Government grants excluded from capital per Income-tax Act; loan amount considered. Tribunal to decide on profit inclusion.

The court held that government grants should not be included in computing capital employed under section 80J of the Income-tax Act. However, the loan amount should be considered in calculating the capital employed. The court directed the Tribunal to decide on whether 50% of the profits earned by the assessee should be included in computing capital employed in accordance with the amended provisions of section 80J. The judgment partially favored the assessee on the loan amount issue, with no definitive ruling on the second issue.

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Issues:
1. Whether the cost of assets purchased with government grants and loans should be included in computing capital employed for section 80J of the Income-tax Act.
2. Whether 50% of the profits earned by the assessee should be considered in computing capital employed for section 80J of the Act.

Analysis:
The judgment pertains to a reference under section 256(1) of the Income-tax Act, 1961, involving the Banaskantha District Co-operative Milk Producers' Union Limited for the assessment year 1973-74. The assessee, a co-operative society, claimed that assets purchased with government grants and loans should be included in the computation of capital employed for section 80J. The Tribunal rejected this contention based on precedent. The court referred to section 80J, which allows a deduction on the capital employed in an industrial undertaking. It was highlighted that the written down value of assets should exclude amounts met directly or indirectly by any other person or authority, such as government grants. The court held that the government grant should not be considered in computing capital employed under section 80J.

Regarding the loan amount, the Tribunal did not provide a definite finding on whether it should be considered in calculating the actual cost of assets. The court noted that section 43 does not require the written down value of assets to be reduced by the portion of the cost met by a loan. Therefore, the court held that the loan amount should be taken into account while calculating the capital employed for section 80J. Thus, the judgment partially favored the assessee on the issue of the loan amount.

On the second issue, the court observed that the Tribunal did not consider the provisions of section 80J. The counsel for the assessee requested the court to direct the Tribunal to decide the matter in line with the amended provisions. As the Tribunal did not address the amended provisions, the court ruled that question No. 2 should be decided by the Tribunal in accordance with the amended provisions of section 80J. Consequently, the court did not provide a definitive answer to question No. 2 in the judgment. The reference was answered accordingly, with no order as to costs.

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