1. The only question that arose in this appeal relating to the assessment year 1977-78 is whether the second unit started by the assessee called Unit No. 2 is entitled to the relief provided for under Section 80J of the Income-tax Act. The relief due to the assesaee was denied on the ground that Unit No. 2 was carved out of Unit No. 1 and the financial accounts maintained were so mixed up and showed a situation where the liability in respect of Unit No. 2 far exceeded the investments resulting- in deficiency in capital and whatever borrowings that were made clearly for investment in Unit No. 2 on which the relief under Section 80J was not due.
2. The assessee, which is a limited company and which has its accounting period of September 1975, filed a return declaring a net loss of Rs. 17,58,587, which was later on revised to Rs. 20,85,669. The revision was made mainly to claim more relief under Section 80J. The assessee-company claimed inter alia relief under Section 80J at Rs. 12,36,356 out of which the Income-tax Officer allowed Rs. 3,43,769.
This claim included Section 80J relief on Plant No. 2 also. The claim for Section 80J relief on Plant No. 2 (the actual quantum not given) was disallowed by the Income-tax Officer on the ground that the liabilities in Plant No. 2 exceeded the value of the fixed assets as on the opening day and as a consequence there was no capital employed to be computed under Section 80J. The Income-tax Officer arrived at this position in the following manner:Gross fixed assets as on 1-5-1976 36,10,701Current assets as on 1-5-1976 Nilto Snow Temp Engg. Co. Ltd. made after that as thecapital employed is to be taken as on the openingnot to be taken into account.
--- 1,360,701Less: Rs.Secured loans from I.C.I.C.I. 17,57,367Due to Plant 1 43,41,176 60,98,543 It was in this manner that the loans were found to be in excess of fixed assets resulting in no capital and it was according to this working that the Income-tax Officer held that there was no apparent capital employed so as to give relief under Section 80J. He also mentioned that in Plant No. 2 the assessee incurred loss and therefore the claim under Section 80J had become academic.
3. Before the Commissioner (A), the assessee after pointing out to the balance sheet and the relevant figures submitted that the aggregate investment in Unit No. 2 as on 1-5-1976 amounted to Rs. 52,79,357 and not Rs. 36,10,701 as taken by the Income-tax Officer and that the advances, etc., amounting to Rs. 16,68,656 was omitted to be considered by the Income-tax Officer, which was wrong. It was further submitted that the said investment was financed out of loans amounting to Rs. 16,67,456 and also out of the amount taken from head office of Rs. 36,11,901. The amount taken from the head office of Rs. 36,11,901 was the capital employed on the first day of the second unit, namely, 1-5-1976 and since that amount had come out of the capital reserves of the company, which totalled to Rs. 1.02 crores, was more than enough to permit the company to invest Rs. 36,11,901 in starting the second unit.
From the point of view of accounting, the actual amount invested in unit Ho. 1 was Rs. 67 lacs leaving a surplus of about Rs. 45 lacs in the hands of the company to be invested in the second unit. It was therefore wrong on the part of the Income-tax Officer to say that there was no capital employed in the second unit and that the relief under Section 80J should therefore be allowed on the sum of Rs. 36,11,901 at 71/2 per cent. Reliance was placed upon a decision of the Delhi High Court in the case of CIT v. Gedore Tools India (P.) Ltd. [1980] 126 ITR 673 and on the decision of the Madras High Court in the case of CIT v.South India Viscose Ltd. [1983] 140 ITR 58 for this view. The Commissioner (A) considered the question as to whether there was any own funds available with the company for investment in the second unit.
