TaxTMI 
TaxTMI 
1985 (1) TMI 1
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....he parties turns on the true interpretation of s. 80J of the I.T. Act, 1961, and, hence, we may begin our discussion of the issues arising in the writ petitions by examining the language of that section. But before we do so, we may usefully refer to the genesis of the provision enacted in s. 80J and the transformation it has undergone from time to time over the years. It is in fact necessary to trace the historical evolution of this provision in order to arrive at its true interpretation, for, as observed by Cardozo J. in Duparquet Huat v. Evans (297 US 216), in questions relating to construction, " history is a teacher that is not to be ignored ". The first time that a provision of this kind was introduced in the Indian I.T. Act, 1922, was by the Taxation Laws (Amendment) Ordinance, 1949, when s. 15C was added in that Act with effect from March 31, 1949. Sub-s. (1) of s. 15C exempted a part of the profits and gains of a new industrial undertaking from tax and this provision as originally enacted was in the following terms: " 15C. (1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial....
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....an Income-tax Act, 1922, or for any sum payable in relation to business profits tax under section 13 of the Business Profits Tax Act, 1947 (XXI of 1947) :... " The process of computation of " capital employed in the undertaking according to this rule consisted of two steps ; one of addition of the value of assets of the industrial undertaking arrived at on the basis of different formulae according to the nature and the date of purchase of the assets and the other, of deduction of " any borrowed money and debt due by the person carrying on the business ". The significant point is that borrowed monies and debts due by the assessee were excluded in computation of " capital employed in the undertaking " by reason of sub-rule (3) of this rule. The Taxation Laws (Amendment) Ordinance, 1949, was replaced by the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, which came into force on December 31, 1949, and by s. 13 of this Act, s. 15C was continued and though some minor modifications were made, sub-s. (1) which granted the exemption remain unchanged. Sub ss. (2), (4) and (6) suffered some minor changes and, as re-enacted, these sub-sections read as follows : " ....
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....for eligibility from initial 3 years to 18 years by suitable amendments in clause (ii) of sub-s. (2) of s. 15C and brought the business of hotels also within the purview of the exemption and laid down the conditions for grant of such exemption. We are not concerned with these changes so far as the present writ petitions are concerned and, hence, we need not refer to them in detail. Suffice it to state that the basic structure of s. 15C remained the same and so did the Indian Income-tax (Computation of Capital of Industrial Undertaking) Rules, 1949. The result was that throughout the period from March 31, 1949, when s. 15C was introduced in the Indian I.T. Act, 1922, up to the time that the Indian I.T. Act, 1922, remained in force, borrowed monies and debts due from the assessee were excluded in computing the capital employed in the undertaking for the purpose of determining the quantum of the exemption eligible under s. 15C. Then came the I.T. Act, 1961, which repealed the Indian I.T. Act, 1922. Section 15C of the I.T. Act, 1922, was recast as s. 84 in the I.T. Act, 1961. Sub-s. (1) of s. 84 granted the same exemption in respect of portion of the profits and gains derived from a....
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.... of days of the computation period during which such asset is used in the business bears to the total number of days comprised in the said period; (ii) 'computation period' means the period for which the profits and gains of the undertaking or hotel are computed under sections 28 to 43A; (iii) 'depreciation' means the allowance admissible under clause (i) or clause (ii) or clause (iv) of sub-section (1) of section 32 ; (iv) 'written down value' means the written down value computed under sub-section (6) of section 43 as if for the words 'previous year' the words 'computation period' were substituted. There were also several other changes made in s. 15C of the Indian I.T. Act, 1922, while recasting it as s. 84, but these changes are not material for the purpose of the present writ petitions and they need not, therefore, detain us. It will thus be seen that even under s. 84 of the I.T. Act, 1961, the same position prevailed as before in regard to the exclusion of borrowed monies and debts in computing the capital employed in an industrial undertaking or a hotel for the purpose of determining the quantum of profits exempted under that section. This position continued un....
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.... for the subsequent years subject to the proviso that in no case shall the deficiency or any part thereof be carried forward beyond the seventh assessment year as reckoned from the end of the initial assessment year. Sub-s. (4) enacted certain conditions which must be fulfilled before an industrial undertaking could qualify for the benefit of the exemption and one of the conditions was that the industrial undertaking should not have been formed " by the transfer to a new business of building, machinery or plant previously used for any purpose ". But sub-s. (6) provided by way of an exception that where in the case of an industrial undertaking, any building, machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the building, machinery or plant or part so transferred does not exceed 20% of the total value of the building, machinery or plant used in the business, then the condition set out in sub-s. (4) shall be deemed to have been complied with and the total value of the building, machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial underta....
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....s, as on the first day of the computation period, of borrowed moneys and debts due by the assessee (including amounts due towards any liability in respect of tax), not being, (a) in the case of an assessee being a company, the amount of its debentures, if any, and (b) in the case of any assessee (including a company) any moneys borrowed from an approved source for the creation of a capital asset in India, if the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years. Explanation.-For the purpose of this sub-rule, (i) 'approved source' means the Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India Ltd. or any banking institution or any person in country outside India or any of the following financial institutions, namely: (a) a State Financial Corporation established under the State Financial Corporations Act, 1951 (LXIII of 1951); (b) the Industrial Development Bank of India, established under the Industrial Development Bank of India Act, 1964 (XIX of 1964); (c) the Madras Industrial and Investment Corporation of India Limited ; (d....
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....owings from an approved source repayable in not less than seven years started for the first time to be taken into account in the computation of the capital employed in the industrial undertaking or the business of hotel, though other categories of borrowed monies and debts due by the assessee continued to remain excluded from such computation. These two changes appear to have been made in view of the Interim Report on Rationalisation and Simplification of Direct Taxation Laws by Shri S. Bhoothalingam, where a recommendation was made that instead of the formula which was being followed up to 31st March, 1968, it would be desirable to simplify the procedure for computation of capital " by basing it on owned capital and long-term borrowings as at the beginning of the year, ignoring the fresh introduction of capital in the course of the year ". This state of affairs continued until April 1, 1971, when the Finance (No. 2) Act, 1971, came into force. While introducing the Bill which ultimately culminated in the Finance (No. 2) Act, 1971, the Finance Minister made a policy statement on the floor of the House in the following terms : "At present, in the case of new industrial underta....
