of Income Tax, Bombay Vs. M/S. Filtrone India Ltd. &
ANR  INSC 129 (5 February 1997)
JEEVAN REDDY, K.S. PARIPOORNAN Paripoornan,
APPEAL NO. 9796 OF 1995
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.
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.
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.
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').
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.
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 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/-.
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.
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:
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?"
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.
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
Section 84(1) of the Income-tax, Act, 1961 at the relevant period read as
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 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:
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;
they have been acquired on or after the commencing date of the computation
period, their average cost during the said period;
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;
the case of assets being debts due to the person carrying on the business, the
nominal amounts of those debts;
the case of any other assets, the value of the assets when they became assets
of the business;
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. ... ....
... .... ....
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;
period' means the period for which the profits and gains of the undertaking or
hotel are computed under sections 28 to 43A. ......................."
Counsel for the appellant (Revenue), Dr. R.R. Misra, contended that the High
Court should have read section 84(1) 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.
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.
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.
such an asset is used or not, it will still be included i the capital employed in
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.
view as aforesaid finds support from the observations of the majority of the
Law Lords in the case of Birmingham Small Arms Co. 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.
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:
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.
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.
2 All ER 296, it was held -- See (1978) 113 ITR 109, 120 (Cal).
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.......".
supplied) We find that the Bombay High Court has consistently followed the
decision in CIT v. Alcock Ashdown & Co. Ltd.
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.
ITR 203 - Himachal Pradesh), Periyar Chemical Ltd. v. 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.
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.
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.
shall be no order as to costs.
appeals are disposed of as above.