Analysing the balance sheet of the company as on 30-6-1975 the Commissioner (A) observed that the total amount invested in unit No. 1 both by way of fixed assets and current assets was Rs. 1,83,99.045, which was much more than the aggregate of the share capital and the reserves of the company. From this he inferred that even for the running of unit No. 1 the company required borrowed funds. He therefore held that the claim of the assessee that a sum of Rs. 36,11,901 was invested in unit No. 2 out of the reserves and share capital of the assessee-company was incorrect. Referring to the High Court decisions, he held that the Delhi High Court decision would be applicable only if surplus reserve capital was available and not otherwise. He distinguished the Madras High Court decision by pointing out that in order that there is a borrowed money, there must be a third party and in this case there was no third party and therefore it could not be said that there was any borrowings. Thus, he agreed with the Income-tax Officer that there was no positive figure of capital employed in unit No. 2 for the purposes of allowing relief under Section 80 J.4. It was against this order of the Commissioner (A) that the present appeal was filed urging that the view taken by both the Income-tax Officer and the Commissioner (A) was erroneous and that from the reading of the balance sheet, it would at once be clear that there was enough of suplus capital with unit No. 1 to place it in a position to advance money to unit No. 2 and that unit No. 2 was not financed by borrowed funds. Arguments were addressed to us on the same lines fortifying the same positions as were taken up before the authorities below; the department contending that there was no capital employed and the assessee contending for the opposite view.
5. To appreciate the position as to whether the head office had any surplus money to enable it to finance the second unit, it is necessary to notice the figures of both head office and of unit No. 2. In head office, i.e., plant No. 1 the position as on 30-6-1975 is as under: Rs.Current assets 92.44 lacsStock, debtors, cash and bank As against this the current liabilities are Rs. 30,78 lacs. Thus, the current assets were in excess by Rs. 61.66 lacs, which represents the working capital of the company available in plant No. 1. This amount is available with plant No. 1 to be utilised for investment in plant No.2. The question would then arise how did the sum of Rs. 61.66 lacs come about in the hands of plant No. 1. The fixed assets of plant No. 1 were Rs. 91.53 lacs and the capital and reserves had worked out to Rs. 94,23 lacs. Thus, the difference between the fixed assets and the share capital and reserves is excess of reserves over fixed assets by Rs. 2.70 lacs, i.e., to say that the share capital reserves is in the excess of the fixed assets. The question would then arise whether the entire amount of share capital and the reserves which is the shareholders' money, has been utilised only in acquiring fixed assets or whether it was used in acquiring current assets also. It is, no doubt, true, there are secured loans to the extent of Rs. 60 lacs as on 1-7-1975. The next question would arise as to how those secured loans were utilised; were they utilised for the purposes of acquiring capital assets or were they utilised for the purposes of acquiring current assets or whether the secured loans were borrowed only for the purposes of providing working capital. Thus, we have two situations, one is excess of current assets over current liabilities by about Rs. 61 lacs and excess of share capital and reserves over fixed assets by Rs. 2.70 lacs. It can be argued that this surplus would not be available in the hands of plant No. 1, had there been no secured loans borrowed. But the question that would arise is not how the secured loan was utilised but how in a case where own capital reserves and loans borrowed were all mixed up inextricably whether it would be possible to say as to what part of that amalgam was utilised in acquiring fixed assets and as to what part was utilised in acquiring current assets. There is no presumption known to us either way unless it is possible to trace from the accounts as to how the funds were utilised. The surplus working capital shown by the balance sheet of plant No. 1 can therefore be taken to be an indication that funds were available in the hands of plant No. 1 for being invested elsewhere and since the borrowals and own capital were inseparably mixed up, a presumption can be that the working capital was out of share capital reserves and the termed loan was utilised in acquiring fixed assets though vice versa also is arguable and possible. It is of considerable significance to note that term loans are granted for acquiring fixed assets though not always. In so far as unit No. 2 is concerned, the entire money of Rs. 36 lacs came out of surplus funds available in plant No. 1. For the purposes of granting relief under Section 80J, unit No. 2 is regarded as a separate industrial undertaking inasmuch as unless it was so regarded it would not be eligible for relief under Section 80 J. If the second unit is to be regarded as a new industrial undertaking, standing on its own becoming eligible for the relief, than the amount advanced by the head office would certainly partake the character of capital in its hands.