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....n years) in the computation of the capital employed which liberalisation was introduced from 1St April, 1968 was withdrawn with effect from 1St April, 1972, that some assessees raised a contention for the first time that on a true construction of sub-s. (1) of s. 80J, the capital employed in the industrial undertaking or the business of a hotel would include long-term borrowings, since according to plain natural construction of the words used, they were part of the " capital employed " and rule 19A, sub-rule (3), in so far as it excluded long-term borrowings from the computation of the capital employed was, therefore, ultra vires sub-section (1) of s. 80J and despite sub-rule (3) of rule 19A, long-term borrowings were liable to be taken into account in computing the " capital employed " in the industrial undertaking or the business of a hotel. This contention was raised for the first time before the Bombay Bench of the Income-tax Appellate Tribunal in Alim Chand Topan Dass v. ITO and the Bombay Bench of the Tribunal by an order dated 24th July, 1973, accepted this contention and held that sub-rule (3) of rule 19A was in conflict with sub-s. (1) of s. 80J and, hence, it was liable t....
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.... that was the provision which required that the " capital employed " should be computed as on the first day of the computation period. The Calcutta High Court in Century Enka Ltd. v. ITO [1977] 107 ITR 909, took the view that what s. 80J, sub-s. (1), required was the computation of the capital in respect of the previous year and not as on the first day of the previous year and, therefore, rule 19A, in so far as it provided that the computation of capital should be made as on the first day of the computation period, was ultra vires sub-s. (1) of s. 80J. This view was also adopted by one or two other High Courts. Since some High Courts took the view that rule 19A was ultra vires sub-s. (1) of s. 80J in so far as it provided for exclusion of long-term borrowings and the computation of the " capital employed " to be made as on the first day of the computation period and in the opinion of the Government, this view was erroneous and did not correctly reflect the intention of Parliament as evinced clearly by the legislative history of this provision, Parliament, with a view to avoiding confusion and uncertainty which would prevail in the state of the law until a final pronouncement was ma....
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....he tax holiday profits. It is thus obvious that the intention has always been that borrowed capital should not form part of the capital employed for the purpose of determining the tax holiday profits. I am, therefore, satisfied that no change in this regard is called for." The Finance (No. 2) Bill of 1980, ultimately culminated in the Finance (No. 2) Act, 1980, and by this Act s. 80J was amended and sub-s. (1A) was introduced with retrospective effect from April 1, 1972. The newly introduced sub-s. (1A) was in the same terms as rule 19A, so that the manner of computation of the " capital employed " in an industrial undertaking or the business of a hotel or a ship remained the same but it was now set out in sub-s. (1A) instead of in rule 19A. The words " computed in the prescribed manner " which occurred in sub-s. (1) of s. 80J were also substituted by the words "computed in the manner specified in sub-s. (1A) " with retrospective effect from the same date, namely, 1st April, 1972. Mr. Palkhivala, learned advocate appearing on behalf of the petitioners, in some of the writ petitions pointed out that the expression " capital employed ...... in respect of the previous year " has....
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....ny event, liable to be taken into account in computing the " capital employed " and such computation could not be made as on the first day of the computation period but was required to take into account additional capital which might be employed during the computation period. So far as the amended sub-section (1A) introduced in s. 80J was concerned, Mr. Palkhivala submitted that this amendment made with retrospective effect from 1st April, 1972, was unconstitutional as being violative of articles 14 and 19(1)(g) of the Constitution. We need not set out here the specific grounds on which the amended sub-s. (1A) was assailed by Mr. Palkhivala as offending articles 14 and 19(1)(g), since on the view we are taking in regard to the validity of rule 19A, it is not necessary for us to examine these grounds urged by Mr. Palkhivala. The learned counsel appearing on behalf of the petitioners in the other writ petitions reiterated the same grounds with only this difference that, according to Dr. Debi Pal, learned counsel appearing on behalf of the petitioners in one of the writ petitions, the " capital employed" would include not only long-term borrowings as submitted by Mr. Palkhivala but....
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....changing economic circumstances, what should from time to time be taken to be "capital employed " for the purpose of calculating the relief allowable under subs. (1) of s. 80J and moreover the rules made by the Central Board in that behalf were required to be placed before each House of Parliament for its approval and there was, therefore, no excessive delegation involved in subs. (1) of s. 80J leaving it to the Central Board to prescribe how the " capital employed " should be computed and what items should be included and what items excluded. It was also submitted by the learned Attorney General that the words used in sub-s. (1) of s. 80J in regard to the computation of the " capital employed " were not " capital employed during the previous year " but " capital employed .... in respect of the previous year. The words " respect of the previous year " were deliberately introduced in sub-s. (1) of s. 80J, when that section came to be enacted with the result that the " capital employed " that was required to be computed for the purpose of s. 80J was the " capital employed in respect of the previous year ". Rule 19A was, therefore, according to the learned Attorney General, not in con....
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....ding long-term borrowings from the computation of the " capital employed " is concerned, the position which prevailed right from 1St April, 1949, to 31st March, 1968, for period of 19 years was that all borrowed monies due from the assessee were excluded in computing the " capital employed " and no one challenged such exclusion as being in conflict with either s. 15C or s. 84. It is undoubtedly true that merely because for a long period of 19 years, the validity of the exclusion of borrowed monies in computing the " capital employed " was not challenged, that cannot be a ground for negativing such challenge if it is otherwise well-founded. It is settled law that acquiescence in an earlier exercise of rule-making power which was beyond the jurisdiction of the rule-making authority cannot make such exercise of rule-making power or a similar exercise of rule-making power at a subsequent date, valid. If a rule made by a rule-making authority is outside the scope of its power, it is, void and it is not at all relevant that its validity has not been questioned for a long period of time: if a rule is void, it remains void whether it has been acquiesced in or not. Vide Proprietary Articles....
