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Issues: (i) Whether borrowed money is to be included in computing capital employed for the purpose of deduction under section 80J; (ii) Whether capital employed is to be taken as the average of the capital on the first and closing day of the accounting period, or as on the first day of the accounting period.
Issue (i): Whether borrowed money is to be included in computing capital employed for the purpose of deduction under section 80J.
Analysis: The question was governed by the law laid down in Lohia Machines Ltd. v. Union of India, under which rule 19A(3) of the Income-tax Rules, 1962, could not be ignored in computing capital employed for section 80J purposes.
Conclusion: The answer was in the negative, in favour of the Revenue and against the assessee.
Issue (ii): Whether capital employed is to be taken as the average of the capital on the first and closing day of the accounting period, or as on the first day of the accounting period.
Analysis: For the purpose of section 80J, capital employed had to be taken as on the first day of the accounting period and not on the average of the opening and closing figures.
Conclusion: The Tribunal's view on averaging was rejected and the computation was directed to be made on the basis of the opening day capital.
Final Conclusion: Both questions were answered against the assessee, and the reference was disposed of with the matter left to the Tribunal for recomputation under section 260 of the Income-tax Act, 1961.
Ratio Decidendi: For section 80J computations, capital employed is determined in accordance with rule 19A(3) and, in the relevant context, on the opening day basis rather than by averaging opening and closing capital figures.
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