Therefore, while granting relief under Section 80J for plant No. 2 treating it as a new industrial undertaking, the question to be asked is not whether there is any surplus capital in the hands of unit No. 1 when it financed unit No. 2 but whether unit No. 1 has got surplus funds. Suppose the entire equity capital of the shareholders is eaten away by loss, it can then be said that there was no capital in its hands and the amount it advanced had necessarily come out of borrowed funds. So long as that situation does not arise, so long as capital and surplus was substantial and so long as it was not proved that that money was utilised directly in acquiring fixed assets, the surplus working capital can reasonably be traced to capital and reserves on the presumption that the current assets were financed by the capital and reserves. We have seen that the balance sheet of plant No. 1 did disclose enough of working capital to cover the advances to plant No.2. In order to say that the sum of Rs. 36 lacs invested in unit No. 2 had come out of borrowed funds, the only test as we can see is to find out whether the funds borrowed by unit No. 1 have directly been advanced to finance unit No. 2. This can be easily found out with reference to the entries in the cash book in plant No. 1. In the absence of such direct finding, we find it difficult to find a nexus between the borrowed capital and the surplus working capital or connect both of them leaving it to toe presumed that the fixed capital had come out of capital and reserves.
6. For this reason and for the reason that for the purposes of Section 80J, unit No. 2 has to be regarded as an independent new industrial undertaking, the sum of Rs. 36 lacs received from the head office, i.e., unit No. 1 can be regarded as its capital. In this context we may also refer to the decision of the Delhi High Court reported in Gedore Tools India (P.) Ltd.'s case (supra) where the following observations appeared at page 678: It would appear to us that it is not necessary for the employment of the capital to be formal in. the sense of actually raising the capital and putting it into the new industrial undertaking.
Employment of capital in a new industrial undertaking is different from the capital belonging to the assessee-company. If surplus reserve capital is available with, the assessee-company it can utilize a specific amount of this capital for the purchase of the plant, machinery, buildings and other assets of the new undertaking.
As soon as the capital is so utilised for acquiring assets for the new undertaking, it will be an employment of capital. The actual amount of capital so utilized/employed in the new undertaking would then qualify for the purpose of calculating the deduction. The utilization of a definite amount of capital appears to be contemplated in order to attract the provisions of the section.
Further, as the reserves of the assessee-company are distinct from the assets employed in the old unit it would not be a case of transfer of assets of the old unit or business to the new undertaking.
Our view appears to be in consonance with the abovementioned decision of the Supreme Court in Textile Machinery Corporation Ltd. [1977] 107 ITR 195, which speaks of investing substantial funds in the new unit without transfer of assets of the old business. In fact, in that case raw materials were supplied to the new jute mill division by the old boiler division which were later on returned to the boiler division after forging and mechanising, and yet it was not held to be a transfer of assets of the old business.
As abovenoticed, the purpose of the section is apparently to provide tax incentives, to stimulate industry and the manufacture of articles resulting in more employment and economic gain for the country. In order to see that this end is achieved it is necessary to guard against an assessee availing of the benefit of the exemption by the device of camouflaging or converting an old undertaking into a new one. Since the assessee before us is not guilty of this and the new undertaking fulfilled the required conditions, the assessee was entitled to claim the relief under Section 80J of the Act by reference to the capital employed in the new industrial undertaking at Faridabad.
It will be seen from the above observations that the Delhi High Court has held that if surplus capital is available with the assessee-company or reserve capital is available with the assessee-company, it can utilize a specific amount of this capital for the purchase of the plant, machinery, building's and other assets of the new undertaking and that the capital so utilized would amount to employment of capital and that capital would qualify for the purposes of calculating the deduction. The High Court also cautioned that only thing to guard, against is that the assesses availing the benefit of the exemption should not adopt the device of camouflaging or converting an old undertaking into a new one. It is not the case of the department here that the assessee is guilty of this device. We have already seen that there is enough of surplus working capital available with the assessee-company and a portion of that surplus capital was utilised for the purchase of-plant and machinery of the new undertaking, namely, unit No. 2.
7. For these reasons, we hold that the assessee is entitled to the claim it made and we direct the authorities to compute the capital in a proper manner according to law and then allow the relief.