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...., came to be enacted and the I.T. Rules, 1962, were made. During this period, s. 15C was amended several times, but though Parliament knew full well that the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949, provided for exclusion of borrowed monies in the computation of "capital employed ", Parliament did not make any change in the statute with a view to clarifying that borrowed monies were not intended to be excluded. Even when the I.T. Act. 1961, was enacted, Parliament continued to use the same language in s. 84 as it did in s. 15C and did not make any change in the language with a view to indicating that the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949, which had been made under s. 15C did not correctly reflect the intention of Parliament. If Parliament had thought that the Indian Income-tax (Computation of Capital of Industrial Undertakings) Rules, 1949, in so far as they provided for exclusion of borrowed monies were not in conformity with its intention, Parliament could have easily made specific provision indicating its intention in the clearest terms when it enacted s. 84 in the I.T. Act, 1961. Even afte....
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....in accordance with this statement r. 19A was amended so as to exclude all borrowed monies. The amending rule was laid before each House of Parliament and there was no dissent or disapproval. It is not possible to believe that despite the statement of the Finance Minister on the floor of the House and the placing of the amending Rule before each House, Parliament was not aware as to what the amended r. 19A provided. Parliament must be presumed to have known that r. 19A was amended in accordance with the statement of the Finance Minister and the amended r. 19A provided for exclusion of borrowed monies in computing the " capital employed " and yet Parliament, if it thought that such exclusion was contrary to its true intent, did not take any steps to rectify the position. Then again, while moving the Finance (No. 2) Bill, 1980, the Finance Minister stated on the floor of the House that the intention of Parliament has always been to exclude borrowed monies in computing the " capital employed " and, therefore, s. 80J was sought to be amended by incorporating r. 19A in the section with retrospective effect. This legislative history traced by us clearly shows beyond doubt that Parliament ....
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....iness Management and Accountancy in support of his plea that " capital employed " must necessarily include long-term borrowings. One of the text-books on which reliance was placed by Mr. Palkhivala was " The Internal Finance of Industrial Undertakings," by T. G. Rose, where it is stated that the total money in the business at any moment or the " total capital employed " is to be found in the figure recorded at the foot of the assets column in the balance-sheet, less any fictitious assets ". This passage equates " total capital employed " with the total money in the business at any moment. It is significant to note that the reference here is not just to " capital employed " but to " total capital employed ". Moreover, this expression has been used in the context of performance evaluation through profit resource ratio and this is made amply clear by passage which occurs subsequently in the same text book, where it is observed that the " question of whether the T.C.E. is owned or borrowed is immaterial for this control figure. The company is employing so much capital in its trading, and, therefore, that capital must run over, through sales, to an extent sufficient to provide a proper ....
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....ng financial performance and efficiency of management, the true measure of which can be ascertained by taking the ratio of profit earned to the total funds employed in the business. Then, reliance was placed on Principles and Practice of Management Accountancy " by J. L. Brown, Financial Manager's job " by Elizabeth Marting and Robert E. Finley and " Glossary of Management Accounting Terms." by the Institute of Cost & Works Accounting of India, where the expression " capital employed " is understood to mean share capital, retained profit and long-term borrowings. But, it may be pointed out that, in these text-books also, the expression " capital employed " has been used in the context of efficiency of business which is naturally measurable by considering what is the profit derived from deployment of the total funds in the business and, since long-term borrowings are also deployed in the business, the profitability of the undertaking cannot be evaluated without taking into account such long-term borrowings which have gone in the earning of the profit. It is significant to note that even in " Principles and Practice of Management Accountancy " by J. L. Brown, there is a highly reveal....
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....ng-term borrowings as part of " capital employed " in accountancy practice. Mr. Palkhivala also relied on certain extracts from Carter's " Advanced Accounts " and Spicer and Pegler's " Book Keeping and Accounts ", but these extracts do not more than show that in certain contexts, the expression " capital employed " would include long-term borrowings. Now, the learned Attorney-General, appearing on behalf of the Revenue, did not dispute the proposition that in a given context, the expression " capital employed " may include long-term borrowings. But his contention was that this expression has no fixed definition connotation would necessarily include long-term borrowings and that in a given situation, it may include long-term borrowings or it may not. The meaning and content of the expression "capital employed" would, contended the learned Attorney-General, depend upon the context and the circumstances in which it is used. The learned Attorney-General pointed out, and in our opinion rightly, that the various passages relied on by Mr. Palkhivala, in support of his contention, dealt mostly with business management and profitability and in those passages, the expression " capital emp....
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....ership will judge the success or failure of management". Of course, while making this statement, it is conceded by the author that " a view is taken by some that capital employed should be defined as net worth plus long-term loans " but the author maintains that "the effective capital, or capital employed in business ... or the net worth ... is always equal to the original capital plus retained profit less any loss that may have been incurred ". So also in Business Accounting I, by B.E. Elliott, the expression "capital employed " is used in senses more than one and it is pointed out that the income used to calculate the rate of return must be appropriate to the capital employed to generate that income. Carter in his book on " Advanced Accounts " (5th edn., by Douglas Garbutt) utters a warning against, describing a borrowing, whether long-term or short-term, as capital. He says: " Money borrowed by means of ordinary loans, mortgages, debentures, bonds, etc., is frequently spoken of as loan capital. Most accountants, however, consider it loose to describe such a liability as capital ". We find that Palmer also in his " Company Law " disapproves of the expression " loan capital " and ....
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....rd to truncate the full width and amplitude of the expression " capital employed " by making rule 19A, sub rule (3), excluding long-term borrowings in the computation of " capital employed". It is interesting to note that even during the period from April 1, 1968, to March 31, 1972, when rule 19A, sub-rule (3), stood unamended, it is only borrowings from an approved source repayable within not less than seven years which were includible in the computation of " capital employed " and not all long-term borrowings. If the contention of Mr. Palkhivala were correct that all long-term borrowings invariably and in all cases formed part of the " capital employed " and were liable to be included in the computation, the unamended sub-rule (3) of rule 19A in so far as it excluded long-term borrowings, other than those from an approved source and repayable within not less than seven years, would be invalid as being in derogation of the provisions of s. 80j, sub-s. (1). But the validity of the unamended sub-rule (3) of rule 19A was at no time challenged on behalf of the assessees and Mr. Palkhivala and the learned counsel supporting him did not seem to contend that the unamended sub-rule (3)....
