tools (P) Ltd. and various other High Courts had consistently followed this view, and no contrary decision was brought to its notice. The Court concluded that the moment an asset is acquired for the purpose of the business, it is capital employed, though the asset is not actually utilised during the accounting year. Accordingly, the Supreme Court dismissed the appeals and upheld the Bombay High Court's inclusion of Rs.21,17,178 in capital employed for Section 84 relief, with the same interpretation applying to Section 80J.
Headnote
A) Income Tax - Tax Holiday for New Industrial Undertakings - Section 84(1) Income-tax Act, 1961 - Capital Employed vs Assets Used - Relief under Section 84(1) is based on capital employed in the undertaking, not on whether individual assets are actually used during the accounting year. The assessee started a new industrial undertaking at Bhavnagar in the previous year relevant to assessment year 1962-63, and the Tribunal found the undertaking had commenced business; assets under construction or not yet installed were part of the integral undertaking. Held that the aggregate cost of workshop under construction and uninstalled machinery was includible in capital employed for computing six per cent relief, as capital is employed when utilised to acquire business assets regardless of actual user (Paras 2,4-10). B) Income Tax - Computation of Capital Employed - Rule 19(6) Income-tax Rules, 1962 - Average Cost and User Relevance - Rule 19(6) defines average cost with reference to days of actual use, but that definition applies only when computing average cost of assets acquired during the computation period; it does not condition eligibility for Section 84 relief on actual user. The Court rejected the Revenue's contention that Section 84 should be read with Rule 19 to require actual use, holding that Rule 19(1) includes assets acquired before the computation period irrespective of user, and Rule 19(6) only affects valuation of assets acquired during the period when average cost is to be taken (Paras 6-9). C) Income Tax - Precedential Consistency - Sections 84 and 80J Income-tax Act, 1961 - Followed Settled High Court Decisions - The Supreme Court approved the law laid down in CIT v. Indian Oxygen Ltd. (113 ITR 109), Ravi Machine Tools (P) Ltd. v. CIT (114 ITR 459), and the decision under appeal in CIT v. Alcock Ashdown & Co. Ltd. (119 ITR 164), which had consistently held that acquisition of an asset for business amounts to employment of capital and actual use is immaterial. The Court noted that no contrary decision was brought to its notice and that Bombay and other High Courts have uniformly applied this interpretation. Held that the High Court's reasoning concluding that capital employed includes assets not yet used called for no interference (Paras 8-10).
Issue of Consideration
Whether the cost of workshop under construction and machinery not yet installed could be included in 'capital employed in the undertaking' for computing relief under Section 84 of Income-tax Act, 1961 for assessment year 1962-63, and similar interpretation under Section 80J for assessment year 1969-70
Final Decision
The Supreme Court dismissed both appeals and affirmed the Bombay High Court judgments. The amount of Rs.21,17,178 representing cost of workshop under construction and uninstalled machinery was held includible in capital employed for Section 84 relief for assessment year 1962-63, and the same interpretation applied to Section 80J for assessment year 1969-70. The referred question was answered in the affirmative in favour of the assessee.
Law Points
- Phrase 'capital employed in the undertaking' in Sections 84(1) and 80J of Income-tax Act
- 1961 refers to capital utilised for acquiring business assets
- not actual user of assets
- relief under Section 84 is available on capital employed
- not assets used
- Rule 19(6) of Income-tax Rules
- 1962 defining average cost only applies for computing average cost of assets acquired during computation period
- assets acquired before computation period included irrespective of user
- moment capital used to acquire asset
- it is employed
- decision follows CIT v. Indian Oxygen Ltd.
- Ravi Machine Tools
- and Alcock Ashdown
