Capital employed under section 80J must reflect tax liability deductions despite balance-sheet presentation

Advance tax paid on a new industrial undertaking was not to be treated as an independent asset for computing capital employed under section 80J; the computation had to follow rule 19A of the Income-tax Rules, 1962, including deduction of amounts due towards tax liability under sub-rule (3). The presentation of the tax entry on the assets side of the balance-sheet did not alter the net capital computation, because the corresponding liability entry reflected the reduced tax burden. On that basis, the capital employed was correctly calculated and the issue was resolved in favour of the Revenue.

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Issues: Whether advance tax paid on the profits of a new industrial undertaking was to be treated as an asset in computing capital employed for the purposes of section 80J, and whether the capital of the undertaking had been correctly calculated under rule 19A of the Income-tax Rules, 1962.

Analysis: The computation of capital employed under section 80J had to be made in accordance with rule 19A, and under sub-rule (3) amounts due towards tax liability were required to be deducted. Advance tax paid was not necessarily an asset in the wealth-tax sense, but in the present balance-sheet the amount shown on the assets side, read with the corresponding liability entry, reflected the net reduction in tax liability. The same result would have been achieved by showing the reduced liability directly, and the manner of presentation did not affect the net computation.

Conclusion: The capital employed in the undertaking was correctly calculated, and the question was answered in favour of the Revenue.

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