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....d ", exclusion of borrowed monies and debts. Similarly, in the Companies (Profits) Surtax Act, 1964, also, the word " computed " has been used in the same sense. Of course, it may be pointed out that, in this statute, the word "computed " has been used in relation to the " capital of the company " and not in relation to the " capital employed " but that would make no difference, because what we are concerned with here is the sense in which the word "computed " has been used and whether it involves the process of exclusion as well as inclusion and on that point, the Act analogically throws considerable light. The statutory deduction which must be made from the chargeable profits for the purpose of determining the charge of surtax under this statute is defined to mean " an amount equivalent to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule and the Second Schedule, after its amendment by Finance Act, 1976 (66 of 1976), does not provide for inclusion of borrowed monies and debts in the computation of capital of the company though it, provides for inclusion of the paid up share capital and reserves. It will thus be seen t....
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....s ever argued, and indeed it is impossible even to conceive of such an argument, that when section 2, clause (45), defines " total income " as the total amount of income computed in accordance with the provisions of the Act, what is indubitably part of income cannot be excluded in the computation. However, the argument of Mr. Palkhivala was that in the case of definition of " total income ", the exclusion of items of income in the process of the, computation is provided for by the Legislature itself and is not purported to be done by any rule-making authority. The Legislature, stated Mr. Palkhivala, can cut down the width and amplitude of the expression " total amount of income " by expressly providing that a particular item or items shall be excluded in the computation of the total amount of income, but the rule-making authority cannot do so, because by doing so, it would be derogating from the provisions of the statute. Now, we have already pointed out that since the expression " capital employed " has a variable meaning which in a given case may or may not include borrowed monies, the Central Board could, in exercise of its rule-making power, exclude borrowed monies in the compu....
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....puted " has been used by the Legislature in sub-s. (1), s. 80J, as involving not only inclusion but also exclusion of items which may otherwise be regarded as falling within the expression " capital employed ". It is left by the Legislature to the Central Board as rule-making authority to prescribe the manner in which the " capital employed " shall be computed and in so prescribing, the Central Board may include or exclude items which may be regarded as forming part of the " capital employed". Mr. Palkhivala, however, contended, relying on the expression " computed in the prescribed manner ", that what is left by the Legislature to the Central Board is merely to prescribe the manner in which the " capital employed " shall be computed and " manner " can only mean mode in which the computation has to be made and under the guise of prescribing the mode of computation, the Central Board cannot, to use the words of Mr. Palkhivala, " encroach upon the substance of the statutory subject-matter " or " remould the substance of the capital employed ". Mr. Palkhivala, in support of this contention, relied on the meaning of the word IC manner " given in various dictionaries and also referre....
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....mployed " for the purpose of determining the standard profits. The same scheme was replicated in the Business Profits Tax Act, 1947, where again an express provision was made in the Second Schedule to that Act that the capital of the company shall consist of " its paid up share capital and its reserves ", thus excluding borrowed monies and debts. Similarly, under the Super Profits Tax Act, 1963, also, a specific provision was enacted in the Second Schedule to that Act that the capital of the company shall be computed on the basis of its paid up capital plus reserves so that, in consequence, borrowed monies and debts shall be excluded in the computation of the capital of the company. What the Central Board did in enacting sub-rule (3) of rule 19A was to follow the precedent set in these three statutes and to make a similar provision excluding borrowed monies and debts in the computation of the " capital employed ". The Central Board could not in the circumstances be said to have acted arbitrarily or whimsically or in an irrational or unusual manner in enacting sub-rule (3) of rule 19A as alleged by Mr. Palkhivala. It may be noted that under all the above three statutes, namely, t....
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...., as on the first day of the previous year relevant to the assessment year, of its paid up share capital and reserves as set out in clauses (i) to (iii) and of: " (IV) the debentures, if any, issued by it to the public : Provided that according to the terms and conditions of issue of such debentures, they are not redeemable before the expiry of a period of seven years from the date of issue thereof ; and (v) any moneys borrowed by it from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which the Central Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India : Provided that such moneys are borrowed for the creation of capital asset in India and the agreement under which such monies are borrowed provides for the repayment thereof during a period of not less than seven years." Thus it will be seen that when the amounts of the debentures and long-term borrowings from approved sources were included in the computation of the capital of a c....
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....d sub-s. (1) of s. 80J on the other, in that the object of each of the four statutes above referred to was the exact opposite of that of subs. (1) of s. 80J. These four statutes, urged by Mr.Palkhivala, aimed at levying additional tax over and above income-tax in respect of excess profits or super profits made by a company and since super profits or excess profits are profits in excess of a fair return on the owner's capital staked in the business, each of the four statutes, for determining the excess profits or super profits, provided specifically that the abatement from the profits shall be calculated by reference only to the assessee's own capital without taking into account any borrowed monies and debts. Mr. Palkhivala contended that since the Legislative intent was to give abatement from the profits only by reference to the assessee's own capital, the abatement was rightly calculated by reference only to the paid up capital and reserves, though in the case of the Companies (Profits) Surtax Act, 1964, as it stood prior to its amendment by the Finance Act 66 of 1976, the Legislature choose to be more liberal and allowed even debentures and long-term borrowings from certain appro....
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....atutes, an argument could well be advanced that borrowed monies are as much part of capital employed in the undertaking as the owner's capital and when monies are borrowed on payment of interest by way of hire charges, they become part of the owner's capital partaking of the same characteristics as the capital originally brought in by the owner and there is no reason why a fair return should not be allowed on it. This has precisely been the argument advanced on behalf of the assessees in support of their contention that " capital employed " must include borrowed monies in sub-s. (1) of s. 80J. But this argument has not prevailed with the Legislature in the enactment of any of the above-mentioned four statutes and despite this argument, the Legislature has chosen to exclude borrowed monies in computing the " capital employed" or the capital of the company for determining what should be regarded as fair return so that profit in excess of such fair return may be subjected to additional tax. The Central Board cannot, therefore, be accused of any irrationality or whimsicality in providing that fair return on the " capital employed " eligible for exemption under sub-s. (1) of s. 80J shou....
