1. The following three questions of law have been referred for our opinion under Section 256(1) of the IT Act, 1961, in RA No. 943/Del/1983 in ITA No. 771/Del/1982 relevant for the asst. yr. 1971-72 :
1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified both on the facts and in law in holding that the amount of Rs. A,57,282 representing loans should not be deducted from the capital employed while working out relief under Section 80J of the IT Act, 1961 by ignoring the provisions of Rule 19 of the IT Rules, 1962?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified both on facts and in law in holding that the capital as employed on the first day of the year should not be taken while computing the relief under Section 80J but should be taken on the average of assets minus average of liability during the year by ignoring the Rules, provisions of Rule 19 of the IT Rules, 1962?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified both on facts and in law in holding that the average value of the project under construction should not be excluded from the capital employed by ignoring the material fact that mere construction does not go to constitute capital employed in the new industrial undertaking?
2. Section 80J, introduced w.e.f. 1st April, 1968, insofar as it is relevant, read as follows:
80J. (1) Where the gross total income of an assessed includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessed, a deduction from such profits and gains (reduced by the aggregate of the deductions, if any, admissible to the assessed under Section 80H and Section 80-I) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent, per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year).
3. It appears from the record that the assessed had borrowed some money which was employed as capital in its unit. The assessed claimed deduction on this amount on the basis of Rule 19A(3) of the IT Rules, 1962 which came into force on 1st April, 1968, and remained in force up to 31st March, 1972. Rule 19A at the relevant time read as follows:
19A. Computation of capital employed in an industrial undertaking or a ship or the business of a hotel for the purposes of Section 80J--(1) For the purposes of Section 80J, the capital employed in an industrial undertaking or the business of a hotel shall be computed in accordance with Sub-rules (2) and (4), and the capital employed in a ship shall be computed in accordance with Sub-rule (5).
(2) The aggregate of the amounts representing the values of the assets as on the first day of the computation period, of the undertaking or of the business of the hotel to which the said Section 80J applies shall first be ascertained in the following manner:
(i) in the case of assets entitled to depreciation, their written down value;
(ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessed;
(iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business;
(IV) in the case of assets being debts due to the person carrying on the business, the nominal amount of those debts;
(v) in the case of assets being cash in hand or bank, the amount thereof....
(3) 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 moneys and debts due by the assessed (including amounts due towards any liability in respect of tax), not being-
(a) m the case of an assessed being a company, the amount of its debentures, if any, and
(b) in the case of any assessed (including a company) any moneys borrowed from an approved source for the creation of a capital asset in India, if the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years.
Explanation,-For the purpose of this Sub-rule:
(i) 'approved source' means the Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India Ltd. or any banking institution or any person in a country outside India or any of the following financial institutions, namely:
(a) a State Financial Corporation established under the State Financial Corporation Act, 1951 (LXIII of 1951);
(b) the Industrial Development Bank of India, established under the Industrial Development Bank of India Act, 1964 (XIX of 1964);
(c) the Madras Industrial and Investment Corporation of Indian Ltd.;
(d) the Re-finance Corporation for Industry Ltd.;
(e) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (XXXI of 1956);
(4) The resultant sum as determined under Sub-rule (3) shall be diminished by the value, as ascertained under Sub-rule (2), of any investments the income from which is not taken into account in computing the profits of the business and any moneys not required for the purpose of the business, insofar as the aggregate of such investments or moneys exceed the amount of the borrowed moneys which under Sub-rule (3) are required to be deducted in computing the capital.
(5) The capital employed in a ship shall be taken to be the written down value of the ship.
The ITO denied the deduction.
4. Feeling aggrieved, the assessed filed an appeal before the CIT(A) who allowed the appeal. Thereafter, the Revenue preferred a second appeal before the Tribunal which, by its order dt. 17th March, 1983, dismissed the appeal relying upon a decision of the Calcutta High Court in Century Enka Ltd. v. ITO : [1977]107ITR909(Cal) . This decision apparently governed question No. 1 that has been referred to us insofar as it held that even borrowed capital employed in the new industrial undertaking shall also be taken into consideration in computing the capital employed for purposes of relief under Section 80J of the Act.
5. There is another decision of the Calcutta High Court relating to the same assessed reported as Century Enka Ltd. v. ITO : [1977]107ITR123(Cal) which deals with question Nos. 2 and 3 but that has unfortunately not been referred to by the Tribunal. In any case, the Tribunal upheld the directions given by the CIT(A) to the ITO to include the borrowed money in the calculation of capital employed by the assessed while computing the relief under Section 80J of the IT Act.
6. The decision rendered by the High Court in Century Enka (supra) has since been overruled by the Constitution Bench of the Supreme Court in Lohia Machines Ltd. v. Union of India : [1985]152ITR308(SC) wherein the Supreme Court has considered the interpretation of the amendment in Section 80J of the IT Act w.e.f. 1st April, 1972.
7. Learned Counsel for the parties are agreed that in view of the insertion of r. 19A of the IT Rules w.e.f. 1st April, 1968, which continued to be in force up to 31st March, 1972 (and thereforee applicable to asst. yr. 1971-72) and the aforesaid decision of the Hon'ble Supreme Court, the computation of the capital employed should be taken on the basis of the first day of the accounting period. The Supreme Court while interpreting Rule 19A observed as follows:
Under Rule 19A, assets acquired on or after the commencement of the computation period were to be left out of account and only the amounts representing the value of the assets as on the first day of the computation period were to enter into the computation of the capital employed in the industrial undertaking or the business of a hotel.
In view of the above decision of the Supreme Court, question Nos. 2 and 3 are answered accordingly.
8. In relation to question No. 1, the Supreme Court, while interpreting Rule 19A held:
under the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949, and Rule 19, all borrowed monies and debts due by the assessed were required to be deducted in computing the 'capital employed' in the industrial undertaking or a hotel, a certain amount of liberalisation was introduced under Rule 19A, providing that 'monies borrowed from an approved source for the creation of a capital asset in India, if the agreement under which such monies are borrowed provides for the repayment thereof during a period of-not less than seven years' shall not be liable to be deducted but shall be taken into account in computing the capital employed in the industrial undertaking or the business of a hotel for the purpose of Section 80J. The result was that from and after 1st April, 1968, when Rule 19A came into force, borrowings from an approved source repayable in not less than seven years started for the first time to be taken into account in the computation of the capital employed in the industrial undertaking or the business of a hotel, though other categories of borrowed monies and debts due by the assessed, continued to remain excluded from such computation.
9. Consequently, borrowed monies could be included in the computation of capital employed, provided the conditions relating to the source of borrowing, the tenure, and terms and conditions of borrowing satisfied the requirements of Rule 19A. We are of the opinion that as there is not enough material available before us to answer this question, thereforee the matter ought to be remanded back to the Tribunal for reconsideration on this issue. The statement of case does not indicate the nature of the borrowed amount and the period of repayment. The assessment order only mentions that the assessed has taken secured loans from IFC (perhaps IFCI) but there is no discussion in this regard insofar as Rule 19A(3) of the IT Rules are concerned. Consequently, in the absence of necessary facts, it is not possible to render an opinion on the first question that has been referred to us.
We thereforee remand the matter back to the Tribunal to decide the issue whether the assessed is entitled to deduction of any borrowed capital in terms of Rule 19A(3) of the IT Rules.