1981 (3) TMI 52 - HC - Income Tax

High Court affirms Tribunal decision on section 80J deduction for second cold storage unit

The High Court upheld the Tribunal's decision in favor of the assessee, allowing the deduction under section 80J for the second unit of a cold storage. ... New Industrial Undertaking ISSUES PRESENTED AND CONSIDERED 1. Whether the assessee was entitled to the deduction under section 80J of the Income-tax Act, 1961, read with Rule 19A of the Income-tax Rules, 1962, in respect of a second cold-storage unit constructed during the relevant previous year. 2. Whether the second unit was excluded from s. 80J relief on the ground that it was formed by the splitting up, reconstruction, or by transfer of previously used machinery or plant, within the meaning of sub-section (4) of s. 80J. 3. Whether the use of some old machinery (written down value Rs. 31,603) in the second unit precluded the deduction because the old assets exceeded the statutory permissibility, or because separate books of account were not maintained making apportionment impossible. 4. The proper application and scope of Explanation 2 to sub-section (4) of s. 80J (deeming provision where previously used machinery does not exceed 20% of total value) and the role of Rule 19A in computing capital employed for the purposes of s. 80J. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Entitlement to s. 80J deduction for the second cold-storage unit Legal framework: Section 80J grants a deduction to an industrial undertaking that meets specified conditions in sub-section (4) (not formed by splitting/reconstruction, not formed by transfer to new business of previously used machinery/plant, operation within prescribed period, and employment thresholds). Rule 19A prescribes the manner of computing capital employed for s. 80J. Precedent treatment: The court noted earlier decisions on the scope of s. 80J and on difficulties in determining profit or capital employed, but did not need an extensive re-examination of those authorities for present facts. Interpretation and reasoning: The Tribunal found on facts that a second unit had been set up in a different building with distinct plant, racks, electrical systems and independent installations, and that the aggregate investment for the unit was ascertainable (total cost shown Rs. 5,39,672, of which Rs. 31,603 represented written down value of old machines). The Court accepted the Tribunal's factual findings and its application of the statutory scheme. Ratio vs. Obiter: Ratio - where a distinct new industrial unit is established with new building and plant and used previously-used assets are within statutory tolerance, s. 80J relief may be allowed. Obiter - remarks about general policy encouraging new industrial undertakings. Conclusion: The Tribunal's conclusion that the assessee was entitled to the deduction under s. 80J for the second unit was correct on the facts found and in accordance with the statute and rules. Issue 2 - Whether the second unit was formed by splitting, reconstruction or by transfer of previously used machinery Legal framework: Sub-section (4)(i) and (ii) bar relief where an undertaking is formed by splitting up or reconstruction of an existing business or by transfer to a new business of previously used machinery or plant; exceptions and deeming provisions are provided in the provisos and Explanations. Precedent treatment: Decisions cited addressed related questions (including difficulty of calculation and whether splitting/reconstruction precludes relief), but the Court relied on the statutory text and the findings of fact by the Tribunal rather than overruling or extending prior authorities. Interpretation and reasoning: The authorities below made no finding that the second unit was formed by splitting up or reconstruction of the existing unit, nor that it resulted from transfer of assets previously used except for a negligible portion. The physical separation (different building, different plant and machinery, independent electrical systems) pointed to a separate undertaking rather than a mere extension or reconstruction. Ratio vs. Obiter: Ratio - factual separation into a distinct unit that is not constituted by splitting or transfer (beyond permissible extent) satisfies sub-section (4) conditions. Obiter - none significant beyond factual application. Conclusion: The second unit was not formed by splitting, reconstruction or impermissible transfer of previously used machinery so as to disqualify the assessee from s. 80J relief. Issue 3 - Effect of use of old machinery and the adequacy of accounts for apportionment Legal framework: Explanation 2 to sub-section (4) provides that where previously used machinery/plant transferred to a new business does not exceed 20% of total value of machinery/plant used in the business, the condition in clause (ii) is deemed complied with and the transferred value is excluded from capital employed computation. Rule 19A governs computation of capital employed. Precedent treatment: The Court referred to authorities dealing with evidentiary difficulties in fixing profit or capital employed but emphasised that inability to maintain separate books is not necessarily fatal if apportionment is practicable. Interpretation and reasoning: The Tribunal and the Court found the written down value of old machinery used was Rs. 31,603 out of a total capital outlay of Rs. 5,39,672. Even if common assets were allocated between the two units, the portion attributable to the second unit would be within the 20% threshold of Explanation 2. The absence of separate books was given undue emphasis by lower authorities; Rule 19A provides the method to compute capital so that apportionment was feasible and the defect in accounting did not make the claim impossible to adjudicate. Ratio vs. Obiter: Ratio - where previously used machinery deployed in a new unit does not, on apportionment, exceed 20% of the total value of machinery/plant used, Explanation 2 applies and the value of such transferred machinery is not to be taken into account in computing capital employed for s. 80J; inability to maintain separate books will not defeat relief where apportionment is practicable. Obiter - policy observation that s. 80J is intended to encourage separate and distinct undertakings. Conclusion: The use of old machinery did not exceed the statutory 20% limit after apportionment, and the deficiency of separate books did not preclude allowance of the deduction; the Tribunal correctly applied Explanation 2 and Rule 19A in permitting the deduction. Issue 4 - Role and application of Rule 19A and scope of s. 80J relief Legal framework: Rule 19A prescribes computation of capital employed for an industrial undertaking for s. 80J; Explanation 2 to sub-section (4) provides a specific deeming rule to exclude small transfers of previously used machinery from disqualification. Precedent treatment: Earlier decisions pointed to difficulties in computing profit or capital employed but did not displace the statutory machinery provided by Rule 19A and the explanatory deeming provision. Interpretation and reasoning: The Court emphasised that Rule 19A supplies the method to compute capital employed, and reliance on absence of separate books was misplaced when the capital introduced into the new unit could be ascertained. The statutory scheme contemplates apportionment and contains a specific tolerance (20%) to allow relief where transfer of previously used machinery is minimal. Ratio vs. Obiter: Ratio - Rule 19A must be applied to compute capital employed; where computation and apportionment are possible, statutory relief should not be denied for accounting defects. Obiter - none beyond affirming the statutory purpose. Conclusion: Rule 19A and Explanation 2 properly applied permit allowance of s. 80J deduction where the facts show a distinct new unit and previously used machinery is within the statutory threshold; the Tribunal's use of these provisions was legally correct.