1978 (1) TMI 24 - HC - Income Tax

High Court ruling on depreciation, capital computation under section 80J, and challenge to vires of rule.

The High Court affirmed the assessee's entitlement to depreciation on the cost of digging a well, allowing depreciation at 10%. However, the Court ruled ... Definition of 'plant' inclusive - depreciation allowance on factory well - computation of capital employed under rule 19A - interpretation of 'debts owed' versus 'debts due' - challenge to vires of rule in reference under s.256 of the ActDefinition of 'plant' inclusive - depreciation allowance on factory well - Assessee entitled to depreciation and development rebate in respect of a well dug within factory premises as part of 'plant'. - HELD THAT: - The Court applied the principle that the expression 'plant' is of wide amplitude and may include installations integral to carrying on the business. The well was dug to secure water supply essential for the manufacturing process and thereby formed part and parcel of the factory's plant. The Tribunal's reliance on the Supreme Court's reasoning in CIT v. Taj Mahal Hotel and this Court's earlier opinion in R.C. No. 66 of 1976 led to the conclusion that depreciation (at the rate allowed by the authorities) and development rebate in respect of the well were permissible under the Act as the well is within the inclusive definition of 'plant'.Question No. 1 answered in the affirmative and against the revenue; depreciation and development rebate on the well allowed.Computation of capital employed under rule 19A - interpretation of 'debts owed' versus 'debts due' - challenge to vires of rule in reference under s.256 of the Act - Method of computing capital for s.80J under r.19A(2)/(3): 'borrowed moneys and debts owed' as on first day of computation period are deductible if they are debts due (whether payable now or in future); court will not entertain a collateral ultra vires challenge to the rule in a reference under s.256. - HELD THAT: - The Court held that s.80J requires capital to be 'computed in the prescribed manner', and r.19A prescribes the mode of computation. Subr. (3) directs deduction of borrowed moneys and debts owed as on the first day of the computation period. The Court interpreted the words 'debts owed' (and the earlier phrasing 'debts due') to include liabilities which are presently owing and will become payable either now or in futuro, so long as they are not contingent liabilities; it is not necessary that the debt be payable immediately on that date. The Court further declined to entertain the contention that r.19A(3) is ultra vires the statute in the context of a reference under s.256, observing that the Tribunal and this Court in a reference cannot decide the vires of the rule and that the section itself leaves the manner of computation to the prescribed rules.Questions Nos. 2 and 3 answered in the negative and against the assessee; the Tribunal's narrower construction was rejected and r.19A(3) must be applied to deduct debts owing as on the first day of the computation period (including those payable in future), and the Court would not adjudicate the ultra vires challenge in this reference.Final Conclusion: Allowed the assessee's claim for depreciation on the well as part of the factory 'plant'; held that for computing capital under r.19A(2)/(3) debts owed as on the first day of the computation period (including liabilities payable in future but not contingent liabilities) are deductible; declined to entertain a vires challenge to r.19A(3) in the reference. Questions answered accordingly; no order as to costs. Issues Involved:1. Entitlement to depreciation on the cost of digging a well.2. Correctness of the method of computing capital for relief under section 80J.3. Allowability of deduction under section 80J on the entire capital employed without reduction by borrowed monies and debts.Issue-wise Detailed Analysis:1. Entitlement to Depreciation on the Cost of Digging a Well:The primary issue was whether the assessee was entitled to depreciation on the cost incurred for digging a well in its factory premises. The Income Tax Officer (ITO) disallowed the claim, relying on the Bombay High Court's decision in Jayasingrao Piraji Rao Ghatge v. CIT, which held that a well does not come within the definition of 'plant.' However, the Appellate Assistant Commissioner (AAC) allowed the claim and directed that depreciation should be allowed at 10%. The Tribunal upheld the AAC's decision, applying the Supreme Court's ruling in CIT v. Taj Mahal Hotel, which included a well within the expression 'plant.' The High Court affirmed this view, stating that the well, being essential for the factory's operations, formed part and parcel of the 'plant.'2. Correctness of the Method of Computing Capital for Relief under Section 80J:The second issue concerned the method of computing capital for relief under section 80J of the Income Tax Act. The assessee argued that certain liabilities, which were due but not payable, should not be deducted for arriving at the capital employed figure. The ITO disagreed, considering the total figure as liability. The AAC, however, upheld the assessee's contention, stating that only moneys and debts due and payable should be deducted. The Tribunal affirmed the AAC's view, relying on a Bombay Tribunal decision. The High Court, however, held that the Tribunal erred in law by not following the Supreme Court's decisions regarding the jurisdiction of the Tribunal to determine the vires of the rule.3. Allowability of Deduction under Section 80J on the Entire Capital Employed:The third issue was whether the deduction under section 80J was allowable on the entire capital employed by the assessee without reducing it by borrowed monies and debts. The Tribunal had concluded that the borrowed capital should not be excluded from the computation, based on the language difference between rule 19(3) before and after April 1, 1972. The High Court disagreed, stating that the Tribunal was in error in interpreting 'debts owed' or 'debts due' to mean only those debts that are due and payable. The Court clarified that 'debts owed' includes all debts, whether payable now or in the future, and ruled that the computation of capital employed must deduct borrowed monies and debts owed as per rule 19A(3).Conclusion:The High Court answered the first question in the affirmative, affirming the assessee's entitlement to depreciation on the cost of digging a well. However, it answered the second and third questions in the negative, against the assessee, holding that the borrowed monies and debts owed must be deducted in computing the capital employed for relief under section 80J. The Court also rejected the assessee's challenge to the vires of rule 19A(3), stating that such a question could not be entertained in a reference under section 256 of the Act.