Court rules on deduction of borrowed moneys and debts for tax computation

The court ruled that borrowed moneys and debts due by the assessee should be deducted from the capital when computing for tax purposes under sections 84 and 80J. The distinction between 'debts due' and 'debts owed' was emphasized, with the court clarifying that all borrowed moneys, regardless of their repayment due date, must be deducted. The judgment highlighted that only 'debts due' for payment should be excluded while computing capital under section 84, and for section 80J, only debts due for payment on the first day of the computation period should be excluded.

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Issues:
Computation of capital employed in a new industrial undertaking for tax purposes under sections 84 and 80J, distinction between 'debts owed' and 'debts due', deduction of borrowed money and debts due by the assessee.

Analysis:
The judgment pertains to an assessee, a limited company engaged in manufacturing pharmaceutical products, for the assessment years 1967-68 to 1970-71. The primary issue revolves around the computation of capital employed in the new industrial undertaking for tax purposes under sections 84 and 80J. The contention raised was whether borrowed moneys and debts due by the assessee should be deducted from the capital, specifically focusing on the distinction between 'debts owed' and 'debts due'. The Tribunal upheld the assessee's contention that borrowed moneys and debts due for payment on the first day of the computation period should be deducted, not just those due and payable on that date.

For the assessment year 1967-68, section 84 along with rule 19(3) was applicable, while for the subsequent years, section 80J replaced section 84, and rule 19(3) was replaced by rule 19A(3). The Supreme Court's interpretation in the case of Lohia Machines Ltd. v. Union of India highlighted that borrowed moneys were generally required to be deducted except for a specific period when certain types of borrowed moneys were included in the computation of capital. The judgment emphasized that all borrowed moneys, regardless of their repayment due date, must be deducted, with exceptions for specific borrowings from approved sources.

The court analyzed the distinction between 'debts due' and 'debts owed', emphasizing that 'debts due' must be payable on the first day of the computation period. The judgment referenced prior decisions such as CIT v. National Organic Chemical Industries Ltd. and CIT v. Gynamij India Ltd., but clarified that these did not address the inclusion of borrowed moneys within 'debts due'. The court reiterated that all borrowed moneys should be deducted, irrespective of their due date, as per the Supreme Court's ruling in Lohia Machines Ltd.

In conclusion, the court answered the referred questions, stating that only 'debts due' for payment should be excluded while computing capital under section 84, except for borrowed moneys, which must be deducted regardless of their due date. For section 80J, only debts due for payment on the first day of the computation period should be excluded, except for specific borrowed moneys falling under rule 19A(3)(b). The court did not address the second question raised by the assessee, as it was covered by the answer to the first question.

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