Commissioner of Income Tax vs Kerala Chemicals and Proteins Ltd.

V.V. Kamat, J.—The Revenue approaches us for the assessment year 1981-82 with regard to the consideration of the question of deduction u/s 80J, with special reference to the provisions of Sub-section (1A) thereof, which is inserted by the Finance (No. 2) Act, 1980, retrospectively, with effect from April 1, 1972. The question is as follows :

" Whether, on the facts and in the circumstances of the case, the value of work-in-progress should be included in the computation of capital for the purpose of relief u/s 80J of the Income Tax Act, 1961 ?"

The assessee is a private limited company engaged in the business of manufacture of chemicals. The assessee claimed deduction u/s 80J. As regards the value of capital work in progress, although there was a claim relating to expenditure pending capitalisation, the said claim has been rejected by the. Tribunal rendering the situation to that effect a finality.

The Income Tax Officer excluded the claim. The reason according to him was that the claim was not relatable to any tangible asset of the business as on the relevant date.

The Commissioner of Income Tax (Appeals) considered the situation in favour of the assessee. The said authority accepted the claim for deduction, relatable to an amount of Rs. 1,56,73,720. It is held that the work-in-progress would form part of the capital employed in view of the decision of this court in Periyar Chemicals Ltd. Vs. Commissioner of Income Tax, , and accordingly directed the Income Tax Officer to calculate deduction under the provisions of Section 80J of the Income Tax Act, 1961, with regard to the above amount.

As stated earlier, the Revenue took up the matter with regard to the amount of Rs. 1,56,73,720, which was accepted by the first appellate authority, and at the other end the assessee took up the matter relating to the expenditure pending capitalisation amounting to Rs. 46,74,371. We have already stated that this aspect has received finality there being no challenge in regard thereto as regards the decision of the Tribunal to the effect that the assessee is not entitled to take into account the expenditure pending capitalisation as part of its capital in computing the capital employed for the purpose of Section 80J of the Act. The Tribunal took into consideration that even though commercial production had begun with effect from June 1, 1979, it could not be said that it could be done overnight. The raw material had to be acquired in advance, labour had to be trained or at least recruited and power supply had to be ensured. The Tribunal has further proceeded in the context to note that the moment the raw material is purchased and the activity of recruiting and training of labour took place, it can be said that the business has commenced even though the first commercial production has taken place at a later stage. In the context of the situation the contention of the Revenue has been dismissed by the Tribunal as of no substance in view of the above decision of this court in the case of Periyar Chemicals Ltd. Vs. Commissioner of Income Tax, as a binding decision in regard to the situation.

Therefore, learned senior tax counsel had to circumscribe his submissions to come out of the rigour of the above decision of this court. As stated in the statement of case itself, it was brought to our notice by learned senior tax counsel, referring to [1992] 197 ITR 151, that to an identical question arising out of the judgment dated March 19, 1992, of the Karnataka High Court in ITRC No. 21 of 1991 ( Commissioner of Income Tax Vs. H.M.T. Ltd., ), thereof, the apex court granted special leave to appeal on August 6, 1992, in regard to the question as to whether the value of the work-in-progress and the cost of machinery in transit should be included in the computation of capital for the purpose of relief u/s 80J of the Act. This was in S. L. P. (Civil) No. 8690 of 1992. The learned senior tax counsel contended that the question as a result thereof is under consideration at the apex court. We would like to point out that the decision of this court in Periyar Chemicals Ltd. Vs. Commissioner of Income Tax, , does not appear to have been taken up to the apex court as we are not told anything in regard thereto Commissioner of Income Tax v. Alcock Ashdown and Co. Ltd., (1997) 224 ITR 353 (SC) -Ed.

After taking us through the statutory provision of Section 80J of the Income Tax Act, 1961, especially Sub-section (1A) thereof, learned counsel made some submissions. He invited our attention particularly to Clause (II)(iii) thereof. To appreciate his submissions we reproduce hereinbelow the relevant portion thereof :

" 80J(1A). 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 : . . .

(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 ;"

It is submitted by him that it is necessary to appreciate that the capital assets acquired otherwise than by a purchase and not entitled to depreciation would have to be understood in terms of the value thereof in the context of time as to when they could be properly understood to have become assets of the business. Learned senior tax counsel submitted that the capital employed in the context will have to be computed in accordance with Clauses (II) to (IV) of Sub-section (1A) of Section 80J of the Act and the emphasis in regard thereto would have to be appreciated in the context of time with reference to the value of the assets in question and the time would be the time when the assets could be understood to have become the assets of the business. Emphasising the above aspect to appreciate his further submission that in the earlier decision of this court in Periyar Chemicals Ltd. Vs. Commissioner of Income Tax, , it would be necessary to consider the manner in which this court has approached the situation. This is because learned senior tax counsel submitted that the importance of the statutory phrase "the value of the assets when they became the assets of the business" has not been properly considered with special emphasis on the meaning of the above phrase. For this purpose, learned senior tax counsel took us through the entire discussion in the context referable to question No. 3 thereof. Learned counsel, apart from the pendency in the form of SLP referred to above, submitted that in view of his submissions the question should be properly referred to a Full Bench for consideration.

