Commissioner of Income Tax vs Atlas Cycle Industries Ltd.

Ashok Bhan, J.—This is a petition filed by the Commissioner of Income Tax, Haryana, Rohtak, u/s 256(2) of the Income Tax Act, 1961 (hereinafter referred to as the Act), for the assessment year 1978-79 directing the Income Tax Appellate Tribunal, Delhi Bench "B", Delhi (hereinafter referred to as the Tribunal), to refer 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 holding that loan of Rs. 27,72,796 should be taken into account for working out deduction available u/s 80J ?"

Reference is being made only to those facts which relate to the controversy raised in this petition.

The assessee is a public limited company. The return for the assessment year 1978-79 was filed on July 27, 1978, declaring an income of Rs. 93,53,580. The Income Tax Officer, Addl. Coys-cum-Trusts Ward, Rohtak, examined the case and framed the assessment u/s 143(3) on October 21, 1981, on a total income of Rs. 1,04,49,250 after making certain additions/disallowances on several counts. The assessee claimed deduction u/s 80J at the rate of 6 per cent. on the capital of Rs. 34,89,312 employed in the rim manufacturing unit against which the assessee-company had borrowed the following amounts :

Investment by cycle unit of Atlas Cycle India Ltd. 27,72,758

Loan from I.E.C. 10,00,000 ---------- Total 37,72,758 ----------

The Income Tax Officer disallowed the deduction claimed by the assessee by observing as under :

"It is noticed that the deduction has not been worked out in accordance with Rule 19A(3). The capital computed is the aggregate of the assets which, on the first day of the computation period, should exclude borrowed amounts and debts owed by the assessee. The assessee had failed to deduct the liability from the capital computed in its calculation. The revised computation in accordance with the rules is enclosed as annexure "B" to this order according to which the assessee is not entitled to any deduction u/s 80J in respect of the plant and machinery installed in the rim plant."

With these remarks the Income Tax Officer deducted the loan to the cycle unit of Atlas Cycle Industries (sister unit of the assessee) advanced to the rim manufacturing unit while computing the capital and allowing deduction u/s 80J. The assessee being aggrieved filed an appeal before the Commissioner of Income Tax (Appeals) who allowed the appeal of the assessee and held that the loan taken'' by the rim manufacturing unit from cycle unit was to be included in the capital computation for allowing deduction u/s 80J. The Revenue did not accept the order of the Commissioner of Income Tax (Appeals) and filed an appeal before the Tribunal who vide its order dated February 29, 1984, dismissed the appeal of the Department. It was held that :

"The ''expression'' borrowed monies and debts owed by the assessee in Rule 19A of the Income Tax Rules, 1962, postulates the existence of third parties from whom the monies have been borrowed or incurred. As such the investment by the cycle unit of Atlas Cycle Industries Ltd., Sonepat, cannot be termed to be ''borrowed monies and debts'' because the rim unit and the cycle unit are part and parcel of one and only one entity in law, i.e., the assessee-company. We, therefore, agree with the Commissioner of Income Tax (Appeals) that the investment made by the cycle unit of Atlas Cycle Industries Ltd. cannot be treated as borrowed monies and debts owed by the assessee. The said amount of Rs. 27,72,758 would thus go into the capital computation base for working out the deduction u/s 80J of the Act."

The Revenue did not accept the view of the Tribunal and filed an application u/s 256(1) of the Act for making a reference of the question of law reproduced in the earlier part of the judgment to this court for its opinion which was declined by the Tribunal holding that the question raised was a question of fact and, therefore, no referable question of law arose from the order of the Tribunal.

The contention raised by counsel appearing for the Revenue is that the rim manufacturing unit of the assessee was an independent unit and while computing its capital the loan taken by it from the cycle unit of Atlas Cycle Industries was not allowable deduction from the computation of the capital. This point has not been considered by this court earlier. The question as to whether the capital borrowed by one unit from another unit of the company is to be deducted from the capital employed in the said unit for the purpose of computation of the capital employed u/s 80J, would certainly be a question of law and the Tribunal has wrongly declined to refer the same to this court for its opinion.

Accordingly, we direct the Tribunal to refer the question of law reproduced in the earlier part of the judgment to this court along with the statement of the case for its opinion.