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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.