Commissioner of Income Tax, Madras Central vs South India Viscose Ltd.

Sethuraman, J.—The Commissioner of Income Tax, Madras, has asked for a reference of the following questions as arising out of the

Tribunals order :

Whether, on the facts and the in the circumstances of the case, and having regard to rule 19A of the Income Tax Rule, 1962, the Appellate

Tribunal, was justified in holding that borrowed capital should not be deducted as a liability while computing the capital employed for purpose of

relief u/s 80J of the Income Tax Act, 1961 ?

There is some misconception in the question as will be overdone from what follow: The assessee is a manufacture of rayon yarn. The assessment

for the year 1970-71 was completed originally granting relief in a sum Rs. 22,66,744 under s. 80J of the I.T. Act, 1961. Subsequently, the ITO, in

the reassessment proceedings, came to the conclusion that in the original capital computation, sum of Rs. 3,77,79,065 had been taken as the

capital employed and that with reference to a sum of Rs. 1,53,37,796, there should have been a reductions, because t that extent its was a liability

though to the rayon and staple fibre units. The ITO accordingly reduced the relief due to the assessee under s. 80J to a sum of Rs. 13,477. The

appeal, of the assessee to the AAC was unsuccessful. The matter was therefore, taken on appeal to the Tribunal. The Tribunal accepted the

assessee''s case on the ground that there was no liability with reference to the said sum of Rs. 1,53,37,794 as it was not either borrowed money or

debt owed to a third party. In the course of the Tribunals order, in para. 6, it is stated as follows:

It is also common ground that no amount was borrowed by the assessee-company from any outside for the above anew unit. There is also no

dispute that the surplus fund of the reason an staple fibre unit were invested in the new pulp unit. On the above facts it is clear that the assessee-

company did not borrow any fund and, therefore, the question of deduction of any alleged borrowal for computing capital employed would not

arise.

Section 80J, as it was then in force, applied to new industrial undertaking and contemplates and deduction at the rate of six per cent. on the

capital employed from the income earned by the new industrial undertaking. In other words, to the extent of six per cent. on the capital employed

the assessee enjoyed a tax concession. Rule 19A is the relevant rule for computation of capital employed in an industrial undertaking. That

provides that the aggregate of the amounts representing the value of the assessed as on the first day of the accounting period of the undertaking

should first be ascertained in a specified manner as pointed out there in Clause (3) of rule 19A provided:

From the aggregate of the amounts as ascertained under sub-rule (2) shall be deducted, the aggregate of the amounts, as on the first day of the

computation period, of borrowed monies and debts owed by the assessee (including any amount due towards and liability in respect of tax).

In the present case, the contention of the Department was the this sum of Rs. 1.58 corers was liable to be deducted under clause (3). The

Tribunal found that to that extent, there was no borrowed moneys only the surplus funds of the rayon and staple fibre unit had been utilised and

there was also no debt owed by the assessee as there was no amount payable to a third party so as to the allowed as a deduction in the

computation of capital.

The order of the Tribunal does not suffer from any error which can be the subject of a reference to this court. In view off the fact that the

amount was admittedly drawn only from the rayon and staple fibre unit, it was clearly neither a borrowals not debt owned by the assessee. The

expressions ""borrowed monies"" and ""debts owed"" by the assessee postulated the existence of third parties from whom the monies are borrowed

or the debts were incurred. In the absence of any such third party in the present case, who that fact that the amount was drawn forms the assessee

itself is admitted, there is no scope for deduction of the said amount under clause (3) of the relevant rule.

The learned counsel pointed out that this amount is shown as ""liability"" in the balance-sheet drawn for the new units. that is merely an internal

accounting. In accountancy, when a branch balance-sheet is prepared, the amount owed to the head office would be displayed as a liability, as

there is no other way of accounting for it. Merely because it is thus, shown as a liability in the said balance-sheet of the law for working out its

profits separately, for granting the relief, it cannot be taken as narrowed monies or as debts owed by the assessee. The Liability in this particular

case is only for another unit of the same company. This finding would be one of fact. Therefore, there is no question of law which can be said to

arise out of the Tribunal''s order. The petition is accordingly dismissed with costs Counsel fee Rs. 250.