TaxTMI 
TaxTMI 
TaxTMI 
1958 (10) TMI 35
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....apalayam. The erection of the weaving machinery and the construction of factory buildings were complete by June, 1946, and the weaving department did not work during the account year ended June, 1946. 3. For the chargeable accounting period commencing from July 1, 1945, and ending on March 31, 1946, the Excess Profits Tax Officer in computing the average capital of the assessee excluded the value of buildings, plant, machinery and electric fittings relating to the weaving department as such department did not work during the relevant chargeable accounting period. 4. The Appellate Assistant Commissioner, however, held that the value of the buildings, plant and machinery and electric fittings of the weaving department did not represent an excluded investment of moneys not required for the business, the amount expended for the weaving department represented capital employed in the business and it has, therefore, to be taken into account in the computation of average capital. 5. At the instance of the Commissioner of Excess Profits Tax, Madras, the Excess Profits Tax Officer preferred an appeal to the Appellate Tribunal and it was contended on behalf of the Department that the spinn....
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....on these new buildings and the weaving machinery were ledgerised only along with the other buildings and machinery already held by the assessee till then. There were no separate ledger accounts to show the weaving section assets separately. 3. The total outlay on the assets acquired for the above outlay are to be found in annexure 'A' annexed hereunto and forms part of the weaving section as on March 31, 1956, is ₹ 2,08,291. Details of the case : The weaving mills started functioning only from July, 1947, and the spinning section was closed on September 1, 1947, according to the directors' report, dated November 12, 1947, copy whereof is annexed hereunto as annexure 'B' and forms part of the case. The yarn spun during July and August, 1947, was not utilised in the weaving section, but sold outside on account of allotment regulations. 4. The aforesaid outlay was financed primarily out of loans from banks obtained on the security of the cotton stock and an equitable mortgage on the immovable property held. The published balance-sheets of the assessee company as on June 30, 1945, and June 30, 1946, together with the directors' report thereon to the sha....
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....inesses. It is respectfully submitted that this aspect does not appear to have been made the basis of its decision. For the purpose of its decision, as set out above, the Tribunal has taken both the businesses only as one and indivisible, the weaving establishment being only an extension, which, however, it found, had not contributed to the profits of the chargeable accounting period in question and accordingly the capital outlay thereon did not form part of the average capital employed by the assessee for its businesses during the chargeable accounting period. 9. As pointed out earlier there are no separate sets of books maintained for the weaving department and the various assets acquired have been ledgerised from time to time in the only set of books maintained for all its activities making no distinction therein between the spinning and weaving sections. There is also only one balance-sheet, exhibiting thereon all the assets and liabilities of the assessee of whatever nature they are. It also seems that the two activities are knit together and properly integrated even in the carrying on thereof. On these facts, we humbly have to hold that both the spinning and weaving sections....
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....#39;s business in the chargeable accounting period ending 31st March, 1946, the exclusion of the value of the building, plant, machinery and electric fittings of the weaving department was in accordance with Schedule II, rule I". On 20th August, 1956, an order was made directing the Tribunal to "submit a specific finding on the question, whether the spinning and weaving departments constituted one business of the assessee or whether they constituted two separate and distinct business of the assessee during the relevant period." That finding has now been received and it is to the effect that "both the spinning and weaving sections of the assessee can only form part and parcel of a single manufacturing business carried on by the assessee during the chargeable accounting period in question." The question, therefore, is whether the capital laid out by the assessee on its weaving department can be taken into account for ascertaining the average amount of capital employed in the business of the assessee within the chargeable accounting period. We shall first quote the relevant statutory provision. We begin with section 6 of the Excess profits Tax Act and the ....
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....alue of the assets or the amount of the debts. It does not say that the assets should be employed in the business. Apart from authority, therefore, on the mere language of the rule, one would be justified in saying that if the funds of the assessee have been used to acquire assets for being used in the business of the assessee, that would be capital employed in the business within the meaning of the rule. Actual employment of the assets acquired is not necessary. The assessee may lay by a large stock of spare parts. It may happen that no occasion arise to utilise such spare parts. Still the money spent in acquiring the spare parts would be capital employed in the business of the assessee. Similarly the assessee may acquire an engine to replace another which its is feared may break down. The new engine may not be used at all. Nevertheless it would be an asset of the assessee and the money used to purchased that piece of machinery would be capital of the assessee employed in its business. The circumstance, therefore, that in the present case the weaving department did not go into actual production will not disentitle the assessee from claiming that the money spent on its should be co....
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....ntion is not sound. The fact that the Hull building has been so much damaged that it cannot at present be used as a theatre does not seem to me in itself to establish that the freehold site and what is upon it is not still 'employed in the trade or business'. If the company decided to abandon the use of the site of the purpose of its business, different considerations might arise. If, however, the theatre was for other reasons temporarily closed, or if it was in course of reconstruction and improvement, this would not justify the contention that it formed no part of the capital referred to in Part II of the Seventh Schedule. Even if it be the case that, for the purposes of excess profits tax, the capital employed in a trade or business of a company does not necessarily included all the capital of the company (and it certainly expressly excludes investments held by a company, the income from which is not to be taken into account in computing the profits of the trade or business (Seventh Schedule, Part II, para. 3), the asset at Hull must be regarded as still employed in the trade or business, even though it is not actively or productively employed in the accounting period.&q....
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....ot; Again, "My Lords, I see no valid reason for disregarding and giving no meaning to the word 'employed'." When, however, we read the speeches of the other learned Lords we find that this view that the assets should have been employed expressed by Lord Simonds was not accepted by them. Lord Radcliffe said: "The test in computing capital is not whether an asset belonging to the proprietor of a business is employed in his business or not, but whether there is capital employed in his business consisting of this or that asset. In many cases, there is no difference at all between the two questions: in a few cases the difference may be important. But to treat them as the same question does tend to lead to a confusion that has not been absent from the arguments in this case, for, whereas once capital has been introduced into a business it may naturally be regarded as still employed in its until such capital is lost or withdrawn. I have not been able to bring to my mind any clear conception of what is meant by an asset being employed in a business if it means something different from merely belonging to it. Your Lordships have been, in effect, invited to say t....