Commissioner of Income Tax vs Sri Ganganagar Fertilizer Corpn.

S.S. Byas, J.—The Tribunal, Jaipur Bench, has referred the following question of law u/s 256(1) of the income tax Act, 1961 (''the Act'') for adjudication:

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that in the case of a newly established industrial undertaking for the purpose of section 80J of the income tax Act, 1961 and rule 19A of the income tax Rules, 1962, borrowed money formed part and parcel of this capital employed in such an undertaking and that deduction thereof is not proper, and in directing the income tax Officer to recompute the capital employed by the assessee-firm in its newly established industrial undertaking without deducting borrowed monies therefrom ?

Material facts, stated in brief, are that the assessee is a partnership firm carrying on the business of manufacturing and sale of fertilizer. The assessment years are 1973-74 to 1975-76. In the returns filed by the assessee, it claimed a relief u/s 80J of the Act at 6 per cent of the capital employed in its undertaking. The capital included the borrowed money for the amount of Rs. 17,58,839 for the year 1973-74, Rs. 19,33,853 for the year 1974-75 and Rs. 20,34,455 for the year 1975-76. The ITO excluded these amounts as they were borrowed moneys. The assessee contended before the ITO that the deduction of the aforesaid amount should be made u/s 80J and relied upon the judgment of the Calcutta High Court rendered in Century Enka Ltd. Vs. Income Tax Officer and Others, The ITO did not follow the view taken by the Calcutta High Court as he had earlier refused to follow it. The assessee went in appeal and the appeal was dismissed by the Commissioner (Appeals). The assessee went in further appeal before the Tribunal. The learned members of the Tribunal did not agree with the view taken by the ITO and upheld in appeal by the Commissioner (Appeals). Following the earlier decisions given by the Tribunal, the Tribunal held that the borrowed money should not have been deducted while computing the capital employed. The ITO was directed to recompute the capital employed and accordingly, grant the necessary relief to the assessee. The Commissioner thereafter moved the Tribunal to make a reference to this Court and the reference was, accordingly, made. We have heard Mr. B.R. Arora, the learned counsel for the revenue and Mr. Rajesh Balia the learned counsel for the assessee.

It was argued by Mr. Arora, the learned counsel for the revenue, that the view taken by the Tribunal is based on the pronouncements made in Century Enka Ltd. Vs. Income Tax Officer, "D" Ward and Others, and Madras Industrial Linings Ltd. Vs. Income Tax Officer and Others, It was argued that these decisions have been overruled by their Lordships of the Supreme Court in Lohia Machines Ltd. and Another Vs. Union of India (UOI) and Others, As such the order of the Tribunal is not proper and should be set aside.

Mr. Chaudhary, the learned counsel appearing on behalf of Mr. R. Balia for the assessee, with all fairness, conceded that in view of the law laid down in the case of Lohia Machines Ltd. (supra) he has nothing to say.

Suffice it to say that the view taken in the cases of Century Enka Ltd. (supra), Madras Industrial Lining Ltd. (supra) and like others, by the Calcutta, Madras, Allahabad, Punjab & Haryana and Andhra Pradesh High Courts has been overruled and the view expressed by the Madhya Pradesh High Court in Commissioner of Income Tax Vs. Anand Bahri Steel and Wire Products, and CIT v. K.N. Oil Industries [1982] 134 ITR 651 was approved by their Lordships of the Supreme Court in the case of Lohia Machines Ltd. (supra). It would be useful to reproduce the following passage of the judgment rendered in the case of Lohia Machines Ltd. (supra).

... insofar as it provided for the exclusion of borrowed monies and debts and particularly long-term borrowings in the computation of the ''capital employed'' by a new industrial undertaking for the purposes of the tax exemption could not be said to be outside the rule-making authority conferred on the Central Board u/s 80J(1) of the income tax Act, 1961, and was a perfectly valid piece of subordinate legislation;

(ii) that rule 19A, insofar as it provided for computation of the ''capital employed'' as on the first day of the computation period, was within the rule-making authority of the Central Board u/s 80J(1);

(iii) that, since rule 19A did not suffer from any infirmity and was valid in its entirety, the Finance (No. 2) Act, 1980, insofar as it amended section 80J by incorporating the provisions of rule 39A as sub-section (1A) in section 80J, with retrospective effect from April 1, 1972, was merely clarificatory in nature and was, accordingly, valid." (p. 309)

The Tribunal was, thus, not justified and correct in holding that deduction u/s 80J is allowable to the assessee on the entire amount claimed to be the ''capital invested'' by the assessee in its industrial undertaking including borrowed capital, ignoring the provisions of rule 19A of the income tax Rules, 1962. The reference is answered in the negative, that is, against the assessee and in favour of the revenue. Parties will bear their own costs of this reference.