Punjab & Haryana H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in directing the AO to recompute deduction under s. 80J by including a sum of Rs. 1,50,000 in the capital employed.

High Court Of Punjab & Haryana

CIT vs. Shree Raghunath Cotton Ginning & Oil Factory

Section 80J

Asst. Year 1985-86

G.S. Singhvi & Ajay Kumar Mittal, JJ.

IT Ref. No. 65 of 1991

26th October, 2004

Counsel Appeared

Rajesh Bindal, for the Revenue : None, for the Assessee

JUDGMENT

Ajay Kumar Mittal, J. :

At the instance of the Revenue, the Income-tax Appellate Tribunal, Delhi Bench “A” (for short “the Tribunal”) has referred the following question of law for the opinion of this Court : “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in directing the AO to recompute deduction under s. 80J by including a sum of Rs. 1,50,000 in the capital employed.”

The assessee is engaged in the business of cotton ginning and delintering cotton seeds at its principal place of business at Fatehabad. During the asst. yr. 1985-86, the assessee floated a small-scale industrial manufacturing unit known as the sawgin unit. The first unit of the assessee was known as the roller unit. The assessee claimed deduction of Rs. 55,975 under s. 80J of the IT Act, 1961 (for short, “the Act”) during the asst. yr. 1985-86. The AO by treating Rs. 1,50,000 as deemed transfer from roller unit to sawgin unit, restricted the allowance under s. 80J to Rs. 44,590. Besides this, he reduced the investment allowance reserve from Rs. 1,17,172 to Rs. 77,405 for computing the capital employed for the purpose of calculating deductions under s. 80J of the Act. The Commissioner of Income-tax (Appeals) [for short, “the CIT(A)”] confirmed the order of the AO. In the second appeal, the Tribunal held that the capital at the beginning of the year should have been taken into account and that there was no justification for the AO to treat the capital of Rs. 1,50,000 as attributable to the roller unit.

Shri Rajesh Bindal, learned counsel appearing for the Revenue, contended that the assessee had no justification to transfer the capital of the partners standing in the books of the roller unit which had been utilised for the purchase of land, construction of building and purchase of machinery, etc., to the account of the sawgin unit for the purposes of claiming deduction under s. 80J of the Act. He pointed out that the initial capital of Rs. 1,50,000 invested by the partners in the sawgin unit was, in fact, utilised for the purposes of various assets of the roller unit and was not available for investment in the sawgin unit. Shri Bindal submitted that the amount of Rs. 1,50,000 could not have been added in the capital employed for the purposes of allowing deductions under s. 80J of the Act.

We have considered the submissions of learned counsel for the Revenue and carefully perused the record. At the very outset, we deem it appropriate to notice the relevant provisions of s. 80J of the Act, which read as under : “80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.—(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under s. 80HH or s. 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the manner specified in sub-s. (1A) in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year) : Provided that in relation to the profits and gains derived by an assessee, being a company, from an industrial undertaking which begins to manufacture or produce articles or to operate its cold storage plant or plants after the 31st day of March, 1976, or from a ship which is first brought into use after that date, or from the business of a hotel which starts functioning after that date, the provisions of this sub-section shall have effect as if for the words ‘six per cent’, the words ‘seven and a half per cent’ had been substituted. (1A) (I) For the purpose of this section, the capital employed in an industrial undertaking or the business of a hotel shall, except as otherwise expressly provided in this section, be computed in accordance with cls. (II) to (IV) and the capital employed in a ship shall be computed in accordance with cl. (V). (II) The aggregate of the amounts representing the values of the assets as on the first day of the computation period of the undertaking or of the business of the hotel to which this section applies shall first be ascertained in the following manner : (i) in the case of assets entitled to depreciation, their written down value : (ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee : (iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business : (iv) in the case of assets, being debts due to the person carrying on the business, the nominal amount of those debts : (v) in the case of assets, being cash in hand or bank, the amount thereof. Explanation 1.—In this clause, ‘actual cost’ has the same meaning as in cl. (1) of s. 43. Explanation 2.—In this clause and in cl. (III), ‘computation period’ means the period for which profits and gains of the industrial undertaking or business of the hotel are computed under ss. 28 to 43A. Explanation 3.—In this clause and in cl. (V), ‘written down value’ has the same meaning as in cl. (6) of s. 43. Explanation 4.—Where the cost of any asset has been satisfied otherwise than in cash, the then value of the consideration actually given for the asset shall be treated as the actual cost of the asset. (III) From the aggregate of the amounts as ascertained under cl. (II) shall be deducted the aggregate of the amounts, as on the first day of the computation period, of borrowed moneys and debts owed by the assessee (including amounts due towards any liability in respect of tax). Explanation.—For the purposes, of this clause,— (i) ‘tax’ means— (a) income-tax or super-tax (including advance tax) due under any provision of this Act; (b) wealth-tax due under any provision of the WT Act, 1957 (27 of 1957); (c) gift-tax due under any provision of the GT Act, 1958 (18 of 1958); (d) super profits tax due under any provision of the Super Profits Tax Act, 1963 (14 of 1963); (e) surtax due under any provision of the Companies (Profits) Surtax Act, 1964 (7 of 1964); (ii) any liability in respect of tax shall be deemed to have become due— (a) in the case of advance tax due under any provision of this Act, on the date on which such advance tax is payable; and (b) in the case of any other tax, on the first day of the period within which it is required to be paid. (IV) The resultant sum as determined under cl. (III) shall be diminished by the value, as ascertained under cl. (II), of any investments the income from which is not taken into account in computing the profits of the business and any moneys not required for the purpose of the business, insofar as the aggregate of such investments or moneys exceed the amount of the borrowed moneys which under cl. (III) are required to be deducted in computing the capital…. (4) This section applies to any industrial undertaking which fulfils all the following conditions, namely :