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....ention of the Legislature that the assessees should be given relief only with reference to their own capital and not with reference to any borrowed monies, presumably because the object of giving relief was to encourage assessees to bring out their own monies for starting new industrial undertakings and the intention was not that the sees should be given relief with reference to monies which did not belong to them but which were borrowed from financial institutions and other parties and which would have to be repaid. Mr. Palkhivala then contended that if sub-s. (1) of s. 80J were construed as leaving late the Central Board to prescribe what items shall be included and what items excluded in the computation of the " capital employed ", it would be vulnerable to attack on the ground of excessive delegation of legislative power and would consequently be void. We do not think there is any substance in this contention, for there is in the present case no question of excessive delegation of legislative power. The essential legislative policy of allowing relief to an assessee who starts a new industrial undertaking or business of a hotel and declaring the period for which such relief s....
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....rument of planning. It can be used to achieve the economic and social goals of the State. For that reason the power to tax must be a flexible power. It must be capable of being modulated to meet the exigencies of the situation. In a Cabinet form of Government, the executive is expected to reflect the views of the Legislature. In fact, in most matters it gives the lead to the Legislature. However, much one might deplore the 'New Despotism' of the executive, the very complexity of the modern society and the demand it makes on its Government have set in motion forces which have made it absolutely necessary for the Legislatures to entrust more and more powers to the executive. Textbook doctrines evolved in the 19th century have become out of date. Present position as regards delegation of legislative power may not be ideal, but in the absence of any better alternative, there is no escape from it. The Legislatures have neither the time, nor the required detailed information nor even the mobility to deal in detail with the innumerable problems arising time and again. In certain matters, they can only lay down the policy and guidelines in as clear a manner as possible." The validity of....
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....of determining the quantum of the relief allowable under the section. What should be the quantum of the relief allowable to the assessee would necessarily depend upon diverse factors such as the impact of the relief on the industry as a whole, the response of the industry to the grant of the relief, the adequacy or inadequacy of the relief granted in promoting the growth of new industrial undertakings, the state of the economy prevailing at the time, whether it is buoyant or depressed and administrative convenience. These are factors which may change from time to time and, hence, in the very nature of things, the working out of the mode of computation of the " capital employed " for the purpose of determining the quantum of the relief must necessarily be left to the Central Board which would be best in a position to consider what should be the quantum of the relief necessary to be given by way of tax incentive in order to promote setting up of new industrial undertakings and hotels and, for that purpose, what amount of the " capital employed " should form the basis for computation of such relief. Moreover, it may be noticed that under s. 296 of the I.T. Act, 1961, every rule mad....
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....es accepted under s. 4 as binding. Seeing that the rules would govern the all India services common to the Central Government and the State Government, provision was made by s. 3 that rules should be framed only after consulting the State Governments. At the same time Parliament took care to see that these rules were laid on the table of Parliament fourteen days before they were to come into force and they were subject to modification, whether by way of repeal or amendment on a motion made by Parliament during the session in which they are so laid. This makes it perfectly clear that Parliament has in no way abdicated its authority, but is keeping strict vigilance and control over its delegate." It will thus be seen that there is no question of excessive delegation of legislative power in the present case and, even on the view as to interpretation taken by us, sub-s. (1) of s. 80J cannot be assailed as unconstitutional on the ground of excessive delegation of legislative power. We must, therefore, hold that sub-r. (3) of r. 19A in so far as it provided for exclusion of borrowed monies and debts and particularly long-term borrowings in the computation of the " capital employed" co....
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....ption given in the parenthetical portion at the end of sub-s. (1) of s. 80J which describes the amount calculated by applying the statutory rate of six per cent. to the " capital employed " computed in the prescribed manner in respect of the previous year as " the relevant amount of capital employed during the previous year ", but that is merely a description given to the amount calculated as provided in the main part of sub-s. (1) of s. 80J and in the main part, we find the words " in respect of the previous year " and not " during the previous year ". It may be pointed out that the words " in respect of the previous year " were introduced for the first time when s. 80J came to be enacted as a result of the Report of Shri S. Boothalingam, where he recommended that the prevailing " base for the calculation of profits, namely, average 'capital employed' in the business during each year " was complicated and difficult to establish and it was, therefore, desirable to adopt the basis of computation of the of capital employed " as at the beginning of the year but ignoring the fresh introduction of capital in the course of the year ". It was following upon the introduction of the words "....
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.... from 1st April, 1972, was merely clarificatory in nature and must, accordingly, be held to be valid. The writ petitions will, therefore, stand dismissed, but having regard to the importance of the questions involved in the writ petitions, we think it would be fair and just to direct each party to bear its own costs of the writ petitions. AMARENDRA NATH SEN J.-I have had the benefit of reading the judgment prepared by my learned brother, Bhagwati J. I regret I cannot persuade myself to agree. The material facts have been fully stated in the judgment of my learned brother. My learned brother, in his judgment, has set out all the relevant provisions of the I.T. Act and the I.T. Rules. He has also traced the legislative history of s. 80J of the I.T. Act, 1961, and has noted the various amendments effected to that section from time to time. It does not, therefore, become necessary to reproduce the same at any length in my judgment. The two questions which fall for determination are: "(1) Whether rule 19A of the Income-tax Rules in so far as the said rule excludes borrowed capital and fixes the first day of the year in the matter of computation of capital employed for the....
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....e aggregate of the amounts, as on the first day of the computation period, of borrowed moneys and debts due by the assessee (including amounts due towards any liability in respect of tax)." Rule 19A forms a part of the I.T. Rules, 1962, which have been framed by virtue of the authority conferred under s. 295 of the I.T. Act, 1961. Section 295 lays down: " (1) The Board may, subject to the control of the Central Government, by notification in the Gazette of India, make rules for the whole or any part of India for carrying out the purposes of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters ........... It may be noted that the matters mentioned in sub-s. (2) do not refer to s. 80J of the Act. The relevant provisions of s. 80J as it stood prior to the impugned amendment by the Finance (No. 2) Act of 1980 material for the purpose of the present proceedings may be set out: "(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there ....
