Commissioner of Income Tax vs Kimatrai Printers and Processors Pvt. Ltd.

G.T. Nanavati, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following two question u/s 256(1) of the Income Tax Act, 1961, to this court for its opinion :

"1.0 Whether, on the facts and in the circumstances of the case, six per cent of the capital employed should be deducted for the full year even though the undertaking had worked for seven months, the accounting year being of seven months ?

Whether, for the purposes of section 80J, the capital employed should be arrived at without deducting the liability and debts ? "

The assessee changed the accounting year relevant to the assessment year 1975-76 and made it of seven months only and thus it started on April 1, 1974, and ended on October 31, 1974. For that year, the assessee claimed deduction u/s 80J.

The Income Tax Officer held that depreciation and deduction u/s 80J would be admissible proportionately and not fully at the rate of six per cent, per annum from the capital employed. The claim which was filed by the assessee u/s 80J was without deducting the liabilities and debts as, while computing the capital employed, the assessee had not deducted the liabilities and dents. The Income Tax Officer computed the capital employed as per rule 19A of the Income Tax Rules.

Therefore, aggrieved by the order passed by the Income Tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner. As regards full deduction at the rate of 6 per cent, of the capital employed, the Appellate Assistant Commissioner, relying upon the decision of the Tribunal in I.T.A. No. 1654/ (Bom) dated July, 1973, upheld the contention raised on behalf of the assessee. The Appellate Assistant Commissioner also upheld the contention raised on behalf of the assessee as regards computation of the capital employed following the decision of the Appellate Tribunal, Bombay, in I.T.A. No. 3643/ (Bom) of 1974-75, dated December 1, 1977.

The Revenue, therefore, preferred an appeal to the Tribunal. The Tribunal also, following the judgment of the Income Tax appellate Tribunal, Bombay Bench-C, in I.T.A. No. 1654/ (Bom) of 1972-73, held that the assessee was entitled to full deduction at the rate of six per cent. on the capital employed. Even though the question regarding correct computation of the capital employed was raised before it, the Tribunal did not record any finding thereon and dismissed the appeal.

The Revenue, therefore, made an application to the Tribunal for referring the following three questions to this court :

"1. Whether, on the facts and in the circumstances of the case and having regard to the condition imposed by the Income Tax Officer for allowing the assessee to change the period of accounting, the Income Tax appellate Tribunal was right in law in holding that though the undertaking of the assessee was allowed to adopt an accounting period of seven months, it was entitled depreciation and deduction u/s 80J for the full year ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal erred in law in not deciding the question as to whether, for the purposes of deduction u/s 80J, the capital employed should be arrived without deducting the liability and debts ?

Whether, for the purpose of deduction u/s 80J, the capital employed should be arrived at without deducting the liability and debts ?"

After hearing the Revenue and the assessee, the Tribunal decided to refer the abovestated two questions to this court.

So far as question No. 1 is concerned, the point raised by it is settled by the decision of this court in Commissioner of Income Tax, Gujarat-I Vs. Sarabhai Sons Ltd., and in fact the Board had also issued a circular explaining how the phrase "per annum" has to be construed. The said circular was issued by the Board on March 3, 1982. Question No. 1, therefore, will have to be answered in the affirmative, that is, against the Revenue and in favour of the assessee.

So far as the point raised by the second question is concerned, it is also concluded by the decision of the Supreme Court and also by the decision of this court. In Lohia Machines Ltd. and Another Vs. Union of India (UOI) and Others, the validity of rule 19A was challenged : The Supreme court negatived the same and held that it was a perfectly valid piece of subordinate legislation. Therein also, the Supreme Court has taken a view that while computing the capital employed, borrowed moneys are required to be excluded.

In Kaira District Co-operative Milk Producers'' Union Ltd. Vs. Commissioner of Income Tax, this court has held in terms that debts and liabilities have to be deducted wile computing the capital for the purpose of section 84/80J. Following the said judgment of the Supreme Court and the decision of this court, we are of the view that the Tribunal was not right in holding that the capital employed for the purpose of section 80J should be arrived at without deducting the liabilities and debts. Question No. 2 is, therefore, answered in the negative, that is, in favour of the Revenue and against the assessee.

In the result, question No. 1 is answered in the affirmative, that is, against the Revenue and in favour of the assessee and question No. 2 is answered in the negative, that is, in favour of the Revenue and against the assessee. This reference stands disposed of accordingly with no order as to costs.