1958 (10) TMI 35 - HC - Income Tax

Assets for Business Expansion Included: Excess Profits Tax Act Applied

JAYARAM MILLS LTD. Versus COMMISSIONER OF EXCESS PROFITS TAX, MADRAS

The Court held in favor of the assessee, ruling that the exclusion of the value of the building, plant, machinery, and electric fittings of the weaving ... - Issues Involved:1. Whether the spinning and weaving departments constituted one business or two separate businesses.2. Whether the exclusion of the value of the building, plant, machinery, and electric fittings of the weaving department was in accordance with Schedule II, rule 1, of the Excess Profits Tax Act.Detailed Analysis:1. Whether the spinning and weaving departments constituted one business or two separate businesses:The Tribunal was directed to submit a specific finding on whether the spinning and weaving departments constituted one business or two separate businesses during the relevant period. The Tribunal found that both the spinning and weaving sections of the assessee formed part and parcel of a single manufacturing business carried on by the assessee during the chargeable accounting period in question. This finding was based on the facts that there were no separate ledger accounts for the weaving section, and the assets were integrated into a single set of books. Additionally, the two activities were knit together and properly integrated in their operations.2. Whether the exclusion of the value of the building, plant, machinery, and electric fittings of the weaving department was in accordance with Schedule II, rule 1, of the Excess Profits Tax Act:The Excess Profits Tax Officer excluded the value of the buildings, plant, machinery, and electric fittings of the weaving department, reasoning that since the weaving department did not go into production during the chargeable accounting period, these assets did not become business assets and hence did not become capital employed for the purpose of earning profits during that period. The Appellate Assistant Commissioner, however, held that the amount expended on these assets was capital employed in the business and should be included in computing the average capital. The Tribunal reversed this decision, agreeing with the Excess Profits Tax Officer.The Court analyzed the relevant statutory provisions, including Section 6 of the Excess Profits Tax Act and sub-rule (1) of rule 1 of Schedule II. It was noted that the rule states that the average amount of capital employed in the business shall be the price paid for assets, the nominal amount of debts, and the value of assets acquired otherwise than by purchase. The word 'employed' in the sub-rule relates to capital and not to assets. The Court concluded that actual employment of the assets acquired is not necessary for them to be considered capital employed in the business. The funds used to acquire assets for the business, even if not yet employed, would still be considered capital employed.The Court referred to the case of Inland Revenue Commissioners v. Byron Ltd., which supported the view that assets need not be actively employed to be considered capital employed in the business. The decision in Birmingham Small Arms Co. v. Inland Revenue Commissioners was distinguished, as it involved a claim to compensation rather than actual capital expenditure on assets.The Court held that the assets acquired for the weaving department, although not yet put into use, were still part of the capital employed in the business. The fact that the weaving department did not go into production during the chargeable accounting period did not disentitle the assessee from claiming that the money spent on it should be considered capital employed in its business.Conclusion:The Court answered the question referred in the negative and in favor of the assessee, concluding that the exclusion of the value of the building, plant, machinery, and electric fittings of the weaving department was not in accordance with Schedule II, rule 1. The assessee was entitled to have these assets included in the computation of average capital employed in the business. The assessee was also awarded costs.