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....d of power : Provided that the condition in clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section : Provided further that, where any building or any part thereof previously used for any purpose is transferred to the business of the industrial undertaking, the value of the building or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking Provided also that in the case of an industrial undertaking which manufactures or produces any article specified in the list in the Eleventh Schedule, the provisions of clause (iii) shall have effect as if for the words 'thirty-three years', the word ' thirty-one years ' had been substituted." I propose to take up first the question of the validity of the rule. consider this will be the proper course to adopt. If the rule is held to be valid, the question of the amendment with retrospective effect may not require any c....
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....en it would not be open to the courts to adopt any other hypothetical construction on the ground that such hypothetical construction is more consistent with the alleged object and policy of the Act." if, however, the words of a statute are not clear and are ambiguous, different considerations may apply in interpreting the provisions for gathering the true intention of the law-giver. It is stated in Halsbury's Laws of England, 4th edn., Vol. 44, in para. 858 at p. 523, as follows: " If the words of a statute are ambiguous, then the intention of Parliament must be sought first in the statute itself, then in other legislation and contemporaneous circumstances, and finally in the general rules laid down long ago, and often approved, namely, by ascertaining: (1) what was the common law before the making of the Act; (2) what was the mischief and defect for which the common law did not provide; (3) what remedy Parliament hath resolved and appointed to cure the disease of the commonwealth; and (4) the true reason of the remedy." As on a fair reading of s. 80J, I am satisfied that the section is sufficiently clear and the language used therein suffers from no ambiguity, it does not....
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....revious year the profits and gains of the undertaking which were included in the total income of the assessee in the previous year. Relief under this section for the undertaking is clearly intended on the capital employed in the undertaking which produced the profits and gains of the undertaking in the previous year. This intention is made manifestly clear, as relief has to be granted on the basis of the profits and gains earned by the undertaking in the previous year by virtue of employment of capital in the undertaking in the previous year. The capital employed in the undertaking which qualifies for relief under this section clearly refers to and must necessarily be the capital employed in the undertaking in the previous year for the purpose of earning the profits. If the capital employed in the undertaking is own capital, such capital qualifies for relief. If capital employed is borrowed capital, such capital will equally qualify for relief. If capital employed consists of assessee's own capital and also borrowed capital, the capital so employed, the assessee's own and borrowed, will both qualify for the relief. The capital employed in the undertaking in the previous year which ....
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....oyed in the undertaking for earning profits and gains does not qualify for any relief under this section. Sub-section (4) of s. 80J lays down the conditions which have to be fulfilled by an undertaking to qualify for the relief granted under this section. Even, in this sub-section, there is no indication that any undertaking set up with borrowed capital or with capital part of which may be borrowed will not be entitled to the benefits of this section. An industrial undertaking which satisfies all the conditions laid down in sub-s. (4) will undoubtedly be entitled to the benefits of s. 80J. An undertaking with borrowed capital can also very well satisfy the conditions of sub-s. (4) and qualify for the relief, as there is nothing in this sub-section which prevents an undertaking set up with wholly or partly borrowed capital from fulfilling the conditions laid down in the sub-s. (4). An undertaking satisfying all the conditions in sub-s. (4) and thereby qualifying for relief if, however, set up with borrowed capital, will be denied the relief to which the undertaking in terms of the clear provisions of the section is justly entitled, merely on the ground that the rule prescribed fo....
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....loyed in the undertaking includes own capital and also borrowed capital employed in the undertaking in the relevant year and the section plainly and unequivocally makes this intention of Parliament manifestly clear. As the section is clear and unambiguous, it is indeed not proper and necessary to refer to any other consideration for its construction. It may, however, be pointed out that this interpretation not only makes perfect sense but also clearly promotes the object for which this section was incorporated. To my mind, the object of s. 80J which indeed replaces the earlier s. 84 which came in place of s. 15C of the earlier I.T. Act, is to give impetus and encouragement to the setting up of new industrial undertakings by offering tax incentives or tax reliefs. The object clearly is to encourage persons to setup new industrial undertakings for rapid industrialisation of the country by offering incentives in respect of undertakings covered by this section by way of grant of tax relief on the capital employed in such undertakings. In the case of Textile Machinery Corporation v. CIT [1977] 107 ITR 195 (SC), this court, while considering the object of a similar provision in s. ....
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....purpose of granting relief under the section is clearly untenable. The section only enjoins that capital employed is to be computed in the manner to be prescribed and the manner of computation of the capital employed only authorises the rule-making authority to deal with the details regarding computation of the capital employed for carrying out the provisions of the section and the provision regarding the manner of computation does not empower or authorise the rule-making authority to lay down which part of the capital employed or how much of it will have to be included or excluded and to what extent, if any. The question whether there should be any such exclusion or inclusion in the matter of consideration of the grant of relief, is essentially a matter of policy for the Legislature to decide and is not matter for the rule-making authority to prescribe. The power of the rulemaking authority in terms of the provision contained in s. 295 of the I.T. Act which confers such power is limited to the framing of rules for carrying out the purposes of the Act. The rule-making authority is not competent to prescribe any rule which will be in the nature of a substantive provision of the Act ....
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....er will be available with the rule-making authority which at its discretion and in the absence of any guideline will be entitled to exclude any or every part of the capital employed even to the extent of rendering the section itself nugatory. This interpretation will have the effect of justifying a delegation of power to the rule-making authority to an extent which cannot be permitted. I have no hesitation in coming to the conclusion that the rule-making authority does not enjoy any such power or jurisdiction. No such power or jurisdiction in the absence of specific provision and clear guideline in the Act could be delegated to the rule-making authority. In the case of STO v. Abraham [1967] 20 STC 367 ; [1967] 3 SCR 518, this court had the occasion to construe the meaning of the phrase " in the prescribed manner " occurring in s. 8(4) of the Central Sales Tax Act, 1956. In dealing with the vires of rule 6 of the Central Sales Tax (Kerala) Rules, 1967, in so far as the said rule purported to prescribe a time-limit within which the declaration was to be filed by the registered dealer, this court held (p. 372 of 20 STC): "In our opinion, the phrase 'in the prescribed manner' occ....
