Commissioner of Income Tax vs K.N. Oil Industries

C.P. Sen, J.—This is an application u/s 256(2) of the Income Tax Act, 1961, by the Commissioner of Income Tax for directing the Appellate Tribunal to state the case and refer the following two questions for opinion of this court.

(1) "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the provisions contained in Section 80J of the Income Tax Act, 1961, read with rule 19A of the Income Tax Rules, 1962, prohibiting inclusion of borrowed capital employed by the assessee while computing the capital employed in the business for the purposes of 80J relief are debatable in nature ?

(2) If the answer to the above question is in the negative, whether the Appellate Tribunal was justified in law in confirming the order of the Commissioner of Income Tax (Appeals) quashing the order of the Income Tax Officer u/s 154 of the Income Tax Act, 1961, rectifying the quantum of relief allowable u/s 80J of the Income Tax Act, 1961, for the assessment year in question ?"

For the assessment year 1972-73, accounting period ending Diwali 1971, the non-applicant filed return of its income in the status of a registered firm. The Income Tax Officer passed an assessment order u/s 143(3) of the Act. Subsequently, the Income Tax Officer found that there was a mistake in computing the capital employed and deduction admissible u/s 80J of the Act. He, therefore, issued a notice u/s 154 of the Act to the assessee on May 14, 1973. The non-applicant objected to the initiation of proceeding under that section. The Income Tax Officer overruled the objection and passed an order u/s 154 holding that the borrowed capital should have been excluded in working out the capital for giving statutory deduction by relying on the provisions of Section 80J and rule 19A of the Income Tax Rules. The non-applicant preferred an appeal before the Commissioner of Income Tax, The Commissioner of Income Tax came to the conclusion that the question whether the borrowed capital had to be excluded for the purposes of Section 80J was a highly debatable issue and consequently no action u/s 154 could be taken. It was held by him that there was no mistake apparent from the record and the order of rectification was consequently invalid. The Department then preferred an appeal before the Income Tax Tribunal. The Tribunal agreed with the view taken by the Commissioner and held that the question was a debatable one and no action u/s 154 was called for. Thereupon, the Department filed an application for reference u/s 256(1) of the Act to the Tribunal for making a reference. The application has been rejected by the Tribunal saying that the findings are of fact.

It is true that the question was debatable at the time when the impugned order was passed by the Commissioner and the Tribunal. But after the decision of the Tribunal, this court in Commissioner of Income Tax Vs. Anand Bahri Steel and Wire Products, and CIT v. K. N. Oil Industries [ 1982] 134 ITR 651 took the view that Sub-rule (3) of Rule 19A of the Income Tax Rules, 1962, which requires the deduction of borrowed moneys in determining the capital employed by the assessee for the purpose of calculating the tax relief u/s 80J of the Income Tax Act, 1961, is consistent with the intention of Parliament and does not go beyond the rule-making power conferred by Section 80J, and is perfectly valid. Rule 3(3) of the Indian Income Tax (Computation of Capital of Industrial Undertakings) Rules, 1949, which corresponded to rule 19A of the Income Tax Rules, 1962, provided for the deduction of borrowed money and debt due by the person carrying on the business in the computation of capital for the purposes of Section 15C of the 1922 Act That rule was not challenged and was in operation till the coming into force of the 1961 Act and the making of the 1962 Rules. It appears that a difierent view was taken by other High Courts and rule 19A(3) was held to be ultra vires and long-term borrowings from any source were liable to be taken into account in computing the capital employed in industrial undertaking. This was so held by the Calcutta High Court in Century Enka Ltd. Vs. Income Tax Officer and Others, , Madras High Court in Madras Industrial Linings Ltd. Vs. Income Tax Officer and Others, , Allahabad High Court in Commissioner of Income Tax Vs. U.P. Hotel-Restaurant Ltd., , Punjab & Haryana High Court in Ganesh Steel Industries Vs. Income Tax Officer and Others, and the Andhra Pradesh High Court in Warner Hindustan Ltd. and Another Vs. Income Tax Officer and Others, . However, the dispute is now settled by the Supreme Court in Lohia Machines Ltd. and Another Vs. Union of India (UOI) and Others, by approving the decision of this court by holding that rule 19A in so far as it excludes borrowed monies and debts in the computation of "capital employed" and provides for computation of capital employed as on the first day of the computation period, is not outside the rule-making authority of the Board and is intra vires Section 80J.

Therefore, we direct the Tribunal to state the case and refer the following question for the opinion of this court:

Whether, in view of the decision of the Supreme Court in Lohia Machines Ltd. and Another Vs. Union of India (UOI) and Others, , the Appellate Tribunal was justified in law in confirming the order of the Commissioner of Income Tax and quashing the order of the Income Tax Officer u/s 154 of the Income Tax Act, 1961, rectifying the quantum of relief allowable u/s 80J of the Act for the assessment year in question ?