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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 Admissibility of exemption under s. 84 of  the Incometax Act, 1961 which has been repealed with effect from 1.4.1968 has never been in dispute.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          589 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