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....aking authority is empowered to make rules for carrying out the purposes of the Act and sub-s. (2) which specifically refers that such rules may provide for all or any of the matters mentioned in the said sub-section does not make any reference to s. 80J. In prescribing the manner of computation of the capital employed, the rule-making authority, in the absence of specific provision in the section itself or in the absence of any statutory provision, cannot exclude any part of the capital employed in the undertaking at its discretion under the guise of the process of prescribing the manner of computation. The argument of the learned Attorney-General that as an undertaking which employs borrowed capital gets relief because in calculating the profits and gains the interest paid on the borrowed capital is taken into account, the rule-making authority in prescribing the manner of computation of the capital employed is entitled to exclude borrowed capital to avoid grant of double relief to the undertaking, is without any merit. Interest paid on borrowed capital by any undertaking, whether it is an undertaking within the meaning of s. 80J or not, is taken into account as business expen....
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....d has undergone changes from time to time and the rule-making authority has in certain years also permitted certain classes of borrowed capital to be taken into account in the computation of capital employed for the purpose of relief. The decision of the Madhya Pradesh High Court does not also take into consideration the question whether the rule seeking to include or exclude borrowed capital at the discretion of the rule-making authority in the absence of any statutory provision or guideline, becomes bad on account of unjustified excessive delegation of authority. This decision of the Madhya Pradesh High Court has not proceeded to construe s. 80J correctly to gather the true intention of Parliament before deciding the question as to whether the rule excluding borrowed capital is consistent with the intention of Parliament clearly expressed in s. 80J. In my opinion, the mere existence of an invalid rule without any challenge for any length of time does not affect the question of validity of the rule and cannot render a rule otherwise invalid to be valid only on the ground that the rule had remained in existence without any challenge for a number of years. In the case of Propriet....
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.... Board v. Indian Aluminium Co. Ltd., AIR 1976 SC 1031, this court held at p. 1046 : " In India many statutes both of Parliament and of State Legislatures provide for subordinate legislation made under the provisions of those statutes to be placed on the table of either the Parliament or the State Legislature and to be subject to such modification, amendment or annulment, as the case may be, as may be made by the Parliament or the State Legislature. Even so, we do not think that where an executive authority is given power to frame subordinate legislation within stated limits, rules made by such authority if outside the scope of the rule-making power should be deemed to be valid merely because such rules have been placed before the Legislature and are subject to such modification, amendment or annulment, as the case may be, as the Legislature may think fit. The process of such amendment, modification or annulment is not the same as the process of legislation and in particular it lacks the assent either of the President or the Governor of the State, as the case may be. We are, therefore, of opinion that the correct view is that notwithstanding the subordinate legislation being laid....
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....by a learned single judge of the Calcutta High Court in Century Enka Ltd. v. ITO [1977] 107 ITR 123, the main consideration upon which this question has to be resolved is (p. 132), whether having regard to the purpose for which provisions of s. 80J of the Act was introduced, it was the legislative intent to restrict the capital employed in any manner so as to limit it to the first day of the computation period. So far as s. 80J is concerned, it does not give any such indication. That apart, such computation of capital employed in an industrial undertaking would defeat the very purpose of the undertaking and would lead to incongruous and anomalous results. While an assessee who has employed capital in an industrial undertaking on the very first day but has withdrawn it for the major part of the year would be entitled to the full benefit, an assessee who has not employed the capital on the first day but has employed it during the major part of the previous year would be deprived of the benefit. If the intendment of the Act is to give tax holiday for the new industrial undertaking with a view to help them find their roots and encourage entrepreneurs to establish new industrial underta....
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....apital and borrowed capital is wholly irrelevant and does not have any nexus with the object sought to be achieved and this distinction between own capital and borrowed capital in the matter of computation of capital employed in the undertaking for the purpose of granting relief results in unjustified discrimination and is, therefore, violative of art. 14 of the Constitution. To my mind, there is no merit in the submission of Dr. Pal. It is entirely a matter for Parliament to decide whether any relief by way of incentive should be allowed and, if so, to what extent and in what manner. There is no obligation on the part of Parliament to make any provision for granting relief to promote new industries. The Legislature in its wisdom may decide to grant relief and may equally decide not to grant any relief. It is essentially for the Legislature to decide as to whether any incentive for promoting industrial growth of the country is called for and if the Legislature feels that in the situation prevailing in the country, such incentive should be provided, it will be again for the Legislature to decide what kind of incentive and in what form and to what extent the same should be provided a....
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.... 1, 1972. It has been contended by the learned counsel for the assessees that the retrospective operation of the provision is unreasonable, arbitrary and violative of arts. 14 and 19 of the Constitution. The main argument is that the withdrawal of relief granted by the statute before the present amendment and lawfully enjoyed by the assessee during all these years and thereby imposing on the assessee an unjust, unmerited and accumulated huge financial liability, cannot be considered to be reasonable; and such imposition of accumulated liability will seriously affect the financial stability of the undertakings and will further create various other difficulties which may be almost impossible for the assessees to overcome. It has been argued that the present amendment has not been necessitated as a result of any provision of the statute being declared ultra vires for any lacuna in the statutory provision and there is no question of any liability being foisted on the Government Of refunding any large sum of money collected as tax from the assessees on account of any statutory provision imposing any levy being declared invalid or unconstitutional. It is submitted that in view of the ....
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....as to cover every contingency and particularly the contingency of the validity of the rule being upheld by this court. The learned Attorney-General has submitted that the amendment has been introduced before the decision of this court in the pending appeals, as Parliament wanted to clarify the position in the interest of all concerned and more so in the interest of the assessees to enable the undertakings which qualified for relief under s. 80J to enjoy the benefit intended to be conferred by the section. It is the submission of the learned Attorney-General that in the absence of any valid rule prescribing the manner of computation of the relief to which the assessee may be entitled under s. 80J, the benefit cannot be computed and, therefore, no benefit contemplated under s. 80J may be at all available to the assessees. He submits that if the rule is held to be valid by this court, in these appeals, the argument of the assessee that the assessee has arranged its affairs on the basis of invalidity of the rule will be of no avail ; and he further submits that if the invalidity is upheld by this court in these appeals, the assessee in the absence of any valid rule prescribing the mann....
