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Issues: (i) Whether borrowed capital was to be included in computing capital for the purpose of deduction under Section 80J of the Income-tax Act, 1961. (ii) Whether the deduction at 6% per annum under Section 80J was admissible for the full year even when the undertaking had worked for less than twelve months.
Issue (i): Whether borrowed capital was to be included in computing capital for the purpose of deduction under Section 80J of the Income-tax Act, 1961.
Analysis: The issue was covered by the Supreme Court decision in Lohia Machines Ltd., which held that borrowed capital was not to be taken into account while computing capital for Section 80J relief.
Conclusion: The question was answered in the negative, in favour of the Revenue and against the assessee.
Issue (ii): Whether the deduction at 6% per annum under Section 80J was admissible for the full year even when the undertaking had worked for less than twelve months.
Analysis: The issue was covered by the decision of the High Court in Sanghi Beverages (Pvt.) Ltd., which held that the statutory rate of 6% per annum could not be curtailed merely because the undertaking had functioned for less than the full year.
Conclusion: The question was answered in the affirmative, in favour of the assessee and against the Revenue.
Final Conclusion: One referred question was decided for the Revenue and the other for the assessee, so the reference was disposed of with divided answers.
Ratio Decidendi: For Section 80J relief, borrowed capital is excluded from the computation of capital, while the prescribed annual rate applies for the full year and is not reduced merely because the undertaking operated for a shorter period.
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