(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose;

(iii) it manufactures or produces articles, or operates one or more cold storage plant or plants, in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of thirty-three years next following the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking;

(iv) in a case where the industrial undertaking manufactures or produces articles, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power :

Provided that the condition in cl. (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in s. 33B, in the circumstances and within the period specified in that section :

Provided further that, where any building or any part thereof previously used for any purpose is transferred to the business of the industrial undertaking, the value of the building or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking : Provided also that in the case of an industrial undertaking which manufactures or produces any article specified in the list in the Eleventh Schedule, the provisions of cl. (iii) shall have effect as if for the words ‘thirty-three years’ the words ‘thirty-one years’ had been substituted. Explanation 1.—For the purposes of cl. (ii) of this sub-section, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :

(a) such machinery or plant was not, at any time, previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the Indian IT Act, 1922 (11 of 1922) or this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee. Explanation 2.—Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of cl. (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with and the total value of the machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking.”

5. An analysis of the above reproduced provisions shows that the assessee is entitled to deductions in respect of a new industrial undertaking in accordance with and subject to the provisions of s. 80J computed in the manner specified in sub-s. (1A) of the section. In other words, the capital employed in an industrial undertaking is to be computed in accordance with sub-cls. (II) to (IV) of sub-s. (1A) of the section. In Kerala State Cashew Development Corporation vs. CIT (1993) 113 CTR (Ker) 266 : (1994) 205 ITR 19 (Ker), a Division Bench of the Kerala High Court interpreted s. 80J of the Act and after making reference to the decision of the Karnataka High Court in Khoday Industries (P) Ltd. vs. CIT (1987) 60 CTR (Kar) 62 : (1987) 163 ITR 646 (Kar) held as under: “We may mention at the outset that the object with which s. 80J has been enacted is to encourage the establishment of new industries in the country. The heading of the section refers to ‘newly established industrial undertakings’, and the conditions laid down by sub-s. (4) for the applicability of the section emphasise the newly established nature of the undertaking. It is true that the term ‘newly established’ does not occur in the body of the section, but it is implicit in its very object and purpose. A necessary corollary of this is that the undertaking itself must be a newly established one, and not that it is a new undertaking to the person acquiring the same from another. The emphasis is on the establishment of the undertaking and not on the person who acquires it afterwards. Otherwise, an undertaking having enjoyed the special deduction can continue to claim the deduction virtually for all time to come by mere change of hands, which is not the object or purpose of the provision.

[See in this connection Khoday Industries (P) Ltd. vs. CIT (1987) 60 CTR (Kar) 62 : (1987) 163 ITR 646 (Kar)]. We have referred to this aspect even at the threshold because of the assessee’s contention that what is contemplated by the section is only a venture employing fresh capital by new entrepreneurs which, according to the assessee, ought to be encouraged with tax concessions like this. But this plea overlooks the distinction maintained in the section between the assessee and the industrial undertaking.”

We respectfully agree with the Kerala High Court and hold that the Tribunal erred in holding that the capital of Rs. 1,50,000 would be attributed to the sawgin unit. A recapitulation of the facts shows that the initial capital of the partners to the tune of Rs. 1,50,000 was already invested for the purchase of land, construction of building and purchase of machinery, etc. belonging to the roller unit. The partners transferred the amount of the capital already invested for the purchase of the land, construction of building and purchase of machinery, etc. of the roller unit to the account of the sawgin unit when the business of the sawgin unit was started. In our opinion, the initial capital to the tune of Rs. 1,50,000 which stood employed in the business of the roller unit and transfer of the same to the sawgin unit did not entitle the assessee to include the said amount in capital employed under s. 80J of the Act.

In view of the above, the question referred to this Court by the Tribunal, is answered in favour of the Revenue and against the assessee.

[Citation : 279 ITR 353]

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