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....evant fact to consider in determining its reasonableness, it may not be unfair to suggest that if the retrospective operation covers a long period like ten years, it should be held to impose a restriction which is unreasonable and, as such, must be struck down as being unconstitutional. In support of this plea, Mr. Setalvad has referred us to the observations made by Sutherland: 'Tax statutes', says Sutherland may be retroactive if the legislature clearly so intends. If the retroactive feature of a law is arbitrary and burdensome, the statute will not be sustained. The reasonableness of each retroactive tax statute will depend on the circumstances of each case. A statute retroactively imposing a tax on income earned between the adoption of an amendment making income taxes legal and the passage of the Income-tax Act is not unreasonable. Likewise, an income-tax not retroactive beyond the year of its passage is clearly valid. The longest period of retroactivity yet sustained has been three years. In general, income-taxes are valid although retroactive, if they affect prior but recent transactions. Basing himself on those observations, Mr. Setalvad contends that since the period covere....
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....his rule. So, it would be idle to contend that merely because a taxing statute purports to operate retrospectively, the retrospective operation per se involves contravention of the fundamental right of the citizen taxed under art. 19(1)(f) or (g). It is true that cases may conceivably occur where the court may have to consider the question as to whether excessive retrospective operation prescribed by a taxing statute amounts to the contravention of the citizens' fundamental right; and in dealing with such a question, the court may have to take into account all the relevant and surrounding facts and circumstances in relation to the taxation. " In the case of Assistant Commissioner of Urban Land Tax v. Buckingham & Carnatic Co. Ltd. [1970] 75 ITR 603 (SC), it was observed at p. 620 : "It is contended on behalf of the petitioners that the retrospective operation of the law from July 1, 1963, would make it unreasonable. We are unable to accept the argument of the petitioners as correct. It is not right to say as a general proposition that the imposition of tax with retrospective effect per se renders the law unconstitutional. In applying the test of reasonableness to a taxing sta....
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....not be doubted. Any retrospective amendment to be valid must, however, be reasonable and not arbitrary and must not be violative of any of the fundamental rights guaranteed under the Constitution. The mere fact that any statutory provision has been amended with retrospective effect does not by itself make the amendment unreasonable. Unreasonableness or arbitrariness of any such amendment with retrospective effect has necessarily to be judged on the merits of the amendment in the light of the facts and circumstances under which such amendment is made. In considering the question as to whether the legislative power to amend a provision with retrospective operation has been reasonably exercised or not, it becomes relevant to enquire as to how the retrospective effect of the amendment operates. In the larger interest of administration and for promotion of public interest and welfare of the country, power has been conferred by the Constitution on Parliament to mobilise resources and to levy taxes. In view of the complexity of fiscal adjustment of diverse elements, Parliament necessarily enjoys a very wide discretion in the matter of fiscal legislation. To meet various expenses for pr....
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....ue of the retrospective operation and the retrospective operation merely validates the levy already imposed and possibly collected. The present amendment has been necessitated not as a result of any part of s. 80J being declared invalid. There was no lacuna or defect in s. 80J prior to the impugned amendment and the section which was perfectly valid granted relief in clear and unambiguous language to the assessee in respect of capital employed, whether assessee's own or borrowed, in an undertaking which qualified for relief under the section. The rule-making authority by framing an invalid rule sought to deny the assessee the benefit of the relief lawfully and validly granted by the section. The rule was contrary to the clear provisions of the statute and the invalid rule has been rightly struck down. By the present amendment, Parliament is seeking to validate not any provision of the statute declared invalid because of any flaw or defect, as there was none, but is seeking to validate an invalid rule which had sought to deprive the assessee of the benefit which Parliament had clearly bestowed on the assessee by the section. The effect of the present amendment by seeking to incorpor....
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....gulating the fiscal structure and to relieve the Government of any financial burden by way of refund of taxes collected for enabling the State to implement its budget by proper collection of revenue expected to be realised. When Parliament in any fiscal statute proposes to grant any relief to any assessee, Parliament must be presumed to do so in public interest. In the instant case, s. 80J granted relief for the purpose of promoting the industrial growth of the country by affording incentive for the setting up of new undertakings. As a matter of policy again Parliament may withdraw such relief or any part thereof or modify the nature, extent and kind of relief, if Parliament in its wisdom may consider any such action necessary and proper and any such act done by Parliament must also be regarded to have been done in public interest. However, the withdrawal or modification with retrospective effect of the relief properly granted by the statute to an assessee which the assessee has lawfully enjoyed or is entitled to enjoy as his vested statutory right depriving the assessee of the vested statutory right has the effect of imposing a levy with restrospective effect for the years for whi....
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.... the borrowed capital also. On the other hand, it is quite clear that if the relief granted is to be withdrawn with retrospective operation from 1972, the assessees who have enjoyed the relief for all those years will have to face a very grave situation. The effect of the withdrawal of the relief with retrospective operation will be to impose on the assessee a huge accumulated financial burden for no fault of the assessee and this is bound to create a serious financial problem for the assessee. Apart from the heavy financial burden which is likely to upset the economy of the undertaking, the assessee will have to face other serious problems. On the basis that the relief was legitimately and legally available to the assessee, the assessee had proceeded to act and to arrange its affairs. If the relief granted is now permitted to be withdrawn with retrospective operation, the assessee may be found guilty of violation of the provisions of other statutes and may be visited with penal consequences. This position cannot be and is not disputed by the learned Attorney-General who has, however, argued that taking into consideration the peculiar facts and circumstances, penal provisions ma....
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....ndment earlier in spite of the decisions of the High Courts, although Parliament had introduced other amendments into this section. Before concluding I wish to emphasise that the withdrawal with retrospective effect by the amendment of any financial benefit or relief granted by a fiscal statute must ordinarily be held to be unreasonable and arbitrary. Such withdrawal makes a mockery of a beneficial statutory provision and leads to chaos and confusion. Such withdrawal in effect results in the imposition of a levy at a future date for past years for which there was no such levy in the relevant years. The imposition of any fresh tax with retrospective effect for years for which there was no such levy is bound to operate unduly harshly on every assessee who is entitled to arrange and normally arranges his financial affairs on the basis of the law as it exists. Such retrospective taxation imposes an unjust and unwarranted accumulated burden on the assessee for no fault on his part and the assessee has to face unnecessarily without any just reason very serious financial and other problems. Imposition of any tax with retrospective effect for years for which no such tax was there, canno....