1997 (3) TMI 34 - HC - Income Tax

Court rules capital for deduction under section 80J must be computed on the first day of the period.

The High Court ruled against the assessee in a case concerning the deduction under section 80J of the Income-tax Act, 1961. The Court held that capital ... New Industrial Undertaking, Special Deduction, Capital Employed Issues:- Interpretation of section 80J of the Income-tax Act, 1961 in relation to deduction for new industrial undertakings.- Determination of capital employed for deduction under section 80J.- Validity of rule 19A of the Income-tax Rules, 1962.- Applicability of Supreme Court rulings on computation of capital for section 80J deduction.Analysis:The judgment pertains to a case where the Appellate Tribunal referred a question of law to the High Court regarding the entitlement of an assessee to deduction under section 80J of the Income-tax Act, 1961 for the assessment year 1974-75. The issue at hand was whether the assessee, a company engaged in a new industrial undertaking, could claim the deduction despite having no opening capital on the first day of the computation period. The Income-tax Officer initially rejected the deduction claim, citing the absence of opening capital. However, the Appellate Tribunal ruled in favor of the assessee, considering capital introduced and augmented during the year. The High Court was tasked with resolving this discrepancy.The Revenue contended that the Tribunal's view allowing the deduction without opening capital was erroneous, citing the Supreme Court's decision in Lohia Machines Ltd. v. Union of India. The Court examined the legislative history and upheld the validity of rule 19A of the Rules, emphasizing that capital employed must be computed as on the first day of the computation period. The Court clarified that the computation of capital under section 80J is based on the first day of the computation period, not on additions made during the year. It highlighted the distinction between 'during the previous year' and 'capital employed in respect of the previous year.'The Court rejected the assessee's request to direct the Tribunal to determine the capital on the first day of the computation period, as the assessee had admitted to the absence of opening capital. The Court emphasized that the Tribunal's decision was based on this premise and that the request fell outside the scope of the reference. Consequently, the Court held that the Tribunal's view on the deduction was legally unsustainable and answered the question in the negative, in favor of the Revenue.In conclusion, the judgment clarifies the importance of determining capital employed as on the first day of the computation period for claiming deductions under section 80J of the Income-tax Act. It underscores the significance of adhering to the statutory provisions and Supreme Court precedents in interpreting tax laws and computing allowable deductions for industrial undertakings.