Additionally, learned senior tax counsel submitted that with regard to the question of depreciation under the provisions of Section 32 of the Income Tax Act, in regard to buildings, machinery, plant or furniture, what is required is not only that these items should be owned by the assessee, but what is further required is that that the items are necessary to be used for the purpose of the business or profession. Therefore, learned counsel submits that the user is the most important aspect in regard to the question of a claim for depreciation. In understanding the statutory phrase under consideration, the situation as to when the concerned asset became the asset of the business would also be required to be considered meaningfully because these claims are in the nature of exemptions and are required to be understood and applied in that sense of the situation. Learned counsel submitted that the word "use" is to be found in Section 32 in the context of a claim for depreciation. He submitted that the situations such as depreciation and deduction are in the nature of benefits offered to the assessee under the relevant statutory provisions and a strict and principled approach is necessary in regard thereto especially while appreciating the use of the words and phrases in regard thereto. He submitted that in the context "the value of the assets when they became assets of the business" would necessarily have to be appreciated in the context of the time in regard to the assets actually becoming assets of the business ; in other words, actually being used as the assets of the business. Learned counsel also submitted referring to the phrase in Clause (iii) of Section 80J of the Act that this will also have to be considered with reference to the assets not entitled to depreciation. In other words, the provision takes into consideration the factual situation that they are not used at all in the context. In our judgment, in the event of our coming to the conclusion that this court in deciding the question has not considered the above aspects or that these aspects could be said not to have been present to this court at the time of deciding the situation, it would be possible to consider the submissions of learned senior tax counsel. However, on going through the decision, we are afraid, it is not possible to come to such a conclusion. Additionally, even the bare reading of Sub-clause (iii) would show that the said clause would govern the situation of the assessee who is not entitled to depreciation. In other words, it would naturally mean that the assessee, not being entitled to depreciation, may be by reason of there being no material of use, the said clause would govern the situation.

Therefore, the language of the clause under consideration also additionally goes to support the view taken by this court earlier.

The question as taken up for consideration by this court in Periyar Chemicals Ltd. Vs. Commissioner of Income Tax, is available in question No. 3 before it and it is as follows (page 165) :

" Whether, on the facts and circumstances of the case, Rs. 5,59,689, being the value of the work-in-progress should be excluded in the computation of the capital employed for the purpose of determining the amount of deduction allowable u/s 80J of the Income Tax Act, 1961, for the assessment year under consideration ?"

The said question is taken up for discussion at pages 168 to 169 of the report. It is clearly held that the value of the capital work-in-progress forms part of the capital employed in the industrial undertaking of the assessee within the meaning of Section 80J(1A) of the Act. In the process of reasoning a paragraph from the professional treatise Law and Practice of Income Tax by Kanga and Palkhivala, Supplement to Seventh Edition, at page 1-138 is quoted and it is to the following effect :

" ''Capital employed'' includes work-in-progress, and also machinery, land or other assets acquired for the business though they may not be actually used in the accounting year : Commissioner of Income Tax Vs. Indian Oxygen Ltd., , Ravi Machine Tools (P.) Ltd. Vs. Commissioner of Income Tax, ; Commissioner of Income Tax, Gujarat-II Vs. Cibatul Ltd., ; Commissioner of Income Tax, Bombay City-I Vs. Alcock Ashdown and Co. Ltd., and Commissioner of Income Tax Vs. Mohan Meakin Breweries Ltd., "

It is also observed thereafter with the help of the decision of the Calcutta High Court in Commissioner of Income Tax Vs. Indian Oxygen Ltd., , that the moment capital is utilised for the purpose of acquiring any assets for a business, such capital becomes employed in that business, whether the asset is actually used for the business or not. Then it is observed that the work-in-progress would, therefore, fall u/s 80J(1A) as forming part of the capital employed in the industrial undertaking. This court also has further observed that the Karnataka High Court and the Gujarat High Court have taken the same view. Referring to a decision of the House of Lords in Birmingham Small Arms Co. Ltd. v. IRC [1951] 2 All ER 296 (HL), referred to by the Calcutta High Court, especially Lord Tucker, to the effect that the words "capital employed" point to the conclusion that in their context they do not refer to the actual use made of a particular asset in the relevant accounting period once it is shown to have been a form of capital put into the business and still there.

Going through the reasoning of this court in Periyar Chemicals Ltd. Vs. Commissioner of Income Tax, , it would not be possible to say that the aspect was not present to the mind of this court when it decided Periyar Chemicals Ltd. Vs. Commissioner of Income Tax, . The decision is of the court of co-ordinate jurisdiction and of a binding nature. In a situation in which we also feel to take the same view, it is not possible to think of a reference to a Full Bench on the ground of internal consistency and judicial discipline in regard thereto. Additionally, this court has also emphasised that the Karnataka High Court, Gujarat High Court, Calcutta High Court and the House of Lords, especially Lord Tucker and Lord Radcliffe speak with the same voice and decision.

In this view of the question, we answer the question in the affirmative, against the Revenue and in favour of the assessee.

A copy of this judgment under the seal of the court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench, for passing consequential orders.